|
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION |
|
Washington,
D.C. 20549 |
| |
|
FORM
10-K |
(Mark
One)
| x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the
fiscal year ended December
31, 2004
OR
| o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the
transition period from____________ to __________
Commission
file number
0-8527
DIALYSIS
CORPORATION OF AMERICA
(Exact
name of registrant as specified in its charter)
FLORIDA |
59-1757642 |
|
(State
or other jurisdiction of |
(I.R.S.
Employer |
|
incorporation
or organization) |
Identification
No.) |
|
1302
CONCOURSE DRIVE, SUITE 204, LINTHICUM, MARYLAND |
21090 |
|
(Address
of principal executive offices) |
(Zip
Code) |
Registrant’s
telephone number, including area code (410)
694-0500
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 o
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. o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).
Yes o No x.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the closing price at which the common
equity was sold on June 30, 2004 was approximately $12,410,000.
As of
March 25, 2005, the Company had 8,661,815 shares of its common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Registrant’s
Registration Statement on Form SB-2 dated December 22, 1995, as amended February
9, 1996, April 2, 1996 and April 15, 1996, Registration No. 33-80877-A Part II,
Item 27, Exhibits, incorporated in Part IV of this Annual Report,
Registrant’s
Annual Report, Form 10-K for the year ended December 31, 1996 and for the seven
years ended December 31, 2003, Part IV, Exhibits, incorporated in Part IV of
this Annual Report.
Annual
Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for the year ended
December 31, 1994, Part IV, Exhibits, incorporated in Part IV of this Annual
Report.
DIALYSIS
CORPORATION OF AMERICA
Index to
Annual Report on Form 10-K
Year
Ended December 31, 2004
|
Cautionary
Notice Regarding Forward-Looking Information |
1 |
|
Item
1. |
Business |
2 |
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Item
2. |
Properties |
30 |
| |
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Item
3. |
Legal
Proceedings |
32 |
| |
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|
Item
4. |
Submission
of Matters to a Vote of Security Holders |
32 |
| Item
5. |
Market
for the Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities |
32 |
| |
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|
Item
6. |
Selected
Financial Data |
34 |
| |
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| Item
7. |
Management's
Discussion and Analysis of Financial Condition and Results of
Operations |
36 |
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|
Item
7A. |
Quantitative
and Qualitative Disclosure About Market Risk |
47 |
| |
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|
|
Item
8. |
Financial
Statements and Supplementary Data |
48 |
| |
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| Item
9. |
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure |
48 |
| |
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|
|
Item
9A. |
Controls
and Procedures |
48 |
| |
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|
Item
9B. |
Other
Information |
49 |
|
Item
10. |
Directors
and Executive Officers of the Registrant |
49 |
| |
|
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|
Item
11. |
Executive
Compensation |
52 |
| |
|
|
| Item
12. |
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
58 |
| |
|
|
|
Item
13. |
Certain
Relationships and Related Transactions |
61 |
| |
|
|
|
Item
14. |
Principal
Accountant Fees and Services |
62 |
|
Item
15. |
Exhibits
and Financial Statement Schedules |
65 |
| |
|
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|
Signatures |
|
71 |
Part
I
Cautionary
Notice Regarding Forward-Looking Information
The
statements contained in this Annual Report on Form 10-K and the documents
incorporated by reference in this Annual Report that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 as amended (the “Securities Act”), and Section 21E of the Securities
Exchange Act of 1934 (the “Exchange Act”). In addition, from time to time, we or
our representatives have made or may make forward looking statements, orally or
in writing, and in press releases. 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 proposed acquisition of our parent public company, Medicore,
Inc. pursuant to a stock for stock merger transaction, 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 based on assumptions and 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 beginning on page 21 of this
annual report. If any of such events occur or circumstances arise that we have
not assessed, they could have a material adverse effect upon our revenues,
earnings, financial condition and business, as well as the trading price of our
common stock, which could adversely affect your investment in our company.
Accordingly, readers are cautioned not to place too much reliance on such
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf, are expressly
qualified in their entirety by the cautionary statements contained in this
annual report. You should read this annual report, the exhibits attached and the
documents incorporated by reference completely and with the understanding that
the company’s actual results may be materially different from what we
expect.
The
forward-looking statements speak only as of the date of this Annual Report, and
except as required by law, we undertake no obligation to rewrite or update such
statements to reflect subsequent events.
Item
1. Business
Historical
We are a
Florida corporation 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, or ESRD. We also provide acute inpatient dialysis
treatments in hospitals, homecare services and dialysis center management
services. 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. We currently operate 23 outpatient dialysis facilities including a
dialysis center in Ohio in which we hold a 40% interest and an unaffiliated
center in Georgia, each of which we manage pursuant to management services
agreements. During 2004, we opened five dialysis centers: one in each of
Maryland, Pennsylvania, and South Carolina and two in Virginia and acquired a
Pennsylvania dialysis company that had been operating two centers. We are in the
process of developing five new centers: one in Maryland, one in Ohio and three
in South Carolina.
Our
principal executive offices are located at 1302 Concourse Drive, Suite 204,
Linthicum, Maryland 21090, and you may contact us as follows:
telephone:
(410) 694-0500
fax:
(410) 694-0596
email:
info@dialysiscorporation.com
Our
internet website can be found at www.dialysiscorporation.com. You may
obtain from our internet website, free of charge, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to
those reports filed with the SEC, press releases, corporate profiles and
corporate governance materials. We also make those documents available to
shareholders free of charge upon request.
Recent
Developments
The
company and its parent, Medicore, Inc., agreed to terms for a merger of Medicore
into our company in a stock for stock merger transaction. This was announced in
a joint release on March 15, 2005. We are currently working toward completion of
an Agreement and Plan of Merger. Medicore, also a public company trading on the
Nasdaq SmallCap Market (MDKI), currently owns approximately 56% of our company.
The merger is subject to the receipt of satisfactory tax and fairness opinions,
the filing of a registration statement including a proxy statement/prospectus
with the SEC, and the approval of the shareholders of Medicore and our company.
Assuming completion of the merger, we anticipate issuing .68 shares of our
common stock for each share of Medicore common stock for an aggregate issuance
of approximately 5,289,000 shares, which will result in approximately 9,000,000
of our shares of common stock to be outstanding upon completion of the
merger.
The bases
for the merger are essentially to simplify the corporate structure, enable the
ownership of the control interest in our company to be in the hands of the
public rather than one entity, and provide to our company the Medicore assets,
which include, among other assets, minimum cash of approximately $4,000,000 to
$5,000,000, the medical supply operations, and income producing realty in
Hialeah, Florida, with an estimated value of at least $3,000,000. Indebtedness
of approximately $2,435,000 at March 25, 2005 which we owe to Medicore under a
financing arrangement provided by Medicore of up to
$5,000,000
will be eliminated. The credit facility is for equipment financing, working
capital and general corporate purposes. These assets to be obtained in the
merger will enhance our liquidity and borrowing power, and provide our company
with the ability to continue our business strategy of controlled growth, further
build our dialysis business, and expand the acquired medical supply
operations.
We are
preparing for filing with the SEC in the near future a registration statement on
Form S-4 containing a proxy statement/prospectus, as well as an information
statement for our company in connection with the merger transaction.
Common
stockholders are urged to read that filing when it becomes available, since it
will contain important information about the merger, Medicore, and our company,
including, but not limited to, each company’s management, risk factors,
stockholder rights, and voting procedures. When the
registration statement and the proxy statement/prospectus is available,
stockholders may obtain free copies and other documents filed with the SEC at
the SEC’s website at www.sec.gov. In
addition, stockholders and others may obtain free copies of the documents filed
with the SEC by the company by contacting Lawrence E. Jaffe, Esq., our corporate
Secretary, at 201-288-8282. Medicore and its directors and executive officers
may be deemed to be participants in the solicitation of proxies from its
stockholders in connection with the merger transaction. Our company is providing
an information statement with respect to the annual meeting and which
stockholder approval for the merger transaction will be sought, but we do not
solicit proxies since a quorum for the stockholder meeting exists by virtue of
Medicore’s controlling interest in our company.
Information
regarding the special interests of the directors and executive officers of
Medicore and our company in the merger transaction will be disclosed in the
proxy statement/prospectus. Additional information regarding the directors and
executive officers of Medicore is included in Medicore’s annual report on Form
10-K for the year ended December 31, 2004, and as to our directors and executive
officers in this annual report, Part III, below. These annual reports and
related documents are available free of charge at the SEC’s website at
www.sec.gov, and
from Lawrence E. Jaffe, corporate Secretary to Medicore and our company, as
described above.
General
Management
believes the company distinguishes itself on the basis of quality patient care,
and a patient-focused, courteous, highly trained professional staff. In addition
to outpatient facilities, we provide acute inpatient dialysis treatments that
are conducted under contractual relationships. Currently we have such
relationships with nine hospitals and medical centers located in areas and
states serviced by our outpatient dialysis facilities. Our homecare services,
through the use of peritoneal dialysis, requires us to provide equipment and
supplies, training, monitoring and follow-up assistance to patients who are able
to perform their treatments at home.
Our
growth depends primarily on the availability of suitable dialysis centers for
development or acquisition in appropriate and acceptable areas, and our ability
to develop new potential dialysis centers at costs within our budget. We opened
five new dialysis centers during 2004: one in Virginia in January, 2004, one in
South Carolina in February, 2004, one in Pennsylvania in March, 2004, one in
Maryland in June, 2004 and another in Virginia in December, 2004. At the end of
August, 2004 we acquired a dialysis company which owns and operates two dialysis
centers in Pennsylvania. We are in the process of developing five additional
dialysis centers: one in Maryland, one in Ohio and three in South
Carolina.
Our
medical service revenues are derived primarily from four sources: (i) outpatient
hemodialysis services (46%, 47% and 48% of medical services revenues for 2004,
2003 and 2002, respectively); (ii) home peritoneal dialysis services (7%, 4%,
and 3% of medical services revenues for 2004, 2003 and 2002, respectively);
(iii) inpatient hemodialysis services for acute patient care provided through
agreements
with hospitals and medical centers (5%, 7% and 10% of medical services revenues
for 2004, 2003 and 2002, respectively); and (iv) ancillary services associated
with dialysis treatments, primarily the administration of erythropoietin
(“EPO”), a bio-engineered protein that stimulates the production of red blood
cells (a deteriorating kidney loses its ability to regulate red blood cell
count, resulting in anemia), (42%, 42% and 39% of medical services revenue for
2004, 2003 and 2002, respectively). Dialysis is an ongoing and necessary therapy
to sustain life for kidney dialysis patients. ESRD patients normally receive 156
dialysis treatments each year.
Essential
to our operations and income is Medicare reimbursement which is a fixed rate
determined by the Center for Medicare and Medicaid Services (“CMS”) of the
Department of Health and Human Services (“HHS”). The level of our revenues and
profitability may be adversely affected by future legislation that could result
in rate cuts. Further, our operating costs tend to increase over the years in
excess of increases in the prescribed dialysis treatment rates. From
commencement of the Medicare ESRD program in 1972 through 1983, the ESRD
composite rate was unchanged, and thereafter decreased over the years until
January, 2000, when the rate was minimally increased by Congress, and further
minimally increased in January, 2001. However, Congress has approved a 1.6%
composite rate increase for 2005. For calendar 2005, Medicare is implementing an
additional change in the manner it reimburses dialysis treatments, which
includes a pricing revision to the current average wholesale price for
separately billable drugs and biologicals. Prepayment will be based on the
average acquisition price as determined by the Office of Inspector General,
referred to as OIG. In order to make this change budget-neutral, a drug add-on
component has been included, which will increase our composite rate by an
additional 8.7%. Further, Medicare intends to implement a case mix payment
system, adjusting the composite rate for a limited number of patient
characteristics. See under this Item 1, “Operations - Medicare Reimbursement”
below. Commercial third-party reimbursement rates, which have increased as a
percentage of our revenues over the last two years, are also susceptible to
reduction. See “Operations - Medicare Reimbursement.” The inpatient dialysis
service agreements for treating acute kidney disease are not subject to
government fixed rates, but rather are negotiated with hospitals. Typically
these rates are at least equivalent to or higher than the government fixed rates
on a per treatment basis.
Stock
Split
On
January 28, 2004, the company effected a two-for-one stock split. All share and
per share data, including option information, in this Annual Report on Form 10-K
for the year ended December 31, 2004, have been adjusted to reflect the stock
split.
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, ESRD, results from chemical imbalance and buildup
of toxic chemicals, and is a state of kidney disease characterized by advanced
irreversible renal impairment. ESRD is a likely consequence of complications
resulting from diabetes, hypertension, advanced age, and specific hereditary,
cystic and urological diseases. ESRD patients, in order to survive, must either
obtain a kidney transplant, which procedure is limited due to lack of suitable
kidney donors and the incidence of rejection of transplanted organs, or obtain
dialysis treatments for the rest of their lives.
Based
upon information published by CMS, the number of ESRD patients requiring
dialysis treatments in the United States at December 31, 2002 was approximately
309,000, and continues to grow at a rate of approximately 7% a year. This is
thought to be attributable primarily to the aging of the
population
and greater patient longevity as a result of improved dialysis technology. The
statistics further reflect approximately 4,443 dialysis facilities, with a
current annual cost for treating ESRD patients in the United States at
approximately $25 billion at December, 2002, of which Medicare accounted for
approximately $17 billion.
ESRD
Treatment Options
Treatment
options for ESRD patients include (1) hemodialysis, performed either at (i) an
outpatient facility, or (ii) inpatient hospital facility, or (iii) the patient’s
home; (2) peritoneal dialysis, either continuous ambulatory peritoneal dialysis
or continuous cycling peritoneal dialysis; and/or (3) kidney transplant. A
significant portion of ESRD patients receive treatments at non-hospital owned
outpatient dialysis facilities (according to CMS, approximately 80%) with most
of the remaining patients treated at home through hemodialysis or peritoneal
dialysis. Patients treated at home are monitored by a designated outpatient
facility.
The most
prevalent form of treatment for ESRD patients is hemodialysis, which involves
the use of an artificial kidney, known as a dialyzer, to perform the function of
removing toxins and excess fluids from the bloodstream. This is accomplished
with a dialysis machine, a complex blood filtering device which takes the place
of certain functions of the kidney, and also controls external blood flow and
monitors the toxic and fluid removal process. The dialyzer has two separate
chambers divided by a semi-permeable membrane, and simultaneously with the blood
circulating through one chamber, dialyzer fluid is circulated through the other
chamber. The toxins and excess fluid pass through the membrane into the dialysis
fluid. On the average, patients usually receive three treatments per week with
each treatment taking three to five hours. Dialysis treatments are performed by
teams of licensed nurses and trained technicians pursuant to the staff
physician’s instructions.
Home
hemodialysis treatment requires the patient to be medically suitable and have a
qualified assistant. Additionally, home hemodialysis requires training for both
the patient and the patient’s
assistant,
which usually encompasses four to eight weeks. Our company does not currently
provide home hemodialysis (non-peritoneal) services.
A second
home treatment for ESRD patients is peritoneal dialysis. There are several
variations of peritoneal dialysis, the most common being continuous ambulatory
peritoneal dialysis and continuous cycling peritoneal dialysis. All forms of
peritoneal dialysis use the patient’s peritoneal (abdominal) cavity to eliminate
fluid and toxins from the patient. Continuous ambulatory peritoneal dialysis
utilizes dialysis solution infused manually into the patient’s peritoneal cavity
through a surgically-placed catheter. The solution is allowed to remain in the
abdominal cavity for a three to five hour period and is then drained. The cycle
is then repeated. Continuous cycling peritoneal dialysis is performed in a
manner similar to continuous ambulatory peritoneal dialysis, but utilizes a
mechanical device to cycle the dialysis solution while the patient is sleeping.
Peritoneal dialysis is the third most common form of ESRD therapy following
center hemodialysis and renal transplant.
While
kidney transplantation, another treatment option for patients with ESRD, is
typically the most desirable form of therapeutic intervention, the scarcity of
suitable donors and possibility of donee rejection limits the availability of
this surgical procedure as a treatment option.
Business
Strategy
Dialysis
Corporation of America has 28 years’ experience in developing and operating
dialysis treatment facilities. Our priority is to provide quality patient care.
We intend to continue to establish alliances
with physicians and hospitals and attempt to initiate dialysis service
arrangements with nursing homes and managed care organizations.
We
continue to actively seek and negotiate with physicians and others to establish
new outpatient dialysis facilities. We are in the process of developing five new
dialysis centers; and we are in different phases of negotiations with physicians
for potential new facilities in a variety of states.
Same
Center Growth
We
endeavor to increase same center growth by adding quality staff and management
and attracting new patients to our existing facilities. We seek to accomplish
this objective by rendering high caliber patient care in convenient, safe and
pleasant conditions. We believe that we have adequate space and stations within
our facilities to accommodate greater patient volume and maximize our treatment
potential. During fiscal 2004, we experienced approximately 9% growth in the
total number of dialysis treatments at our 14 dialysis centers that were in
existence as of December 31, 2003, and a 20% growth in medical services revenue
for these centers. We had an increase of over 50% in peritoneal dialysis
patients in fiscal 2004.
Development
and Acquisition of Facilities
One of
the primary elements in developing or acquiring facilities is locating an area
with an existing patient base under the current treatment of local
nephrologists, since the proposed facility would primarily be serving such
patients. Other considerations in evaluating development of a dialysis facility
or a proposed acquisition are the availability and cost of qualified and skilled
personnel, particularly nursing and technical staff, the size and condition of
the facility and its equipment, the atmosphere for the patients, the area’s
demographics and population growth estimates, state regulation of dialysis and
healthcare services, and the existence of competitive factors such as existing
outpatient dialysis facilities within reasonable proximity to the proposed
center.
Expansion
is approached primarily through the development of our own dialysis facilities.
Acquisition of existing outpatient dialysis centers is a faster but more costly
means of growth. The primary reason for physicians selling or participating in
the development of independently owned centers is the avoidance of
administrative and financial responsibilities, freeing their time to devote to
their professional practice. Other motivating forces are the physician’s desire
to be part of a larger organization allowing for economies of scale and the
ability to realize a return on their investment if they have an interest in the
dialysis entity.
To
construct and develop a new facility ready for operation takes an average of six
to eight months, and approximately 12 months or longer to generate income, all
of which are subject to variables based on location, size and competitive
elements. Some of our centers are in the developmental stage, since they have
not reached the point where the patient base is sufficient to generate and
sustain earnings. See Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” Construction of a 15 station facility,
typically the size of our dialysis facilities, costs in a range of $750,000 to
$1,000,000, including equipment and initial working capital requirements,
depending on location, size and related services to be provided by the proposed
facility. Acquisition of existing facilities can be substantially more
expensive, and is usually based primarily upon the patient base and earnings,
and to a lesser extent, location and competition. Any significant expansion,
whether through acquisition or development of new facilities, is dependent upon
existing funds or financing from other sources. We have a financing arrangement
with our parent for up to $5,000,000 for equipment financing and working
capital. At March 25, 2005, we had borrowed $2,435,000, which is under a demand
promissory
note at an annual interest rate of prime plus 1.25%. Assuming completion of the
merger with our parent, we would obtain, among other assets, approximately
$4,000,000 to $5,000,000 in cash for building our dialysis operations. See
“Recent Developments” above.
Inpatient
Services
We also
seek to increase acute dialysis treatments through 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.
There is
no certainty as to when any additional centers or service contracts will be
implemented, or, to the extent implemented, the number of dialysis stations or
patient treatments these centers or service contracts may involve, or if they
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 we 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 their start-up
costs and expenses and to their having a smaller and slower developing patient
base. See “Business Strategy,” “Operations” and “Competition” of this Item 1,
and Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Operations
Location,
Capacity and Use of Facilities
We
operate 23 outpatient dialysis facilities in Georgia, Maryland, New Jersey,
Ohio, Pennsylvania, Virginia and South Carolina, including an Ohio dialysis
center in which we hold a 40% interest and which we operate in conjunction with
the majority owner, the medical director of that center, and an unaffiliated
center in Georgia which we manage. These dialysis facilities have a total
designed capacity of 331 licensed stations.
22 of our
23 dialysis facilities are owned through subsidiaries of which 13 are 100% owned
by us, eight owned by us as a majority owner in conjunction with the medical
directors of those centers who hold minority interests, and one of which we hold
a minority 40% interest, and which we manage under contract. We also manage an
unaffiliated dialysis center in Georgia. One of the Pennsylvania and one of the
Georgia dialysis centers are located on properties that we own and lease to our
subsidiaries. Our Cincinnati, Ohio dialysis center is leased from a corporation
owned by the medical director of that center who, together with his wife, holds
a minority interest in the subsidiary operating that center. See Item 2,
“Properties.”
Additionally,
the company provides acute care inpatient dialysis services to nine hospitals in
areas serviced by our dialysis facilities. 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. Furthermore,
most of our dialysis facilities have the capacity to provide training, supplies
and
on-call support services for home peritoneal patients. Dialysis Corporation of
America provided approximately 149,000 hemodialysis treatments in 2004, an
increase of approximately 31,000 treatments compared to fiscal
2003.
We
estimate that on average our centers were operating at approximately 54% of
capacity as of December 31, 2004, based on the assumption that a dialysis center
is able to provide up to three treatments a day per station, six days a week. We
believe we can increase the number of dialysis treatments at our centers without
making significant additional capital expenditures.
Operations
of Dialysis Facilities
Our
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.
We
maintain a team of dialysis specialists to provide for the individual needs of
each patient. In accordance with participation requirements under the Medicare
ESRD program, each facility retains a medical director qualified and experienced
in the practice of nephrology and the administration of a renal dialysis
facility. See “Physician Relationships” below. Each facility is overseen by an
administrator who supervises the daily operations and the staff, which consists
of registered nurses, licensed practical nurses, patient care technicians, a
social worker to assist the patient and family to adjust to dialysis treatment
and to provide help in financial assistance and planning, and a registered
dietitian. In addition, there are independent consultants who visit with our
dialysis patients. These individuals supervise the patient’s needs and
treatments. See “Employees” below. In furtherance of our business strategy, we
strive to attract and retain skilled nurses and other staff, competition for
whom is intense.
Our
dialysis facilities offer high-efficiency conventional hemodialysis, which, in
our experience, provides the most viable treatment for most patients. We
consider our dialysis equipment to be both modern and efficient, providing state
of the art treatment in a safe and comfortable environment.
Our
facilities also offer home dialysis, primarily continuous ambulatory peritoneal
dialysis and continuous cycling peritoneal dialysis. Training programs for
continuous ambulatory peritoneal dialysis or continuous cycling peritoneal
dialysis generally encompass two to three weeks at the dialysis facility, and
such training is conducted by the facility’s home training nurse. After the
patient completes training, they are able to perform treatment at home with
equipment and supplies provided by the company.
Inpatient
Dialysis Services
We
presently provide inpatient dialysis services to nine hospitals in Georgia, Ohio
and Pennsylvania, under agreements either with us or with one of our
subsidiaries in the area. The agreements are for a term ranging from one to five
years, with automatic renewal terms, subject to termination by notice of either
party. Inpatient services are typically necessary for patients with acute kidney
failure resulting from trauma or similar causes, patients in the early stages of
ESRD, and ESRD patients who require hospitalization for other
reasons.
Ancillary
Services
Our
dialysis facilities provide certain ancillary services to ESRD patients,
including the administration of certain prescription drugs, such as EPO upon a
physician’s prescription. EPO is a bio-engineered protein which stimulates the
production of red blood cells and is used in connection with dialysis to treat
anemia, a medical complication frequently experienced by ESRD patients. EPO
decreases the necessity for blood transfusions in ESRD patients. There is only
one manufacturer of EPO in the United States and there are currently no
alternative products that perform the functions of EPO available to dialysis
treatment providers. Although we have a good relationship with this manufacturer
and have not experienced any problems in receipt of our supply of EPO, any loss
or limitation of supply of this product could have a material adverse effect on
our operating revenue and income.
Physician
Relationships
An
integral element to the success of a facility is its association with area
nephrologists. A dialysis patient generally seeks treatment at a facility near
the patient’s home where the patient’s nephrologist has an established practice.
Consequently, we rely on our ability to develop affiliations with area
nephrologists.
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 eight of our centers have acquired a
minority ownership interest in the center they service, and an Ohio affiliate is
majority owned by the medical director of that facility. We make every effort to
comply with federal and state regulations concerning our relationship with the
physicians and the medical directors treating patients at our facilities. See
“Government Regulation” below. We know of no limitations on physician ownership
in our subsidiaries.
Agreements
with medical directors typically range from a term of five to 10 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
typically 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. These agreements, however, do not prohibit
physicians providing services at our facilities from providing direct patient
care services at other locations; and consistent with the federal and state law,
such agreements do not require a physician to refer patients to our dialysis
centers. Usually, physician’s professional fees for services are billed directly
to the patient or to government payment authorities by the treating physician
and paid directly to the physician or the professional association.
Our
ability to establish and operate a dialysis facility in a particular area is
substantially dependent on 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, most likely resulting in closure. Compensation of
medical directors is
separately
negotiated for each facility and generally depends on competitive factors, the
size of the facility, and the fair market value of the services to be
provided.
Quality
Assurance
Dialysis
Corporation of America implements a quality assurance program to maintain and
improve the quality of dialysis treatment and care we provide to our patients in
each facility. Quality assurance activities involve the ongoing examination of
care provided, the identification of therapy deficiencies, the need for any
necessary improvements in the quality of care, and evaluation of improved
technology. Specifically, this program requires each center’s staff, including
its medical director and nurse administrator, to regularly review quality
assurance data and initiate programs for improvement, including dialysis
treatment services, equipment, technical and environmental improvements, and
staff-patient and personnel relationships. These evaluations are in addition to
assuring regulatory compliance with CMS and the Occupational Safety and Health
Administration. Our Vice President of Clinical Services, a certified nephrology
nurse, oversees this program in addition to ensuring that we meet federal and
state compliance requirements for our dialysis centers. See “Government
Regulation” below.
Quality
Clinical Results
Our goal
is to provide consistent quality clinical care to our patients from caring and
qualified doctors, nurses, patient care technicians, social workers and
dieticians. We have demonstrated an unwavering commitment to quality renal care
through our continuous quality improvement initiatives. We strive to maintain a
leadership position as a quality provider in the dialysis industry and often set
our goals higher than the national average standards.
Kt/V is a
formula that measures the amount of dialysis delivered to the patient, based on
the removal of urea, an end product of protein metabolism. Kt/V provides a means
to determine an individual dialysis prescription and to monitor the
effectiveness or adequacy of the dialysis treatment as delivered to the patient.
It is critical to strive to achieve a Kt/V level of greater than 1.2 for as many
patients as possible. The national average for 2003, the most recent data
available, indicated 92% of dialysis patients had a Kt/V level greater than 1.2,
while 95% of our patients had a Kt/V level greater than 1.2, for 2003 and 2004.
Anemia is
a shortage of oxygen-carrying red blood cells. Because red blood cells bring
oxygen to all the cells in the body, anemia causes severe fatigue, heart
disorders, difficulty concentrating, reduced immune function, and other
problems. Anemia is common among renal patients, caused by insufficient
erythropoietin, iron deficiency, repeated blood losses, and other factors.
Anemia can be detected with a blood test for hemoglobin or
hematocrit. It is
ideal to have as many patients as possible with hemoglobin levels above 11.
The
national average for 2003 indicated 79% of dialysis patients had a hemoglobin
level greater than 11, while 80% of our patients had a hemoglobin level greater
than 11, for 2003 and 2004.
One
indicator of the overall health of our patients is the number of days that are
spent in the hospital. The crude hospitalization rate is the total number of
hospital days during a given year per total population. Hospitalization of
patients can be related or unrelated to chronic kidney disease. The national
average for 2001, the most recent data available, was 14.5 hospital days per
patient per year, while our average was 11 hospital days per patient per year,
for 2003 and 2004.
Patient
Revenues
A
substantial amount of the fees for outpatient dialysis treatments are funded
under the ESRD Program established by the federal government under the Social
Security Act, and administered in accordance with rates set by CMS. A majority
of dialysis patients are covered under Medicare. The balance of the outpatient
charges are paid by private payors including the patient’s medical insurance,
private funds or state Medicaid plans. 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. If there is no secondary payor to cover the remaining 20%, Medicare may
reimburse us for part of that balance as part of our annual cost report filings.
Medicare and Medicaid programs are subject to regulatory changes, statutory
limitations and government funding restrictions, which may adversely affect
dialysis services payments and, consequently, our revenues. See “Medicare
Reimbursement” below.
The
inpatient dialysis services are paid for by each contracted hospital pursuant to
contractual pre-determined fees for the different dialysis
treatments.
Medicare
Reimbursement
We are
reimbursed primarily by Medicare under a prospective reimbursement system for
chronic dialysis services, and by third party payors including Medicaid and
commercial insurance companies. Each of our dialysis facilities is certified to
participate in the Medicare program. Under the Medicare system, the
reimbursement rates are fixed in advance and limit the allowable charge per
treatment, but provide us with predictable and recurring per treatment revenues
and allows us to retain any profit earned. An established composite rate set by
CMS governs the Medicare reimbursement available for a designated group of
dialysis services, including dialysis treatments, supplies used for such
treatments, certain laboratory tests and medications.
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 for 2005 is $9.76 per 1000 units for amounts in excess
of three units per patient per year, and certain physician-ordered tests
provided to dialysis patients. Approximately 28% of our medical services revenue
in 2004 was derived from providing dialysis patients with EPO. CMS limits the
EPO reimbursement based upon patients’ hematocrit levels. Other ancillary
services, mostly other drugs, account for approximately an additional 10% of our
medical services revenue. We submit claims monthly and are usually paid by
Medicare within 14 days of the submission.
There
have been a variety of proposals to Congress for Medicare reform. We are unable
to predict what, if any, future changes may occur in the rate of reimbursement.
Congress has approved a 1.6% composite rate increase for 2005. Commencing this
year, Medicare will reimburse dialysis providers for the ten most utilized ESRD
drugs at an amount equal to the cost of such drugs as determined by the OIG, and
for other ESRD drugs, Medicare will reimburse at an amount equal to the average
sale price of the drug plus 6%, and the composite rate will be increased by an
amount estimated by HHS to be the dialysis provider’s average profit for these
drugs. To make this change budget-neutral, a drug add-on
composite
has been included. Accordingly, it has been determined by CMS that the Medicare
ESRD composite rate will increase by approximately 8.7% or $11 per treatment,
and that payments for separately billable drugs will be reduced as described
above. In addition, it is anticipated that CMS will begin as of April 1, 2005 to
reimburse providers using a case mix formula. CMS plans to adjust reimbursements
based on predefined patient parameters such as patient height, weight and age.
Congress has mandated a budget neutrality factor adjustment so that aggregate
payments under the system for 2005 equal payments that would have been made
without the case mix adjustments and the add-on composite for reimbursement of
the drugs.. Management believes that there will be minimal impact on its average
Medicare revenue per treatment as a result of these changes in Medicare
reimbursement. This is the first increase in the Medicare ESRD composite rate
since 2001. 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 reimbursements generally
follow Medicare reimbursement levels and coverages without any co-insurance
amounts. Certain states, however, require beneficiaries to pay a monthly share
of the cost based upon levels of income or assets. Pennsylvania and New Jersey
have Medical Assistance Programs comparable to Medicaid, with primary and
secondary insurance coverage to those who qualify. We are a licensed ESRD
provider in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina
and Virginia.
Sources
of Medical Services Revenue
| |
|
Year Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Medicare |
|
|
48 |
% |
|
54 |
% |
|
49 |
% |
|
Medicaid
and Comparable Programs |
|
|
8 |
% |
|
8 |
% |
|
9 |
% |
|
Hospital
inpatient dialysis services |
|
|
6 |
% |
|
7 |
% |
|
10 |
% |
|
Commercial
and private payors |
|
|
38 |
% |
|
31 |
% |
|
32 |
% |
| |
|
|
|
|
|
|
|
|
|
|
Management
Services
Dialysis
Corporation of America has a management services agreement with each of its
wholly- and majority-owned subsidiaries, with its 40% owned affiliate DCA of
Toledo, LLC, and with an unaffiliated Georgia dialysis center, providing each of
them with administrative and management services, including, but not limited to,
assisting in procuring capital equipment, preparing budgets, bookkeeping,
accounting, data processing, and other corporate based information services,
materials and human resource management, billing and collection, and accounts
receivable and payable processing. These services are provided for a percentage
of net revenues of each particular facility.
Corporate
Integrity Program
Dialysis
Corporation of America has developed a Corporate Integrity Program to assure it
continues to achieve its goal of providing the highest level of care and service
in a professional and ethical manner consistent with applicable federal and
state laws and regulations. This program is
intended
to (i) reinforce our management’s, employees’ and professional affiliates’
awareness of their responsibilities to comply with applicable laws in the
increased and complex regulatory environment relating to our operations, (ii)
benefit the overall care and services for our dialysis patients, and (iii)
assure our operations are in compliance with the law, which, in turn, should
assist us in operating in a cost-effective manner, and accordingly, benefit our
shareholders.
Our board
of directors has established an audit committee consisting of three independent
members of the board who oversee audits, accounting, financial reporting, and
who have established
procedures
for receipt, retention and resolution of complaints relating to those areas
(none to date), among other responsibilities. The audit committee operates under
a charter providing for its detailed responsibilities.
We have
developed a Compliance Program to assure compliance with fraud and abuse laws,
enhance communication of information, and provide a mechanism to quickly
identify and correct any problems that may arise. This Compliance Program
supplements and enhances our existing policies, including those applicable to
claims submission, cost report preparation, internal audit and human
resources.
Code
of Ethics
As part
of our Corporate Integrity Program, we have established a Code of Ethics and
Business Conduct covering management and all employees to assure all persons
affiliated with our company and our operations act in an ethical and lawful
manner. The Code of Ethics and Business Conduct covers relationships among and
between affiliated persons, patients, payors, and relates to information
processing, compliance, workplace conduct, environmental practices, training,
education and development, among other areas. In our commitment to delivering
quality care to dialysis patients, we have mandated rigorous standards of ethics
and integrity.
Our Code
of Ethics and Business Conduct is designed to provide:
| · |
ethical
handling of actual or apparent conflicts of interest between personal and
professional relationships |
| · |
full,
fair, accurate, timely, and understandable disclosure in reports and
documents we file with the SEC and in our other public
communications |
| · |
compliance
with applicable governmental laws, rules and
regulations |
| · |
prompt
internal reporting of violations of the Code to an appropriate person
identified in the Code |
| · |
accountability
for adherence to the Code |
The
portion of our Code of Ethics and Business Conduct as it applies to our
principal executive officer, principal financial officer, principal accounting
officer, and persons performing similar functions, may be obtained without
charge upon request to our corporate Secretary and
counsel,
Lawrence E. Jaffe, Esq., Jaffe & Falk, LLC, at 777 Terrace Avenue, Hasbrouck
Heights, New Jersey 07604.
The
Corporate Integrity Program is implemented, and reviewed and upgraded from time
to time, to provide a highly professional work environment and lawful and
efficient business operations to better serve our patients and our
shareholders.
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 28 years, we have never been
subject to any suit relating to the providing of dialysis treatments. We
currently have general and umbrella liability insurance, as well as professional
and products liability. Our insurance policies provide coverage on an
“occurrence” basis and are subject to annual renewal. A hypothetical successful
claim against us in excess of our insurance coverage could have a material
adverse effect upon our business and results of operations. The medical
directors supervising our dialysis operations and other physicians practicing at
the facilities are required to maintain their own professional malpractice
insurance coverage.
Government
Regulation
General
Regulation
of healthcare facilities, including dialysis facilities, is extensive, with
legislation continually proposed relating to safety, maintenance of equipment
and proper records, quality assurance programs, reimbursement rates,
confidentiality of medical records, licensing and other areas of operations.
Each dialysis facility must be certified by CMS, and we must comply with certain
rules and regulations established by CMS regarding charges, procedures and
policies. Each dialysis facility is also subject to periodic inspections by
federal and state agencies to determine if their operations meet the appropriate
regulatory standards. Our operations are also subject to the Occupational Safety
and Health Administration, known as OSHA, relating to workplace safety and
employee exposure to blood and other potentially infectious
material.
Many
states have eliminated the requirement to obtain a certificate of need prior to
the establishment or expansion of a dialysis center. There are no certificate of
need requirements in the states in which we are presently
operating.
Our
record of compliance with federal, state and local governmental laws and
regulations remains excellent. Nevertheless, we are unable to predict the scope
and effect of any changes in government regulations, particularly any
modifications in the reimbursement rate for medical services or requirements to
obtain certification from CMS. Enforcement, both privately and by the
government, has become more stringent, particularly in attempts to combat fraud
and waste. Since our inception in 1976, we have maintained all of our licenses,
including our Medicare and Medicaid and equivalent certifications. The loss of
any licenses and certifications would have a material adverse effect on our
operations, revenues and earnings.
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 applicable laws or regulations. See
“Fraud and Abuse” and “Stark II” below. To date, none of our business
arrangements with physicians, patients or others have been the subject of
investigation by any governmental authority. No assurance can be given, however,
that our business arrangements will not be the subject of future investigation
or prosecution by federal or state governmental authorities which could result
in civil and/or criminal sanctions.
Certification
and Reimbursement
Our
dialysis centers must meet certain requirements, including, among others, those
relating to patient care, patient rights, medical records, the physical set-up
of the center, and personnel, in order to be certified by CMS, to be covered
under the Medicare program and to receive Medicare reimbursement. See above
under “Operations - Medicare Reimbursement.” All of our dialysis centers are
certified under the Medicare program and applicable state Medicaid programs.
Coverage for ESRD services has been revised by CMS for 2005. See in this Item 1,
“Operations - Medicare Reimbursement” above.
Fraud
and Abuse
Certain
aspects of our business are subject to federal and state laws governing
financial relationships between health care providers and referral sources and
the accuracy of information submitted in connection with reimbursement. These
laws, collectively referred to as “fraud and abuse” laws, include the
Anti-Kickback Statute, Stark II, other federal fraud laws, and similar state
laws.
The fraud
and abuse laws apply because our medical directors have financial relationships
with the dialysis facilities and also refer patients to those facilities for
items and services reimbursed by federal and state health care programs.
Financial relationships with patients who are federal program beneficiaries also
implicate the fraud and abuse laws. Other financial relationships which bear
scrutiny under the fraud and abuse laws include relationships with hospitals,
nursing homes, and various vendors.
Anti-Kickback
Statutes
The
federal Anti-Kickback Statute, derived from certain provisions of the Social
Securities Act of 1965, prohibits the knowing and willful solicitation, receipt,
offer, or payment of any remuneration, directly or indirectly, in return for or
to induce the referral of patients or the ordering or purchasing of items or
services payable under the Medicare, Medicaid, or other federal health care
program.
Sanctions
for violations of the Anti-Kickback Statute include criminal penalties, such as
imprisonment and fines of up to $25,000 per violation, and civil penalties of up
to $50,000 per violation, as well as exclusion from Medicare, Medicaid, and
other federal health care programs.
The
language of the Anti-kickback Statute has been construed broadly by the courts.
Over the years, the federal government has published regulations that
established “safe harbors” to the Anti-Kickback Statute. An arrangement that
meets all of the elements of the safe harbor is immunized from prosecution under
the Anti-Kickback Statute. The failure to satisfy all elements, however, does
not necessarily mean the arrangement violates the Anti-Kickback
Statute.
Some
states have enacted laws similar to the Anti-Kickback Statute. These laws may
apply regardless of payor source, may include criminal and civil penalties, and
may contain exceptions that differ from the safe harbors to the Anti-Kickback
Statute.
As
required by Medicare regulations, each of our dialysis centers is supervised by
a medical director, who is a licensed nephrologist or otherwise qualified
physician. The compensation of our company’s medical directors, who are
independent contractors, is fixed by a medical director agreement and reflects
competitive factors in each respective location, the size of the center, and the
physician’s professional qualifications. The medical director’s fee is fixed in
advance, typically for periods of one to
five
years and does not take into account the volume or value of any referrals to the
dialysis center. Eight of our outpatient dialysis centers are owned jointly
between us and physicians who, in most cases, hold a minority position through a
professional association. Our Ohio affiliate is majority-owned by the medical
director of that facility. 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 in a subsidiary acquired by the physician has been consistent
with the fair market value of the cash consideration paid, assets transferred
to, and/or services performed by that physician for the subsidiary, and there is
no intent to induce referrals to any of our centers. See “Business - Physician
Relationships” above. We believe our arrangements with our medical directors are
in material compliance with applicable law. Several states in which we operate
have laws prohibiting 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 a percentage ownership
in our dialysis facilities, we would restructure our relationship with these
physicians but could be subject to penalties.
Management
believes that the Anti-Kickback Statute and other fraud and abuse laws are
primarily directed at abusive practices that increase the utilization and cost
of services covered by governmentally funded programs. The dialysis services we
provide generally cannot, by their very nature, be over-utilized since dialysis
treatment is not elective, and is only indicated when there is temporary or
permanent kidney failure. Medical necessity is capable of being supported by
objective documentation, drastically reducing the possibility of
over-utilization. Additionally, there are safe harbors for certain arrangements.
Nevertheless, while relationships created by medical director ownership of
minority interests in our facilities satisfy many but not all of the criteria
for the safe harbor, 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 compliance with the law, we have adopted a corporate Compliance
Program that addresses medical necessity and medical chart audits to confirm
medical necessity of referrals.
With
respect to our inpatient dialysis services, we provide hospitals with dialysis
services, including qualified nursing and technical personnel, supplies,
equipment and technical services. In certain instances, the medical director of
our dialysis center who has a minority interest in that facility may refer
patients to hospitals with which we have an inpatient dialysis services
arrangement. 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, enforcement
procedures, or whether changes in the safe harbor rules will affect our position
with respect to the Anti-Kickback Statute, but we will continue to make every
effort to remain in compliance.
Stark
II
The
Physician Ownership and Referral Act, known as Stark II, bans certain physician
referrals, with 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.
For purposes of Stark II, “designated health services” include, 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.”
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.
HHS’
regulations to Stark II became effective in January, 2002. CMS adopted Phase II
of its regulations under Stark II in March, 2004. These regulations exclude from
covered designated health services and referral prohibitions, services included
in the ESRD composite rate and EPO and other drugs required as part of dialysis
treatments under certain conditions. Also excluded from “inpatient hospital
services” are dialysis services provided by a hospital not certified by CMS to
provide outpatient dialysis services, which would exclude our inpatient hospital
services agreements from Stark II. Equipment and supplies used in connection
with home dialysis are excluded from the Stark II definition of “durable medical
equipment.”
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 and
Medicaid program and patient abuse. Since dialysis is a necessary medical
treatment for those with temporary or permanent kidney failure, it is not highly
susceptible to that type of abuse. We believe, based upon the proposed rules and
the industry practice, that Congress did not intend to include dialysis services
and the services and items we provide that are incidental 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, or practices with which they are affiliated, as medical
directors of our dialysis centers pursuant to medical director agreements, which
we believe meet the exception for personal service arrangements under Stark II.
Non-affiliated physicians who send their patients to or treat their patients at
any of our facilities do not receive any compensation from the
company.
Medical
directors of our dialysis centers who hold a minority investment interest in the
subsidiaries operating those centers may refer patients to hospitals with which
we have an acute inpatient dialysis service arrangement. Although the
regulations of Stark II may be interpreted to apply to these types of
transactions, we believe that our contractual arrangements with hospitals for
acute care inpatient dialysis services are in compliance with Stark
II.
If CMS or
any other government entity otherwise interprets the Stark II regulations, we
may be required to restructure certain existing compensation or investment
agreements with our medical directors, or, in the alternative, refuse to accept
referrals for designated health services from certain physicians. Stark II
prohibits Medicare or Medicaid reimbursement of items or services provided
pursuant to a prohibited referral, and imposes substantial civil monetary
penalties on facilities which submit claims for reimbursement. If such were to
be the case, we could be required to repay amounts reimbursed for drugs,
equipment and services that CMS determines to have been furnished in violation
of Stark II, in addition to substantial civil monetary penalties, which could
adversely affect our operations and financial results. We believe that if Stark
II is interpreted by CMS or any other governmental entity to apply to our
arrangements, it is possible that we could be permitted to bring our financial
relationships
with
referring physicians into material compliance with the provisions of Stark II on
a prospective basis. However, prospective compliance may not eliminate the
amounts or penalties, if any, that might be determined to be owed for past
conduct, and there can be no assurance that the costs and expenses associated
with such prospective compliance, if permissible, would not have a material
adverse effect on the company.
Health
Insurance Reform Act
The
Health Insurance Portability and Accountability Act of 1996, known as HIPAA,
provided for health insurance reforms which included a variety of provisions
important to healthcare providers, such as significant changes to the Medicare
and Medicaid fraud and abuse laws, which were expanded. HIPAA established two
programs that coordinate federal, state and local healthcare fraud and abuse
activities. Under these programs, these governmental entities undertake a
variety of monitoring activities, including medical utilization and fraud
review, cost report audits and secondary payor determinations. The Incentive
Program for Fraud and Abuse Information rewards Medicare recipients 10% of the
overpayment up to $1,000 for reporting Medicare fraud and abuse. HIPAA further
created Health Care Fraud Crimes and extended their applicability to private
health plans.
As part
of the administrative simplification provisions of HIPAA, final regulations
governing electronic transactions relating to healthcare information were
published by HHS. These regulations require a party transmitting or receiving
healthcare transactions electronically to send and receive data in single
format. This regulation applies to our submissions and processing of healthcare
claims and also applies to many of our payors. We believe that we are in
compliance with the transactions standards rule.
HIPAA
also includes provisions relating to the privacy of healthcare information. HHS’
privacy rules cover all individually identifiable healthcare information known
as “protected health information” and apply to healthcare providers, health
plans, and healthcare clearing houses, known as “covered entities.” The
regulations are quite extensive and complex, but basically require companies to:
(i) obtain patient acknowledgement of receipt of a notice of privacy practices;
(ii) obtain patient authorization before certain uses and disclosures of
protected health information; (iii) respond to patient requests for access to
their healthcare information; and (iv) develop policies and procedures with
respect to uses and disclosures of protected health information. We expended
significant resources to develop and implement policies and procedures to
address privacy issues, and we believe we are in compliance with the HIPAA
privacy rules.
The final
HIPAA security regulations governing the security of health information that is
maintained or transmitted electronically were published in February, 2003. These
regulations generally require implementation of safeguards for ensuring the
confidentiality of electronic health information. Most covered entities will
have until April 21, 2005 to comply with the standards. Management believes it
is currently in compliance with the HIPAA security standards.
HIPAA
increases significantly the civil and criminal penalties for offenses related to
healthcare fraud and abuse. HIPAA increased civil monetary penalties from $2,000
plus twice the amount for each false claim to $10,000 plus three times the
amount for each false claim. HIPAA expressly prohibits four practices, namely
(1) submitting a claim that the person knows or has reason to know is for
medical items or services that are not medically necessary, (2) transferring
remuneration to Medicare and Medicaid beneficiaries that is likely to influence
such beneficiary to order or receive items or services, (3) certifying the need
for home health services knowing that all of the coverage requirements have not
been met, and (4) engaging in a pattern or practice of upcoding claims in order
to obtain greater reimbursement. However, HIPAA creates a tougher burden of
proof for the government by requiring that the government
establish
that the person “knew or should have known” a false or fraudulent claim was
presented. The “knew or should have known” standard is defined to require
“deliberate ignorance or reckless disregard of the truth or falsity of the
information,” thus merely negligent conduct or billing errors should not violate
the Civil False Claims Act.
As for
criminal penalties, HIPAA adds healthcare fraud, theft, embezzlement,
obstruction of investigations and false statements to the general federal
criminal code with respect to federally funded health programs, thus subjecting
such acts to criminal penalties. Persons convicted of these crimes face up to 10
years imprisonment and/or fines. Moreover, a court imposing a sentence on a
person convicted of federal healthcare offense may order the person to forfeit
all real or personal property that is derived from the criminal offense. The
Attorney General is also provided with a greatly expanded subpoena power under
HIPAA to investigate fraudulent criminal activities, and federal prosecutors may
utilize asset freezes, injunctive relief and forfeiture of proceeds to limit
fraud during such an investigation.
Although
we believe we substantially comply with currently applicable state and federal
laws and regulations and to date have not had any difficulty in maintaining our
licenses and Medicare and Medicaid authorizations, the healthcare service
industry is and will continue to be subject to substantial and continually
changing regulation at the federal and state levels, and the scope and effect of
such and its impact on our operations cannot be predicted. No assurance can be
given that our activities will not be reviewed or challenged by regulatory
authorities. We continue to work with our healthcare counsel in reviewing our
policies and procedures and make every effort to comply with HIPAA and other
applicable federal and state laws and regulations.
Any loss
by us of our approval as a certified provider under the Medicare or Medicaid
programs or our 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 various federal, state and local hazardous waste
laws and non-hazardous medical waste disposal laws. Most of our waste is
non-hazardous. 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, such as the federal False Claims Act, prohibiting
anyone from presenting false claims or fraudulent information to obtain payments
from Medicare, Medicaid and other third-party payors. These laws provide for
both criminal and civil penalties, exclusion from
Medicare
and Medicaid participation, repayment of previously collected amounts and other
financial penalties. The submission of Medicare cost reports and requests for
payment by dialysis centers are covered by these laws. The False Claims Act has
been used to prosecute for fraud, for coding errors, billing for services not
provided, and billing for services at a higher than allowable billing rate. We
believe we have the proper internal controls and procedures for issuance of
accounts and complete cost reports and payment requests. Such reports and
requests, however, are subject to a challenge under these laws.
Certain
states have anti-kickback legislation and laws dealing with self-referral
provisions similar to the federal Anti-Kickback Statute and Stark II. We have no
reason to believe that we are not in compliance with such state
laws.
Dialysis
Corporation of America has developed a Compliance Program as part of its
Corporate Integrity Program, designed to assure compliance with fraud and abuse
laws and regulations. See above under the caption “Corporate Integrity Program.”
The establishment and implementation of our Compliance Program, coupled with our
existing policies and internal controls, could have the effect of mitigating any
civil or criminal penalties for potential violations, of which we have had none
since our inception in 1976. We will continue to use our best efforts to fully
comply with federal and state laws, regulations and requirements as applicable
to our operations and business.
Competition
The
dialysis industry is highly competitive. There are numerous providers who have
dialysis centers in the same areas as our centers. Many are owned by larger
corporations, which operate dialysis centers 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, Inc., Gambro Healthcare, Inc., DaVita, Inc. and Renal Care Group, Inc.
DaVita recently entered into an agreement to acquire Gambro. These companies
have substantially greater financial resources, significantly more centers,
patients and services than we do, and by virtue of such may have an advantage
over us in competing for nephrologists and acquisitions of dialysis facilities
in areas and markets we target. Moreover, competition for acquisitions has
increased the cost of acquiring existing dialysis centers. Fresenius and Gambro
also manufacture and sell dialysis equipment and supplies, which may provide
them with a greater competitive edge. We also face competition from hospitals
and physicians that operate their own dialysis facilities.
Competitive
factors most important in dialysis treatment are quality of care and service,
convenience of location and pleasantness of the environment. Another significant
competitive factor is the ability to attract and retain qualified nephrologists.
These physicians are a substantial source of patients for the dialysis centers,
are required as medical directors of the dialysis center for it to participate
in the Medicare ESRD program, and are responsible for the supervision of the
medical 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. There
can be no assurance that we will compete effectively with any of our
competitors.
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 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 in the growth of this
modality,
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
subsequently lost the functionality of the transplanted kidney and have returned
to dialysis treatments.
Employees
As of
February, 2005, our company had 301 full time employees, including
administrators, licensed practical nurses, registered nurses, technical
specialists, patient care technicians, clerical employees, social workers,
dietitians and corporate staff. We retain 23 part-time employees consisting of
registered nurses, patient care technicians and clerical employees. We also
utilize 78 per diem personnel to supplement staffing.
We retain
18 independent contractors and sub-contractors who include social workers and
dietitians at our Maryland, New Jersey, Ohio, Pennsylvania, Virginia and certain
Georgia facilities. These contractors are in addition to the medical directors,
who supervise patient treatment at each facility.
We
believe our relationship with our employees is excellent and we have not
suffered any strikes or work stoppages. None of our employees is represented by
any labor union. We are an equal opportunity employer.
Risk
Factors
We have
listed below certain of the risk factors relating to Dialysis Corporation of
America and our securities. There may be other risks and uncertainties that we
may face and of which we are currently unaware which could also adversely affect
our business, operations and financial condition. If any of such risks or
uncertainties arise, or the risks listed below occur, our operations, earnings
and financial condition could be materially harmed, which, in turn, would most
likely adversely affect the trading price of our common stock. Any such event
could negatively impact a shareholder’s investment in the company.
Until
fiscal 2001, we had experienced operational losses
Since
1989, when we sold four of our five dialysis centers, we had experienced
operational losses. Not until fiscal 2001 did we reflect net income. We
initiated an expansion program in 1995, opening two new dialysis centers that
year, and to date operate and/or manage 23 centers in the states of Georgia,
Maryland, New Jersey, Ohio, Pennsylvania, Virginia and South Carolina, and we
have five centers in development. Some of our dialysis centers have generated
losses since their commencement of operations and, although typical to newly
established facilities, some continue to generate losses after 12 months of
operations. This is due to operational costs and time needed to reach maturity
of dialysis treatments. See Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
Dialysis
operations are subject to extensive government regulation
Our
dialysis operations are subject to extensive federal and state government
regulations, which include:
| · |
licensing
requirements for each dialysis center |
| · |
government
healthcare program participation
requirements |
| · |
reimbursement
for patient services |
| · |
patient
referral prohibitions; broad federal and state anti-kickback
regulations |
| · |
false
claims prohibitions for health care reimbursement and other fraud and
abuse regulations |
| · |
record
keeping requirements |
| · |
health,
safety and environmental compliance |
| · |
expanded
protection of the privacy and security of personal medical
data |
| · |
establishing
standards for the exchange of electronic health information; electronic
transactions and code sets; unique identifiers for providers, employers,
health plans and individuals |
Many of
these laws and regulations are complex and open to further judicial and
legislative interpretations. If we are forced to change our method of operations
because of these regulations, our earnings, financial condition and business
could be adversely affected. The imposition of additional licensing and other
regulatory requirements may, among other things, increase our cost of doing
business. In addition, any violation of these governmental regulations could
involve substantial civil and criminal penalties and fines, revocation of our
licenses, closure of one or more of our centers, and our exclusion from
participating in Medicare and Medicaid programs. Any loss of federal or state
certifications or licenses would materially adversely impact our
business.
Our
arrangements with our physician medical directors do not meet the safe harbor
provisions of federal and state laws, and may subject us to greater governmental
scrutiny
Neither
our arrangements with the medical directors of our facilities, typically
retained by us as independent contractors under a fixed fee medical director
agreement, nor the minority ownership interests of referring physicians in
certain of our dialysis facilities meet all of the requirements of published
safe harbors to the illegal remuneration provisions of the Social Security Act
and similar state laws. These laws impose civil and criminal sanctions on
persons who receive or make payments for referring a patient for treatment that
is paid for in whole or in part by Medicare, Medicaid or similar state programs.
Transactions that do not fall within the safe harbor may be subject to greater
scrutiny by enforcement agencies.
Our
operations are subject to Medicare and Medicaid audits with concurrent potential
civil and criminal penalties for failure to comply
We are
subject to periodic audits by the Medicare and Medicaid programs, which have
various rights and remedies if they assert that we have overcharged the programs
or failed to comply with program requirements. Rights and remedies available
under these programs include repayment of any amounts alleged to be overpayments
or in violation of program requirements, or making deductions from
future
amounts due to us. These programs may also impose fines, criminal penalties or
program exclusions.
In the
ordinary course of our business, we receive notices of deficiencies for failure
to comply with various regulatory requirements. We review such notices and take
appropriate corrective action. In most cases, we and the reviewing agency will
agree upon the measures that will bring the center or services into compliance.
In some cases or upon repeat violations, none of which we have experienced, the
reviewing agency may take various adverse actions against a provider, including
but not limited to:
| · |
the
imposition of fines; |
| · |
suspension
of payments for new admissions to the center;
and |
| · |
in
extreme circumstances, decertification from participation in the Medicare
or Medicaid programs and revocation of a center’s
license. |
Any such
regulatory actions could adversely affect a center’s ability to continue to
operate, to provide certain services, and/or its eligibility to participate in
Medicare or Medicaid programs or to receive payments from other payors.
Moreover, regulatory actions against one center may subject our other centers,
which may be deemed under our common control or ownership, to similar adverse
remedies.
There
has been increased governmental focus and enforcement with respect to anti-fraud
initiatives as they relate to healthcare providers
State and
federal governments are devoting increased attention and resources to anti-fraud
initiatives against healthcare providers. Legislation has expanded the penalties
for heath care fraud, including broader provisions for the exclusion of
providers from the Medicaid program. We have established policies and procedures
that we believe are sufficient to ensure that our facilities will operate in
substantial compliance with these anti-fraud requirements. While we believe that
our business practices are consistent with Medicare and Medicaid criteria, those
criteria are often vague and subject to change and interpretation. Anti-fraud
actions could have an adverse effect on our financial position and results of
operations.
Our
revenues and financial stability are dependent on fixed reimbursement rates
under Medicare and Medicaid
During
2002, 2003 and 2004, approximately 49%, 54% and 48% of our patient revenues was
derived from Medicare reimbursement and 9%, 8% and 8% of our patient revenues
was derived from Medicaid and equivalent programs. Decreases in Medicare and
Medicaid and equivalent rates and programs for our dialysis treatments would
adversely affect our revenues and profitability.
Federal
and state governments seek to maintain, if not reduce costs, and any such
actions in the healthcare industry could adversely affect our revenues and
earnings, including the following
| · |
reductions
in payments to us or government programs in which we
participate |
| · |
increases
in labor and supply costs, which we do experience, without comparable
governmental reimbursement rate increases |
| · |
inclusion
in the flat composite rate for dialysis treatments those ancillary
services which we currently bill separately |
This year
the reimbursement rate will change, primarily increasing the composite rate by
8.7% and reducing the reimbursement rate for certain drugs, including EPO. CMS
is expanding the drug and ancillary services that are included in the composite
rate. We will be reimbursed for other separately billable ESRD drugs at an
average sale price plus 6% The regulations provide for budget-neutrality, case
mix and geographic adjustments in the composite rate.
Management
does not believe these changes in reimbursement coupled with a 1.6% increase in
the Medicare composite rate will have a significant impact on our operations,
expenses or earnings.
Decreases
in reimbursement payments from third-party, non-government payors could
adversely affect our earnings
Any
reduction in the rates paid by private insurers, hospitals and other
non-governmental third-party organizations would adversely affect our business.
Alternatively, any change in patient coverage, such as Medicare eligibility as
opposed to higher private insurance coverage, would result in a reduction of
revenue. We estimate approximately 42%, 38% and 44% of our patient revenues for
2002, 2003 and 2004, respectively, was obtained from sources other than Medicare
or Medicaid and equivalent programs. We generally charge non-governmental
organizations for dialysis treatment rates which exceed the fixed Medicare and
Medicaid and equivalent rates. Any limitation on our ability to charge these
higher rates, which may be affected by expanded coverage by Medicare under the
fixed composite rate, or expanded coverage of dialysis treatments by managed
care organizations, which commonly have lower rates than we charge, could
adversely affect our business, results of operations, and financial
condition.
Any
decrease in the availability of or the reimbursement rate of EPO would reduce
our revenues and earnings
EPO, the
bio-engineered drug used for treating anemia in dialysis patients, is currently
available from a single manufacturer, Amgen, Inc. In 2003, Amgen increased the
price of EPO, and there is no assurance that there will not be further price
increases. There currently is no alternative drug available to us for the
treatment of anemia of our dialysis patients. The available supply of EPO could
be delayed or reduced, whether by Amgen itself, through unforeseen
circumstances, or as a result of excessive demand. This would adversely impact
our revenues and profitability, since approximately 26%, 28% and 28%,
respectively, of our medical revenues in 2002, 2003 and 2004 were based upon the
administration of EPO to our dialysis patients. Most of our EPO reimbursement is
from government programs.
The
implementation of the case-mix adjustment could adversely affect our revenues,
profitability and cash flow.
CMS has
adopted a case-mix adjustment for the ESRD composite rate, under which the
Medicare composite rate will be adjusted based on a patient’s age, body mass
index and body surface are. These regulations are scheduled to become effective
in April, 2005. Management believes implementing these case-mix adjustments will
require significant systems changes for the Medicare fiscal intermediaries that
process and pay Medicare claims. If the required systems changes are not made on
a timely basis, then
the
Medicare fiscal intermediaries may delay the payment of claims or may not pay
claims correctly, either of which could have an adverse effect on our cash flow,
revenues and profitability. We are presently unable to predict the impact of
this care-mix adjustment, since it depends on our patient mix.
New
Amgen drug could affect use of EPO, adversely impacting our
profitability.
Amgen is
the sole manufacturer of EPO, which is administered in conjunction with dialysis
treatments to address a patient’s anemia. Amgen has developed and obtained FDA
approval for its new drug Aranesp®, used to treat anemia, and which is indicated
to be effective for a longer period than EPO. Based on its longer lasting
capabilities, potential profit margins on Aranesp® could be significantly lower
than on EPO, and furthermore, Aranesp® could be administered by a dialysis
patient’s physician, further eliminating potential revenues from the treatment
of anemia in our dialysis patients. The introduction of Aranesp® as an
anemia treatment for dialysis patients, therefore, could adversely impact our
revenues and profitability.
Our
ability to grow is subject to our resources and available
locations
Other
than four center acquisitions over the period 2002 through 2004, expansion of
our operations has been through construction of dialysis centers. We developed
two dialysis centers and acquired one facility in 2003 and opened five new
centers and acquired a company with two dialysis facilities in 2004. We seek
areas with qualified and cost-effective nursing and technical personnel and a
sufficient population to sustain a dialysis center. These opportunities are
limited and we compete with much larger dialysis companies for appropriate
locations. The time period from the beginning of construction through
commencement of operations of a dialysis center generally takes four to six
months and sometimes longer. Once the center is operable, it generates revenues,
but usually does not operate at full capacity, and may incur losses for
approximately 12 months or longer. Our growth strategy based on construction
also involves the risks of our ability to identify suitable locations to develop
additional centers. Those we do develop may never achieve profitability, and
additional financing may not be available to finance future
development.
Our
inability to acquire or develop dialysis centers in a cost-effective manner
would adversely affect our ability to expand our business and as a result, our
profitability.
Growth
places significant demands on our financial and management skills. Inability on
our behalf to meet the challenges of expansion and to manage any such growth
would have an adverse effect on our results of operations and financial
condition.
Our
attempt to expand through development or acquisition of dialysis centers which
are not currently identified entails risks which shareholders and investors will
not have a basis to evaluate
We expand
generally by seeking an appropriate location for development of a dialysis
center and by taking into consideration the potential geographic patient base,
and the availability of a physician nephrologist to be our medical director and
a skilled work force. Construction, equipment and initial working capital costs
for a new dialysis center with 15 stations, typically the size of our dialysis
facilities, range from $750,000 to $1,000,000. The cost of acquiring a center is
usually much greater. We cannot assure you that we will be successful in
developing or acquiring dialysis facilities, or otherwise
successfully
expanding our operations. We are negotiating with nephrologists and others to
establish new dialysis centers, but we cannot assure you that these negotiations
will result in the development of new centers. Furthermore, there is no basis
for shareholders and investors to evaluate the specific merits or risks of any
potential development or acquisition of dialysis facilities.
We
depend on physician referrals, and the limitation or cessation of such referrals
would adversely impact our revenues and earnings
Most
dialysis facilities, including ours, are dependent upon referrals of ESRD
patients for treatment by physicians, primarily those physicians specializing in
nephrology. We retain by written agreement qualified physicians or groups of
qualified physicians to serve as medical directors for each of our facilities.
The medical directors are typically a source of patients treated at the
particular facility served. There is no requirement for these physicians to
refer their patients to us, and they are free to refer patients to any other
dialysis facility. The loss of the patient base of the medical director or other
physicians in the area of our facilities could result in a decline in our
operations, revenues and earnings. We may not be able to renew or otherwise
negotiate compensation under the medical director agreements with our medical
director physicians which could terminate the relationship, and without a
suitable medical director replacement could result in closure of the facility.
Accordingly, the loss of these key physicians at a particular facility could
have a material adverse effect on the operations of the facility and could
adversely affect our revenues and earnings. Most of our medical director
agreements range in terms of from five to ten years with renewals. We have had
no difficulty in renewing the few agreements which expired in 2004. All the
medical director agreements provide for noncompetition restrictions. We have
never had to attempt to enforce such restrictions, but there is no assurance
that a particular jurisdiction in which the agreement is applicable would uphold
such noncompetition agreement, which would increase the potential for
competition with affiliated dialysis centers and could adversely impact our
revenues and earnings.
Some of
our medical directors or the medical groups with whom they are associated own
minority interests in certain of our subsidiaries which operate dialysis
centers. If these interests are deemed to violate applicable federal or state
law, these physicians may be forced to dispose of their ownership interests.
Industry
changes could adversely affect our business
Healthcare
organizations, public and private, continue to change the manner in which they
operate and pay for services. Our business is designed to function within the
current healthcare financing and reimbursement system. In recent years, the
healthcare industry has been subject to increasing levels of government
regulation of reimbursement rates and capital expenditures, among other things.
In addition, proposals to reform the healthcare system have been considered by
Congress, and still remain a priority issue. Any new legislative initiatives, if
enacted, may (i) further increase government regulation of or other involvement
in healthcare, (ii) lower reimbursement rates, and (iii) otherwise change the
operating environment for healthcare companies. We cannot predict the likelihood
of those events or what impact they may have on our earnings, financial
condition or business.
Our
business is subject to substantial competition, and we must compete effectively,
otherwise our growth could slow
We are
operating in a highly competitive environment in terms of operation, development
and acquisition of existing dialysis centers. Our competition comes from other
dialysis centers, many of which are owned by much larger companies, and from
hospitals. The dialysis industry is rapidly consolidating, resulting in several
very large dialysis companies competing for the acquisition of existing dialysis
centers and the development of relationships with referring physicians.
Recently, DaVita, Inc. has proposed to acquire Gambro Healthcare US, which, if
such transaction is completed, could result in that combined entity being one of
the largest, if not the largest, dialysis provider in the United States. Many of
our competitors have significantly greater financial resources, more dialysis
facilities and a significantly larger patient base. In addition, technological
advances by our competitors may provide more effective dialysis treatments than
the services provided by our centers.
We also
compete with physicians who open their own dialysis facilities. Competition for
existing centers has increased the costs of acquiring such facilities.
Competition is also intense for qualified nursing and technical staff as well as
for nephrologists with an adequate patient base. Although we have exhibited
growth over the last several years, we can provide no assurance that we will be
able to compete effectively. Our failure to do so could impair our continued
growth and profitability.
We
could be subject to professional liability claims that may adversely affect
us
Operation
of dialysis centers and, in particular, the provision of dialysis treatments to
ESRD patients, as is the case with most healthcare treatment services, entails
significant risks of liability. Accordingly, we could be subject to various
actions and claims of professional liability alleging negligence in the
performance of our treatment and related services, as well as for the acts or
omissions of our employees. As we grow and the number of our patients increases,
so too does our exposure increase to potential malpractice, professional
negligence, and other related legal theories and causes of action. These
potential claims could seek substantial damages, possibly beyond our insurance
coverage, and could subject us to the incurrence of significant fees and costs
related to defending such potential claims. Such potential future claims for
malpractice or professional liability, including any judgments, settlements or
costs associated with such claims and actions, could have a material adverse
effect on us.
Our
insurance costs and deductibles have been substantially increasing over the last
several years, and may not be sufficient to cover claims and
losses
We
maintain a program of insurance coverage against a broad range of risks in our
business, including, and of primary importance, professional liability
insurance, subject to certain deductibles. The premiums and deductibles under
our insurance program have been steadily and significantly increasing over the
last several years as a result of general business rate increases coupled with
our continued growth and development of dialysis centers. We are unable to
predict further increases in premiums and deductibles, but based on experience
we anticipate further increases in this area, which could adversely impact
earnings. The liability exposure of operations in the healthcare services
industry has increased, resulting not only in increased premiums, but in limited
liability on behalf of the insurance carriers. Our ability to obtain the
necessary and sufficient insurance coverage for our operations upon expiration
of our insurance policies may be limited, and sufficient insurance may not be
available on favorable terms, if at
all. Such
insurance may not be sufficient to cover any judgments, settlements or costs
relating to potential future claims, complaints or law suits. Our inability to
obtain sufficient insurance for our operations, or if we obtain insurance which
is limited, any future significant judgments, settlements and costs relating to
future potential actions, suits or claims, could have an adverse effect on our
company.
Medicore,
Inc., our parent, which owns approximately 56% of our voting securities, has
some common officers and directors, which presents the potential for conflicts
of interest
Medicore
owns approximately 56% of our common stock, and is able to elect all of our
directors and otherwise control our management and operations. Such control is
also complemented by the fact that Thomas K. Langbein is Chairman of the Board
of both our company and Medicore, of which he is also the President and Chief
Executive Officer; and Daniel R. Ouzts is Vice President and Treasurer of both
companies. Neither Mr. Langbein nor Mr. Ouzts devotes full time to our
management. Peter D. Fischbein, who has been a director of Medicore since 1984,
was elected as a director of our company in June, 2004. Lawrence E. Jaffe, Esq.,
a member of Jaffe & Falk, LLC, our corporate counsel, is our corporate
Secretary, as well as corporate Secretary and a director of Medicore. The costs
of executive salaries and other shared corporate overhead for these companies
are allocated on the basis of time spent. The amount of expenses charged to us
by Medicore for 2004 amounted to approximately $200,000.
Additionally,
there have been past and there are current transactions between our company and
Medicore and their directors, including insurance coverage.
In March,
2004, Medicore agreed to provide us with up to $1,500,000 in dialysis equipment
financing under a demand promissory note with individual advances with interest
at prime plus 1.25%. The note was subsequently modified to increase the maximum
advances to $5,000,000, and its purpose expanded to include working capital. At
March 25, 2005, there was $2,435,000 outstanding under this financing. See Note
4 to “Notes to Consolidated Financial Statements.”
Since
Medicore holds a majority interest in our company, there exists the potential
for conflicts between Medicore and us, and the responsibilities of our
management to our shareholders could conflict with the responsibilities owed by
management of Medicore to its shareholders.
The
loss of certain executive personnel without retaining qualified replacements
could adversely affect our business operations, and as a result, our revenues
and earnings could decline
We are
dependent upon the services of our executive officers, Thomas K. Langbein,
Chairman of the Board, who also holds that position with our parent, Medicore,
of which company he is also President and Chief Executive Officer, and Stephen
W. Everett, our President, Chief Executive Officer and a director. Mr. Langbein
has been involved with Medicore since 1971, when his investment banking firm,
Todd & Company, Inc., took it public, and with us since we became a public
company in 1977 (originally a wholly-owned subsidiary of Medicore organized in
1976). Mr. Everett joined our company in November, 1998 as Vice President,
became Executive Vice President in June, 1999, President on March 1, 2000, and
Chief Executive Officer in May, 2003. Mr. Everett has been involved in the
healthcare industry for 25years. Mr. Langbein has an employment agreement with
our parent through February 28, 2009, which provides for a one year from
termination non-competition within 10 miles of Medicore’s medical products
operations or then existing dialysis facilities owned by our company, with no
restrictions
outside these limits. Mr. Everett has an employment agreement with us through
December 31, 2005, with a one-year non-competition provision within the United
States, which period is extended for the duration of any breach of the
non-competition provisions. The covenant not to compete is inapplicable if we
terminate Mr. Everett without cause or we materially breach the agreement . It
would be very difficult to replace the services of these individuals, whose
services, both individually and combined, if lost, would adversely affect our
operations and earnings, and most likely as a result, the trading price of our
common stock. There is no key-man life insurance covering any of our
officers.
Shares
eligible for future sale by restricted shareholders may adversely affect our
stock price
Our
officers and directors and officers and directors of our parent own
approximately 1,247,000 shares of our common stock and vested options
exercisable into an additional approximately 231,000 shares of common stock, for
an aggregate of 1,478,000 shares or approximately 17% of the outstanding common
stock. Most of the shares held by these officers and directors, upon satisfying
the conditions of Rule 144 under the Securities Act, may be sold without
complying with the registration provisions of the Securities Act. Rule 144
conditions include:
| · |
holding
the shares for one year from acquisition; |
| · |
volume
limits of selling every three months an amount of shares which does not
exceed the greater of 1% of the outstanding common stock, or the average
weekly volume of trading as reported by Nasdaq during the four calendar
weeks prior to the sale; |
| · |
filing
Form 144 with the SEC; |
| · |
the
company continuing to timely file its reports under the Exchange
Act; |
Our
publicly tradable common stock, known as the float, is approximately 2,976,000
shares. Common stock of the company owned by our officers and directors and the
officers and directors of our parent represent approximately 42% of the float.
Accordingly, the sale by such officers and directors under Rule 144 may have an
adverse affect on the market price of our common stock, and may inhibit our
ability to manage subsequent equity or debt financing.
Over
the last year and several months, our stock price has exhibited volatility, and
any investment in our common stock may, therefore, decline for reasons unrelated
to our performance
Our
common stock trades on the Nasdaq SmallCap Market under the symbol “DCAI.” The
market price of our common stock has exhibited significant volatility in 2004
and early 2005. Given adjustment for a January, 2004 two-for-one stock split,
the 52 week range was $2.50 to $31.50, reached on January 4, 2005. The first
three quarters of 2004, the stock traded in the $4.00 to $5.75 range on limited
volume. The volume and market substantially increased in the last quarter
approximately as follows:
| |
|
Common
Stock |
|
Total |
|
| |
|
High |
|
Low |
|
Volume |
|
|
October,
2004 |
|
$ |
8.49 |
|
$ |
4.82 |
|
|
596,589 |
|
|
November,
2004 |
|
$ |
16.59 |
|
$ |
5.75 |
|
|
1,838,533 |
|
|
December,
2004 |
|
$ |
30.50 |
|
$ |
14.07 |
|
|
6,391,571 |
|
The
volume of trading of our common stock on December 31, 2004 was approximately
3,139,000 shares. The range of market prices for our common stock and trading
volume for the first quarter of 2005 through March 15, 2005, the date of the
announcement of our anticipated merger with our parent (see “Recent
Developments” above) is as reported by Nasdaq:
| |
|
Common Stock |
|
Total |
|
| |
|
High |
|
Low |
|
Volume |
|
|
January,
2005 |
|
$ |
31.50 |
|
$ |
19.12 |
|
|
12,165,712 |
|
|
February,
2005 |
|
$ |
33.50 |
|
$ |
22.10 |
|
|
5,811,037 |
|
|
March
15, 2005 |
|
$ |
35.00 |
|
$ |
23.00 |
|
|
3,824,814 |
|
| |
|
|
|
|
|
|
|
|
|
|
For the
few days subsequent to the merger announcement our common stock traded in the
range of $19.25 to $25.80.
Other
than the merger announcement on March 15, 2005, and the continued growth of the
company, there was no information known to management that would cause the rise
or significant fluctuation in the price of our common stock, or the increase in
trading volume. The renal care industry has experienced continued and rapid
consolidation, as evidenced by the proposed acquisition involving two of the
major dialysis services providers, DaVita, Inc. and Gambro Healthcare U.S., for
an estimated $3 billion, and may have generated interest of the marketplace in
our common stock.
Other
factors that could continue to cause fluctuation in our common stock
include:
| · |
changes
in government regulation, whether legislative, enforcement or
reimbursement rates |
| · |
third
party reports relating to the dialysis industry and our company
(unsolicited by management) |
| · |
announcements
by management relating to the company’s performance or other material
events |
| · |
actions
and announcements by our competitors |
| · |
the
outlook for the healthcare industry
generally |
Investors
should understand that in general, stock prices fluctuate for reasons unrelated
to operating results. Any changes in the above discussed factors, the Medicare
and Medicaid reimbursement rates in particular, or general economic, political,
global and market conditions, could result in a decline in the market price and
volume of trading in our common stock.
Item
2. Properties
Dialysis
Corporation of America owns three properties, one located in Lemoyne,
Pennsylvania, a second in Easton, Maryland, and a third in Valdosta, Georgia.
The Maryland property consists of approximately 7,500 square feet, most of which
is leased to a competitor under a 10-year lease through June 30, 2009 with two
renewals of five years each. The lease is guaranteed by the tenant’s parent
company. We use approximately 600 square feet at that property for an
administrative office.
The
Lemoyne property consists of approximately 15,000 square feet and houses one of
our dialysis centers which accounts for approximately 5,400 square feet, under a
five year lease through December 22, 2008, with one additional renewal period of
five years. The center is approved for 17 dialysis stations with space available
for expansion. We use approximately 4,000 square feet of the Lemoyne property
for administrative offices.
The
Easton, Maryland property has a mortgage to secure a $700,000 development loan
to our Vineland, New Jersey subsidiary at an annual interest rate of 1% over the
prime rate, maturing in December 2007, which loan we guaranty. This loan had a
remaining principal balance of approximately $610,000 at December 31, 2004. See
Item 7, “Management’s Discussions and Analysis of Financial Condition and
Results of Operations” and Note 2 to “Notes to Consolidated Financial
Statements.”
We
acquired property in Valdosta, Georgia in 2000, which property is subject to a
five year $788,000 mortgage obtained in April, 2001 with interest at the prime
rate plus ½% with a minimum rate of 6%, maturing in April, 2006. This mortgage
had a remaining principal balance of approximately $675,000 at December 31,
2004. We constructed a dialysis center at this property comprising approximately
6,000 square feet which we have leased to one of our subsidiaries for $90,600
per year under a 10-year lease, with two additional renewal periods of five
years each.
For our
Cincinnati, Ohio facility, we purchased the property, and completed the
construction of an approximately 5,000 square foot dialysis facility at a cost
of approximately $740,000. In February, 2003, we sold the property to a
corporation owned by the medical director of that facility, which, in turn,
leased the facility to our Cincinnati subsidiary for an initial term of 10 years
from the commencement date of February 6, 2003, with two additional five-year
renewal periods. Annual rental fees remain the same for the first four years of
the lease, and thereafter increase annually based upon a percentage increase in
the CPI for the Cincinnati, Ohio area. $75,000 of tenant improvements were
funded by a loan by us to our majority owned Cincinnati subsidiary operating
this center for which the subsidiary issued to us a five-year promissory note.
The loan must be paid prior to that subsidiary paying any other of its
indebtedness, and earlier if at such time the subsidiary has cash flow or other
proceeds available for distribution to its members under its operating
agreement, subject to tax payment distributions which have a priority. Should
our subsidiary sell additional limited liability interests, the proceeds will
first be used to repay the loan.
In
addition to our Lemoyne, Pennsylvania, Valdosta, Georgia and Cincinnati, Ohio
facilities, we presently have 19 other dialysis centers, including the facility
in Toledo, Ohio in which we have a 40% interest, that lease their respective
facilities from unaffiliated parties, most under five to ten year initial terms,
usually with two additional renewal periods of five years each, for space
ranging from approximately 3,000 to 7,000 square feet. We sublet a minimal
amount of space at four of our dialysis centers to the physicians who are our
medical directors at those centers for their medical offices. The subleases are
on a commercially reasonable basis and are structured to comply with the safe
harbor provisions of the “Anti-Kickback Statute.” See Item 1, “Business -
Government Regulation - Fraud and Abuse.”
In July,
2004, we moved our executive offices to Linthicum, Maryland, which comprise
approximately 4,600 square feet and are leased for five years to July 11,
2009.
We are
constructing or renovating facilities for three new centers in Maryland, Ohio
and South Carolina under recently signed leases for those premises, and we have
acquired two additional properties
in South
Carolina for development of new facilities. Neither of the acquired South
Carolina properties are subject to a mortgage. We continue to actively pursue
the additional development and acquisition of dialysis facilities in other areas
which would entail the acquisition or lease of additional property.
We
construct most of our dialysis centers, which have state-of-the-art equipment
and facilities. Dialysis stations at our centers are equipped with modern
dialysis machines, most of which had been financed under a 1996 master
lease/purchase agreement. We now acquire our equipment, currently from advances
by our parent under a demand promissory note for up to $5,000,000 with annual
interest on advances at 1.25% over the prime rate. See Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” Item
13, “Certain Relationships and Related Transactions,” and Note 4 to “Notes to
Consolidated Financial Statements.”
None of
our dialysis facilities are operating at full capacity. See “Business -
Operations - Location, Capacity and Use of Facilities” above. The existing
dialysis facilities could accommodate greater patient volume, particularly if we
increase hours and/or days of operation without adding additional dialysis
stations or any additional capital expenditures. We also have the ability and
space at most of our facilities to expand to increase patient volume subject to
obtaining appropriate governmental approval.
We
maintain executive offices at 1302 Concourse Drive, Suite 204, Linthicum,
Maryland 21090, and administrative offices at 27 Miller Street, Suite 2,
Lemoyne, Pennsylvania 17043, as well as at our parent’s facility at 2337 West
76th Street,
Hialeah, Florida 33016.
Item
3. Legal Proceedings
None.
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,
2004 to a vote of security holders through the solicitation of proxies or
otherwise.
PART
II
|
Item
5. |
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities |
Price
Range
Our
common stock trades on the Nasdaq SmallCap Market under the symbol “DCAI.” The
following table indicates the high and low bid prices for our common stock for
each of the four quarters for the years ended December 31, 2003 and 2004 as
reported by Nasdaq.
| |
|
Bid
Price |
|
|
2003 |
|
High |
|
Low |
|
|
1st
Quarter |
|
$ |
2.09 |
|
$ |
1.70 |
|
|
2nd
Quarter |
|
|
2.21 |
|
|
1.70 |
|
|
3rd
Quarter |
|
|
2.66 |
|
|
1.63 |
|
|
4th
Quarter |
|
|
4.26 |
|
|
2.37 |
|
| |
|
Bid
Price |
|
|
2004 |
|
High |
|
Low |
|
|
1st
Quarter |
|
$ |
6.00 |
|
$ |
2.50 |
|
|
2nd
Quarter |
|
|
5.65 |
|
|
3.75 |
|
|
3rd
Quarter |
|
|
5.14 |
|
|
3.81 |
|
|
4th
Quarter |
|
|
30.42 |
|
|
4.51 |
|
| |
|
|
|
|
|
|
|
At March
24, 2005, the high and low sales prices of our common stock were $21.40 and
$19.11, respectively.
Bid
prices represent prices between brokers, and do not include retail mark-ups,
mark-downs or any commission, and may not necessarily represent prices in actual
transactions.
Stockholders
At March
24, 2005, we had 123 shareholders of record as reported by our transfer agent.
We have been advised by ADP, which organization holds securities for banks,
brokers and depositories, that there are currently approximately 6,407
beneficial owners of our common stock.
Dividend
Policy
Dialysis
Corporation of America does not anticipate that it will pay dividends in the
foreseeable future. The board of directors intends to retain earnings for use in
the business. Future dividend policy will be at the discretion of the board of
directors, and will depend on our earnings, capital requirements, financial
condition and other similar relevant factors. Assuming completion of the
contemplated merger with our parent, Medicore, we will receive additional
assets, including approximately $4 million to $5 million, which management
intends to use for continued expansion and growth of our dialysis operations.
See “Recent Developments” and “Business Strategy” under Item 1, “Business.” Any
determination to pay a dividend is also subject to one of the covenants in the
mortgage on our Valdosta, Georgia property (see Item 2, “Properties”) which
restricts the payment of dividends above 25% of our net worth.
Equity
Compensation Plan
The
following table provides certain information with respect to the one equity
compensation plan approved by shareholders in effect at December 31, 2004. There
are no equity compensation plans outstanding that were not approved by
shareholders.
|
Plan
Category |
Number
of securities to be
issued
upon exercise of
outstanding
options, warrants
and
rights |
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights |
Number
of securities
remaining
available for
future
issuance under equity
compensation
plans
(excluding
securities reflected
in
column (a)) |
|
(a) |
(b) |
(c) |
| |
|
|
|
|
Equity
compensation plans
approved
by security holders: (1) |
694,616 |
$1.874 |
742,654(1) |
| |
|
|
|
_______________
|
(1) |
The
options are five years in duration (except for one three-year option for
10,000 shares), 341,616 vested
and 353,000 non-vested, expire at various dates between January 1, 2006
and August 15, 2009, contain anti-dilution provisions providing for
adjustments of the exercise price under certain circumstances and have
termination provisions. |
Sale
of Securities Not Registered Under the Securities Act
There
were no sales of our securities, registered or unregistered, under the
Securities Act of 1933, as amended (the “Securities Act”), except under option
grants and option exercises which were exempt from the registration requirements
of Section 5 of the Securities Act under the private placement exemption of
Section 4(2) and/or Regulation D of the Securities Act, based on the limited
number of optionees who are officers, directors and/or key employees. See Item
11, “Executive Compensation,” Item 12, “Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters,” and Note 6 to “Notes to
Consolidated Financial Statements.” These sales of options and common stock upon
option exercises were reported in our quarterly reports, Form 10-Q, for the
periods ended March 31, 2004, June 30, 2004 and September 30, 2004. There were
no option grants or exercises or other sales of our securities during the fourth
quarter of fiscal 2004.
Stock
Repurchases
In
September, 2000, the board of directors authorized the company to buy back up to
600,000 shares of its common stock. The company repurchased and cancelled
approximately 360,000 shares of its common stock from the fourth quarter of 2000
through 2003. The only repurchases the company made during 2004 were upon option
exercises for stock, which aggregated 71,375 shares, all during the first
quarter of 2004. See Note 8 to “Notes to Consolidated Financial
Statements.”
Item
6. Selected Financial Data
The
following selected financial data for the five years ended December 31, 2004 is
derived from the audited consolidated financial statements of the company and
its subsidiaries. The consolidated financial statements and related notes for
the three years ended December 31, 2004, together with the related Reports of
Independent Certified Public Accountants, are included elsewhere in this Annual
Report on Form 10-K. The data should be read in conjunction with the
consolidated financial statements, related notes and other financial information
included herein, and Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
| |
|
Consolidated
Statements of Operations Data |
|
| |
|
(in
thousands except per share amounts) |
|
| |
|
Years Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
Revenues(1) |
|
$ |
40,986 |
|
$ |
29,997 |
|
$ |
25,354 |
|
$ |
19,035 |
|
$ |
8,769 |
|
|
Net
income (loss) |
|
|
2,214 |
|
|
1,150 |
|
|
1,242 |
|
|
784 |
|
|
(356 |
) |
|
Earnings
(loss) per share(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
.27 |
|
|
.15 |
|
|
.16 |
|
|
.10 |
|
|
(.05 |
) |
|
Diluted |
|
|
.25 |
|
|
.13 |
|
|
.14 |
|
|
.10 |
|
|
(.05 |
) |
|
|
|
Consolidated Balance Sheet Data |
|
| |
|
(in
thousands) |
|
| |
|
December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
|
Working
capital |
|
$ |
3,644 |
|
$ |
3,773 |
|
$ |
4,593 |
|
$ |
3,883 |
|
$ |
3,869 |
|
Total
assets |
|
|
26,490 |
|
|
19,604 |
|
|
17,154 |
|
|
15,683 |
|
|
11,177 |
|
Intercompany
advance payable (receivable) from Medicore |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(non-current
portion) |
|
|
449 |
|
|
234 |
|
|
--- |
|
|
(201 |
) |
|
(414 |
) |
Intercompany
note and accrued interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payable
to Medicore |
|
|
1,462 |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
Long
term debt, net of current portion |
|
|
1,586 |
|
|
2,097 |
|
|
2,727 |
|
|
2,935 |
|
|
1,755 |
|
Stockholders’
equity |
|
|
13,330 |
|
|
10,970 |
|
|
9,727 |
|
|
8,485 |
|
|
7,799 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Prior
year amounts have been reclassified to conform to current year
presentation. |
|
(2) |
All
share and per share data retroactively adjusted for two-for-one stock
split effected January 28, 2004. |
Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
commonly known as MD&A, is our attempt to provide a narrative explanation of
our financial statements, and to provide our shareholders and investors with the
dynamics of our business as seen through our eyes as management. Generally,
MD&A is intended to cover expected effects of known or reasonably expected
uncertainties, expected effects of known trends on future operations, and
prospective effects of events that have had a material effect on past operating
results. Our discussion of MD&A should be read in conjunction with our
consolidated financial statements, including the notes, included elsewhere in
this Annual Report on Form 10-K. Please also review the Cautionary Notice
Regarding Forward-Looking Information on page one of this Annual
Report.
Overview
Dialysis
Corporation of America provides dialysis services, primarily kidney dialysis
treatments through 23 outpatient dialysis centers, including a 40% owned Ohio
affiliate and one unaffiliated dialysis center which it manages, to patients
with chronic kidney failure, also know as end-stage renal disease or ESRD. We
provide dialysis treatments to dialysis patients of nine hospitals and medical
centers through acute inpatient dialysis services agreements with those
entities. We provide homecare services, including home peritoneal
dialysis.
The
following table shows the number of in-center, home peritoneal and acute
inpatient treatments performed by us through the dialysis centers we operate,
including the two centers we manage, one in which we have a 40% ownership
interest, and those hospitals and medical centers with which we have inpatient
acute service agreements for the periods presented:
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
In
center |
|
|
127,293 |
|
|
103,025 |
|
|
86,475 |
|
|
Home
peritoneal |
|
|
13,311 |
|
|
7,193 |
|
|
4,504 |
|
|
Acute |
|
|
8,387 |
|
|
8,010 |
|
|
9,116 |
|
| |
|
|
148,991(1 |
) |
|
118,228(1 |
) |
|
100,095(1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
(1) |
Treatments
by the two managed centers included: in-center treatments of 13,196,
11,081 and 6,563, respectively, for 2004, 2003 and 2002; no home
peritoneal treatments; and acute treatments of 128, 156 and 87,
respectively, for 2004, 2003 and 2002. |
We also
provide ancillary services associated with dialysis treatments, including the
administration of EPO for the treatment of anemia in our dialysis patients. EPO
is currently available from only one manufacturer, and no alternative drug has
been available to us for the treatment of anemia in our dialysis patients. If
our available supply of EPO were reduced either by the manufacturer or due to
excessive demand, our revenues and net income would be adversely affected. The
manufacturer of EPO increased its
price in
early 2003, and could implement further price increases which would adversely
affect our net
income.
This manufacturer has developed another anemia drug that could possibly
substantially reduce our revenues and profit from the treatment of anemia in our
patients.
ESRD
patients must either obtain a kidney transplant or obtain regular dialysis
treatments for the rest of their lives. Due to a lack of suitable donors and the
possibility of transplanted organ rejection, the most prevalent form of
treatment for ESRD patients is hemodialysis through a kidney dialysis machine.
Hemodialysis patients usually receive three treatments each week with each
treatment lasting between three and five hours on an outpatient basis. Although
not as common as hemodialysis in an outpatient facility, home peritoneal
dialysis is an available treatment option, representing the third most common
type of ESRD treatment after outpatient hemodialysis and kidney
transplantation.
Approximately
56% of our medical service revenues are derived from Medicare and Medicaid
reimbursement with rates established by CMS, and which rates are subject to
legislative changes. Over the last two years, Medicare reimbursement rates have
not increased. Congress has approved a 1.6% composite rate increase for 2005.
Also for 2005, Medicare is implementing the way it reimburses dialysis
providers, which includes revision of pricing for separately billable drugs and
biologics, with an add-on component to make the change budget-neutral. Medicare
also is to implement a case mix payment system as an adjustment to the composite
rate. See Item 1, “Business - Operations - Medicare Reimbursement.” Dialysis is
typically reimbursed at higher rates from private payors, such as a patient’s
insurance carrier, as well as higher payments received under negotiated
contracts with hospitals for acute inpatient dialysis services.
The
following table shows the breakdown of our revenues by type of payor for the
periods presented:
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Medicare |
|
|
48 |
% |
|
54 |
% |
|
49 |
% |
|
Medicaid
and comparable programs |
|
|
8 |
% |
|
8 |
% |
|
9 |
% |
|
Hospital
inpatient dialysis services |
|
|
6 |
% |
|
7 |
% |
|
10 |
% |
|
Commercial
insurers and other private payors |
|
|
38 |
% |
|
31 |
% |
|
32 |
% |
| |
|
|
100 |
% |
|
100 |
% |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
Our
medical service revenues are derived primarily from four sources: outpatient
hemodialysis services, home peritoneal dialysis services, inpatient hemodialysis
services and ancillary services. The following table shows the breakdown of our
medical service revenues (in thousands) derived from our primary revenue sources
and the percentage of total medical service revenue represented by each source
for the periods presented:
| |
|
Year
Ended December 31, |
|
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Outpatient
hemodialysis services |
|
$ |
18,599 |
|
|
46 |
% |
$ |
13,873 |
|
|
47 |
% |
$ |
12,118 |
|
|
48 |
% |
|
Home
peritoneal dialysis services |
|
|
2,691 |
|
|
7 |
% |
|
1,294 |
|
|
4 |
% |
|
823 |
|
|
3 |
% |
|
Inpatient
hemodialysis services |
|
|
2,261 |
|
|
5 |
% |
|
2,114 |
|
|
7 |
% |
|
2,545 |
|
|
10 |
% |
|
Ancillary
services |
|
|
16,899 |
|
|
42 |
% |
|
12,395 |
|
|
42 |
% |
|
9,676 |
|
|
39 |
% |
| |
|
$ |
40,450 |
|
|
100 |
% |
$ |
29,676 |
|
|
100 |
% |
$ |
25,162 |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
healthcare industry is subject to extensive regulation by federal and state
authorities. There are a variety of fraud and abuse measures to combat waste,
including anti-kickback regulations and extensive prohibitions relating to
self-referrals, violations of which are punishable by criminal or civil
penalties, including
exclusion from Medicare and other governmental programs. Unanticipated changes
in healthcare programs or laws could require us to restructure our business
practices which, in turn, could materially adversely affect our business,
operations and financial condition. See Item 1, “Business - Government
Regulation.” We have developed a Corporate Integrity Program to assure that we
provide the highest level of patient
care and services in a professional and ethical manner consistent with
applicable federal and state laws and regulations. Among the different programs
is our Compliance Program, which has been implemented to assure our compliance
with fraud and abuse laws and to supplement our existing policies relating to
claims submission, cost report preparation, initial audit and human resources,
all geared towards a cost-efficient operation beneficial to patients and
shareholders. See Item 1, “Business - Corporate Integrity Program.”
Dialysis
Corporation of America’s future
growth depends primarily on the availability of suitable dialysis centers for
development or acquisition in appropriate and acceptable areas, and our ability
to manage the development costs for these potential dialysis centers while
competing with larger companies, some of which are public companies or divisions
of public companies with greater numbers of personnel and financial resources
available for acquiring and/or developing dialysis centers in areas targeted by
us. Additionally, there is intense competition for qualified nephrologists who
would serve as medical directors of dialysis facilities, and be responsible for
the supervision of those dialysis centers. There is no assurance as to when any
new dialysis centers or inpatient service contracts with hospitals will be
implemented, or the number of stations, or patient treatments such center or
service contract may involve, or if such center or service contract will
ultimately be profitable. It has been our experience that newly established
dialysis centers, although contributing to increased revenues, have adversely
affected our results of operations in the short term due to start-up costs and
expenses and a smaller patient base.
Results
of Operations
The
following table shows our results of operations (in thousands) and the
percentage of medical service revenue represented by each line item for the
periods presented:
| |
|
Year
Ended December 31, |
|
| |
|
2004
|
|
2003 |
|
2002 |
|
|
Medical
service revenue |
|
$ |
40,450 |
|
|
100.0 |
% |
$ |
29,676 |
|
|
100.0 |
% |
$ |
25,162 |
|
|
100.0 |
% |
|
Other
income |
|
|
536 |
|
|
1.3 |
% |
|
321 |
|
|
1.1 |
% |
|
191 |
|
|
.8 |
% |
|
Total
operating revenues |
|
|
40,986 |
|
|
101.3 |
% |
|
29,997 |
|
|
101.1 |
% |
|
25,353 |
|
|
100.8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of medical services |
|
|
23,546 |
|
|
58.2 |
% |
|
18,221 |
|
|
61.4 |
% |
|
15,067 |
|
|
59.9 |
% |
|
Selling,
general and administrative expenses |
|
|
12,089 |
|
|
29.9 |
% |
|
9,357 |
|
|
31.5 |
% |
|
7,500 |
|
|
29.8 |
% |
|
Provision
for doubtful accounts |
|
|
1,198 |
|
|
3.0 |
% |
|
290 |
|
|
1.0 |
% |
|
720 |
|
|
2.9 |
% |
|
Total
operating costs and expenses |
|
|
36,833 |
|
|
91.1 |
% |
|
27,868 |
|
|
93.9 |
% |
|
23,287 |
|
|
92.6 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income |
|
|
4,153 |
|
|
10.3 |
% |
|
2,129 |
|
|
7.2 |
% |
|
2,066 |
|
|
8.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other,
net |
|
|
35 |
|
|
.1 |
% |
|
78 |
|
|
.3 |
% |
|
33 |
|
|
.1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes, minority |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
and equity in affiliate earnings |
|
|
4,188 |
|
|
10.4 |
% |
|
2,207 |
|
|
7.4 |
% |
|
2,099 |
|
|
8.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision |
|
|
1,576 |
|
|
3.9 |
% |
|
878 |
|
|
3.0 |
% |
|
771 |
|
|
3.1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before minority interest and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity
in affiliate earnings |
|
|
2,612 |
|
|
6.5 |
% |
|
1,329 |
|
|
4.5 |
% |
|
1,328 |
|
|
5.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in income of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated
subsidiaries |
|
|
(681 |
) |
|
(1.7 |
%) |
|
(223 |
) |
|
(.8 |
)% |
|
(155 |
) |
|
(.6 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in affiliate earnings |
|
|
283 |
|
|
.7 |
% |
|
44 |
|
|
.1 |
% |
|
69 |
|
|
.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income |
|
$ |
2,214 |
|
|
5.5 |
% |
$ |
1,150 |
|
|
3.9 |
% |
$ |
1,242 |
|
|
4.9 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
Compared to 2003
Operating
income increased approximately $2,025,000 (95%) for the year ended December 31,
2004, compared to the preceding year. For this same period, income before income
taxes, minority interest and equity in affiliate earnings increased $1,982,000
(90%), and net income increased $1,064,000 (93%).
Medical
service revenues increased approximately $10,773,000 (36%) for the year ended
December 31, 2004, compared to the preceding year with the increase largely
attributable to a 27% increase in total dialysis treatments performed by the
company from 106,991 in 2003 to 135,667 in 2004. This increase reflects
increased revenues of approximately $2,500,000 for our Pennsylvania dialysis
centers, including revenues of $782,000 for our new Pottstown center and
revenues of $750,000 for the two centers included in our acquisition of Keystone
Kidney Care; increased revenues of $1,064,000 for our New Jersey centers;
increased revenues of $1,548,000 for our Georgia centers; increased revenues of
approximately $1,109,000 for our Maryland centers, including revenues of
$305,000 for our new Rockville, Maryland center; increased revenues of
approximately $1,361,000 for our Ohio center; revenues of approximately
$1,089,000 for our two new Virginia centers; and revenues of approximately
$2,101,000 for our new South Carolina center. Some of our patients carry
commercial insurance which
may
require an out of pocket co-pay by the patient, which is often uncollectible by
us. This co-pay is typically limited, and therefore may lead to our
under-recognition of revenue at the time of service. We routinely recognize
these revenues as we become aware that these limits have been met.
Other
operating income increased by approximately $216,000 for the year ended December
31, 2004, compared to the preceding year. This includes a litigation settlement
of $134,000 during 2004 and an increase in management fee income of $82,000,
pursuant to management services agreements with our 40% owned Toledo, Ohio
affiliate and an unaffiliated Georgia center.
Cost of
medical services sales as a percentage of sales decreased to 58% for the year
ended December 31, 2004, compared to 61% for the preceding year, as a result of
decreases in payroll costs and supply costs as a percentage of medical service
sales.
Approximately
28% of our medical services revenues for the year ended December 31, 2004, and
for the preceding year was derived from the administration of EPO to our
dialysis patients. This drug is only available from one manufacturer in the
United States. Price increases for this product without our ability to increase
our charges would increase our costs and thereby adversely impact our earnings.
We cannot predict the timing, if any, or extent of any future price increases by
the manufacturer, or our ability to offset any such increases. Beginning this
year, Medicare will reimburse dialysis providers for the top ten most utilized
ESRD drugs at an amount equal to the cost of such drugs as determined by the
Inspector General of HHS, with complimentary increases in the composite rate.
Management believes these changes will have little impact on the company’s
average Medicare revenue per treatment. See Item 1, “Business - Operations -
Medicare Reimbursement.”
Selling,
general and administrative expenses, those corporate and facility costs not
directly related to the care of patients, including, among others,
administration, accounting and billing, increased by approximately $2,731,000
(29%) for the year ended December 30, 2004, compared to the preceding year. This
increase reflects operations of our new dialysis centers in Pennsylvania, South
Carolina, Virginia, and Maryland, and increased support activities resulting
from expanded operations. Selling, general and administrative expenses as a
percentage of medical services revenues decreased to approximately 30% for the
ended December 31, 2004, compared to 31% for the preceding year, including
expenses of new centers incurred prior to Medicare approval for which there were
no corresponding medical service revenues. Selling, general and administrative
expenses include bonuses for officers, directors and corporate counsel amounting
to $475,000 for the year ended December 31, 2004 compared to $220,000 for the
preceding year. See Item 11, “Executive Compensation.”
Provision
for doubtful accounts increased approximately $908,000 for year ended December
31, 2004, compared to the preceding year. Medicare bad debt recoveries of
$213,000 were recorded during the year ended December 31, 2004, compared to
approximately $326,000 for the preceding year. Without the effect of the
Medicare bad debt recoveries, the provision would have amounted to 3% of sales
for the year ended December 31, 2004 compared to 2% for the preceding year. The
provision for doubtful accounts reflects our collection experience with the
impact of that experience included in accounts receivable presently reserved,
plus recovery of accounts previously considered uncollectible from our Medicare
cost report filings. The provision for doubtful accounts is determined under a
variety of criteria, primarily aging of the receivables and payor mix. Accounts
receivable are estimated to be uncollectible based upon various criteria
including the age of the receivable, historical collection trends and our
understanding of the nature and collectibility of the receivables, and are
reserved for in the allowance for doubtful accounts until they are written
off.
Other
non-operating income (expense) decreased approximately $11,000 for the year
ended December 31, 2004, compared to the preceding year. This includes a
decrease in interest income of $15,000, an increase in rental income of $1,000,
a decrease in miscellaneous other income of $14,000 and a decrease in interest
expense of $39,000 with the effect of reduced average non-inter-company
borrowings more than offsetting an increase in average interest rates. Interest
expense to our parent, Medicore, Inc., increased $54,000 for the year ended
December 31, 2004 compared to the preceding year as a result of an increase in
the intercompany advance payable to our parent and borrowings under a demand
promissory note payable to our parent. The prime rate was 5.25% at December 31,
2004, and 4% at December 31, 2003. See Notes 1, 3 and 4 of “Notes to the
Consolidated Financial Statements.”
Although
operations of additional centers have resulted in additional revenues, certain
of these centers are still in the developmental stage and, accordingly, their
operating results will adversely impact our overall results of operations until
they achieve a patient count sufficient to sustain profitable
operations.
We
experienced same-center growth in total treatments of approximately 9% for the
year ended December 31, 2004, compared to the preceding year, and same-center
revenues grew approximately 20%. Management continues to search for ways to
operate more efficiently and reduce costs through process improvements. In
addition, we are reviewing technological improvements and intend to make capital
investments to the extent we are confident such improvements will improve
patient care and operating performance. [How much? What kind? Cannot keep saying
this - explain]
Minority
interest represents the proportionate equity interests of minority owners of our
subsidiaries whose financial results are included in our consolidated results.
Equity in affiliate earnings represents our proportionate interest in the
earnings of our 40% owned Ohio affiliate whose operating results improved for
the year ended December 31, 2004, compared to the preceding year. See Notes 1
and 15 to “Notes to Consolidated Financial Statements.”
2003
Compared to 2002
Medical
service revenues increased approximately $4,514,000 (18%) for the year ended
December 31, 2003, compared to the preceding year with the increase largely
attributable to a 14% increase in total dialysis treatments performed by us from
93,445 in 2002 to 106,991 in 2003. This increase reflects increased revenues of
approximately $1,998,000 for our Pennsylvania dialysis centers, decreased
revenues of $95,000 for our New Jersey centers reflecting termination of our two
New Jersey acute care contracts during 2002; increased revenues of $674,000 for
our Georgia centers, revenues of approximately $1,255,000 for our new Maryland
center; revenues of approximately $709,000 for our new Ohio center; and a
decrease in consulting and license income of approximately $27,000.
Other
operating income increased by approximately $129,000 for the year ended December
31, 2003, compared to the preceding year. This increase represents increased
management fee income pursuant to management services agreements with our 40%
owned Toledo, Ohio affiliate and unaffiliated Georgia center with which we
entered a management services agreement effective September 2002.
Cost of
medical services sales as a percentage of sales increased to 61% for the year
ended December 31, 2003, compared to 60% for the preceding year which increase
is primarily attributable to costs for treatments at new dialysis centers prior
to Medicare approval of those centers for which there
were no
corresponding medical service revenues; increases in the cost of EPO as a
percentage of EPO sales revenues; and increases in the cost of professional
liability insurance.
The cost
of our professional liability insurance coverage increased by $43,000 or 62% for
the year ended December 31, 2003, compared to the preceding year. While a
portion of this increase is attributable to our new centers and overall increase
in treatments, a substantial portion of the cost increase relates to the general
market conditions for professional liability coverage of reduced availability
and higher costs for this coverage. Continued cost increases for professional
liability coverage could adversely impact our earnings.
Approximately
28% of our medical services revenues for the year ended December 31, 2003 was
derived from the administration of EPO to our dialysis patients compared to 26%
for the preceding year. This drug is only available from one manufacturer in the
United States which raised the price for its product in January, 2003. Continued
price increases for this product without our ability to increase our charges
would increase our costs and thereby adversely impact our earnings. We cannot
predict the timing, if any, or extent of any future price increases by the
manufacturer, or our ability to offset any such increases.
Selling,
general and administrative expenses, those corporate and facility costs not
directly related to the care of patients, including, among others,
administration, accounting and billing, increased by approximately $1,857,000
for the year ended December 31, 2003, compared to the preceding year. This
increase reflects operations of our new dialysis centers in Ohio and Maryland,
and increased support activities resulting from expanded operations. Selling,
general and administrative expenses as a percentage of medical services revenues
increased to approximately 32% for the year ended December 31, 2003, compared to
30% for the preceding year, including patient treatment expenses of new centers
incurred prior to Medicare approval for which there were no corresponding
medical service revenues.
Provision
for doubtful accounts decreased approximately $430,000, largely as a result of
Medicare bad debt recoveries of approximately $341,000 during 2003 compared to
approximately $52,000 for the preceding year. Without the effect of the Medicare
bad debt recoveries the provision would have amounted to 2% of sales for the
year ended December 31, 2003 compared to 3% for the preceding year. This change
reflects our collection experience with the impact of that experience included
in accounts receivable presently reserved, plus recovery of accounts previously
considered uncollectible from our Medicare cost report filings. The provision
for doubtful accounts is determined under a variety of criteria, primarily aging
of the receivables and payor mix. Accounts receivable are estimated to be
uncollectible based upon various criteria including the age of the receivable,
historical collection trends and our understanding of the nature and
collectibility of the receivables, and are reserved for in the allowance for
doubtful accounts until they are written off.
Other
non-operating income (expense) increased approximately $52,000 for the year
ended December 31, 2003, compared to the preceding year. This includes an
increase in interest income of $10,000, an increase in rental income of $16,000,
an increase in miscellaneous other income of $6,000 and a decrease in interest
expense of $20,000 reflecting reduced average interest rates and reduced average
non-inter-company borrowings during the year ended December 31, 2003, compared
to the preceding year. The prime rate was 4.00% at December 31, 2003 and 4.25%
at December 31, 2002. See Notes 1,3, and 4 of “Notes to the Consolidated
Financial Statements.”
Although
operations of additional centers have resulted in additional revenues, certain
of these centers are still in the developmental stage and, accordingly, their
operating results adversely impact our overall results of operations until they
achieve a patient count sufficient to sustain profitable
operations.
We
experienced same-center growth in total treatments of approximately 7% in 2003,
and same-center revenues grew approximately 9% in fiscal 2003. Management
continues to search for ways to operate more efficiently and reduce costs
through process improvements. In addition, we are reviewing technological
improvements and intend to make capital investments to the extent we are
confident such improvements will improve patient care and operating
performance.
Interest
expense decreased by approximately $17,000 for the year ended December 31, 2003,
compared to the preceding year, reflecting lower interest rates on variable rate
debt and reduced average borrowings by us.
Minority
interest represents the proportionate equity interests of minority owners of our
subsidiaries whose financial results are included in our consolidated results.
The increase in minority interest resulted from financial improvements of the
related subsidiaries.
Equity in
affiliate earnings represents our proportionate interest in the earnings of our
40% owned Ohio affiliate.
The prime
rate was 4.00% at December 31, 2003 and 4.25% at December 31, 2002.
Accrued
compensation of $186,000 was bonused to the board of directors relating to the
exercise of a portion of their outstanding stock options, amounting to an
aggregate of 95,619 shares acquired at exercise prices ranging from $1.25 to
$1.50.
Liquidity
and Capital Resources
Working
capital totaled approximately $3,644,000 at December 31, 2004, which reflected a
decrease of $129,000 (3%) during the current year. Included in the changes in
components of working capital was a decrease in cash and cash equivalents of
$914,000, which included net cash provided by operating activities of
$3,015,000; net cash used in investing activities of $4,605,000 (including
additions to property and equipment of $3,132,000, acquisition payments to a
minority member in two of our subsidiary dialysis centers for the remaining
balance due of $670,000 to acquire an aggregate of 30% of such member’s interest
in each of such subsidiaries, a net cash expenditure of $758,000 on acquisition
of Keystone Kidney Care, distributions of $97,000 received from our 40% owned
Ohio affiliate, and loans of $125,000 to physician affiliates); and net cash
provided by financing activities of $677,000 (including an increase in advances
payable to our parent of $215,000, notes payable to our parent of $1,435,000,
debt repayments of $715,000, distributions to subsidiary minority members of
$436,000, receipts of $5,000 from the exercise of stock options and capital
contributions of $172,000 by a subsidiary minority member). See Notes 1 and 13
to “Notes to Consolidated Financial Statements.”
Our
Easton, Maryland building has a mortgage to secure a development loan for our
Vineland, New Jersey subsidiary, which loan is guaranteed by us. This loan had a
remaining principal balance of $610,000 at December 31, 2004 and $636,000 at
December 31, 2003. In April, 2001, we obtained a $788,000 five-year mortgage on
our building in Valdosta, Georgia, which had an outstanding principal
balance
of approximately $675,000 at December 31, 2004 and $715,000 at December 31,
2003. See Note 2 to “Notes to Consolidated Financial Statements.”
We have
an equipment financing agreement for kidney dialysis machines for our
facilities, which had an outstanding balance of approximately $814,000 at
December 31, 2004, and $1,321,000 at December 31, 2003. There was no additional
equipment financing under this agreement during 2004. See Note 2 to “Notes to
Consolidated Financial Statements.”
During
2004, we borrowed approximately $1,435,000 under a demand promissory note to our
parent primarily to develop new dialysis centers, for dialysis equipment
purchases and for the initial payment of our acquisition of Keystone Kidney
Care. See Note 4 to “Notes to Consolidated Financial Statements.”
We opened
centers in Ashland, Virginia; Warsaw, Virginia; Aiken, South Carolina;
Pottstown, Pennsylvania; and Rockville, Maryland during 2004, and acquired
Keystone Kidney Care effective as of the close of business on August 31, 2004.
We are in the process of developing a new dialysis center in each of Maryland
and Ohio, and three new dialysis centers in South Carolina. Payment of the
balance due of $670,000 on the purchase of minority interests in two of our
Georgia dialysis centers was made during the second quarter of 2004. Payment of
$761,000 was made September 1, 2004 on our Keystone Kidney Care acquisition. See
Note 10 to “Notes to Consolidated Financial Statements.”
On March
15, 2005, the company and its parent, Medicore, Inc., issued a joint press
release announcing their agreement to terms for a merger of Medicore into the
company. The proposed merger is subject to finalizing an Agreement and Plan of
Merger, the receipt of satisfactory tax and fairness opinions, the filing of a
registration statement containing a proxy statement/prospectus with the SEC, and
the approval of shareholders of each of Medicore and our company. This
transaction will enable the control interest in the company to be in the hands
of the public stockholders and provide the company with additional capital
resources to expand. See Item 1, “Business - Recent Developments,” and Note 16
to “Notes to Consolidated Financial Statements.”
Capital
is needed primarily for the development of outpatient dialysis centers. The
construction of a 15 station facility, typically the size of our dialysis
facilities, costs in the range of $750,000 to $1,000,000, 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.
Although our expansion strategy focuses primarily on construction of new
centers, we have expanded through acquisition of dialysis facilities and
continue to review potential acquisitions. Development of a dialysis facility to
initiate operations takes four to six months and usually up to 12 months or
longer to generate income. We consider some of our centers to be in the
developmental stage since they have not developed a patient base sufficient to
generate and sustain earnings.
We are
seeking to expand our outpatient dialysis treatment facilities and inpatient
dialysis care and are presently in different phases of negotiations with
physicians for the development of additional outpatient centers. Such expansion
requires capital. We have been funding our expansion through internally
generated cash flow and financing from our parent, Medicore, Inc. See Notes 3
and 5 to “Notes to Consolidated Financial Statements.” Our future expansion may
require us to seek outside financing. While we anticipate that financing will be
available either from a financial institution or our parent
company,
including the proposed merger of our parent with our company providing us with
cash of at least approximately $4 million to $5 million (see Item 1, “Business -
Recent Developments”), no assurance can be given that we will be successful in
implementing our growth strategy or that adequate financing will be available to
support our expansion. See Item 1, “Business-Business Strategy.”
Aggregate
Contractual Obligations
As of
December 31, 2004, the Company’s contractual obligations (in thousands),
including payments due by period, are as follows:
| |
|
Payments
due by period |
|
| |
|
|
|
Less
than |
|
|
|
|
|
More
than |
|
| |
|
Total |
|
1
year |
|
1-3
years |
|
3-5
years |
|
5
years |
|
|
Long-term
debt |
|
$ |
2,099 |
|
$ |
513 |
|
$ |
1,586 |
|
$ |
--- |
|
$ |
--- |
|
|
Note
payable to Medicore |
|
|
1,435 |
|
|
1,435 |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
Operating
leases |
|
|
8,841 |
|
|
1,426 |
|
|
2,857 |
|
|
2,408 |
|
|
2,150 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
services |
|
|
5,405 |
|
|
1,037 |
|
|
1,556 |
|
|
1,392 |
|
|
1,420 |
|
|
Construction
contracts |
|
|
28 |
|
|
28 |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
Total
purchase obligations |
|
|
5,433 |
|
|
1,065 |
|
|
1,556 |
|
|
1,392 |
|
|
1,420 |
|
|
Total
contractual obligations |
|
$ |
17,808 |
|
$ |
4,439 |
|
$ |
5,999 |
|
$ |
3,800 |
|
$ |
3,570 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
Accounting Pronouncements
In
November , 2004, the FASB issued Statement of Financial Accounting Standards No.
151, “Inventory Costs”, an amendment of ARB No. 43, Chapter 4 (“FAS 151”). FAS
151 requires companies to recognize as current-period charges abnormal amounts
of idle facility expense, freight, handling costs, and wasted materials
(spoilage). FAS 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The company does not expect FAS 151 to have
a significant effect on its consolidated financial statements. See Note 1 to
“Notes to Consolidated Financial Statements.”
In
December, 2004, the FASB issued Statement of Financial Accounting Standards No.
153, “Exchanges of Non-monetary Assets”, an amendment of APB Opinion No. 29
(“FAS 153”). The amendments made by FAS 153 are intended to assure that
non-monetary exchanges of assets that are commercially substantive are based on
the fair value of the assets exchanged. FAS 153 is effective for non-monetary
assets exchanges occurring in fiscal periods beginning after June 15, 2004. The
company does no expect FAS 153 to have a significant effect on its financial
statements.
In
December 16, 2004, the Financial Accounts Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised), “Share-Based
Payment” (FAS 123®”). FAS 123® requires companies to recognized the fair value
of stock option grants as a compensation costs in their financial statements.
Public entities, other than small business issuers, will be required to apply
FAS 123® in the first interim or annual reporting period that begins after June
15, 2005. The company will be subjects to the provisions of FAS 123® effective
July 1, 2005. In addition to stock options granted after the effective date,
companies will be required to recognize a compensation cost with respect to any
unvested stock options outstanding as of the effective date equal to the grant
date fair value of those
options
(as previously disclosed in the notes to the financial statements) with the cost
invested options later recognized over the vesting period of the options. The
company is in the process of determining the impact that FAS 123® will have on
its consolidated financial statements.
Critical
Accounting Policies and Estimates
The SEC
has issued cautionary advice to elicit more precise disclosure in this Item 7,
MD&A, about accounting policies management believes are most critical in
portraying our financial results and in requiring management’s most difficult
subjective or complex judgments.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
judgments and estimates. On an on-going basis, we evaluate our estimates, the
most significant of which include establishing allowances for doubtful accounts,
a valuation allowance for our deferred tax assets and determining the
recoverability of our long-lived assets. The basis for our estimates are
historical experience and various assumptions that are believed to be reasonable
under the circumstances, given the available information at the time of the
estimate, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily available from
other sources. Actual results may differ from the amounts estimated and recorded
in our financial statements.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue
Recognition:
Revenues
are recognized net of contractual provisions at the expected collectable amount.
We receive payments through reimbursement from Medicare and Medicaid for our
outpatient dialysis treatments coupled with patients’ private payments,
individually and through private third-party insurers. A substantial portion of
our revenues are derived from the Medicare ERSD program, which outpatient
reimbursement rates are fixed under a composite rate structure, which includes
the dialysis services and certain supplies, drugs and laboratory tests. Certain
of these ancillary services are reimbursable outside of the composite rate.
Medicaid reimbursement is similar and supplemental to the Medicare program. Our
acute inpatient dialysis operations are paid under contractual arrangements,
usually at higher contractually established rates, as are certain of the private
pay insurers for outpatient dialysis. We have developed a sophisticated
information and computerized coding system, but due to the complexity of the
payor mix and regulations, we sometimes receive more or less than the amount
expected when the services are provided. We reconcile any differences at least
quarterly.
Allowance
for Doubtful Accounts:
We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our patients or their insurance carriers to make required
payments. Based on historical information, we believe that our allowance is
adequate. Changes in general economic, business and market conditions could
result in an impairment in the ability of our patients and the insurance
companies to make their required payments, which would have an adverse effect on
cash flows and our results of operations. The allowance for doubtful accounts is
reviewed monthly and changes to the allowance are updated based on actual
collection experience. We use a combination of percentage of sales and the aging
of accounts receivable to establish an allowance for losses on accounts
receivable.
Valuation
Allowance for Deferred Tax Assets: The carrying value of deferred tax assets
assumes that we will be able to generate sufficient future taxable income to
realize the deferred tax assets based on estimates and assumptions. If these
estimates and assumptions change in the future, we may be required to adjust our
valuation allowance for deferred tax assets which could result in additional
income tax expense.
Long-Lived
Assets: We state our property and equipment at acquisition cost and compute
depreciation for book purposes by the straight-line method over estimated useful
lives of the assets. In accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount of the asset may not be recoverable. Recoverability of assets to be held
and used is measured by comparison of the carrying amount of an asset to the
future cash flows expected to be generated by the asset. If the carrying amount
of the asset exceeds its estimated future cash flows, an impairment charge is
recognized to the extent the carrying amount of the asset exceeds the fair value
of the asset. These computations are complex and subjective.
Goodwill
and Intangible Asset Impairment: In assessing the recoverability of our goodwill
and other intangibles we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets.
This impairment test requires the determination of the fair value of the
intangible asset. If the fair value of the intangible asset is less than its
carrying value, an impairment loss will be recognized in an amount equal to the
difference. If these estimates or their related assumptions change in the
future, we may be required to record impairment charges for these assets. We
adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets,” (FAS 142) effective January 1, 2002, and are required to
analyze goodwill and indefinite lived intangible assets for impairment on at
least an annual basis.
Impact
of Inflation
Inflationary
factors have not had a significant effect on our operations. A substantial
portion of our revenue is subject to reimbursement rates established and
regulated by the federal government. These rates do not automatically adjust for
inflation. Any rate adjustments relate to legislation and executive and
Congressional budget demands, and have little to do with the actual cost of
doing business. Therefore, dialysis services revenues cannot be voluntarily
increased to keep pace with increases in nursing and other patient care costs.
Increased operating costs without a corresponding increase in reimbursement
rates may adversely affect our earnings in the future.
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 funds in liquid interest bearing accounts of which we
held approximately $592,000 at December 31, 2004.
Interest
rate risk on debt is managed by negotiation of appropriate rates for equipment
financing and other fixed rate obligations based on current market rates. There
is an interest rate risk associated with our variable rate debt obligations,
which totaled approximately $1,285,000 at December 31, 2004, and our demand
promissory note payable to our parent, Medicore, which amounted to approximately
$1,435,000 at December 31, 2004 and $2,435,000 at March 25, 2005.
We have
exposure to both rising and falling interest rates. Assuming a relative 15%
decrease in rates on our period-end investments in interest bearing accounts and
a relative 15% increase in rates on our period-end variable rate debt would have
resulted in a negative impact of approximately $17,000 on our results of
operations for the year ended December 31, 2004.
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,
specifically, Part IV, Item 15, “Exhibits, Financial Statement Schedules and
Reports on Form 8-K,” subpart (a)1, “All Financial Statements - See Index to
Consolidated Financial Statements,” and subpart (a)2, “Financial Statement
Schedules - See Index to Consolidated Financial Statements.”
Item
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
None
Item
9A. Controls and Procedures
(a) Evaluation
of Disclosure Controls and Procedures.
As of the
end of the period covered by this Annual Report on Form 10-K for the year ended
December 31, 2004, we carried out an evaluation, under the supervision and with
the participation of our management, including our President and Chief Executive
Officer, and the Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-15 of
the Securities Exchange Act of 1934 (the “Exchange Act”), which disclosure
controls and procedures are designed to provide reasonable assurance that
information required to be disclosed by our company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods specified by the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our
President and Chief Executive Officer, and our Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
(b) Changes
in Internal Control.
There
were no changes in our internal control over financial reporting that occurred
during fiscal 2004 or subsequent to the evaluation as described in subparagraph
(a) above that materially affected, or are reasonably likely to materially
affect, our control over financial reporting.
Item
9B. Other Information
To the
best of our knowledge, we have reported all information required to be disclosed
in our current reports on Form 8-K during the fourth quarter of our fiscal year,
2004.
PART
III
Item
10. Directors and Executive Officers of the Registrant
Below are
the names, ages, positions held with the company, business experience and
related information for our directors and executive officers. Executive officers
are appointed each year by our board of directors at its first meeting following
the annual meeting of shareholders, to serve during the ensuing year. There are
no family relationships between any of our executive officers and
directors.
|
Name |
|
Age |
|
Position |
|
Held
Since |
|
Thomas
K. Langbein |
|
59 |
|
Chairman
of the Board |
|
1980 |
| |
|
|
|
|
|
|
|
Stephen
W. Everett |
|
48 |
|
Chief
Executive Officer |
|
2003 |
| |
|
|
|
President
and director |
|
2000 |
| |
|
|
|
|
|
|
|
J.
Michael Rowe |
|
43 |
|
Vice
President of Operations |
|
2002 |
| |
|
|
|
|
|
|
|
Don
Waite |
|
50 |
|
Vice
President of Finance and |
|
|
| |
|
|
|
Chief
Financial Officer |
|
August
16, 2004 |
| |
|
|
|
|
|
|
|
Daniel
R. Ouzts |
|
58 |
|
Vice
President and Treasurer |
|
1996 |
| |
|
|
|
|
|
|
|
Robert
W. Trause* |
|
62 |
|
Director |
|
1998 |
| |
|
|
|
|
|
|
|
Alexander
Bienenstock* |
|
67 |
|
Director |
|
2001 |
| |
|
|
|
|
|
|
|
Peter
D. Fischbein* |
|
65 |
|
Director |
|
June
3, 2004 |
| |
|
|
|
|
|
|
| * |
Member
of the company’s Audit, Compensation and Nominating
Committees |
Thomas
K. Langbein has been
affiliated with the company since 1980. He is Chairman of the Board and was
Chief Executive Officer of the company until May 29, 2003, when that position
was relinquished to Stephen W. Everett, President of the company. Mr. Langbein
is the Chairman of the Board, Chief Executive Officer and President of Medicore,
our parent. Mr. Langbein is President, sole shareholder and director of Todd
& Company, Inc., a broker-dealer, currently not active, registered with the
SEC and a member of the NASD. Mr. Langbein was appointed as a director of Linux
Global Partners, Inc. a private Linux software company in which Medicore, in
January, 2000, acquired an ownership interest and to which company our parent
provided loans, with funding from our company. He resigned as a Linux director
in November, 2002. See Item 13, “Certain Relationships and Related
Transactions.”
Stephen
W. Everett has been
involved in the healthcare industry for over 25 years, primarily responsible for
oversight, deal structuring, physician recruitment and practice management in
the renal healthcare field. He joined the company in November, 1998 as Vice
President, became Executive Vice President in June, 1999, President on March 1,
2000, and Chief Executive Officer on May 29, 2003.
Michael
Rowe became
affiliated with the company on June 1, 2001. Mr. Rowe has been involved in the
healthcare field for 21 years, recently, from January, 2000 to March, 2001, with
Advanced Orthopedic Centers, Inc., a large orthopedic surgery group, as
administrator, and from February, 1997 to December, 1999, he was Executive
Director and Vice President of Virginia Physicians/PhyCor of Richmond, a
division of PhyCor, Inc., a national practice management company.
Don
Waite joined
the company on August 16, 2004. From 1999 to 2004, Mr. Waite was Vice President
and Partner of Nephrology Specialty Group, Inc., which established and operated
a small chain of outpatient dialysis clinics, which it sold in 2004 to an
international dialysis services company.
Daniel
R. Ouzts served
as controller of the company from 1983 through January, 2002, and Vice President
and Treasurer from 1996 to January, 2002, and July, 2003 to August 16, 2004, on
which date he ceased being the company’s Chief Financial Officer. He serves as
Vice President of Finance (since 1986), Treasurer (since 1983) and Principal
Financial Officer (since 1995) of Medicore. Mr. Ouzts is a certified public
accountant. See Item 13, “Certain Relationships and Related
Transactions.”
Robert
W. Trause is a
senior commercial account specialist engaged in the marketing of commercial
insurance specializing in property and casualty insurance sales to mid-to-large
range companies. He has been affiliated with an insurance agency in New Jersey
since 1991.
Alexander
Bienenstock is an
attorney who has specialized in securities and corporate matters for over 30
years. From September, 2000 through October, 2001 he was a legal consultant with
IDT Corp., a NYSE telecommunications company. He had been affiliated with
several law firms, and is currently a sole practitioner and real estate broker.
Mr. Bienenstock’s background includes having been an adjunct assistant professor
in accounting and management at New York University, and, for approximately 10
years, Chief Attorney, Branch of Small Issues of the New York Regional Office of
the SEC.
Peter
D. Fischbein is an
attorney and is a director of Medicore, which position he has held since 1984.
He is a member of Medicore’s Audit, Nominating and Compensation Committees. Mr.
Fischbein was a director of Viragen, Inc., a public company and former
subsidiary of Medicore from 1981 to 2002. See Item 13, “Certain Relationships
and Related Transactions.”
There are
no family relationships among any of the officers or directors of the
company.
Corporate
Governance
Our board
of directors oversees the business and affairs of the company and monitors the
performance of management. The board does not involve itself in day-to-day
operations. The board is kept apprised through discussions with the Chairman,
other directors, executives, the Audit, Nominating and Compensation Committees,
division heads, advisors, including counsel, outside auditors, investment
bankers and other consultants, by reading reports, contracts, rules and
legislation, and other materials sent to them, and by participating in board and
committee meetings.
Our board
and management have a commitment to sound and effective corporate governance
practices. We have established and maintain a Compliance Program to prevent and
detect violations commonly known in healthcare industry as “fraud and abuse”
laws. We also have established a Code of Ethics and Business Conduct to continue
our tradition of adhering to the most rigorous standards of ethics and
integrity. Our Code of Ethics applies to all our employees as well as to our
principal executive officers, chief financial officer, principal accounting
officer, and persons performing similar functions. Our Code of Ethics is
reviewed and updated as necessary. We will provide to any person, without
charge, upon request, a copy of our Code of Ethics by contacting our corporate
Secretary, Lawrence E. Jaffe, Esq., at Jaffe & Falk, LLC, 777 Terrace
Avenue, Hasbrouck Heights, New Jersey 07604, telephone no. (201) 288-8282 or
email, lej@jaffefalkllc.com.
The board
of directors has an Audit Committee, Nominating and Compensation Committees,
each of which consists of the same independent directors. The board has two
other non-independent members and our by-laws provide for up to nine directors
in order to have positions available for other independent directors. We are a
Controlled Company as that term is defined in The Nasdaq Stock Market Rule
4350(c)(5), since our parent, Medicore, owns approximately 56% of our voting
securities. Therefore, we are exempt from the Nasdaq listing requirements to
have a board composed of a majority of independent directors, and compensation
and nominating committees comprised solely of independent directors. However, we
believe in the corporate governance provisions of the SEC and Nasdaq, and,
therefore, we have established these committees consisting of independent
directors.
Audit
Committee
In
accordance with Nasdaq Stock Market Rule 4350(d), we have an Audit Committee of
three members, all of whom are independent as defined in Nasdaq Stock Market
Rule 4200(a)(15) and who meet the criteria of independence set forth in Rule
10A-3(b)(1) under the Exchange Act, have not participated in the preparation of
the company’s financial statements at any time during the past three years, and
are able to read and understand fundamental financial statements, including the
company’s balance sheet, income statement and cash flow statement. Alex
Bienenstock, Chairman of the Audit Committee, has experience in finance and
accounting, and the background which was the basis for the board’s determination
that Mr. Bienenstock is an “audit committee financial expert” as defined in Item
401(h) of Regulation S-K under the Exchange Act. To review Mr. Bienenstock’s
credentials, reference is made to “Directors and Executive Officers of the
Registrant” above. The designation of Mr. Bienenstock as the Audit Committee
financial expert does not impose on him any duty, obligation or liability that
is greater than any duty, obligation or liability imposed on such person as a
member of the Audit Committee and board of directors. The other members of our
Audit Committee are Robert Trause, and Peter D. Fischbein. Mr. Fischbein is an
independent board member of our parent and is a member of Medicore’s Audit and
Compensation Committees.
The Audit
Committee, a very essential oversight committee, pursuant to its charter
provides assistance to the board in fulfilling its responsibilities to our
shareholders and the investment community relating to accounting, reporting
practices, the quality and integrity of our financial reports, and surveillance
of internal controls and accounting and auditing services. The charter
specifies:
| · |
the
scope of the Audit Committee’s
responsibilities |
| · |
how
the Audit Committee carries out those
responsibilities |
| · |
structure,
processes and membership requirements |
The Audit
Committee does not prepare financial statements or perform audits, and its
members are not auditors or certifiers of the company’s financial statements.
Shareholder
Nominee Procedure
There
have been no material changes to the procedures by which security holders may
recommend nominees to our board of directors as we have described in our
information statement dated April 27, 2004, under the caption “Information About
Directors and Executive Officers - Other Nominees.”
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our directors, executive officers and 10%
shareholders to file reports with the SEC, the Nasdaq Stock Market and our
company, indicating their beneficial ownership of common stock of the company
and any changes in their beneficial ownership. As a matter of practice, our
counsel usually assists the officers and directors in preparing the beneficial
ownership reports and reporting changes in beneficial ownership. Counsel will
usually handle the filing of those beneficial ownership reports. The rules of
the SEC require that we disclose failed or late filings of reports of company
stock ownership by our directors and executive officers. To the best of our
knowledge, and based solely on review of such forms filed with the company, all
beneficial ownership reports by these reporting persons for the year 2004 were
filed on a timely basis, except one report by Alexander Bienenstock, filed two
days late, and two reports by Bart Pelstring, both filed late, one report by one
day. Mr. Pelstring resigned as a director effective January 1,
2005.
Item
11. Executive Compensation
The
Summary Compensation Table below sets forth compensation paid by the company and
its subsidiaries for the last three fiscal years ended December 31, 2004 for
services in all capacities for its Chairman of the Board, who was Chief
Executive Officer through May 29, 2003, and for its Chief Executive Officer and
each of its executive officers whose total annual salary, bonus or other
compensation exceeded $100,000.
Summary
Compensation Table
| |
|
|
|
|
|
|
|
|
|
Long
Term |
|
| |
|
Annual
Compensation |
|
Compensation
Awards |
|
|
(a) |
|
(b) |
|
(c) |
|
(d) |
|
(e) |
|
(g) |
|
| |
|
|
|
|
|
|
|
Other |
|
Securities |
|
| |
|
|
|
|
|
|
|
Annual |
|
Underlying |
|
|
Name
and |
|
|
|
Salary |
|
Bonus |
|
Compensation |
|
Options/SARs
(#) |
|
|
Principal
Position |
|
Year |
|
($) |
|
($) |
|
($) |
|
Company |
|
Medicore |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
K. Langbein, CEO(1) |
|
|
2004 |
|
|
86,960(2 |
) |
|
100,000(3 |
) |
|
5,987(4 |
) |
|
50,000(5 |
) |
|
|
|
| |
|
|
2003 |
|
|
83,308(2 |
) |
|
87,200(6 |
) |
|
5,611(4 |
) |
|
|
|
|
|
|
| |
|
|
2002 |
|
|
73,367(2 |
) |
|
58,929(7 |
) |
|
7,687(4 |
) |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
W. Everett, Pres. |
|
|
2004 |
|
|
179,692(8 |
) |
|
250,000(9 |
) |
|
7,783(10 |
) |
|
50,000(5 |
) |
|
|
|
|
and
CEO(1) |
|
|
2003 |
|
|
168,923(8 |
) |
|
117,078(11 |
) |
|
2,338(10 |
) |
|
|
|
|
|
|
| |
|
|
2002 |
|
|
129,808(8 |
) |
|
85,714(12 |
) |
|
4,179(10 |
) |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J.
Michael Rowe, Vice |
|
|
2004 |
|
|
147,754(8 |
) |
|
50,000(9 |
) |
|
811(13 |
) |
|
25,000(14 |
) |
|
|
|
|
President
(Operations) |
|
|
2003 |
|
|
139,462(8 |
) |
|
25,000(15 |
) |
|
768(13 |
) |
|
50,000(16 |
) |
|
|
|
| |
|
|
2002 |
|
|
115,539(8 |
) |
|
20,000(17 |
) |
|
740(13 |
) |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Don
Waite, Vice President |
|
|
2004 |
|
|
41,538(8 |
) |
|
8,000(9 |
) |
|
-0- |
|
|
50,000(19 |
) |
|
|
|
|
(Finance)
and Chief |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Officer(18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Thomas
K. Langbein was CEO until May 29, 2003, at which time Stephen W. Everett
assumed that position. |
|
(2) |
Annual
compensation paid by Medicore, which was $347,838, $333,200 and $293,500,
respectively, for fiscal 2004, 2003 and 2002. Amounts included in the
Summary Compensation Table reflect the compensation allocated to the
company in proportion to the time spent on its
behalf. |
|
(3) |
Director
fee accrued in 2004 and paid in February,
2005 |
|
(4) |
Automobile
allowance and related expenses, and life and disability insurance premiums
paid by Medicore amounted to $33,626, $30,200 and $30,700, respectively
for 2004, 2003 and 2002. As part of the general corporate overhead
allocation, the amounts in the Summary Compensation Table reflect the
portion of such payment which is allocated to the
company. |
| (5) |
Vests
12,500 shares every June 7, commencing June 7, 2005 to June 7,
2008. |
|
(6) |
Accrued
in 2003 and paid in February, 2004 as a director fee. Includes $56,258 for
the partial exercise of options and $30,942 cash.
|
|
(7) |
Includes
(i) $46,429 accrued in 2002 and paid in March, 2003 for the partial
exercise of options; and (ii) $12,500, the general corporate overhead
allocable portion of Medicore’s bonus of $50,000 accrued in 2002 and paid
in January, 2003. |
| (8) |
All
compensation paid by the company. |
| (9) |
Accrued
in 2004 and paid in February, 2005. |
|
(10) |
Includes
automobile related expenses of $5,329 and $1,957, respectively for 2004
and 2002, and life insurance premiums of $2,454, $2,338 and $2,000,
respectively, in 2004, 2003 and 2002, all of which were paid by the
company. |
|
(11) |
Includes
(i) a bonus accrued in 2003 and paid in February, 2004 relating to the
exercise of director stock options which included the payment of the $.625
exercise price for 69,242 shares exercised under Mr. Everett’s options
(valued at $43,276) together with a related cash distribution to Mr.
Everett of $23,802; and (ii) a cash bonus of $50,000 accrued in 2003 and
paid in January, 2004. |
|
(12) |
Includes
(i) $35,714 accrued in 2002 and paid in March, 2003 for the partial
exercise of options; and (ii) bonus of $50,000 accrued in 2002 and paid in
January, 2003. |
| (13) |
Life
insurance premiums. |
| (14) |
Vests
6,250 shares every June 7, commencing June 7, 2005 to June 7,
2008. |
| (15) |
Accrued
in 2003 and paid in January, 2004. |
| (16) |
Vests
12,500 shares every June 4, commencing June 4, 2004 to June 4,
2007. |
| (17) |
Accrued
in 2002 and paid in January, 2003. |
| (18) |
Joined
the company effective August 16, 2004. |
|
(19) |
Vests
12,500 shares every August 15, commencing August 15, 2005 to August 15,
2008; any accelerated vesting for change in control prior to August 15,
2005, this option accelerates only for 12,500
shares. |
Option/SAR
Grants In Last Fiscal Year
|
Individual
Grants |
|
Potential
Realizable |
|
|
|
|
Number
of |
|
%
of Total |
|
|
|
|
|
Value
at Assumed |
|
|
|
|
Securities |
|
Options/SARs |
|
Exercise |
|
|
|
Annual
Rates of Stock |
|
|
|
|
Underlying |
|
Granted
to |
|
or
Base |
|
|
|
Price
Appreciation |
|
|
|
|
Options/SARs |
|
Employees
in |
|
Price |
|
Expiration |
|
For
Option Term |
|
|
Name |
|
Granted
(#) |
|
Fiscal
Year |
|
($/Sh) |
|
Date |
|
5%($) |
|
10%($) |
|
|
(a) |
|
(b) |
|
(c) |
|
(d) |
|
(e) |
|
(f) |
|
(g) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
K. Langbein |
|
|
50,000(1 |
) |
|
21.7 |
|
$ |
4.02 |
|
|
6/6/09 |
|
|
55,533 |
|
|
122,713 |
|
|
Stephen
W. Everett |
|
|
50,000(1 |
) |
|
21.7 |
|
$ |
4.02 |
|
|
6/6/09 |
|
|
55,533 |
|
|
122,713 |
|
|
J.
Michael Rowe |
|
|
25,000(2 |
) |
|
10.9 |
|
$ |
4.02 |
|
|
6/6/09 |
|
|
27,766 |
|
|
61,356 |
|
|
Don
Waite |
|
|
50,000(3 |
) |
|
21.7 |
|
$ |
4.02 |
|
|
8/15/09 |
|
|
55,533 |
|
|
122,713 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
12,500
shares vest each June 7, from June 7, 2005 to June 7,
2008. |
|
(2) |
6,250
shares vest each June 7, from June 7, 2005 to June 7,
2008. |
|
(3) |
12,500
shares vest each August 16, from August 16, 2005 to August 16,
2008. |
Aggregated
Option/SAR Exercises In Last Fiscal Year and FY-End Option/SAR
Values
|
(a) |
|
(b) |
|
(c) |
|
(d) |
|
(e) |
|
|
|
|
|
|
|
|
Number
of |
|
|
|
|
|
|
|
|
|
|
Securities |
|
Value
of |
|
|
|
|
|
|
|
|
Underlying |
|
Unexercised |
|
|
|
|
|
|
|
|
Unexercised |
|
In-the-Money |
|
|
|
|
|
|
|
|
Options/SARs |
|
Options/SARs
at |
|
|
|
|
|
|
|
|
at
FY-End (#) |
|
Fiscal
Year End($) |
|
|
|
|
Shares
Acquired |
|
Value
Realized |
|
Exercisable/ |
|
Exercisable/ |
|
|
Name |
|
on
Exercise (#) |
|
($) |
|
Unexercisable |
|
Unexercisable($) |
|
|
CEO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
K. Langbein |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
Options |
|
|
90,012 |
|
|
231,780 |
|
|
50,000
(unexer.)(1 |
) |
|
1,020,500 |
|
| |
|
|
355,702 |
|
|
1,236,064 |
|
|
|
|
|
|
|
|
Medicore
Options |
|
|
100,000 |
|
|
77,000 |
|
|
100,000
(exer. |
) |
|
787,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
W. Everett |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
Options |
|
|
69,242 |
|
|
178,298 |
|
|
273,616
(exer.)(2 |
) |
|
6,513,429 |
|
|
|
|
|
|
|
|
|
|
50,000
(unexer.)(1 |
) |
|
1,020,500 |
|
|
Medicore
Options |
|
|
8,334 |
|
|
6,417 |
|
|
8,333
(exer. |
) |
|
65,581 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J.
Michael Rowe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
Options |
|
|
-0- |
|
|
-0- |
|
|
87,500
(exer. |
) |
|
2,058,875 |
|
|
|
|
|
|
|
|
|
|
87,500
(unexer.)(3 |
) |
|
1,950,875 |
|
|
Medicore
Options |
|
|
-0- |
|
|
-0- |
|
|
-0- |
|
|
-0- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Don
Waite |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
Options |
|
|
-0- |
|
|
-0- |
|
|
50,000
(unexer.)(4 |
) |
|
1,020,500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Vests
in equal amounts of 12,500 shares each June 7, from June 7, 2005 to June
7, 2008. |
|
(2) |
Includes
options for 66,000 shares, exercisable at $.625 per share through January
1, 2006, which options vested on January 1, 2005. An aggregate of 150,000
of these options were exercised after December 31,
2004. |
|
(3) |
Non-vested
incentive options including (i) 25,000 options exercisable at $.75 per
share; (ii) 37,500 options exercisable at $1.80 per share; and (iii)
25,000 options exercisable at $4.02 per
share. |
| (4) |
Non-vested
incentive options exercisable at $4.02 per share |
Compensation
of Directors
There are
no standard arrangements for compensating directors for services as directors or
for participating on any committee. We reimburse directors for travel and
related out-of-pocket expenses incurred in attending shareholder, board and
committee meetings, which expenses have been minimal. In lieu of any cash
compensation or per meeting fees to directors for acting as such, we have
provided directors, among others, with options to purchase common stock of the
company at exercise prices no less than the fair market value as of the date of
grant. In January, 2004, bonuses were granted to the board members, including
$131,000 bonused for exercise of a portion of their options, amounting to
205,892 shares at exercise prices ranging from $.625 to $.75, and a cash award
aggregating $66,000. At the annual meeting in June, 2004, incentive and
non-qualified options for 145,000 shares were granted to the board members
exercisable at $4.02 per share, the fair market value at the time of grant, of
which 130,000 vest over four years commencing June 7, 2005. See Item 12,
“Security Ownership of Certain Beneficial Owners and Management.”
In
February, 2005, the company provided director fees of $20,000 to each director,
except to Thomas K. Langbein, who received a $100,000 fee in recognition of his
services as Chairman of the Board. He received a $150,000 bonus from Medicore
for his services as Chairman of the Board, Chief Executive Officer and President
of our Parent. Stephen W. Everett, director, President and Chief Executive
Officer, received a $250,000 bonus for his efforts on behalf of the company. He
also received a salary increase. See below, “Employment Contracts and
Termination of Employment and Change-In-Control Arrangements.”
Employment
Contracts and Termination of Employment and Change-In-Control
Arrangements
Stephen
W. Everett, President and director of the company, has a five-year employment
contract through December 31, 2005. Effective for 2005, his annual compensation
was increased from $180,000 to $250,000. Mr. Everett’s employment agreement also
provides:
| · |
employee
and fringe benefits to the extent available by the company to other
similarly situated executive employees |
| · |
reimbursement
for reasonable out-of-pocket expenses incurred in connection with his
duties |
| · |
vacations
normally taken by senior management |
|
- |
death;
three months’ severance pay |
| |
- |
for
cause; salary and expenses to date of termination (“cause” includes
conviction for fraud or criminal conduct, habitual drunkenness or drug
addition, embezzlement, regulatory agency sanctions against Mr. Everett or
the company due to his wrongful acts, material breach of the agreement,
dishonesty, or resignation, except if due to breach by the
company) |
|
- |
by
the company after 13 weeks of disability; three months’ severance
pay |
| |
- |
by
Mr. Everett upon breach by the company; severance pay equal to the greater
of six months of his then compensation or his remaining compensation under
the agreement |
| · |
confidentiality
restrictions two years from termination |
| · |
non-competition
for one year from termination within the United States; provided,
non-competition eliminated if the company terminates Mr. Everett without
cause or due to the company’s material breach of the
agreement |
| · |
Mr.
Everett to assign any patents, property rights, discovery or idea to the
company |
Certain
executive and accounting personnel and administrative facilities of the company
and Medicore were common for fiscal 2004. The costs of executive and accounting
salaries and other shared corporate overhead for these companies were charged on
the basis of time spent. Mr. Langbein, as Chairman of the Board of the Company
and Chairman of the Board, CEO and President of Medicore, and Mr. Ouzts, as an
officer, of the company and Medicore, divided their time and efforts among these
companies. See Item 13, “Certain Relationships and Related Transactions.” These
executive and accounting salaries and other shared corporate overhead will be
eliminated in the merger of its parent with the company, should it be
successfully completed. See Item 1, “Business - Recent
Developments.”
Options,
Warrants or Rights
1999
Dialysis Corporation of America Stock Option Plan
| · |
grants
available to officers, directors, consultants, key employees, advisors and
similar parties |
| · |
options
(non-qualified and incentive) may be up to five years, may require
vesting, exercise price determined by board of
directors |
| · |
options
may, at discretion of board, be exercised either with cash, common stock
with fair market value equal to cash exercise price, optionee’s personal
non-recourse or recourse note, at the discretion of the board, or
assignment to the company if sufficient proceeds from the sale of common
stock acquired upon exercise of the option with an authorization to the
broker to pay that amount to the company, or any combination of such
payments |
| · |
termination
of optionee’s affiliation with the company
by |
|
|
|
- |
death,
disability or retirement after age 65, exercisable for nine months but not
beyond option expiration date |
|
- |
termination
for cause, right to exercise terminates
immediately |
|
- |
any
other termination, 30 day exercise |
| · |
options
are non-transferable |
| · |
forced
redemption at formulated prices upon change in control of the company
which includes (i) sale of substantially all of the assets of the company
or its merger or consolidation; (ii) majority of the board changes other
than by election of shareholders pursuant to board solicitations or
vacancies filled by board caused by death or resignation; or (iii) a
person or group acquires or makes a tender offer for at least 25% of the
company’s common stock |
| · |
1999
Plan history to March 25, 2005 (adjusted for two-for-one split on January
28, 2004) |
| |
|
|
authorized:
|
3,000,000 |
|
issued:
|
2,241,000 |
|
vested:
|
232,116 |
|
non-vested:
|
282,500 |
|
exercised:
|
1,742,730 |
|
cancelled:
|
193,654 |
|
available:
|
742,654 |
|
exercise
prices: |
range
from $.625 to $4.02 |
|
exercise
periods: |
range
from 1/1/06 to 8/15/09 |
| |
|
The
exercise price of options is no less than 100% of the fair market value of the
common stock on the date of grant.
|
Item
12. |
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
The
following table sets forth as of March 25, 2005, the names and beneficial
ownership of the equity securities of Dialysis Corporation of America and its
parent, Medicore, for directors of the company, individually itemized, and for
directors and executive officers of Dialysis Corporation of America as a group,
without naming them, and for each of the current executive officers described in
the Summary Compensation Table (see Item 11, “Executive Compensation”), and for
shareholders known to Dialysis Corporation of America to beneficially own more
than 5% of our voting securities.
All
shares and per share data, including option information, in this annual report
on Form 10-K have been adjusted to reflect a two-for-one stock split effected by
the company on January 28, 2004.
| |
|
|
Amount and Nature of Beneficial
Ownership |
|
| |
|
|
Dialysis |
|
|
|
|
|
Medicore |
|
|
|
|
| |
|
|
Common |
|
|
|
|
|
Common |
|
|
|
|
|
Name |
|
|
Stock(1) |
|
|
%(2) |
|
|
Stock |
|
|
%(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicore |
|
|
4,821,244 |
|
|
55.7 |
|
|
----- |
|
|
----- |
|
|
2337
W. 76th
Street |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hialeah,
FL 33016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
K. Langbein |
|
|
445,714(4 |
) |
|
5.2 |
|
|
1,356,014(5 |
) |
|
18.8 |
|
|
c/o
Medicore |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
777
Terrace Avenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hasbrouck
Heights, NJ 07604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
W. Everett |
|
|
400,000(6 |
) |
|
4.6 |
|
|
25,000(7 |
) |
|
0.4 |
|
|
c/o
Dialysis Corporation of America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1302
Concourse Drive, Suite 204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Linthicum,
MD 21090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J.
Michael Rowe |
|
|
87,500(8 |
) |
|
1.0 |
|
|
-0- |
|
|
-0- |
|
|
c/o
Dialysis Corporation of America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1302
Concourse Drive, Suite 204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Linthicum,
MD 21090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Don
Waite |
|
|
-0-(9 |
) |
|
-0- |
|
|
-0- |
|
|
-0- |
|
|
c/o
Dialysis Corporation of America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1302
Concourse Drive, Suite 204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Linthicum,
MD 21090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
W. Trause |
|
|
58,428(10 |
) |
|
0.7 |
|
|
-0- |
|
|
-0- |
|
|
431C
Hackensack Street |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carlstadt,
NJ 07072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter
D. Fischbein |
|
|
39,600(10 |
) |
|
0.5 |
|
|
178,609(11 |
) |
|
5.3 |
|
|
430
East 86th
Street |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
York, NY 10028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alexander
Bienenstock |
|
|
20,000(12 |
) |
|
0.2 |
|
|
-0- |
|
|
-0- |
|
|
766
West Broadway |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Woodmere,
NY 11598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
directors and executive |
|
|
1,095,742(13 |
) |
|
12.3 |
|
|
1,892,115(14 |
) |
|
26.0 |
|
|
officers
as a group (8 persons) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Medicore
owns 4,821,244 shares (approximately 56%) of our common stock. Officers
and directors of Dialysis Corporation of America, who may also be officers
and/or directors of Medicore and shareholders of each company, disclaim
any indirect beneficial ownership of Dialysis
|
Corporation
of America common stock through Medicore’s approximately 56% ownership of
Dialysis Corporation of America. Thomas K. Langbein, by virtue of his positions
with Dialysis Corporation of America and Medicore and his stock ownership of
Medicore, may be deemed to have indirect beneficial ownership of such shares
through shared voting and investment power with respect to Medicore’s ownership
of Dialysis Corporation of America. Mr. Langbein disclaims such entire indirect
beneficial ownership, but for his proportionate indirect interest, approximately
848,539 shares of the company or approximately 9.8%.
|
(2) |
Based
on 8,661,815 shares outstanding, but exclusive of common stock issuable
under (i) 232,116 currently exercisable options at prices ranging from
$.625 to $4.02 per share; and (ii) 282,500 non-vested options which vest
over periods ranging from June 4, 2005 to August 16, 2008, exercisable at
prices ranging from $.75 to $4.02 per
share. |
| (3) |
Based
on 7,132,434 shares outstanding exclusive of (i) 231,995 shares underlying
outstanding options under Medicore’s 1989 Stock Option Plan (14,000
non-vested options not included); (ii) 400,000 shares available for
issuance under certain conditions of Thomas K. Langbein’s employment
agreement; and (iii) 98,000 shares reserved for issuance under a key
employee stock plan. |
| (4) |
Does
not include (i) a five-year incentive option for 50,000 shares exercisable
at $4.02 per share to June 6, 2009, vesting in equal amounts of 12,500
shares each June 7, 2005 through 2008; and (ii) Medicore’s 4,821,244 share
ownership of the company of which Mr. Langbein disclaims beneficial
ownership except to the extent of his indirect beneficial ownership
through his 17.6% direct ownership of Medicore. See Note (1)
above. |
| (5) |
Includes
an option for 100,000 shares of Medicore common stock exercisable at $1.38
per share to July 26, 2005. Does not include 400,000 shares reserved under
Mr. Langbein’s employment agreement issuable under certain circumstances,
such as a change in control, termination and
retirement. |
| (6) |
Includes
an incentive option for 123,616 shares exercisable at $.625 per share to
January 1, 2006. Does not include an incentive option for 50,000 shares
exercisable at $4.02 per share to June 6, 2009, vesting in equal amounts
of 12,500 shares each June 7, 2005 through June 7,
2008. |
| (7) |
Includes
an option for 8,333 shares of Medicore common stock exercisable at $1.38
per share to July 26, 2005. |
| (8) |
Includes
(i) 75,000 vested incentive options exercisable at $.75 to September 5,
2006; and (ii) 12,500 vested incentive options exercisable at $1.80 to
June 3, 2008. Does not include (i) 25,000 of the same incentive options as
(i) above vesting September 5, 2005; (ii) 37,500 of the same incentive
options as (ii) above vesting 12,500 shares each June 4 over the next
three years, 2005, 2006 and 2007; and (iii) a five-year incentive option
for 25,000 shares exercisable at $4.02 to June 6, 2009, and vesting in
equal amounts of 6,250 shares each June 7, 2005 through June 7,
2008. |
| (9) |
Does
not include a five-year incentive option for 50,000 shares exercisable at
$4.02 per share to August 15, 2009, vesting in equal amounts of 12,500
shares each August 16, 2005 to August 16, 2008. |
| (10) |
Includes
a non-qualified option for 5,000 shares exercisable at $4.02 per share
through June 6, 2009. |
| (11) |
Includes
(i) an option for 16,666 shares of Medicore common stock exercisable at
$1.38 per share to July 26, 2005; and (ii) 7,350 shares Mr. Fischbein
holds as trustee for his daughter, who is of majority age and lives
independently of her father. Does not include (i) 196,382 shares (2.8%)
owned by his wife, Susan Kaufman, who is economically independent of Mr.
Fischbein, and who maintains separate banking and brokerage accounts; and
(ii) 100,000 shares (1.4%) held in trust for their minor son by his wife,
over which trust Mr. Fischbein has no control nor in which he has any
interest. |
| (12) |
Includes
non-qualified options (i) for 5,000 shares exercisable at $2.25 per share
to August 18, 2006; and (ii) for 5,000 shares exercisable at $4.02 per
share to June 6, 2009. Does not include a non-qualified option for 5,000
shares vesting August 19, 2005, exercisable at $2.25 per share to August
18, 2006. |
| (13) |
Includes
231,116 vested options. Does not include Medicore’s ownership or any
indirect beneficial ownership through Medicore’s ownership. See Note (1)
above. |
| (14) |
Includes
options for 139,999 shares of Medicore common
stock. |
Item
13. Certain Relationships and Related Transactions
Our
parent, Medicore, owns approximately 56% of our common stock. See Item 12,
“Security Ownership of Certain Beneficial Owners and Management.”
George
Langbein, formerly an employee of Medicore and brother of Thomas K. Langbein,
obtains the group health insurance coverage for Medicore’s employees as well as
personal life insurance policies for several executives and key employees.
Medicore pays for the $1,600,000 of life insurance owned by Thomas K. Langbein,
and $100,000 life insurance covering Daniel R. Ouzts. See Item 11, “Executive
Compensation.” The premiums paid by Medicore on the life insurance and group
health insurance for its employees for fiscal 2004 aggregated approximately
$157,000. We are of the opinion that the cost and coverage of the insurance are
as favorable as can be obtained from unaffiliated parties.
Certain
of the officers and directors of the company are officers and/or directors of
Medicore and its affiliates. Thomas K. Langbein is Chairman of the Board of the
company and Medicore and Chief Executive Officer and President of the latter.
Daniel R. Ouzts is Vice President and Treasurer of the company and Vice
President (Finance) , Principal Financial Officer and Treasurer of Medicore.
Peter D. Fischbein is a director of the company and of Medicore. See Item 10,
“Directors and Executive Officers of the Registrant.” Mr. Langbein beneficially
owns 5.2% of our company, and 18.8% of our parent, which includes an option for
100,000 Medicore shares. Mr. Ouzts has a less than 1% interest in our company,
and approximately 2% interest in Medicore, which includes an option for 15,000
shares. Peter D. Fischbein owns less than 1% of the stock of our company and
5.3% of Medicore shares, which includes an option for 16,666 Medicore shares.
Lawrence E. Jaffe is corporate Secretary and counsel to our company and our
parent, of which company he is a director. Mr. Jaffe has an approximately 3%
interest in our company and in our parent, which for the latter includes an
option for 33,333 Medicore shares. See Item 12, “Security Ownership of Certain
Beneficial Owners and Management.” Mr. Jaffe
and his
son, Joshua M. Jaffe, devote a substantial portion of their professional
services to our company and our parent, from which companies their law firm,
Jaffe & Falk, LLC, receives approximately 60% of their professional fees
(including bonuses), which for fiscal 2004 aggregated approximately $413,000, of
which $236,000 was for our company.
Certain
of the executive and accounting personnel and administrative facilities of our
company and our parent, are common. The costs of executive, financial and
administrative salaries and other shared corporate overhead for these companies
are charged on the basis of time spent. Since the shared expenses are allocated
on a cost basis, there is no intercompany profit involved. The amount of
expenses charged to us by Medicore amounted to approximately $200,000 for the
year ended December 31, 2004. Utilization of personnel and administrative
facilities in this manner enables Medicore to share the cost of qualified
individuals with its subsidiaries rather than duplicating the cost for various
entities. It is our opinion that these services are on terms as favorable as we
could receive from unaffiliated parties.
On March
17, 2004, we issued a demand promissory note to our parent, Medicore, for up to
$1,500,000 of financing for equipment purchases. The financing carries an annual
interest rate of 1.25% over the prime rate. The financing was increased in June,
2004, to $5,000,000 and its purposes extended for working capital and other
corporate purposes. At March 25, 2005, the outstanding balance on this financing
was approximately $2,435,000 at an interest rate of 7.0%, with accrued interest
payable on the note of approximately $30,000.
The
relationships and related transactions discussed in this Item 13 will be
eliminated assuming and upon completion of the merger of Medicore with our
company. See Item 1, “Business - Recent Developments.”
In May,
2001, the company loaned Stephen W. Everett, its President and Chief Executive
Officer, $95,000 at an annual interest of prime plus 1% (floating) payable on
demand but no later than May 11, 2006. Accrued interest aggregated approximately
$13,000 at December 31, 2004. The demand loan is collateralized by all of Mr.
Everett’s options and underlying common stock of the company, as well as any
proceeds from the sale of such common stock.
Certain
directors of our parent, Medicore, Messrs. Anthony C. D’Amore, Peter D.
Fischbein, Seymour Friend, Robert Magrann, and Lawrence E. Jaffe, our corporate
Secretary and counsel (plus options he gifted to his children, each of majority
age and independent of their father), in April, 2000, exercised their options
granted under our 1999 Stock Option Plan for 680,000 shares. The exercise was
effected with cash for the par value, and the balance, an aggregate of $421,600,
based on the number of underlying shares on the date of exercise, in the form of
three-year non-recourse promissory notes at a rate of interest of 6.2% per
annum, due April 20, 2003, and extended to April 20, 2004. These loans,
principal and interest, were repaid through the sale to the company of shares of
the company’s common stock owned by the noteholders at fair market value on
February 9, 2004.
Item
14. Principal Accountant Fees and Services
Audit
Fees
Moore
Stephens, P.C. performed the audit of our annual financial statements as of and
for the years ended December 31, 2003 and 2004, and reviewed the financial
statements included in our quarterly reports on Form 10-Q for 2004. The fees of
Moore Stephens, P.C. for professional services rendered for the audit
of our financial statements for fiscal 2003 were $27,000 and for fiscal 2004 are
anticipated to be $32,000.
Moore
Stephens’ fees for professional services for review of the financial statements
in our quarterly reports on Form 10-Q for fiscal 2004 were $8,800. The review of
the financial statements included in our Forms 10-Q for 2003 was performed by
our former accountants, Wiss & Company, LLP, for an aggregate fee of
$4,500.
Audit
Related Fees
Neither
of Moore Stephens, P.C. nor Wiss & Company, LLP performed any assurance and
related services for Dialysis Corporation of America, or any other services
reasonably related to the performance of the audit or review of our financial
statements during fiscal 2004 and 2003 that were not otherwise audit services as
described above.
Tax
Fees
Moore
Stephens, P.C. handled the calculation and preparation of materials related to
estimated taxes and the preparation of tax returns for 2003 and 2004. The tax
fees for 2003 were $18,000, and the fees for such services for 2004 to be billed
in 2005 are $22,000.
All
Other Fees
In
addition to the professional services and fees billed as described above under
“Audit Fees” and “Tax Fees,” in 2004, Moore Stephens, P.C. performed research on
accounting and tax matters for a $3,500 fee. Wiss & Company did not provide
any other services or bill other fees to our company or any of our
subsidiaries.
Our Audit
Committee has established its pre-approval policies and procedures, pursuant to
which it approved the foregoing audit and permissible non-audit services
provided by Moore Stephens, P.C. in 2004. The Audit Committee’s pre-approval
policy provides each audit and permitted non-audit service to be reviewed for a
determination of approval by the Audit Committee. Requests or applications for
specific services to be provided by the independent auditor are also submitted
to our Vice President of Finance and Chief Financial Officer, and must include a
detailed description of the services to be rendered. Our Vice President of
Finance and Chief Financial Officer shall provide the Audit Committee with a
written report as to the scope and applicability of the proposed services with
further communications between and among the auditors, the Vice President of
Finance and Chief Financial Officer, and the Audit Committee, as necessary for
further clarification and evaluation. The Audit Committee will make the
determination that any requested audit and/or non-audit services, upon the above
mentioned review process, are necessary and within the scope of the company’s
operations and reporting responsibilities, will not, in its opinion and
evaluation, impair the auditor’s independence, nor be considered a prohibited
non-audit service consistent with the SEC’s rules relating to these issues. The
Audit Committee will provide a report of its approval or disapproval of our
requested audit and non-audit services to management and the board for
implementation. The Audit Committee will monitor the
performance
of all services provided by the independent auditors and determine whether such
services are in compliance with its approval policies. The Audit Committee will
report to management on a periodic basis on the results of its monitoring, and
recommend appropriate action, including termination of the independent
accountants for breaches of the approved policies or the deficiency in providing
services to the company.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(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 (b) below.
(b) Exhibits
+
|
3.1 |
Articles
of Incorporation ‡ |
|
3.2 |
By-Laws
of the Company ‡
|
|
4.1 |
Form
of Common Stock Certificate of the Company ‡ |
|
|
10.1 |
Lease
between DCA of Wellsboro, Inc. (formerly Dialysis Services of
Pennsylvania, Inc. - Wellsboro)(1)
and James and Roger Stager dated January 15, 1995 (incorporated by
reference to Medicore, Inc.’s(2)
Annual Report on Form 10-K for the year ended December 31, 1994 (“1994
Medicore Form 10-K”), Part IV, Item 14(a) 3 (10)(lxii)).
|
|
|
10.2 |
Lease
between the Company and DCA of Lemoyne, Inc. (formerly Dialysis Services
of Pennsylvania, Inc. - Lemoyne)(1)
dated December 23, 1998 (incorporated by reference to the Company’s Annual
Report on Form 10-K for the year ended December 31, 1998 (“1998 Form
10-K”), Part IV, Item 14(c)(10)(ii)). |
|
|
10.3 |
Renewal
of Lease between the Company and DCA of Lemoyne, Inc.(1)
dated December 30, 2003 (incorporated by reference to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2003 (“2003 Form
10-K”), Part IV, Item 15(c)10.3). |
|
|
10.4 |
Medical
Director Agreement between DCA of Wellsboro, Inc. (formerly 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)).(3) |
|
|
10.5 |
Agreement
for In-Hospital Dialysis Services(4)
between Dialysis Services of Pennsylvania, Inc. - Wellsboro(1)
and Soldiers & Sailors Memorial Hospital dated September 28, 1994 [*]
(incorporated by reference to September, 1994 Medicore(2)
Form 10-Q, Part II, Item 6(a)(10)(ii)). |
|
|
10.6 |
Lease
between DCA of Carlisle, Inc. (formerly Dialysis Services of PA., Inc. -
Carlisle)(5)
and
Lester P. Burkholder, Jr. and Kirby K. Burkholder dated November 1, 1996
(incorporated by reference to the Company’s Annual Report on Form 10-K for
the year ended December 31, 1996 (“1996 Form 10-K”), Part IV, Item 14(a) 3
(10)(xxiii)). |
|
|
10.7 |
Lease
between DCA of Manahawkin, Inc. (formerly Dialysis Services of NJ., Inc. -
Manahawkin)(5)
and William P. Thomas dated January 30, 1997 (incorporated by reference to
the Company’s 1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxiv)).
|
|
|
10.8 |
Renewal
of Lease between DCA of Manahawkin, Inc.(5)
and William P. Thomas dated February 20, 2004 (incorporated by reference
to the Company’s 2003 Form 10-K, Part IV, Item
14(c)10.8). |
|
|
10.9 |
Equipment
Master Lease Agreement BC-105 between the Company and B. Braun Medical,
Inc. dated November 22, 1996 (incorporated by reference to the Company’s
1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxvii)).
|
|
|
10.10 |
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) |
|
|
10.11 |
Lease
between DCA of Chambersburg, Inc. (formerly Dialysis Services of Pa., Inc.
- Chambersburg)(5)
and BPS Development Group dated April 13, 1998 (incorporated by reference
to the Company’s March, 1998 Form 10-Q, Part II, Item 6(a), Part II, Item
10(i)). |
|
|
10.12 |
1999
Stock Option Plan of the Company (May 21, 1999) (incorporated by reference
to the Company’s Annual Report on Form 10-K for the year ended December
31, 1999 (“1999 Form 10-K”), Part IV, Item
14(c)(10)(xxiii)). |
|
|
10.13 |
Form
of Stock Option Certificate under the 1999 Stock Option Plan (May 21,
1999) (incorporated by reference to the Company’s 1999 Form 10-K, Part IV,
Item 14(c)(10)(xxiv)). |
|
|
10.14 |
Lease
between DCA of Vineland, LLC(7)
and Maintree Office Center, L.L.C. dated May 10, 1999 (incorporated by
reference to the Company’s 1999 Form 10-K, Part IV, Item
14(c)(10)(xxv)). |
|
|
10.15 |
Management
Services Agreement(8)
between the Company and DCA of Vineland, LLC(7)
dated April 30, 1999 (incorporated by reference to the Company’s 1999 Form
10-K, Part IV, Item 14(c)(10)(xxviii)). |
|
|
10.16 |
Amendment
No. 1 to Management Services Agreement between the Company and DCA of
Vineland, LLC(7)
dated October 27, 1999 (incorporated by reference to the Company’s 1999
Form 10-K, Part IV, Item 14(c)(10)(xxix)). |
|
|
10.17 |
Indemnity
Deed of Trust from the Company to Trustees for the benefit of St. Michaels
Bank dated December 3, 1999 (incorporated by reference to the Company’s
Current Report on Form 8-K dated December 13, 1999 (“December Form 8-K”),
Item 7(c)(99)(i)). |
|
|
10.18 |
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)). |
|
|
10.19 |
Lease
between the Company and DCA of So. Ga., LLC (1)
dated November 8, 2000 (incorporated by reference to the Company’s Current
Report on Form 8-K dated January 3, 2001 (“January 2001 Form 8-K”), Item
7(c)(10)(i)). |
|
|
10.20 |
Lease
between DCA of Fitzgerald, LLC (1)
and Hospital Authority of Ben Hill County, d/b/a Dorminy Medical Center,
dated February 8, 2001 (incorporated by reference to the Company’s Current
Report on Form 8-K dated March 5, 2001, Item
7(c)(10)(i)). |
|
|
10.21 |
Employment
Agreement between Stephen W. Everett and the Company dated December 29,
2000 (incorporated by reference to the Company’s Annual Report on Form
10-K for the year ended December 31, 2000 (“2000 Form 10-K”), Part IV,
Item 14(c)(10)(xii)).** |
|
|
10.22 |
Lease
between the Company and Renal Treatment Centers - Mid-Atlantic, Inc. dated
July 1, 1999 (incorporated by reference to the Company’s 2000 Form 10-K,
Part IV, Item 14(c)(10((xlii)). |
|
|
10.23 |
Commercial
Loan Agreement between the Company and Heritage Community Bank, dated
April 3, 2001 (incorporated by reference to the Company’s Current Report
on Form 8-K dated June 14, 2001 (“June, 2001 Form 8-K”), Item
7(c)(i)). |
|
|
10.24 |
Promissory
Note by the Company to Heritage Community Bank, dated April 3, 2001
(incorporated by reference to the Company’s June, 2001 Form 8-K, Item
7(c)(ii)). |
|
|
10.25 |
Modification
Agreement to Promissory Note to Heritage Community Bank dated December 16,
2002 (incorporated by reference to the Company’s Annual Report on Form
10-K for the year ended December 31, 2002 (“2002 Form 10-K”), Part IV,
Item 15(c)10.25). |
|
|
10.26 |
Lease
between DCA of Mechanicsburg, LLC(1)
and Pinnacle Health Hospitals dated July 24, 2001 (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 2001, Part II, Item
6(a)(10)(ii)). |
|
|
10.27 |
Lease
between DCA of Central Valdosta, LLC(1)
and W. Wayne Fann dated March 20, 2001 (incorporated by reference to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2001,
Part IV, Item 14(c) 10.38). |
|
|
10.28 |
Promissory
Note Modification Agreement between DCA of Vineland, LLC(7)
and St. Michaels Bank dated December 27, 2002 (incorporated by reference
to the Company’s 2002 Form 10-K, Part IV, Item
15(c)10.30). |
|
|
10.29 |
Lease
between the Company and Dr. Gerald Light dated February 15, 2002
(incorporated by reference to the Company’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2002, Part II, Item
6(a)(99)(i)). |
|
|
10.30 |
Lease
between DCA of Royston, LLC(1)
and Ty Cobb Healthcare System, Inc. dated March 15, 2002 (incorporated by
reference to the Company’s Current Report on Form 8-K dated April 22,
2002, Item 7(c)(10)(i)). |
|
|
10.31 |
Lease
Agreement between DCA of Chevy Chase, LLC(5)
and BRE/Metrocenter LLC and Guaranty of the Company dated August 8, 2002
(incorporated by reference to the Company’s Current Report on Form 8-K
dated September 25, 2002, Item
7(c)(10)(i)). |
|
|
10.32 |
The
Company’s Section 125 Plan effective September 1, 2002 (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002, Part II, Item
6(99)). |
|
|
10.334 |
Lease
Agreement between Pupizion, Inc. and DCA of Cincinnati, LLC(9)
dated December 11, 2002 (incorporated by reference to the Company’s 2002
Form 10-K, Part IV, Item 15(c)10.35). |
|
|
10.34 |
Promissory
Note from DCA of Cincinnati, LLC(9) to
the Company dated February 3, 2003 (incorporated by reference to the
Company’s 2002 Form 10-K, Part IV, Item
15(c)10.36). |
|
|
10.35 |
Loan
Agreement between the Company and a Physician dated April 22, 2003 [*]
(incorporated by reference to the Company’s Current Report on Form 8-K
dated July 15, 2003 (“July, 2003 Form 8-K”), Item
7(c)(10)(i)). |
|
|
10.36 |
Promissory
Note and Security Agreement from a Physician dated April 22, 2003 [*]
(incorporated by reference to the Company’s July, 2003 Form 8-K, Item
7(c)(10((ii)). |
|
|
10.37 |
Lease
Agreement between DCA of Warsaw, LLC(1)
and Warsaw Village, L.P. dated July 23, 2003 (incorporated by reference to
the Company’s Current Report on Form 8-K dated August 5, 2003, Item
7(c)(10)(i)). |
|
|
10.38 |
Lease
Agreement between DCA of Pottstown, LLC(5)
and Fisher Scheler, LLC dated August 19, 2003 (incorporated by reference
to the Company’s Current Report on Form 8-K dated August 27, 2003, Item
7(c)(iv)(i)). |
|
|
10.39 |
Demand
Promissory Note from the Company to Medicore, Inc.(2)
dated March 1, 2004 (incorporated by reference to the Company’s 2003 Form
10-K, Part IV, Item 14(c)10.46). |
|
|
10.40 |
Agreement
of Lease by and between Copt Concourse, LLC and the Company dated March
31, 2004 (incorporated by reference to the Company’s Current Report on
Form |
8-K dated
March 31, 2004, item 7(c)(10((i)).
|
|
16 |
Letter
re: Change in Certifying Accountant |
|
|
16.1 |
Letter
of Wiss & Company, LLP addressed to the Securities and Exchange
Commission dated November 7, 2003 (incorporated by reference to the
Company’s Quarterly Report on Form 10-Q for the third quarter ended
September 30, 2003, Part II, Item
6(a)(16)). |
|
21 |
Subsidiaries
of the Company. |
|
23 |
Consent
of experts and counsel |
|
23.1 |
Consent
of Wiss & Company, LLP |
|
23.2 |
Consent
of Moore Stephens, P.C. |
|
31 |
Rule
13a-14(a)/15d-14(a) Certifications. |
|
|
31.1 |
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934. |
|
|
31.2 |
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934. |
|
|
32 |
Section
1350 Certifications |
|
|
32.1 |
Certification
of the Chief Executive Officer and the Principal Financial Officer
pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350.## |
|
[*] |
Confidential
portions omitted have been filed separately with the Securities and
Exchange Commission. |
| + |
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. |
|
** |
Management
contract or compensatory plan or
arrangement. |
|
## |
In
accordance with Release No. 34-47551, this exhibit is furnished to the SEC
as an accompanying document and is not deemed to be “filed” for purposes
of Section 18 of the Securities Exchange Act of 1934 or otherwise subject
to the liabilities of that Section, and it shall not be deemed
incorporated by reference into any filing under the Securities Act of
1933. |
|
(1) |
Wholly-owned
subsidiary. |
|
(2) |
Parent
of the company owning approximately 56% 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) |
Each
subsidiary has a Medical Director Agreement which is substantially similar
to the exhibit filed but for area of non-competition and compensation. Our
affiliate, DCA of Toledo, LLC (40% owned), has a substantially similar
Medical Director Agreement. |
|
(4) |
The
acute inpatient services agreements referred to as Agreement for
In-Hospital Dialysis Services are substantially similar to the exhibit
filed, but for the hospital involved, the term and the service
compensation rates. Agreements for In-Hospital Dialysis Services include
the following areas: Valdosta and Fitzgerald, Georgia; Bedford, Carlisle,
Chambersburg, Harrisburg, Mechanicsburg and Wellsboro, Pennsylvania;
Toledo, Ohio. |
|
(5) |
80%
owned subsidiary. |
|
(6) |
Certain
dialysis equipment is leased from time to time and for each lease a new
schedule is added to the Master Lease; other than the nature of the
equipment and length of the lease, the schedules conform to the exhibit
filed and the terms of the Master Lease remain the
same. |
|
(7) |
51%
owned subsidiary. |
|
(8) |
The
Company has a Management Services Agreement with each of its subsidiaries
each of which is substantially similar to the exhibit filed but for the
name of the particular subsidiary which entered into the Agreement and the
compensation. The Company has a Management Services Agreement with DCA of
Toledo, LLC in which it holds a 40%
interest. |
| (9) |
60%
owned subsidiary. |
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/ STEPHEN
W. EVERETT
Stephen
W. Everett
President
and Chief Executive Officer
March 29,
2005
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
29, 2005 |
|
Thomas
K. Langbein |
|
|
|
|
| |
|
|
|
|
|
/s/
STEPHEN W. EVERETT |
|
President,
Chief Executive Officer |
|
|
|
Stephen
W. Everett |
|
and
Director |
|
March
29, 2005 |
| |
|
|
|
|
|
/s/
DON WAITE |
|
Vice
President of Finance |
|
|
|
Don
Waite |
|
(Chief
Financial Officer) |
|
March
29, 2005 |
| |
|
|
|
|
|
/s/
PETER D. FISCHBEIN |
|
Director |
|
March
29, 2005 |
|
Peter
D. Fischbein |
|
|
|
|
| |
|
|
|
|
|
/s/
ROBERT W. TRAUSE |
|
Director |
|
March
29, 2005 |
|
Robert
W. Trause |
|
|
|
|
| |
|
|
|
|
|
/s/
ALEXANDER BIENENSTOCK |
|
Director |
|
March
29, 2005 |
|
Alexander
Bienenstock |
|
|
|
|
ANNUAL
REPORT ON FORM 10-K
ITEM
8, ITEM 15(a) (1) and (2), and (d)
LIST
OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL
STATEMENTS AND SUPPLEMENTAL DATA
FINANCIAL
STATEMENT SCHEDULES
YEAR
ENDED DECEMBER 31, 2004
DIALYSIS
CORPORATION OF AMERICA
LINTHICUM,
MARYLAND
FORM
10-K—ITEM 15(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 of the Annual Report on Form
10-K:
| |
Page |
| |
|
|
Consolidated
Balance Sheets as of December 31, 2004 and 2003 |
F-4 |
| |
|
|
Consolidated
Statements of Operations - Years ended December 31, 2004, 2003, and
2002 |
F-5 |
| |
|
|
Consolidated
Statements of Stockholders’ Equity - Years ended December 31, 2004,2003
and 2002 |
F-6 |
| |
|
|
Consolidated
Statements of Cash Flows - Years ended December 31, 2004, 2003 and
2002 |
F-7 |
| |
|
|
Notes
to Consolidated Financial Statements - December 31, 2004 |
F-8 |
| |
|
| |
|
|
The
following financial statement schedule of Dialysis Corporation of America
and subsidiaries is included in Item 15(d): |
|
| |
|
|
Schedule
II - Valuation and qualifying accounts |
F-31 |
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.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
Dialysis
Corporation of America
Linthicum,
Maryland
We have
audited the accompanying consolidated balance sheets of Dialysis Corporation of
America and its subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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 its subsidiaries as of December 31, 2004 and 2003,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of
America.
MOORE
STEPHENS, P. C.
Certified
Public Accountants.
Cranford,
New Jersey
February
18, 2005 except for Note 16,
for which
the date is March 15, 2005
REPORT
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders
and Board of Directors
Dialysis
Corporation of America
We have
audited the accompanying consolidated statements of income, stockholders’ equity
and cash flows of Dialysis Corporation of America and subsidiaries for the year
ended December 31, 2002. Our audit also included the information related to the
year ended December 31, 2002 on the financial statement schedule listed in the
Index at Item 15(a). These financial statements and schedule are the
responsibility of the company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.
We
conducted our audits in accordance with auditing standards generally accepted in
the United States. Those standards require that we plan and perform the 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 results of operations and cash flows
of Dialysis Corporation of America and subsidiaries for year ended December 31,
2002, 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, 2002, 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
WISS
& COMPANY, LLP
February
7, 2003
Livingston,
New Jersey
DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
| |
|
December
31, |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
|
ASSETS |
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
601,603 |
|
$ |
1,515,202 |
|
Accounts
receivable, less allowance |
|
|
|
|
|
|
|
of
$1,636,000 at December 31, 2004; |
|
|
|
|
|
|
|
$785,000
at December 31, 2003 |
|
|
8,592,476 |
|
|
4,913,318 |
|
|
Inventories |
|
|
1,297,782 |
|
|
1,043,710 |
|
Deferred
income tax asset |
|
|
720,000 |
|
|
412,000 |
|
|
Officer
loan and interest receivable |
|
|
111,696 |
|
|
107,503 |
|
|
Prepaid
expenses and other current assets |
|
|
1,223,023 |
|
|
1,392,721 |
|
|
Total
current assets |
|
|
12,546,580 |
|
|
9,384,454 |
|
| |
|
|
|
|
|
|
|
|
Property
and equipment: |
|
|
|
|
|
|
|
Land
|
|
|
376,211 |
|
|
376,211 |
|
|
Buildings
and improvements |
|
|
2,352,191 |
|
|
2,332,904 |
|
Machinery
and equipment |
|
|
8,087,349 |
|
|
6,039,256 |
|
|
Leasehold
improvements |
|
|
4,674,704 |
|
|
3,548,875 |
|
| |
|
|
15,490,455 |
|
|
12,297,246 |
|
|
Less
accumulated depreciation and amortization |
|
|
6,496,571 |
|
|
5,030,550 |
|
| |
|
|
8,993,884 |
|
|
7,266,696 |
|
| |
|
|
|
|
|
|
|
Goodwill |
|
|
3,649,014 |
|
|
2,291,333 |
|
|
Other
assets |
|
|
1,300,236 |
|
|
661,891 |
|
|
Total
other assets |
|
|
4,949,250 |
|
|
2,953,224 |
|
| |
|
$ |
26,489,714 |
|
$ |
19,604,374 |
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
1,625,930 |
|
$ |
1,167,213 |
|
Accrued
expenses |
|
|
4,921,769 |
|
|
3,170,269 |
|
|
Note
payable and accrued interest payable to parent |
|
|
1,461,647 |
|
|
--- |
|
Current
portion of long-term debt |
|
|
513,000 |
|
|
575,000 |
|
|
Income
taxes payable |
|
|
--- |
|
|
28,949 |
|
|
Acquisition
liabilities - current portion |
|
|
380,298 |
|
|
670,000 |
|
|
Total
current liabilities |
|
|
8,902,644 |
|
|
5,611,431 |
|
| |
|
|
|
|
|
|
|
|
Advances
from parent |
|
|
449,117 |
|
|
234,094 |
|
Long-term
debt, less current portion |
|
|
1,585,936 |
|
|
2,097,355 |
|
|
Acquisition
liabilities, net of current portion |
|
|
380,297 |
|
|
--- |
|
|
Deferred
income tax liability |
|
|
559,000 |
|
|
59,000 |
|
|
Total
liabilities |
|
|
11,876,994 |
|
|
8,001,880 |
|
| |
|
|
|
|
|
|
|
|
Minority
interest in subsidiaries |
|
|
1,282,924 |
|
|
632,177 |
|
| |
|
|
|
|
|
|
|
|
Commitments
and Contingencies |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Stockholders'
equity: |
|
|
|
|
|
|
|
Common
stock, $.01 par value, authorized 20,000,000 shares:
8,485,815
shares issued and outstanding at December 31, 2004;
7,937,544
shares issued and outstanding at December 31, 2003 |
|
|
84,858 |
|
|
79,376 |
|
|
Additional
paid-in capital |
|
|
4,957,146 |
|
|
5,238,952 |
|
Retained
earnings |
|
|
8,287,792 |
|
|
6,073,589 |
|
|
Notes
receivable from options exercised |
|
|
--- |
|
|
(421,600 |
) |
|
Total
stockholders' equity |
|
|
13,329,796 |
|
|
10,970,317 |
|
| |
|
$ |
26,489,714 |
|
$ |
19,604,374 |
|
| |
|
|
|
|
|
|
|
See notes
to consolidated financial statements.
DIALYSIS
CORPORATION OF AMERICA AND SUBSIDIARIES