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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, 2001
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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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(Exact name of registrant as specified in its charter)
FLORIDA 59-1757642
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1344 ASHTON ROAD, HANOVER, MARYLAND 21076
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (410) 694-0500
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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
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 common
stock was sold on March 15, 2002 was approximately $4,026,000.
As of March 15, 2002, the Company had 3,887,344 shares of its common
stock outstanding.
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 29, 2002.
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, incorporated in Part IV
of this Annual Report,
Registrant's Annual Report, Form 10-K for the five years ended December
31, 2000, Part IV, Exhibits, incorporated in Part IV of this Annual Report.
Annual Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for
the year ended December 31, 1994, Part IV, Exhibits, incorporated in Part IV of
this Annual Report.
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DIALYSIS CORPORATION OF AMERICA
Index to Annual Report on Form 10-K
Year Ended December 31, 2001
Page
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PART I
Item 1. Business........................................................... 1
Item 2. Properties......................................................... 23
Item 3. Legal Proceedings.................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders................ 24
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters................................................ 25
Item 6. Selected Financial Data............................................ 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 27
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.......... 31
Item 8. Financial Statements and Supplementary Data........................ 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 32
PART III
Item 10. Directors and Executive Officers of the Registrant................. 32
Item 11. Executive Compensation............................................. 33
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 33
Item 13. Certain Relationships and Related Transactions..................... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 34
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, and Section 21E of the Securities Exchange Act of
1934. The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors for forward-looking statements. Certain of the forward-looking
statements include management's expectations, intentions, beliefs and strategies
regarding the growth of our company and our future operations, the character and
development of the dialysis industry, anticipated revenues, our need for and
sources of funding for expansion opportunities and construction, expenditures,
costs and income, our business strategies and plans for future operations, 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." Words such as "anticipate," "estimate," "expects," "projects,"
"intends," "plans" and "believes," and words and terms of similar substance used
in connection with any discussions of future operating or financial performance
identify forward-looking statements. Such forward-looking statements, like all
statements about expected future events, are subject to substantial risks and
uncertainties that could cause actual results to materially differ from those
expressed in the statements, including the general economic, market and business
conditions, opportunities pursued or not pursued, competition, changes in
federal and state laws or regulations affecting the company and our operations,
and other factors discussed periodically in our filings. Many of the foregoing
factors are beyond our control. Among the factors that could cause actual
results to differ materially are the factors detailed in the risks discussed in
the "Risk Factors" section below. Accordingly, readers are cautioned not to
place too much 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
We are a Florida corporation which was organized in 1976. We develop
and operate 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 also provide acute inpatient
dialysis treatments in hospitals, as well as providing homecare services through
our wholly owned subsidiary, DCA Medical Services, Inc. We became a public
company in 1977, and went private in 1979. 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. We currently operate 11 outpatient dialysis
facilities, and have a 40% interest in a dialysis center in Ohio which we
manage.
GENERAL
Management believes the company distinguishes itself on the basis of
quality patient care, and a patient-focused, courteous, highly trained
professional staff. Our acute inpatient dialysis treatments are conducted under
contractual relationships currently with eleven hospitals and medical centers
located in areas and states serviced by our outpatient dialysis facilities.
Homecare, sometimes referred to as method II home patient treatment, requires
the company to provide equipment and supplies, training, monitoring and
follow-up assistance to patients who are able to perform their treatments at
home.
Our growth depends primarily on the availability of suitable dialysis
centers for development or acquisition in appropriate and acceptable areas, and
our ability to develop 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 two new dialysis facilities in
Georgia in 2001 and one dialysis center in the first quarter of 2002 in
Pennsylvania. A center in Ohio, in which we have a 40% interest which we manage,
opened in February, 2001. We are in the development stages for two new centers,
one in Ohio and one in Maryland. We are completing the acquisition of a dialysis
unit in Georgia, which should be operational in the second quarter of 2002.
There is intense competition for retaining qualified nephrologists, whose
patients normally seek treatment with their physicians at centers with which the
doctor is affiliated, and which physicians 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 (47%, 51% and 50% of medical services
revenues for 2001, 2000 and 1999, respectively); (ii) home peritoneal dialysis
services, including method II services (3%, 6% and 9% of medical services
revenues for 2001, 2000 and 1999, respectively); (iii) inpatient hemodialysis
services for acute patient care provided through agreements with hospitals and
medical centers (15%, 10% and 10% of medical services revenues for 2001, 2000
and 1999, respectively); and (iv) ancillary services associated with dialysis
treatments, primarily 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 (35%, 33% and 31% of medical services revenue for 2001, 2000
and 1999, respectively). Dialysis is an ongoing and necessary therapy to sustain
life for kidney dialysis patients. ESRD patients normally receive 156 dialysis
treatments each year.
Essential to our operations and income is Medicare reimbursement which
is a fixed rate determined by the Center for Medicare and Medicaid Services
("CMS") 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. Further, our operating costs tend to increase over
the years in excess of increases in the prescribed dialysis treatment rates.
From commencement of the Medicare ESRD program in 1972 through 1983, the ESRD
composite rate was unchanged, and was decreased over the years thereafter, which
was only minimally increased by Congress in January, 2000, which rate has
increased through 2002. Commercial third-party reimbursement rates are also
susceptible to reduction. 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 hospitals, and
typically the rates are higher on a per treatment basis.
DIALYSIS INDUSTRY
Kidneys 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, End Stage Renal Disease, results
from chemical imbalance and buildup of toxic chemicals, and is a state of kidney
disease characterized by advanced irreversible renal impairment. 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 either 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.
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Based upon information published by the National Kidney Foundation, the
number of ESRD patients requiring dialysis treatments in the United States is
approximately 240,000, and continues to grow at a rate of approximately 7% a
year. This is thought to be attributable primarily to the aging of the
population and greater patient longevity as a result of improved dialysis
technology. The statistics further reflect approximately 3,600 dialysis
facilities of which 260 are hospital-based, and the current annual cost of
treating ESRD in the United States is approximately $18 billion.
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 or continuous cycling peritoneal dialysis; and/or (3) kidney
transplant. A significant portion of ESRD patients receive treatments at
non-hospital owned outpatient dialysis facilities (according to CMS,
approximately 86%) with most of 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 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 patient's assistant, which
usually encompasses four to eight weeks. Dialysis Corporation of America 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 continuous ambulatory
peritoneal dialysis.
A second home treatment for ESRD patients is peritoneal dialysis. There
are several variations of peritoneal dialysis, the most common being continuous
ambulatory peritoneal dialysis and continuous cycling peritoneal dialysis. All
forms of peritoneal dialysis use the patient's peritoneal (abdominal) cavity to
eliminate fluid and toxins from the patient. Continuous ambulatory peritoneal
dialysis 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. Continuous cycling peritoneal dialysis is
performed in a manner similar to continuous ambulatory peritoneal dialysis, but
utilizes a mechanical device to cycle the 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
Dialysis Corporation of America has 25 years' experience in developing
and operating dialysis treatment facilities. Our first priority is to provide
quality patient care. We intend to continue to establish alliances with
physicians and hospitals, 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 are in the development
stages for two new centers, one in Ohio, and one in Maryland, and we are
anticipating completion of an acquisition of a dialysis unit in Georgia in the
immediate future. We are currently in different phases of negotiations with
physicians for potential new facilities in different areas of the country. In
2001 through the first quarter of 2002, we have five new acute inpatient
dialysis services agreements with hospitals in Pennsylvania, Ohio, Georgia and
New Jersey.
Our parent, Medicore, Inc., sold a controlling interest in Techdyne,
Inc., another public subsidiary of Medicore, in June, 2001 for $10,000,000 plus
a three year earn-out which will amount to between $2,500,000 and $5,000,000. A
substantial portion of the after tax proceeds of that sale are anticipated to be
made available to our company for expansion of our dialysis operations.
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
adequate space and stations within our facilities to accommodate greater patient
volume and maximize our treatment potential.
Development and Acquisition of Facilities
One of the primary elements in developing or acquiring 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 development of a dialysis facility
or a proposed acquisition 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 is approached primarily through the development of our own
dialysis facilities. Acquisition of existing outpatient dialysis centers is a
faster but more costly means of growth. The primary reason for physicians
selling or participating in the development of independently owned centers is
the avoidance of administrative and financial responsibilities, freeing their
time to devote to their
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professional practice. Other motivating forces are the physician's desire to be
part of a larger organization allowing for economies of scale and the ability to
realize a return on their investment if they have an interest in the dialysis
entity.
To construct and develop a new facility ready for operations takes an
average of six to eight months, and approximately 12 months or longer to
generate income, all of which are subject to location, size and competitive
elements. Some of our centers are in the developmental stage, since they have
not reached the point where the patient base is sufficient to generate and
sustain earnings. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Construction of a 15 station facility
typically costs 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, and is usually based
primarily upon the number of patients, and to a lesser extent, location,
competition, nature of facility and negotiation. We have recently completed an
agreement to acquire a dialysis unit in Georgia with approximately 18 dialysis
stations. Assuming we complete this acquisition in the immediate future, this
center is expected to be operational in the second quarter of 2002. Any
significant expansion, whether through acquisition or development of new
facilities, is dependent upon existing funds or financing from other sources.
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 our 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. 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. In 2001, we entered into new acute inpatient dialysis services
agreements with hospitals in New Jersey and Georgia. The Ohio center in which we
have a 40% interest entered into an acute inpatient service agreement in 2001.
There is no certainty as to when any additional centers or service
contracts will be implemented, or the number of dialysis stations or patient
treatments such may involve, or if such will ultimately be profitable. There is
no assurance that we will be able to continue to enter into favorable
relationships with physicians who would become medical directors of such
proposed dialysis facilities, or that our 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 and
due to their having 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
We operate eleven outpatient dialysis facilities in Pennsylvania, New
Jersey and Georgia, with a total designed capacity of 173 licensed stations. We
have a 40% interest in an Ohio dialysis center which we operate in conjunction
with the majority owner, which center has a total of 12 licensed dialysis
centers. We own and operate our centers through subsidiaries of which seven are
100% owned, three are
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80% owned, and one 51% owned. The Lemoyne, Pennsylvania, and one of the South
Georgia dialysis facilities are located on properties owned by Dialysis
Corporation of America and leased to those subsidiaries. See Item 2,
"Properties."
The company also provides acute care inpatient dialysis services to
nine hospitals in areas serviced by our dialysis facilities, and we are in the
process of negotiating additional acute dialysis services contracts in the areas
surrounding our facilities and in tandem with development of future proposed
sites. Each of our dialysis facilities provides training, supplies and on-call
support services for home peritoneal patients. Dialysis Corporation of America
provided approximately 61,000 hemodialysis treatments in 2001.
The company estimates that on average its centers were operating at
approximately 60% of capacity as of December 31, 2001, 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 can increase the number of dialysis
treatments at our centers without making additional capital expenditures.
Operations of Dialysis Facilities
Our company'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.
Our company maintains a team of 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 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.
Our facilities also offer home dialysis, primarily continuous
ambulatory peritoneal dialysis and continuous cycling peritoneal dialysis.
Training programs for continuous ambulatory peritoneal dialysis or continuous
cycling peritoneal dialysis generally encompass two to three weeks at the
dialysis 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 nine
hospitals in New Jersey, Pennsylvania and Georgia, under agreements either with
the company or with one of our facilities in the
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area. Our Ohio affiliate in which we have a 40% interest also provides acute
inpatient services to a hospital in its area. The agreements are for a term
ranging from one to five years, with automatic 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 certain prescription drugs, such as
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.
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 where the patient's nephrologist has an
established practice. Consequently, we rely on our ability to develop
affiliations with area nephrologists who may provide quality dialysis care and
patients.
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 source of patients treated at the particular center
served. Our dialysis centers are operated through subsidiaries, either
corporations or limited liability companies. The medical directors of four of
our centers have acquired an ownership interest in the center they service
ranging from 20% to 49%. Our Ohio affiliate is owned 60% by the physician. 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 typically range from a term of five
years to ten years, with renewal provisions, usually two renewal options each
for five years. Each agreement specifies the duties, responsibilities and
compensation of the medical director. 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 facilities 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. Usually, physician's professional fees for services are
billed directly to government payment authorities by the treating physician and
paid directly to the physician or the professional association.
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 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
7
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
Dialysis Corporation of America implements a quality assurance program
to maintain and improve the quality of dialysis treatment and care we provide to
our patients in each facility. Quality assurance activities involve the ongoing
examination of care provided, the identification of deficiencies in that care
and any necessary improvements in 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 CMS and the Occupational
Safety and Health Administration. Our Vice President of Clinical Services, who
is a certified nephrology 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 CMS. A
majority of dialysis patients are covered under 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, New Jersey,
Georgia and Ohio, 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.
The inpatient dialysis services are paid for by the hospital pursuant
to contractual pre-determined fees for the different dialysis treatments.
Medicare Reimbursement
The company is reimbursed primarily by Medicare under a prospective
reimbursement system for chronic dialysis services, and by third party payors
including Medicaid and commercial insurance companies. Each of our dialysis
facilities is certified to participate in the Medicare program. Under the
Medicare system, the reimbursement rates are fixed in advance and limit the
allowable charge per treatment, but provide us with predictable and recurring
per treatment revenues and allows us to retain any profit earned. An established
composite rate set by CMS 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. CMS
eliminated routine Medicare coverage for such
8
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.
The company receives reimbursement for outpatient dialysis services
provided to Medicare-eligible patients at rates that are currently between
approximately $121 and $135 per treatment, depending upon regional wage
variations. The Medicare reimbursement rate is subject to change by legislation.
An average ESRD reimbursement rate is approximately $124 per treatment for
outpatient dialysis services. The current maximum composite reimbursement rate
is $144 per treatment. The Benefits Improvement and Protection Act of 2000
provided for a 2.7% increase in the amount paid to dialysis facilities for
performance of services in 2001. Congress has requested studies of the ESRD
composite rate structure as well as other related ancillary services to
determine whether the composite rate is subject to an annual inflationary
increase. In connection with that study, the Prospective Payment Assessment
Commission recommended to Congress no change in the compensate rate. Congress
need not implement PROPAC's recommendations.
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. Approximately 26% of our
revenues in 2001 was derived from providing dialysis patients with EPO. CMS
limits the EPO reimbursement rate based upon patients' hematocrit levels. Except
for the administration of EPO, other ancillary services are not significant
sources of income to us. We routinely submit claims monthly and are usually paid
by Medicare within 30 days of the submission.
There have been a variety of proposals to Congress for Medicare reform.
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 would
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 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 and New Jersey
have Medical Assistance Programs comparable to Medicaid, as well as New Jersey,
with primary and secondary insurance coverage to those who qualify. We are a
licensed ESRD provider in New Jersey, Pennsylvania and Georgia.
SOURCES OF MEDICAL SERVICES REVENUE
Year Ended December 31,
-----------------------
2001 2000
---- ----
Medicare 48% 59%
Medicaid and Comparable Programs 11% 13%
Hospital inpatient dialysis services 15% 10%
Commercial and private payors 26% 18%
9
Management Services
Dialysis Corporation of America has a management services agreement
with each subsidiary and with DCA of Toledo, LLC, in which it holds a minority
position, providing them with administrative and management services, including
but not limited to providing capital equipment, preparing budgets, bookkeeping,
accounting, data processing, and other corporate based information services,
materials and human resource management, billing and collection, and accounts
receivable and payable processing. These services are provided for a percentage
of net revenues of each particular facility.
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. We are very proud of the fact that, although we have been
involved in chronic and acute kidney dialysis services for approximately 25
years, the company has never been subject to any suit relating to its dialysis
operations. We currently have general and umbrella liability insurance, as well
as professional and products liability. 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,
confidentiality of medical records, licensing and other areas of operations.
Each of the dialysis facilities must be certified by CMS, and we must comply
with certain rules and regulations established by CMS 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. Our operations are also subject to the
Occupational Safety and Health Administration, known as OSHA, relating to
workplace safety and employee exposure to blood and other potentially infectious
material.
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
the states in which we are presently operating.
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 CMS.
Enforcement, both privately and by the government, has become more stringent
adding to
10
compliance costs as well as potential sanctions. Since inception in 1976, we
have maintained all of our licenses, including our Medicare and Medicaid and
equivalent certifications. The loss of any licenses and certifications would
have a negative impact on our company.
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 our business
arrangements will not be the subject of future investigation or prosecution by
federal or state governmental authorities which could result in civil and/or
criminal sanctions.
Fraud and Abuse
Each year OIG publishes a general Work Plan. For the year 2002, OIG
indicated it planned to concentrate, among other things, on utilization service
patterns of beneficiaries and assess the medical necessity and accuracy of
coding of selected categories of services provided outside the composite rate,
Medicare payments for EPO, and method II billing, including the adequacy of CMS
oversight and the impact on nursing home residents. We reviewed the OIG 2002
Work Plan, and we believe that we are in compliance with applicable regulations.
Nevertheless, we will continue to review risk areas inherent to dialysis
treatment and service, and to maintain 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. Over the years, the federal government has
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 compensation of our company's medical directors, who
are independent contractors, is fixed by a medical director agreement and
reflects competitive factors in each respective location, and the size of the
center, and the physician's professional qualifications. The medical director's
fee is fixed in advance, typically for periods of one to five years and does not
take into account amount 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 (our Ohio affiliate is majority-owned
by a physician). These physicians also act as the medical directors for those
facilities. We attempt to structure our arrangements with our physicians to
comply with the Anti-Kickback Statute. Many of these physicians' patients are
treated at our facilities. We
11
believe that the value of the minority interest represented by stock of our
subsidiaries issued to physicians has been consistent with the fair market value
of the cash consideration paid, assets transferred to, and/or services performed
by such physicians for the subsidiary, 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. Two
states in which we operate, Georgia and Maryland, have similar statutes to the
federal anti-kickback laws limiting physicians from holding financial interests
in various types of medical facilities. If these statutes are interpreted to
apply to relationships we have with our medical directors who hold joint
ownership in our dialysis facilities, we would restructure our relationship with
these physicians but could be subject to penalties.
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
capable of objective documentation, drastically reducing the possibility of over
utilization. There are safe harbors for certain arrangements. However, these
relationships with medical director ownership of minority interests in our
facilities satisfy 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 medical and corporate compliance
plans 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 company 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, is
subject to civil penalties of up to $15,000 per referral and can be excluded
from participation in the Medicare and Medicaid programs.
12
HHS' regulations to Stark II became effective in January, 2002,
primarily excluding from Stark II services included in the ESRD composite rate.
These regulations exclude from covered designated health services and referral
prohibitions, EPO and other drugs required as part of dialysis treatments under
certain conditions. Also excluded from "inpatient hospital services" are
dialysis services provided by a hospital not certified by CMS to provide
outpatient dialysis services, which would exclude our inpatient hospital
services agreements from Stark II, since those hospitals are not providing
outpatient dialysis. Equipment and supplies used in connection with home
dialysis are excluded from the Stark II definition of "durable medical
equipment." HHS is revisiting its regulations and intends to issue additional
regulations to the Stark legislation. We are unable to predict the extent or
nature of such revised and/or new HHS regulations, which may negatively impact
our operations or require us to restructure different aspects of our business.
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 health services." Phase I of the federal Stark II regulations and
the legislative history of Stark II indicates that the purpose behind the Stark
II prohibition on physician referral is to prevent Medicare program and patient
abuse. Since dialysis is a necessary medical treatment for those with temporary
or permanent kidney failure it is not highly susceptible to that type of abuse.
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.
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 our 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 the
company.
Medical directors of our facilities which hold a minority investment
interest in those subsidiaries may refer patients to hospitals with which the
company has an acute inpatient dialysis service arrangement. Stark II may be
interpreted to apply to these types of interests. We believe that our
contractual arrangements with hospitals for acute care inpatient dialysis
services are in compliance with Stark II.
If CMS or any other government entity takes a contrary position to the
Stark II 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 CMS determines
to have been furnished in violation of Stark II, in addition to substantial
civil monetary penalties, which could adversely affect our operations and future
financial results. We believe that if Stark II is interpreted by CMS or any
other governmental entity to apply to our arrangements, it is possible that we
could 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.
13
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. 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, or impose further regulation or
restrictions on healthcare providers. 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 and operations, as well as our
competitors.
The Health Insurance Portability and Accountability Act of 1996
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. HIPAA established two programs that
coordinate federal, state and local healthcare fraud and abuse activities, 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 program under HIPAA, which began in January, 1999, rewards
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.
As part of the administrative simplification provisions of HIPAA, final
regulations governing electronic transactions relating to healthcare information
were published by HHS. These regulations require a party transmitting or
receiving healthcare transactions electronically to send and receive data in
single format, rather than the different data formats currently used. This
regulation applies to our submissions and processing of healthcare claims. We
are in the process of developing the single format transmission, which is
required to be in place in October, 2003.
HHS also published regulations relating to the exchange of healthcare
information to comply with HIPAA privacy standards. HSS' privacy rules cover all
individually identifiable healthcare information covering healthcare providers,
health plans, and healthcare clearing houses, known as "covered entities," as
well as business associates and employers, who are indirectly regulated by the
privacy rules. The regulations, which require organizations to comply no later
than April 14, 2003, require covered entities to continually obligate business
associates and employers to follow the privacy rules. Healthcare provider is
defined very broadly, and may include therapists and social workers, among
others. The regulations are quite extensive and complex, but basically require
companies to: (i) obtain patient consent before using or disclosing protected
heathcare information for heathcare, payment or other uses; (ii) respond to
patient requests for access to their healthcare information; and (iii) develop
policies and procedures with respect to uses and disclosures of protected
healthcare information. HHS recently proposed changes to these privacy
regulations to correct unintended consequences that threatened patients' access
to quality health care. These proposals include, among others, removing consent
requirements hindering access to
14
care, clarifying oral communication restrictions by allowing doctors to discuss
a patient's treatment with other doctors and professionals involved in their
care, parental access to children's records, and prohibiting use of patients'
records for marketing while allowing appropriate communications.
We have developed and continue to refine our processing of patient
healthcare information to comply with HHS' patient privacy regulations. These
regulations are complex, and require our continued efforts, which add to our
administrative and financial obligations, to insure proper patient healthcare
information protection. It is anticipated that these privacy regulations will be
further amended and developed, which could require our company to spend
additional effort and money toward compliance.
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 reimbursement. However, HIPAA 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 have not had any difficulty
in maintaining our licenses and 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. CMS
requires that all dialysis facilities have a contract with a licensed medical
waste handler for any hazardous waste. We also follow OSHA's Hazardous
15
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.
OTHER REGULATION
There are also federal and state laws prohibiting anyone from
presenting false claims or fraudulent information to obtain payments from
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. Such reports and
requests are 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 we are 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
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. and Davita, Inc. Most of
these companies have substantially greater financial resources, many more
centers, patients and services than our company, 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. Fresenius and Gambro also
manufacture and sell dialysis equipment and supplies, which may provide them
with an even greater competitive edge. Competition for acquisitions has
increased the cost of acquiring existing dialysis facilities. We also face
competition from hospitals and physicians that operate 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
16
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.
EMPLOYEES
As of March 4, 2002, our company had 163 full time employees, including
nurse administrators, licensed practical nurses, registered nurses, technical
service manager, technical specialists, patient care technicians, and clerical
employees. We retain 27 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 22 independent contractors who include the social workers and
dietitians at our Pennsylvania and New Jersey facilities and our Ohio affiliate,
which dialysis facility we manage. These are in addition to the medical
directors, who supervise patient treatment at each facility, and the social
workers and dietitians at our Georgia facilities, who are independent
contractors.
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.
RISK FACTORS
UNTIL FISCAL 2001, WE HAD EXPERIENCED OPERATIONAL LOSSES
Since 1989, when we sold four of our five dialysis centers, we had
experienced operational losses. Not until fiscal 2001 did we reflect net income.
We initiated an expansion program in 1995, opening two new dialysis centers that
year, and to date have 11 centers in New Jersey, Pennsylvania and Georgia, with
a 40% interest in a dialysis facility in Ohio which we manage, and two
facilities in the development stage in Maryland and Ohio. However, some of our
dialysis centers have generated losses since their commencement of operations
and, although typical to newly established facilities, some continue to generate
losses after 12 months of operations. This is due to operational costs and time
needed to reach full capacity of dialysis treatments. We are now developing two
new dialysis centers and are in the process of completing the acquisition of
another, which will generate greater revenues; however, until these dialysis
centers develop their patient base, they may not reflect profitable operations.
DIALYSIS OPERATIONS ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
Our dialysis operations are subject to extensive federal and state
government regulations which include:
17
o licensing requirements for each dialysis facility o patient referral
prohibitions o false claims prohibitions for health care reimbursement
o record keeping requirements o health, safety and environmental
compliance o restriction of disclosure of individually identifiable
health
information
Many of these laws and regulations are complex and open to a variety of
interpretations. If we are forced to change our method of operations because of
these regulations, our earnings, financial condition and business might be
adversely affected. In addition, any violation of these governmental regulations
could involve substantial civil and criminal penalties and fines, and exclusion
from participating in Medicare and Medicaid programs. Any loss of federal or
state certifications or licenses would adversely impact our business.
Neither our arrangements with the medical directors of our facilities
nor the minority ownership interests of referring physicians in certain of our
dialysis facilities meet all of the requirements of published safe harbors to
the illegal remuneration provisions of the Social Security Act and similar state
laws. These laws impose civil and criminal sanctions on persons who receive or
make payments for referring a patient for treatment that is paid for in whole or
in part by Medicare, Medicaid or similar state programs. Transactions that do
not fall within the safe harbor may be subject to greater scrutiny by
enforcement agencies.
OUR REVENUES AND FINANCIAL STABILITY ARE DEPENDENT ON FIXED REIMBURSEMENT RATES
UNDER MEDICARE AND MEDICAID
Approximately 48% of our patient revenues for 2001 was derived from
Medicare reimbursement. Approximately 11% of our patient revenues for 2001 was
derived from Medicaid and equivalent programs. Decreases in Medicare and
Medicaid and equivalent rates and programs for our dialysis treatments would
adversely affect our revenues and profitability. Furthermore, operating costs
tend to increase over the years without comparable increases in the prescribed
dialysis treatment rates.
DECREASES IN REIMBURSEMENT PAYMENTS FROM THIRD-PARTY, NON-GOVERNMENT PAYORS
COULD ADVERSELY AFFECT OUR EARNINGS
Any reduction in the rates paid by private insurers, hospitals and
other non-governmental third-party organizations would adversely affect our
business. We estimate approximately 41% of our patient revenues for 2001 was
obtained from sources other than Medicare or Medicaid and equivalent programs.
We generally charge non-governmental organizations for dialysis treatment rates
which exceed the fixed Medicare and Medicaid and equivalent rates. Any
limitation on our ability to charge these higher rates, which may be affected by
expanded coverage by Medicare under the fixed corporate rate, or expanded
coverage of dialysis treatments by managed care organizations, which commonly
have lower rates than we charge, would adversely affect our business, results of
operations, and financial condition.
18
ANY DECREASE IN THE AVAILABILITY OF OR THE REIMBURSEMENT RATE OF EPO WOULD
REDUCE OUR REVENUES AND EARNINGS
EPO, the bio-engineered drug used for treating anemia in dialysis
patients, is currently available from a single manufacturer, Amgen, Inc. Two
years ago, Amgen increased the price of EPO, and there is no assurance there
will not be further price increases this year or in the near future. There
currently is no alternative drug available to us for dialysis patient treatment
of anemia. The available supply could also be reduced, whether by Amgen or
through excessive demand. This would adversely impact our revenues and
profitability, since approximately 26% of our medical revenues in 2001 were
based upon the administration of EPO to our dialysis patients. Most of our EPO
reimbursement is from government programs. We are unsure whether there will be
an EPO reimbursement rate reduction, but if such occurs, it would adversely
affect our revenues and earnings.
OUR ABILITY TO GROW IS SUBJECT TO OUR RESOURCES AND AVAILABLE LOCATIONS
To date, expansion of our operations has been through construction of
dialysis facilities rather than acquisition. This is due to the substantial
costs involved in an acquisition, usually valued on a per-patient basis. We are
attempting to complete our first acquisition of a dialysis unit in Georgia. . We
look for areas with qualified and cost-effective nursing and technical
personnel, with a sufficient population to sustain a dialysis facility. These
opportunities are limited and we compete with much larger dialysis companies for
appropriate locations. Construction through commencement of operations generally
takes four to six months and sometimes longer. Once the facility is operable, it
generates revenues, but usually does not operate at full capacity, and generates
losses for 12 months or more. Our growth strategy based on construction also
involves the risks of our ability to identify suitable locations to develop
additional facilities. Those we do develop may never achieve profitability, and
additional financing may not be available to finance future development.
Our inability to acquire or develop facilities in a cost-effective
manner would adversely affect our ability to expand our business and our
profitability.
Growth places significant demands on our financial and management
skills. Inability on our behalf to meet the challenges of expansion and to
manage any such growth would have an adverse effect on our management, results
of operations and financial condition.
OUR ATTEMPT TO EXPAND THROUGH DEVELOPMENT OR ACQUISITION OF DIALYSIS FACILITIES
WHICH ARE NOT CURRENTLY IDENTIFIED ENTAILS RISKS WHICH SHAREHOLDERS AND
INVESTORS WILL NOT HAVE A BASIS TO EVALUATE
We expand generally through seeking an appropriate location considering
the patient base, availability of a physician nephrologist to be our medical
director, and a skilled work force. Construction and equipment costs for a new
dialysis facility typically range from $600,000 to $750,000. The cost of
acquiring a center is usually much greater. We cannot ensure that we will be
successful in developing or acquiring dialysis facilities, or otherwise
successfully expanding our operations. We are negotiating with nephrologists and
others to establish new dialysis centers, but we cannot ensure these
negotiations will result in the development of new centers. Furthermore, there
is no basis for shareholders and investors to evaluate the specific merits or
risks of any potential development or acquisition of dialysis facilities.
19
WE DEPEND ON PHYSICIAN REFERRALS, AND THE LIMITATION OR CESSATION OF SUCH
REFERRALS WOULD ADVERSELY IMPACT OUR REVENUES AND EARNINGS
Our dialysis facilities and those centers we seek to develop are
dependent upon referrals of ESRD patients for treatment by physicians
specializing in nephrology. Generally, the nephrologist or medical professional
association of physicians supervising a particular dialysis center's operations,
known as a medical director of that facility, account for most of the patient
base. There is no requirement for these physicians to refer their patients to
us, and they are free to refer patients to any other conveniently located
dialysis facility. The loss of these key referring physicians at a particular
center could have a material adverse effect on the operations of the center and
could adversely affect our revenues and earnings.
Some of the referring physicians own minority interests in certain of
our dialysis facilities. If these interests are deemed to violate applicable
federal or state law, these physicians may be forced to dispose of their
ownership interests. We are unable to predict how this would affect our
relationship with these referring physicians, who may move their patients
elsewhere, which would have an adverse effect on our business.
INDUSTRY CHANGES COULD ADVERSELY AFFECT OUR BUSINESS
The healthcare industry is in a period of change and uncertainty.
Healthcare organizations, public and private, continue to change the manner in
which they operate and pay for services. Our business is designed to function
within the current healthcare financing and reimbursement system. In recent
years, the healthcare industry has been subject to increasing levels of
government regulation of reimbursement rates and capital expenditures, among
other things. In addition, proposals to reform the healthcare system have been
considered by Congress, and still remain a priority issue. Any new legislative
initiatives, if enacted, may further increase government regulation of or other
involvement in healthcare, lower reimbursement rates and otherwise change the
operating environment for healthcare companies. We cannot predict the likelihood
of those events or what impact they may have on our earnings, financial
condition or business.
OUR BUSINESS IS SUBJECT TO SUBSTANTIAL COMPETITION, AND WE MUST COMPETE
EFFECTIVELY, OTHERWISE OUR GROWTH COULD SLOW
We are operating in a very competitive environment in terms of
operations and development and acquisition of existing dialysis centers. Our
competition comes from other dialysis centers, many of which are owned by much
larger companies, and from hospitals. The dialysis industry is rapidly
consolidating. There are some very large dialysis companies competing for the
acquisition of existing dialysis centers and the development of relationships
with referring physicians. Most of our competition have much greater financial
resources, more dialysis facilities and a larger patient base.
Competition also comes from technological advances that provide more
effective dialysis treatments than the services provided by our centers.
We experience competition from physicians who open their own dialysis
facilities. Competition for existing centers has increased the costs of
acquiring such facilities. Competition is also intense for qualified nursing and
technical staff as well as for nephrologists with an adequate patient base.
Management can provide no assurance our company can compete effectively, and
thereby continue its growth.
20
MEDICORE, INC., OUR PARENT, WHICH OWNS 62% OF OUR COMPANY, HAS SOME COMMON
OFFICERS AND DIRECTORS, WHICH PRESENTS THE POTENTIAL FOR CONFLICTS OF INTEREST
Medicore owns 62% of our company, and is able to elect all of our
directors and otherwise control our management and operations. Such control is
also complemented by the fact that Thomas K. Langbein is Chairman of the Board
and Chief Executive Officer of both our company and Medicore, of which company
he is also the President, and Daniel R. Ouzts is Vice President and Treasurer of
both companies. Neither Mr. Langbein nor Mr. Ouzts devotes full time to our
management. The costs of executive salaries and other shared corporate overhead
for these companies are charged first on the basis of direct usage when
identifiable, with the remainder allocated on the basis of time spent. The
amount of expenses charged by Medicore to our company for 2001 amounted to
approximately $200,000.
Additionally, there have been past and there are current transactions
between our company and Medicore and their directors, including loans and
insurance coverage. We advanced funds to Medicore for working capital
requirements until Medicore sold Techdyne, Inc., another of its public
subsidiaries, in June, 2001. We also loaned Medicore $2,200,000 over the last
two years for its financing and investment in Linux Global Partners, Inc.
("LGP"), a private company involved in developing a Linux desktop product and
investing in Linux software companies, and which company is in its developmental
stages. Medicore repaid that loan in May and June, 2001, with approximately
$294,000 of accrued interest.
Since Medicore holds a majority interest in our company, there exists
the potential for conflicts between Medicore and us, and the responsibilities of
our management to our shareholders could conflict with the responsibilities owed
by management of Medicore to its shareholders.
THERE IS A POSSIBILITY OF CONTINUED VOLATILITY IN OUR SECURITY PRICE
Our common stock trades on the Nasdaq SmallCap Market. Over the years
the market price of the common stock has significantly fluctuated. During the
last two years, the common stock has been as high as $6.88 in the first quarter
of 2000 and as low as $.23 in the second quarter of 2001. On March 15, 2002, the
closing price of the common stock was $3.42. The market price of our common
stock could fluctuate substantially based upon announcements concerning our
company, such as operating results, government regulatory changes, technological
innovations, or information concerning our competitors. In addition, security
prices fluctuate widely for reasons unrelated to operations, usually general
political, and worldwide and domestic economic conditions, and the stock
market's reaction. These fluctuations and events could adversely affect the
market price of our common stock.
POSSIBLE DELISTING AND RISKS OF LOW PRICED STOCKS
Our common stock trades on the Nasdaq SmallCap Market. There are
certain criteria for continued listing on the Nasdaq SmallCap Market, known as
maintenance requirements. Failure to satisfy any one of these maintenance
listing requirements could result in our securities being delisted from the
Nasdaq SmallCap Market. These criteria include two active market makers,
maintenance of $2,500,000 of stockholders' equity (or a market capitalization of
$35,000,000 or a net income of $500,000 for our most recently completed fiscal
year or in two of the last three most recently completed fiscal years), a
minimum bid price for our common stock of $1.00, and at least 500,000 publicly
held shares with a market value of at least $1,000,000, among others. Usually,
if a deficiency occurs for a
21
period of 30 consecutive business days, the particular company is notified by
Nasdaq and has 90 days to achieve compliance. Nasdaq has proposed adjustments to
its SmallCap Market bid price grace period from 90 days to 180 days. Following
this grace period, issuers that demonstrate compliance with the core initial
listing standards of the SmallCap Market, which is either net income of $750,000
(determined from the most recently completed fiscal year or two of the most
recently completed fiscal years), stockholders' equity of $5,000,000, or market
capitalization of $50,000,000, will be afforded an additional 180-day grace
period within which to regain compliance. If the company is unable to
demonstrate compliance, the security is subject to delisting. The security might
be able to trade on the OTC Bulletin Board, a less transparent trading market
which may not provide the same visibility for the company or liquidity for its
securities, as does the Nasdaq SmallCap Market. As a consequence, an investor
may find it more difficult to dispose of or obtain prompt quotations as to the
price of our securities, and may be exposed to a risk of decline in the market
price of the common stock.
In November, 2000 and again in April, 2001, we received notification
from the Nasdaq Listing Qualifications Department of the Nasdaq Stock Market
that our common stock failed to maintain a closing bid price greater than or
equal to $1.00 per share for 30 consecutive days, as required by Marketplace
Rule 4310(c)(4). In each instance, we maintained our Nasdaq SmallCap Market
listing. In December, 2000, we received notice from Nasdaq's Lising
Qualifications Department that our common stock failed to maintain a market
value of public float greater than $1,000,000 as required under Marketplace Rule
4310(c)(7), which was ultimately complied with. These situations dealing with
the trading market are beyond our control. There can be no assurance that some
other listing maintenance criteria will not become deficient, whether within or
beyond our control, and without a timely cure, could cause our common stock to
be delisted from the Nasdaq SmallCap Market.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT SHAREHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
Our parent company owns 2,410,622 shares of our common stock, or 62% of
our company. Officers and directors of our company and parent own approximately
300,000 shares of common stock and 486,000 options exercisable into an
additional 486,000 shares of common stock. Most of the shares held by these
officers and directors are not freely tradable and are restricted from public
sale. However, a registration statement covering the sale of shares held by
these officers, directors and Medicore, may be effected, since these are
controlling persons of the company, and all their shares, including those
issuable upon exercise of their options, would then be eligible for resale in
the public market without restriction. Also, the officers' and directors' common
stock now owned, as well as the shares obtainable upon exercise of their
options, upon satisfying the conditions of Rule 144 under the Securities Act,
may be sold without complying with the registration provisions of the Securities
Act. These conditions include holding the shares for one year from acquisition,
volume limits of selling every three months an amount of shares which does not
exceed the greater of 1% of the outstanding common stock, or the average weekly
volume of trading as reported by Nasdaq during the four calendar weeks prior to
the sale, the filing of a Form 144, our company continuing to timely file its
reports under the Exchange Act, and the sales are sold directly to a market
maker or otherwise sold through a typical broker's transaction, with normal
commissions and no prearranged solicitations of the purchase order. Our tradable
common stock, known as the float, is approximately 1,177,222 shares, and the
approximately 300,000 shares of common stock directly owned by the officers and
directors represents approximately 25% of the float, and with the options for
486,000 additional shares, would represent approximately 47% of the float.
Accordingly, the sale by such officers and directors, whether through a
registration statement or under Rule 144, may have an adverse affect on the
market price of our common stock, and may hamper our ability to manage
subsequent equity or debt financing. If these shareholders sell substantial
amounts of their common stock of our company, including shares issued upon the
exercise of their options, into the public market, the market price of our
common stock could fall.
22
ITEM 2. PROPERTIES
DCA owns three properties, one located in Lemoyne, Pennsylvania, a
second in Easton, Maryland, and a third in Valdosta, Georgia. The Maryland
property consists of approximately 7,500 square feet, most of which is leased to
a competitor under a 10-year lease through June 30, 2009 with two renewals of
five years each. The lease is guaranteed by the tenant's parent company.
The Lemoyne property of approximately 15,000 square feet houses one of
our dialysis centers of approximately 5,400 square feet, approved for 17
dialysis stations with space available for expansion under a five year lease
through December 22, 2003, with two renewals of five years each. We use
approximately 2,500 square feet for an administrative office in Lemoyne.
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 the first mortgage on the Easton, Maryland property. As of December 31,
2001, the remaining principal amount of the mortgage on the Lemoyne property was
approximately $ 61,000 and the first mortgage on the Easton property was
approximately $77,000. 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 $700,000 loan to our
Vineland, New Jersey subsidiary at an annual interest rate of 1 1/2% over the
prime rate, which loan we guaranty, and is further secured by that subsidiary's
assets, exclusive of financed 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."
We acquired property in Valdosta, Georgia in 2000, and constructed a
dialysis facility there. This property is subject to a five year $788,000
mortgage obtained in April, 2001 with interest at 8.29% which matures in April,
2006. This mortgage had a remaining principal balance of approximately $776,000
at December 31, 2001. We lease approximately 6,000 square feet to one of our
dialysis centers in Valdosta for $90,600 per year under a 10-year lease, with
two renewals of five years.
Dialysis Corporation of America leases space at its Lemoyne,
Pennsylvania property to unrelated parties for their own business activities
unrelated to dialysis services. One lease is for approximately 1,500 square feet
through December 31, 2002, a second lease is for approximately 530 square feet
on a month-to-month basis, and a month-to-month lease for an office.
In addition to our Lemoyne, Pennsylvania, and Valdosta, Georgia
facilities, we presently have nine other dialysis facilities. Each is leased
from unaffiliated parties, most under five to ten year leases, usually with two
renewals of five years each, for space ranging from approximately 3,000 to 7,000
square feet. The lease in Homerville, Georgia is for two years to October 15,
2002, for approximately 1,700 square feet. We sublet a minimal amount of square
feet at two of our dialysis facilities to the physicians who are our medical
directors at those facilities for their medical offices. The subleases are on a
commercially reasonable basis and are structured to comply with the safe harbor
provisions of the "Anti-Kickback Statute." See Item 1, "Business - Government
Regulation - Fraud and Abuse."
23
We lease approximately 2,300 square feet in Hanover, Maryland for
executive offices pursuant to a five year lease with one five year renewal
option.
We are actively pursuing the additional development and acquisition of
dialysis facilities in all other areas of the country which would entail the
acquisition or lease of additional property.
We construct most of our dialysis facilities, which have
state-of-the-art equipment and facilities. The dialysis stations are equipped
with modern dialysis machines 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 August, 2006. 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 most of our facilities to expand to increase
patient volume subject to obtaining appropriate governmental approval.
We maintain executive offices at 1344 Ashton Road, Suite 201, Hanover,
Maryland 21076, and administrative office at 27 Miller Street, Suite 2, Lemoyne,
Pennsylvania 17043, as well as with our parent at 2337 West 76th Street,
Hialeah, Florida 33016.
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, 2001 to a vote of security holders through the solicitation
of proxies or otherwise. Since Medicore owns approximately 62% 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. Shareholders who are entitled to vote at the annual
meeting scheduled for May 29, 2002, which are those shareholders of record on
April 11, 2002, will receive an Information Statement which provides certain
information relating to "Directors and Executive Officers," "Executive
Compensation," "Security Ownership of Certain Beneficial Owners and Management,"
and "Certain Relationships and Related Transactions," and which information is
incorporated by reference into this Annual Report on Form 10-K for the year
ended December 31, 2001. See Part III of this Annual Report, Items 10, 11, 12
and 13.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK 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, 2000 and 2001 as reported by Nasdaq.
BID PRICE
---------
2001 HIGH LOW
---- ---- ---
1st Quarter $1.03 $ .50
2nd Quarter 1.90 .23
3rd Quarter 2.10 1.02
4th Quarter 4.20 1.28
BID PRICE
---------
2000 HIGH LOW
---- ---- ---
1st Quarter* $6.88 $4.06
2nd Quarter* 4.44 1.00
3rd Quarter* 3.34 .63
4th Quarter 1.06 .63
- ---------------
* The price increases may have been, in part or primarily, the result of
the announcement of the execution of the Merger Agreement with
MainStreet and related agreements, which transaction terminated in
August, 2000.
At March 15, 2002, the high and low sales price of our common stock was
$3.42.
Bid prices represent prices between brokers, and do not include retail
mark-ups, mark-downs or any commission, and may not necessarily represent actual
transactions.
At March 15, 2002, we had 122 shareholders of record as reported by our
transfer agent. We have been advised by ADP, which organization holds securities
for banks and depositories, that there are approximately 660 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, 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. Until 2001, we had experienced
operational losses. See Item I, "Business - Risk Factors," Item 6, "Selected
Financial Data," and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
On April 17, 2000, pursuant to the exercise of options at $1.25 per
share, five officers and/or directors of the company and its parent, and family
members of one optionee to whom the optionee gifted options, acquired an
aggregate of 340,000 shares of common stock of the company. Each paid par value
and issued a three-year non-recourse promissory note due April 16, 2003, with
interest at 6.2%. The shares were sold to the officers and directors pursuant to
the non-public offering exemption of Section 4(2) and Regulation D of the
Securities Act.
25
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December
31, 2001 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,
----------------------------------------------------
2001 2000 1999 1998 1997(1)
-------- -------- -------- -------- --------
Revenues .................................... $ 19,441 $ 9,247 $ 5,866 $ 4,004 $ 9,221
Net income (loss) ........................... 784 (356) (668) (204) 1,993
Earnings (loss) per share
Basic ...................................... .20 (.09) (.19) (.06) .56
Diluted .................................... .20 (.09) (.19) (.06) .55
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
December 31,
----------------------------------------------------
2001 2000 1999 1998 1997(1)
-------- -------- -------- -------- --------
Working capital ............................. $ 3,883 $ 3,869 $ 4,152 $ 5,115 $ 7,062
Total assets ................................ 15,683 11,177 9,036 9,349 11,638
Intercompany receivable from
Medicore (non-current portion) ............. 201 414 105 121
Long term debt, net of current portion ...... 2,935 1,755 870 633 693(2)
Stockholders' equity ........................ 8,485 7,799 7,260 7,771 8,049
- -------------------------
(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.
(2) Includes advances from Medicore in 1997.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations, commonly known as MD&A, is our attempt to provide the investor
with a narrative explanation of our financial statements, and to provide our
shareholders and investors with the dynamics of our business as seen through our
eyes as management. Generally, MD&A is intended to cover expected effects of
known or reasonably expected uncertainties, expected effects of known trends on
future operations, and prospective effects of events that have had a material
effect on past operating results. In conjunction with our discussion of MD&A,
shareholders should read the company's consolidated financial statements,
including the notes, contained at the back part of this annual report on Form
10-K. Please also review the Cautionary Notice Regarding Forward-Looking
Information on page one of this annual report.
GENERAL
Dialysis Corporation of America provides dialysis services, primarily
kidney dialysis treatments through its 11 outpatient dialysis centers, plus an
additional center in which it holds a minority interest, and through its acute
inpatient dialysis services agreements with hospitals, provides dialysis
treatments to the hospital's dialysis patients. We also provide homecare
services, including home peritoneal dialysis and method II services, the latter
relating to providing patients with supplies and equipment. Dialysis Corporation
of America also provides ancillary services associated with dialysis treatments,
primarily the administration of EPO.
Approximately 59% of our medical revenues are derived from Medicare and
Medicaid reimbursement with rates established by CMS, and which rates are
subject to legislative changes. Over the last two years, Medicare rates have
slightly increased, and are not related to the increasing costs of operations.
Dialysis is typically reimbursed at higher rates from private payors, such as
the patient's insurance carrier, as well as higher payments received under
negotiated contracts with hospitals for acute inpatient dialysis services.
The healthcare industry is subject to extensive regulations of federal
and state authorities. There are a variety of fraud and abuse measures to combat
waste, which include anti-kickback regulations, extensive prohibitions relating
to self-referrals, violations of which are punishable by criminal or civil
penalties, including exclusion from Medicare and other governmental programs.
There can be no assurance that there will not be unanticipated changes in
healthcare programs or laws or that we will not be required to restructure our
practice and will not experience material adverse effects as a result of any
such challenges or changes. See Item 1, "Business - Government Regulation."
Dialysis Corporation of America's future growth depends primarily on
the availability of suitable dialysis centers for development or acquisition in
appropriate and acceptable areas, and our ability to develop these new potential
dialysis centers at costs within our budget while competing with larger
companies, some of which are public companies or divisions of public companies
with greater personnel and financial resources who have a significant advantage
in acquiring and/or developing facilities in areas targeted by us. Additionally,
there is intense competition for retaining qualified nephrologists who are
responsible for the supervision of the dialysis centers. There is no certainty
as to when any new centers or inpatient service contracts with hospitals will be
implemented, or the number of stations, or patient treatments such may involve,
or if such will ultimately be profitable. It has been our experience that newly
established dialysis centers, although contributing to increased revenues, have
adversely affected our results of operations due to start-up costs and expenses
and a smaller patient base until they develop.
27
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
Medical service revenues increased approximately $10,150,000 (116%) for
the year ended December 31, 2001, compared to the preceding year. This increase
reflects increased revenues of our Pennsylvania dialysis centers of
approximately $ 1,894,000; increased revenues of approximately $2,239,000 for
our New Jersey centers; and increased revenues of approximately $5,902,000 for
our Georgia centers, one of which commenced operations in the fourth quarter of
2000, and two centers became operational during 2001, and $115,000 consulting
and license income.
Interest and other income increased by approximately $44,000 for the
year ended December 31, 2001, compared to the preceding year. This increase
includes a decrease in interest from our parent of $76,000 for the year ended
December 31, 2001 compared to the preceding year, including interest on a note
receivable and an advance receivable with the decrease due primarily to our
parent's repayment of a note to us, a decrease in other interest income of
$33,000 primarily as a result of a decrease in average interest rates which more
than offset an increase in average invested funds, management fee income of
$116,000 pursuant to a Management Services Agreement with our 40% owned Toledo,
Ohio affiliate, an increase in miscellaneous other income of $29,000 and an
increase in rental income of $8,000.
Cost of medical services sales as a percentage of sales decreased to
64% for the year ended December 31, 2001, compared to 67% for the preceding year
as a result of decreases in both supply costs and payroll costs as a percentage
of sales.
Selling, general and administrative expenses, those corporate and
facility costs not directly related to the care of patients, including, among
others, administration, accounting and billing, increased by approximately
$2,065,000 for the year ended December 31, 2001, compared to the preceding year.
This increase reflects operations of our new dialysis centers in Georgia and
Pennsylvania as well as increased support activities resulting from expanded
operations. Although selling, general and administrative expenses increased, as
a percent of medical service revenues these expenses decreased to 30% for the
year ended December 31, 2001, compared to 40% for the preceding year reflecting
efficiencies associated with expanded operations.
Provision for doubtful accounts increased approximately $467,000 as a
result of expanded operations. The provision amounted to 3% of sales for the
year ended December 31, 2001 compared to 2% for the year ended December 31,
2000. This increase reflects different collectibility levels associated with the
company's operations in new geographic areas, such as our Georgia operations.
Although operations of additional centers have resulted in additional
revenues, some are still in the developmental stage and, accordingly, their
operating results will adversely affect results of operations until they achieve
a sufficient patient count to sustain profitable operations.
Interest expense increased by approximately $128,000 for the year ended
December 31, 2001, compared to the preceding year primarily as a result of
additional equipment financing agreements, our Vineland loan and our April, 2001
Georgia mortgage.
The prime rate was 4.75% at December 31, 2001 and 9.50% at December 31,
2000.
28
2000 COMPARED TO 1999
Medical service revenues increased approximately $3,271,000 (59%) for
the year ended December 31, 2000, compared to the preceding year. This increase
reflects increased revenues of our Pennsylvania dialysis centers of
approximately $1,174,000; increased revenues of approximately $1,834,000 for our
New Jersey centers, including revenues of approximately $1,524,000 for our
Vineland, New Jersey center which commenced operations in February, 2000; and
revenues of approximately $263,000 for our new Georgia centers in Valdosta and
Homerville, Georgia.
Interest and other income increased by approximately $111,000 for the
year ended December 31, 2000, compared to the preceding year. This increase
includes an increase in interest from our parent of $198,000 for the year ended
December 31, 2000 compared to the preceding year, including interest on a note
receivable and an advance receivable, interest on stock option notes of
approximately $19,000, and a decrease in other interest income of $103,000 as a
result of a reduction in invested funds.
Cost of medical services sales as a percentage of sales amounted to 67%
for the year ended December 31, 2000, compared to 72% for the preceding year,
reflecting a decrease in both supply costs and healthcare salaries as a
percentage of sales.
Selling, general and administrative expenses increased by approximately
$828,000 for the year ended December 31, 2000, compared to the preceding year.
This increase reflects operations of our new dialysis centers in New Jersey and
Georgia, as well as increased support activities resulting from expanded
operations. Selling, general and administrative expenses as a percent of medical
service revenues decreased to 40% for the year ended December 31, 2000, from 49%
for the preceding year reflecting efficiencies associated with expanded
operations. Provision for doubtful accounts increased approximately $94,000 as a
result of expanded operations.
Although operations of new centers result in additional revenues, while
they are in the developmental stage their operating results adversely affect
results of operations. 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 increased by approximately $10,000 for the year ended
December 31, 2000, compared to the preceding year primarily as a result of
additional equipment financing agreements.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $3,883,000 at December 31, 2001, which
reflected an increase of approximately $14,000 (.4%) during the current year.
Included in the changes in components of working capital was an increase in cash
and cash equivalents of $1,686,000, which included net cash provided by
operating activities of $692,000, net cash provided by investing activities of
$399,000 (including additions to property and equipment of $1,233,000,
investment in our 40% Ohio affiliate of $153,000, repayment to us by our parent
of $2,200,000 in loans, the initial $300,000 payment on our acquisition of
subsidiary minority interest and a $95,000 loan to the company's president) and
net cash provided by financing activities of $594,000 (including a decrease in
advances to our parent of $214,000, debt repayments of $298,000, repurchases of
stock of $98,000 and proceeds from our Georgia mortgage of $788,000). The change
in working capital reflected increases of approximately $2,327,000 in accounts
receivable and $1,890,000 in accounts payable and accrued expenses due to
increased sales activity.
29
We have mortgages with a Maryland bank on two of our buildings, one in
Lemoyne, Pennsylvania and the other in Easton, Maryland, with a combined balance
of approximately $138,000 at December 31, 2001, and $210,000 at December 31,
2000. In 2001, we were in default of certain covenants relating to these
mortgages. The covenants principally related to rent cap requirements for which
the bank has waived compliance. 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 Maryland building. The Maryland property
has a second mortgage to secure a three-year $700,000 loan to our Vineland, New
Jersey subsidiary, which loan is guaranteed by the company and secured by that
subsidiary's personal property exclusive of its dialysis equipment. In April
2001, we obtained a $788,000 five-year mortgage on our building in Valdosta,
Georgia, which had an outstanding balance of $776,000 at December 31, 2001. See
Item 2, "Properties" and 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 $1,678,000
at December 31, 2001, and $1,140,000 at December 31, 2000. This included
additional equipment financing of approximately $752,000 during 2001. See Note 2
to "Notes to Consolidated Financial Statements."
We opened our ninth and tenth centers in Fitzgerald, Georgia and
Valdosta, Georgia (our second Valdosta center) in August 2001 and our eleventh
center in Mechanicsburg, Pennsylvania in January 2002. A center in Ohio which we
manage and in which we hold a minority interest (40%), opened in February, 2001.
Capital is needed primarily for the development of outpatient dialysis
centers. The construction of a 15 station facility, typically the size of our
dialysis facilities, costs in the range of $600,000 to $750,000 depending on
location, size and related services to be provided, which includes equipment and
initial working capital requirements. Acquisition of an existing dialysis
facility is more expensive than construction, although acquisition would provide
us with an immediate ongoing operation, which most likely would be generating
income. We presently plan to expand our operations primarily through
construction of new centers, rather than acquisition. Development of a dialysis
facility to initiate operations takes four to six months and usually 12 months
or longer to generate income. We consider some of our centers to be in the
developmental stage, since they have not developed a patient base sufficient to
generate and sustain earnings.
We are seeking to expand our outpatient dialysis treatment facilities
and inpatient dialysis care. Such expansion requires capital. We are presently
in different phases of negotiations with physicians for additional outpatient
centers. No assurance can be given that we will be successful in implementing
our growth strategy or that financing will be available to support such
expansion. See Item 1, "Business - Business Strategy" and Notes 7 and 9 to
"Notes to Consolidated Financial Statements."
In 2000, we loaned an aggregate of $2,200,000 to our parent, at an
annual interest rate of 10%, which our parent loaned to LGP. After several
extensions of the January 26, 2001 maturity date, in consideration for which we
received 100,000 additional LGP shares, in May, 2001, Medicore paid us $215,000,
representing $200,000 of principal with accrued interest, and in June, 2001,
Medicore paid us the remaining $2,000,000 in loans along with approximately
$279,000 of accrued interest. See Note 4 to "Notes to Consolidated Financial
Statements." Thomas K. Langbein, Chairman of the Board and CEO of our company
and our parent, of which company he is also the President, is a director of LGP.
See Item 13, "Certain Relationships and Related Transactions" and Note 4 to
"Notes to Consolidated Financial Statements."
30
In September, 2000, the company announced its intent to repurchase up
to approximately 300,000 of its outstanding shares. Approximately 93,000 shares
were repurchased for cancellation at a cost of $98,000 during 2001, with total
repurchases for cancellation of 170,000 shares with a cost of $163,000 since
September, 2000. See Note 9 to "Notes to Consolidated Financial Statements."
We believe that current levels of working capital and available
financing alternatives will enable us to meet our liquidity demands for at least
the next twelve months as well as expand our dialysis facilities and thereby our
patient base.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133), which is effective for fiscal
quarters of fiscal years beginning after June 15, 2000. The adoption of FAS 133
has had no effect on the company's consolidated financial statements. In July
2001, the FASB issued Statements of Financial Accounting Standards No. 141,
"Business Combinations" (FAS 141) and No. 142, "Goodwill and Other Intangible
Assets" (FAS 142). Other than expanded disclosures, FAS 141 has had no effect on
the company's consolidated financial statements. Pursuant to FAS 142, the
goodwill arising after June 30, 2001 will not be amortized and will be subject
to the impairment testing provisions of FAS 142 commencing in 2002. See Notes 1
and 11 to "Notes to Consolidated Financial Statements." In August 2001, the FASB
issued Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment on Disposal of Long-lived Assets" (FAS 144). The adoption of FAS 144,
which is required in 2002, is not expected to have a significant effect on the
company's consolidated operations, financial position on cash flows.
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,"
"Government Regulation," and "Risk Factors" 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 $1,505,000 at December 31,
2001.
31
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 $838,000 at December 31, 2001.
We have 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 $8,000 on our results 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
None
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 20, 2002. There are no family relationships between any of the executive
officers and directors of the company.
Name Age Position Held Since
- ---- --- -------- ----------
Thomas K. Langbein 56 Chairman of the Board and 1980
Chief Executive Officer 1986
Stephen W. Everett 45 President and director 2000
Timothy Rumrill 41 Vice President of Finance 2002
and Controller
Daniel R. Ouzts 55 Vice President and Treasurer 1996
For more detailed information about our executive officers and
directors you are referred to the caption "Information About Directors and
Executive Officers" of our Information Statement relating to the annual meeting
of shareholders anticipated to be held on May 29, 2002, which is incorporated
herein by reference.
32
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 29, 2002, 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 29, 2002, 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 29, 2002,
incorporated herein by reference.
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 29, 2002, incorporated herein by reference.
33
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) Current Reports on Form 8-K filed during the fourth quarter.
None
(c) Exhibits +
3.1 Articles of Incorporation++
3.2 By-Laws of the Company++
4.1 Form of Common Stock Certificate of the Company++
10 Material Contracts
10.1 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)).
10.2 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 ("1998 Form 10-K"), Part IV, Item
14(c)(10)(ii)).
10.3 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)).
10.4 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)).
10.5 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)).
34
10.6 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)).
10.7 Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Wellsboro(1) 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)).(8)
10.8 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)).(8)
10.9 Agreement for In-Hospital Dialysis Services(12) 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)).
10.10 Agreement for In-Hospital Dialysis Services(12) 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)).
10.11 Lease between Dialysis Services of PA., Inc. - Carlisle(5) and
Lester P. Burkholder, Jr. and Kirby K. Burkholder dated November
1, 1996 (incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 ("1996 Form
10-K"), Part IV, Item 14(a) 3 (10)(xxiii)).
10.12 Lease between Dialysis Services of NJ., Inc. - Manahawkin(5) 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)).
10.13 Addendum to Lease Agreement between William P. Thomas and
Dialysis Services of NJ., Inc. - Manahawkin(5) dated June 4, 1997
(incorporated by reference to the 1997 Form 10-K, Part IV, Item
14(c)(xviii)).
10.14 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)).
10.15 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)).(6)
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
35
10.16 Agreement for In-Hospital Dialysis Services(12) between Dialysis
Services of Pennsylvania, Inc. - Carlisle(5) 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)).
10.17 Lease between Dialysis Services of Pa., Inc. - Chambersburg(5)
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)).
10.18 Lease between the Company and Wirehead Networking Solutions, Inc.
dated December 1, 1998 (incorporated by reference to the
Company's 1998 Form 10-K, Part IV, Item 14(c)(10)(xxvi)).
10.19 1999 Stock Option Plan of the Company (May 21, 1999)
(incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1999 ("1999 Form 10-K"),
Part IV, Item 14(c)(10)(xxiii)).
10.20 Form of Stock Option Certificate under the 1999 Stock Option Plan
(May 21, 1999) (incorporated by reference to the Company's 1999
Form 10-K, Part IV, Item 14(c)(10)(xxiv)).
10.21 Lease between DCA of Vineland, LLC(4) and Maintree Office Center,
L.L.C. dated May 10, 1999(incorporated by reference to the
Company's 1999 Form 10-K, Part IV, Item 14(c)(10)(xxv)).
10.22 Medical Director Agreement between DCA of Vineland, LLC(4) and
Vineland Dialysis Professionals dated April 30, 1999(incorporated
by reference to the Company's 1999 Form 10-K, Part IV, Item
14(c)(10)(xxvi)).(8)
10.23 Medical Director Agreement between Dialysis Services of PA., Inc.
- Carlisle(5) and Cumberland Valley Nephrology Associates,
P.C.(7) dated April 30, 1999 (incorporated by reference to the
Company's 1999 Form 10-K, Part IV, Item 14(c)(10)(xxvii)).(8)
10.24 Management Services Agreement between the Company and DCA of
Vineland, LLC(4) dated April 30, 1999 (incorporated by reference
to the Company's 1999 Form 10-K, Part IV, Item
14(c)(10)(xxviii)).(9)
10.25 Amendment No. 1 to Management Services Agreement between the
Company and DCA of Vineland, LLC(4) dated October 27, 1999
(incorporated by reference to the Company's 1999 Form 10-K, Part
IV, Item 14(c)(10)(xxix)).
10.26 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)).
10.27 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)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
36
10.28 Lease between the Company and DCA of So. Ga., LLC (11) dated
November 8, 2000 (incorporated by reference to the Company's
Current Report on Form 8-K dated January 3, 2001 ("January 2001
Form 8-K"), Item 7(c)(10)(i)).
10.29 Lease between DCA of Fitzgerald, LLC (1) and Hospital Authority
of Ben Hill County, dba Dorminy Medical Center, dated February 8,
2001 (incorporated by reference to the Company's Current Report
on Form 8-K dated March 5, 2001, Item 7(c)(10)(i)).
10.30 Employment Agreement between Stephen W. Everett and the Company
dated December 29, 2000 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December
31, 2000 ("2000 Form 10-K"), Part IV, Item 14(c)(10)(xii)).
10.31 Lease between the Company and Renal Treatment Centers -
Mid-Atlantic, Inc. dated July 1, 1999 (incorporated by reference
to the Company's 2000 Form 10-K, Part IV, Item 14(c)(10((xlii)).
10.32 Commercial Loan Agreement between the Company and Heritage
Community Bank, dated April 3, 2001 (incorporated by reference to
the Company's Current Report on Form 8-K dated June 14, 2001
("June, 2001 Form 8-K"), Item 7(c)(i)).
10.33 Promissory Note by the Company to Heritage Community Bank, dated
April 3, 2001 (incorporated by reference to the Company's June,
2001 Form 8-K, Item 7(c)(ii)).
10.34 Guaranty of Medicore, Inc.(2) to Heritage Community Bank, dated
April 3, 2001 (incorporated by reference to the Company's June,
2001 Form 8-K, Item 7(c)(iii)).
10.35 Lease between the Company and Commons Office Research dated June
11, 2001 (incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001 ("June,
2001 Form 10-Q"), Part II, Item 6(a)(10((i)).
10.36 Lease between DCA of Mechanicsburg, LLC(11) and Pinnacle Health
Hospitals dated July 24, 2001 (incorporated by reference to the
Company's June, 2001 Form 10-Q, Part II, Item 6(a)(10)(ii)).
10.37 Lease between the Company and Clinch Memorial Hospital dated
September 29, 2000.
10.38 Lease between DCA of Valdosta, LLC and W. Wayne Fann dated March
20, 2001.
10.39 Promissory Note Modification Agreement between DCA of Vineland,
LLC(4) and St. Michaels Bank dated November 28, 2001.
21 Subsidiaries of the Company.
27 Financial Data Schedule (for SEC use only).
- -------------------------
+ Documents incorporated by reference not included in Exhibit Volume.
37
++ 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 62% 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) The company 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) 51% owned subsidiary.
(5) 80% owned facility.
(6) 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.
(7) 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.
(8) Each subsidiary has a Medical Director Agreement which is substantially
similar to the exhibit but for area of non-competition and
compensation. In addition to the Medical Director Agreements already
listed, these agreements include an additional seven subsidiaries. Our
affiliate, DCA of Toledo, LLC (40% owned), has a substantially similar
Medical Director Agreement.
(9) Each of our other 10 subsidiaries has a Management Services Agreement
which is substantially similar to the exhibit filed but for the name of
the particular subsidiary which entered into the Agreement and the
compensation.
(10) 100% owned subsidiary.
(11) The acute inpatient services agreements referred to as Agreement for
In-Hospital Dialysis Services or Agreement for Acute Dialysis Services
are substantially similar to the exhibit filed, but for the hospital
involved, the term and the service compensation rates. In addition to
those acute inpatient service agreements already filed there is the
following: Acute Dialysis Services Agreement with St. Francis Medical
Center, Trenton, New Jersey dated March 7, 2001.
38
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
and Chief Executive Officer
March 26, 2002
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 March 26, 2002
- ----------------------------- Directors and Chief
Thomas K. Langbein Executive Officer
/s/ STEPHEN W. EVERETT President and Director March 26, 2002
- -----------------------------
Stephen Everett
/s/ TIMOTHY RUMRILL Vice President of Finance March 26, 2002
- ----------------------------- and Controller
Timothy Rumrill
/s/ DANIEL R. OUZTS Vice President and Treasurer March 26, 2002
- -----------------------------
Daniel R. Ouzts
/s/ BART PELSTRING Director March 26, 2002
- -----------------------------
Bart Pelstring
/s/ ROBERT W. TRAUSE Director March 26, 2002
- -----------------------------
Robert W. Trause
/s/ ALEXANDER BIENENSTOCK Director March 26, 2002
- -----------------------------
Alexander Bienenstock
/s/ DR. DAVID L. BLECKER Director March 26, 2002
- -----------------------------
Dr. David L. Blecker
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, 2001
DIALYSIS CORPORATION OF AMERICA
HANOVER, MARYLAND
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, 2001 and 2000. F-3
Consolidated Statements of Operations - Years ended
December 31, 2001, 2000, and 1999. F-4
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2001, 2000 and 1999. F-5
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999. F-6
Notes to Consolidated Financial Statements - December 31, 2001. F-7
The following financial statement schedule of Dialysis Corporation of America
and subsidiaries is included in Item 14(d):
Schedule II - Valuation and qualifying accounts. F-21
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 sheets of Dialysis
Corporation of America and subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included 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 of America. Those standards require that we plan and
perform the audits 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, 2001 and 2000,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. 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 8, 2002
Livingston, New Jersey
F-2
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,479,447 $ 793,666
Accounts receivable, less allowance
of $727,000 at December 31, 2001;
$306,000 at December 31, 2000 4,019,578 1,692,592
Note receivable from parent -- 2,200,000
Inventories 739,121 334,127
Deferred income taxes 252,000 --
Prepaid expenses and other current assets 640,283 468,001
------------ ------------
Total current assets 8,130,429 5,488,386
Property and equipment:
Land 376,211 376,211
Buildings and improvements 2,221,406 2,207,447
Machinery and equipment 4,361,046 2,914,010
Leasehold improvements 2,244,612 1,720,625
------------ ------------
9,203,275 7,218,293
Less accumulated depreciation and amortization 2,852,739 2,048,148
------------ ------------
6,350,536 5,170,145
Goodwill 523,140 --
Advances to parent 200,728 414,339
Deferred income taxes 166,000 --
Deferred expenses and other assets 312,600 104,512
------------ ------------
$ 15,683,433 $ 11,177,382
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,605,136 $ 553,704
Accrued expenses 1,529,844 689,600
Current portion of long-term debt 357,000 295,031
Income taxes payable 455,000 81,451
Payable subsidiary minority interest acquisition 300,000 --
------------ ------------
Total current liabilities 4,246,980 1,619,786
Long-term debt, less current portion 2,934,909 1,755,228
Minority interest in subsidiaries 16,183 3,060
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares; 3,887,344 shares issued
and outstanding in 2001; 3,979,844 shares issued
and outstanding in 2000 38,873 39,798
Capital in excess of par value 5,186,580 5,283,585
Retained earnings 3,681,508 2,897,525
Notes receivable from options exercised (421,600) (421,600)
------------ ------------
Total stockholders' equity 8,485,361 7,799,308
------------ ------------
$ 15,683,433 $ 11,177,382
============ ============
See notes to consolidated financial statements.
F-3
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues:
Medical service revenue $ 18,919,752 $ 8,769,470 $ 5,498,541
Interest and other income 521,418 477,631 367,030
------------ ------------ ------------
19,441,170 9,247,101 5,865,571
Cost and expenses:
Cost of medical services 12,021,907 5,833,081 3,964,258
Selling, general and administrative expenses 5,583,062 3,518,367 2,690,863
Provision for doubtful accounts 659,007 192,395 98,666
Interest expense 210,805 82,456 72,605
------------ ------------ ------------
18,474,781 9,626,299 6,826,392
------------ ------------ ------------
Income (loss) before income taxes, minority interest
and equity in affiliate loss 966,389 (379,198) (960,821)
Income tax provision (benefit) 80,078 (30,287) (292,462)
------------ ------------ ------------
Income (loss) before minority interest and equity in
affiliate loss 886,311 (348,911) (668,359)
Minority interest in income (loss)
of consolidated subsidiaries (85,983) 14,218 --
Equity in affiliate loss (16,345) (20,896) --
------------ ------------ ------------
Net income (loss) $ 783,983 $ (355,589) $ (668,359)
============ ============ ============
Earning (loss) per share:
Basic $.20 $(.09) $(.19)
==== ===== =====
Diluted $.20 $(.09) $(.19)
==== ===== =====
See notes to consolidated financial statements.
F-4
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL IN
COMMON EXCESS OF RETAINED TREASURY NOTES
STOCK PAR VALUE EARNINGS STOCK RECEIVABLE TOTAL
--------- ------------ ------------ ----------- ---------- -----------
Balance at January 1, 1999 $ 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
Net loss (355,589) (355,589)
Repurchase of 76,600 shares (766) (64,059) (64,825)
Exercise of stock options for
340,000 of common stock 3,400 421,600 (421,600) 3,400
Exercise of stock purchase warrants
for 170,100 shares of common stock 1,701 763,749 765,450
Minority investment in subsidiary 190,781 190,781
--------- ------------ ------------ ----------- ---------- -----------
Balance at December 31, 2000 39,798 5,283,585 2,897,525 -- (421,600) 7,799,308
Net income 783,983 783,983
Repurchase of 92,500 shares (925) (97,005) (97,930)
--------- ------------ ------------ ----------- ---------- -----------
Balance at December 31, 2001 $ 38,873 $ 5,186,580 $ 3,681,508 $ -- $ (421,600) $ 8,485,361
========= ============ ============ =========== ========== ===========
See notes to consolidated financial statements.
F-5
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
------------ ------------ ------------
Operating activities:
Net income (loss) $ 783,983 $ (355,589) $ (668,359)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 804,592 593,973 450,460
Amortization 4,067 2,332 1,743
Bad debt expense 659,007 192,395 98,666
Deferred income taxes (418,000) -- --
Minority interest 85,983 (14,218) --
Equity in affiliate loss 16,345 20,896 --
Stock option related compensation expense -- -- 153,000
Increase (decrease) relating to operating activities from:
Accounts receivable (2,918,650) (1,105,419) (417,448)
Inventories (404,994) (114,504) (40,434)
Prepaid expenses and other current assets (213,562) 69,360 (342,427)
Accounts payable 1,051,432 158,702 151,034
Accrued expenses 868,726 324,249 72,757
Income taxes payable 373,549 81,451 (232,306)
------------ ------------ ------------
Net cash provided by (used in) operating activities 692,478 (146,373) (773,314)
Investing activities:
Decrease (increase) in notes receivable from parent 2,200,000 (2,200,000) --
Loan to MainStreet -- (140,000) --
Loans to subsidiary medical director practice (20,332) (83,521) --
Loan to officer (95,000) -- --
Additions to property and equipment, net of minor disposals (1,233,183) (1,407,763) (815,919)
Investment in affiliate (152,811) (28,589) --
Purchase of minority interest in subsidiary (300,000) -- --
Deferred expenses and other assets (3,330) 7,158 44,066
Sale of minority interest in subsidiaries 4,000 206,000 4,040
------------ ------------ ------------
Net cash provided by (used) in investing activities 399,344 (3,646,715) (767,813)
Financing activities:
Decrease (increase) in advances to parent 213,611 (309,197) 15,723
Repurchase of stock (97,930) (64,825) --
Long-term borrowings 787,500 700,000 --
Payments on long-term debt (297,650) (167,464) (182,043)
Exercise of warrants and stock options -- 768,850 --
Deferred financing costs (11,572) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 593,959 927,364 (166,320)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,685,781 (2,865,724) (1,707,447)
Cash and cash equivalents at beginning of year 793,666 3,659,390 5,366,837
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,479,447 $ 793,666 $ 3,659,390
============ ============ ============
See notes to consolidated financial statements.
F-6
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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 owns and operates eleven kidney dialysis centers, five located in
Pennsylvania (including a center which commenced operations in January 2002),
two in New Jersey and four in Georgia, and has agreements to provide inpatient
dialysis treatments to various hospitals, provides supplies and equipment for
dialysis home patients, provides certain dialysis consulting services and
manages a 40% owned affiliate. See "Consolidation."
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 62% owned subsidiary of Medicore,
Inc. (the "parent") as of December 31, 2001. We have a 40% interest in an Ohio
dialysis center we manage, which is accounted for on the equity method and not
consolidated for financial reporting purposes.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
GOVERNMENT REGULATION
A substantial portion of the company's revenues are attributable to
payments received under Medicare, which is supplemented by Medicaid or
comparable benefits in the states in which the company operates. Reimbursement
rates under these programs are subject to regulatory changes and governmental
funding restrictions. Laws and regulations governing the Medicare and Medicaid
programs are complex and subject to interpretation. The company believes that it
is in compliance with all applicable laws and regulations and is not aware of
any pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusions from the Medicare and Medicaid programs.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
reported in the balance sheet for cash and cash equivalents approximate their
fair values. 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-7
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets is comprised as follows:
DECEMBER 31,
-------------------------
2001 2000
---------- ----------
Vendor volume discounts receivable $ 209,649 $ 33,597
Receivable from affiliate 115,715 --
Officer loan receivable 98,956 --
Note receivable -- 140,000
Interest receivable from parent -- 185,836
Other 215,963 108,568
---------- ----------
$ 640,283 $ 468,001
========== ==========
ACCRUED EXPENSES
Accrued expenses is comprised as follows:
DECEMBER 31,
-------------------------
2001 2000
---------- ----------
Accrued compensation $ 590,875 $ 203,084
Due to insurance companies 671,935 294,659
Other 267,034 191,857
---------- ----------
$1,529,844 $ 689,600
========== ==========
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; 3 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.
F-8
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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.
COMPREHENSIVE INCOME
The company follows Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income" (FAS 130) which contains rules for the
reporting of comprehensive income and its components. Comprehensive income
(loss) consists of net income (loss).
REVENUE RECOGNITION
The company follows the guidelines of SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB101). Medical service revenues
are recorded as services are rendered.
GOODWILL
Goodwill represents cost in excess of net assets acquired. Pursuant to
Statement of Financial Accounting Standard No. 142 (FAS 142), since the
company's goodwill was acquired after June 30, 2001, it will not be amortized
but will be subject to impairment testing under FAS 142 commencing in 2002. See
New Pronouncements below and Note 11.
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.
F-9
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
STOCK-BASED COMPENSATION
The company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related Interpretations in
accounting for its employee stock options. Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123) 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.
EARNINGS PER SHARE
Diluted earnings (loss) per share gives effect to potential common shares
that were dilutive and outstanding during the period, such as stock options and
warrants, calculated using the treasury stock method and average market price.
No potentially dilutive securities were included in the diluted earning per
share computation for 2000 or 1999, as a result of the net losses, and to
include them would be anti-dilutive.
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Net income (loss) $ 783,983 $ (355,589) $ (668,359)
=========== =========== ===========
Weighted average shares-denominator basic computation 3,913,756 3,923,683 3,546,344
Effect of dilutive stock options 103,968 -- --
----------- ----------- -----------
Weighted average shares, as adjusted-denominator diluted
computation 4,017,724 3,923,683 3,546,344
=========== =========== ===========
Earnings (loss) per share:
Basic $.20 $(.09) $(.19)
==== ====== ======
Diluted $.20 $(.09) $(.19)
==== ====== ======
The company had various potentially dilutive securities during the periods
presented, including stock options and warrants. See Notes 6 and 7.
F-10
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
INTEREST AND OTHER INCOME
Interest and other income is comprised as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Rental income $168,224 $160,432 $142,561
Interest income from Medicore 122,867 199,286 1,697
Interest income 57,502 90,064 193,287
Management fee income 115,715 -- --
Other income 57,110 27,849 29,485
-------- -------- --------
$521,418 $477,631 $367,030
======== ======== ========
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable and debt in the accompanying
financial statements approximate their fair value because of the short-term
maturity of these instruments, and in the case of debt because such instruments
either bear variable interest rates which approximate market or have interest
rates approximating those currently available to the company for loans with
similar terms and maturities.
NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for fiscal
quarters of fiscal years beginning after June 15, 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. Since the company does not
presently utilize derivative financial instruments, the adoption of FAS 133 has
had no effect on its consolidated financial statements.
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Other than expanded disclosure requirements, FAS 141 has had no effect on the
company's consolidated financial statements. Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators are present) for
impairment. Separate intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives (with no maximum life). The
amortization provisions of FAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2002, the provisions of FAS 142 will be effective for
fiscal years beginning after December 15, 2001. Pursuant to the provisions of
FAS 142, the goodwill resulting from the company's acquisition of minority
interest in August 2001 will not be amortized and will be subject
F-11
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
to the impairment testing provisions of FAS 142 commencing in 2002, prior to
which it will be subject to the impairment provisions of Accounting Principals
Board Opinion No. 17, "Intangible Assets", and FASB Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and Assets to be Disposed of." See Note 11.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment on Disposal of Long-lived Assets" (FAS
144). FAS 144 clarifies when a long-lived asset held for sale should be
classified as such. It also clarifies previous guidance under FAS 121,
"Accounting for the Impairment of long-lived assets and for long-lived assets to
be disposed of." The company will be required to adopt FAS 144 in 2002. The
adoption of FAS 144 is not expected to have a significant effect on the
company's consolidated operations, financial position or cash flows.
NOTE 2 - LONG-TERM DEBT
Long-term debt is as follows:
DECEMBER 31,
--------------------
2001 2000
-------- --------
Mortgage note secured by land and building with
a net book value of $355,000 at December 31, 2001
Monthly principal payments of $3,333 plus interest
at 1% over the prime rate through November 2003 $ 76,719 $116,715
Mortgage note secured by land and building with a
net book value of $623,000 at December 31, 2001
Monthly principal payments of $2,667 plus interest
at 1% over the prime rate through November 2003 61,281 93,284
Development and equipment loan secured by assets
of DCA of Vineland and land and building with
a total net book value of $1,542,000 at
December 31, 2001. Interest of 8.75% through
December 2, 2001; 1 1/2% over the prime rate
thereafter. Monthly payments of interest only
through December 2, 2001; thereafter, monthly
principal payments of $2,917 plus interest with
remaining balance due September 2, 2003 700,000 700,000
Mortgage note secured by land and building with a
net book value of $940,000 at December 31, 2001
Monthly payments of $6,800 including principal and
interest at 8.29% commencing May 2001, with
remaining balance due April 2006 775,842 --
F-12
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - LONG-TERM DEBT--CONTINUED
DECEMBER 31,
----------------------
2001 2000
---------- ----------
Equipment financing agreement secured by equipment
with a net book value of $1,588,000 at December 31,
2001.Monthly payments totaling $28,426 as of
December 31, 2001, including principal and interest,
as described below, pursuant to various schedules
extending through August 2006 with interest at
rates ranging from 4.14% to 10.48% 1,678,067 1,140,260
---------- ----------
3,291,909 2,050,259
Less current portion 357,000 295,031
---------- ----------
$2,934,909 $1,755,228
========== ==========
The company through its subsidiary, DCA of Vineland, LLC, pursuant to a
December 3, 1999 loan agreement obtained a $700,000 development and equipment
line of credit with interest at 8.75% through December 2, 2001 and 1 1/2% over
the prime rate thereafter which is secured by the acquired assets of DCA of
Vineland and a second mortgage on the company's real property in Easton,
Maryland on which an affiliated bank holds the first mortgage. Outstanding
borrowings are subject to monthly payments of interest only through December 2,
2001 with monthly payments thereafter of $2,917 principal plus interest with any
remaining balance due September 2, 2003. This loan had an outstanding principal
balance of $700,000 at December 31, 2001 and December 31, 2000.
In April 2001, the company obtained a $788,000 five-year mortgage through
April 2006 on its building in Valdosta, Georgia with interest at 8.29%. Payments
are $6,800 including principal and interest commencing May 2001 with a final
payment consisting of a balloon payment and any unpaid interest due April 2006.
This mortgage is guaranteed by the company's parent, Medicore. The remaining
principal balance under this mortgage amounted to approximately $776,000 at
December 31, 2001.
The equipment financing agreement provides financing for kidney dialysis
machines for the company's dialysis facilities in Pennsylvania, New Jersey and
Georgia. Additional financing totaled approximately $387,000 in 1999, $525,000
in 2000 and $752,000 in 2001. Payments under the agreement are pursuant to
various schedules extending through August 2006. Payments under most schedules
begin one year after commencement of the financing which would increase monthly
payments from $28,426 as of December 31, 2001 to $50,825 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 remaining principal balance under this financing amounted to approximately
$1,678,000 at December 31, 2001 and $1,140,000 at December 31, 2000.
The prime rate was 4.75% as of December 31, 2001 and 9.50% as of December 31,
2000.
Scheduled maturities of long-term debt outstanding at December 31, 2001 are
approximately: 2002-$357,000; 2003-$1,211,000; 2004-$502,000; 2005-$356,000,
2006-$866,000. Interest payments on the above debt amounted to approximately
$152,000 in 2001, $84,000 in 2000 and $54,000 in 1999, respectively.
F-13
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 2 - LONG-TERM DEBT--CONTINUED
The company's various mortgage 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
The company files separate federal and state income tax returns.
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:
The company has equity positions in seven Limited Liability Companies
("LLC's"), each possessing a finite life. Based on their limited liability
status, its members are not liable for the LLC's debts, liabilities, or
obligations. Each LLC has complied with the criteria for tax treatment as a
partnership. As a result, taxable income or loss is to be reported on each
member's respective tax returns. Losses attributable to the company's equity
position in these LLC's has been included as a component of retained earnings as
of December 31, 2001.
DECEMBER 31,
-----------------------
2001 2000
--------- ---------
Deferred tax liabilities:
Depreciation and amortization $ -- $ --
--------- ---------
Total deferred tax liabilities -- --
Deferred tax assets:
Depreciation and amortization 199,500 9,000
Accrued expenses 77,000 53,000
Bad debt allowance 280,500 107,000
--------- ---------
Subtotal 557,000 169,000
State Net operating loss carryforwards 78,000 271,000
--------- ---------
Total deferred tax assets 635,000 440,000
Valuation allowance for deferred tax assets (217,000) (440,000)
--------- ---------
Net deferred tax asset 418,000 --
Net deferred taxes $ 418,000 $ --
========= =========
A valuation allowance was provided that fully offsets the deferred tax assets
recorded at December 31, 2000 as management believed that it was more likely
than not that, based on the weight of the available evidence, the deferred tax
asset would not be realized.
F-14
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 3--INCOME TAXES--CONTINUED
Significant components of the income tax provision (benefit) are as follows:
2001 2000 1999
--------- --------- ---------
Current:
Federal $ 360,000 $ (85,709) $(324,720)
State 138,078 55,422 32,258
--------- --------- ---------
498,078 (30,287) (292,462)
========= ========= =========
Deferred:
Federal (390,583) -- --
State (27,417) -- --
--------- --------- ---------
(418,000) -- --
--------- --------- ---------
$ 80,078 $ (30,287) $(292,462)
========= ========= =========
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,
--------------------------------------
2001 2000 1999
--------- --------- ---------
Statutory tax rate (34%) applied to income (loss)
before income taxes $ 323,015 $(136,032) $(325,395)
Adjustments due to:
State taxes, net of federal benefit 57,003 36,578 21,290
Change in valuation allowance (223,000) 243,000 117,000
Non-deductible items 8,146 -- 3,395
Prior year tax return accrual adjustment -- (173,833) (108,752)
Other (85,086) -- --
--------- --------- ---------
$ 80,078 $ (30,287) $(292,462)
========= ========= =========
Income tax (refunds) payments were approximately $123,000 in 2001, $(395,000)
in 2000 and $223,000 in 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 years ended December 31, 2001,
2000 and 1999.
As of December 31, 2001 and December 31, 2000, the company had an
intercompany advance receivable from the parent of approximately $201,000 and
$414,000, respectively, which bore interest at the short-term Treasury Bill
rate. Interest income on the intercompany advance receivable amounted to
approximately $14,000, $13,000 and $2,000 for the years ended December 31, 2001,
2000 and 1999, 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, 2003, and therefore, the
advance has been classified as long-term at December 31, 2001.
F-15
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 4 - TRANSACTIONS WITH PARENT--CONTINUED
In January, March and August, 2000, we loaned an aggregate of $2,200,000 to
our parent at an annual interest rate of 10%, with a substantial portion of the
loan and accrued interest scheduled to be repaid on January 26, 2001. These
funds were loaned by our parent to LGP, a private company investing in Linux
software companies and recently attempting to initiate the development and
marketing of a Linux desktop software system. Our parent also acquired an
approximately 11% interest in LGP. We extended the maturity of the loans to our
parent, as it did with LGP, in consideration for which we received 100,000
shares of common stock of LGP, increasing our ownership in LGP to 400,000
shares, with a cost basis of approximately $140,000 resulting from a write-off
of a note secured by 300,000 LGP shares, which is included in deferred expenses
and other assets. Interest income on the notes receivable from the parent, which
have the same terms as the parent's loans to LGP, amounted to approximately
$109,000 for 2001, all of which was earned during the first half of 2001, and
$186,000 for the year ended December 31, 2000.
In May 2001, our parent paid us $215,000, representing $200,000 of the loan
with $15,500 of accrued interest. In June 2001, our parent repaid to us the
remaining outstanding loan of $2,000,000 and accrued interest of $279,000.
NOTE 5 - OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 2001, 2000 and 1999, respectively, the
company paid premiums of approximately $133,000, $114,000 and $161,000 for
insurance obtained through two persons, one a director of the parent, and the
other a relative of an officer and director of the company and the parent.
For the years ended December 31, 2001, 2000 and 1999, respectively, legal
fees of $144,000, $133,000 and $132,000 were paid to an attorney who acts as
general counsel and Secretary for the company and the parent and who is a
director of the parent.
In May 2002, the company loaned its president $95,000 to be repaid with
accrued interest at prime minus 1% (floating prime) on or before maturity on May
11, 2006. This demand loan is collateralized by all of the President's stock
options in the company, as well as common stock from exercise of the options and
proceeds from sale of such stock. Interest income on the loan amounted to
approximately $4,000 for 2001. This loan and the related accrued interest of
$4,000 have been included in prepaid expenses and other current assets at
December 31, 2001.
F-16
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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. 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.
In April 1999, the company adopted a stock option plan pursuant to which the
board of directors granted 800,000 options exercisable at $1.25 per share to
certain of it officers, directors, employees and consultants with 340,000
options exercisable through April 20, 2000 and 460,000 options exercisable
through April 20, 2004. In 1999, the company recorded expense of $153,000 on
340,000 of these options pursuant to FAS 123 and APB 25. In April 2000, the
340,000 one year options were exercised for which the company received cash
payment of the par value and the balance in three-year promissory notes with
interest at 6.2%.
On January 2, 2001, the company's board of directors granted to the company's
president an option for 165,000 shares exercisable at $1.25 per share for five
years from vesting with 33,000 options vesting January 2001 and 33,000 options
vesting January 1 for each of the next four years.
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 during 2001 and 1999, respectively: risk-free interest rate of 5.75% and
5.65% no dividend yield; volatility factor of the expected market price of the
company's common stock of 1.15 and .95, and a weighted-average expected life of
4 years and 1.9 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.
F-17
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 6 - STOCK OPTIONS--CONTINUED
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the options' vesting period with one fifth of the 2001
options vesting during 2001. Since the April 1999 options vested immediately,
the company's pro forma disclosure recognized expense upon issuance of the
options. No pro forma information is provided for 2000 as no options were
granted during that year. The company's pro forma information follows:
2001 1999
--------- -----------
Pro forma net income (loss) $ 773,021 $ (958,759)
========= ===========
Pro forma earnings (loss) per share $.20 $(.28)
==== =====
A summary of the company's stock option activity and related information for
the years ended December 31 follows:
2001 2000 1999
---- ---- ----
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding-beginning of year 465,000 809,500 19,500
Granted 165,000 $1.25 --- 800,000 $1.25
Cancellations -- --- --
Exercised -- (340,000) $1.25 --
Expired -- (4,500) 1.50 (10,000) 3.50
------- ------- -------
Outstanding-end of year 630,000 465,000 809,500
======= ======= =======
Outstanding and exercisable
at end of year:
January 2001 options 33,000 1.25
April 1999 options 460,000 1.25 460,000 1.25 800,000 1.25
November 1995 options -- -- 4,500 1.50
June 1998 options 5,000 2.25 5,000 2.25 5,000 2.25
------- ------- -------
498,000 465,000 809,500
======= ======= =======
Weighted-average fair value of
options granted during the year $.43 $-- $.59
==== ==== ====
The remaining contractual life at December 31, 2001 is 2.3 years for 460,000
options issued in April 1999 and 1.4 years for the 5,000 options issued in June
1998. The remaining contractual life for the January 2001 options is 4 years for
the 33,000 options which vested January 2001 and 6 years, 7 years, 8 years and 9
years for the 33,000 options vesting January 2002, January 2003, January 2004
and January 2005, respectively.
F-18
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 6 - STOCK OPTIONS--CONTINUED
The company has 765,000 shares reserved for future issuance, including: 5,000
shares for the June 1998 options; 460,000 shares for the April 1999 options and
165,000 shares for the January 2001 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 June 30, 2000, at which time the remaining
options expired. During 2000, approximately 170,000 warrants were exercised with
net proceeds to the company of approximately $765,000. 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 their expiration on April 16, 2001
with the underlying warrants being substantially identical to the public
warrants except that they are exercisable at $5.40 per share.
NOTE 8 - COMMITMENTS
The company has leases on facilities housing its dialysis operations. The
aggregate lease commitments at December 31, 2001 are approximately:
2002-$466,000; 2003-$435,000; 2004-$340,000; 2005-$260,000; 2006-$221,000;
thereafter-$694,000. Total rent expense was approximately $316,000, $218,000 and
$173,000 for the years ended December 31, 2001, 2000 and 1999, 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, 2001.
NOTE 9 - REPURCHASE OF COMMON STOCK
In September 2000, the company announced its intent to repurchase up to an
additional 300,000 shares of its common stock at current market prices. The
company repurchased and cancelled approximately 77,000 shares in the fourth
quarter of 2000 with a repurchase cost of approximately $65,000, and a total of
approximately 93,000 shares at a cost of approximately $98,000 during 2001.
NOTE 10 - CAPITAL EXPENDITURES
Capital expenditures were as follows:
2001 2000 1999
---- ---- ----
$1,985,000 $1,933,000 $1,203,000
========== ========== ==========
F-19
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 11 - ACQUISITION OF MINORITY INTEREST
In August 2001,the company acquired the 30% minority interest in DCA of So.
Ga., LLC, for $600,000 of which $300,000 was paid in cash and $300,000 is
payable in August, 2002. This transaction resulted in $523,000 goodwill
representing the excess of the $600,000 purchase price over the $77,000 fair
value of the minority interest acquired. The goodwill will be amortized for tax
purposes over a 15-year period. The company's decision to make this investment
was based largely on the profitability of DCA of So. Ga. Subsequent to this
acquisition, DCA of So. Ga. will continue to be included in the company's
consolidated condensed statement of operations; however, minority interest in
DCA of So. Ga.'s results of operations will not be recorded subsequent to the
company's acquisition of the minority interest. The party from which the company
acquired the minority interest has an agreement to act as medical director of
another of the company's subsidiaries. If this party should fail to satisfy the
terms of that agreement, the purchase price of the 30% minority interest in DCA
of So. Ga. would be reduced to $300,000. See Note 1.
F-20
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DIALYSIS CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
DECEMBER 31, 2001
- ---------------------------------------------- ------------- ----------------------------- -------------- -------------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------- ------------- ----------------------------- -------------- -------------
Additions
(Deductions) Additions
Charged Charged to
Balance at (Credited) Other Other Changes Balance
Beginning to Cost Accounts Add (Deduct) at End of
Classification Of Period and Expenses Describe Describe Period
- ---------------------------------------------- ------------- ------------ ---------------- -------------- -------------
YEAR ENDED DECEMBER 31, 2001:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 306,000 $ 659,000 $(238,000)(1) $ 727,000
Valuation allowance for deferred tax asset 440,000 (223,000) -- 217,000
--------- --------- --------- ---------
$ 746,000 $ 436,000 $(238,000) $ 944,000
========= ========= ========= =========
YEAR ENDED DECEMBER 31, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 237,000 $ 192,000 $(123,000)(1) $ 306,000
Valuation allowance for deferred tax asset 197,000 243,000 -- 440,000
--------- --------- --------- ---------
$ 434,000 $ 435,000 $(123,000) $ 746,000
========= ========= ========= =========
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
========= ========= ========= =========
(1) Uncollectable accounts written off, net of recoveries.
F-21