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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, 2000
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.)
27 Miller Avenue, Lemoyne, Pennsylvania 17043
- ------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (717) 730-6164
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class
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. [X]
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 20, 2001 was approximately $1,098,542.
As of March 20, 2001, the Company had 3,932,844 outstanding shares of
its common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporating information by reference from the Information
Statement in connection with the Registrant's Annual Meeting of Shareholders
anticipated to be on May 24, 2000.
Registrant's Registration Statement on Form SB-2 dated December 22,
1995, as amended February 9, 1996, April 2, 1996 and April 15, 1996,
Registration No. 33-80877-A Part II, Item 27, Exhibits.
Registrant's Annual Report, Form 10-K for the four years ended
December 31, 1999, Part IV, Exhibits.
Annual Reports for Registrant's Parent, Medicore, Inc., Forms 10-K
for the year ended December 31, 1994, Part IV, Exhibits.
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DIALYSIS CORPORATION OF AMERICA
Index to Annual Report on Form 10-K
Year Ended December 31, 2000
PAGE
PART I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 17
Item 3. Legal Proceedings.................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.................................. 18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............ 19
Item 6. Selected Financial Data.............................................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................ 21
Item 7A. Quantitative and Qualitative Disclosure About Market Risk............................ 24
Item 8. Financial Statements and Supplementary Data.......................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 25
Item 11. Executive Compensation............................................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 26
Item 13. Certain Relationships and Related Transactions....................................... 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 27
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
the 1934. The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors for forward-looking statements. Certain of the forward-looking
statements include management's expectations, intentions, beliefs and strategies
regarding the growth of our company and our future operations, the character and
development of the dialysis industry, anticipated revenues, our need for and
sources of funding for expansion opportunities and construction, expenditures,
costs and income, 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 included in our registration statement filed with the
SEC on Form S-3 (effective July 1, 1999). 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 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 eight outpatient dialysis facilities,
four facilities in Pennsylvania, two dialysis facilities in New Jersey, and two
dialysis facilities in Georgia. We have a 40% interest in a dialysis center in
Ohio which we manage. Our ninth dialysis center is under construction and
scheduled to open within the next several months. Our dialysis facilities are
operated through subsidiaries, corporations or limited liability companies, with
our ownership ranging from 51% to 100%. We manage our dialysis facilities under
management services agreements. Dialysis Corporation of America also provides
acute dialysis services through contractual relationships with nine hospitals
and medical centers. In addition, we provide homecare services through our
wholly owned subsidiary, DCA Medical Services, Inc.
GENERAL
Management believes the company distinguishes itself on the basis of
quality patient care, and a patient-focused, courteous, highly trained
professional staff. For the year ended December 31, 2000, we performed
approximately 38,350 dialysis treatments, of which approximately 32,400 were
outpatient treatments, approximately 2,600 were homecare patients, and
approximately 3,350 represented inpatient dialysis treatments. Our facilities
are designed for a maximum of 108 stations to render outpatient dialysis
treatment and training of home dialysis patients. The Ohio facility in which we
have a 40% interest has 12 dialysis stations.
Our inpatient dialysis treatments are conducted under contractual
relationships currently with nine hospitals and medical centers located in areas
and states serviced by our outpatient dialysis facilities. Homecare, sometimes
referred to as method 2 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 acquisition or development 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 much greater personnel and financial
resources who have a significant advantage in acquiring and/or developing
facilities in areas targeted by us. We opened our sixth center in New Jersey in
February, 2000, two new dialysis facilities in Georgia in November, 2000, with
another currently under construction. A center in Ohio in which we have a 40%
interest and which we manage, opened in February, 2001. 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 (51%, 50% and 52% of medical services
revenues for 2000, 1999 and 1998, respectively); (ii) home peritoneal dialysis
services, including method 2 services (6%, 9% and 11% of medical services
revenues for 2000, 1999 and 1998, respectively); (iii) inpatient hemodialysis
services for acute patient care provided through agreements with hospitals and
medical centers (10%, 10% and 11% of medical services revenues for 2000, 1999
and 1998, respectively); and (iv) ancillary services associated with dialysis
treatments, primarily certain tests and the administration of erythropoietin
("EPO"), a bio-engineered protein that stimulates the production of red blood
cells, since a deteriorating kidney loses its ability to regulate red blood cell
count, resulting in anemia (33%, 31% and 26% of medical services revenue for
2000, 1999 and 1998, respectively). Dialysis is an ongoing and necessary therapy
to sustain life for kidney dialysis patients and utilization of the company's
services is substantially predictable. ESRD patients normally receive 156
dialysis treatments each year. For the year ended December 31, 2000,
approximately 59% of our revenues were derived from Medicare reimbursement.
Essential to our operations and income is Medicare reimbursement
which is a fixed rate determined by the Health Care Financing Administration
("HCFA") of the Department of Health and Human Services ("HHS"). The level of
our revenues and profitability may be adversely affected by future legislation
that could result in rate cuts. Further, our operating costs tend to increase
over the years without any comparable increases, if any, in the prescribed
dialysis treatment rates, which usually remain fixed. There also may be
reductions in commercial third-party reimbursement rates. See "Operations -
Medicare Reimbursement." The inpatient dialysis service agreements for treating
acute kidney disease are not subject to government fixed rates, but rather are
negotiated with the hospitals, and typically the rates are higher on a per
treatment basis.
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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, or End Stage Renal Disease which
results from chemical imbalance and buildup of toxic chemicals, 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 obtain a kidney transplant, which procedure
is limited due to lack of suitable kidney donors and the incidence of rejection
of transplanted organs, or obtain regular dialysis treatment for the rest of
their lives.
Based upon information published by HCFA, the number of ESRD patients
requiring dialysis treatments in the United States continues to grow and is
thought to be attributable primarily to the aging of the population and greater
patient longevity as a result of improved dialysis technology. The total number
of ESRD patients in the United States is increasing by approximately 10% a year.
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. The significant portion of ESRD patients
receive treatments at non-hospital owned outpatient dialysis facilities
(according to HCFA, approximately 86%) with the remaining patients treated at
home through hemodialysis or peritoneal dialysis. Patients treated at home are
monitored by a designated outpatient facility.
The most prevalent form of treatment for ESRD patients is
hemodialysis, which involves the use of an artificial kidney, known as a
dialyzer, to perform the function of removing toxins and excess fluids from the
bloodstream. This is accomplished with a dialysis machine, a complex blood
filtering device which takes the place of certain functions of the kidney and
which machine also controls external blood flow and monitors the toxic and fluid
removal process. The dialyzer has two separate chambers divided by a
semi-permeable membrane, and at the same time the blood circulates through one
chamber, a dialyzer fluid is circulated through the other chamber. The toxins
and excess fluid pass through the membrane into the dialysis fluid. On the
average, patients usually receive three treatments per week with each treatment
taking three to five hours. Dialysis treatments are performed by teams of
licensed nurses and trained technicians pursuant to the staff physician's
instructions.
Home hemodialysis treatment requires the patient to be medically
suitable and have a qualified assistant. Additionally, home hemodialysis
requires training for both the patient and the assistant, which usually takes
four to eight weeks. 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
3
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 dialysis solution while the patient is
sleeping. Peritoneal dialysis is the third most common form of ESRD therapy
following center hemodialysis and renal transplant.
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 24 years' experience in
developing and operating dialysis treatment facilities. Our first priority is
top quality patient care. We intend to continue to establish alliances with
physicians and hospitals and to attempt to initiate dialysis service
arrangements with nursing homes and managed care organizations, and to continue
to emphasize our high quality patient care. Our smaller size allows us to focus
on each patient's individual needs while remaining sensitive to the physicians'
professional concerns.
We continue to actively seek and negotiate with physicians and others
to establish new outpatient dialysis facilities. In 2000 we opened two new
dialysis centers in Georgia. An Ohio facility in which we have a 40% interest
opened in February, 2001. We have another dialysis facility under construction
in Georgia, and we are currently in different phases of negotiations with
physicians for potential new facilities in different areas of the country,
primarily in the eastern seaboard states. We have also entered into five
additional acute inpatient dialysis services agreements with hospitals in
Georgia, New Jersey, Ohio, and Pennsylvania.
Same Center Growth
We endeavor to increase same center growth by adding quality staff
and management and attracting new patients to our existing facilities. We seek
to accomplish this objective by rendering high caliber patient care in
convenient, safe and serene conditions for everyone involved. We believe that we
have existing adequate space and stations within our facilities to accommodate
greater patient volume and maximize our treatment potential.
Acquisition and Development of Facilities
One of the primary elements in acquiring or developing facilities is
locating an area with an existing patient base under the current treatment of a
local nephrologist, since the facility is primarily going to serve such
patients. Other considerations in evaluating a proposed acquisition or
development of a dialysis facility are the availability and cost of qualified
and skilled personnel, particularly nursing and technical staff, the size and
condition of the facility and its equipment, the atmosphere for the patients,
the area's demographics and population growth estimates, state regulation of
dialysis and healthcare services, and the existence of competitive factors such
as hospital or proprietary non-hospital owned and existing outpatient dialysis
facilities within reasonable proximity to the proposed center.
Expansion of our operations is being approached presently through the
development of our own dialysis facilities. Acquisition of existing outpatient
dialysis centers, which we have not done, is a faster but much more costly means
of growth. The primary reason 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
professional practice. Other motivating forces are the
4
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 may take
an average of four to six months, and approximately 12 months or longer to
generate income, all of which are subject to location, size and competitive
elements. Four of our centers, two of which are recently established, one in
Homerville, Georgia, the second being our 40% owned affiliate in Toledo, Ohio,
and two having been operational for awhile, including Carlisle, Pennsylvania
and Manahawkin, New Jersey, are in the developmental stages since they have
not reached the point where the patient base is sufficient to generate and
sustain earnings. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Construction of a 15 station
facility may cost in a range of $600,000 to $750,000 depending on location,
size and related services to be provided by the proposed facility. Acquisition
of existing facilities is substantially more expensive, and is usually based
primarily upon the number of patients, and to a lesser extent, location,
competition, nature of facility and negotiation. Any significant expansion,
whether through acquisition or development of new facilities, is dependent
upon existing funds or financing from other sources. To date, no acquisitions
have been made and should such acquisition opportunities arise, there is no
assurance that we would have available or be able to raise the necessary
financing to pursue or complete such an acquisition. Our parent, Medicore,
Inc., is in the process of selling a controlling interest of Techdyne,
Inc., another public subsidiary of Medicore for a little in excess of
$10,000,000. That proposed transaction is subject to approval of Medicore's
shareholders. A substantial portion of the proceeds of that sale are anticipated
to be made available to our company for expansion of our dialysis operations.
There is no assurance that Medicore's proposed sale of its control interest of
Techdyne will be approved by Medicore shareholders, or otherwise completed.
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 2000 we entered into two new acute inpatient dialysis services
agreements, and one additional acute inpatient agreement in 2001, 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."
5
OPERATIONS
Location, Capacity and Use of Facilities
We operate eight outpatient dialysis facilities in Pennsylvania, New
Jersey and Georgia , with a total designed capacity of 108 licensed stations. We
have a 40% interest in an Ohio dialysis center which we manage and has a total
of 12 licensed dialysis centers. We own and operate these centers through our
subsidiaries of which three are 100% owned, three are 80% owned, one 70% and one
51% owned. The Lemoyne, Pennsylvania, and one of the South Georgia dialysis
facilities are located on property 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
eight 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. See "Dialysis Industry" above.
The table below indicates when each subsidiary commenced operations
and the approximate number of patient treatments for the periods indicated.
Dialysis Treatments
Year Ended
December 31,
Commencement -------------------------------
Subsidiary and Location of Operations 2000 1999 1998
- ----------------------- ------------- ---- ---- ----
Dialysis Services of PA., Inc. - Lemoyne June, 1995 8,300 7,600 7,500
Dialysis Services of PA., Inc. - Wellsboro September, 1995 5,200 3,000 3,600
Dialysis Services of PA., Inc. - Carlisle September, 1997 2,400 3,000 3,500
Dialysis Services of NJ, Inc. - Manahawkin July, 1998 3,300 1,300 250
Dialysis Services of PA., Inc. - Chambersburg January, 1999 4,900 2,900 ---
DCA of Vineland, LLC February, 2000 6,800 --- ---
DCA of So. Ga., LLC November, 2000 1,200 --- ---
DCA of Homerville, LLC November, 2000 127 --- ---
The Ohio dialysis center in which we hold a 40% interest commenced
operations in February, 2001.
The company estimates that on average its centers were operating at
approximately 60% of capacity as of December 31, 2000, based on the assumption
that a dialysis center is able to provide up to three treatments a day per
station, six days a week. We believe we are able to increase the number of
dialysis treatments at our centers without making additional capital
expenditures.
Operations of Dialysis Facilities
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.
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Our company maintains a team of expert dialysis specialists to
provide for the individual needs of each patient. In accordance with
participation requirements under the Medicare ESRD program, each facility
retains a medical director qualified and experienced in the practice of
nephrology and the administration of a renal dialysis facility. See "Physician
Relationships" below. Each facility is overseen by a nurse administrator who
supervises the daily operations and the staff, which consists of registered
nurses, licensed practical nurses, patient care technicians, a part-time social
worker to assist the patient and family to adjust to dialysis treatment and to
provide help in financial assistance and planning, and a part-time registered
dietitian. These individuals supervise the patient's needs and treatments. See
"Employees" below. The company must continue to attract and retain skilled
nurses and other staff, competition for whom is intense.
The company's facilities offer high-efficiency and conventional
hemodialysis, which, in our experience, provides the most viable treatment for
most patients. We consider our dialysis equipment to be both modern and
efficient, providing state of the art treatment in a safe and comfortable
environment. In 2000, we acquired an additional 53 dialysis machines for our
recently opened dialysis centers which are more advanced and include better
safety features and updated technology. The addition of the improved equipment
enhances our ability to provide more efficient treatment.
Our facilities also offer home dialysis (other than hemodialysis),
primarily continuous ambulatory peritoneal dialysis and continuous cycling
peritoneal dialysis and method 2. Training programs for continuous ambulatory
peritoneal dialysis or continuous cycling peritoneal dialysis generally
encompass two to three weeks at each facility, and such training is conducted by
the facility's home training nurse. After the patient completes training, they
are able to perform treatment at home with equipment and supplies provided by
the company.
Inpatient Dialysis Services
The company presently provides inpatient dialysis services to eight
hospitals in New Jersey, Pennsylvania and Georgia , under agreements either with
the company or with one of our facilities in the 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 EPO upon a physician's prescription.
EPO is a bio-engineered protein which stimulates the production of red blood
cells and is used in connection with dialysis to treat anemia, a medical
complication frequently experienced by ESRD patients. EPO decreases the
necessity for blood transfusions in ESRD patients. Other ancillary services that
we provide to our patients include electrocardiograms and blood transfusions,
all of which are separately reimbursed by Medicare. See "Medicare Reimbursement"
below.
Physician Relationships
An integral element to the success of a facility is its association
with area nephrologists. A dialysis patient generally seeks treatment at a
facility near the patient's home and where such patient's nephrologist has
established its practice. Consequently, we rely on our ability to develop
affiliations with area nephrologists who may provide additional patients and
quality dialysis care.
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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 five of
our eight 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 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 to the
government payment authority on a direct basis by the treating physician and
paid directly to the physician or the professional corporation.
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 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 every facility. Quality assurance activities involve
the ongoing examination of care provided, the identification of deficiencies in
that care and any necessary improvements of the quality of care. Specifically,
this program requires each center's staff, including its medical director and/or
nurse administrator to regularly review quality assurance data, whether related
to dialysis treatment services, equipment, technical and environmental
improvements, and staff-patient and personnel relationships. These evaluations
are in addition to assuring regulatory compliance with HCFA and the Occupational
Safety and Health Administration. Our manager of compliance, who is a registered
nurse, oversees this program in addition to ensuring that the company meets
federal and state compliance requirements for dialysis centers. See "Government
Regulation" below.
8
Patient Revenues
A substantial amount of the fees for outpatient dialysis treatments
are funded under the ESRD Program established by the federal government under
the Social Security Act, and administered in accordance with rates set by HCFA.
It has been reported by HCFA that 92% of all dialysis patients were covered by
Medicare. The balance of the outpatient charges are paid by private payors
including the patient's medical insurance, private funds or state Medicaid
plans. Pennsylvania, 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.
Inpatient treatments accounted for approximately 10%, 10% and 11% of our
revenues for the years ended December 31, 2000, 1999 and 1998, respectively.
Medicare Reimbursement
The company is reimbursed primarily from third party payors including
Medicaid, commercial insurance companies, but substantially by Medicare under a
prospective reimbursement system for chronic dialysis services. Each of our
dialysis facilities is certified to participate in the Medicare program. Under
that Medicare system, the reimbursement rates are fixed in advance and limit the
allowable charge per treatment, but provides us with predictable and recurring
per treatment revenues and allows us to retain any profit earned. An established
composite rate set by HCFA governs the Medicare reimbursement available for a
designated group of dialysis services, including dialysis treatments, supplies
used for such treatments, certain laboratory tests and medications. HCFA
eliminated routine Medicare coverage for such tests as nerve conduction studies,
electrocardiograms, chest x-rays and bone density measurements, and will only
pay for such tests when there is documentation of medical necessity. The
Medicare composite rate is subject to regional differences in wage earnings.
The company receives reimbursement for outpatient dialysis services
provided to Medicare-eligible patients at rates that are currently between $120
and $126 per treatment, depending upon regional wage variations. The Medicare
reimbursement rate is subject to change by legislation. An average ESRD
reimbursement rate is $122 per treatment for outpatient dialysis services. The
current maximum composite reimbursement rate is $142 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.
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. Except for the
administration of EPO, these ancillary services are not significant sources of
income to us compared to reimbursement for actual treatment. We routinely
submit claims monthly and is usually paid by Medicare within 30 days of the
submission.
9
We are unable to predict what, if any, future changes may occur in
the rate of reimbursement. Any reduction in the Medicare composite reimbursement
rate could have a material adverse effect on our business, revenues and net
earnings.
Medicaid Reimbursement
Medicaid programs are state administered programs partially funded by
the federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state defined levels and who are
otherwise uninsured. The programs also serve as supplemental insurance programs
for the Medicare co-insurance portion and provide certain coverages (e.g., oral
medications) that are not covered by Medicare. State regulations generally
follow Medicare reimbursement levels and coverages without any co-insurance
amounts. Certain states, however, require beneficiaries to pay a monthly share
of the cost based upon levels of income or assets. Pennsylvania has a Medical
Assistance Program comparable to Medicaid, as well as New Jersey, with primary
and secondary insurance coverage to those who qualify. We are a licensed ESRD
Medicaid provider in New Jersey, Pennsylvania and Georgia.
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 that 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 24
years, the company has never been subject to any suit relating to its dialysis
operations. We currently have general liability insurance, including
professional and products liability, with coverage limits of $1 million per
occurrence and $3 million in the aggregate annually. Our insurance policies
provide coverage on an "occurrence" basis and are subject to annual renewal. A
hypothetical successful claim against us in excess of our insurance coverage
could have a material adverse effect upon our business and results of
operations. The medical directors supervising our dialysis operations and other
physicians practicing at the facilities are required to maintain their own
professional malpractice insurance coverage.
GOVERNMENT REGULATION
General
Regulation of healthcare facilities, including dialysis, is
extensive, with legislation continually proposed relating to safety, maintenance
of equipment and proper records, quality assurance programs,
10
reimbursement rates, licensing and other areas of operations. Each of the
dialysis facilities must be certified by HCFA, and we must comply with certain
rules and regulations established by HCFA regarding charges, procedures and
policies. Each dialysis center is also subject to periodic inspections by
federal and state agencies to determine if their operations meet the appropriate
regulatory standards. These requirements have been satisfied by each of our
dialysis facilities.
Many states have eliminated the requirement for dialysis centers to
obtain a certificate of need, a condition for regulating the establishment and
expansion of dialysis centers. There are no certificate of need requirements in
Pennsylvania, New Jersey, Georgia or Ohio, where we are presently operating. In
past years, we have always been able to comply with applicable certificate of
need laws.
Our record of compliance with federal, state and local governmental
laws and regulations remains excellent. Regulation of healthcare facilities,
including dialysis centers, is extensive with legislation continually proposed
relating to safety, reimbursement rates, licensing and other areas of
operations. We are unable to predict the scope and effect of any changes in
government regulations, particularly any modifications in the reimbursement rate
for medical services or requirements to obtain certification from HCFA.
Enforcement may also become more stringent adding to compliance costs as well as
potential sanctions.
We regularly review legislative and regulatory changes and
developments and will restructure a business arrangement if we determine such
might place our operations in material noncompliance with such law or
regulation. See "Fraud and Abuse" and "Stark II" below. To date, none of our
business arrangements with physicians, patients or others have been the subject
of investigation by any governmental authority. No assurance can be given,
however, that DCA's business arrangements will not be the subject of a future
investigation or prosecution by a federal or state governmental authority which
could result in civil and/or criminal sanctions.
Fraud and Abuse
Each year OIG publishes a Fraud and Abuse Civil Plan. For the year
2000, OIG indicated it planned to concentrate, among other things, on ESRD
reimbursement issues, including oversight of dialysis facilities, separately
billable maintenance dialysis services, and medical appropriateness of tests and
other dialysis-related services. We reviewed the OIG 2000 Work Plan, and believe
that OIG will continue to focus in these areas in 2001, and that we are in
compliance with applicable regulations. Nevertheless, we will continue to review
risk areas inherent to dialysis treatment and service, and to develop and
implement a compliance program. This program focuses on employee education
concerning applicable billing rules, regulations and insurance carrier
interpretations, as well as auditing medical records to ensure the medical
necessity of services provided and billed.
The Social Security Act provides Medicare coverage to most persons
regardless of age or financial condition for dialysis treatments as well as
kidney transplants. The Social Security Act further prohibits, as do many state
laws, the payment of patient referral fees for treatments that are otherwise
paid for by Medicare, Medicaid or similar state programs under the Medicare and
Medicaid Patient and Program Protection Act of 1987, or the "Anti-kickback
Statute." The Anti-kickback Statute and similar state laws impose criminal and
civil sanctions on persons who knowingly and willfully solicit, offer, receive
or pay any remuneration, directly or indirectly, in return for, or to include,
the referral of a patient for treatment, among other things. Included in the
civil penalties is exclusion of the provider from participation in the Medicare
and Medicaid programs. The language of the Anti-kickback Statute has been
construed broadly by the courts. The federal government in 1991, 1992 and late
1999 published regulations that established exceptions, "safe harbors," to the
Anti-kickback Statute for certain business arrangements that would not be deemed
to violate the illegal remuneration provisions of the federal
11
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 is
fixed by a medical director agreement and reflects competitive factors in their
respective location, and the size of the center, and the physician's
professional qualifications. The medical director's fee is fixed in advance for
periods of one to five years and does not take into account the volume of
patient treatments or amounts of referrals to the dialysis center. Four of our
outpatient dialysis centers are owned jointly between the company and a group of
physicians, who hold a minority position (the Ohio center 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 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 assets transferred to, or services
performed by such physicians for the subsidiary, and in certain cases, monetary
compensation, and there is no intent to induce referrals to our facilities. See
"Business - Physician Relationships" above. We have never been challenged under
these statutes and believe our arrangements with our medical directors are in
material compliance with applicable law. 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 therefore capable of objective documentation, drastically reducing
the possibility of overutilization. There are safe harbors for certain
arrangements. However, these relationships with medical director ownership of a
minority interest in our facility satisfies many but not all of the criteria for
the safe harbor, and there can be no assurance that these relationships will not
subject us to investigation or prosecution by enforcement agencies. In an effort
to further our position of adhering to the law, we have initiated the
development of a compliance plan and medical chart audits to confirm medical
necessity of referrals.
With respect to our inpatient dialysis services, we provide the
hospital or similar healthcare entity with dialysis services, including
qualified nursing and technical personnel, supplies, equipment and technical
services. In certain instances, medical directors of a 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.
12
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. Phase I of federal
regulations interpreting Stark II were issued in January, 2001, anticipated to
become effective in the first quarter of 2002.
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, and that dialysis is a necessary medical treatment
for those with temporary or permanent kidney failure that is not susceptible to
that type of abuse. 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 its dialysis centers pursuant to
medical director agreements, which we believe meet the exception for personal
service arrangements under Stark II. Non-affiliated physicians who send or treat
their patients at any of our facilities do not receive any compensation from 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 HCFA 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 HCFA determines
to have been furnished in violation of Stark II, in addition to substantial
civil monetary penalties, which may adversely affect our operations and future
financial results. We believe that if Stark II is interpreted by HCFA or any
other governmental entity to apply to our arrangements, it is possible that we
will be permitted to bring our financial relationships with referring physicians
into material compliance with the provisions of Stark II on a prospective basis.
However, prospective compliance may not eliminate the amounts or penalties, if
any, that might be determined to be owed for past conduct, and there can be no
assurance that such prospective compliance, if permissible, would not have a
material adverse effect on the company.
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, to be
known as the "Fraud and Abuse Control Program" and the "Medicare Integrity
Program." The Fraud and Abuse Control Program will be conducted jointly by HHS
and the Attorney General while the Medicare Integrity Program, which is funded
by the Medicare Hospital Insurance Trust Fund, will enable HHS, the Department
of Justice and the FBI to monitor and review specifically Medicare fraud.
Under these programs, these governmental entities will undertake a
variety of monitoring activities which were previously left to providers to
conduct, including medical utilization and fraud review, cost report audits,
secondary payor determinations, reports of fraud and abuse actions against
providers will be shared as well as encouraged by rewarding whistleblowers with
money collected from civil fines. The Incentive Program for Fraud and Abuse
Information, a new program under HIPAA, began in January, 1999 rewarding
Medicare recipients 10% of the overpayment up to $1,000 for reporting Medicare
fraud and abuse. HIPAA further created several new Health Care Fraud Crimes and
extended their applicability to private health plans; but the Anti-kickback
Statute does not apply to private health plans.
HHS recently published HIPAA privacy regulations which appear to
require development of extensive policies and procedures, including
administrative safeguards relating to private health information in our
possession. Also, there are proposed security and electronic signature
safeguards that would require us to develop information systems and electronic
safeguards to protect data integrity. Compliance with these proposals, required
by April, 2003, will involve substantial effort and expense by the company.
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, HIPA creates
a tougher burden of proof for the government by requiring that the government
establish that the person "knew or should have known" a false or fraudulent
claim was presented. The "knew or should have known" standard is defined to
require "deliberate ignorance or reckless disregard of the truth or falsity of
the information," thus merely negligent conduct or billing errors should not
violate the Civil False Claims Act.
14
As for criminal penalties, HIPAA adds healthcare fraud, theft,
embezzlement, obstruction of investigations and false statements to the general
federal criminal code with respect to federally funded health programs, thus
subjecting such acts to criminal penalties. Persons convicted of these crimes
face up to 10 years imprisonment and/or fines. Moreover, a court imposing a
sentence on a person convicted of federal healthcare offense may order the
person to forfeit all real or personal property that is derived from the
criminal offense. The Attorney General is also provided with a greatly expanded
subpoena power under HIPAA to investigate fraudulent criminal activities, and
federal prosecutors may utilize asset freezes, injunctive relief and forfeiture
of proceeds to limit fraud during such an investigation.
Although we believe we substantially comply with currently applicable
state and federal laws and regulations and to date has not had any difficulty in
maintaining its licenses or its Medicare and Medicaid authorizations, the
healthcare service industry is and will continue to be subject to substantial
and continually changing regulation at the federal and state levels, and the
scope and effect of such and its impact on our operations cannot be predicted.
No assurance can be given that our activities will not be reviewed or challenged
by regulatory authorities.
Any loss by the company of its various federal certifications, its
approval as a certified provider under the Medicare or Medicaid programs or its
licenses under the laws of any state or other governmental authority from which
a substantial portion of our revenues are derived or a change resulting from
healthcare reform, a reduction of dialysis reimbursement or a reduction or
complete elimination of coverage for dialysis services, would have a material
adverse effect on our business.
Environmental and Health Regulations
Our dialysis centers are subject to hazardous waste laws and
non-hazardous medical waste regulation. Most of our waste is non-hazardous. HCFA
requires that all dialysis facilities have a contract with a licensed medical
waste handler for any hazardous waste. We also follow OSHA's Hazardous Waste
Communications Policy, which requires all employees to be knowledgeable of the
presence of and familiar with the use and disposal of hazardous chemicals in the
facility. Medical waste of each facility is handled by licensed local medical
waste sanitation agencies who are primarily responsible for compliance with such
laws.
There are a variety of regulations promulgated under OSHA relating to
employees exposed to blood and other potentially infectious materials requiring
employers, including dialysis centers, to provide protection. We adhere to
OSHA's protective guidelines, including regularly testing employees and patients
for exposure to hepatitis B and providing employees subject to such exposure
with hepatitis B vaccinations on an as-needed basis, protective equipment, a
written exposure control plan and training in infection control and waste
disposal.
OTHER REGULATION
There are also federal and state laws prohibiting anyone from
presenting false claims or fraudulent information for payments by Medicare,
Medicaid and other third-party payors. These laws provide for both criminal and
civil penalties, exclusion from Medicare and Medicaid participation, repayment
of previously collected amounts and other financial penalties under the False
Claims Act. The submission of Medicare cost reports and requests for payment by
dialysis centers are covered by these laws. We believe we have the proper
internal controls and procedures for issuance of accounts and complete cost
reports and payment requests. However, there is no assurance that such reports
and requests are materially accurate and complete and therefore subject to a
challenge under these laws.
15
Certain states have anti-kickback legislation and laws dealing with
self-referral provisions similar to the federal Anti-kickback Statute and Stark
II. We have no reason to believe that it is not in compliance with such state
laws.
COMPETITION
The dialysis industry is very competitive. There are numerous
providers who have dialysis facilities in the same areas as the company. Many
are owned by physicians or major corporations which operate dialysis facilities
regionally, nationally and internationally. Our operations are small in
comparison with those corporations. Some of our major competitors are public
companies, including Fresenius Medical Care, Gambro Healthcare, Inc., Renal Care
Group, Inc. 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. Competition for acquisitions has increased the cost of acquiring
existing dialysis facilities. We also face competition from hospitals that
provide dialysis treatments. We have also experienced competition from admitting
physicians of our centers who have opened their own dialysis facilities.
Competitive factors most important in dialysis treatment are quality
of care and service, convenience of location and pleasantness of the
environment. Another significant competitive factor is the ability to attract
and retain qualified nephrologists. These physicians are a substantial source of
patients for the dialysis centers, are required as medical directors of the
dialysis facility for it to participate in the Medicare ESRD program, and are
responsible for the supervision and operations of the center. Our medical
directors usually are subject to non-compete restrictions within a limited
geographic area from the center they administer. Additionally, there is always
substantial competition for obtaining qualified, competent nurses and technical
staff at reasonable labor costs.
Based upon advances in surgical techniques, immune suppression and
computerized tissue typing, cross-matching of donor cells and donor organ
availability, renal transplantation in lieu of dialysis is becoming a
competitive factor. It is presently the second most commonly used modality in
ESRD therapy. With greater availability of kidney donations, currently the most
limiting factor, renal transplantations could become a more significant
competitive aspect to the dialysis treatments we provide. Although kidney
transplant is a preferred treatment for ESRD, certain patients who have
undergone such transplants have lost their transplant function and returned to
dialysis treatments.
EMPLOYEES
As of March 20, 2001, our company had 118 full time employees,
including nurse administrators, clinical registered nurse managers, registered
nurses, chief technician, technical specialists, patient care technicians, and
clerical employees. We retain 49 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 nine independent contractors who include the social workers
and dietitians at each of our facilities and our Ohio affiliate, which dialysis
facility we manage. These are in addition to the medical directors, who are
independent contractors and who supervise patient treatment at each facility.
16
We believe our relationship with our employees is good and we have
not suffered any strikes or work stoppages. None of our employees is represented
by any labor union. We are an equal opportunity employer.
ITEM 2. PROPERTIES
DCA owns 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, with a current base rent of approximately $118,000 per annum
with additional charges for water, electric and real estate taxes. The lease is
guaranteed by the tenant's parent company.
The Lemoyne property of approximately 15,000 square feet houses our
dialysis center of approximately 5,400 square feet, approved for 13 dialysis
stations with space available for expansion under a five year lease through
December 22, 2003, at an annual rental of $43,088 per annum plus separately
metered utilities, insurance and additional rent of $5,386 per year covering
common area maintenance expenses, with two renewals of five years each at
escalating base rent for each renewal period. We use approximately 2,500
square feet for our executive office.
We acquired property in Valdosta, Georgia in 2000 for $207,000, and
constructed a dialysis facility there. We lease approximately 6,000 square feet
to one of our dialysis centers for $90,600 per year under a 10-year lease, with
two renewals of five years; and we lease an additional 2,160 square feet to a
professional association which acts as the medical director of that Valdosta,
Georgia dialysis facility for its medical offices under a 10-year lease, with
two renewals of five years each, at $32,400 per annum.
The Easton, Maryland property is subject to two mortgages from
affiliated Maryland banking institutions. The Lemoyne, Pennsylvania property is
also subject to a mortgage from one of the Maryland banking institutions which
holds one of the mortgages on the Easton, Maryland property. As of December 31,
2000, the remaining principal amount of the mortgage on the Lemoyne property was
approximately $93,000 and the first mortgage on the Easton property was
approximately $117,000. 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 8.75%, which loan
we guaranty, and is further secured by that subsidiary's personal property,
exclusive of otherwise 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."
Dialysis Corporation of America also 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, at an aggregate rental of approximately $13,500 per
annum, a second lease is for approximately 530 square feet through May 21, 2001
on a month-to-month basis at $465 per month, and a month-to-month lease for an
office at $100 per month.
17
In addition to our Lemoyne, Pennsylvania, and Valdosta, Georgia
facilities, we presently have seven other dialysis facilities (one under
construction). Each is leased from unaffiliated parties under five or ten year
leases, all 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 approximately 2,000 square feet at an annual rental of approximately
$18,000, and is for two years to October 15, 2002. The rentals for these
facilities range from $25,000 to $74,000 per annum, some adding utilities, real
estate taxes and costs for casualty insurance premiums. We sublet 1,800 square
feet at our Chambersburg, Pennsylvania facility to the physicians who are our
medical directors at that facility for their medical offices in Chambersburg.
The sublease is on a commercially reasonable basis and is structured to comply
with the safe harbor provisions of the "Anti-kickback Statute." See Item 1,
"Business - Government Regulation - Fraud and Abuse."
We are actively pursuing the additional development of dialysis
facilities in all other areas of the country which would entail the acquisition
or lease of additional property.
We construct all of our dialysis facilities, and each is relatively
new with state-of-the-art equipment and facilities. The dialysis stations are
equipped with modern dialysis 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 May, 2005. See Note 2 to
"Notes to Consolidated Financial Statements."
None of our dialysis facilities are operating at full capacity. See
"Business - Operations - Location, Capacity and Use of Facilities" above. The
existing dialysis facilities could accommodate greater patient volume,
particularly if we increase hours and/or days of operation without adding
additional dialysis stations or any additional capital expenditures. We also
have the ability and space at each of our facilities to expand to increase
patient volume subject to obtaining appropriate governmental approval.
We maintain executive offices at 27 Miller Street, Suite 2, Lemoyne,
Pennsylvania 17043 as well as with our parent, Medicore ("Medicore" or the
"Parent"), at 2337 West 76th Street, Hialeah, Florida.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in or subject to any material pending legal
actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of our fiscal year
ended December 31, 2000 to a vote of security holders through the solicitation
of proxies or otherwise. Since Medicore owns approximately 61% 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 23, 2001, which are those shareholders of record on
April 6, 2001, 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, 2000. See Part III of this Annual Report, Items 10, 11, 12
and 13.
18
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, 1999 and 2000 as reported by Nasdaq.
BID PRICE
1999 HIGH LOW
---- ---- ---
1st Quarter................... $1.75 $ .69
2nd Quarter.................. 3.30 .56
3rd Quarter................... 4.50 1.94
4th Quarter*.................. 6.88 1.34
BID PRICE
2000 HIGH LOW
---- ---- ---
1st Quarter*...................... $6.88 $ 4.06
2nd Quarter*........................ 4.44 1.00
3rd Quarter*......................... 3.34 0.63
4th Quarter..................... 1.06 0.63
- ---------------
* The price increases may have been, in part or primarily, the result
of the announcement during the fourth quarter of the execution of the
Merger Agreement with MainStreet and related agreements, which
transaction terminated in August, 2000.
At March 20, 2001, the high and low sales price of our common stock
was $.75. Over the last several quarters our stock has not traded actively.
Bid and asked prices are without adjustments for retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions.
At March 20, 2001, we had 108 shareholders of record and
approximately 765 beneficial owners of our common stock.
We do not anticipate that we will pay dividends in the foreseeable
future. The board of directors intends to retain earnings, if any, for use in
the business. Future dividend policy will be at the discretion of the board of
directors, and will depend on our earnings, capital requirements, financial
condition and other similar relevant factors. We have experienced operational
losses since 1989. See Item 6, "Selected Financial Data," and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
19
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended
December 31, 2000 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,
----------------------------------------------------------------------
2000 1999 1998(1) 1997(1) 1996
----------- ----------- ----------- ----------- -----------
Revenues $ 9,247 $ 5,866 $ 4,004 $ 9,221 $ 4,137
Net (loss) income (356) (668) (204) 1,993 (23)
(Loss) earnings per share
Basic (.09) (.19) (.06) .56 (.01)
Diluted (.09) (.19) (.06) .55 (.01)
CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS)
DECEMBER 31,
----------------------------------------------------------------------
2000 1999 1998(1) 1997(1) 1996
----------- ----------- ----------- ----------- -----------
Working capital $ 3,869 $ 4,152 $ 5,115 $ 7,062 $ 4,529
Total assets 11,177 9,036 9,349 11,638 7,522
Intercompany receivable from
Medicore (non-current portion) 414 105 121
Long term debt, net of current portion(2) 1,755 870 633 693 585
Stockholders' equity 7,799 7,260 7,771 8,049 6,000
- -------------------------
(1) Reflects the sale of substantially all the assets of our Florida
subsidiary, Dialysis Services of Florida, Inc. - Fort Walton Beach and related
Florida dialysis operations, including the homecare operations of another
subsidiary, Dialysis Medical, Inc., to Renal Care Group, Inc. and its affiliates
for $5,065,000 of which consideration $4,585,000 was cash with the balance
consisting of 13,873 shares of Renal Care Group common stock. We owned 80% of
Dialysis Services of Florida and Dialysis Medical, Inc., and on February 20,
1998 the 20% interest of Dialysis Services of Florida owned by our former
medical director and his 20% interest in Dialysis Medical, Inc. were redeemed
for approximately $625,000 of which sum included 6,936 shares of the Renal Care
Group common stock valued at $240,000 with the balance in cash. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 9 to "Notes to Consolidated Financial Statements."
(2) Includes advances from Medicore in 1997 and 1996.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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 $921,000 (33%) 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 amounted to 42% for the year ended
December 31, 2000, and 51% for the preceding year.
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.
1999 COMPARED TO 1998
Medical service revenues increased approximately $1,946,000 (55%) for
the year ended December 31, 1999, compared to the preceding year. This increase
reflects increased revenues of our Pennsylvania dialysis centers of
approximately $1,460,000 including increased revenues of approximately $882,000
for our dialysis center located in Chambersburg, Pennsylvania, which commenced
operations in January, 1999, and increased revenues of approximately $486,000
for our Manahawkin, New Jersey center, which received regulatory approval in
December, 1998. Although the operations of new centers have resulted in
additional revenues, they are still in the developmental stage and, accordingly,
their operating results will adversely affect our results of operations until
they achieve a sufficient patient count to cover fixed operating costs.
21
Interest and other income decreased by approximately $85,000 for
the year ended December 31, 1999, compared to the preceding year. This decrease
is largely due to a decrease in interest earned as a result of a decrease in
invested funds.
Cost of medical services sales as a percentage of sales increased to
72% in 1999 compared to 71% in 1998, reflecting an increase in supply costs as a
percentage of sales and a decrease in healthcare salaries as a percentage of
sales.
Selling, general and administrative expenses increased by
approximately $942,000 (51%) for 1999 compared to the preceding year. This
increase reflected operations of the Company's new dialysis centers, $153,000 in
compensation expense from issuance of stock options and approximately $93,000
associated with our decision not to go through with plans to construct a
facility in Toms River, New Jersey, as well as increased support activities
resulting from expanded operations. Selling general and administrative expenses
as a percent of medical services revenue amounted to 51% for the year ended
December 31, 1999, compared to 52% for the preceding year.
As a result of having centers in the developmental stage, which have
not achieved a sufficient patient count to sustain profitable operations, we
have continued to experience operational losses.
Interest expense decreased by approximately $9,000 during the
comparable periods largely as a result of reduced average outstanding
borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $3,869,000 at December 31, 2000, which
reflected a decrease of approximately $284,000 during the current year. Included
in the changes in components of working capital was a decrease in cash and cash
equivalents of $2,866,000, which included net cash used in operating activities
of $146,000, net cash used in investing activities of $3,647,000 (including
$2,200,000 loans to our Parent; a $140,000 loan to MainStreet; additions to
property and equipment of $1,408,000 primarily related to new centers, including
$963,000 for purchase of land and construction of a building for our new
Valdosta, Georgia center; and $206,000 proceeds from the sale of minority
interest in subsidiaries), and net cash provided by financing activities of
$927,000 (including advances to our parent of $309,000, debt repayments of
$167,000, borrowings of $700,000 on our Vineland, New Jersey development loan,
and net proceeds from option and warrant exercises of $769,000). The change in
working capital reflected increases of approximately $913,000 in accounts
receivable and $483,000 in accounts payable and accrued expenses due to
increased sales activity.
We have mortgages on two of our buildings, one in Lemoyne,
Pennsylvania and the other in Easton, Maryland, with first mortgages having a
combined balance of approximately $210,000 at December 31, 2000, and $282,000 at
December 31, 1999. In 2000, we were in default of certain covenants relating to
these mortgages. The covenants principally related to debt service ratio
requirements and 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 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. 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 $1,140,000
at December 31, 2000, and $731,000 at
22
December 31, 1999. This included additional equipment financing of approximately
$525,000 during 2000. See Note 2 to "Notes to Consolidated Financial
Statements."
We opened our sixth center in Vineland, New Jersey in February, 2000,
and our seventh and eighth centers in Georgia in November, 2000, and a center in
Ohio which we manage and in which we hold a minority interest (40%), which
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 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 four of our centers to be in the developmental stage, since
they have not developed a patient base sufficient to generate and sustain
earnings. Two of these centers were recently established, Homerville, Georgia
(November, 2000) and Ohio (February, 2001). The two other developmental stage
centers have been operational as of December 31, 2000, for approximately 41
months (Manahawkin, New Jersey) and 39 months (Carlisle, Pennsylvania).
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 January 2000, we loaned $1,500,000 to our parent, Medicore, Inc.,
at an annual interest rate of 10%, with the loan and accrued interest originally
scheduled to be repaid on January 26, 2001. Our parent utilized this loan to
fund a loan by it to Linux Global Partners, which invests in Linux software
companies, in conjunction with which our parent acquired a 6% ownership interest
in Linux, which increased to 8% in March, 2000, in conjunction with our parent
borrowing an additional $500,000 from us on the same terms as the original loan
to fund a loan of the same amount to Linux Global Partners. On August 9, 2000,
our parent borrowed an additional $200,000 at 10% interest, which additional
funds it loaned to Linux Global Partners on the same terms. Medicore extended
the maturity of the loans to Linux Global Partners to June 30, 2001 for
additional consideration from Linux Global Partners . The maturity of the
company's loans to the parent have been similarly extended. 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 Linux Global Partners. See Item 13, "Certain
Relationships and Related Transactions."
In July, 2000, the company loaned $140,000 to MainStreet, a private
company with whom we had a proposed merger transaction, which was subsequently
terminated, pursuant to a one year secured convertible promissory note.
MainStreet defaulted in payment of that note on November 1, 2000, resulting in
the company obtaining 300,000 shares of Linux Global Partners, the collateral
securing the MainStreet loan. See Item 13, "Certain Relationships and Related
Transactions" and Notes 11 and 12 to "Notes to Consolidated Financial
Statements."
In September, 2000, the company announced its intent to repurchase up
to approximately 300,000 of its outstanding shares. Approximately 77,000 shares
were repurchased for cancellation at a cost of $65,000 in the fourth quarter of
2000. See Note 9 to "Notes to Consolidated Financial Statements."
23
We believe that current levels of working capital and available
financing alternative 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 PRONOUNCEMENT
In June, 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is effective
for fiscal years beginning after June 15, 2000. FAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities
and requires, among other things, that all derivatives be reorganized as either
assets or liabilities in the statement of financial position and that these
instruments be measured at fair value. We are in the process of determining the
impact that the adoption of FAS 133 will have on our consolidated financial
statements. Due to the company's limited use of derivative financial
instruments, the adoption of FAS 133 is not expected to have a significant
effect on its consolidated results of operations, financial position or cash
flows.
PROPOSED MERGER AND ACQUISITION
On October 20, 1999, we entered into an Agreement and Plan of Merger
pursuant to which MainStreet would merge with and ultimately own 80% of our
company. The proposed merger was terminated in August, 2000. See Note 11 to
"Notes to Consolidated Condensed Financial Statements."
IMPACT OF INFLATION
Inflationary factors have not had a significant effect on our
operations. A substantial portion of our revenue is subject to reimbursement
rates established and regulated by the federal government. These rates do not
automatically adjust for inflation. Any rate adjustments relate to legislation
and executive and Congressional budget demands, and have little to do with the
actual cost of doing business. See "Operations - Medicare Reimbursement" and
"Government Regulation" under Item 1, "Business." Therefore, dialysis services
revenues cannot be voluntary increased to keep pace with increases in nursing
and other patient care costs. Increased operating costs without a corresponding
increase in reimbursement rates may adversely affect our earnings in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not consider our exposure to market risks, principally changes
in interest rates, to be significant.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities of which we held approximately $73,000 at December 31,
2000.
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 $210,000 at December 31, 2000.
24
We have exposure to both rising and falling interest rates. A1/2%
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 $2,000 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
Effective August 6, 1999, the board of directors, upon the
recommendation of the audit committee, terminated Ernst & Young LLP as our
independent accountants, and engaged new independent accountants, Wiss &
Company, LLP, for the company's annual audit for our 1999 fiscal year. This
matter was previously reported in our Current Report on Form 8-K dated August
27, 1999. The audit committee recommended Wiss & Company, LLP for our annual
audit for our 2000 fiscal year, and shareholders ratified that recommendation at
our annual meeting held on May 24, 2000.
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, 2001. There are no family relationships between any of the executive
officers and directors of the company.
NAME AGE POSITION HELD SINCE
- ---- --- -------- ----------
Thomas K. Langbein 55 Chairman of the Board and 1980
Chief Executive Officer 1986
Stephen W. Everett 44 President 2000
Daniel R. Ouzts 54 Vice President (Finance)
and Treasurer 1996
For more detailed information about our executive officers and
directors you are referred to the caption "Information About Directors and
Executive Officers" of our Information Statement relating to the annual meeting
of shareholders anticipated to be held on May 23, 2001, which is incorporated
herein by reference.
25
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 23, 2001, 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 23, 2001, 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 23, 2001,
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 23, 2001, incorporated herein by reference.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this report.
1. All financial statements - See Index to Consolidated
Financial Statements.
2. Financial statement schedules - See Index to Consolidated
Financial Statements.
3. Refer to subparagraph (c) below.
(b) Reports on Form 8-K
None
(c) Exhibits +
(3) (i) Articles of Incorporation++
(ii) By-Laws of the Company++
(4) (i) Form of Common Stock Certificate of the Company++
(ii) Form of Underwriters' Options++
(iii) Form of Warrant Agreement between the Company, Continental
Stock Transfer & Trust Co. and Joseph Dillon & Co., Inc.++
(10) Material Contracts
(i) Lease between Dialysis Services of Pennsylvania, Inc. -
Wellsboro(1) and James and Roger Stager dated January 15,
1995 (incorporated by reference to Medicore, Inc.'s(2)
Annual Report on Form 10-K for the year ended December 31,
1994 ("1994 Medicore Form 10-K"), Part IV, Item 14(a) 3
(10)(lxii)).
(ii) Lease between the Company and Dialysis Services of
Pennsylvania, Inc. - Lemoyne(1) dated December 1, 1998
(incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998, Part IV,
Item 14(c)(10)(ii)).
(iii) Loan Agreement between the Company and Mercantile-Safe
Deposit and Trust Company dated November 30, 1988(3)
(incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998
("March, 1998 Form 10-Q"), Part II, Item 6(a), Part II,
Item 10(iii)).
(iv) First Amendment to Loan Agreement between the Company and
Mercantile-Safe Deposit and Trust Company dated December 1,
1997(3) (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997
("1997 Form 10-K"), Part IV, Item 14(c)(xxviii)).
27
(v) Promissory Note to Mercantile-Safe Deposit and Trust
Company dated November 30, 1988(3) (incorporated by
reference to the March, 1998 Form 10-Q, Part II, Item 6(a),
Part II, Item 10(ii)).
(vi) First Amendment and Modification to Promissory Note to
Mercantile-Safe Deposit and Trust Company(3) (incorporated
by reference to the 1997 Form 10-K, Part IV, Item
14(c)(xxix)).
(vii) Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Wellsboro(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)
(viii) Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Lemoyne(1) and Herbert I. Soller, M.D.
dated January 30, 1995 [*] (incorporated by reference to
the 1994 Medicore(2) Form 10-K, Part IV, Item
14(a)(3)(10)(lx)).(8)
(ix) 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)).
(x) 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)).
(xi) 1995 Stock Option Plan of the Company (November 10,
1995).++
(xii) Form of Stock Option Certificate under 1995 Stock Option
Plan (November 10, 1995).++
(xiii) Lease between Dialysis Services of PA., Inc. - Carlisle(5)
and Lester P. Burkholder, Jr. and Kirby K. Burkholder dated
November 1, 1996 (incorporated by reference to the
Company's 1996 Form 10-K, Part IV, Item 14(a) 3
(10)(xxiii)).
(xiv) Lease between Dialysis Services of NJ., Inc. -
Manahawkin(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)).
(xv) 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)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
28
(xvi) Equipment Master Lease Agreement BC-105 between the Company
and B. Braun Medical, Inc. dated November 22, 1996
(incorporated by reference to the Company's 1996 Form 10-K,
Part IV, Item 14(a) 3 (10)(xxvii)).
(xvii) Schedule of Leased Equipment 0597 commencing June 1, 1997
to Master Lease BC-105 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 ("June, 1997 10-Q"), Part II, Item
6(a), Part II, Item 10(i)).(6)
(xviii) 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)).
(xix) 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)).
(xx) Lease between the Company and Wirehead Networking
Solutions, Inc. dated December 1, 1998 (incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, Part IV, Item
14(c)(10)(xxvi)).
(xxi) 1999 Stock Option Plan of the Company (May 21, 1999)
(incorporated by reference to the Company's Annual Report
for the year ended December 31, 1999 ("1999 Form 10-K"),
Part IV, Item 14(c)(10)(xxiii)).
(xxii) 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)).
(xxiii) 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)).
(xxiv) 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)
(xxv) Medical Director Agreement between Dialysis Services of
PA., Inc. - Carlisle(5) and Cumberland Valley Nephrology
Associates, P.C. dated April 30, 1999 (incorporated by
reference to the Company's 1999 Form 10-K, Part IV, Item
14(c)(10)(xxvii)).(8)
(xxvi) 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)
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
29
(xxvii) 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)).
(xxviii) 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)).
(xxix) 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)).
(xxx) Promissory Note from Medicore, Inc.(2) to the Company dated
January 27, 2000 (incorporated by reference to the
Company's Current Report on Form 8-K dated February 10,
2000, Item 7(c)10.1)
(xxxi) Home Services Agreement between DCA of Vineland, LLC (4)
and DCA Medical Services, Inc. (1) dated January 1, 2000
(incorporated by reference to the Company's 1999 Form 10-K,
Part IV, Item 14(c)(10)(xxxiii)) (10)
(xxxii) Loan and Security Agreement between the Company and
MainStreet IPO.com Inc. dated July 12, 2000 (incorporated
by reference to the Company's Current Report on Form 8-K
dated July 19, 2000 ("July Form 8-K"), Item 7(c)(99)(i)).
(xxxiii) Secured Convertible Promissory Note for $140,000 issued to
the Company by MainStreet IPO.com Inc. dated July 12, 2000
(incorporated by reference to the Company's July Form 8-K,
Item 7(c)(99)(ii)).
(xxxiv) Amended Secured Promissory Note from Medicore, Inc. (2) to
the Company dated March 27, 2000.
(xxxv) Promissory Note from Medicore, Inc. (2) to the Company
dated August 9, 2000 (incorporated by reference to the
Company's Current Report on Form 8-K dated August 21, 2000
("August Form 8-K"), Item 7(c)(99)(i)).
(xxxvi) Loan and Security Agreement between South Georgia
Nephrology, P.C. and the Company dated July 21, 2000
(incorporated by reference to the Company's August Form
8-K, Item 7(c)(10) 10.1).
(xxxvii) Stock Transfer Restrictions Agreement by and among South
Georgia Nephrology, P.C., Dr. Andrew Queler, and the
Company dated July 21, 2000 (incorporated by reference to
the Company's August Form 8-K, Item 7(c)(10) 10.2).
(xxviii) 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)).
(xxxix) Lease between the Company and South Georgia Nephrology,
P.C. dated November 27, 2000 (incorporated by reference to
the Company's January 2001 Form 8-K, Item 7(c)(10)(ii)).
30
(xl) 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)).
(xli) Employment Agreement between Stephen W. Everett and the
Company dated December 29, 2000.
(xlii) Lease between the Company and Renal Treatment Centers -
Mid-Atlantic, Inc. dated July 1, 1999.
(16) (i) Letter re change in certifying accountant dated August
13, 1999 (incorporated by reference to the Company's
Current Report on Form 8-K dated August 13, 1999, Item
7(c)(16)).
(ii) Letter re change in certifying accountant dated August 27,
1999 (incorporated by reference to the Company's Current
Report on Form 8-K/A#1 dated August 27, 1999, item
7(c)(16)).
(21) Subsidiaries of the Company.
(23) Consent of experts and counsel
(i) Consent of Ernst & Young LLP, Independent Certified Public
Accountants
(ii) Consent of Wiss & Company, LLP, Independent Certified
Public Accountants
(27) Financial Data Schedule (for SEC use only).
- -------------------------
+ Documents incorporated by reference not included in Exhibit Volume.
++ Incorporated by reference to the company's registration statement on
Form SB-2 dated December 22, 1995 as amended February 9, 1996, April
2, 1996 and April 15, 1996, registration no. 33-80877-A, Part II,
Item 27.
(1) Wholly-owned subsidiary.
(2) Parent of the company owning approximately 61% of the company's
outstanding common stock. Medicore is subject to Section 13(a)
reporting requirements of the Exchange Act, with its common stock
listed for trading on the Nasdaq SmallCap Market.
(3) Dialysis Corporation of America has two loans with Mercantile Safe
Deposit and Trust Company and such loan documents and promissory
notes conform to the exhibit filed but for the amount of each loan.
(4) 51% owned subsidiary.
(5) 80% owned facility.
31
(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 Medical Director Agreement exhibit but
for area of non-competition and compensation. In addition to the
Medical Director Agreements already listed, these agreements include
the following subsidiaries: DCA of Fitzgerald, LLC, and DCA of
Homerville, LLC. Our affiliate, DCA of Toledo, LLC (40% owned), has a
substantially similar agreement.
(9) There are several substantially similar Management Services
Agreements which conform to the exhibit filed but for the name of the
particular subsidiary which entered into the Agreement.
(10) Certain subsidiaries have an identical Home Services Agreement with
DCA Medical Services, Inc., including :DCA of So. Ga., LLC, and DCA
of Fitzgerald, LLC. Our affiliate, DCA of Toledo, LLC (40% owned),
has an identical agreement.
(11) 70% owned subsidiary.
(12) 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.
32
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DIALYSIS CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
DECEMBER 31, 2000
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Additions (Deductions) Charged to Other Changes Balance
Beginning Charged (Credited) to Other Accounts Add (Deduct) at End of
Classification Of Period Cost and Expenses Describe Describe Period
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 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
========= ========== ========== ========
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 52,000 $ 101,000 $ (9,000)(1) $144,000
Valuation allowance for deferred tax asset --- 80,000 --- 80,000
--------- ---------- ---------- --------
$ 52,000 $181,000 $ (9,000) $224,000
========= ========== ========== ========
(1) Uncollectable accounts written off, net of recoveries.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIALYSIS CORPORATION OF AMERICA
By: /s/ THOMAS K. LANGBEIN
--------------------------------------
Thomas K. Langbein
Chairman of the Board of Directors
March 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ THOMAS K. LANGBEIN Chairman of the Board of Directors March 28, 2001
- -------------------------------
Thomas K. Langbein
/s/ STEPHEN W. EVERETT President March 28, 2001
- -------------------------------
Stephen Everett
/s/ DANIEL R. OUZTS Vice President, Treasurer, Chief March 28, 2001
- ------------------------------- Financial Officer and Controller
Daniel R. Ouzts
/s/ BART PELSTRING Director March 28, 2001
- ---------------------
Bart Pelstring
/s/ ROBERT W. TRAUSE Director March 28, 2001
- -------------------------------
Robert W. Trause
34
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, 2000
DIALYSIS CORPORATION OF AMERICA
LEMOYNE, PENNSYLVANIA
FORM 10-K--ITEM 14(a)(1) AND (2)
DIALYSIS CORPORATION OF AMERICA
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Dialysis Corporation of
America and subsidiaries are included in Item 8:
PAGE
Consolidated Balance Sheets as of December 31, 2000 and 1999. F-4
Consolidated Statements of Operations - Years ended
December 31, 2000, 1999, and 1998. F-5
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2000, 1999 and 1998. F-6
Consolidated Statements of Cash Flows - Years ended
December 31, 2000, 1999 and 1998. F-7
Notes to Consolidated Financial Statements - December 31, 2000. F-8
The following financial statement schedule of Dialysis Corporation of America
and subsidiaries is included in Item 14(d):
Schedule II - Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Dialysis Corporation of America
We have audited the accompanying consolidated balance sheets of Dialysis
Corporation of America and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 2000. 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 generally accepted auditing
standards. 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, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 2000, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ WISS & COMPANY, LLP
March 9, 2001
Livingston, New Jersey
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Dialysis Corporation of America
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Dialysis Corporation of America and
subsidiaries for the year ended December 31, 1998. Our audit included the
information related to the year ended December 31, 1998 on the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Dialysis Corporation of America and subsidiaries for the year
ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule for the year ended December 31, 1998, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
March 22, 1999
Miami, Florida
F-3
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 793,666 $ 3,659,390
Accounts receivable, less allowance
of $306,000 at December 31, 2000;
$237,000 at December 31, 1999 1,692,592 779,568
Note receivable from parent 2,200,000 --
Inventories 334,127 219,623
Prepaid expenses and other current assets 468,001 397,361
------------ ------------
Total current assets 5,488,386 5,055,942
Property and equipment:
Land 376,211 168,358
Buildings and improvements 2,207,447 1,425,912
Machinery and equipment 2,914,010 2,051,803
Leasehold improvements 1,720,625 1,660,172
------------ ------------
7,218,293 5,306,245
Less accumulated depreciation and amortization 2,048,148 1,454,190
------------ ------------
5,170,145 3,852,055
Advances to parent 414,339 105,142
Deferred expenses and other assets 104,512 22,808
------------ ------------
$ 11,177,382 $ 9,035,947
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 553,704 $ 395,002
Accrued expenses 689,600 365,351
Current portion of long-term debt 295,031 143,438
Income taxes payable 81,451 --
------------ ------------
Total current liabilities 1,619,786 903,791
Long-term debt, less current portion 1,755,228 869,985
Minority interest in subsidiaries 3,060 2,080
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares; 3,979,844 shares issued and outstanding
in 2000; 3,546,344 shares issued and
outstanding in 1999 39,798 35,463
Capital in excess of par value 5,283,585 3,971,514
Retained earnings 2,897,525 3,253,114
Notes receivable from options exercised (421,600) --
------------ ------------
Total stockholders' equity 7,799,308 7,260,091
------------ ------------
$ 11,177,382 $ 9,035,947
============ ============
See notes to consolidated financial statements.
F-4
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues:
Medical service revenue $ 8,769,470 $ 5,498,541 $ 3,552,279
Interest and other income 477,631 367,030 451,656
----------- ----------- -----------
9,247,101 5,865,571 4,003,935
Cost and expenses:
Cost of medical services 5,833,081 3,964,258 2,516,239
Selling, general and administrative expenses 3,710,762 2,789,529 1,847,175
Interest expense 82,456 72,605 81,531
----------- ----------- -----------
9,626,299 6,826,392 4,444,945
----------- ----------- -----------
Loss before income taxes, minority interest
and equity in affiliate loss (379,198) (960,821) (441,010)
Income tax (benefit) (30,287) (292,462) (236,838)
----------- ----------- -----------
Loss before minority interest and equity in
affiliated loss (348,911) (668,359) (204,172)
Minority interest in loss (income)
of consolidated subsidiaries 14,218 -- --
Equity in affiliate loss (20,896) -- --
----------- ----------- -----------
Net loss $ (355,589) $ (668,359) $ (204,172)
=========== =========== ===========
Loss per share:
Basic $(.09) $(.19) $(.06)
===== ===== =====
Diluted $(.09) $(.19) $(.06)
===== ===== =====
See notes to consolidated financial statements.
F-5
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL IN
COMMON EXCESS OF RETAINED TREASURY NOTES
STOCK PAR VALUE EARNINGS STOCK RECEIVABLE TOTAL
----- --------- -------- ----- ---------- -----
C>
Balance at January 1, 1998 $ 37,513 $4,008,720 4,208,935 $(206,250) $ 8,048,918
Net loss (204,172) (204,172)
Repurchase of 105,000 shares (108,690) (108,690)
Redemption of minority interest
in subsidiaries 35,434 35,434
--------- ---------- --------- ---------- ---------- ----------
Balance at December 31, 1998 37,513 4,044,154 4,004,763 (314,940) 7,771,490
Net loss (668,359) (668,359)
Issuance of stock options as compensation 153,000 153,000
Sale of minority interest in
subsidiaries 3,960 3,960
Cancellation of 205,000 treasury shares (2,050) (229,600) (83,290) 314,940 ---
--------- ---------- --------- ---------- ---------- ----------
Balance at December 31, 1999 35,463 3,971,514 3,253,114 --- 7,260,091
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
========= ========== ========== =========== ========== ==========
See notes to consolidated financial statements.
F-6
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
-------------------------------------------
Operating activities:
Net loss $ (355,589) $ (668,359) $ (204,172)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 593,973 450,460 332,697
Amortization 2,332 1,743 1,690
Bad debt expense 192,395 98,666 100,856
Deferred income taxes -- -- 24,000
Gain on sale of securities -- -- (12,780)
Minority interest (14,218) -- --
Equity in affiliate loss 20,896 -- --
Stock option related compensation expense -- 153,000 --
Increase (decrease) relating to operating activities from:
Accounts receivable (1,105,419) (417,448) (67,479)
Inventories (114,504) (40,434) (65,374)
Prepaid expenses and other current assets 69,360 (342,427) 43,825
Accounts payable 158,702 151,034 171,437
Accrued expenses 324,249 72,757 (62,505)
Income taxes payable 81,451 (232,306) (1,422,858)
----------- ----------- -----------
Net cash used in operating activities (146,373) (773,314) (1,160,663)
Investing activities:
Loan to parent (2,200,000) -- --
Loan to MainStreet (140,000) -- --
Loan to subsidiary medical director practice (83,521) -- --
Redemption of minority interest in subsidiaries -- -- (385,375)
Additions to property and equipment, net of minor disposals (1,407,763) (815,919) (904,873)
Investment in affiliate (28,589) -- --
Proceeds from sale of securities -- -- 252,780
Deferred expenses and other assets 7,158 44,066 (27,219)
Sale of minority interest in subsidiaries 206,000 4,040 --
----------- ----------- -----------
Net cash used in investing activities (3,646,715) (767,813) (1,064,687)
Financing activities:
Advances (to) from parent (309,197) 15,723 (249,592)
Repurchase of stock (64,825) -- (108,690)
Long-term borrowings 700,000 -- --
Payments on long-term debt (167,464) (182,043) (152,451)
Exercise of warrants and stock options 768,850 -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities 927,364 (166,320) (510,733)
----------- ----------- -----------
Decrease in cash and cash equivalents (2,865,724) (1,707,447) (2,736,083)
Cash and cash equivalents at beginning of year 3,659,390 5,366,837 8,102,920
----------- ----------- -----------
Cash and cash equivalents at end of year $ 793,666 $ 3,659,390 $ 5,366,837
=========== =========== ===========
See notes to consolidated financial statements.
F-7
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company is in one business segment, kidney dialysis operations,
providing outpatient hemodialysis services, home dialysis services, inpatient
dialysis services and ancillary services associated with dialysis treatments.
The Company operates eight kidney dialysis centers, four located in
Pennsylvania, two in New Jersey and two in Georgia, and has agreements to
provide inpatient dialysis treatments to various hospitals and provides supplies
and equipment for dialysis home patients.
CONSOLIDATION
The consolidated financial statements include the accounts of Dialysis
Corporation of America ("DCA") and its subsidiaries, collectively referred to as
the "Company." All material intercompany accounts and transactions have been
eliminated in consolidation. The Company is a 60.6% owned subsidiary of
Medicore, Inc. (the "Parent") as of December 31, 2000. We have a 40% interest
in an Ohio dialysis center which 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 generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
GOVERNMENT REGULATION
A substantial portion of the Company's revenues are attributable to
payments received under Medicare, which is supplemented by Medicaid or
comparable benefits in the statesin 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-8
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
INVENTORIES
Inventories, which consist primarily of supplies used in dialysis
treatments, are valued at the lower of cost (first-in, first-out method) or
market value.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets, which range from 5 to 34 years for buildings and improvements; 4 to 10
years for machinery, computer and office equipment, and furniture; and 5 to 10
years for leasehold improvements based on the shorter of the lease term or
estimated useful life of the property. Replacements and betterments that extend
the lives of assets are capitalized. Maintenance and repairs are expensed as
incurred. Upon the sale or retirement of assets, the related cost and
accumulated depreciation are removed and any gain on loss is recognized.
LONG-LIVED ASSET IMPAIRMENT
Pursuant to Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of,"
impairment of long-lived assets, including intangibles related to such assets,
is recognized whenever events or changes in circumstances indicate that the
carrying amount of the asset, or related groups of assets, may not be fully
recoverable from estimated future cash flows and the fair value of the related
assets is less than their carrying value. The Company, based on current
circumstances, does not believe any indicators of impairment are present.
DEFERRED EXPENSES
Deferred expenses, except for deferred loan costs, are amortized on the
straight-line method, over their estimated benefit period ranging to 60 months.
Deferred loan costs are amortized over the lives of the respective loans.
INCOME TAXES
Deferred income taxes are determined by applying enacted tax rates
applicable to future periods in which the taxes are expected to be paid or
recovered to differences between financial accounting and tax basis of assets
and liabilities.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB25) and related Interpretations
in accounting for its employee stock options. Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation" permits a
company to elect to follow the accounting provisions of APB 25 rather than the
alternative fair value accounting provided under FAS 123 but requires pro forma
net income and earnings per share disclosures as well as various other
disclosures not required under APB 25 for companies following APB 25.
F-9
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
EARNINGS PER SHARE
Diluted earning per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants, calculated using the treasury stock method and average market price.
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
---------------------------------------
Net loss $ (355,589) $ (668,359) $ (204,172)
========== ========== ===========
Weighted average shares 3,923,683 3,546,344 3,626,330
========= ========= =========
Loss per share:
Basic $(.09) $(.19) $(.06)
====== ====== ======
Diluted $(.09) $(.19) $(.06)
====== ====== ======
The Company has various stock options, as well as underwriter options to
purchase 100,000 shares of common stock and 200,000 common stock purchase
warrants which have not been included in the earnings (loss) per share
computation since they are anti-dilutive.
INTEREST AND OTHER INCOME
Interest and other income is comprised as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------------------------------------
Rental income $160,432 $142,561 $121,835
Interest income from Medicore 199,286 1,697 892
Interest income 90,064 193,287 296,051
Other 27,849 29,485 32,878
-------- -------- --------
$477,631 $367,030 $451,656
======== ======== ========
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable and debt in the
accompanying financial statements approximate their fair value because of the
short-term maturity of these instruments, and in the case of debt because such
instruments bear variable interest rates which approximate market.
F-10
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
NEW PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is effective
for fiscal years beginning after June 15, 2000. FAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities
and requires, among other things, that all derivatives be recognized as either
assets or liabilities in the statement of financial position and that these
instruments be measured at fair value. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its
consolidated financial statements. Due to the Company's limited use of
derivative financial instruments, the adoption of FAS 133 is not expected to
have a significant effect on its consolidated results of operations, financial
position or cash flows.
NOTE 2--LONG-TERM DEBT
Long-term debt is as follows:
DECEMBER 31,
2000 1999
---------- ----------
Mortgage note secured by land and
building with a net book value of
$369,000 at December 31, 2000
Monthly principal payments of $3,333
plus interest at 1% over the prime
rate through November 2003 $ 116,715 $ 156,711
Mortgage note secured by land and
building with a net book value of
$667,000 at December 31, 2000
Monthly principal payments of $2,667
plus interest at 1% over the prime
rate through November 2003 93,284 125,289
Development and equipment loan secured
by assets of DCA of Vineland and
land and building with a total net
book value of $1,348,000 at December
31, 2000. Interest of 8.75%. Monthly
payments of interest only through
December 2001; thereafter, monthly
payments of principal and interest
totaling $6,186 with remaining
balance due September 2, 2003 700,000 --
Equipment financing agreement secured
by equipment with a net book value
of $1,115,000 at December 31, 2000
Monthly payments totaling $17,494 as
of December 31, 2000, including
principal and interest, as described
below, pursuant to various schedules
extending through August 2005 with
interest at rates ranging from 4.14%
to 10.48% 1,140,260 731,423
---------- ----------
2,050,259 1,013,423
Less current portion 295,031 143,438
---------- ----------
$1,755,228 $ 869,985
========== ==========
F-11
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 2--LONG-TERM DEBT--CONTINUED
The Company through its subsidiary, DCA of Vineland, LLC, pursuant to a
December 3, 1999 loan agreement obtained a $700,000 development and equipment
line of credit with interest at 8.75% which is secured by the acquired assets of
DCA of Vineland and a second mortgage on the Company's real property in Easton,
Maryland on which an affiliated bank holds the first mortgage. Outstanding
borrowings are subject to monthly payments of interest only through December
2001 with monthly payments thereafter of principal and interest totaling $6,186
with any remaining balance due September 2, 2003. This loan had an outstanding
principal balance of $700,000 at December 31, 2000 with no outstanding
borrowings as of December 31, 1999.
The equipment financing agreement provides financing for kidney
dialysis machines for the Company's dialysis facilities in Pennsylvania and New
Jersey. Additional financing totaled approximately $245,000 in 1998,
$387,000 in 1999 and $525,000 in 2000. Payments under the agreement are pursuant
to various schedules extending through August 2005. Payments under some
schedules begin one year after commencement of the financing which would
increase monthly payments from $17,494 as of December 31, 2000 to $32,124 if
all payments had commenced as of that date.
Financing under the equipment purchase agreement is a noncash financing
activity which is a supplemental disclosure required by Financial Accounting
Standards Board Statement No 95, "Statement of Cash Flows."
The prime rate was 9.50% as of December 31, 2000 and 8.50% as of
December 31, 1999.
Scheduled maturities of long-term debt outstanding at December 31, 2000
are approximately: 2001-$295,000; 2002-$385,000; 2003-$1,056,000; 2004-$215,000;
2005-$99,000. Interest payments on the above debt amounted to approximately
$84,000 in 2000, $54,000 in 1999 and $64,000 in 1998, respectively.
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
Subsequent to the completion of the Company's public offering in April
1996, the Company files separate federal and state income tax returns. The net
operating loss carryforwards that were available at December 31, 1995 were
utilized prior to the completion of its public offering.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets are as follows:
The Company has a net operating loss carryforward of approximately
$170,000 at December 31, 2000 that expires in 2020.
F-12
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 3--INCOME TAXES--CONTINUED
The Company has equity positions in four 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, 2000.
DECEMBER 31,
----------------------
2000 1999
----------------------
Deferred tax liabilities:
Depreciation and amortization $ -- $ 25,000
--------- ---------
Total deferred tax liabilities -- 25,000
Deferred tax assets:
Depreciation and amortization 9,000 --
Accrued expenses 53,000 26,000
Bad debt allowance 107,000 96,000
--------- ---------
Subtotal 169,000 122,000
State Net operating loss carryforwards 271,000 100,000
--------- ---------
Total deferred tax assets 440,000 222,000
Valuation allowance for deferred tax assets (440,000) (197,000)
--------- ---------
Net deferred tax asset -- 25,000
Net deferred taxes $ -- $ --
========= =========
A valuation allowance has been provided that fully offsets the
deferred tax asset recorded at December 31, 2000 and December 31, 2000 and
December 31, 1999 as management believes that it is more likely than not that,
based on the weight of the available evidence, the deferred tax asset will not
be realized.
Significant components of the income tax provision (benefit) are as
follows:
2000 1999 1998
---- ---- ----
Current:
Federal $ (85,709) $(324,720) $(301,000)
State 55,422 32,258 40,162
--------- --------- ---------
(30,287) (292,462) (260,838)
Deferred -- -- 24,000
--------- --------- ---------
$ (30,287) $(292,462) $(236,838)
========= ========= =========
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:
F-13
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 3--INCOME TAXES--CONTINUED
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
------------------------------------
Statutory tax rate (34%) applied to income (loss)
before income taxes .................... $(136,032) $(325,395) $(149,943)
Adjustments due to:
State taxes, net of federal benefit .... 36,578 21,290 25,049
Change in valuation allowance .......... 243,000 117,000 80,000
Benefits of net operating losses ....... -- -- --
Non-deductible items ................... -- 3,395 2,973
Prior year tax return accrual adjustment (173,833) (108,752) (194,917)
--------- --------- ---------
$ (30,287) $(292,462) $(236,838)
========= ========= =========
Income tax (refunds) payments were approximately $(395,000) in 2000,
$223,000 in 1999 and $1,162,000 in 1998.
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, 2000 and
1999 and $240,000 for the year ended December 31, 1998.
As of December 31, 2000 and December 31, 1999, the Company had an
intercompany advance receivable from the Parent of approximately $414,000 and
$105,000, respectively, which bore interest at the short-term Treasury Bill
rate. Interest income on the intercompany advance receivable amounted to
approximately $13,000, $2,000 and $1,000 for the years ended December 31, 2000,
1999 and 1998, respectively. Interest on an intercompany advance payable
amounted to approximately $6,000 for the year ended December 31, 1998. 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, 2002, and therefore, the advance has been classified as long-term
at December 31, 2000.
On January 27, 2000, the Company's Parent acquired a 6% interest in
Linux Global Partners ("LGP"), a private holding company investing in Linux
software companies, and loaned LGP $1,500,000 with a 10% annual interest rate.
The Parent obtained an option to acquire an additional 2% interest in
conjunction with loaning $500,000 more to LGP, which 2% interest it acquired and
additional loan it made on March 27, 2000. The loans were originally scheduled
to mature January 26, 2001. On August 9, 2000, the Parent loaned LGP an
additional $200,000 with an annual interest rate of 10% originally scheduled to
mature in 30 days with the maturity having been extended. The Parent borrowed
the funds it utilized for the loans from the Company with an annual interest
rate of 10%. Interest income on the notes receivable from the Parent, which have
the same terms as the Parent's loans to LGP, amounted to approximately $186,000
for the year ended December 31, 2000. Interest receivable on the note from the
Parent amounted to approximately $186,000 at December 31, 2000 and is included
in prepaid expenses and other current assets. The Parent issued options to
purchase 150,000 shares of its common stock to MainStreetIPO.com Inc. and two of
its officers in January 2000 as a finder's fee in conjunction with the
F-14
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 4--TRANSACTIONS WITH PARENT--CONTINUED
Parent's investment in LGP. To assist LGP in achieving its long-term investment
objectives, the Company's Parent has agreed to extend the maturity of its notes
receivable from LGP to June 30, 2001 for additional consideration consisting of
400,000 additional shares of LGP stock and the right to convert all or part of
the loans into Convertible Preferred A shares of LGP with the same terms and
conditions as a private placement of its securities in process by LGP.
Additionally, LGP has agreed to repay all monies owed to the Parent prior to any
other use of its private placement proceeds if the Parent chooses not to convert
the loans. The maturity of the Company's notes receivable from the Parent have
also been extended to June 30, 2001. See Notes 11 and 12.
NOTE 5--OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 2000, 1999 and 1998, respectively, the
Company paid premiums of approximately $114,000, $161,000 and $124,000 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, 2000, 1999 and 1998, respectively,
legal fees of $133,000, $132,000 and $80,000 were paid to an attorney who acts
as general counsel and Secretary for the Company and the Parent.
NOTE 6--STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as is
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standard Board Statement No. 123 "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense was recognized.
In November, 1995, the Company adopted a stock option plan for up to
250,000 options. 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. 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 they Company received cash
payment of the par value and the balance in three-year promissory notes with
interest at 6.2%.
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
F-15
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 6 --STOCK OPTIONS--CONTINUED
Black-Scholes option pricing model with the following weighted-average
assumptions for options granted/modified during 1999 and 1998, respectively:
risk-free interest rate of 5.65% for the 1999 options and 5.55% for the options
granted/modified during 1998; no dividend yield; volatility factor of the
expected market price of the Company's common stock of .95 and .93, and a
weighted-average expected life of 1.9 years and 2.0 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective input assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period, and since the
options vested immediately, the Company's pro forma disclosure recognizes
expense upon issuance of the options. No pro forma information is provided for
2000 as no options were granted during 2000. The Company's pro forma information
follows:
1999 1998
---- ----
Pro forma net loss $(958,759) $(209,039)
========== ==========
Pro forma loss per share $(.28) $(.06)
========== ==========
A summary of the Company's stock option activity, and related
information for the options issued in 1999, 1998, 1996 and 1995 follows:
2000 1999 1998
---- ---- ----
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding-beginning of year 809,500 19,500 29,000
Granted --- 800,000 $1.25 10,000 $2.25
Cancellations --- --- (5,000) 4.75
Exercised (340,000) $1.25 --- ---
Expired (4,500) 1.50 (10,000) 3.50 (14,500) 1.50
------- ------- ------
Outstanding-end of year 465,000 809,500 19,500
======= ======= ======
Outstanding and exercisable
at end of year
April 1999 options 460,000 1.25 800,000 1.25 ---
November 1995 options --- 4,500 1.50 4,500 1.50
August 1996 and June 1998 options 5,000 2 .25 5,000 2.25 10,000 2.25
August 1996 options --- --- 5,000 4.75
-------- ------- ------
465,000 809,500 19,500
======== ======= ======
Weighted-average fair value of
options granted during the year $ -- $.59 $.79
==== ==== ====
F-16
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 6 --STOCK OPTIONS--CONTINUED
The remaining contractual life at December 31, 2000 is 3.3 years for
460,000 options issued in April 1999 and 2.4 years for the 5,000 options issued
in June 1998.
The Company has 765,000 shares reserved for future issuance, including:
5,000 shares under the 1995 plan; 460,000 shares under the 1999 plan and 300,000
shares for underwriter options.
NOTE 7--COMMON STOCK
Pursuant to a 1996 public offering 1,150,000 shares of common stock
were issued, including 150,000 shares from exercise of the underwriters
overallotment option, and 2,300,000 redeemable common stock purchase warrants to
purchase one common share each at an exercise price of $4.50 originally
exercisable through April 16, 1999 and extended to 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 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, 2000 are approximately:
2001-$252,000; 2002-$233,000; 2003-$198,000; 2004-$100,000; thereafter-$17,000.
Total rent expense was approximately $218,000, $173,000 and $49,000 for the
years ended December 31, 2000, 1999 and 1998, 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, 2000.
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.
NOTE 10--CAPITAL EXPENDITURES
Capital expenditures were as follows:
2000 1999 1998
---- ---- ----
$1,933,000 $1,203,000 $1,149,000
========== ========== ==========
F-17
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
NOTE 11--PROPOSED MERGER AND ACQUISITION
On October 20, 1999, the Company entered into an Agreement and Plan of
Merger with MainStreet IPO.com Inc. ("MainStreet") and its wholly-owned
subsidiary, MainStreet Acquisition Inc. In August 2000, the Company terminated
the proposed merger as a result of MainStreet's failure to satisfy conditions
contemplated by the merger agreement.
NOTE 12--LOAN TO MAINSTREET
In July 2000, the Company loaned $140,000 to MainStreet pursuant to a
one year convertible promissory note secured by 300,000 shares of Linux Global
Partners owned by MainStreet. The note bore interest at prime plus 1/2% payable
at the earlier of failure of the Company's shareholders to approve its proposed
merger with MainStreet before November 1, 2000 or at maturity on July 11, 2001.
Since the proposed merger with MainStreet terminated, the $140,000 loan with
$4,356 of accrued interest to November 1, 2000 matured on that date. MainStreet
defaulted in payment and the Company acquired the 300,000 shares of Linux Global
Partners which secured the loan. See Note 11.
F-18
EXHIBIT 21
SUBSIDIARIES
Jurisdiction of Percentage Owned
Subsidiaries Incorporation by Registrant
DCA Medical Services, Inc. Florida 100%
DCA of SO. GA., LLC Delaware 70%
DCA of Vineland, LLC New Jersey 51%
Dialysis Services of NJ, Inc.-
Manahawkin New Jersey 80%
Dialysis Services of NJ, Inc. -
Toms River* New Jersey 80%
Dialysis Services of PA, Inc. - Carlisle Pennsylvania 80%
Dialysis Services of PA, Inc. - Chambersburg Pennsylvania 80%
Dialysis Services of PA, Inc. - Lemoyne Pennsylvania 100%
Dialysis Services of PA, Inc. - Wellsboro Pennsylvania 100%
Renal Services of Pa., Inc.* Pennsylvania 100%
DCA of Homerville, LLC Delaware 100%
DCA of Fitzgerald, LLC Georgia 100%
* inactive.
EXHIBIT 23(i)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement (Form S-3, No. 33-80877-a) of Dialysis Corporation of America and in
the related Prospectus of our report dated March ___, 2001, with respect to the
consolidated financial statements and schedule of Dialysis Corporation of
America as of and for the year ended December 31, 1998 included in this Annual
Report (Form 10-K) for the year ended December 31, 2000.
/s/ ERNST & YOUNG LLP
March ___, 2001
Miami, Florida
EXHIBIT 23(ii)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement (Form S-3, No. 33-80877-a) of Dialysis Corporation of America and in
the related Prospectus of our report dated March 9, 2001, with respect to the
consolidated financial statements of Dialysis Corporation of America included in
its Annual Report (Form 10-K) for the two years ended December 31, 2000 and
1999, filed with the Securities and Exchange Commission.
/s/ WISS & COMPANY, LLP
March 28, 2001
Livingston, New Jersey