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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2002
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________ to __________
Commission file number 0-8527
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DIALYSIS CORPORATION OF AMERICA
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(Exact name of registrant as specified in its charter)
FLORIDA 59-1757642
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1344 ASHTON ROAD, HANOVER, MARYLAND 21076
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (410) 694-0500
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Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
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common stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X].
The aggregate market value of the voting stock held by non-affiliates of
the registrant computed by reference to the closing price at which the common
stock was sold on February 10, 2003 was approximately $5,545,000.
As of February 10, 2003, the Company had 3,887,344 shares of its common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporating information by reference from the Information
Statement in connection with the Registrant's Annual Meeting of Shareholders
anticipated to be on May 29, 2003.
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 six years ended December 31,
2001, Part IV, Exhibits, incorporated in Part IV of this Annual Report.
Annual Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for the
year ended December 31, 1994, Part IV, Exhibits, incorporated in Part IV of this
Annual Report.
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DIALYSIS CORPORATION OF AMERICA
Index to Annual Report on Form 10-K
Year Ended December 31, 2002
Page
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 26
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 27
Item 4. Submission of Matters to a Vote of Security Holders . . 28
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . 28
Item 6. Selected Financial Data . . . . . . . . . . . . . . . 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 29
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk . . . . . . . . . . . . . . . . . . . . . . . 36
Item 8. Financial Statements and Supplementary Data . . . . . 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 37
PART III
Item 10. Directors and Executive Officers of the Registrant . . . 37
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. . . . . . 38
Item 13. Certain Relationships and Related Transactions . . . 38
Item 14. Controls and Procedures . . . . . . . . . . . . . . . 38
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 39
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report on Form 10-K that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934. The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors for forward-looking statements. Certain of the forward-looking
statements include management's expectations, intentions, beliefs and strategies
regarding the growth of our company and our future operations, the character and
development of the dialysis industry, anticipated revenues, our need for and
sources of funding for expansion opportunities and construction, expenditures,
costs and income, our business strategies and plans for future operations, and
similar expressions concerning matters that are not considered historical facts.
Forward-looking statements also include our statements regarding liquidity,
anticipated cash needs and availability, and anticipated expense levels in Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Words such as "anticipate," "estimate," "expects," "projects,"
"intends," "plans" and "believes," and words and terms of similar substance used
in connection with any discussions of future operating or financial performance
identify forward-looking statements. Such forward-looking statements, like all
statements about expected future events, are subject to substantial risks and
uncertainties that could cause actual results to materially differ from those
expressed in the statements, including the general economic, market and business
conditions, opportunities pursued or not pursued, competition, changes in
federal and state laws or regulations affecting the company and our operations,
and other factors discussed periodically in our filings. Many of the foregoing
factors are beyond our control. Among the factors that could cause actual
results to differ materially are the factors detailed in the risks discussed in
the "Risk Factors" section below. 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 the
company. Accordingly, readers are cautioned not to place too much reliance on
such forward-looking statements, which speak only as of the date made and which
we undertake no obligation to revise to reflect events after the date made.
ITEM 1. BUSINESS
HISTORICAL
We are a Florida corporation which was organized in 1976. We develop and
operate outpatient kidney dialysis centers that provide quality dialysis and
ancillary services to patients suffering from chronic kidney failure, generally
referred to as end stage renal disease, or ESRD. We also provide acute
inpatient dialysis treatments in hospitals, provide homecare services through
our wholly owned subsidiary, DCA Medical Services, Inc. and provide 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. In 1997, we sold our Florida dialysis
operations. We currently operate 16 outpatient dialysis facilities, including a
40% interest in a dialysis center in Ohio and an unaffiliated center in Georgia,
each of which we manage pursuant to management services agreements. We are in
the development stage for a center in Indiana and a center in Virginia.
Our principal executive offices are located at 1344 Ashton Road, Suite 201,
Hanover, Maryland 21076, and you may contact us as follows:
telephone: (410) 694-0500
fax: (410) 694-0596
email: severett@dialysiscorporation.com
GENERAL
Management believes the company distinguishes itself on the basis of
quality patient care, and a patient-focused, courteous, highly trained
professional staff. Our acute inpatient dialysis treatments are conducted under
contractual relationships currently with nine hospitals and medical centers
located in areas and states serviced by our outpatient dialysis facilities.
Homecare, sometimes referred to as method II home patient treatment, requires
the company to provide equipment and supplies, training, monitoring and
follow-up assistance to patients who are able to perform their treatments at
home.
Our growth depends primarily on the availability of suitable dialysis
centers for development or acquisition in appropriate and acceptable areas, and
our ability to develop new potential dialysis centers at costs within our
budget. We opened a dialysis center in the first quarter of 2002 in
Pennsylvania. We acquired a dialysis unit in Georgia in the second quarter of
2002. We opened two new centers in February 2003, one in Ohio and one in
Maryland. We are in the development stage for two new centers, one in Indiana
and one in Virginia.
Our medical service revenues are derived primarily from four sources: (i)
outpatient hemodialysis services (49%, 47% and 51% of medical services revenues
for 2002, 2001 and 2000, respectively); (ii) home peritoneal dialysis services,
including method II services (3%, 3%, and 6% of medical services revenues for
2002, 2001 and 2000, respectively); (iii) inpatient hemodialysis services for
acute patient care provided through agreements with hospitals and medical
centers (10%, 15% and 10% of medical services revenues for 2002, 2001 and 2000,
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), (38%, 35%
and 33% of medical services revenue for 2002, 2001 and 2000, respectively).
Dialysis is an ongoing and necessary therapy to sustain life for kidney dialysis
patients. ESRD patients normally receive 156 dialysis treatments each year.
Essential to our operations and income is Medicare reimbursement which is a
fixed rate determined by the Center for Medicare and Medicaid Services ("CMS")
of the Department of Health and Human Services ("HHS"). The level of our
revenues and profitability may be adversely affected by future legislation that
could result in rate cuts. Further, our operating costs tend to increase over
the years in excess of increases in the prescribed dialysis treatment rates.
From commencement of the Medicare ESRD program in 1972 through 1983, the ESRD
composite rate was unchanged, and was decreased over the years thereafter, which
was only minimally increased by Congress in January, 2000, which rate has
increased through 2002. Commercial third-party reimbursement rates, 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, and
typically the rates are at least equivalent or higher on a per treatment basis.
2
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 regular dialysis treatment for the rest of their
lives.
Based upon information published by CMS, the number of ESRD patients
requiring dialysis treatments in the United States is approximately 286,000, and
continues to grow at a rate of approximately 5% 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 4,200 dialysis facilities, and the current annual cost of
treating ESRD in the United States is approximately $22 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. Dialysis Corporation of America does not
currently provide home hemodialysis (non-peritoneal) services. The use of
conventional home hemodialysis has declined and is minimal due to the patient's
suitability and lifestyle, the need for the presence of a partner and a dialysis
machine at home, and the higher expense involved over continuous ambulatory
peritoneal dialysis.
3
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.
The third modality for patients with ESRD is kidney transplantation. While
this is the most desirable form of therapeutic intervention, the scarcity of
suitable donors and possibility of donor rejection limits the availability of
this surgical procedure as a treatment option.
BUSINESS STRATEGY
Dialysis Corporation of America has 26 years' experience in developing and
operating dialysis treatment facilities. Our first priority is to provide
quality patient care. We intend to continue to establish alliances with
physicians and hospitals, attempt to initiate dialysis service arrangements with
nursing homes and managed care organizations, and to continue to emphasize our
high quality patient care. Our smaller size allows us to focus on each
patient's individual needs while remaining sensitive to the physicians'
professional concerns.
We continue to actively seek and negotiate with physicians and others to
establish new outpatient dialysis facilities. We are in the development stages
for two new centers, one in Indiana, and one in Virginia. We are in different
phases of negotiations with physicians for potential new facilities in different
areas of the country.
Same Center Growth
We endeavor to increase same center growth by adding quality staff and
management and attracting new patients to our existing facilities. We seek to
accomplish this objective by rendering high caliber patient care in convenient,
safe and serene conditions. We believe that we have adequate space and stations
within our facilities to accommodate greater patient volume and maximize our
treatment potential. We experienced approximately 18% growth in the total
number of treatments for our dialysis centers in existence as of December 31,
2001, and a 22% growth in medical services revenue. Our peritoneal dialysis
patients approximately doubled in fiscal 2002.
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
4
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 operations 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 costs in a range of $600,000 to $750,000 depending
on location, size and related services to be provided by the proposed facility.
Acquisition of existing facilities is substantially more expensive, and is
usually based primarily upon the 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.
Inpatient Services
Management is also seeking to increase acute dialysis care contracts with
hospitals for inpatient dialysis services. These contracts are sought with
hospitals in areas serviced by our facilities. Hospitals are willing to enter
into such inpatient care arrangements to eliminate the administrative burdens of
providing dialysis services to their patients as well as the expense involved in
maintaining dialysis equipment, supplies and personnel. We believe that these
arrangements are beneficial to our operations, since the contract rates are
individually negotiated with each hospital and are not fixed by government
regulation as is the case with Medicare reimbursement fees for ESRD patient
treatment. In 2002, we entered into new acute inpatient dialysis services
agreements with hospitals in Georgia.
There is no certainty as to when any additional centers or service
contracts will be implemented, or the number of dialysis stations or patient
treatments such may involve, or if such will ultimately be profitable. There is
no assurance that we will be able to continue to enter into favorable
relationships with physicians who would become medical directors of such
proposed dialysis facilities, or that our company will be able to acquire or
develop any new dialysis centers within a favorable geographic area. Newly
established dialysis centers, although contributing to increased revenues, also
adversely affect results of operations due to start-up costs and expenses and
due to their having a smaller and slower developing patient base. See "Business
Strategy," "Operations" and "Competition" of Item 1, "Business," and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
5
OPERATIONS
Location, Capacity and Use of Facilities
We operate 16 outpatient dialysis facilities in Pennsylvania, New Jersey,
Georgia, Ohio and Maryland, 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 230
licensed stations. The owner of the facility we manage in Georgia is involved
in litigation and subject to its success in that litigation and continuing to be
the sole owner of that facility, we have given the owner a put option to sell to
us, and we have a call option to purchase, all the assets of that Georgia
dialysis facility. Each of the options are exercisable for two years commencing
September 11, 2003. The put is not exercisable unless that Georgia dialysis
facility has $100,000 in pre-tax income. Upon exercise the owner would receive
a 20% interest in our Georgia facility and the remainder in cash, determined on
a formula based upon a multiple of EBITDA.
We own and operate our centers through subsidiaries of which a majority are
100% owned, with the balance owned in conjunction with the medical directors of
each center who hold interests ranging from 20% to 49%. We have a minority 40%
interest in a center in Ohio which we manage. The Lemoyne, Pennsylvania, and
one of the South Georgia dialysis facilities are located on properties owned by
Dialysis Corporation of America and leased to those subsidiaries. Our Ohio
dialysis center is leased from a corporation owned by the medical director of
that facility who also, together with his wife's corporation, owns 40% of the
center. See Item 2, "Properties." We also manage an un-affiliated dialysis
center in Georgia.
Additionally, the company provides acute care inpatient dialysis services
to nine hospitals in areas serviced by our dialysis facilities, and we are in
the process of negotiating additional acute dialysis services contracts in the
areas surrounding our facilities and in tandem with development of future
proposed sites. Each of our dialysis facilities has the capacity to provide
training, supplies and on-call support services for home peritoneal patients.
Dialysis Corporation of America provided approximately 80,000 hemodialysis
treatments in 2002.
The company estimates that on average its centers were operating at
approximately 50% of capacity as of December 31, 2002, based on the assumption
that a dialysis center is able to provide up to three treatments a day per
station, six days a week. We believe we can increase the number of dialysis
treatments at our centers without making additional capital expenditures.
Operations of Dialysis Facilities
Our company's dialysis facilities are designed specifically for outpatient
hemodialysis and generally contain, in addition to space for dialysis
treatments, a nurses' station, a patient weigh-in area, a supply room, water
treatment space used to purify the water used in hemodialysis treatments, a
dialyzer reprocessing room (where, with both the patient's and physician's
consent, the patient's dialyzer is sterilized for reuse), staff work area,
offices and a staff lounge. Our facilities also have a designated area for
training patients in home dialysis. Each facility also offers amenities for the
patients, such as a color television with headsets for each dialysis station, to
ensure the patients are comfortable and relaxed.
6
Our company maintains a team of dialysis specialists to provide for the
individual needs of each patient. In accordance with participation requirements
under the Medicare ESRD program, each facility retains a medical director
qualified and experienced in the practice of nephrology and the administration
of a renal dialysis facility. See "Physician Relationships" below. Each
facility is overseen by a nurse administrator who supervises the daily
operations and the staff, which consists of registered nurses, licensed
practical nurses, patient care technicians, a part-time social worker to assist
the patient and family to adjust to dialysis treatment and to provide help in
financial assistance and planning, and a part-time registered dietitian. These
individuals supervise the patient's needs and treatments. See "Employees"
below. The company must continue to attract and retain skilled nurses and other
staff, competition for whom is intense.
The company's facilities offer high-efficiency conventional hemodialysis,
which, in our experience, provides the most viable treatment for most patients.
We consider our dialysis equipment to be both modern and efficient, providing
state of the art treatment in a safe and comfortable environment.
Our facilities also offer home dialysis, primarily continuous ambulatory
peritoneal dialysis and continuous cycling peritoneal dialysis. Training
programs for continuous ambulatory peritoneal dialysis or continuous cycling
peritoneal dialysis generally encompass two to three weeks at the dialysis
facility, and such training is conducted by the facility's home training nurse.
After the patient completes training, they are able to perform treatment at home
with equipment and supplies provided by the company.
Inpatient Dialysis Services
The company presently provides inpatient dialysis services to nine
hospitals in Ohio, Pennsylvania and Georgia, under agreements either with the
company 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 supplier of EPO in the United States without alternative
products available to dialysis treatment providers. Although we have a good
relationship with the 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 who may provide quality dialysis care and patients.
7
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 seven of
our centers have acquired an ownership interest in the center they service
ranging from 20% to 49%. Our Ohio affiliate is owned 60% by the physician. We
make every effort to comply with federal and state regulations concerning our
relationship with the physicians and the medical directors treating patients at
our facilities (see "Government Regulation" below), and we know of no
limitations on physician ownership in our subsidiaries.
Agreements with medical directors typically range from a term of five 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 provide for non-competition in a limited geographic area
surrounding that particular dialysis center during the term of the agreement and
upon termination for a limited period. However, the agreements do not prohibit
physicians providing services at our facilities from providing direct patient
care services at other locations; and consistent with the federal and state law,
such agreements do not require a physician to refer patients to our dialysis
centers. Usually, physician's professional fees for services are billed directly
to the patient or to government payment authorities by the treating physician
and paid directly to the physician or the professional association.
The company's ability to establish a dialysis facility in a particular area
is significantly geared to the availability of a qualified physician or
nephrologist to serve as the medical director. The loss of a medical director
who could not be readily replaced would have a material adverse effect on the
operations of that facility, most likely resulting in closure. Compensation of
medical directors is separately negotiated for each facility and generally
depends on competitive factors such as the local market, the physician's
qualifications and the size of the facility.
Quality Assurance
Dialysis Corporation of America implements a quality assurance program to
maintain and improve the quality of dialysis treatment and care we provide to
our patients in each facility. Quality assurance activities involve the ongoing
examination of care provided, the identification of 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/or 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, who is a certified
nephrology nurse, oversees this program in addition to ensuring that the company
meets federal and state compliance requirements for dialysis centers. See
"Government Regulation" below.
8
Patient Revenues
A substantial amount of the fees for outpatient dialysis treatments are
funded under the ESRD Program established by the federal government under the
Social Security Act, and administered in accordance with rates set by CMS. A
majority of dialysis patients are covered under Medicare. The balance of the
outpatient charges are paid by private payors including the patient's medical
insurance, private funds or state Medicaid plans. Pennsylvania, New Jersey,
Georgia, Maryland and Ohio, presently the states in which we operate, provide
Medicaid or comparable benefits to qualified recipients to supplement their
Medicare coverage.
Under the ESRD Program, payments for dialysis services are determined
pursuant to Part B of the Medicare Act which presently pays 80% of the allowable
charges for each dialysis treatment furnished to patients. The maximum payments
vary based on the geographic location of the center. The remaining 20% may be
paid by Medicaid if the patient is eligible, from private insurance funds or the
patient's personal funds. If there is no secondary payor to cover the remaining
20%, Medicare may reimburse part of the 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 our revenues and dialysis services payments. See "Medicare
Reimbursement" below.
The inpatient dialysis services are paid for by the hospital pursuant to
contractual pre-determined fees for the different dialysis treatments.
Medicare Reimbursement
The company is reimbursed primarily by Medicare under a prospective
reimbursement system for chronic dialysis services, and by third party payors
including Medicaid and commercial insurance companies. Each of our dialysis
facilities is certified to participate in the Medicare program. Under the
Medicare system, the reimbursement rates are fixed in advance and limit the
allowable charge per treatment, but provide us with predictable and recurring
per treatment revenues and allows us to retain any profit earned. An
established composite rate set by CMS governs the Medicare reimbursement
available for a designated group of dialysis services, including dialysis
treatments, supplies used for such treatments, certain laboratory tests and
medications. The Medicare composite rate is subject to regional differences.
The company receives reimbursement for outpatient dialysis services
provided to Medicare-eligible patients at rates that are currently between
approximately $121 and $136 per treatment, depending upon regional wage
variations. The Medicare reimbursement rate is subject to change by
legislation. An average ESRD reimbursement rate is approximately $124 per
treatment for outpatient dialysis services. The current maximum composite
reimbursement rate is $144 per treatment. Congress has requested studies of the
ESRD composite rate structure as well as other related ancillary services to
determine whether the composite rate is subject to an annual inflationary
increase. To date this issue is still pending.
Other ancillary services and items are eligible for separate reimbursement
under Medicare and are not part of the composite rate, including certain drugs
such as EPO, the allowable rate of which is currently $10 per 1000 units for
amounts in excess of three units per patient per year, and certain
physician-ordered tests provided to dialysis patients. Approximately 26% of our
medical services revenues in 2002 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 revenues. We submit claims monthly
and are usually paid by Medicare within 14 days of the submission.
9
There have been a variety of proposals to Congress for Medicare reform. We
are unable to predict what, if any, future changes may occur in the rate of
reimbursement. Any reduction in the Medicare composite reimbursement rate could
have a material adverse effect on our business, revenues and net earnings.
Medicaid Reimbursement
Medicaid programs are state administered programs partially funded by the
federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state defined levels and who are
otherwise uninsured. The programs also serve as supplemental insurance programs
for the Medicare co-insurance portion and provide certain coverages (e.g., oral
medications) that are not covered by Medicare. State regulations generally
follow Medicare reimbursement levels and coverages without any co-insurance
amounts. Certain states, however, require beneficiaries to pay a monthly share
of the cost based upon levels of income or assets. Pennsylvania 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 New Jersey, Ohio, Pennsylvania and Georgia.
SOURCES OF MEDICAL SERVICES REVENUE
Year Ended December 31,
-------------------------
2002 2001
---- ----
Medicare 49% 48%
Medicaid and Comparable Programs 9% 11%
Hospital inpatient dialysis services 10% 15%
Commercial and private payors 32% 26%
Management Services
Dialysis Corporation of America has a management services agreement with
each subsidiary, with its 40% owned affiliate DCA of Toledo, LLC, and with an
unaffiliated Georgia dialysis center providing 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 we continue to achieve our 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 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 the operations of our company. This should
benefit the overall care and services for our dialysis patients, assure our
operations are in compliance with the law, which should also assist in operating
in a cost-effective manner, and accordingly, benefit our shareholders.
10
The 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.
Our company has 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 company's existing policies,
including those applicable to claims submission, cost report preparation,
internal audit and human resources.
As part of our Corporate Integrity Program, the company has also developed
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, development, among other areas. In its
commitment to delivering quality care to dialysis patients, the company has
mandated rigorous standards of ethics and integrity.
The Corporate Integrity Program is implemented and upgraded 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 26 years, the
company has never been subject to any suit relating to its dialysis operations.
The company initiated and is involved in a breach of contract dispute. See Item
3, "Legal Proceedings." 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 of the dialysis facilities must be certified by CMS, and we
must comply with certain rules and regulations established by CMS regarding
charges, procedures and policies. Each dialysis center is also subject to
periodic inspections by federal and state agencies to determine if their
operations
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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. Regulation of healthcare facilities,
including dialysis centers, is extensive with legislation continually proposed
relating to safety, reimbursement rates, licensing and other areas of
operations. We are unable to predict the scope and effect of any changes in
government regulations, particularly any modifications in the reimbursement rate
for medical services or requirements to obtain certification from CMS.
Enforcement, both privately and by the government, has become more stringent,
particularly in attempts to combat fraud and waste. Since inception in 1976, we
have maintained all of our licenses, including our Medicare and Medicaid and
equivalent certifications. The loss of any licenses and certifications would
have a material adverse effect on our company, 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 such law or regulation. See "Fraud
and Abuse" and "Stark II" below. To date, none of our business arrangements
with physicians, patients or others have been the subject of investigation by
any governmental authority. No assurance can be given, however, that our
business arrangements will not be the subject of future investigation or
prosecution by federal or state governmental authorities which could result in
civil and/or criminal sanctions.
Fraud and Abuse
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 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, and exclusion from Medicare,
Medicaid, and other federal health care programs.
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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 the company
and physicians, usually professional associations, who hold a minority position.
Our Ohio affiliate is majority-owned by a physician. These physicians, except
in one instance, 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 our
subsidiaries acquired by physicians has been consistent with the fair market
value of the cash consideration paid, assets transferred to, and/or services
performed by such physicians for the subsidiary, and there is no intent to
induce referrals to our facilities. See "Business - Physician Relationships"
above. We have never been challenged under the fraud and abuse laws and 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 joint 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 provided by the company 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 objective documentation, drastically reducing the
possibility of over utilization. There are safe harbors for certain
arrangements. Relationships with medical director ownership of minority
interests in our facilities satisfy many but not all of the criteria for the
safe harbor, and there can be no assurance that these relationships will not
subject us to investigation or prosecution by enforcement agencies. In an
effort to further our compliance with the law, we have adopted a corporate
compliance plan 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, medical
directors of a company facility who have a minority interest in that facility
may refer patients to hospitals with which we have an inpatient dialysis
services arrangement. Although these arrangements may implicate the federal
fraud and abuse laws, we believe our acute inpatient hospital services are in
compliance with the law. See "Stark II" below.
13
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 do believe we
will remain in compliance.
Stark II
The Physician Ownership and Referral Act, known as Stark II, bans physician
referrals, with certain exceptions, for certain "designated health services" as
defined in the statute to entities in which a physician or an immediate family
member has a "financial relationship" which includes an ownership or investment
interest in, or a compensation arrangement between the physician and the entity.
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. 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." HHS is revisiting its
regulations and intends to issue additional regulations to the Stark
legislation. We are unable to predict the extent or nature of such revised
and/or new HHS regulations, which may negatively impact our operations or
require us to restructure different aspects of our business.
Phase I of the federal Stark II regulations and the legislative history of
Stark II indicates that the purpose behind the Stark II prohibition on physician
referral is to prevent Medicare 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 provided by the
company incident to dialysis services within the Stark II prohibitions.
If the provisions of Stark II were found to apply to our arrangements
however, we believe that we would be in compliance. We compensate our
nephrologist-physicians as medical directors of our dialysis centers pursuant to
medical director agreements, which we believe meet the exception for personal
service arrangements under Stark II. Non-affiliated physicians who send their
patients to or treat their patients at any of our facilities do not receive any
compensation from the company.
14
Medical directors of our facilities which hold a minority investment
interest in those subsidiaries may refer patients to hospitals with which the
company has an acute inpatient dialysis service arrangement. Stark II may be
interpreted to apply to these types of interests. We believe that our
contractual arrangements with hospitals for acute care inpatient dialysis
services are in compliance with Stark II.
If CMS or any other government entity 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, to
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 future financial results. We
believe that if Stark II is interpreted by CMS or any other governmental entity
to apply to our arrangements, it is possible that we could be permitted to bring
our financial relationships with referring physicians into material compliance
with the provisions of Stark II on a prospective basis. However, prospective
compliance may not eliminate the amounts or penalties, if any, that might be
determined to be owed for past conduct, and there can be no assurance that such
prospective compliance, if permissible, would not have a material adverse effect
on the company.
Health Insurance Reform Act
Congress has taken action in recent legislative sessions to modify the
Medicare program for the purpose of reducing the amounts otherwise payable from
the program to healthcare providers. Future legislation or regulations may be
enacted that could significantly modify the ESRD program or substantially reduce
the amount paid to the company for its services, or impose further regulation or
restrictions on healthcare providers. Further, statutes or regulations may be
adopted which demand additional requirements in order for us to be eligible to
participate in the federal and state payment programs. Any new legislation or
regulations may adversely affect our business and operations, as well as our
competitors.
The Health Insurance Portability and Accountability Act of 1996, 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, known as the "Fraud and Abuse Control Program" and
the "Medicare Integrity Program." The Fraud and Abuse Control Program is
conducted jointly by HHS and the Attorney General while the Medicare Integrity
Program enables HHS, the Department of Justice and the FBI to monitor and review
Medicare fraud.
Under these programs, these governmental entities undertake a variety of
monitoring activities previously left to providers to conduct, 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 several new Health Care Fraud Crimes and
extended their applicability to private health plans.
15
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 are in the process
of developing the single format transmission, which is required to be in place
by October 16, 2003.
HHS also published regulations relating to the exchange of healthcare
information to comply with HIPAA privacy standards. 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." Covered entities must be in
compliance no later than April 14, 2003. 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. HHS proposed changes to these
privacy regulations to correct unintended consequences that threatened patients'
access to quality health care.
We have developed and continue to refine our HIPAA compliance plan, and
expect to be in material compliance by April 14, 2003. These regulations are
complex, and require our continued efforts, which add to our administrative and
financial obligations, to insure the privacy of protected health information.
It is anticipated that the HIPAA privacy rules will be further amended, which
could require our company to spend additional resources to comply.
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
16
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 the company of its various federal certifications, its approval
as a certified provider under the Medicare or Medicaid programs or its licenses
under the laws of any state or other governmental authority from which a
substantial portion of our revenues are derived or a change resulting from
healthcare reform, a reduction of dialysis reimbursement or a reduction or
complete elimination of coverage for dialysis services, would have a material
adverse effect on our business.
Environmental and Health Regulations
Our dialysis centers are subject to hazardous waste laws and non-hazardous
medical waste regulation. Most of our waste is non-hazardous. CMS requires
that all dialysis facilities have a contract with a licensed medical waste
handler for any hazardous waste. We also follow OSHA's Hazardous Waste
Communications Policy, which requires all employees to be knowledgeable of the
presence of and familiar with the use and disposal of hazardous chemicals in the
facility. Medical waste of each facility is handled by licensed local medical
waste sanitation agencies who are primarily responsible for compliance with such
laws.
There are a variety of regulations promulgated under OSHA relating to
employees exposed to blood and other potentially infectious materials requiring
employers, including dialysis centers, to provide protection. We adhere to
OSHA's protective guidelines, including regularly testing employees and patients
for exposure to hepatitis B and providing employees subject to such exposure
with hepatitis B vaccinations on an as-needed basis, protective equipment, a
written exposure control plan and training in infection control and waste
disposal.
OTHER REGULATION
There are also federal and state laws prohibiting anyone from presenting
false claims or fraudulent information to obtain payments from Medicare,
Medicaid and other third-party payors, such as the federal False Claims Act.
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 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
17
mitigating any civil or criminal penalties for potential violations, none of
which we have had in our existence since 1976. We will continue to use our best
efforts to fully comply with federal and state laws, regulations and
requirements as applicable to its operations and business.
COMPETITION
The dialysis industry is very competitive. There are numerous providers
who have dialysis facilities in the same areas as the company. Many are owned
by major corporations, which operate dialysis facilities regionally, nationally
and internationally. Our operations are small in comparison with those
corporations. Some of our major competitors are public companies, including
Fresenius Medical Care, Inc., A.G., Gambro Healthcare, Inc., Renal Care Group,
Inc. and DaVita, Inc. Most of these companies have substantially greater
financial resources, many more centers, patients and services than our company,
and by virtue of such may have an advantage over us in competing for
nephrologists and acquisitions of dialysis facilities in areas and markets we
target. Fresenius and Gambro also manufacture and sell dialysis equipment and
supplies, which may provide them with an even greater competitive edge.
Competition for acquisitions has increased the cost of acquiring existing
dialysis facilities. We also face competition from hospitals and physicians
that operate their own dialysis facilities.
Competitive factors most important in dialysis treatment are quality of
care and service, convenience of location and pleasantness of the environment.
Another significant competitive factor is the ability to attract and retain
qualified nephrologists. These physicians are a substantial source of patients
for the dialysis centers, are required as medical directors of the dialysis
facility for it to participate in the Medicare ESRD program, and are responsible
for the supervision 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.
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,
renal transplantations could become a more significant competitive aspect to the
dialysis treatments we provide. Although kidney transplant is a preferred
treatment for ESRD, certain patients who have undergone such transplants have
lost their transplant function and returned to dialysis treatments.
EMPLOYEES
As of January, 2003, our company had 191 full time employees, including
nurse administrators, licensed practical nurses, registered nurses, technical
service manager, technical specialists, patient care technicians, clerical
employees, and social workers and dietitians. We retain 11 part-time employees
consisting of registered nurses, patient care technicians and clerical
employees. We also utilize 61 "per diem" personnel to supplement staffing.
We retain 10 independent contractors who include social workers and
dietitians at our Pennsylvania and New Jersey and certain Georgia facilities.
These are in addition to the medical directors, who supervise patient treatment
at each facility, and the social workers and dietitians at certain of our
Georgia facilities, who are independent contractors.
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We believe our relationship with our employees is good and we have not
suffered any strikes or work stoppages. None of our employees is represented by
any labor union. We are an equal opportunity employer.
RISK FACTORS
We have listed below certain of the risk factors relating to our company
and our securities. There may be other risks and uncertainties that the company
may face 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 company, 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 seriously 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 16 centers in New Jersey,
Pennsylvania, Georgia, Ohio and Maryland, and we have two facilities in the
development stage in Indiana and Virginia. Some of our dialysis centers have
generated losses since their commencement of operations and, although typical to
newly established facilities, some continue to generate losses after 12 months
of operations. This is due to operational costs and time needed to reach full
capacity of dialysis treatments. 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 facility
- patient referral prohibitions
- 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 a variety of
interpretations. If we are forced to change our method of operations because of
these regulations, our earnings, financial condition and business might be
adversely affected. In addition, any violation of these governmental
19
regulations could involve substantial civil and criminal penalties and fines,
revocation of licensure, closure of a facility, and exclusion from participating
in Medicare and Medicaid programs. Any loss of federal or state certifications
or licenses would 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 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, none of which we
have done. Rights and remedies available to 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 provider's ability to
continue to operate, to provide certain services, and/or the eligibility to
participate in Medicare or Medicaid programs or to receive payments from other
payors. Further, actions against one center may subject our other centers
deemed under common control or ownership to 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. Recent
legislation expanded the penalties for heath care fraud, including broader
provisions for the exclusion of providers from the Medicaid program. We have
20
established policies and procedures that we believe are sufficient to ensure
that our facilities will operate in substantial compliance with these anti-fraud
and abuse 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, however, 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, approximately 49% of our patient revenues was derived from
Medicare reimbursement and 9% 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. Furthermore, operating costs tend to increase over
the years without comparable increases in the prescribed dialysis treatment
rates.
DECREASES IN REIMBURSEMENT PAYMENTS FROM THIRD-PARTY, NON-GOVERNMENT PAYORS
COULD ADVERSELY AFFECT OUR EARNINGS
Any reduction in the rates paid by private insurers, hospitals and other
non-governmental third-party organizations would adversely affect our business.
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% of our patient revenues for 2002 was
obtained from sources other than Medicare or Medicaid and equivalent programs.
We generally charge non-governmental organizations for dialysis treatment rates
which exceed the fixed Medicare and Medicaid and equivalent rates. Any
limitation on our ability to charge these higher rates, which may be affected by
expanded coverage by Medicare under the fixed corporate rate, or expanded
coverage of dialysis treatments by managed care organizations, which commonly
have lower rates than we charge, 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. On January 1,
2003, Amgen increased the price of EPO, and there is no assurance there will not
be further price increases. There currently is no alternative drug available to
us for dialysis patient treatment of anemia. The available supply could be
delayed or reduced, whether by Amgen, unforeseen circumstances, or through
excessive demand. This would adversely impact our revenues and profitability,
since approximately 26% of our medical revenues in 2002 were based upon the
administration of EPO to our dialysis patients. Most of our EPO reimbursement
is from government programs. We are unsure whether there will be an EPO
reimbursement rate reduction, but if such occurs, it would adversely affect our
revenues and earnings.
OUR ABILITY TO GROW IS SUBJECT TO OUR RESOURCES AND AVAILABLE LOCATIONS
Other than one center acquisition in 2002, expansion of our operations has
been through construction of dialysis facilities. This is due to the
substantial costs involved in an acquisition, usually
21
valued on a per-patient basis. We seek areas with qualified and cost-effective
nursing and technical personnel, with a sufficient population to sustain a
dialysis facility. These opportunities are limited and we compete with much
larger dialysis companies for appropriate locations. Construction through
commencement of operations generally takes four to six months and sometimes
longer. Once the facility is operable, it generates revenues, but usually does
not operate at full capacity, and may generate 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
facilities. Those we do develop may never achieve profitability, and additional
financing may not be available to finance future development.
Our inability to acquire or develop facilities in a cost-effective manner
would adversely affect our ability to expand our business and our profitability.
Growth places significant demands on our financial and management skills.
Inability on our behalf to meet the challenges of expansion and to manage any
such growth would have an adverse effect on our management, results of
operations and financial condition.
OUR ATTEMPT TO EXPAND THROUGH DEVELOPMENT OR ACQUISITION OF DIALYSIS FACILITIES
WHICH ARE NOT CURRENTLY IDENTIFIED ENTAILS RISKS WHICH SHAREHOLDERS AND
INVESTORS WILL NOT HAVE A BASIS TO EVALUATE
We expand generally through seeking an appropriate location considering the
patient base, availability of a physician nephrologist to be our medical
director, and a skilled work force. Construction and equipment costs for a new
dialysis facility with 15 stations typically range from $600,000 to $750,000.
The cost of acquiring a center is usually much greater. We cannot ensure that
we will be successful in developing or acquiring dialysis facilities, or
otherwise successfully expanding our operations. We are negotiating with
nephrologists and others to establish new dialysis centers, but we cannot ensure
these negotiations will result in the development of new centers. Furthermore,
there is no basis for shareholders and investors to evaluate the specific merits
or risks of any potential development or acquisition of dialysis facilities.
WE DEPEND ON PHYSICIAN REFERRALS, AND THE LIMITATION OR CESSATION OF SUCH
REFERRALS WOULD ADVERSELY IMPACT OUR REVENUES AND EARNINGS
Our dialysis facilities and those centers we seek to develop are dependent
upon referrals of ESRD patients for treatment by physicians specializing in
nephrology. Generally, the nephrologist or medical professional association of
physicians supervising a particular dialysis center's operations, known as a
medical director of that facility, account for most of the patient base. There
is no requirement for these physicians to refer their patients to us, and they
are free to refer patients to any other conveniently located dialysis facility.
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
referring physicians at a particular center could have a material adverse effect
on the operations of the center and could adversely affect our revenues and
earnings.
Some of the referring physicians own minority interests in certain of our
dialysis facilities. If these interests are deemed to violate applicable
federal or state law, these physicians may be forced to dispose of their
ownership interests. We are unable to predict how this would affect our
relationship with these referring physicians or their patients, who may seek
treatment elsewhere, which would have an adverse effect on our business.
22
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 further increase government regulation of or other
involvement in healthcare, lower reimbursement rates and otherwise change the
operating environment for healthcare companies. We cannot predict the
likelihood of those events or what impact they may have on our earnings,
financial condition or business.
OUR BUSINESS IS SUBJECT TO SUBSTANTIAL COMPETITION, AND WE MUST COMPETE
EFFECTIVELY, OTHERWISE OUR GROWTH COULD SLOW
We are operating in a very competitive environment in terms of 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. There are
some very large dialysis companies competing for the acquisition of existing
dialysis centers and the development of relationships with referring physicians.
Most of our competition have much greater financial resources, more dialysis
facilities and a larger patient base.
Competition also comes from technological advances that provide more
effective dialysis treatments than the services provided by our centers.
We experience competition from physicians who open their own dialysis
facilities. Competition for existing centers has increased the costs of
acquiring such facilities. Competition is also intense for qualified nursing
and technical staff as well as for nephrologists with an adequate patient base.
Management can provide no assurance our company can compete effectively, and
thereby continue its growth.
MEDICORE, INC., OUR PARENT, WHICH OWNS 62% OF OUR COMPANY, HAS SOME COMMON
OFFICERS AND DIRECTORS, WHICH PRESENTS THE POTENTIAL FOR CONFLICTS OF INTEREST
Medicore owns 62% of our company, and is able to elect all of our directors
and otherwise control our management and operations. Such control is also
complemented by the fact that Thomas K. Langbein is Chairman of the Board and
Chief Executive Officer of both our company and Medicore, of which company he is
also the President; and Daniel R. Ouzts is Vice President and Treasurer of both
companies. Neither Mr. Langbein nor Mr. Ouzts devotes full time to our
management. The costs of executive salaries and other shared corporate overhead
for these companies are allocated on the basis of time spent. The amount of
expenses charged by Medicore to our company for 2002 amounted to approximately
$200,000.
Additionally, there have been past and there are current transactions
between our company and Medicore and their directors, including loans and
insurance coverage. We advanced funds to Medicore for working capital
requirements until Medicore sold Techdyne, Inc., another of its public
23
subsidiaries, in June, 2001. We also loaned Medicore $2,200,000 for its
financing and investment in Linux Global Partners, Inc. ("LGP"), a private
company involved in developing a Linux desktop product and investing in Linux
software companies, and which company is in its developmental stages. Medicore
repaid that loan in May and June, 2001, with approximately $294,000 of accrued
interest.
Since Medicore holds a majority interest in our company, there exists the
potential for conflicts between Medicore and us, and the responsibilities of our
management to our shareholders could conflict with the responsibilities owed by
management of Medicore to its shareholders.
THE LOSS OF CERTAIN EXECUTIVE PERSONNEL WITHOUT RETAINING QUALIFIED REPLACEMENTS
COULD ADVERSELY AFFECT MANAGEMENT OF OUR BUSINESS, AND OUR REVENUES AND EARNINGS
COULD DECLINE
We are dependent upon the services of our executive officers, Thomas K.
Langbein, Chairman of the Board and Chief Executive Officer, who also holds
those positions with our parent, Medicore, of which company he is also
President, and Stephen W. Everett, director and President of the company. Mr.
Langbein has been involved with Medicore since 1971, when his investment banking
firm, Todd & Company, Inc., took it public, and with our company since it became
a public company in 1977 (originally a wholly-owned subsidiary of Medicore
organized in 1976). Mr. Everett joined us in November, 1998 as Vice President,
became Executive Vice President in June, 1999, and President on March 1, 2000.
Mr. Everett has been involved in the healthcare industry for 23 years. Mr.
Langbein has an employment agreement with the parent through August 21, 2003,
which provides for non-competition within 20 miles of Medicore's primary
operations, with an option for Medicore to pay $4,000 per month for 12 months
for additional non-competition provisions. Mr. Everett has an employment
agreement with the company through December 31, 2005 with a one-year
non-competition provision within the United States. It would be very difficult
to replace the services of these individuals, whose services, individually and
certainly combined, if lost would adversely affect our company, its operations
and earnings, and most likely as a result, the trading price of our common
stock. There is no key-man life insurance on any of our officers.
THERE IS A POSSIBILITY OF CONTINUED VOLATILITY IN OUR SECURITY PRICE
Our common stock trades on the Nasdaq SmallCap Market. Over the years the
market price of the common stock has significantly fluctuated. During the last
two years, the common stock has been as high as $7.35 in the second quarter of
2002 and as low as $.23 in the second quarter of 2001. On February 19, 2003,
the closing price of the common stock was $3.64. The market price of our common
stock could fluctuate substantially based upon announcements concerning our
company, such as operating results, government regulatory changes, technological
innovations, or information concerning our competitors. In addition, security
prices fluctuate widely for reasons unrelated to operations, usually general
political, and worldwide and domestic economic conditions, and the stock
market's reaction. These fluctuations and events could adversely affect the
market price of our common stock.
POSSIBLE DELISTING AND RISKS OF LOW PRICED STOCKS
Our common stock trades on the Nasdaq SmallCap Market. There are certain
criteria for continued listing on the Nasdaq SmallCap Market, known as
maintenance requirements. Failure to satisfy any one of these maintenance
listing requirements could result in our securities being delisted from the
Nasdaq SmallCap Market. These criteria include two active market makers,
24
maintenance of $2,500,000 of stockholders' equity (or a market capitalization of
$35,000,000 or a net income of $500,000 for our most recently completed fiscal
year or in two of the last three most recently completed fiscal years), a
minimum bid price for our common stock of $1.00, and at least 500,000 publicly
held shares with a market value of at least $1,000,000, among other criteria.
For SmallCap companies, as is our company, if a deficiency occurs for a period
of 30 consecutive business days, the particular company is notified by Nasdaq
and has 180 days to achieve compliance. Following this grace period, issuers
that demonstrate compliance with the core initial listing standards of the
SmallCap Market, which is either net income of $750,000 (determined from the
most recently completed fiscal year or two of the most recently completed fiscal
years), stockholders' equity of $5,000,000, or market capitalization of
$50,000,000, will be afforded an additional 180-day grace period within which to
regain compliance. If the company is unable to demonstrate compliance, the
security is subject to delisting. The security might be able to trade on the OTC
Bulletin Board, a less transparent trading market which may not provide the same
visibility for the company or liquidity for its securities, as does the Nasdaq
SmallCap Market. As a consequence, an investor may find it more difficult to
dispose of or obtain prompt quotations as to the price of our securities, and
may be exposed to a risk of decline in the market price of the common stock.
In November, 2000 and again in April, 2001, we received notification from
the Nasdaq Listing Qualifications Department of the Nasdaq Stock Market that our
common stock failed to maintain a closing bid price greater than or equal to
$1.00 per share for 30 consecutive days, as required by Marketplace Rule
4310(c)(4). In each instance, we maintained our Nasdaq SmallCap Market listing.
In December, 2000, we received notice from Nasdaq's Listing Qualifications
Department that our common stock failed to maintain a market value of public
float greater than $1,000,000 as required under Marketplace Rule 4310(c)(7),
which was ultimately complied with. These situations dealing with the trading
market are beyond our control. There can be no assurance that some other
listing maintenance criteria will not become deficient, whether within or beyond
our control, and without a timely cure, could cause our common stock to be
delisted from the Nasdaq SmallCap Market.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT SHAREHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
Our parent company owns 2,410,622 shares of our common stock, or 62% of our
company. Officers and directors of our company and parent own approximately
290,000 shares of common stock and 516,000 options exercisable into an
additional 516,000 shares of common stock. Most of the shares held by these
officers and directors are not freely tradable and are restricted from public
sale. However, a registration statement covering the sale of shares held by
these officers, directors and Medicore, may be effected, since these are
controlling persons of the company, and all their shares, including those
issuable upon exercise of their options, would then be eligible for resale in
the public market without restriction. Also, the officers' and directors'
common stock now owned, as well as the shares obtainable upon exercise of their
options, upon satisfying the conditions of Rule 144 under the Securities Act,
may be sold without complying with the registration provisions of the Securities
Act. These conditions include holding the shares for one year from acquisition,
volume limits of selling every three months an amount of shares which does not
exceed the greater of 1% of the outstanding common stock, or the average weekly
volume of trading as reported by Nasdaq during the four calendar weeks prior to
the sale, the filing of a Form 144, our company continuing to timely file its
reports under the Exchange Act, and the sales are sold directly to a market
maker or otherwise sold through a typical broker's transaction, with normal
commissions and no prearranged solicitations of the purchase order. Our
tradable common stock, known as the float, is approximately 1,187,222 shares,
and the approximately 290,000 shares of common stock directly owned by the
officers and directors of our company and parent represents approximately 24% of
the float, and with the options for 516,000 additional shares, would represent
approximately 47% of the float. Accordingly, the sale by such officers and
25
directors, whether through a registration statement or under Rule 144, may have
an adverse affect on the market price of our common stock, and may hamper our
ability to manage subsequent equity or debt financing. If these shareholders
sell substantial amounts of their common stock of our company, including shares
issued upon the exercise of their options, into the public market, the market
price of our common stock could fall.
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 of approximately 15,000 square feet houses one of our
dialysis centers of approximately 5,400 square feet, approved for 17 dialysis
stations with space available for expansion under a five year lease through
December 22, 2003, with two renewals of five years each. We use approximately
4,000 square feet for administrative offices.
We paid off the remaining balance on first mortgages on our Easton,
Maryland and Lemoyne, Pennsylvania properties in December 2002. 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 $662,000 at December 31, 2002. See
Item 7, "Management's Discussions and Analysis of Financial Condition and
Results of Operations" and Note 2 to "Notes to Consolidated Financial
Statements."
We acquired property in Valdosta, Georgia in 2000, and constructed a
dialysis facility there. This property is subject to a five year $788,000
mortgage obtained in April, 2001 with interest at prime plus with a minimum
rate of 6% maturing in April, 2006. This mortgage had a remaining principal
balance of approximately $753,000 at December 31, 2002. We lease approximately
6,000 square feet to one of our dialysis centers in Valdosta for $90,600 per
year under a 10-year lease, with two renewals of five years.
For our Cincinnati, Ohio facility, we purchased the property and recently
completed the construction of an approximately 5,000 square foot dialysis
facility at a cost of approximately $740,000, including approximately $75,000 of
tenant improvements. In February, 2003, we sold the property to a corporation
owned by the medical director of that facility with that corporation owning 20%
of our Cincinnati subsidiary. The medical director's wife owns a company which
also holds a 20% interest in the Cincinnati facility. The corporation owned by
the medical director is leasing the facility to our Cincinnati subsidiary under
a 10 year lease with two consecutive five-year renewals with rental escalation
commencing five years from the commencement date, which was February 6, 2003,
based upon a percentage increase in the CPI for the Cincinnati, Ohio area. Our
60% owned Cincinnati subsidiary issued to us a five-year $75,000 promissory note
for the tenant improvements we provided. The note 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 note.
Dialysis Corporation of America leases space at its Lemoyne, Pennsylvania
property to unrelated parties for their own business activities unrelated to
dialysis services. One lease was for approximately 1,500 square feet through
June 30, 2003. A second lease is for approximately 530 square feet on a
month-to-month basis.
26
In addition to our Lemoyne, Pennsylvania, Valdosta, Georgia and Cincinnati,
Ohio facilities, we presently have 11 other dialysis centers that lease their
respective facilities from unaffiliated parties, most under five to ten year
leases, usually with two renewals of five years each, for space ranging from
approximately 3,000 to 7,000 square feet. The lease in Homerville, Georgia was
for two years to September 30, 2002, for approximately 1,700 square feet. The
lease is now on a month-to-month basis. We sublet a minimal amount of space at
two of our dialysis facilities to the physicians who are our medical directors
at those facilities for their medical offices. The subleases are on a
commercially reasonable basis and are structured to comply with the safe harbor
provisions of the "Anti-Kickback Statute." See Item 1, "Business - Government
Regulation - Fraud and Abuse."
We lease approximately 2,300 square feet in Hanover, Maryland for executive
offices pursuant to a five year lease with one five year renewal option.
We are developing a new center in Indiana and a new center in Virginia and
are actively pursuing 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 facilities, which have state-of-the-art
equipment and facilities. The dialysis stations are equipped with modern
dialysis machines under a November, 1996 master lease/purchase agreement with a
$1.00 purchase option at the end of the term. Payments under the various
schedules extend through August, 2007. See Note 2 to "Notes to Consolidated
Financial Statements."
None of our dialysis facilities are operating at full capacity. See
"Business - Operations - Location, Capacity and Use of Facilities" above. The
existing dialysis facilities could accommodate greater patient volume,
particularly if we increase hours and/or days of operation without adding
additional dialysis stations or any additional capital expenditures. We also
have the ability and space at most of our facilities to expand to increase
patient volume subject to obtaining appropriate governmental approval.
We maintain executive offices at 1344 Ashton Road, Suite 201, Hanover,
Maryland 21076, and administrative 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
In July, 2002, the company initiated an action against Lawrence Weber
Medical, Inc. d/b/a Omnicare Renal Services in the United States District Court
for the Middle District of Pennsylvania asserting a breach by Omnicare of a
Consulting Services Agreement. The company is seeking damages, costs of the
legal action, and other relief as the court deems equitable. Omnicare filed an
answer and counterclaims against the company and its subsidiary alleging
breaches of the Consulting Services Agreement and related agreements between the
parties seeking damages. The company believes the counterclaims are without
merit. Discovery has recently commenced. The company intends to vigorously
prosecute its claims and defend the counterclaims. This action is in the
discovery stage, with a trial date scheduled for September, 2003.
27
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, 2002 to a vote of security holders through the solicitation of
proxies or otherwise. Since Medicore owns approximately 62% of our equity,
proxies are not solicited, but rather we provide our shareholders with an
Information Statement and an Annual Report. The Information Statement provides
similar information to shareholders as does a proxy statement, except there is
no solicitation of proxies. Shareholders who are entitled to vote at the annual
meeting scheduled for May 29, 2003, which are those shareholders of record on
April 11, 2003, will receive an Information Statement which provides certain
information relating to "Directors and Executive Officers," "Executive
Compensation," "Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters," and "Certain Relationships and Related
Transactions," and which information is incorporated by reference into this
Annual Report on Form 10-K for the year ended December 31, 2002. See Part III
of this Annual Report, Items 10, 11, 12 and 13.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock commenced trading on the Nasdaq SmallCap Market on April
17, 1996, under the symbol "DCAI." The table below indicates the high and low
bid prices for our common stock for the four quarters for the years ended
December 31, 2001 and 2002 as reported by Nasdaq.
BID PRICE
---------
2001 HIGH LOW
---- ---- ---
1st Quarter $1.03 $ .50
2nd Quarter 1.90 .23
3rd Quarter 2.10 1.02
4th Quarter 4.20 1.28
BID PRICE
---------
2002 HIGH LOW
---- ---- ---
1st Quarter $3.80 $ 2.80
2nd Quarter 7.35 2.35
3rd Quarter 4.50 2.00
4th Quarter 4.38 2.90
_______________
At February 10, 2003, the high and low sales prices of our common stock
were $4.00 and $3.89, respectively.
Bid prices represent prices between brokers, and do not include retail
mark-ups, mark-downs or any commission, and may not necessarily represent actual
transactions.
At February 10, 2003, we had 110 shareholders of record as reported by our
transfer agent. We have been advised by ADP, which organization holds
securities for banks and depositories, that there are approximately 812
beneficial owners of our common stock.
28
Dialysis Corporation of America has never paid a dividend and 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. Until 2001, we had experienced operational losses. See Item
I, "Business - Risk Factors," Item 6, "Selected Financial Data," and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December 31,
2002 is derived from the audited consolidated financial statements of the
company. The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands except per share amounts)
Years Ended December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenues . . . . . . . . . . $25,607 $19,441 $9,247 $5,866 $4,004
Net income (loss) . . . . . . 1,242 784 (356) (668) (204)
Earnings (loss) per share
Basic . . . . . . . . . .32 .20 (.09) (.19) (.06)
Diluted . . . . . . . . . .29 .20 (.09) (.19) (.06)
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
December 31,
-------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Working capital . . . . . . . . . . . . . . $ 4,593 $ 3,883 $ 3,869 $ 4,152 $ 5,115
Total assets . . . . . . . . . . . . . . . 17,154 15,683 11,177 9,036 9,349
Intercompany receivable from
Medicore (non-current portion). . . . . . --- 201 414 105 121
Long term debt, net of current portion . . 2,727 2,935 1,755 870 633
Stockholders' equity . . . . . . . . . . . . 9,727 8,485 7,799 7,260 7,771
_________________________
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations, commonly known as MD&A, is our attempt to provide the investor with
a narrative explanation of our financial statements, and to provide our
shareholders and investors with the dynamics of our business as seen through our
eyes as management. Generally, MD&A is intended to cover expected effects of
known or reasonably expected uncertainties, expected effects of known trends on
future operations, and prospective effects of events that have had a material
effect on past operating results. In conjunction with our discussion of MD&A,
shareholders should read the company's consolidated financial statements,
29
including the notes, contained at the back part of this annual report on Form
10-K. Please also review the Cautionary Notice Regarding Forward-Looking
Information on page one of this Annual Report.
GENERAL
Dialysis Corporation of America provides dialysis services, primarily
kidney dialysis treatments through 16 outpatient dialysis centers, including one
in which it holds a minority interest and one unaffiliated dialysis facility
which it manages. Our company also provides dialysis treatments to dialysis
patients of nine hospitals and medical centers through acute inpatient dialysis
services agreements. We also provide homecare services, including home
peritoneal dialysis and method II services, the latter relating to providing
patients with supplies and equipment. Dialysis Corporation of America also
provides ancillary services associated with dialysis treatments, primarily the
administration of EPO.
Approximately 58% 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 rates have
slightly increased, not relating to increased costs of operations. Dialysis is
typically reimbursed at higher rates from private payors, such as the patient's
insurance carrier, as well as higher payments received under negotiated
contracts with hospitals for acute inpatient dialysis services.
Our medical service revenues are derived primarily from four sources:
% of Medical Services
Revenues for 2002
-----------------
- - outpatient hemodialysis services 49%
- - home peritoneal dialysis services 3%
- - inpatient hemodialysis services 10%
- - ancillary services, primarily administration of EPO 38%
See Item 1, "Business," under the captions "General" and "Operations."
The healthcare industry is subject to extensive regulations of federal and
state authorities. There are a variety of fraud and abuse measures to combat
waste, which include anti-kickback regulations, extensive prohibitions relating
to self-referrals, violations of which are punishable by criminal or civil
penalties, including exclusion from Medicare and other governmental programs.
There can be no assurance that there will not be unanticipated changes in
healthcare programs or laws or that we will not be required to restructure our
practice and will not experience material adverse effects as a result of any
such challenges or changes. See Item 1, "Business - Government Regulation." We
have developed a Corporate Integrity Program to assure our company provides 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 and committees responsible for its implementation is our
Compliance Program to assure compliance with fraud and abuse laws and supplement
our existing policies relating to claims submission, cost report preparation,
initial audit and human resources, all geared to 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 develop these new potential
dialysis centers at costs within our budget while competing with larger
companies, some of which are public companies or divisions of public companies
with more personnel and financial resources, in acquiring and/or developing
facilities in areas targeted by us. Additionally, there is intense competition
30
for retaining qualified nephrologists who are responsible for the supervision of
the dialysis centers. There is no assurance as to when any new centers or
inpatient service contracts with hospitals will be implemented, or the number of
stations, or patient treatments such may involve, or if such will ultimately be
profitable. It has been our experience that newly established dialysis centers,
although contributing to increased revenues, have adversely affected our results
of operations due to start-up costs and expenses and a smaller patient base.
RESULTS OF OPERATIONS
2002 COMPARED TO 2001
Medical service revenues increased approximately $6,243,000 (33%) for the
year ended December 31, 2002, compared to the preceding year. This increase
reflects increased revenues of our Pennsylvania dialysis centers of
approximately $1,947,000, including revenues of $874,000 for our new
Pennsylvania facility which commenced operations in January 2002; decreased
revenues of $71,000 for our New Jersey centers reflecting a reduction in
patients at one of our New Jersey facilities and termination of our two New
Jersey acute care contracts; and increased revenues of $4,454,000 for our
Georgia centers, two of which became operational during 2001 which contributed
$3,263,000 additional revenues in 2002 and another being acquired in April 2002
for which 2002 revenues amounted to $1,212,000; and a decrease in consulting and
license income of approximately $87,000.
Interest and other income decreased by approximately $77,000 for the year
ended December 31, 2002, compared to the preceding year. This includes a
decrease in interest from our parent of $120,000 for the year ended December 31,
2002 compared to the preceding year, consisting of interest on a note receivable
and an advance receivable, primarily due to our parent's repayment of the note;
a decrease in other interest income of $13,000 primarily due to a decrease in
average interest rates; an increase in management fee income of $76,000 pursuant
to a management services agreement with our 40% owned Toledo, Ohio affiliate and
an unaffiliated Georgia center with which we entered a management services
agreement effective September 2002; a decrease in miscellaneous other income of
$26,000 and an increase in rental income of $6,000.
Cost of medical services sales as a percentage of sales decreased to 60%
for the year ended December 31, 2002, compared to 64% for the preceding year as
a result of decreases in both supply costs and payroll costs as a percentage of
sales. We receive approximately 26% of our medical services revenues from the
administration of EPO to our patients. This drug is only available from one
manufacturer in the United States which raised its price for the product in
January, 2003. Continued price increases for this product without our ability
to increase our charges will increase our costs and thereby adversely impact our
earnings. We cannot predict the price increases, if any, or the extent of such
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 $
1,917,000 for the year ended December 31, 2002, compared to the preceding year.
This increase reflects operations of our new dialysis center in Pennsylvania,
the Georgia center acquired in April 2002 and a full year's operations for the
two Georgia centers opened during 2001; and increased support activities
resulting from expanded operations. Although selling, general and
administrative expenses increased, as a percent of medical service revenues
these expenses remained relatively constant amounting to 30% for the year ended
December 31, 2002, and for the preceding year.
31
Provision for doubtful accounts increased approximately $61,000, largely as
a result of increased sales revenues. The provision remained relatively
constant amounting to 3% of sales for the year ended December 31, 2002 and for
the preceding year. 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.
Although operations of additional centers have resulted in additional
revenues, some are still in the developmental stage and, accordingly, their
operating results will adversely affect results of operations until they achieve
a sufficient patient count to sustain profitable operations.
The company experienced same-center growth in total treatments of
approximately 18% in 2002. Same-center revenues grew 22% in fiscal 2002. The
company made an acquisition in May 2002 of a facility in Georgia that added 4%
to revenue and 5% to operating income. Overall, operating income grew
approximately 64% in fiscal 2002, as our dialysis facilities continue to mature,
especially the 4 new dialysis centers added in 2001 and 2002. During this
maturation process, management continues to search for ways to operate more
efficiently and reduce costs through process improvements and improve our bottom
line. We are reviewing technological improvements as well, and will make the
capital investment if we are confident such improvements will improve patient
care and operating performance.
Interest expense increased by approximately $9,000 for the year ended
December 31, 2002, compared to the preceding year primarily as a result of
additional equipment financing agreements with the increase tempered to some
extent by decreased interest rates.
The prime rate was 4.25% at December 31, 2002 and 4.75% at December 31,
2001.
Accrued compensation of approximately $100,000 was bonused to the board of
directors on a pro rata basis for exercise of a portion of their options,
amounting to 79,642 shares at exercise prices ranging from $1.25 to $1.50,
representing approximately 14% of the directors' aggregate options and
approximately 12% of all outstanding options.
2001 COMPARED TO 2000
Medical service revenues increased approximately $10,150,000 (116%) for the
year ended December 31, 2001, compared to the preceding year. This increase
reflects increased revenues of our Pennsylvania dialysis centers of
approximately $1,894,000; increased revenues of approximately $2,239,000
for our New Jersey centers; and increased revenues of approximately $5,902,000
for our Georgia centers, one of which commenced operations in the fourth quarter
of 2000, and two centers became operational during 2001, and $115,000 consulting
and license income.
Interest and other income increased by approximately $44,000 for the year
ended December 31, 2001, compared to the preceding year. This increase includes
a decrease in interest from our parent of $76,000 for the year ended December
31, 2001 compared to the preceding year, including interest on a note receivable
and an advance receivable with the decrease due primarily to our parent's
repayment of a note to us, a decrease in other interest income of $33,000
primarily as a result of a decrease in average interest rates which more than
offset an increase in average invested funds, management fee income of $116,000
pursuant to a Management Services Agreement with our 40% owned Toledo, Ohio
affiliate, an increase in miscellaneous other income of $29,000 and an increase
in rental income of $8,000.
32
Cost of medical services sales as a percentage of sales decreased to 64%
for the year ended December 31, 2001, compared to 67% for the preceding year as
a result of decreases in both supply costs and payroll costs as a percentage of
sales.
Selling, general and administrative expenses, those corporate and facility
costs not directly related to the care of patients, including, among others,
administration, accounting and billing, increased by approximately $2,065,000
for the year ended December 31, 2001, compared to the preceding year. This
increase reflects operations of our new dialysis centers in Georgia and
Pennsylvania as well as increased support activities resulting from expanded
operations. Although selling, general and administrative expenses increased, as
a percent of medical service revenues these expenses decreased to 30% for the
year ended December 31, 2001, compared to 40% for the preceding year reflecting
efficiencies associated with expanded operations.
Provision for doubtful accounts increased approximately $467,000 as a
result of expanded operations. The provision amounted to 3% of sales for the
year ended December 31, 2001 compared to 2% for the year ended December 31,
2000. This increase reflects different collectibility levels associated with
the company's operations in new geographic areas, such as our Georgia
operations.
Although operations of additional centers have resulted in additional
revenues, some are still in the developmental stage and, accordingly, their
operating results will adversely affect results of operations until they achieve
a sufficient patient count to sustain profitable operations.
Interest expense increased by approximately $128,000 for the year ended
December 31, 2001, compared to the preceding year primarily as a result of
additional equipment financing agreements, our Vineland loan and our April, 2001
Georgia mortgage.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled approximately $4,593,000 at December 31, 2002,
which reflected an increase of $710,000 (18%) during the current year. Included
in the changes in components of working capital was an increase in cash and cash
equivalents of $92,000, which included net cash provided by operating activities
of $2,096,000 (including funding of $779,000 for a facility to be sold during
the first quarter of 2003), net cash used in investing activities of $1,763,000
(including additions to property and equipment of $927,000, $550,000 for
acquisition of a Georgia dialysis center and a $300,000 payment due on a prior
year subsidiary minority interest acquisition); and net cash used in financing
activities of $241,000 (including a decrease in advances to our parent of
$201,000, and debt repayments of $431,000). In addition to the $779,000
facility construction costs, which is included in prepaid expenses and other
current assets, working capital reflects an increase in amounts refundable to
insurance companies of $599,000 included in accrued expenses. See Notes 1 and 8
to "Notes to Consolidated Financial Statements."
In December 2002, we paid off the remaining balances on first mortgages
with a Maryland bank on two of our buildings, one in Lemoyne, Pennsylvania and
the other in Easton, Maryland, which had a combined balance of approximately
$72,000. The Maryland property has a mortgage to secure a development loan for
our Vineland, New Jersey subsidiary, which loan is guaranteed by the company.
This loan had a remaining principal balance of $662,000 at December 31, 2002 and
$700,000 at December 31, 2001. In April 2001, we obtained a $788,000 five-year
mortgage on our building in Valdosta, Georgia, which had an outstanding
33
principal balance of approximately $753,000 at December 31, 2002 and $776,000 at
December 31, 2001. See Item 2, "Properties" and Note 2 to "Notes to Consolidated
Financial Statements."
We have an equipment financing agreement for kidney dialysis machines for
our facilities, which had an outstanding balance of approximately $1,844,000 at
December 31, 2002, and $1,678,000 at December 31, 2001. This included
additional equipment financing of approximately $399,000 during 2002. See Note
2 to "Notes to Consolidated Financial Statements."
We opened our eleventh center in Mechanicsburg, Pennsylvania in January,
2002, acquired a center in Georgia in April, 2002, and opened our 13th and 14th
centers in Cincinnati, Ohio and Chevy Chase, Maryland in February, 2003.
Capital is needed primarily for the development of outpatient dialysis centers.
The construction of a 15 station facility, typically the size of our dialysis
facilities, costs in the range of $600,000 to $750,000 depending on location,
size and related services to be provided, which includes equipment and initial
working capital requirements. Acquisition of an existing dialysis facility is
more expensive than construction, although acquisition would provide us with an
immediate ongoing operation, which most likely would be generating income. We
presently plan to expand our operations primarily through construction of new
centers, rather than acquisition. Development of a dialysis facility to
initiate operations takes four to six months and usually up to 12 months or
longer to generate income. We consider some of our centers to be in the
developmental stage, since they have not developed a patient base sufficient to
generate and sustain earnings.
We are seeking to expand our outpatient dialysis treatment facilities and
inpatient dialysis care. We are in the developmental stage for a new center in
Indiana and a new center in Virginia. We are presently in different phases of
negotiations with physicians for additional outpatient centers. Such expansion
requires capital. No assurance can be given that we will be successful in
implementing our growth strategy or that financing will be available to support
such expansion. See Item 1, "Business - Business Strategy" and Notes 7 and 9 to
"Notes to Consolidated Financial Statements."
In 2000, we loaned an aggregate of $2,200,000 to Medicore, our parent, at
an annual interest rate of 10%, to fund a loan by our parent to Linux Global
Partners, Inc. After several extensions of the January 27, 2001 maturity date,
in consideration for which we received 100,000 additional Linux Global Partners
shares, in May, 2001, Medicore paid us $215,000, representing $200,000 of
principal plus accrued interest, and in June, 2001, Medicore paid us the
remaining $2,000,000 in loans and approximately $279,000 of accrued interest.
See Note 4 to "Notes to Consolidated Financial Statements." Thomas K. Langbein,
Chairman of the Board and CEO of our company and our parent, of which company he
is also the President, was a director of Linux Global Partners until November,
2002. See Item 13, "Certain Relationships and Related Transactions" and Note 4
to "Notes to Consolidated Financial Statements."
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, " Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146). FAS 146, which will be
effective for exit or disposal activities initiated after December 31, 2002, is
not expected to have a material impact on the company's results of operation,
financial position or cash flows. See Note 1 to "Notes to Consolidated
Condensed Financial Statements."
34
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" (FAS 148), which amends FAS 123, "Accounting for Stock-Based
Compensation", transition requirements when voluntarily changing to the fair
value based method of accounting for stock-based compensation and also amends
FAS 123 disclosure requirements. FAS 148 is not expected to have a material
impact on the company's results of operations, financial position or cash flow.
See Note 1 to "Notes to Consolidated Condensed Financial Statements."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In December, 2001, the SEC issued a cautionary advice to elicit more
precise disclosure in this Item 7, MD&A, about accounting policies management
believes are most critical in portraying the company's 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 as services are rendered. 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 which we reconcile
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.
35
Valuation Allowance for Deferred Tax Assets: The carrying value of
deferred tax assets assumes that we will be able to generate sufficient future
taxable income to realize the deferred tax assets based on estimates and
assumptions. If these estimates and assumptions change in the future, we may be
required to adjust our valuation allowance for deferred tax assets which could
result in additional income tax expense.
Long-Lived Assets: We state our property and equipment at acquisition cost
and compute depreciation for book purposes by the straight-line method over
estimated useful lives of the assets. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of the asset may not recoverable. Recoverability
of assets to be held and used is measured by comparison of the carrying amount
of an asset to the future cash flows expected to be generated by the asset. If
the carrying amount of the asset exceeds its estimated future cash flows, an
impairment charge is recognized to the extent the carrying amount of the asset
exceeds the fair value of the asset. These computations are complex and
subjective.
Goodwill and Intangible Asset Impairment: In assessing the recoverability
of our goodwill and other intangibles we must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of the
respective assets. This impairment test requires the determination of the fair
value of the intangible asset. If the fair value of the intangible assets is
less than its carrying value, an impairment loss will be recognized in an amount
equal to the difference. If these estimates or their related assumptions change
in the future, we may be required to record impairment changes 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. See "Operations - Medicare Reimbursement," "Government
Regulation," and "Risk Factors" under Item 1, "Business." Therefore, dialysis
services revenues cannot be voluntary increased to keep pace with increases in
nursing and other patient care costs. Increased operating costs without a
corresponding increase in reimbursement rates may adversely affect our earnings
in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not consider our exposure to market risks, principally changes in
interest rates, to be significant.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in interest
bearing accounts of which we held approximately $1,618,000 at December 31, 2002.
36
Interest rate risk on debt is managed by negotiation of appropriate rates
for equipment financing and other fixed rate obligations based on current market
rates. There is an interest rate risk associated with our variable rate
mortgage obligations, which totaled $1,415,000 at December 31, 2002.
We have exposure to both rising and falling interest rates. Assuming a
relative 15% decrease in rates on our year-end investments in interest bearing
accounts and a relative 15% increase in rates on our year-end variable rate
mortgage debt would result in a negative annual impact of approximately $9,000
on our results of operations.
We do not utilize financial instruments for trading or speculative purposes
and do not currently use interest rate derivatives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this annual
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the company are appointed each year by the board
of directors at its first meeting following the annual meeting of shareholders,
to serve during the ensuing year. The following information indicates their
positions with the company and age of the executive officers at February 10,
2003. There are no family relationships between any of the executive officers
and directors of the company.
Name Age Position Held Since
- ---- --- -------- ----------
Thomas K. Langbein 57 Chairman of the Board and 1980
Chief Executive Officer 1986
Stephen W. Everett 46 President and director 2000
Timothy Rumrill 42 Vice President of Finance and 2002
Principal Financial Officer
Daniel R. Ouzts 56 Vice President and Treasurer 1996
For more detailed information about our executive officers and directors
you are referred to the caption "Information About Directors and Executive
Officers" of our Information Statement relating to the annual meeting of
shareholders anticipated to be held on May 29, 2003, which is incorporated
herein by reference.
37
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation is included under the caption
"Executive Compensation" of our Information Statement relating to the annual
meeting of shareholders anticipated to be held on May 29, 2003, incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
Information on beneficial ownership of our voting securities by each
director and all officers and directors as a group, and for each of the named
executive officers disclosed in the Summary Compensation Table (see "Executive
Compensation" of our Information Statement relating to the annual meeting of
shareholders anticipated to be held on May 29, 2003, incorporated herein by
reference), and by any person known to beneficially own more than 5% of any
class of our voting security, is included under the caption "Beneficial
Ownership of the Company's Securities" of our Information Statement relating to
the annual meeting of shareholders anticipated to be held on May 29, 2003,
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions is included
under the caption "Certain Relationships and Related Transactions" of our
Information Statement relating to the annual meeting of shareholders anticipated
to be held on May 29, 2003, incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
------------------------------------------------
Within the 90 days prior to the date of this Annual Report for the year
ended December 31, 2002, we carried out an evaluation, under the supervision and
with the participation of our management, including the company's Chairman and
Chief Executive Officer and the Principal Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"), which disclosure controls and procedures are designed to insure
that information required to be disclosed by a 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. Based upon
that evaluation, the Chairman and the Principal Financial Officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information relating to the company (including our consolidated
subsidiaries) required to be included in the company's period SEC filings.
(b) Changes in Internal Control.
---------------------------
Subsequent to the date of such evaluation as described in subparagraph (a)
above, there were no significant changes in our internal controls or other
factors that could significantly affect these controls, including any corrective
action with regard to significant deficiencies and material weaknesses.
38
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this report.
1. All financial statements - See Index to Consolidated Financial
Statements.
2. Financial statement schedules - See Index to Consolidated Financial
Statements.
3. Refer to subparagraph (c) below.
(b) Current Reports on Form 8-K filed during the fourth quarter.
None
(c) Exhibits +
3.1 Articles of Incorporation
3.2 By-Laws of the Company
4.1 Form of Common Stock Certificate of the Company
10 Material Contracts
10.1 Lease between Dialysis Services of Pennsylvania, Inc. - Wellsboro(1) and
James and Roger Stager dated January 15, 1995 (incorporated by reference to
Medicore, Inc.'s(2) Annual Report on Form 10-K for the year ended December
31, 1994 ("1994 Medicore Form 10-K"), Part IV, Item 14(a) 3 (10)(lxii)).
10.2 Lease between the Company and Dialysis Services of Pennsylvania, Inc. -
Lemoyne(1) dated December 1, 1998 (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998
("1998 Form 10-K"), Part IV, Item 14(c)(10)(ii)).
10.3 Medical Director Agreement between Dialysis Services of Pennsylvania, Inc.
- Wellsboro(1) and George Dy, M.D. dated September 29, 1994 [*]
(incorporated by reference to Medicore, Inc.'s(2) Quarterly Report on Form
10-Q for the quarter ended September 30, 1994 as amended January, 1995
("September, 1994 Medicore(2) Form 10-Q"), Part II, Item 6(a)(10)(i)).(3)
10.4 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)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
39
10.5 Lease between Dialysis Services of PA., Inc. - Carlisle(5) and Lester P.
Burkholder, Jr. and Kirby K. Burkholder dated November 1, 1996
(incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 ("1996 Form 10-K"), Part IV, Item 14(a) 3
(10)(xxiii)).
10.6 Lease between Dialysis Services of NJ., Inc. - Manahawkin(5) and William P.
Thomas dated January 30, 1997 (incorporated by reference to the Company's
1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxiv)).
10.7 Addendum to Lease Agreement between William P. Thomas and Dialysis Services
of NJ., Inc. - Manahawkin(5) dated June 4, 1997 (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December 31,
1997, Part IV, Item 14(c)(xviii)).
10.8 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)).
10.9 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)
10.10 Lease between Dialysis Services of Pa., Inc. - Chambersburg(5) and BPS
Development Group dated April 13, 1998 (incorporated by reference to the
Company's March, 1998 Form 10-Q, Part II, Item 6(a), Part II, Item 10(i)).
10.11 Lease between the Company and Wirehead Networking Solutions, Inc. dated
December 1, 1998 (incorporated by reference to the Company's 1998 Form
10-K, Part IV, Item 14(c)(10)(xxvi)).
10.12 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 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)).(8)
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)).
40
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 (9) 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.
10.26 Lease between the Company and Commons Office Research dated June 11, 2001
(incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 ("June, 2001 Form 10-Q"), Part II, Item
6(a)(10((i)).
10.27 Lease between DCA of Mechanicsburg, LLC(1) and Pinnacle Health Hospitals
dated July 24, 2001 (incorporated by reference to the Company's June, 2001
Form 10-Q, Part II, Item 6(a)(10)(ii)).
10.28 Lease between the Company and Clinch Memorial Hospital dated September 29,
2000 (incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001 ("2001 Form 10-K"), Part IV, Item
14(c) 10.37).
10.29 Lease between DCA of Central Valdosta, LLC(9) and W. Wayne Fann dated
March 20, 2001 (incorporated by reference to the Company's 2001 Form 10-K,
Part IV, Item 14(c) 10.38).
41
10.30 Promissory Note Modification Agreement between DCA of Vineland, LLC(7) and
St. Michaels Bank dated December 27, 2002.
10.31 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)).
10.32 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)).
10.33 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)).
10.34 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)).
10.35 Lease Agreement between Pupizion, Inc. and DCA of Cincinnati, LLC(10)
dated December 11, 2002.
10.36 Promissory Note from DCA of Cincinnati, LLC(10) to the Company dated
February 3, 2003.
21 Subsidiaries of the Company.
27 Financial Data Schedule (for SEC use only).
99 Additional Exhibits
(i) Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1850 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(ii) Certification of Principal Financial Officer pursuant to 18
U.S.C. Section 1850 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
_________________________
+ Documents incorporated by reference not included in Exhibit Volume.
++ Incorporated by reference to the company's registration statement on Form
SB-2 dated December 22, 1995 as amended February 9, 1996, April 2, 1996 and
April 15, 1996, registration no. 33-80877-A, Part II, Item 27.
(1) Wholly-owned subsidiary.
42
(2) Parent of the company owning approximately 62% of the company's outstanding
common stock. Medicore is subject to Section 13(a) reporting requirements
of the Exchange Act, with its common stock listed for trading on the Nasdaq
SmallCap Market.
(3) 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, Fitzgerald and Hawkinsville, Georgia; Carlisle,
Chambersburg, Lemoyne and Wellsboro, Pennsylvania; Toledo, Ohio.
(5) 80% owned subsidiary.
(6) Dialysis equipment is leased from time to time and a new schedule is added
to the Master Lease; other than the nature of the equipment and the length
of the lease, the schedules conform to the exhibit filed and the terms of
the Master Lease remain the same.
(7) 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) 70% owned subsidiary
(10) 60% owned subsidiary.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIALYSIS CORPORATION OF AMERICA
By: /s/ THOMAS K. LANGBEIN
----------------------
Thomas K. Langbein
Chairman of the Board of Directors and
Chief Executive Officer
February 27, 2003
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 February 27, 2003
- ---------------------- and Chief Executive Officer
Thomas K. Langbein
/s/ STEPHEN W. EVERETT President and Director February 27, 2003
- ----------------------
Stephen W. Everett
/s/ TIMOTHY RUMRILL Vice President (Finance) and February 27, 2003
- ---------------------- Principal Financial Officer
Timothy Rumrill
/s/ DANIEL R. OUZTS Vice President and Treasurer February 27, 2003
- ----------------------
Daniel R. Ouzts
/s/ BART PELSTRING Director February 27, 2003
- ----------------------
Bart Pelstring
/s/ ROBERT W. TRAUSE Director February 27, 2003
- ----------------------
Robert W. Trause
/s/ ALEXANDER BIENENSTOCK Director February 27, 2003
- -------------------------
Alexander Bienenstock
/s/ DR. DAVID L. BLECKER Director February 27, 2003
- ------------------------
Dr. David L. Blecker
44
CERTIFICATIONS
I, Thomas K. Langbein, certify that:
1. I have reviewed this annual report on Form 10-K of Dialysis
Corporation of America;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data, and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Thomas K. Langbein
Date: February 27, 2003 -------------------------------------------
THOMAS K. LANGBEIN, Chief Executive Officer
CERTIFICATIONS
I, Stephen W. Everett, certify that:
1. I have reviewed this annual report on Form 10-K of Dialysis
Corporation of America;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data, and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Stephen W. Everett
Date: February 27, 2003 -----------------------------
STEPHEN W. EVERETT, President
CERTIFICATIONS
I, Timothy Rumrill, certify that:
1. I have reviewed this annual report on Form 10-K of Dialysis
Corporation of America;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data, and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Timothy Rumrill
Date: February 27, 2003 --------------------------------------------
TIMOTHY RUMRILL, Principal Financial Officer
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 15(A) (1) AND (2), (C) AND (D)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 2002
DIALYSIS CORPORATION OF AMERICA
HANOVER, 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:
Page
----
Consolidated Balance Sheets as of December 31, 2002 and 2001. F-3
Consolidated Statements of Operations - Years ended December 31, 2002, 2001, and 2000. F-4
Consolidated Statements of Stockholders' Equity - Years ended December 31,
2002, 2001 and 2000. F-5
Consolidated Statements of Cash Flows - Years ended December 31, 2002, 2001
and 2000. F-6
Notes to Consolidated Financial Statements - December 31, 2002. F-7
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-21
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Dialysis Corporation of America
We have audited the accompanying consolidated balance sheets of Dialysis
Corporation of America and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. Our
audits also included 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 of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dialysis Corporation of America and subsidiaries at December 31, 2002 and 2001,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ WISS & COMPANY, LLP
February 7, 2003
Livingston, New Jersey
F-2
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,571,916 $ 2,479,447
Accounts receivable, less allowance
of $831,000 at December 31, 2002;
$727,000 at December 31, 2001 3,515,958 4,019,578
Inventories 877,058 739,121
Deferred income taxes 392,000 252,000
Prepaid expenses and other current assets 1,735,001 640,283
-------------- --------------
Total current assets 9,091,933 8,130,429
-------------- --------------
Property and equipment:
Land 376,211 376,211
Buildings and improvements 2,322,663 2,221,406
Machinery and equipment 5,232,632 4,361,046
Leasehold improvements 2,712,953 2,244,612
-------------- --------------
10,644,459 9,203,275
Less accumulated depreciation and amortization 3,877,738 2,852,739
-------------- --------------
6,766,721 6,350,536
-------------- --------------
Goodwill 923,140 523,140
Advances to parent --- 200,728
Deferred income taxes --- 166,000
Other assets 372,190 312,600
-------------- --------------
Total other assets 1,295,330 1,202,468
-------------- --------------
$ 17,153,984 $ 15,683,433
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,373,190 $ 1,605,136
Accrued expenses 2,594,066 1,529,844
Current portion of long-term debt 532,000 357,000
Income taxes payable --- 455,000
Payable subsidiary minority interest acquisition --- 300,000
-------------- --------------
Total current liabilities 4,499,256 4,246,980
Long-term debt, less current portion 2,727,105 2,934,909
Deferred income taxes 28,000 ---
Minority interest in subsidiaries 172,165 16,183
-------------- --------------
Total liabilities 7,426,526 7,198,072
-------------- --------------
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000 shares;
3,887,344 shares issued and outstanding 38,873 38,873
Capital in excess of par value 5,186,580 5,186,580
Retained earnings 4,923,605 3,681,508
Notes receivable from options exercised (421,600) (421,600)
-------------- --------------
Total stockholders' equity 9,727,458 8,485,361
-------------- --------------
$ 17,153,984 $ 15,683,433
============== ==============
See notes to consolidated financial statements.
F-3
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------------------
2002 2001 2000
---- ---- ----
Revenues:
Medical service revenue $25,162,380 $18,919,752 $8,769,470
Interest and other income 444,297 521,418 477,631
----------- ----------- ----------
25,606,677 19,441,170 9,247,101
----------- ----------- ----------
Cost and expenses:
Cost of medical services 15,066,551 12,021,907 5,833,081
Selling, general and administrative expenses 7,500,029 5,583,062 3,518,367
Provision for doubtful accounts 720,500 659,007 192,395
Interest expense 220,441 210,805 82,456
----------- ----------- ----------
23,507,521 18,474,781 9,626,299
----------- ----------- ----------
Income (loss) before income taxes, minority interest
and equity in affiliate earnings (loss) 2,099,156 966,389 (379,198)
Income tax provision (benefit) 771,180 80,078 (30,287)
----------- ----------- -----------
Income (loss) before minority interest and equity in
affiliate earnings (loss) 1,327,976 886,311 (348,911)
Minority interest in income (loss)
of consolidated subsidiaries 155,412 85,983 (14,218)
Equity in affiliate earnings (loss) 69,533 (16,345) (20,896)
---------- ----------- -----------
Net income (loss) $1,242,097 $ 783,983 $ (355,589)
========== =========== ===========
Earning (loss) per share:
Basic $.32 $.20 $(.09)
==== ==== =====
Diluted $.29 $.20 $(.09)
==== ==== =====
See notes to consolidated financial statements.
F-4
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital in
Common Excess of Retained Notes
Stock Par Value Earnings Receivable Total
------------ ------------ ---------- ----------- -------------
Balance at January 1, 2000 $ 35,463 $ 3,971,514 $3,253,114 $ $ 7,260,091
---
Net loss (355,589) (355,589)
Repurchase of 76,600 shares (766) (64,059) (64,825)
Exercise of stock options for
340,000
of common stock 3,400 421,600 (421,600) 3,400
Exercise of stock purchase
warrants for
170,100 shares of common stock 1,701 763,749 765,450
Minority investment in subsidiary 190,781 190,781
------------ ------------ ---------- ----------- -------------
Balance at December 31, 2000 39,798 5,283,585 2,897,525 (421,600) 7,799,308
Net income 783,983 783,983
Repurchase of 92,500 shares (925) (97,005) (97,930)
------------ ------------ ---------- ----------- -------------
Balance at December 31, 2001 38,873 5,186,580 3,681,508 (421,600) 8,485,361
Net income 1,242,097 1,242,097
------------ ------------ ---------- ----------- -------------
Balance at December 21, 2002 $ 38,873 $ 5,186,580 $4,923,605 $ (421,600) $ 9,727,458
============ =========== ========== =========== =============
See notes to consolidated financial statements.
F-5
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------------
2002 2001 2000
------ ------ ------
Operating activities:
Net income (loss) $ 1,242,097 $ 783,983 $ (355,589)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,059,697 804,592 593,973
Amortization 6,190 4,067 2,332
Bad debt expense 720,500 659,007 192,395
Deferred income taxes 54,000 (418,000) ---
Minority interest 155,412 85,983 (14,218)
Equity in affiliate (earnings) loss (69,533) 16,345 20,896
Increase (decrease) relating to operating activities from:
Accounts receivable (216,880) (2,918,650) (1,105,419)
Inventories (137,937) (404,994) (114,504)
Prepaid expenses and other current assets (1,094,718) (213,562) 69,360
Accounts payable (231,946) 1,051,432 158,702
Accrued expenses 1,064,223 868,726 324,249
Income taxes payable (455,000) 373,549 81,451
----------- ------------ -----------
Net cash provided by (used in) operating activities 2,096,105 692,478 (146,373)
----------- ------------ -----------
Investing activities:
Decrease (increase) in notes receivable from parent --- 2,200,000 (2,200,000)
Loan to MainStreet --- --- (140,000)
Loans to subsidiary medical director practice --- (20,332) (83,521)
Loan to officer --- (95,000) ---
Additions to property and equipment, net of minor disposals (927,352) (1,233,183) (1,407,763)
Acquisition of dialysis center (550,000)
Investment in affiliate 22,800 (152,811) (28,589)
Purchase of minority interest in subsidiary (300,000) (300,000) ---
Other assets (19,048) (3,330) 7,158
Sale of minority interest in subsidiaries 10,570 4,000 206,000
----------- ------------ -----------
Net cash (used in) provided by investing activities (1,763,030) 399,344 (3,646,715)
----------- ------------ -----------
Financing activities:
Decrease (increase) in advances to parent 200,728 213,611 (309,197)
Repurchase of stock --- (97,930) (64,825)
Long-term borrowings --- 787,500 700,000
Payments on long-term debt (431,334) (297,650) (167,464)
Exercise of warrants and stock options --- --- 768,850
Deferred financing costs --- (11,572) ---
Distribution to subsidiary minority member (10,000) --- ---
----------- ------------ -----------
Net cash (used in) provided by financing activities (240,606) 593,959 927,364
----------- ------------ -----------
Increase (decrease) in cash and cash equivalents 92,469 1,685,781 (2,865,724)
Cash and cash equivalents at beginning of year 2,479,447 793,666 3,659,390
----------- ------------ -----------
Cash and cash equivalents at end of year $ 2,571,916 $ 2,479,447 $ 793,666
=========== ============ ===========
See notes to consolidated financial statements.
F-6
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The company is in one business segment, kidney dialysis operations,
providing outpatient hemodialysis services, home dialysis services, inpatient
dialysis services and ancillary services associated with dialysis treatments.
The company owns 14 operating dialysis centers located in Pennsylvania, New
Jersey, Georgia, Ohio and Maryland, manages two other dialysis facilities, one a
40% owned Ohio affiliate and the other an unaffiliated Georgia center, and has
two dialysis facilities under development; has agreements to provide inpatient
dialysis treatments to nine hospitals; and provides supplies and equipment for
dialysis home patients. See "Consolidation."
Consolidation
The consolidated financial statements include the accounts of Dialysis
Corporation of America and its subsidiaries, collectively referred to as the
"company." All material intercompany accounts and transactions have been
eliminated in consolidation. The company is a 62% owned subsidiary of Medicore,
Inc., our parent, as of December 31, 2002. We have a 40% interest in an Ohio
dialysis center which we manage, which is accounted for on the equity method and
not consolidated for financial reporting purposes.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
The company's principal estimates are for estimated uncollectible accounts
receivable as provided for in our allowance for doubtful accounts, estimated
useful lives of depreciable assets, estimates for patient revenues from
non-contracted payors, and the valuation allowance for deferred tax assets based
on the estimated realizability of deferred tax assets. Our estimates are based
on historical experience and assumptions believed to be reasonable given the
available evidence at the time of the estimates. Actual results could differ
from those estimates.
Government Regulation
A substantial portion of the company's revenues are attributable to
payments received under Medicare, which is supplemented by Medicaid or
comparable benefits in the states in which the company operates. Reimbursement
rates under these programs are subject to regulatory changes and governmental
funding restrictions. Laws and regulations governing the Medicare and Medicaid
programs are complex and subject to interpretation. The company believes that it
is in compliance with all applicable laws and regulations and is not aware of
any pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation
F-7
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
as well as significant regulatory action including fines, penalties, and
exclusions from the Medicare and Medicaid programs.
Cash and Cash Equivalents
The company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
reported in the balance sheet for cash and cash equivalents approximate their
fair values. The credit risk associated with cash and cash equivalents is
considered low due to the high quality of the financial institutions in which
these assets are invested.
Inventories
Inventories, which consist primarily of supplies used in dialysis
treatments, are valued at the lower of cost (first-in, first-out method) or
market value.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets is comprised as follows:
December 31,
-----------------------------------
2002 2001
---- ----
Vendor volume discounts receivable $ 321,302 $209,649
Receivable from management service contracts 47,756 115,715
Officer and employee loans receivable 104,931 98,956
Property to be sold (See Note 12) 778,561 ---
Prepaid expenses 318,839 161,552
Other 163,612 54,411
---------- --------
$1,735,001 $640,283
========== ========
Accrued Expenses
Accrued expenses is comprised as follows:
December 31,
-----------------------------------
2002 2001
---- ----
Accrued compensation $ 800,318 $ 590,875
Due to insurance companies 1,271,235 671,935
Other 522,513 267,034
---------- ----------
$2,594,066 $1,529,844
========== ==========
Vendor Concentration
The company purchases erythropoietin (EPO) from one supplier which
comprised 34% in 2002, 32% in 2001 and 29% in 2000 of the company's cost of
sales. There is only one supplier of EPO in the United States without
alternative products available to dialysis treatment providers. Revenues from
the administration of EPO comprised 26% in 2002, 25% in 2001 and 23% in 2000 of
medical service revenue.
F-8
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Property and Equipment
Property and equipment is stated on the basis of cost. Depreciation is
computed for book purposes by the straight-line method over the estimated useful
lives of the assets, which range from 5 to 34 years for buildings and
improvements; 3 to 10 years for machinery, computer and office equipment, and
furniture; and 5 to 10 years for leasehold improvements based on the shorter of
the lease term or estimated useful life of the property. Replacements and
betterments that extend the lives of assets are capitalized. Maintenance and
repairs are expensed as incurred. Upon the sale or retirement of assets, the
related cost and accumulated depreciation are removed and any gain on loss is
recognized.
Long-Lived Asset Impairment
Pursuant to Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of,"
impairment of long-lived assets, including intangibles related to such assets,
is recognized whenever events or changes in circumstances indicate that the
carrying amount of the asset, or related groups of assets, may not be fully
recoverable from estimated future cash flows and the fair value of the related
assets is less than their carrying value. Financial Accounting Standards Board
Statement No. 144, "Accounting for the Impairment of Disposal of Long-lived
Assets" (FAS 144) clarified when a long-lived asset held for sale should be
classified as such. It also clarifies previous guidance under FAS 121. The
adoption of FAS 144 in 2002 did not affect the company's consolidated
operations, financial position or cash flows. The company, based on current
circumstances, does not believe any indicators of impairment are present.
Comprehensive Income
The company follows Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive Income" (FAS 130) which contains rules for the
reporting of comprehensive income and its components. Comprehensive income
(loss) consists of net income (loss).
Revenue Recognition
The company follows the guidelines of SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB101). Medical service
revenues are recorded as services are rendered.
Goodwill
Goodwill represents cost in excess of net assets acquired. The company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (FAS 142) effective January 1, 2002. Under FAS 142, goodwill
and intangible assets with indefinite lives are no longer amortized but are
reviewed annually (or more frequently if impairment indicators are present) for
impairment. Pursuant to the provisions of FAS 142, the goodwill resulting from
the company's acquisition of minority interest in August 2001 is not being
amortized for book purposes and is subject to the annual impairment testing
provisions of FAS 142 commencing in 2002. This goodwill is also subject
F-9
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
to the transitional goodwill testing provisions of FAS 142 which require testing
during the first six months of 2002 for previously recorded goodwill, which
testing indicated no impairment for this goodwill. The goodwill resulting from
the company's acquisition of a Georgia dialysis center in April 2002 is not
being amortized for book purposes and is subject to the annual impairment
testing provision of FAS 142, which testing indicated no impairment for this
goodwill. The company does not expect FAS 142 to have a material impact on its
consolidated results of operations, financial position or cash flows. See Note
11.
Deferred Expenses
Deferred expenses, except for deferred loan costs, are amortized on the
straight-line method, over their estimated benefit period ranging to 60 months.
Deferred loan costs are amortized over the lives of the respective loans.
Income Taxes
Deferred income taxes are determined by applying enacted tax rates
applicable to future periods in which the taxes are expected to be paid or
recovered to differences between financial accounting and tax basis of assets
and liabilities.
Stock-Based Compensation
The company follows the intrinsic method of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" (FAS 123) requires use of option
valuation models that were not developed for use in valuing employee stock
options. FAS 123 permits a company to elect to follow the intrinsic method of
APB 25 rather than the alternative fair value accounting provided under FAS 123
but requires pro forma net income and earnings per share disclosures as well as
various other disclosures not required under APB 25 for companies following APB
25. The company has adopted the disclosure provisions required under Financial
Accounting Standards Board Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (FAS 148). Under APB 25, because the
exercise price of the company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense was recognized.
See "New Pronouncements."
Pro forma information regarding net income and earnings per share is
required by FAS 123 and FAS 1428, and has been determined as if the company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for options granted during 2002 and 2001, respectively: risk-free
interest rate of 3.73% and 5.40%; no dividend yield; volatility factor of the
expected market price of the company's common stock of 1.15 and 1.14, and a
weighted-average expected life of 5 years and 4 years. No options were granted
in 2000.
F-10
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective input assumptions including the expected stock price
volatility. Because the company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period. No pro forma
information is provided for 2000 as no options vested during that year. The
company's pro forma information follows:
2002 2001 2000
---- ---- ----
Net income (loss), as reported $1,242,000 $784,000 $(356,000)
Stock-based employee compensation expense
under fair value method, net of related
tax effects (46,000) (24,000) --
---------- -------- ---------
Pro forma net income (loss) $1,196,000 $760,000 $(356,000)
Earnings (loss) per share:
Basic, as reported $.32 $.20 $(.09)
==== ==== ======
Basic, pro forma $.31 $.19 $(.09)
==== ==== ======
Diluted, as reported $.29 $.20 $(.09)
==== ==== ======
Diluted, pro forma $.28 $.19 $(.09)
==== ==== ======
Earnings per Share
Diluted earnings (loss) per share gives effect to potential common shares
that were dilutive and outstanding during the period, such as stock options and
warrants, calculated using the treasury stock method and average market price.
No potentially dilutive securities were included in the diluted earnings per
share computation for 2000, as a result of the net losses, and to include them
would be anti-dilutive.
Year Ended December 31,
-----------------------------------------
2002 2001 2000
---- ---- ----
Net income (loss) $1,242,097 $ 783,983 $(355,589)
========== ========= =========
Weighted average shares-denominator basic computation 3,887,344 3,913,756 3,923,683
Effect of dilutive stock options 446,182 103,968 --
---------- ---------- -----------
Weighted average shares, as adjusted-denominator diluted
computation 4,333,526 4,017,724 3,923,683
========= ========= ==========
Earnings (loss) per share:
Basic $.32 $.20 $(.09)
==== ==== ======
Diluted $.29 $.20 $(.09)
==== ==== ======
F-11
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
The company had various potentially dilutive securities during the periods
presented, including stock options and warrants. See Notes 6 and 7.
Interest and Other Income
Interest and other income is comprised as follows:
Year Ended December 31,
--------------------------------------------
2002 2001 2000
---- ---- ----
Rental income $174,227 $168,224 $160,432
Interest income from Medicore 2,957 122,867 199,286
Interest income 44,889 57,502 90,064
Management fee income 191,213 115,715 ---
Other income 31,011 57,110 27,849
-------- -------- --------
$444,297 $521,418 $477,631
======== ======== ========
Estimated Fair Value of Financial Instruments
The carrying value of cash, accounts receivable and debt in the
accompanying financial statements approximate their fair value because of the
short-term maturity of these instruments, and in the case of debt because such
instruments either bear variable interest rates which approximate market or have
interest rates approximating those currently available to the company for loans
with similar terms and maturities.
New Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146), which addresses the
accounting and reporting for costs associated with exit or disposal activities.
FAS 146 requires that a liability for a cost associated in an exit or disposal
activity be recognized when the liability is incurred rather than being
recognized at the date of an entity's commitment to an exit plan, which had been
the method of recognition under Emerging Issues Task Force Issue No. 94-3, which
FAS 146 supercedes. FAS 146, which will be effective for exit or disposal
activities initiated after December 31, 2002, is not expected to have a material
impact on the company's results of operation, financial position or cash flows.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (FAS-148), which amends FAS 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition when voluntarily
changing to the fair value based method of accounting for stock-based employee
compensation. FAS 148 also amends FAS 123 disclosure requirements to require
prominent disclosures in annual and interim financial statements about the
method used to account for stock-based employee
F-12
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
compensation and its effect on results of operations. The company has adopted
the transition guidance and annual disclosure provisions of FAS 148 for fiscal
years commencing during 2002. The company is subject to the expanded disclosure
requirements of FAS 148 but does not expect FAS 148 to otherwise have a material
impact on its consolidated results of operations, financial position or cash
flows.
NOTE 2--LONG-TERM DEBT
Long-term debt is as follows:
December 31,
------------
2002 2001
---- ----
of $3,333 plus interest at 1% over the prime rate through
November 2003.
Note paid in full December 2002. $ --- $76,719
Mortgage note secured by land and building with Monthly principal
payments of $2,667 plus interest at 1% over the prime rate
through November 2003.
Note paid in full December 2002. --- 61,281
Development loan secured by land and building with a net book value of
$352,000 at December 31, 2002. Monthly principal payments of
$2,211 plus interest at 1% over the prime rate effective
December 16, 2002
with remaining balance due December 2, 2007. 662,084 700,000
Mortgage note secured by land and building with a net book value of
$915,000 at December 31, 2002. Interest of prime plus 1/2%
with a minimum rate of 6.0% effective December 16, 2002.
Monthly payments of $6,800 including principal and
interest with remaining balance due April 2006. 752,619 775,842
Equipmentfinancing agreement secured by equipment with a net book
value of $1,749,000 at December 31, 2002. Monthly payments
totaling $49,224 as of December 31, 2002, including principal
and interest, as described below, pursuant to various
schedules extending through August 2007 with interest at rates
ranging from 4.14% to 10.48%. 1,844,402 1,678,067
----------- ----------
3,259,105 3,291,909
Less current portion 532,000 357,000
----------- ----------
$2,727,105 $2,934,909
=========== ==========
F-13
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 2--LONG-TERM DEBT--Continued
The company through its subsidiary, DCA of Vineland, LLC, pursuant to a
December 3, 1999 loan agreement obtained a $700,000 development loan with
interest at 8.75% through December 2, 2001, 1 1/2% over the prime rate
thereafter through December 15, 2002 and 1% over prime thereafter secured by a
mortgage on the company's real property in Easton, Maryland. Outstanding
borrowings were subject to monthly payments of interest only through December 2,
2001, with monthly payments thereafter of $2,917 principal plus interest through
December 2, 2002 and monthly payments thereafter of $ $2,217 plus interest with
any remaining balance due December 2, 2007. This loan had an outstanding
principal balance of $662,000 at December 31, 2002 and $700,000 December 31,
2001.
In April 2001, the company obtained a $788,000 five-year mortgage through
April 2006 on its building in Valdosta, Georgia with interest at 8.29% until
March 2002 7.59% thereafter until December 16, 2002 and prime plus 1/2% with a
minimum of 6.0% effective December 16, 2002. Payments are $6,800 including
principal and interest commencing May 2001 with a final payment consisting of a
balloon payment and any unpaid interest due April 2006. The remaining principal
balance under this mortgage amounted to approximately $753,000 at December 31,
2002 and $776,000 at December 31, 2001.
The equipment financing agreement provides financing for kidney dialysis
machines for the company's dialysis facilities. Additional financing totaled
approximately $399,000 in 2002 and $752,000 in 2001, $525,000 in 2000. Payments
under the agreement are pursuant to various schedules extending through August
2007. Financing under the equipment purchase agreement is a noncash financing
activity which is a supplemental disclosure required by Financial Accounting
Standards Board Statement No 95, "Statement of Cash Flows." The remaining
principal balance under this financing amounted to approximately $1,844,000 at
December 31, 2002 and $1,678,000 at December 31, 2001.
The prime rate was 4.25% as of December 31, 2002 and 4.75% as of December
31, 2001.
Scheduled maturities of long-term debt outstanding at December 31, 2002 are
approximately: 2003- $532,000; 2004-$630,000; 2005-$511,000; 2006-$954,000,
2007-$632,000 thereafter $---. Interest payments on the above debt amounted to
approximately $234,000 in 2002, $152,000 in 2001 and $84,000 in 2000,
respectively.
The company's various mortgage agreements contain certain restrictive
covenants that, among other things, restrict the payment of dividends, rent
commitments, additional indebtedness and prohibit issuance or redemption of
capital stock and require maintenance of certain financial ratios.
NOTE 3--INCOME TAXES
The company files separate federal and state income tax returns.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the company's deferred tax liabilities and assets are as follows:
F-14
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 3--INCOME TAXES--Continued
The company has equity positions in 12 limited liability companies
("LLC's"), each possessing a finite life. Based on their limited liability
status, its members are not liable for the LLC's debts, liabilities, or
obligations. Each LLC has complied with the criteria for tax treatment as a
partnership. As a result, taxable income or loss is to be reported on each
member's respective tax returns. Losses attributable to the company's equity
position in these LLC's has been included as a component of retained earnings as
of December 31, 2002.
December 31,
--------------------------------
2002 2001
---- ----
Deferred tax liabilities:
Depreciation and amortization $225,000 $ --
-------- --------
Total deferred tax liabilities $225,000 --
Deferred tax assets:
Depreciation and amortization --- 199,500
Accrued expenses 93,000 77,000
Bad debt allowance 303,000 280,500
Startup costs 17,000 ---
--------- ---------
Subtotal 413,000 557,000
State net operating loss carryforwards 248,000 78,000
--------- ---------
Total deferred tax assets 661,000 635,000
Valuation allowance for deferred tax assets (72,000) (217,000)
--------- ---------
Deferred tax asset net of valuation allowance 589,000 418,000
--------- ---------
Net deferred tax asset $ 364,000 $418,000
========= =========
A valuation allowance was provided that offsets a portion of the deferred
tax assets recorded at December 31, 2001 as management believed that it was more
likely than not that, based on the weight of the available evidence, that this
portion of deferred tax assets would not be realized.
Significant components of the income tax provision (benefit) are as follows:
2002 2001 2000
---- ---- ----
Current:
Federal $ 601,967 $ 360,000 $ (85,709)
State 115,213 138,078 55,422
----------- ---------- -----------
717,180 498,078 (30,287)
----------- ---------- -----------
Deferred:
Federal 274,000 (390,583) ---
State (220,000) (27,417) ---
----------- ---------- -----------
54,000 (418,000) ---
----------- ---------- -----------
$ 771,180 $ 80,078 $ (30,287)
=========== ========== ===========
F-15
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 3--INCOME TAXES--Continued
The reconciliation of income tax (benefit) attributable to income (loss)
before income taxes computed at the U.S. federal statutory rate is:
Year Ended December 31,
-------------------------------------------
2002 2001 2000
---- ---- ----
Statutory tax rate (34%) applied to income (loss)
before income taxes $ 702,874 $ 323,015 $(136,032)
Adjustments due to:
State taxes, net of federal benefit 103,101 57,003 36,578
Change in valuation allowance (145,000) (223,000) 243,000
Non-deductible items 11,982 8,146 --
Prior year tax return accrual adjustment (14,456) -- (173,833)
Other 112,679 (85,086) --
---------- ------------ ----------
$ 771,180 $ 80,078 $ (30,287)
========== ============ ==========
Income tax (refunds) payments were approximately $1,234,000 in 2002,
$123,000 in 2001 and $(395,000) in 2000.
NOTE 4--TRANSACTIONS WITH PARENT
Our parent provides certain financial and administrative services for us.
Central operating costs are charged on the basis of time spent. In the opinion
of management, this method of allocation is reasonable. The amount of expenses
allocated by the parent totaled approximately $200,000 for the years ended
December 31, 2002, 2001 and 2000.
As of December 31, 2001, we had an intercompany advance receivable from our
parent of approximately $201,000, which bore interest at the short-term Treasury
Bill rate. Interest income on the intercompany advance receivable amounted to
approximately $3,000, $14,000 and $13,000 for the years ended December 31, 2002,
2001 and 2000, respectively. Interest is included in the intercompany advance
balance. The advance was repaid during 2002.
In January, March and August, 2000, we loaned an aggregate of $2,200,000 to
our parent at an annual interest rate of 10%, with a substantial portion of the
loan and accrued interest scheduled to be repaid on January 26, 2001. These
funds were loaned by our parent to Linux Global Partners, Inc., a private
company investing in Linux software companies and recently attempting to
initiate the development and marketing of a Linux desktop software system. Our
parent also acquired an approximately 14% interest in Linux Global Partners. We
extended the maturity of the loans to our parent, as it did with Linux Global
Partners, in consideration for which we received 100,000 shares of common stock
of Linux Global Partners, increasing our ownership in Linux Global Partners to
400,000 shares (approximately 2% of Linux Global Partners), with a cost basis of
approximately $140,000 resulting from a write-off of a note secured by 300,000
Linux Global Partners shares, which is included in deferred expenses and other
assets. Interest income on the notes receivable from the parent, which had the
same terms as the
F-16
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 4--TRANSACTIONS WITH PARENT--Continued
parent's loans to Linux Global Partners, amounted to approximately $109,000 for
2001, all of which was earned during the first half of 2001, and $186,000 for
the year ended December 31, 2000. In May 2001, our parent paid us $215,500,
representing $200,000 of the loan with $15,500 of accrued interest. In June
2001, our parent repaid to us the remaining outstanding loan of $2,000,000 and
accrued interest of $279,000.
NOTE 5--OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 2002, 2001 and 2000, respectively, the
company paid premiums of approximately $275,000, $133,000 and $114,000 for
insurance obtained through two persons, one a director of the parent, and the
other a relative of an officer and director of the company and the parent.
For the years ended December 31, 2002, 2001 and 2000, respectively, legal
fees of $156,000, $144,000 and $133,000 were paid to an attorney who acts as
general counsel and Secretary for the company and the parent and who is a
director of the parent.
In May 2001, the company loaned its president $95,000 to be repaid with
accrued interest at prime minus 1% (floating prime) on or before maturity on May
11, 2006. This demand loan is collateralized by all of the President's stock
options in the company, as well as common stock from exercise of the options and
proceeds from sale of such stock. Interest income on the loan amounted to
approximately $5,000 and $4,000 for 2002 and 2001, respectively. This loan and
the related accrued interest of approximately $9,000 are included in prepaid
expenses and other current assets.
NOTE 6--STOCK OPTIONS
In November, 1995, the company adopted a stock option plan for up to
250,000 options. On June 10, 1998, the board of directors granted an option
under the 1995 plan to a new board member for 5,000 shares exercisable at $2.25
per share through June 9, 2003, which is the only outstanding option under this
plan.
In April, 1999, the company adopted a stock option plan pursuant to which
the board of directors granted 800,000 options exercisable at $1.25 per share to
certain of its officers, directors, employees and consultants with 340,000
options exercisable through April 20, 2000 and 460,000 options exercisable
through April 20, 2004, of which 60,000 options to date have been cancelled. In
April, 2000, the 340,000 one-year options were exercised for which the company
received cash payment of the par value and the balance in three-year promissory
notes with the interest at 6.2%.
In January, 2001, the board of directors granted to the company's president
an option for 165,000 shares exercisable at $1.25 per share for five years from
vesting with 33,000 options vesting January 2001 and 33,000 options vesting
January 1 for each of the next four years.
F-17
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 6--STOCK OPTIONS--Continued
In September 2001, the board of directors granted 75,000 five-year options
exercisable at $1.50 per share through September 5, 2006 to certain officers,
directors and key employees. 15,000 of the options vested immediately with the
remaining 60,000 options to vest 15,000 options each September 5 commencing
September 5, 2002.
In March 2002, the board of directors granted a five-year option for 30,000
shares exercisable at $3.15 per share through February 28, 2007 to an officer.
The option vests 7,500 each February 28 from 2003 through 2006.
In May, 2002, the board of directors granted a total of 10,500 five-year
options to employees, most options for 500 shares of common stock of the
company, with two options for 1,500 shares of common stock, all options
exercisable at $4.10 per share through May 28, 2007. Options for 2,000 shares
have been cancelled. All the options vest on May 29, 2004.
A summary of the company's stock option activity and related information
for the years ended December 31 follows:
2002 2001 2000
---- ---- ----
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- ---------------- ------- ---------------- ------- ----------------
Outstanding-beginning of year 705,000 465,000 809,500
Granted 40,500 $4.10 240,000 $1.33 ---
Cancellations (62,000) --- ---
Exercised --- --- (340,000) $1.25
Expired --- --- (4,500) $1.50
-------- -------- ---------
Outstanding-end of year 683,500 705,000 465,000
======== ======== ========
Outstanding-end of year:
May 2002 options 8,500 $4.10 --- ---
March 2002 options 30,000 $3.15 --- ---
September 2001 options 75,000 $1.50 75,000 ---
January 2001 options 165,000 $1.25 165,000 $1.25 ----
April 1999 options 400,000 $1.25 460,000 $1.25 460,000 $1.25
June 1998 options 5,000 $2.25 5,000 $2.25 5,000 $2.25
-------- -------- --------
683,500 705,000 465,000
======== ======== ========
Outstanding and exercisable
end of year:
September 2001 options 15,000 $1.50 --- ---
January 2001 options 66,000 $1.25 33,000 $1.25
April 1999 options 400,000 $1.25 460,000 $1.25 460,000 $1.25
June 1998 options 5,000 $2.25 5,000 $2.25 5,000 $2.25
-------- -------- --------
486,000 498,000 465,000
======== ======== ========
Weighted-average fair value of
options granted during the year $2.56 $.61 $ --
===== ==== =====
The remaining contractual life at December 31, 2002 is 4.4 years for the
May 2002 options, 4.2 years for the March 2002 options, 3.7 years for the
September 2001 options, 3 years for the September 2001
F-18
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 6--STOCK OPTIONS--Continued
options, 3 years for the January 2001 options, 1.3 years for the April 1999
options and .4 years for the June 1998 options.
The company has 683,500 shares reserved for issuance, including: 5,000
shares for the June 1998 options; 400,000 shares for the April 1999 options and
165,000 shares for the January 2001 options, 75,000 shares for the September
2001 options, 30,000 shares for the March 2002 options and 8,500 shares for the
May 2002 options.
NOTE 7--COMMON STOCK
Pursuant to a 1996 public offering 1,150,000 shares of common stock were
issued, including 150,000 shares from exercise of the underwriters overallotment
option, and 2,300,000 redeemable common stock purchase warrants to purchase one
common share each at an exercise price of $4.50 originally exercisable through
April 16, 1999 and extended to June 30, 2000, at which time the remaining
options expired. During 2000, approximately 170,000 warrants were exercised with
net proceeds to the company of approximately $765,000. The underwriters received
options to purchase 100,000 units each consisting of one share of common stock
and two common stock purchase warrants, for a total of 100,000 shares of common
stock and 200,000 common stock purchase warrants, with the options exercisable
at $4.50 per unit from April 17, 1997 through their expiration on April 16, 2001
with the underlying warrants substantially identical to the public warrants
except that they were exercisable at $5.40 per share.
NOTE 8--COMMITMENTS
The company has leases on facilities housing its dialysis operations. The
aggregate lease commitments at December 31, 2002 are approximately:
2003-$708,000; 2004-$597,000; 2005-$520,000; 2006-$510,000; 2007-$466,000;
thereafter-$1,684,000. Total rent expense was approximately $521,000, $316,000
and $218,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Effective January 1, 1997, the company established a 401(k) savings plan
(salary deferral plan) with an eligibility requirement of one year of service
and 21 year old age requirement. The company has made no contributions under
this plan as of December 31, 2002. The company and its parent
established a new 401(k) plan effective January 2003, which allows employees, in
addition to regular employee contributions, to elect to have a portion of bonus
payments contributed. As an incentive to save for retirement, the company will
match 10% of an employee's contribution.
NOTE 9--REPURCHASE OF COMMON STOCK
In September 2000, the company announced its intent to repurchase up to
300,000 shares of its common stock at current market prices. The company
repurchased and cancelled approximately 77,000 shares in the fourth quarter of
2000 with a repurchase cost of approximately $65,000, and a total of
approximately 93,000 shares at a cost of approximately $98,000 during 2001.
F-19
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 10--CAPITAL EXPENDITURES
Capital expenditures were as follows:
2002 2001 2000
---- ---- ----
$1,326,000 $1,985,000 $1,933,000
========== ========== ==========
NOTE 11--ACQUISITIONS
In August 2001, the company acquired the remaining 30% minority interest in
DCA of So. Ga., LLC, giving the company a 100% ownership interest, for $600,000
of which $300,000 was paid in August, 2001 and $300,000 was paid in August,
2002. This transaction resulted in $523,000 goodwill representing the excess of
the $600,000 purchase price over the $77,000 fair value of the minority interest
acquired. The goodwill is being amortized for tax purposes over a 15-year
period. The company's decision to make this investment was based largely on the
profitability of DCA of So. Ga. The party from whom the company acquired the
minority interest has an agreement to act as medical director of another of the
company's subsidiaries. See Note 1.
In April 2002, the company acquired a dialysis center in Royston, Georgia
for $550,000. This transaction resulted in $400,000 goodwill representing the
excess of the $550,000 purchase price over the $150,000 fair value of the assets
acquired. The goodwill is being amortized for tax purposes over a 15-year
period. The company's decision to make this investment was based on its
expectation of future profitability resulting from its review of this dialysis
center's operations prior to making the acquisition. See Note 1.
NOTE 12--SUBSEQUENT EVENTS
In May 2002, the company purchased land on which it constructed a facility
for a new dialysis center in Cincinnati, Ohio. Upon completion, in February 2003
the company sold the property to a corporation owned by one of the minority
members of DCA of Cincinnati, the company's subsidiary which will operate that
dialysis facility, and the president and owner of such corporation is the
medical director of that dialysis facility. The company is leasing the facility
from the corporation to which it sold the completed facility. The cost of the
land and construction costs are included in Prepaid Expenses and Other Current
Assets as of December 31, 2002. See Note 1.
F-20
Schedule II - Valuation and Qualifying Accounts
Dialysis Corporation of America, Inc. and Subsidiaries
December 31, 2002
- ------------------------------------------------- ------------- -------------------------------------- ----------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------- ------------- ----------------------- -------------- ----------------------------
Additions
Balance at Additions (Deductions) Charged to Other Changes Balance
Beginning Charged (Credited) to Other Accounts Add (Deduct) at End of
Classification Of Period Cost and Expenses Describe Describe Period
- ------------------------------------------------- ------------- ----------------------- -------------- ----------------------------
YEAR ENDED DECEMBER 31, 2002:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 727,000 $721,000 $(617,000)(1) $831,000
Valuation allowance for deferred tax asset 217,000 (145,000) --- 72,000
--------- -------- ---------- --------
$ 944,000 $576,000 $(617,000) $903,000
========= ======== ========== ========
YEAR ENDED DECEMBER 31, 2001:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 306,000 $659,000 $(238,000)(1) $727,000
Valuation allowance for deferred tax asset 440,000 (223,000) --- 217,000
--------- -------- ---------- --------
$ 746,000 $436,000 $(238,000) $944,000
========= ======== ========== ========
YEAR ENDED DECEMBER 31, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 237,000 $192,000 $(123,000)(1) $306,000
Valuation allowance for deferred tax asset 197,000 243,000 --- 440,000
--------- -------- ---------- --------
$ 434,000 $435,000 $(123,000) $746,000
========= ======== ========== ========
(1) Uncollectable accounts written off, net of recoveries.
F-21
Exhibits
to
DIALYSIS CORPORATION OF AMERICA
Annual Report on Form 10-K For the Fiscal Year Ended December 31, 2002
10.25 Modification Agreement to Promissory Note to Heritage Community
Bank dated December 16, 2002.
10.30 Promissory Note Modification Agreement between DCA of Vineland,
LLC and St. Michaels Bank dated December 27, 2002.
10.35 Lease Agreement between Pupizion, Inc. and DCA of Cincinnati, LLC
dated December 11, 2002.
10.36 Promissory Note from DCA of Cincinnati, LLC to the Company dated
February 3, 2003.
21 Subsidiaries of the Company
99 Additional Exhibits
(i) Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1850 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(ii) Certification of Principal Financial Officer pursuant to 18
U.S.C. Section 1850 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.