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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, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________ to __________
Commission file number 0-8527
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DIALYSIS CORPORATION OF AMERICA
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(Name of small business issuer in its charter)
FLORIDA 59-1757642
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2337 W. 76TH STREET, HIALEAH, FLORIDA 33016
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(Address of principal executive offices) ( Zip Code)
Issuer's telephone number (305) 364-1308
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Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
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Common Stock, $.01 par value
Common Stock Purchase Warrants
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ 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 stock was
sold on March 17, 1997 was approximately $4,866,000.
As of March 17, 1997, the Company had 3,588,844 outstanding shares of its
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive
Information Statement in connection with the Registrant's Annual Meeting of
Shareholders to be held on June 11, 1997
Registrant's Registration Statement on Form SB-2 dated December 22, 1995,
as amended February 9, 1996, April 2, 1996 and April15, 1996, Registration No.
33-80877-A Part II, Item 27, Exhibits
Annual Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for the
years ended December 31, 1988, 1989, 1993 and 1994, Part IV, Exhibits.
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DIALYSIS CORPORATION OF AMERICA
Index to Annual Report on Form 10-K
Year Ended December 31, 1996
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PART I
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 14
Item 3. Legal Proceedings...................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................................... 16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............. 16
Item 6. Selected Financial Data................................................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................................... 18
Item 8. Financial Statements and Supplementary Data............................................ 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................. 21
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 21
Item 11. Executive Compensation................................................................. 23
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 23
Item 13. Certain Relationships and Related Transactions......................................... 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 24
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Part I
ITEM 1. BUSINESS
Historical
Dialysis Corporation of America, since incorporated in Florida in July,
1976, developed and operated 10 outpatient dialysis centers. Seven were sold by
1989, with one of them remaining, its Fort Walton Beach, Florida dialysis
facility. The Company built two new centers in 1995, one in Lemoyne,
Pennsylvania and one in Wellsboro, Pennsylvania. A fourth center is under
construction in Carlisle, Pennsylvania and the lease for a fifth dialysis
facility in the southern New Jersey area is being concluded, subject to a
variance, with a medical director already in place for that proposed facility.
Home dialysis treatments are effected through two separate subsidiaries,
DCA Medical Services ("Medical Services") and Dialysis Medical, Inc. ("DMI"),
the latter having commenced operations January 1, 1997. The Pennsylvania
dialysis centers and Medical Services have acute care contracts with hospitals
in their respective regions to provide in-patient dialysis services.
Through its three dialysis centers the Company is approved for 42 dialysis
stations in modern, pleasant surroundings for its approximately 130 dialysis
patients and in 1996 performed approximately 13,800 out-patient dialysis
treatments. Medical Services provided method 2 home patient supply sales for the
year ended December 31, 1996 of approximately $ 600,000. The Company performed
approximately 1,375 in-patient dialysis treatments in 1996.
In December, 1995 the Company established a subsidiary, Renal Services of
Pa., Inc. ("Renal Services"), to implement the Company's growth strategy to
obtain new in-patient dialysis services at hospitals and to assist in
establishing or acquiring out-patient dialysis centers. Renal Services has
obtained a new proposed location in Manahawkin, New Jersey and a medical
director has been retained for that proposed facility. A new dialysis facility
approved for 12 dialysis stations is under construction in Carlisle,
Pennsylvania and is expected to be operational sometime in the third quarter
of 1997.
Dialysis Industry
Kidneys generally act as a filter removing harmful substances and enabling
the body to maintain proper and healthy balances of chemicals and water in the
blood. Chronic kidney failure is also known as end-stage renal disease ("ESRD")
which results in chemical imbalance and buildup of toxic chemicals. It is a
state of kidney disease characterized by advanced renal impairment which is
irreversible, and without treatment or kidney transplantation, is fatal.
Based upon information published by the Health Care Financing
Administration ("HCFA") of the Department of Health and Human Services ("HHS"),
the approximate number of ESRD patients requiring dialysis treatments in the
United States was approximately 202,000 at the end of 1995 reflecting an
approximately 6% growth rate over the last 10 years. The growth in the number of
ESRD patients can be attributed primarily to the aging of the population and
greater patient longevity as a result of improved dialysis technology.
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There are a variety of Medicare approved ESRD facilities such as transplant
hospitals and centers. According to statistics developed by HCFA, at the end of
1995 there were approximately 2,000 independent dialysis facilities.
Approximately 70% of the independent dialysis centers are non-hospital
proprietary owned facilities.
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) home through hemodialysis and peritoneal dialysis, either continuous
ambulatory peritoneal dialysis ("CAPD") or continuous cycling peritoneal
dialysis ("CCPD"); and (2) kidney transplant. The significant portion of ESRD
patients receive treatments at outpatient dialysis facilities (approximately
82%) with the remaining patients treated at home through hemodialysis or
peritoneal dialysis. Patients treated at home are monitored by a designated
outpatient facility.
The most prevalent form of treatment for ESRD patients is hemodialysis,
which involves the use of an artificial kidney, known as a dialyzer, to perform
the function of removing toxins and excess fluids from the blood-stream. This is
accomplished with the dialysis machine, a complex blood filtering device which
takes the place of certain functions of the kidney and which machine also
controls external blood flow and monitors the toxic and fluid removal process.
The dialyzer has two separate chambers divided by a semi-permeable membrane, and
when the blood circulates through one chamber, a dialyzer fluid is circulated
through the other chamber. The toxins and excess fluid pass through the membrane
into the dialysis fluid. 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 physician's
instructions.
ESRD patients may be treated at home with either hemodialysis or peritoneal
dialysis. Home hemodialysis treatment requires the patient to be medically
suitable and have a qualified assistant. Additionally, home dialysis requires
training for both the patient and the assistant, which usually takes two to
three weeks. The use of conventional home hemodialysis has declined and is
minimal due to the stress to the patient and the need for the presence of a
partner and is more expensive than CAPD.
Another home treatment for ESRD patients is through peritoneal dialysis.
There are several variations of peritoneal dialysis, the most common being CAPD
and CCPD. All forms of peritoneal dialysis use the patient's peritoneal
(abdominal) cavity to eliminate fluid and toxins from the patient. CAPD utilizes
dialysis solution and the patient's peritoneal cavity to eliminate fluid and
toxins from the patient and does not require a mechanical device or an
assistant. CCPD is performed in a manner similar to CAPD, but utilizes a
mechanical device to cycle dialysis solution while the patient is sleeping.
Peritoneal dialysis is the third most common form of ESRD therapy following
center hemodialysis and renal transplant.
The second most common modality for patients with ESRD is kidney
transplantation which the Company does not provide. While this is the most
desirable form of therapeutic intervention, the shortage of suitable donors and
possibility of donor rejection limits the availability of this alternative.
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Operations
Location, Capacity and Use of Facilities
The Company currently operates three outpatient dialysis centers with a
total capacity of 42 licensed stations. The Company owns and operates those
centers through its subsidiaries. Dialysis Services of Florida, Inc.-Ft. Walton
Beach ("DSF") is located in Florida and the other two, Dialysis Services of
Pennsylvania, Inc.-Lemoyne ("DSP-L") and Dialysis Services of Pennsylvania,
Inc.-Wellsboro ("DSP-W") are in Pennsylvania. The Wellsboro, Pennsylvania and
Fort Walton Beach, Florida facilities are leased from unaffiliated parties, and
the Lemoyne, Pennsylvania dialysis center is located on property owned by the
Company and leased to its subsidiary. See Item 2, "Properties." A new dialysis
center is under construction in Carlisle, Pennsylvania and the Company is
completing a lease, subject to a variance, for a new dialysis facility in
Manahawkin, New Jersey.
The Company also provides acute inpatient dialysis services to three
hospitals, one in each of the regions where its facilities are located. Each of
its dialysis facilities provides training, supplies and on - call support
services for home peritoneal dialysis. See "Dialysis Industry" above.
The Fort Walton Beach, Florida dialysis facility, which commenced
operations in 1989 and is approved for 17 dialysis stations, for the years ended
December 31, 1994, 1995 and 1996 provided approximately 9,920, 9,400 and 12,050
dialysis treatments, respectively. This includes Medical Services which provided
approximately 400 acute patient care treatments, and approximately 4,550 home
patient treatments for the year ended December 31, 1996. The Lemoyne,
Pennsylvania center commenced operations in June, 1995 and through December 31,
1995, its initial period of operations, provided approximately 2,100 dialysis
treatments, and for the year ended December 31, 1996, provided approximately
5,570 dialysis treatments. The Wellsboro, Pennsylvania dialysis facility
commenced operations on September 28, 1995 and provided approximately 390
dialysis treatments for the year ended December 31, 1995 and approximately 2,130
dialysis treatments for the year ended December 31, 1996.
Operations of Dialysis Centers
The 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 and kitchen. The Company's 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 to
each dialysis station. The Fort Walton Beach facility is located on the Gulf of
Mexico, providing the dialysis patient with a beautiful and relaxing view and
atmosphere.
In accordance with conditions for participation in the Medicare ESRD
program, each facility has a qualified Medical Director. See "Physician
Relationships" below. Each facility also has a nurse administrator who
supervises the day-to-day operations and the staff, which consists of registered
nurses, licensed practical nurses, patient care technicians, a part-time social
worker and a part-time registered
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dietitian. The Company must continue to attract and retain skilled nurses and
other staff, competition for whom is intense.
All of the Company's facilities offer high-flux and high-efficiency
hemodialysis, which utilize machinery that allow patients to dialyze in a
shorter period of time per treatment because such methods cleanse the blood at a
faster rate than conventional hemodialysis. The Company's facilities also offer
conventional hemodialysis, which, in the Company's experience, provides the most
viable treatment for the patients. The Company considers its dialysis equipment
to be modern and efficient.
The Company's facilities also offer various forms of home dialysis,
primarily CAPD and CCPD. Home dialysis services consist of providing equipment
and supplies, training, patient monitoring and follow-up assistance to patients
who prefer and are able to receive dialysis treatments in their homes. Patients
and their families or other patient helpers are trained by a registered nurse to
perform either CAPD or CCPD at home. Training programs for CAPD or CCPD
generally encompass two to three weeks.
Inpatient Dialysis Services
The Company provides inpatient dialysis services to three hospitals. These
services (excluding physician professional services) are for a per treatment fee
individually negotiated with the hospital. The Company either transports the
dialysis equipment and supplies to the hospital when requested, or maintains the
equipment and supplies at the hospital, and administers the dialysis treatments
as required. Inpatient services are typically required 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.
One of the Pennsylvania in-hospital treatment agreements expires on May 30, 1997
and if not favorably renegotiated will adversely impact patient treatment and
revenues.
Ancillary Services
Dialysis facilities provide certain ancillary services to ESRD patients,
including the administration of Erythropoietin ("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 all forms of dialysis to treat
anemia, a medical complication frequently experienced by ESRD patients. Other
ancillary services may include studies to test the degree of bone deterioration;
electrocardiograms; nerve conduction studies to test the degree of deterioration
of nerves; doppler flow testing to test the effectiveness of the patient's
vascular access for dialysis; blood transfusions; and therapeutive
plasmapheresis. See "Medicare Reimbursement" below.
Physician Relationships
A key factor in the success of a facility is its relationship with area
nephrologists. An ESRD patient generally seeks treatment at a facility near such
patient's home and where such patient's nephrologist has practice privileges.
Consequently, the Company relies on its ability to provide quality dialysis care
and to meet the needs of referring physicians in order to continue to receive
physician referrals of ESRD patients.
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The conditions of participation in the Medicare ESRD program mandate that
treatment at a dialysis facility be under the general supervision of a Director
who is a physician. The Company has engaged by written agreement qualified
physicians or groups of qualified physicians to serve as Medical Directors for
each of its facilities. Generally, the Medical Director must be board eligible
or board certified in internal medicine and have had at least 12 months of
experience or training in the care of patients at ESRD facilities. The Company's
Medical Directors refer patients to the Company's centers and are typically the
substantial source of referrals to the particular center served.
The agreement with the Medical Directors are usually for five years (with
renewal privileges) and specify their duties and establish their compensation.
Under the Company's Medical Director Agreements, the Medical Director elects the
alternate reimbursement plan under the ESRD program, whereby the physician's fee
for services is billed to the government payment authority on a direct basis,
and such fee is paid directly to the physician or professional association as
the case may be. The Medical Director (or professional association) maintains
its own medical malpractice insurance. The agreements provide for
non-competition for an average of one to two years in a limited area related to
the Company's dialysis centers. The Medical Director Agreement does not prohibit
the physician from providing direct patient care services at other locations and
consistent with law, such Agreement does not require a physician to refer
patients to the Company's dialysis center. The Company's ability to establish a
dialysis facility is significantly geared to the availability of a qualified
physician or nephrologist, with a patient base, to serve as the Company's
Medical Director. The loss of a Medical Director or an important referring
physician at a particular center could have a material adverse effect on the
operations of that facility and the Company. Compensation of Medical Directors
is separately negotiated for each facility and generally depends on competitive
factors in the local market, the physician's qualifications and the size of the
facility.
Quality Assurance
Pursuant to the over-all direction of Charles Coe, a Vice President, the
Company implements a quality assurance program to maintain and improve the
quality of dialysis treatment and care it provides to its patients. This program
requires each center, through its Medical Director and administrator, to review
quality assurance data, whether related to direct dialysis treatment services,
or equipment and technical improvements, to environmental improvements and
staff-patient, personal relationships. These evaluations are in addition to
assuring regulatory compliance with HCFA and the Occupational Safety and Health
Administration ("OSHA").
Patient Revenues
Substantially all of the fees for outpatient dialysis treatments are funded
under the ESRD Program administered and in accordance with rates established by
HCFA. The balance of the outpatient charges are paid by private payors including
the patient's medical insurance or private funds. 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 location of
the center. See "Medicare Reimbursement" below.
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The inpatient dialysis services are paid for by the hospital pursuant to
contractual pre-determined fees for the different dialysis treatments. Inpatient
treatments accounted for approximately 11% and 12% of the Company's revenues for
the year ended December 31, 1995 and December 31, 1996, respectively.
Florida and Pennsylvania, the two states in which the Company presently
operates, provide Medicaid or comparable benefits to qualified recipients to
supplement their Medicare coverage. Medicaid payments to the Company have not
been significant. Medicare and Medicaid programs are subject to regulatory
changes, statutory limitations and governmental funding restrictions, which may
adversely affect the Company's revenues and dialysis services payments. See
"Medicare Reimbursement" below.
Medicare Reimbursement
The Company is reimbursed primarily from third party payors including
Medicaid, commercial insurance companies, and substantially by Medicare under a
prospective reimbursement system for chronic dialysis services provided to ESRD
patients. Under this system, the reimbursement rates are fixed in advance and
have been adjusted from time to time by Congress. Although this form of
reimbursement limits the allowable charge per treatment, it provides the Company
with predictable and recurring per treatment revenues and allows the Company to
retain any profit earned. Medicare has established a composite rate set by HCFA
that governs the Medicare reimbursement available for a designated group of
dialysis services, including the dialysis treatment, supplies used for such
treatment, certain laboratory tests and certain medications. HCFA recently
eliminated routine Medicare coverage for nerve conduction studies,
electrocardiograms, chest x-rays and bone mineral density measurements, and will
only pay for such tests when there is documentation of medical necessity. The
Medicare composite rate is subject to regional differences. Certain other
services and items are eligible for separate reimbursement under Medicare and
are not part of the composite rate, including certain drugs (including EPO, the
allowable rate currently $10 per 1000 units), blood (for amounts in excess of
three units per patient per year), and certain physician-ordered tests provided
to dialysis patients. The ancillary services are not significant segments of
income to the Company. The Company routinely submits claims monthly and is
usually paid by Medicare within 30 days of the submission.
The Company receives reimbursement for outpatient dialysis services
provided to Medicare-eligible patients at rates that are currently between $117
and $123 per treatment, depending upon regional wage variations. The Medicare
reimbursement rate is subject to change by legislation and recommendations by
the Prospective Payment Assessment Commission ("PROPAC"). Congressional actions
resulted in net reduction of the average reimbursement rate from a fixed fee of
$138 per treatment in 1983 to approximately $125 per treatment in 1990. Congress
increased the ESRD reimbursement rate, effective January 1, 1991, resulting in
an average ESRD reimbursement rate of $126 per treatment. The current maximum
composite reimbursement rate is $134 per treatment. In 1990, Congress required
that HHS and PROPAC study dialysis costs and reimbursement and make findings as
to the appropriateness of ESRD reimbursement rates. In March 1995, PROPAC
recommended no changes be made in the reimbursement rate. However, Congress is
not required to implement this recommendation and could either raise or lower
the reimbursement rate. The Company is unable to predict what, if any, future
changes may occur in the rate of reimbursement, or, if made, whether any such
changes will have a material effect on the Company's revenues and net earnings.
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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. The State of Florida does not
provide Medicaid benefits on a primary insurance basis, but does provide
benefits as a secondary insurer to Medicare. Within the State of Florida,
various governmental subdivision agencies provide insurance coverage for the
indigent who are otherwise uninsured. Pennsylvania has a Medical Assistance
Program comparable to Medicaid, with primary and secondary insurance coverage to
those who qualify. The Company is a licensed ESRD Medicaid provider in all
states in which it does business.
Business Strategy
The Company, having 20 years experience in successfully developing and
operating dialysis treatment centers, is intent upon using its expertise to
expand its dialysis operations, including provision of additional ancillary
services to patients. Expansion of its dialysis facilities is being approached
through the acquisition of existing outpatient dialysis centers and/or
developing its own dialysis centers. In 1995, there were approximately 2,860
Medicare approved ESRD facilities of which approximately 2,000 were independent
dialysis centers (non-hospital centers). A substantial number of these free
standing centers are owned by physicians or major corporations, certain of which
are public companies.
The primary reason for the sale of independently owned centers by
physicians is typically the avoidance of administrative and financial
responsibilities, freeing their time to devote to their professional practice.
Other motivating forces are the physician-owner's desire to be part of a larger
public organization allowing for economies of scale and the ability to realize a
return on their investment. It is also management's opinion that the
physician-owners are willing to negotiate and sell to an organization, like the
Company, that has years of experience of developing and operating dialysis
centers.
As in operating dialysis centers, the key element in acquiring or
developing centers is locating a nephrologist or group of nephrologists with a
substantial patient base, since the center is primarily going to serve such
patients. Other considerations in evaluating a proposed acquisition or
development of a dialysis center are the availability and cost of qualified
labor, 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, whether a certificate of need is
required, and the existence of competitive factors such as hospital or
proprietary non-hospital owned and existing outpatient dialysis facilities
within reasonable proximity of the proposed center.
The Company estimates that the development of a new outpatient dialysis
center, subject to location, size and services, would cost from $600,000 to
$750,000. An acquisition, which usually costs more than construction and
development of a new center, can be accomplished quickly once the parties
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are in agreement. To construct and develop a new center ready for operations may
take an average of four to six months and approximately 12 months to generate
income, all of which are subject to location, size and competitive elements. The
Company is frequently in initial negotiations with nephrologists to develop or
acquire dialysis centers. There is no assurance these negotiations will result
in any final or firm arrangements for the development of any new dialysis
facilities.
Management is also seeking to increase acute dialysis care contracts with
hospitals for inpatient dialysis services. These contracts are sought with
hospitals in areas serviced by its centers. Hospitals are willing to enter into
such inpatient care arrangements for cost efficiencies and to eliminate the
administrative burdens of providing dialysis services to their patients. It is
simpler for the hospital to engage an independent party with the expertise and
the knowledge, such as the Company, to provide the inpatient dialysis
treatments; and the Company finds these arrangements beneficial, since the
contract rates are negotiated and are not fixed by government regulation as is
the case with Medicare reimbursement fees for ESRD patient treatment.
To further implement its growth strategy, Renal Services, was established
at the end of 1995 and retained as its Vice President an individual with
knowledge, experience and relationships in the Pennsylvania-New Jersey region.
She is presently negotiating with several hospitals for the Company to provide
inpatient dialysis services. This subsidiary would administer and operate any
new additional hospital inpatient dialysis service. The Vice President of Renal
Services is also actively seeking and negotiating with physicians for
establishing new outpatient dialysis facilities, one in New Jersey which has a
medical director and is completing its lease, subject to a variance. Other than
the proposed facility in New Jersey, there are no other firm agreements for the
acquisition or construction of additional dialysis facilities, no firm contract
for acute inpatient dialysis services, and no assurance can be given that any
such acquisition or development will be completed.
The Company has been receiving proposals from nursing homes and managed
care facilities to treat such institutions' dialysis patients. The Company has
recently initiated a non-exclusive relationship with a managed care facility to
treat its dialysis patients at DSP-L and is reviewing other proposed agreements
with nursing homes and managed care facilities to provide its residents with
dialysis treatment care. Part of the Company's growth strategy is to expand into
alliances with managed care organizations, particularly those with multi-units
throughout the region. The initial arrangement and agreements being reviewed
provide for the Company to bill Medicare as is its normal procedure rather than
the nursing home or managed care facility. This is a new area of development for
the Company and may not materialize into significant growth.
Any significant expansion, whether through acquisition or development of
new centers, is dependent upon existing funds or financing from other sources.
To construct a 10 station center may cost in a range of $600,000 to $750,000
depending on location, size and related services to be provided by the proposed
facility. Acquisition of existing facilities may range from $40,000 to $70,000
per patient. Therefore, a center with 30 patients could cost from $1,200,000 to
$2,100,000 subject to location, competition, nature of facility and negotiation.
Should such acquisition opportunities arise, there can be no assurance that the
Company would have available or be able to raise the necessary financing.
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Potential Liability and Insurance
Participants in the health care market are subject to lawsuits based upon
alleged negligence, many of which involve large claims and significant defense
costs. The Company, although involved in chronic and acute kidney dialysis
services for approximately 20 years, has never been subject to any suit relating
to its dialysis operations. The Company currently has in force general liability
insurance, including professional and products liability, with coverage limits
of $1 million per occurrence and $3 million in the aggregate annually. The
Company's insurance policies provide coverage on an "occurrence" basis and are
subject to annual renewal. A successful claim against the Company in excess of
the Company's insurance coverage could have a material adverse effect upon the
Company's business and results of operations.
Government Regulation
General
Dialysis treatment centers must comply with various state and federal
health laws which are generally applicable to medical care facilities. The
dialysis center must meet standards relating but not limited to maintenance of
equipment and proper records, personnel and quality assurance programs. Each
dialysis center is subject to periodic inspections by state agencies to
determine if the operations meet these regulatory standards. The Company must
comply with certain rules and regulations of and each dialysis center must be
certified by HCFA. These requirements have been satisfied by the Company's
dialysis facilities. HCFA's regulations generally control and regulate the
charges, procedures and policies which must be followed by dialysis centers.
Many states have eliminated the requirement for dialysis centers to obtain
a certificate of need, a requirement for regulating the establishment and
expansion of dialysis centers. There are no certificate of need requirements in
Florida or Pennsylvania where the Company presently operates. In past years, the
Company has always been able to comply with applicable certificate of need laws.
The Company's record of compliance with federal, state and local
governmental laws and regulations has been excellent. Regulation of health care
facilities, including dialysis centers, is extensive with legislation
continually proposed relating to safety, reimbursement rates, licensing and
other areas of operations. The Company is unable to predict the scope and effect
of any changes in governmental regulations, particularly any modifications in
the reimbursement rate for medical services or requirements to obtain
certification from HCFA. Enforcement may also become more stringent adding to
compliance costs as well as potential sanctions. There are few regulations and
decisions interpreting the laws relating to and addressing dialysis operations.
Therefore, it is difficult to assess whether the Company's past or present
operations and contractual arrangements might be successfully challenged, or
whether the Company would be able to modify its contracts or business practices
to comport with the law and to maintain its licenses and approvals, the failure
of which could adversely effect its business. The Company reviews legislative
changes and developments and will restructure a business arrangement if
management determines such might place it in material noncompliance with such
law or regulation. See "Social Security Act" and "Stark II" below. None of the
Company's business arrangements with physicians, patients or others has been the
subject of investigation by any governmental authority. No assurance can be
given that the Company's business arrangements will not be the subject of an
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investigation or prosecution by a federal or state governmental authority which
could result in any type of civil or criminal sanction.
Social Security Act
The Social Security Act provides Medicare coverage to most persons
regardless of age or financial condition for dialysis treatments as well as
kidney transplants. See "Patient Revenues" and "Medicare Reimbursement" under
Item 1, "Business - Operations." The Social Security Act further prohibits, as
do many state laws, the payment of patient referral fees for treatments that are
otherwise paid for by Medicare, Medicaid or similar state programs. Although the
Social Security Act expressly prohibits kickbacks, bribes or rebates for patient
referrals, the courts have broadly construed the wrongful transaction language
relating to patient referrals, which could subject dialysis treatment operators
to criminal and civil violations, including imprisonment, fines or exclusion of
the provider from future participation in the Medicare program.
The federal government in 1991 and 1992 published regulations that
established exceptions, "safe harbors", for certain business arrangements that
would not be deemed to violate the illegal remuneration provision of the federal
statute. All elements must be satisfied to meet the safe harbor exception, but
failure to satisfy all elements does not mean the business arrangement violates
the illegal remuneration provision of the statute. As required by Medicare
regulations, each of the Company's dialysis centers is supervised by a Medical
Director, a licensed nephrologist or otherwise qualified physician. The Medical
Directors are in private practice and are one of the most important sources of
the dialysis center's business, since it is such physician's patients that
utilize the services of the center. The compensation of the Company's Medical
Directors is fixed by the Medical Director Agreement and reflects competitive
factors in their respective location, and the size of the center. See Item 1,
"Business - Physician Relationships." The Company has never been challenged
under these statutes and believes its arrangement with its Medical Directors are
in material compliance with applicable law. The Company endeavors in good faith
to comply with all governmental regulations. However, there can be no assurance
that the Company will not be required to change its practices or experience a
material adverse effect as a result of any such potential challenge.
The Company's dialysis facilities in Fort Walton Beach, Florida is operated
by DSF, a subsidiary in which the Medical Director, whose patients are dialyzed
at the facility, holds a minority ownership interest. By virtue of the Stark II
legislation restricting certain physician referrals for certain "designated
health services," that center's inpatient treatments was succeeded to by Medical
Services, another subsidiary of the Company. See Item 1, "Business - Operations
- - Location, Capacity and Use of Facilities" and "Stark II" below.
In July, 1994, the Secretary of HHS proposed a rule that "would modify the
original set of safe harbor provisions to give greater clarity to the rule
making's original intent," which would, among other things, make changes to the
safe harbors on personal services and management contracts, and small entity
investment interest. The Company cannot predict the outcome of the rule making
process or whether changes in the safe harbor rule will affect the Company's
position with respect to the anti-kickback statute, but does believe it will
remain in compliance.
Florida has legislation prohibiting physicians from holding financial
interests in various types of
10
<PAGE> 13
medical facilities to which they refer patients, of which dialysis facilities
are not included. Specifically, the Florida statute prohibits health care
providers (which term includes physicians) from referring a patient for
designated health care services to an entity in which the health care provider
(physician) has an investment interest. Designated health services includes
clinical laboratory services, physical therapy services, diagnostic imaging
services, radiation therapy and comprehensive rehabilitative services. The
Florida statute also precludes a physician from referring a patient for any
other health care item or service to an entity in which the physician has an
investment interest unless the entity is a publicly traded corporation meeting
certain substantial criteria or certain disclosure requirements are met as well
as other terms and criteria, which disclosure criteria the Company believes it
satisfies. The Company provides its Fort Walton Beach, Florida patients with a
written disclosure form informing the patient of the existence of an investment
interest of the Medical Director of that facility, and with the names and
addresses of at least two alternative sources of such services. A violation of
the disclosure requirements constitutes a misdemeanor and may be grounds for
disciplinary action.
Stark II
The Physician Ownership and Referral Act ("Stark II") was adopted and
incorporated into the Omnibus Budget Reconciliation Act of 1993. Stark II
restricts physician referrals, with certain exceptions, for certain "designated
health services" to entities in which a physician or an immediate family member
has a "financial relationship" defined to include an ownership or investment
interest in, or a compensation arrangement between the physician, and the
entity. The entity is prohibited from claiming payment for such services under
the Medicare or Medicaid programs, is liable for the refund of amounts received
pursuant to prohibited claims, can be imposed with civil penalties of up to
$15,000 per service and can be excluded from participation in the Medicare and
Medicaid programs. Stark II provisions which may be relevant to the Company
became effective on January 1, 1995.
For purposes of Stark II, "designated health services" includes, among
others, clinical laboratory services, durable medical equipment, parenteral and
enteral nutrients, home health services, and inpatient and outpatient hospital
services. The Company believes, based upon the language and the legislative
history of Stark II and the industry practice, that Congress did not intend to
include dialysis services and the services and items provided incident to
dialysis services as accomplished by the Company within the Stark II
prohibitions. The Company compensates its nephrologist-physicians as Medical
Directors of its dialysis centers pursuant to Medical Director Agreements. As a
condition to participating in the Medicare ESRD program, dialysis treatments at
a center must be under the supervision of a Director who is a physician. See
Item 1, "Business-Operations-Physician Relationships." The physician's
compensation is fixed by agreement and is not geared to the number of patients
treated at or patient referrals to the dialysis center. Non-affiliated
physicians who send or treat their patients at any of the Company's facilities
do not receive any compensation from the Company. The Company bills Medicare for
the patient treatment and the non-affiliated physician bills the patient, or
other third party reimbursement source, for his services. The Company's
provision of inpatient services to a hospital in the area of the Fort Walton
Beach, Florida, dialysis facility operated by DSF in which subsidiary the
Medical Director holds an investment interest might have been deemed referral
for designated health services, since the Medical Director was also affiliated
with and treating those patients at the local hospital. DSF terminated its
inpatient treatment contract with that hospital, which inpatient treatment
services were succeeded to by another subsidiary of the Company in which no
physician has any investment or ownership interest.
11
<PAGE> 14
Medicare
The Medicare program represents a substantial portion of the federal
budget. Congress has taken action in most recent legislative sessions to modify
the Medicare program for the purpose of reducing the amounts otherwise payable
from the program to health care providers. However, there are no significant
proposed cuts in dialysis payments. HCFA is initiating a Congressionally -
mandated ESRD managed care demonstration project to last three years to
determine fees for dialysis and transplant patients. In the budget bill now
undergoing reconciliation in Congress, the ESRD program received a five year
waiver from reduction in Medicare outlays to allow for the results of the HCFA
project. Legislation or regulations may be enacted in the future that may
significantly modify the ESRD program or substantially reduce the amount paid
for Company services. Further, statutes or regulations may be adopted which
impose additional requirements in order for the Company to be eligible to
participate in the federal and state payment programs. Such new legislation or
regulations may adversely affect the Company's business operations, as well as
its competitors.
On August 21, 1996, President Clinton signed the Health Insurance
Portability and Accountability Act of 1996 ( "HIPA"), a package of health
insurance reforms which include a variety of provisions important to health care
providers, such as significant changes to the Medicare and Medicaid fraud and
abuse laws. The fraud and abuse provisions were effective January 1, 1997. While
many of the provisions are self-implementing, some require further rulemaking by
HHS. HIPA established two programs that will coordinate federal, state and local
health care fraud and abuse activities, to be known as the Fraud and Abuse
Control Program and the Medicare Integrity Program. Under these programs,
governmental and, in some cases private entities may undertake a variety of
activities (including medical, utilization and fraud review, cost report audits,
secondary payor determinations), new safe harbors may be created or edited and
reports of fraud and abuse actions against providers will be shared. HIPA
further seeks to encourage whistleblower reports by individuals. HIPA further
extends coverage of the fraud and abuse laws to all federally funded health care
programs and to private health plans; but the anti-kickback statute does not
apply to private health plans.
HIPA also sets forth a program intended to assist providers in
understanding the requirements of the fraud and abuse laws. HIPA first permits
individuals to petition the Department for written advisory opinions regarding
whether an arrangement constitutes prohibited remuneration under the federal
anti-fraud abuse laws, satisfies the requirement of an existing safe harbor
and/or constitutes grounds for imposition of civil and criminal sanctions under
the federal anti-fraud and abuse laws. Such opinions will be binding on HHS and
the party receiving the opinions. HHS is required to publish regulations
specifying the procedures governing the application and response processes
respecting these advisory opinions.
HIPA also increases significantly the amount of civil monetary penalties
for offenses related to health care fraud and abuse, increasing civil monetary
penalties from $2,000 plus twice the amount of each false claim to $10,000 plus
three times the amount of each false claim. HIPA 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
12
<PAGE> 15
been met, and (4) engaging in a pattern or practice of
upcoding claims in order to obtain greater reimbursement. However, HIPA creates
a tougher burden of proof for the government by requiring that the government
establish that the person "knowingly presented" a false or fraudulent claim,
where "knowingly presented" is defined to require "deliberate ignorance" or
"reckless disregard" of the law. Merely negligent conduct should nor violate the
Civil False Claims Act. HIPA further adds health care 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. Moreover, a court imposing a
sentence on a person convicted of federal health care offense may order the
person to forfeit all real or personal property that is derived from the
criminal offense. HIPA did not clarify, modify or eliminate provisions of Stark
II.
In January, 1997 HHS proposed a new regulation that would revise and update
ESRD conditions for coverage. The proposal focuses on patients' rights and
reforms and expands coverage. The proposal also reflects new developments in
technology and equipment.
Hazardous Waste and Other Regulations
The Company's dialysis centers are subject to hazardous waste laws and
non-hazardous medical waste regulation. Much of the Company's waste is
non-hazardous. Medical waste is handled seperately and contracted with licensed
medical waste sanitation agencies which 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, including
providing employees subject to such exposure with hepatitis B vaccinations,
protective equipment, written exposure control plan and training in infection
control and waste disposal.
Although the Company believes it complies in all material respects with
currently applicable laws and regulations and to date has not had any difficulty
in maintaining its licenses or its Medicare and Medicaid authorizations, the
health care service industry is and will continue to be subject to substantial
regulation at the federal and state levels, and the scope and effect of such and
its impact on the Company's operations cannot be predicted. No assurance can be
given that the Company's activities will not be reviewed or challenged by
regulatory authorities.
Any loss by the Company of its various federal certifications, its
authorization to participate in the Medicare or Medicaid programs or its
licenses under the laws of any state or other governmental authority from which
a substantial portion of its revenues is derived or a change resulting from
health care reform reducing dialysis reimbursement or reducing or eliminating
coverage for dialysis services would have a material adverse effect on the
Company's business.
Competition
The dialysis industry is highly competitive. There are numerous local
providers, many owned by physicians, and several major operators of dialysis
facilities regionally and nationally. Some of these major companies are public
and most of whom have substantially greater financial resources, many more
13
<PAGE> 16
centers, patients and services provided then the Company, and by virtue of such
have a significant advantage in competing for acquisitions of dialysis
facilities in areas and markets targeted by the Company. Competition for
acquisitions has increased the cost of acquiring existing dialysis facilities.
The Company also faces competition from hospitals that provide dialysis
treatments. Based upon its ownership of four centers, one in Florida and three
dialysis facilities in Pennsylvania (one under construction), the Company is not
a significant competitive force in this industry.
Competitive factors most important in dialysis treatment are quality of
care and service, convenience of location and pleasantness of the environment.
The Company's existing facility in Fort Walton Beach, Florida, is a
state-of-the-art facility in pleasant surroundings. This facility is in a
suburban area and there are approximately four competitors within a 50 to 60
mile area. Its facility in Lemoyne, Pennsylvania is in a more urban area and
faces substantial competition from approximately four centers within a 20 mile
radius. The dialysis facility in Wellsboro, Pennsylvania is in a rural area with
little competition (one competitor approximately 50 miles away) and due to the
lack of density of population will require more time for growth.
Another significant competitive factor is the ability to attract and retain
qualified nephrologists who normally are the sole source of patient referrals to
the dialysis center and who are responsible for the supervision and operations
of the center. 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 is becoming a competitive factor. It is
presently the second most commonly used modality in ESRD therapy. With greater
availability of kidney donations, currently the most limiting factor, renal
transplantations could become a more significant competitive aspect to dialysis
treatments provided by the Company. Although kidney transplant is a most favored
treatment for ESRD, certain patients who have undergone such transplants have
lost their transplant function and returned to dialysis treatments.
Employees
As of February 28, 1997, the Company had 39 full time employees, exclusive
of its four executive officers, including three nurse administrators, 16
registered nurses, one chief technician, 13 patient care technicians, three
technical specialists and three clerical employees. The Company also retains on
a part-time basis three social workers, three dietitians, two registered nurses
and two clerical employees. The Medical Directors of the Company's dialysis
facilities are independent contractors and are not employees of the Company.
The Company believes its relationship with its employees is good and it has
not suffered any strikes or work stoppages. None of the Company's employees is
represented by any labor union. The Company is an equal opportunity employer.
ITEM 2. PROPERTIES
The Company acquired two properties in 1987 where it operated two of the
four dialysis centers which it sold in 1989. One property consists of
approximately 8,000 square feet located in
14
<PAGE> 17
Easton, Maryland of which 5,400 square feet is leased to the purchaser of one of
the dialysis centers sold in 1989 and a competitor of the Company, through March
31, 1998 with a five year renewal option. The Company obtains an annual rental
of approximately $80,000, plus utilities and real estate taxes. The tenant
recently leased an additional 2,040 square feet on a month-to-month basis
through the term of the original lease at $24,000 per annum plus real estate
taxes and a percentage of the utilities. The Company maintains an office for its
President at this facility. The other property is located in Lemoyne,
Pennsylvania. The Company's new dialysis center in Lemoyne, approximately 3,400
square feet, approved for 13 dialysis stations, was constructed in this building
with space available for expansion. DSP-L, the Company's subsidiary, leases this
facility from the Company under a five year lease that commenced December 1,
1995 at an annual rental of $60,000, reduced to $33,730 per annum effective May,
1996, plus utilities, insurance and real estate taxes, with two renewals of five
years each. This building houses an office for its Vice President/
Administrator. As lessor, the Company also leases approximately 2,200
square feet at its Lemoyne, Pennsylvania property to two other unrelated parties
for their own business activities unrelated to dialysis services or to the
Company. These leases are for a period through 1998 with aggregate rentals of
approximately $20,000 per annum.
The Company's properties in Lemoyne, Pennsylvania and Easton, Maryland, are
subject to mortgages from a Maryland banking institution. As of December 31,
1996, the remaining principal amount of the mortgage on the Lemoyne property was
approximately $224,000 and on the Easton, Maryland property was approximately
$280,000. Each mortgage extends through November, 2003, bears interest at 1%
over the prime rate, and is secured by the real property and the Company's
personal property at those locations. The bank also has a lien on rents due the
Company and security deposits from leases of the properties.
Written approval of the lender is required for all leases, assignments or
subletting, alterations and improvements and sales of the properties. Under the
terms of the mortgages, the bank has the immediate right to demand repayment of
the outstanding balances. See Item 7, "Management's Discussions and Analysis of
Financial Condition and Results of Operations" and Note 2 to "Notes to
Consolidated Financial Statements."
The Company leases its dialysis facility in Fort Walton Beach, Florida
under a lease renewed through October 31, 1999 with an additional renewal of
five years, currently at a rental of approximately $61,000 per annum. The lease
is through the Company's subsidiary, DSF, and consists of a three-story dialysis
facility of approximately 5,200 square feet. The Company has guaranteed DSF's
performance and obligations under the lease. This facility has 17 dialysis
stations for patient treatment, examination rooms, nurse's station, staff lounge
and water treatment areas. See Item 1, "Business-Operations."
The dialysis facility in Wellsboro, Pennsylvania consists of approximately
4,000 square feet, with 12 dialysis stations and is leased for five years
through September, 27, 2000 at a rental of approximately $25,000 per annum with
two renewals of five years each.
The Carlisle, Pennsylvania dialysis facility, currently under construction,
is leased by the Company's subsidiary, Dialysis Services of PA, Inc.-Carlisle
("DSP-C") under a five year lease to commence when the space is substantially
completed, with two renewals of five years each. The facility consists of 4,340
square feet of space to house 12 dialysis stations at an annual rental of
$32,550.
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<PAGE> 18
Dialysis Services of NJ, Inc.-Manahawkin ("DSNJ") a new subsidiary of the
Company , has completed a five year lease for its new dialysis facility in
Manahawkin, New Jersey for approximately 4,000 square feet at an annual rate of
approximately $38,000 per annum plus its proportionate share of the real estate
taxes and casualty insurance premiums. The lease is renewable for two
consecutive five year periods. The facility is designed for 12 dialysis
stations. For the lease to be effective and construction to commence, a variance
from the local municipality is being sought. There is no assurance that the
variance will be granted, and, if not, further delays in opening this new
dialysis facility will be encountered until a proper location is secured.
The Fort Walton Beach, Florida facility operates at near capacity. The
Lemoyne and Wellsboro facilities, which initiated operations in 1995, are
currently operating at approximately 75% and 40% capacity, respectively. The
existing dialysis facilities could accommodate patient volume, particularly if
the Company increases hours and/or days of operation without adding additional
dialysis stations. The Company could expand each facility if need be subject to
obtaining appropriate governmental approval.
Renal Services leased approximately 300 square feet of office space in New
Jersey for one year which lease has been renewed for one year through December
1997.
The dialysis stations are equipped with modern dialysis equipment under a
November, 1996 master-lease/purchase agreement with a $1.00 purchase option at
the end of the term.
The Company maintains executive offices with its parent, Medicore (the
"Parent"), at 777 Terrace Avenue, Hasbrouck Heights, New Jersey 07604 as well as
2337 West 76th Street, Hialeah, Florida. It also maintains an office for its
President at its property at 402 Marvel Court, P.O. Box 1878 Easton, Maryland
21601.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in or subject to any claims or litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the Company's fiscal
year to a vote of security holders through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company completed its public offering of 1,150,000 shares of Common
Stock, and 2,300,000 redeemable common stock purchase warrants ("Warrants") in
April, 1996. Its securities 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 the partial second quarter and the full remaining third and
fourth quarters for the year ended December 31, 1996 as reported by Nasdaq.
<TABLE>
<CAPTION> Bid Price
---------
1996 High Low
---- ---- -----
<S> <C> <C>
2nd Quarter(partial)........ $6.25 $3.50
3rd Quarter................. $5.63 $4.06
4th Quarter................. $4.25 $2.50
</TABLE>
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<PAGE> 19
Bid and asked prices are without adjustments for retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions.
At March 17, 1997, the Company had 145 shareholders of record and based
upon its April, 1996 public offering estimates it has approximately 800
beneficial owners of its Common Stock.
In November, 1995, the Company effected a 50% stock dividend increasing its
outstanding shares of Common Stock prior to its 1996 public offering to
2,432,844 shares. Immediately thereafter the Company declared a $1.30 per share
dividend to common stockholders of record on November 15, 1995 resulting in a
$3,134,000 reduction in intercompany indebtedness owed by its Parent to the
Company with a payment of approximately $29,000 to the then remaining .9%
minority.
The Company does not anticipate that it will pay dividends in the
foreseeable future. The board of directors intends to retain all earnings, if
any, for use in the business. Future dividend policy will depend on the
Company's earnings, control requirements, financial condition and similar
relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the three years ended December
31, 1996 are derived from the audited consolidated financial statements. The
selected financial data for the two years ended December 21, 1993 are derived
from unaudited financial statements. The data should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included herein.
<TABLE>
<CAPTION>
Consolidated Statements of Operations Data
(in thousands except per share amounts)
Years Ended December 31
-------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues .......................... $ 4,137 $ 2,668 $ 2,201 $ 2,090 $ 1,948
Net (loss)income .................. (23) (167) 75 85 117
(Loss) Income per
common share(1) ................. (.01) (.07) .03 .03 .05
Weighted average shares outstanding
and equivalents(1) .............. 3,237 2,433 2,433 2,433 2,433
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet Data
(in thousands)
December 31
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital .................... $ 4,529 $ 651 $ 187 $ 260 $ 704
Total assets ....................... 7,552 3,972 6,847 6,851 6,820
Intercompany receivable from
Medicore (non-current portion)(2) 3,134 4,284 3,706
Long-term debt, net of current
portion 215 152
Stockholders' equity (deficit) ..... 6,000 2,569 5,899 5,824 5,739
- ------
</TABLE>
(1) Reflects Common Stock dividend effected in November, 1995. See Item 5,
"Market for the Registrant's Common Equity and Related Stockholder Matters."
17
<PAGE> 20
(2) $1,000,000 repaid by Medicore on October 4, 1995; approximately $3,134,000
reduction effected through $1.30 per share dividend in November, 1995. See Note
(1) above and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 and Section 21E of the Securities Exchange Act of the 1934
(the "Exchange Act"), including statements regarding the Company's expectations,
intentions, beliefs, or strategies regarding the future. Forward looking
statements include the Company's statements regarding liquidity, anticipated
cash needs and availability, and anticipated expense levels in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
including anticipated development and acquisition of dialysis centers, new
facility completions and related anticipated costs. All forward looking
statements included in this document are based on information available to the
Company on the date hereof, and the Company assumes no obligation to update any
such forward looking statement. It is important to note that the Company's
actual results could differ materially from those in such forward looking
statements. Among the factors that could cause actual results to differ
materially are the factors detailed in the risks discussed in the "Risk Factors"
section included in the Company's Registration Statement Form SB-2, as filed
with the Securities and Exchange Commission (effective on April 17, 1996).
The dialysis industry is highly competitive and subject to extensive
regulation, including the limitation on fees for dialysis treatment and
services. Significant competitive factors include quality of care and service,
convenience of location and pleasant environment. Additionally, there is intense
competition for retaining qualified nephrologists who normally are the sole
source of patient referrals and are responsible for the supervision of the
dialysis centers. There is also substantial competition for obtaining qualified
nurses and technical staff. Major companies, some of which are public companies
or divisions of public companies, have many more centers, physicians and
financial resources than does the Company, and by virtue of such have a
significant advantage in competing for acquisitions of dialysis facilities in
areas targeted by the Company.
The Company's future growth depends primarily on the availability of
suitable dialysis centers for acquisition or development in appropriate and
acceptable areas, and the Company's ability to compete with larger companies
with greater personnel and financial resources to develop these new potential
dialysis centers at costs within the budget of the Company. Its ability to
retain qualified nephrologists, nursing and technical staff at reasonable rates
is also a significant factor. Management continues in negotiations with
nephrologists for the acquisition or development of new dialysis facilities, as
well as with hospitals and other health care maintenance entities. The Company
has its fourth center in Carlisle, Pennsylvania under construction and its fifth
center is awaiting a variance before the lease can be effective and construction
to commence. Several agreements for acute in-patient services are under review
but there is no assurance that such agreements will be completed. There is no
certainty as to when any new centers or service contracts will be implemented,
or the number of stations, or patient treatments such may involve, or if such
will ultimately be profitable. As noted below, newly established dialysis
centers, although contributing to increased revenues, also adversely affect
results of operations due to start-up costs and expenses with a smaller
developing patient base.
Results of Operations
1996 Compared to 1995
Medical service revenue increased approximately $1,526,000 (66%) for the
year ended December 31, 1996 compared to the preceding year. This increase was
largely attributable to increased revenues of approximately $1,292,000 (243%)
compared to the preceding year at the Company's new dialysis centers in Lemoyne,
Pennsylvania which commenced treatments in June 1995 and Wellsboro, Pennsylvania
which
18
<PAGE> 21
commenced treatments in October 1995. Revenues attributable to the Company's
Florida dialysis center increased $234,000 compared to the preceding year.
Although the operations of the new Lemoyne and Wellsboro, Pennsylvania centers
have resulted in increased revenues, during their developmental stage, these
centers will adversely affect the Company's results of operations.
Interest and other income decreased approximately $58,000 for the year
ended December 31, 1996 compared to the preceding year. As a result of the
dividend to the Parent and advance repayment by the Parent (see "Liquidity and
Capital Resources" below), the intercompany receivable from the Parent on which
the Company had been earning interest income was repaid. Interest income from
the Parent, which is included in interest and other income, amounted to
approximately $198,000 for the year ended December 31, 1995. The loss of this
interest income was offset to a large degree by an increase of approximately
$138,000 in other interest income resulting from interest earned on proceeds
invested from the company's security offering completed in the second quarter of
1996.
Cost of medical services sales decreased to 65% for the year ended December
31, 1996 compared to 69% for the preceding year largely as a result of a
decrease in healthcare salaries as a percentage of sales due to the increased
sales revenues generated by the Company's new Pennsylvania facilities.
Selling, general and administrative expenses increased approximately
$378,000 for the year ended December 31, 1996 compared to the preceding year
reflecting increases associated with the new Pennsylvania dialysis centers.
Selling general and administrative expenses as a percentage of medical service
revenues amounted to 41% for the year ended December 31, 1996 compared to 52%
the preceding year.
Interest expense increased approximately $19,000 for the year ended
December 31, 1996 compared to the preceding year. Included was interest of
$14,000 on the advances payable to the Parent with interest at the short-term
Treasury Bill rate. Also included were increases as a result of the equipment
purchase agreements for dialysis machines and decreases in interest as a result
of reduced mortgages. The prime rate was 8.25% at December 31, 1996 and 8.5% at
December 31, 1995.
1995 Compared to 1994
Revenues increased approximately $475,000 (26%) for the year ended December
31, 1995 compared to the preceding year. The increase primarily resulted from
the commencement of treatments at the Company's new dialysis centers in Lemoyne,
Pennsylvania in June 1995 and Wellsboro, Pennsylvania in October 1995, which
accounted for approximately $531,000 in revenues for the year ended December 31,
1995. Revenues related to the Company's dialysis center in Fort Walton Beach,
Florida decreased approximately $57,000 which included revenues lost as a result
of a hurricane for the year ended December 31, 1995 compared to the same period
of the preceding year. Although the new Lemoyne and Wellsboro Pennsylvania
centers (see "Liquidity and Capital Resources" below) are expected to result in
increased revenues, as was the case for the year ended December 31, 1995, during
their developmental stage, these centers will adversely affect the Company's
results of operations.
As a result of the dividend to Medicore and advance repayment by Medicore
(see Notes to Item 6, "Selected Financial Data" and "Liquidity and Capital
Resources" below), the intercompany receivable from Medicore on which the
Company had been earning interest income has been repaid. Interest income from
Medicore, which is included in interest and other income, amounted to
approximately $198,000 and $176,000 for the years ended December 31, 1995 and
December 31, 1994, respectively, without which the Company would have reflected
a larger loss for 1995 and a loss for 1994.
Cost of medical services sales increased to 69% for the year ended December
31, 1995 compared to 62% for the preceding year. This increase is largely
attributable to higher costs per
19
<PAGE> 22
treatment associated with the low volume of treatments at the new Pennsylvania
dialysis centers and includes relatively high salary and benefit costs for the
new facilities due to the competition for health care workers in the area.
Selling, general and administrative expenses increased approximately
$273,099 (29%) reflecting increases associated with the new Pennsylvania
dialysis centers. This included start-up costs of approximately $80,000 which
were expensed during the fourth quarter of 1995 rather than being deferred.
Management of the Company believes that due to probable changes in the
accounting for startup costs, it is no longer prudent to capitalize start-up
costs.
Interest expense increased approximately $12,000 for the year ended
December 31, 1995 compared to the same period of the preceding year largely as a
result of increased average interest rates and equipment purchase agreements for
dialysis machines at the new Pennsylvania centers. The prime rate was 8.5% at
December 31, 1995 and December 31, 1994.
Liquidity and Capital Resources
Working capital totaled $4,529,000 at December 31, 1996, which reflected an
increase of approximately $3,878,000 during the year ended December 31, 1996,
largely as a result of the Company's security offering completed during the
second quarter of 1996. Included in the changes in components of working capital
was an increase in cash and cash equivalents of $3,518,000, which included net
cash used in operating activities of $130,000, net cash used in investing
activities of $54,000 (including additions to property and equipment of
$159,000) and net cash provided by financing activities of $3,702,000 (including
proceeds from the Company's security offering of $3,445,000, advances from the
Parent of $370,000 and debt repayments of $114,000).
During 1988, the Company obtained mortgages totaling $1,080,000 on its two
buildings, one in Lemoyne, Pennsylvania and the other in Easton, Maryland, each
of which housed the Company's dialysis centers. These centers were sold in
October, 1989. The mortgages had a combined remaining balance of $504,000 and
$576,000 at December 31, 1996 and December 31, 1995, respectively. The Company
was in default of certain covenants principally relating to net worth and debt
service ratio requirements under these loan agreements for which the lender has
waived compliance through December 31, 1997.
The bank has liens on the real and personal property of the Company,
including a lien on all rents due and security deposits from the rental of these
properties. The loans contain a provision allowing the bank mandatory repayment
upon 90 days written notice after five years. The five year period has elapsed;
accordingly, while no notice has been given the unpaid principal balance is
carried as a current liability. The unaffiliated Maryland dialysis center
continues to lease space from the Company in its building. The Pennsylvania
center relocated during 1995 and the Company constructed its own new facility at
that property which commenced treatments in June 1995. The Company also opened a
new dialysis center in a leased facility in Wellsboro, Pennsylvania in October
1995. See Note 2 to "Notes to Consolidated Financial Statements".
In November, 1995, the board of directors authorized a 50% stock dividend
which increased the outstanding Common Stock to 2,432,844 shares. The board also
authorized the declaration of a $1.30 per share dividend for which the Parent's
portion related to its 99.1% ownership interest in the Company at that time
amounted to approximately $3,134,000, which was paid by a reduction in the
intercompany advances receivable from the Parent, and the minority interest
portion of approximately $29,000 was paid in cash. See Note 4 to "Notes to
Consolidated Financial Statements".
20
<PAGE> 23
In October 1995, the Parent repaid approximately $1,000,000 of the
indebtedness due to the Company. See Note 4 to "Notes to Consolidated Financial
Statements".
The Company believes that current levels of working capital, including the
proceeds of its securities offering, will enable it to successfully meet its
liquidity demands for at least the new twelve months.
Net proceeds of the Company's security offering completed in the second
quarter of 1996 were approximately $3,445,000 including the underwriters'
over-allotment option exercise. The Company, having operated on a larger scale
in the past, is seeking to expand its outpatient dialysis treatment facilities
and inpatient dialysis care. Such expansion, whether through acquisitions of
existing centers, or the development of its own dialysis centers, requires
capital, which was the basis for the Company's security offering. No assurance
can be given that the Company will be successful in implementing its growth
strategy or that the funds from its securities offering will be adequate to
finance such expansion. See Note 7 to "Notes to Consolidated Financial
Statements".
The Company has entered into agreements with medical directors, and intends
to establish two new dialysis centers, one in New Jersey and one in
Pennsylvania. It is anticipated that the Pennsylvania center, currently under
construction, will commence operations in the third quarter of 1997. The
Company's lease for its New Jersey center is subject to obtaining a variance
from the local municipality. If this variance is not obtained, further delays in
opening this new dialysis center would be encountered pending securing a
suitable location.
Impact of Inflation
Inflationary factors have not had a significant effect on the Company's
operations, although the Company has experienced increased costs of supplies,
salaries and general and administrative expenses.
A substantial portion of the Company's 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 Item 1, "Business-Government Regulation."
Therefore, dialysis services revenues cannot be voluntarily increased to keep
pace with increases in nursing and other patient care costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
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
Information on directors of the Company is included under the caption
"Election of Directors" of the Company's definitive Information Statement
relating to the Annual Meeting of Shareholders to be held on June 11, 1997,
which is incorporated herein by reference.
21
<PAGE> 24
The executive officers of the Company are elected each year by the Board of
Directors at its first meeting following the Annual Meeting of Shareholders to
serve during the ensuing year and until their respective successors are elected
and qualified. There are no family relationships between any of the executive
officers of the Company.
The following information indicates the position and age of the executive
officers at March, 1997, and their business experience during the prior five
years.
<TABLE>
<CAPTION>
Name Age Position with the Company Position Held Since
- ---- --- ------------------------- -------------------
<S> <C> <C> <C>
Thomas K. Langbein 51 Chairman of the Board of Director, and 1980
Chief Executive Officer 1986
Bart Pelstring 56 President and 1986
Director 1985
Daniel R. Ouzts 50 Vice President (Finance) and Treasurer 1996
Charles Coe 34 Vice President (Operations) 1996
Michael C. Duke 40 Director 1995
</TABLE>
THOMAS K. LANGBEIN has been affiliated with the Company since March, 1980
when he was appointed Chairman of the Board of Directors and President. Mr.
Langbein relinquished the position of President in September, 1986 when he was
appointed as Chief Executive Officer of the Company. He is Chairman of the Board
and Chief Executive Officer of each of the Company's subsidiaries. Mr. Langbein
is also the Chairman of the Board, Chief Executive Officer and President of
Medicore, the parent of the Company. He is the Chairman of the Board and Chief
Executive Officer of Techdyne, Inc. ("Techdyne") a 63% owned public subsidiary
of Medicore engaged in the manufacture, assembly and distribution of electronic
and electro-mechanical components. Mr. Langbein is President, sole shareholder
and director of Todd & Company, Inc., ("Todd") a broker-dealer registered with
the Securities and Exchange Commission and a member of the NASD. Mr. Langbein
devotes most of his time to the affairs of the Company, Medicore and Techdyne.
See "Certain Transactions" of the Company's definitive Information Statement
relating to the Annul Meeting of Shareholders to be held on June 11, 1997,
incorporated herein by reference.
BART PELSTRING has been affiliated with the Company since 1976. Mr.
Pelstring was appointed Vice-President of Operations in March, 1980 and served
in that capacity until September, 1986 when he was appointed as President of the
Company, which position as well as director (elected in July, 1985) he holds
with the Company's subsidiaries. Mr. Pelstring is a founding member of the
National Renal Administrators Association and was the founder and president of
the Florida Renal Administrators Association.
DANIEL R. OUZTS has been affiliated with the Company since 1983 as its
controller, and in June, 1996 was appointed Vice President of Finance and
Treasurer. He holds those positions with the Company's parent, Medicore, Inc.
and is Vice President of Finance and Controller of Techdyne, Inc. Mr. Ouzts is a
certified public accountant. See "Certain Relationships and Related
Transactions" of the Company's definitive Information Statement relating to the
Annul Meeting of Shareholders to be held on June 4, 1997, incorporated herein by
reference.
22
<PAGE> 25
CHARLES COE has been affiliated with the Company since January, 1989 as
nurse administrator and to administrator in 1993. Mr. Coe became an Assistant
Vice President in 1995 and in April, 1996 he was appointed Vice President of
Operations.
MICHAEL C. DUKE served as Vice President and general counsel to Renal
Treatment Centers, Inc., a competitor of the Company, from 1989 through 1994.
Mr. Duke is a partner of Duke & Duke, a law firm in West Chester, Pennsylvania.
Mr. Duke has experience and expertise in the dialysis industry and its
regulation.
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation is included under the caption
"Executive Compensation" of the Company's definitive Information Statement
relating to the Annual Meeting of Shareholders to be held on June 11, 1997,
which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on beneficial ownership of the Company's 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 the Company's definitive Information Statement
relating to the Annual Meeting of Shareholders to be held on June 11, 1997,
which is incorporated herein by reference), and by any person known to
beneficially own more than 5% of any class of voting security of the Company, is
included under the caption "Security Ownership of Certain Beneficial Owners and
Management" of the Company's definitive Information Statement relating to the
Annual Meeting of Shareholders to be held on June 11, 1997, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions is included
under the caption "Certain Transactions" of the Company's definitive Information
Statement relating to the Annual Meeting of Shareholders to be held on June 11,
1997, which is incorporated herein by reference.
23
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this report.
1. All financial statements
See Index to Consolidated Financial Statements
2. Exhibits
(3)(i) Articles of Incorporation ++
(ii) By-Laws of the Company ++
(4)(i) Form of Common Stock Certificate of the Company++
(ii) Form of Redeemable Common Stock Purchase Warrant ++
(iii) Form of Underwriters' Options ++
(iv) Form of Warrant Agreement between the Company, Continental Stock
Transfer & Trust Co. and Joseph Dillon & Co., Inc.++
10(i) Lease between Premier Development of Orlando, Inc. and Dialysis
Services of Florida, Inc. - Fort Walton Beach(1), with Rider and
Guarantee of the Company dated May 24, 1989 (incorporated by
reference to the Medicore, Inc.'s(2) Annual Report on Form 10-K for
the year ended December 31, 1989, Part IV Item 14(a) (xxii)).
(ii) Addendum No. 1 to Lease between Premier Development of Orlando, Inc.
and Dialysis Services of Florida, Inc. - Fort Walton Beach(1) dated
August, 1991 (incorporated by reference to Medicore, Inc.'s(2)
Annual Report on Form 10-K for the year ended December 31, 1993
("1993 Medicore Form 10-K"), Part IV, Item 14(a) 3(10) (xvi)).
(iii) Lease Renewal between JACO, L.C. and Dialysis Services of Florida,
Inc. - Fort Walton Beach(1) dated November 29, 1993 (incorporated by
reference to the 1993 Medicore(2) Form 10-K, Part IV, Item 14(a)
3(10)(xvii)).
(iv) Lease between the Company and Mid-Shore Dialysis Center, Inc.
(merged with and now known as Renal Treatment Centers - Maryland,
Inc.) dated March 28, 1988 (incorporated by reference to Medicore,
Inc.'s(2) Annual Report on Form 10-K for the year ended December
31, 1988 ("1988 Medicore Form 10-K"), Part IV, Item 14(a) 3(10)
(xxxi)).
(v) First Amendment to Lease between the Company and Renal Treatment
Centers Maryland, Inc. dated November 16, 1992 (incorporated by
reference to Medicore, Inc.'s(2) Annual Report on Form 8-K dated
January 21, 1993, Item 7(c) (xii)).
24
<PAGE> 27
(vi) Second Amendment to Lease between the Company and Renal Treatment
Centers-Maryland, Inc. dated December 30, 1996.
(vii) Lease between Dialysis Services of Pennsylvania, Inc. - Wellsboro(3)
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)).
(viii) Lease between the Company and Service All Group, Inc. and Terry
Sheppard dated March 24, 1995 (incorporated by reference to the 1994
Medicore(2) Form 10-K, Part IV, Item 14(a) 3(10) (lxviii)).
(ix) Lease between the Company and Dialysis Services of Pennsylvania, Inc.
- Lemoyne(3) dated December 1, 1995.++
(x) Loan Agreement between the Company and Mercantile-Safe Deposit and
Trust Company dated November 30, 1988 (incorporated by reference to
the 1988 Medicore(2), Form 10-K, Part IV, Item 14(a) (10) (xxx)).
(xi) Medical Director's Agreement between Dialysis Services of Florida,
Inc. - Fort Walton Beach (1) and Henry M. Haire, M.D., P.A. dated
December 19, 1988 (incorporated by reference to the 1989 Medicore(2)
Form 10-K, Part IV, Item 14(a) 3(10) (xxi)).
(xii) Renewal of Medical Director's Agreement between Dialysis Services of
Florida., Inc. Fort Walton Beach(1) and Henry M. Haire, M.D., P.A.
dated August 1, 1994 [*] (incorporated by reference to the 1994
Medicore(2) Form 10-K, Part IV, Item 14(a) 3(10) (xiv)).
(xiii) Medical Directors Agreement between Dialysis Services of
Pennsylvania, Inc. - Wellsboro(3) 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)).
(xiv) Medical Directors Agreement between Dialysis Services of
Pennsylvania, Inc. - Lemoyne(3) and Herbert I. Soller, M.D. dated
January 30, 1995 [*] (incorporated by reference to the 1994
Medicore(2) Form 10-K, Part IV, Item 14(a) 3(10) (lx)).
(xv) Agreement for In-Hospital Dialysis Services between Dialysis Services
of Pennsylvania, Inc. - Wellsboro(3) 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.
25
<PAGE> 28
(xvi) Agreement for In-Hospital Dialysis Services between DCA Medical
Services, Inc.(3) and Fort Walton Beach Medical Center dated April 7,
1995. [*]++
(xvii) Agreement for In-Hospital Dialysis Services between Dialysis
Services of Pennsylvania, Inc. - Lemoyne(3) and Capital Health System,
Inc. d/b/a Harrisburg Hospital dated June 1, 1995. [*]++
(xviii) Agreement between Renal Services of Pa., Inc.(3) and Christine
Durr dated December 1, 1995.++
(xix) 1995 Stock Option Plan of the Company (November 10, 1995). ++
(xx) Form of Stock Option Certificate under 1995 Stock Option Plan
(November 10, 1995). ++ (xxi) -Form of Non-Qualified Stock Option
granted to Medical Directors.
(xxii) Lease between Renal Services, Pa., Inc.(3) and Ronald J. Peck dated
December 4, 1995.++
(xxiii) Lease between Dialysis Services of PA., Inc.-Carlisle(3) and
Lester P. Burkholder, Jr. and Kirby K. Burkholder dated November 1,
1996.
(xxiv) Lease between Dialysis Services of NJ., Inc.-Manahawkin (3) and
William P. Thomas dated January , 1997.
(xxv) Medical Directors Agreement between Dialysis Services of NJ,
Inc.-Manahakwin(3) and Oceanview Medical Group, P.A. dated September
5, 1996 [*](incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1996
("September 30, 1996 Form 10-Q"), Part II, Item 6(a), Part II
Exhibits, 10 (i)).
(xxvi) Medical Directors Agreement between Dialysis Services of PA.,
Inc.-Carlisle(3) and Herb Soller, M.D. dated October 1, 1996
[*](incorporated by reference to the Company's September 30, 1996 Form
10-Q, Part II, Item 6(a), Part II Exhibits 10, (ii)).
(xxvii) Equipment Lease Agreement between the Company and B. Braun
Medical, Inc. dated November 22, 1996.
(xxviii) Tenant Subordination Agreement dated February 1997 between J.A. Hunt
Services, Inc. and Mercantile-Safe Deposit and Trust Company.
(11) Statement re: computation of per share earnings.
(21) Subsidiaries of the Company
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
- -------------------------
26
<PAGE> 29
++ 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) 80% owned subsidiary
(2) Parent of the Company owning approximately 67% 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 National Market.
(3) Wholly-owned subsidiary
27
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIALYSIS CORPORATION OF AMERICA
By: /s/ THOMAS K. LANGBEIN
----------------------------------
Thomas K. Langbein
Chairman of the Board of Directors
March 24, 1997
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ THOMAS K. LANGBEIN Chairman of the Board of Directors March 24, 1997
- ------------------------------------
Thomas K. Langbein
/s/ BART PELSTRING President and Director March 24, 1997
- ------------------------------------
Bart Pelstring
/s/ DANIEL R. OUZTS Vice President, Treasurer, Chief March 24, 1997
- ------------------------------------ Financial Officer and Controller
Daniel R. Ouzts
/s/ CHARLES COE Vice President March 24, 1997
- ------------------------------------
Charles Coe
/s/ MICHAEL C. DUKE Director March 24, 1997
- -----------------------------------
Michael C. Duke
</TABLE>
28
<PAGE> 31
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2),(c) and (d)
LIST OF FINANCIAL STATEMENTS AND SUPPLEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1996
DIALYSIS CORPORATION OF AMERICA
HIALEAH, FLORIDA
<PAGE> 32
FORM 10-K--ITEM 14(a)1 and (2)
DIALYSIS CORPORATION OF AMERICA
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Dialysis Corporation of
America and subsidiaries are included in Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1996 and 1995................. F-3
Consolidated Statements of Operations--Years Ended December 31, 1996, 1995,
and 1994................................................................... F-4
Consolidated Statements of Stockholders' Equity--Years ended December 31,
1996, 1995 and 1994........................................................ F-5
Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995
and 1994................................................................... F-6
Notes to Consolidated Financial Statements--December 31, 1996................ F-7
</TABLE>
The following financial statement schedule of Dialysis Corporation of
America and Subsidiaries is included in Item 14(d):
Schedule II--Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
F-1
<PAGE> 33
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, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dialysis Corporation of America and subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
March 21, 1997
Miami, Florida
F-2
<PAGE> 34
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $4,579,273 $1,061,351
Restricted cash 137,896 131,889
Accounts receivable, less allowance
of $154,000 at December 31, 1996;
$128,000 at December 31, 1995 461,269 503,584
Inventories 156,648 88,323
Prepaid expenses and other current assets 85,278 21,021
---------- ----------
Total current assets 5,420,364 1,806,168
Property and Equipment:
Land 168,358 168,358
Buildings and improvements 1,221,531 1,158,591
Machinery and equipment 1,144,191 1,041,264
Leasehold improvements 265,556 264,301
---------- ----------
2,799,636 2,632,514
Less accumulated depreciation 716,728 637,971
---------- ----------
2,082,908 1,994,543
Deferred expenses and other assets 49,017 171,156
---------- ----------
$7,552,289 $3,971,867
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 148,660 $ 326,165
Accrued expenses 182,986 219,952
Current portion of long-term debt 560,120 609,000
---------- ---------
Total current liabilities 891,766 1,155,117
Long-term debt, less current portion 215,466 151,942
Advances from parent 369,547
Minority interest in subsidiary 75,472 95,967
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value, authorized
20,000,000 shares issued and outstanding
3,588,844 shares in 1996 and 2,432,844
shares in 1995 35,888 24,328
Capital in excess of par value 3,748,595 305,997
Retained earnings 2,215,555 2,238,516
---------- ----------
Total stockholders' equity 6,000,038 2,568,841
---------- ----------
$7,552,289 $3,971,867
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 35
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Medical service revenue $3,830,809 $2,304,773 $1,830,271
Interest and other income 305,706 363,413 370,388
---------- ---------- ----------
4,136,515 2,668,186 2,200,659
Cost and expenses:
Cost of medical services 2,508,323 1,592,666 1,137,323
Selling, general and administrative expenses 1,577,487 1,199,213 926,114
Interest expense 86,694 67,704 55,888
---------- ---------- ----------
4,172,504 2,859,583 2,119,325
---------- ---------- ----------
(Loss) income before minority interest (35,989) (191,397) 81,334
Minority interest in (loss) income
of consolidated subsidiaries 13,028 24,126 (6,429)
----------- ---------- ----------
Net (loss) income $ (22,961) $ (167,271) $ 74,905
=========== ========== ==========
(Loss) income per common share $ (.01) $(.07) $.03
====== ===== ====
Weighted average shares 3,237,243 2,432,844 2,432,844
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 36
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in
Common Excess of Retained
Stock Par Value Earnings Total
------ --------- -------- -----
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $24,328 $ 305,997 $ 5,493,532 $ 5,823,857
Net income 74,905 74,905
------- --------- ----------- -----------
Balance at December 31, 1994 24,328 305,997 5,568,437 5,898,762
Net loss (167,271) (167,271)
Dividend on common shares of $1.30 per share (3,162,650) (3,162,650)
------- --------- ----------- -----------
Balance at December 31, 1995 24,328 305,997 2,238,516 2,568,841
Net loss (22,961) (22,961)
Net proceeds from security offering with
issuance of 1,150,000 common shares 11,500 3,433,658 3,445,158
Exercise of stock options 60 8,940 9,000
------- --------- ----------- -----------
Balance at December 31, 1996 $35,888 $3,748,595 $2,215,555 $ 6,000,038
======= ========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 37
DIALYSIS CORP. OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Operating activities:
Net (loss) income $ (22,961) $ (167,271) $ 74,905
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation 199,315 116,510 85,735
Amortization 11,235 9,190 36,338
Bad debt expense 139,802 51,181 51,316
Minority interest (13,028) (24,126) 6,429
Increase (decrease) relating to operating activities from:
Accounts receivable (97,487) (415,098) 49,776
Inventories (68,325) (51,821) (3,033)
Prepaid expenses and other current assets (64,257) (8,984) 23,169
Accounts payable (177,505) 271,898 (34,330)
Accrued expenses (36,966) 36,930 26,967
---------- --------- ---------
Net cash (used in) provided by operating activities (130,177) (181,591) 317,272
Investing activities:
Additions to property and equipment, net of minor disposals (159,180) (661,569) (30,879)
Proceeds from restricted cash 401,206 383,798 372,136
Restricted cash (407,213) (389,402) (375,834)
Deferred expenses and other assets 110,904 (52,020) 20,179
Purchase portion of minority interest in subsidiary (15,000)
---------- --------- ---------
Net cash used in investing activities (54,283) (734,193) (14,398)
Financing activities:
Net proceeds of securities offering 3,445,158
Advances from (to) parent company 369,547 1,410,327 (260,271)
Payments on long-term debt (113,856) (91,058) (72,000)
Exercise of stock options 9,000
Dividend payments to minority shareholders (7,467) (28,841) (5,000)
---------- --------- ---------
Net cash provided by (used in) financing activities 3,702,382 1,290,428 (337,271)
---------- --------- ---------
Increase (decrease) in cash and cash equivalents 3,517,922 374,644 (34,397)
Cash and cash equivalents at beginning of year 1,061,351 686,707 721,104
---------- --------- ---------
Cash and cash equivalents at end of period $4,579,273 $1,061,351 $ 686,707
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 38
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Dialysis
Corporation of America ("DCA") and its subsidiaries, collectively referred to as
the "Company". All material intercompany accounts and transactions have been
eliminated in consolidation. The Company is a 67.2% owned subsidiary of
Medicore, Inc. (the "Parent").
Business
The Company operates three kidney dialysis centers, which are located in
Florida and Pennsylvania, has agreements to provide inpatient dialysis
treatments to various hospitals and provides supplies and equipment for dialysis
home patients.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Government Regulation
Substantially all 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.
Restricted Cash
Restricted cash amounts represent cash balances pledged as collateral on
borrowings of another subsidiary of the Parent.
Inventories
Inventories, which consist primarily of supplies used in dialysis
treatments, are valued at the lower of cost (first-in, first-out method) or
market value.
Property and Equipment
Property and equipment is stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets for financial reporting purposes and by accelerated methods for income
tax purposes. Effective January 1, 1996, the Company adopted the provisions of
the Financial Accounting Standards Board Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The
adoption of the provisions of FAS 121 had no material effect on the results of
operations, financial condition or cash flows of the Company. Based on current
circumstances, the Company does not believe any indicators of impairment are
present.
F-7
<PAGE> 39
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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 at the end of each period are determined by applying
enacted tax rates applicable to future periods in which the taxes are expected
to be paid or recovered to differences between financial accounting and tax
basis of assets and liabilities.
Stock-Based Compensation
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB25) and related Interpretations in accounting
for its employee stock options. Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation" permits a company to elect
to follow the accounting provisions of APB 25 rather than the alternative fair
value accounting provided under FAS 123 but requires pro forma net income and
earnings per share disclosures as well as various other disclosures not required
under APB 25 for companies following APB 25. See Note 6.
Income per Common Share
Income (loss) per share has been computed based on the weighted average
number of shares outstanding.
The effect of the 50% stock dividend authorized by the Company's Board of
Directors in November 1995 has been reflected in weighted average shares for all
periods presented.
Interest and Other Income
Interest and other income is comprised as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Rental income $101,161 $127,565 $158,948
Interest income from Medicore 198,463 176,070
Other interest income 168,950 31,448 26,945
Other 35,595 5,937 8,425
-------- -------- --------
$305,706 $363,413 $370,388
======== ======== ========
</TABLE>
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
reported in the balance sheet for cash and cash equivalents approximate their
fair values. The credit risk associated with cash and cash equivalents is
considered low due to the high quality of the financial institutions in which
these assets are invested.
F-8
<PAGE> 40
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
Estimate fair value of Financial Instruments
The carrying value of cash, accounts receivable and debt in the
accompanying financial statements approximate their fair value because of the
short-term maturity of these instruments, and in the case of debt because such
instruments bear variable interest rates which approximate market.
NOTE 2--LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
--------- ---------
<S> <C> <C>
Mortgage note secured by land and building with a net book value of $420,000
at December 31, 1996. Monthly principal payments of $3,333 plus interest
at 1% over the prime rate. The loan is redeemable at the bank's option
after November 30, 1993, and is, therefore, reflected as current at
December 31, 1996. $280,032 $320,028
Mortgage note secured by land and building with a net book value of $630,000
at December 31, 1996. Monthly principal payments of $2,667 plus interest
at 1% over the prime rate. The loan is redeemable at the bank's option
after November 30, 1993, and is, therefore, reflected as current at
December 31, 1996. 223,968 255,972
Equipment purchase agreement secured by equipment with a net book value of
$360,000 at December 31, 1996. Monthly payments of $4,435 commencing
September 1995, including principal and interest, through June 2000
with additional monthly payments of $2,750 commencing December 1996,
including principal and interest, through September 2001. Interest at 12%. 271,586 184,942
------- -------
775,586 760,942
Less current portion 560,120 609,000
------- -------
$215,466 $151,942
======= =======
</TABLE>
The equipment purchase agreement is for the purchase of kidney dialysis
machines for the Company's new facilities in Pennsylvania and was amended in
1996 to include equipment for the Company's Florida facility. The initial
principal balance was $195,130. Additional borrowings totaled $124,096 in 1996.
The prime rate was 8.25% as of December 31, 1996 and 8.5% as of December
31, 1995.
F-9
<PAGE> 41
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1996
NOTE 2--LONG-TERM DEBT--Continued
Scheduled maturities of long-term debt outstanding at December 31, 1996
are: 1997-$560,000; 1998-$65,000; 1999-$73,000; 2000-$54,000; 2001 $23,586.
Interest payments on the above debt amounted to approximately $73,000; $68,000
and $55,000 in 1996, 1995 and 1994, respectively.
NOTE 3--INCOME TAXES
The Company has been included in the consolidated federal and state income
tax returns of the Parent through April 30, 1996. Subsequent to the completion
of the Company's public offering in April 1996, the Company will file separate
federal and state income tax returns with the income tax liability reflected
on a separate return basis with its available net operating loss carryforwards
at December 31, 1995 having been utilized prior to the completion of its
public offering. The Company had net operating loss carryforwards of
approximately $6,000 at December 31, 1996 and $567,000 at December 31, 1995
expiring in 2011.
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:
<TABLE>
<CAPTION>
Rounded December 31,
--------------------
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation $ 62,000 $ 47,000
Accrued expenses 4,000 -0-
Amortization -0- 10,000
-------- --------
Total deferred tax liabilities 66,000 57,000
Deferred Tax Assets:
Amortization 12,000 -0-
Accrued expenses 11,000 40,000
Bad debt allowance 58,000 49,000
-------- --------
Sub-total 81,000 89,000
Net operating loss carryforward 2,000 215,000
-------- --------
Total deferred tax assets 83,000 304,000
Valuation allowance for deferred tax assets (17,000) (247,000)
-------- --------
66,000 57,000
-------- --------
Net deferred tax $ -0- $ -0-
======== ========
</TABLE>
Due to uncertainty as to the realizability of deferred tax assets, a
valuation allowance was recorded as of December 31, 1996 and December 31, 1995.
F-10
<PAGE> 42
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1996
NOTE 3--INCOME TAXES--Continued
The reconciliation of income tax attributable to (loss) income before
income taxes computed at the U.S. federal statutory rate to income tax (benefit)
expense is:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Rounded
-------
Statutory tax rate (34%) applied to (loss) income
before income taxes $(12,200) $(65,000) $ 28,000
Adjustments due to:
Change in valuation allowance 230,000 73,000 (28,000)
Benefits of net operating losses (213,000) -0- -0-
Other (4,800) (8,000)
-------- -------- --------
12,200 65,000 (28,000)
-------- -------- --------
$ -0- $ 0 $ 0
======== ======== =========
</TABLE>
NOTE 4--TRANSACTIONS WITH PARENT
The Parent provides certain administrative services to the Company
including office space and general accounting assistance. These expenses and all
other central operating costs are charged on the basis of direct usage, when
identifiable, or on the basis of time spent. In the opinion of management, this
method of allocation is reasonable. The amount of expenses allocated by the
Parent totaled approximately $240,000 for each of the years ended December 31,
1996, 1995 and 1994.
On October 4, 1995, the Parent repaid approximately $1,000,000 of the
advances due to the Company.
On November 10, 1995, the Company's Board of Directors authorized the
declaration of a $1.30 per share dividend (after giving effect to a 50% stock
dividend also authorized by the Board) for which the parent's portion related to
its 99.1% ownership interest in the Company totaled approximately $3,134,000.
This amount was offset against the intercompany receivable from Medicore. As
a result of this dividend and repayments by the Parent, the intercompany
receivable from the Parent, on which the Company has been earning interest
income, has been repaid. The reduction in the intercompany receivable relating
to the dividend declared represents a noncash financing activity which is a
supplemental disclosure required by SFAS 95.
The intercompany receivable from Medicore bore interest at the short-term
Treasury bill rate commencing January 1, 1994. Interest on these advances
amounted to approximately $198,000 and $176,000 in 1995 and 1994, respectively,
and was included in the intercompany receivable from Medicore.
As of December 31, 1996, the Company had an intercompany advance payable to
the Parent of approximately $370,000 which bears interest at the short-term
Treasury Bill rate. Interest on this intercompany advance amounted to
approximately $14,000 for the year ended December 31, 1996, and is included in
the intercompany advance payable. The Parent has agreed not to require repayment
of the intercompany advances prior to January 1, 1998, and therefore, the
advances have been classified as long-term at December 31, 1996.
F-11
<PAGE> 43
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1996
NOTE 5--OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 1996, 1995 and 1994, respectively, the
Company paid premiums of approximately $80,000, $73,000 and $72,000 for
insurance through a director of the Parent, and the relative of an officer and
director of the Company and the Parent.
For the years ended December 31, 1996, 1995 and 1994, respectively, legal
fees of $63,000, $22,260 and $20,000 were paid to an officer of the Parent who
acts as general counsel and Secretary for the Company and the Parent.
NOTE 6--STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as is
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board Statement No. 123 "Accounting for
Stock-Based Compensation", requires use of option valuation on models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense was recognized.
In November, 1995, the Company adopted a stock option plan for up to
250,000 options. Pursuant to this plan, in November, 1995, the Board of
Directors granted 210,000 options to certain of its officers, directors,
employees and consultants of which 194,000 options were outstanding at
December 31, 1996. These options vested immediately and are exercisable
for a period of five years through November 9, 2000 at $1.50 per share.
The Company has 250,000 shares reserved for future issuance.
In August 1996, the Board of Directors granted 15,000 options to the
medical directors at its three kidney dialysis centers. These options vested
immediately and are exercisable for a period of 3 years through August 18, 1999
at $4.75 per share.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for options issued during 1995 and 1996, respectively: risk-free
interest rates of 6.5% and 5.75%; no dividend yield; volatility factor of the
expected market price of the Company's common stock of .50 for both years; and a
weighted-average expected life of the options of 2.5 years and 1.5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective input assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employees stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period, and since the options
vested immediately, the Company's pro forma disclosure recognizes expense upon
issuance of the options. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Pro forma net loss $(35,051) $(268,359)
========= ==========
Pro forma loss per share $(.01) $(.11)
====== ======
</TABLE>
F-12
<PAGE> 44
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
December 31, 1996
NOTE 6--STOCK OPTIONS-Continued
A summary of the Company's stock option activity, and related information
for the options issued in 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
------- ---------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year 210,000 $1.50
Granted 15,000 4.75 210,000 $1.50
Exercised (6,000) 1.50
Forfeited
Expired (10,000) 1.50
--------
Outstanding-end of year 209,000 210,000 1.50
======= =======
November 1995 options 194,000 1.50 210,000 1.50
August 1996 options 15,000 4.75
------- -------
209,000 210,000 1.50
======= =======
Exercisable at end of year 209,000 210,000 1.50
======= =======
November 1995 options 194,000 1.50 210,000 1.50
August 1996 options 15,000 4.75
------- -------
209,000 210,000 1.50
======= =======
Weighted-average fair value of
options granted during the year $1.30 $.54
====== ====
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 were $1.50 for
the November 1995 options and $4.75 for the August 1996 options. The remaining
contractual life for the November 1995 options is 3.9 years and for the August
1996 options is 2.6 years.
NOTE 7--COMMON STOCK
The Company completed a public offering of common stock and warrants during
the second quarter of 1996, providing it with net proceeds of approximately
$3,445,000. The Company intends to use the proceeds from the offering to acquire
or develop free standing outpatient dialysis centers and for expanding its
inpatient dialysis treatment services.
Pursuant to the offering 1,150,000 shares of common stock were issued,
including 150,000 shares from exercise of the underwriters overallotment option,
and there are 2,300,000 redeemable common stock purchase warrants to purchase
one common share each with an exercise price of $4.50 exercisable from April 17,
1997 through April 17, 1999. The underwriters received options to purchase
100,000 units each consisting of one share of common stock and two common stock
purchase warrants, for a total of 100,000 shares of common stock and 200,000
common stock purchase warrants, with the options exercisable at $4.50 per unit
from April 17, 1997 through April 17, 2001 with the underlying warrants being
substantially identical to the public warrants except that they are exercisable
at $5.40 per share.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Commitments
The Company has leases on facilities housing its dialysis operations. The
aggregate lease commitments at December 31, 1996 are approximately:
1997-$85,000; 1998-$85,000; 1999-$75,000. Total rent expense was approximately
$65,000, $52,000 and $63,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
Upon completion of its public offering, the Company retained the
underwriters to provide financial consulting services pertaining to the
Company's business, at a monthly fee of $3,000 per month for a period of 18
months, which was paid in full at closing of the offering.
F-13
<PAGE> 45
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DIALYSIS CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
Additions Additions
Balance at Charged to Charged to Other Charges Balance
Beginning Cost and Other Accounts Add (Deduct) at End of
Classification Of Period Expenses Describe Describe Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable
accounts $127,753 $139,802 $(113,555)(1) $154,000
======== ======== ========= ========
YEAR ENDED DECEMBER 31, 1995:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable
accounts $ 81,415 $ 51,181 $( 4,843)(1) $127,753
======== ======== ========= ========
YEAR ENDED DECEMBER 31, 1994:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable
accounts $ 10,000 $ 51,316 $ 20,099 (1) $ 81,415
======== ======== ========= ========
</TABLE>
(1) Uncollectable accounts written off, net of recoveries.
<PAGE> 46
EXHIBIT INDEX
-------------
(3)(i) Articles of Incorporation ++
(ii) By-Laws of the Company ++
(4)(i) Form of Common Stock Certificate of the Company++
(ii) Form of Redeemable Common Stock Purchase Warrant ++
(iii) Form of Underwriters' Options ++
(iv) Form of Warrant Agreement between the Company, Continental Stock
Transfer & Trust Co. and Joseph Dillon & Co., Inc.++
10(i) Lease between Premier Development of Orlando, Inc. and Dialysis
Services of Florida, Inc. - Fort Walton Beach(1), with Rider and
Guarantee of the Company dated May 24, 1989 (incorporated by
reference to the Medicore, Inc.'s(2) Annual Report on Form 10-K for
the year ended December 31, 1989, Part IV Item 14(a) (xxii)).
(ii) Addendum No. 1 to Lease between Premier Development of Orlando, Inc.
and Dialysis Services of Florida, Inc. - Fort Walton Beach(1) dated
August, 1991 (incorporated by reference to Medicore, Inc.'s(2)
Annual Report on Form 10-K for the year ended December 31, 1993
("1993 Medicore Form 10-K"), Part IV, Item 14(a) 3(10) (xvi)).
(iii) Lease Renewal between JACO, L.C. and Dialysis Services of Florida,
Inc. - Fort Walton Beach(1) dated November 29, 1993 (incorporated by
reference to the 1993 Medicore(2) Form 10-K, Part IV, Item 14(a)
3(10)(xvii)).
(iv ) Lease between the Company and Mid-Shore Dialysis Center, Inc. (merged
with and now known as Renal Treatment Centers - Maryland, Inc.) dated
March 28, 1988 (incorporated by reference to Medicore, Inc.'s(2)
Annual Report on Form 10-K for the year ended December 31, 1988
("1988 Medicore Form 10-K"), Part IV, Item 14(a) 3(10) (xxxi)).
(v) First Amendment to Lease between the Company and Renal Treatment
Centers Maryland, Inc. dated November 16, 1992 (incorporated by
reference to Medicore, Inc.'s(2) Annual Report on Form 8-K dated
January 21, 1993, Item 7(c) (xii)).
(vi) Second Amendment to Lease between the Company and Renal Treatment
Centers-Maryland, Inc. dated December 30, 1996.
(vii) Lease between Dialysis Services of Pennsylvania, Inc. - Wellsboro(3)
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)).
(viii) Lease between the Company and Service All Group, Inc. and Terry
Sheppard dated March 24, 1995 (incorporated by reference to the 1994
Medicore(2) Form 10-K, Part IV, Item 14(a) 3(10) (lxviii)).
(ix) Lease between the Company and Dialysis Services of Pennsylvania, Inc.
- Lemoyne(3) dated December 1, 1995.++
(x) Loan Agreement between the Company and Mercantile-Safe Deposit and
Trust Company dated November 30, 1988 (incorporated by reference to
the 1988 Medicore(2), Form 10-K, Part IV, Item 14(a) (10) (xxx)).
<PAGE> 47
(xi) Medical Director's Agreement between Dialysis Services of Florida,
Inc. - Fort Walton Beach (1) and Henry M. Haire, M.D., P.A. dated
December 19, 1988 (incorporated by reference to the 1989 Medicore(2)
Form 10-K, Part IV, Item 14(a) 3(10) (xxi)).
(xii) Renewal of Medical Director's Agreement between Dialysis Services of
Florida., Inc. Fort Walton Beach(1) and Henry M. Haire, M.D., P.A.
dated August 1, 1994 [*] (incorporated by reference to the 1994
Medicore(2) Form 10-K, Part IV, Item 14(a) 3(10) (xiv)).
(xiii) Medical Directors Agreement between Dialysis Services of
Pennsylvania, Inc. - Wellsboro(3) 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)).
(xiv) Medical Directors Agreement between Dialysis Services of
Pennsylvania, Inc. - Lemoyne(3) and Herbert I. Soller, M.D. dated
January 30, 1995 [*] (incorporated by reference to the 1994
Medicore(2) Form 10-K, Part IV, Item 14(a) 3(10) (lx)).
(xv) Agreement for In-Hospital Dialysis Services between Dialysis Services
of Pennsylvania, Inc. - Wellsboro(3) 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)).
(xvi) Agreement for In-Hospital Dialysis Services between DCA Medical
Services, Inc.(3) and Fort Walton Beach Medical Center dated April 7,
1995. [*]++
(xvii) Agreement for In-Hospital Dialysis Services between Dialysis
Services of Pennsylvania, Inc. - Lemoyne(3) and Capital Health System,
Inc. d/b/a Harrisburg Hospital dated June 1, 1995. [*]++
(xviii) Agreement between Renal Services of Pa., Inc.(3) and Christine
Durr dated December 1, 1995.++
(xix) 1995 Stock Option Plan of the Company (November 10, 1995). ++
(xx) Form of Stock Option Certificate under 1995 Stock Option Plan
(November 10, 1995). ++ (xxi) -Form of Non-Qualified Stock Option
granted to Medical Directors.
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
<PAGE> 48
(xxii) Lease between Renal Services, Pa., Inc.(3) and Ronald J. Peck dated
December 4, 1995.++
(xxiii) Lease between Dialysis Services of PA., Inc.-Carlisle(3) and
Lester P. Burkholder, Jr. and Kirby K. Burkholder dated November 1,
1996.
(xxiv) Lease between Dialysis Services of NJ., Inc.-Manahawkin (3) and
William P. Thomas dated January , 1997.
(xxv) Medical Directors Agreement between Dialysis Services of NJ,
Inc.-Manahakwin(3) and Oceanview Medical Group, P.A. dated September
5, 1996 [*](incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1996
("September 30, 1996 Form 10-Q"), Part II, Item 6(a), Part II
Exhibits, 10 (i)).
(xxvi) Medical Directors Agreement between Dialysis Services of PA.,
Inc.-Carlisle(3) and Herb Soller, M.D. dated October 1, 1996
[*](incorporated by reference to the Company's September 30, 1996 Form
10-Q, Part II, Item 6(a), Part II Exhibits 10, (ii)).
(xxvii) Equipment Lease Agreement between the Company and B. Braun
Medical, Inc. dated November 22, 1996.
(xxviii) Tenant Subordination Agreement dated February 1997 between J.A. Hunt
Services, Inc. and Mercantile-Safe Deposit and Trust Company.
(11) Statement re: computation of per share earnings.
(21) Subsidiaries of the Company
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
- -------------------------
++ 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) 80% owned subsidiary
(2) Parent of the Company owning approximately 67% 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 National Market.
(3) Wholly-owned subsidiary
<PAGE> 1
Exhibit (10)(xxviii)
TENANT SUBORDINATION AGREEMENT
THIS TENANT SUBORDINATION AGREEMENT made as of the _______ day of
February, 1997 by and between J. A. Hunt Services, Inc., a ___________________
corporation (the "Tenant") and Mercantile-Safe Deposit
and Trust Company, a Maryland banking institution (the "Bank").
WHEREAS, the Tenant is the lessee under a certain lease (the "Lease")
dated April 1, 1995 from Dialysis Corporation of America, a Florida corporation
(the "Landlord"), to Tenant, of certain real property, together with the
improvements thereon, known as 27 Miller Avenue, located in Lemoyne, Cumberland
County, Pennsylvania, as more particularly described in the Lease (the
"Premises");
WHEREAS, the Bank has made a loan to Landlord and secured said loan by
a Mortgage and Security Agreement dated November 30, 1988 on the Premises (the
"Mortgage"); and
WHEREAS, at the request of the Landlord and in consideration of the
making of said loan by the Bank, the Tenant has agreed to subordinate the Lease
to the Mortgage.
NOW, THEREFORE, THIS SUBORDINATION AGREEMENT WITNESSETH, that for
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto do hereby agree and covenant as follows:
1. Tenant hereby acknowledges and agrees that the Lease is and shall
be (i) subordinate to the Mortgage, and (ii) subject and inferior to the
Mortgage.
2. Should the Premises be transferred to any person or party other
than the Landlord by reason of foreclosure of or other proceedings brought
pursuant to or under the Mortgage, Tenant shall attorn to and be bound to said
transferee under all of the terms, covenants and conditions of the Lease for
the remaining balance of the term thereof and any extensions or renewals
thereof, with the same force and effect as if the transferee was the lessor
under the Lease.
3. Unless Tenant is in default under the Lease, the Lease shall not be
terminated, nor shall Tenant's use, possession or enjoyment of the Premises be
interfered with, by reason of any foreclosure proceeding or other action
brought pursuant to or under the Mortgage.
4. Each party hereto does hereby agree to execute, acknowledge and
deliver to the other such further instruments as may be necessary to effectuate
the purposes of this subordination, attornment and non-disturbance.
WITNESS the following hands and seals as of the day and year first
above written.
WITNESS: TENANT:
J. A. HUNT SERVICES, INC.
- --------------------------- By________________________
(SEAL)
WITNESS: MERCANTILE-SAFE DEPOSIT
AND TRUST COMPANY
- --------------------------- By________________________
Stephen D. Palmer,
Assistant Vice President
(SEAL)
ACKNOWLEDGED AND AGREED this _________ day of ___________________, 1997.
WITNESS: DIALYSIS CORPORATION OF AMERICA
- --------------------------- By_____________________________
Barton L. Pelstring,
President
(SEAL)
2
<PAGE> 2
STATE OF NEW YORK, ________________________ OF _____________________, to wit:
I HEREBY CERTIFY, that on this ______ day of ___________________, 1997,
before me, the undersigned Notary Public of the State of New York, personally
appeared _____________________________________________________________________,
who acknowledged himself to be the ___________________________________________
of ______________________________________________________________, known to me
(or satisfactorily proven) to be the person who executed the foregoing
Subordination Agreement and acknowledged that he executed the same for the
purposes therein contained by signing the name of the said corporation, by
himself as _______________________________________________.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
______________________________
Notary Public
My Commission Expires:
______________________________
STATE OF MARYLAND, CITY OF BALTIMORE, to wit:
I HEREBY CERTIFY, that on this _____ day of _____________________,
1997, before me, the undersigned Notary Public of the State of Maryland,
personally appeared STEPHEN D. PALMER, who acknowledged himself to be the
ASSISTANT VICE PRESIDENT of MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY, known to
me (or satisfactorily proven) to be the person who executed the foregoing
Subordination Agreement and acknowledged that he executed the same for the
purposes therein contained by signing the name of the said Company, by himself
as ASSISTANT VICE PRESIDENT.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
______________________________
Notary Public
My Commission Expires:
______________________________
3
<PAGE> 3
STATE OF PENNSYLVANIA, _____________________ of _______________________, to wit:
I HEREBY CERTIFY, that on this _____ day of _____________________,
1997, before me, the undersigned Notary Public of the State of ________________,
personally appeared BARTON L. PELSTRING, who acknowledged himself to be the
PRESIDENT of DIALYSIS CORPORATION OF AMERICA, known to me (or satisfactorily
proven) to be the person who executed the foregoing Subordination Agreement and
acknowledged that he executed the same for the purposes therein contained by
signing the name of the said Corporation, by himself as PRESIDENT.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
______________________________
Notary Public
My Commission Expires:
______________________________
4
<PAGE> 1
EXHIBIT 11
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
COMPUTATION OF (LOSS) EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PRIMARY AND FULLY DILUTED
Weighted average shares outstanding 3,237,243 2,432,844 2,432,844
========= ========= =========
Net (loss) income $ (22,961) $(167,271) $ 74,905
========= ========= =========
Net (loss) income per share $(.01) $(.07) $.03
===== ==== ====
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES
------------
<TABLE>
<CAPTION>
Jurisdiction of Percentage Owned
Subsidiaries Incorporation By Registrant
------------ --------------- ----------------
<S> <C> <C>
DCA Medical Services, Inc. Florida 100%
Dialysis Medical, Inc. Florida 80%
Dialysis Services of Florida, Inc.-
Fort Walton Beach Florida 80%
Dialysis Services of NJ, Inc.-
Manahawkin New Jersey 100%
Dialysis Services of Pennsylvania, Inc.-
Carlisle Pennsylvania 100%
Dialysis Services of Pennsylvania, Inc.-
Lemoyne Pennsylvania 100%
Dialysis Services of Pennsylvania, Inc.-
Wellsboro Pennsylvania 100%
Renal Services of Pa., Inc. Pennsylvania 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,579,273
<SECURITIES> 0
<RECEIVABLES> 461,269
<ALLOWANCES> 0
<INVENTORY> 156,648
<CURRENT-ASSETS> 5,420,364
<PP&E> 2,799,636
<DEPRECIATION> 716,728
<TOTAL-ASSETS> 7,552,289
<CURRENT-LIABILITIES> 891,766
<BONDS> 215,466
0
0
<COMMON> 35,888
<OTHER-SE> 5,964,150
<TOTAL-LIABILITY-AND-EQUITY> 7,552,289
<SALES> 3,830,809
<TOTAL-REVENUES> 4,136,515
<CGS> 2,508,323
<TOTAL-COSTS> 2,508,323
<OTHER-EXPENSES> 1,577,487
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,694
<INCOME-PRETAX> (35,989)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,961)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,961)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> 0
<FN>ACCOUNTS RECEIVABLE ARE NET OF ALLOWANCE OF
$154,000 AT DECEMBER 31, 1996.
</TABLE>
