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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, 1997
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ---------- to ----------
Commission file number 0-8527
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DIALYSIS CORPORATION OF AMERICA
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(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.)
27 MILLER AVENUE, LEMOYNE, PENNSYLVANIA 17043
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (717) 730-7399
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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
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 4, 1998 was approximately $1,692,000.
As of March 4, 1998, the Company had 3,651,344 outstanding shares of
its common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Information
Statement in connection with the Registrant's Annual Meeting of Share-
holders to be held on June 10, 1998.
Registrant's Registration Statement on Form SB-2 dated December 22,
1995, as amended February 9, 1996, April 2, 1996 and April 15, 1996,
Registration No. 33-80877-A Part II, Item 27, Exhibits.
Registrant's Annual Report, Form 10-K for the year ended December 31,
1996.
Annual Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for
the years ended December 31, 1994 and 1995, Part IV, Exhibits.
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DIALYSIS CORPORATION OF AMERICA
Index to Annual Report on Form 10-K
Year Ended December 31, 1997
Page
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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................. 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant......... 24
Item 11. Executive Compensation..................................... 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 26
Item 13. Certain Relationships and Related Transactions............. 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 27
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Part I
Item 1. Business
Historical
Dialysis Corporation of America ("DCA" or the "Company") is a Florida
corporation, organized in 1976, which develops and operates outpatient
kidney dialysis centers that provide quality dialysis and ancillary
services to patients suffering from chronic kidney failure, generally
referred to as end stage renal disease ("ESRD"). In 1997, the Company
operated four dialysis centers located in Florida and Pennsylvania. In
October, 1997 it sold its Florida dialysis operations, which included
Dialysis Services of Florida, Inc. - Fort Walton Beach ("DSF"), an acute
care inpatient dialysis services agreement with a Florida hospital from
its subsidiary, DCA Medical Services, Inc. ("DCAMS"), which subsidiary
continues to perform home care for the Company's Pennsylvania operations,
and Dialysis Medical, Inc. ("DMI"), which subsidiary rendered services to
the Florida homecare patients. DCA currently operates three outpatient
dialysis facilities in Lemoyne, Wellsboro and Carlisle, Pennsylvania,
through its wholly owned subsidiaries, Dialysis Services of Pa., Inc. -
Lemoyne ("DSPL"), Dialysis Services of Pa., Inc. - Wellsboro ("DSPW"),
and Dialysis Services of Pa., Inc. - Carlisle ("DSPC"). The Company has
commenced construction of a Manahawkin, New Jersey dialysis facility and
will soon commence construction of a dialysis facility in Toms River,
New Jersey and one in Chambersburg, Pennsylvania. Additional new
facilities are anticipated, currently through construction and develop-
ment of new dialysis centers as opposed to acquisition.
Management believes the Company distinguishes itself on the basis of
quality patient care. The Company currently provides outpatient dialysis
services through its three modern outpatient facilities with an aggregate
of 31 dialysis stations to approximately 96 patients in Pennsylvania,
which accounted for approximately 9,700 dialysis treatments. Including
treatments performed by DSF, sold on October 31, 1997, for the year ended
December 31, 1997 the Company performed approximately 21,500 dialysis
treatments, of which approximately 15,300 were outpatient treatments,
approximately 4,400 were homecare patients, and approximately 1,800
represented inpatient dialysis treatments. The Company's facilities
are designed for outpatient dialysis treatments and training of home
dialysis patients.
DCA's inpatient dialysis treatments result from contractual rela-
tionships with three hospitals located in areas serviced by the Company's
outpatient dialysis centers. Homecare, sometimes referred to as Method 2
home patient treatment, involves providing equipment and supplies,
training, patient monitoring and follow-up assistance to patients who
are able and prefer to be treated at home.
Management intends to continue in its attempt to penetrate existing
markets through development, and if feasible, acquisitions of dialysis
facilities. To date, the Company's growth has not been significant,
attributable to competition for the same operating areas and qualified
medical directors stemming from much larger dialysis providers with
significantly more resources. The Company's growth is also slower since
there is greater time involved in establishing a new dialysis center as
opposed to acquiring an existing facility. A subsidiary, Renal Services
of Pa., Inc. ("Renal Services"), was established two years ago to assist
the Company in implementing its growth strategy.
Dialysis Industry
Kidneys generally act as a filter removing harmful substances and
excess water from the blood, enabling the body to maintain proper and
healthy balances of chemicals and water. Chronic kidney
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failure, or ESRD, which results from chemical imbalance and buildup of
toxic chemicals, is a state of kidney disease characterized by advanced
irreversible renal impairment. ESRD is a likely consequence of complica-
tions resulting from diabetes, hypertension, advanced age and specific
hereditary and renal diseases. Without regular treatment or kidney
transplantation, it is often fatal.
Based upon information published by the Health Care Financing Adminis-
tration ("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 200,000 at the end of 1995, the latest
year in which there is compiled information by HCFA, reflecting an approx-
imately 9% growth rate. The growth in the number of ESRD patients is
attributable primarily to the aging of the population and greater patient
longevity as a result of improved dialysis technology. The United States
Renal Data System estimates that total direct medical payments for ESRD
was approximately $11.1 billion in 1994, of which approximately $8.3
billion was paid by the federal government through the Medicare program.
According to statistics developed by HCFA, at the end of 1995 there
were approximately 2,900 independent dialysis facilities. Approximately
62% 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) the patient's home; (2) peritoneal dialysis, either continuous
ambulatory peritoneal dialysis ("CAPD") or continuous cycling peritoneal
dialysis ("CCPD"), usually performed at the patient's home; and/or (3)
kidney transplant. The significant portion of ESRD patients receive
treatments at outpatient dialysis facilities (approximately 83%) with
the remaining patients treated at home through hemodialysis or peritoneal
dialysis. Patients treated at home are monitored by a designated out-
patient 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 at the same time the blood circulates
through one chamber, a dialyzer fluid is circulated through the other
chamber. The toxins and excess fluid pass through the membrane into the
dialysis fluid. On the average, patients usually receive three treatments
per week with each treatment taking three to five hours. Dialysis treat-
ments are performed by teams of licensed nurses and trained technicians
pursuant to the staff 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
hemodialysis requires training for both the patient and the assistant,
which usually takes four to eight weeks. The use of conventional home
hemodialysis has declined and is minimal due to the patient's suitability
and lifestyle, the need for the presence of a partner and the higher
expense involved over CAPD.
A second home treatment for ESRD patients is 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
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dialysis solution installed manually into the patient's peritoneal cavity,
which does not require use of a mechanical device or an assistant. The
patient uses a sterile dialysis solution which is fed into the cavity
through a surgically-placed catheter. The solution is allowed to remain
in the abdominal cavity for a three to five hour period and is then
drained. The cycle is then repeated. 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 third modality for patients with ESRD is kidney transplantation.
While this is the most desirable form of therapeutic intervention, the
scarcity of suitable donors and possibility of donor rejection limits
the availability of this surgical procedure as a treatment option.
Business Strategy
DCA, having 21 years experience in successfully developing and
operating dialysis treatment facilities, plans to use such experience
and expertise to expand its dialysis operations, including provision of
ancillary services to patients. First in DCA's objectives is top quality
patient care. At the end of 1996, there were approximately 2,900 Medicare
approved ESRD facilities of which approximately 62% were independent
dialysis centers (non-hospital centers). A substantial number of these
freestanding centers are owned by physicians or major corporations,
certain of which are public companies. Management intends to continue
to establish alliances with hospitals and to initiate dialysis service
arrangements with nursing homes and managed care organizations, and to
continue to emphasize its high quality patient care, its smaller size
which allows it to focus on each patient's individual needs while
remaining sensitive to the physicians' professional concerns.
To further implement the Company's 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 Pennsyl-
vania-New Jersey region. The Vice President of Renal Services is also
actively seeking and negotiating with physicians to establish new
outpatient dialysis facilities. Other than the two proposed facilities
in New Jersey, and although there are ongoing negotiations with physicians
and healthcare facilities, there are no other firm agreements for the
acquisition or construction of additional dialysis facilities, no firm
contracts for acute inpatient dialysis services, and no assurance can be
given that any such acquisition or development will be completed.
Same Center Growth
The Company endeavors to increase same center growth and attract new
staff and new patients to its existing facilities by rendering high caliber
patient care in convenient, safe and serene conditions for everyone
involved. The Company believes that it has existing adequate space
within its facilities to accommodate greater patient volume and will
work to achieve such increase, to lower its fixed costs, and operate at
a greater efficiency level.
Acquisition and Development of Facilities
One of the primary elements in acquiring or developing facilities is
locating an area with an existing substantial patient base under the
guidance of a local nephrologist, since the facility is primarily going
to serve such patients. Other considerations in evaluating a proposed
acquisition or development of a dialysis facility are the availability
and cost of qualified and skilled personnel, particularly nursing and
technical staff, the size and condition of the facility and its equipment,
the atmosphere for the
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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.
Expansion of the Company's dialysis facilities is being approached
presently through the development of its own dialysis facilities. Acqui-
sition of existing outpatient dialysis centers, which the Company has not
effected, is a faster but much more expensive means of growth. The
primary reason for the sale of independently owned centers by physicians
is typically the avoidance of administrative and financial responsibili-
ties, 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.
To construct and develop a new facility ready for operations may take
an average of four to six months and 12 months or longer to generate
income, all of which are subject to location, size and competitive
elements. To construct a 10 station facility may cost in a range of
$600,000 to $750,000 depending on location, size and related services
to be provided by the proposed facility. Acquisition of existing
facilities may range from $40,000 to $70,000 per patient. Therefore, a
facility with 30 patients could cost from $1,200,000 to $2,100,000
subject to location, competition, nature of facility and negotiation.
Any significant expansion, whether through acquisition or development of
new facilities, is dependent upon existing funds or financing from other
sources. To date, no acquisitions have been made and should such
acquisition opportunities arise, there is no assurance that the Company
would have available or be able to raise the necessary financing.
Inpatient Services
Management is also seeking to increase acute dialysis care contracts
with hospitals for inpatient dialysis services. These contracts are sought
with hospitals in areas serviced by its facilities. 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 DCA, to provide the
inpatient dialysis treatments; and DCA 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.
Operations
Location, Capacity and Use of Facilities
The Company currently operates three outpatient dialysis facilities in
Pennsylvania with a total capacity of 31 licensed stations. The Company
owns and operates those centers through its subsidiaries, DSPL, DSPW and
DSPC. The Lemoyne, Pennsylvania dialysis facility is located on property
owned by the Company and leased to the subsidiary. See Item 2, "Proper-
ties." The Company has initiated construction at a leased space for a
new dialysis facility in Manahawkin, New Jersey through its subsidiary,
Dialysis Services of NJ, Inc. - Manahawkin ("DSNJ"). The Company recently
incorporated new subsidiaries in Pennsylvania and New Jersey for which it
is presently negotiating Medical Director Agreements and anticipates to
develop facilities through those subsidiaries, and has plans for additional
facilities in New Jersey and Pennsylvania as well as other locations.
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The Company also provides acute care inpatient dialysis services to
three hospitals in areas where its dialysis facilities are located and is
negotiating additional contracts in the areas surrounding its facilities
and in tandem with the development of its proposed sites. Each of its
dialysis facilities provides training, supplies and on - call support
services for home peritoneal patients. See "Dialysis Industry" above.
DSPL commenced operations in June, 1995 and for the 12 months ended
December 31, 1996, its initial period of operations, provided approxi-
mately 5,686 dialysis treatments, and for the year ended December 31,
1997, provided approximately 7,241 dialysis treatments. DSPW commenced
operations on September 28, 1995 and for the 12 months ended December 31,
1996 provided approximately 2,031 dialysis treatments and approximately
2,298 dialysis treatments for the year ended December 31, 1997. DSPC
commenced operations in the third quarter of 1997, providing 1,346
treatments at year end.
The Company sold the assets of DSF, its dialysis facility in Fort
Walton Beach, Florida, including the Method 2 services of DMI, at the end
of October of 1997. DSF, which commenced operations in 1989 and was
approved for 17 dialysis stations, for the year ended December 31, 1996
provided approximately 12,050 dialysis treatments and for the ten month
period ended October 31, 1997 provided approximately 6,214 dialysis
treatments. DMI provided 2,773 treatments to its Method 2 patients in
Florida for the ten months ended October 31, 1997.
The Company estimates that on average its centers were operating at
approximately 65% of capacity as of December 31, 1997, based on the
assumption that a dialysis center is able to provide up to three treat-
ments a day per station, six days a week. The Company believes it may
increase the number of dialysis treatments at its centers without making
additional capital expenditures.
Operations of Dialysis Facilities
DCA'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 for each dialysis station, to ensure the
patients are comfortable and relaxed.
In accordance with participation requirements under the Medicare ESRD
program, each facility retains a medical director qualified and experienced
in the practice of nephrology and the administration of a renal dialysis
facility. See "Physician Relationships" below. Each facility also has a
nurse administrator who supervises the daily operations and the staff,
which consists of registered nurses, licensed practical nurses, patient
care technicians, a part-time social worker and a part-time registered
dietitian, who all supervise each aspect of the patients' treatments.
See "Employees" below. 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 patients high-flux hemodialysis
based upon physician evaluation and recommendation of each patient's
suitability, allowing those 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
high-efficiency and conventional hemodialysis, which, in the Company's
experience, provides the most viable treatment for most patients.
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The Company considers its dialysis equipment to be both modern and
efficient, providing state of the art treatment in a safe and comfortable
environment.
The Company's facilities also offer home dialysis, primarily CAPD and
CCPD. Training programs for CAPD or CCPD generally encompass two to three
weeks.
Inpatient Dialysis Services
The Company presently provides inpatient dialysis services to three
hospitals in Pennsylvania. The inpatient agreement with a Florida
hospital, which was the primary asset of DCAMS, was assumed by the
buyer of the Fort Walton Beach facility as part of the October 31, 1997
sale of the Company's Florida operations. These services (excluding
physician professional services) are under contracts with the hospitals
wherein the dialysis facility provides the equipment, supplies and
personnel to perform the dialysis treatments as required by the hospital.
These hospital agreements specify per treatment fees individually
negotiated with the hospital. Inpatient services are typically necessary
for patients with acute kidney failure resulting from trauma or similar
causes, patients in the early stages of ESRD, and ESRD patients who
require hospitalization for other reasons. One of the Pennsylvania
in-hospital agreements was renewed on June 1, 1997 and another Pennsyl-
vania inpatient hospital agreement commenced August 1997. Each is for
a one year term with automatic one-year renewal terms, subject to
termination by notice of either party.
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 dialysis to treat anemia, a medical complication frequently
experienced by ESRD patients. EPO decreases the necessity for blood
transfusions in ESRD patients. Other ancillary services may include
bone densitometry 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; and blood transfusions.
See "Medicare Reimbursement" below.
Physician Relationships
An integral element to the success of a facility is its association
with area nephrologists. A dialysis patient generally seeks treatment at
a facility near the patient's home and where such patient's nephrologist
has established practice privileges. Consequently, the Company relies on
its ability to attract and satisfy the needs of referring nephrologists to
gain new patients and to provide quality dialysis care through these
referring physicians.
The conditions of a facility's participation in the Medicare ESRD
program mandate that treatment at a dialysis facility be under the general
supervision of a medical director who is a physician. The Company retains
by written agreement qualified physicians or groups of qualified physicians
to serve as medical directors for each of its facilities. Generally, the
medical directors are board eligible or board certified in internal
medicine by a professional board specializing in nephrology and have had
at least 12 months of experience or training in the care of dialysis
patients at ESRD facilities. The Company's medical directors are
typically a significant source of referrals to the particular center
served.
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Agreements with medical directors are usually for a term of five years
with renewal privileges. Each agreement specifies the duties, responsi-
bilities and compensation of the medical director as well as elects the
alternate reimbursement plan under the ESRD program, whereby each
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. Under the agreements each
medical director or professional association maintains his, her or its
own medical malpractice insurance. The agreements also provide for non-
competition usually for a period of one year in a limited geographic area
surrounding that particular dialysis center. The agreements do not
prohibit physicians providing services at the facility from providing
direct patient care services at other locations; and consistent with the
federal and state law, such agreements do not require a physician to refer
patients to the Company's dialysis center.
The Company's ability to establish a dialysis facility in a particular
area is significantly geared to the availability of a qualified physician
or nephrologist with an existing patient base to serve as the Company's
medical director. The loss of a medical director who could not be readily
replaced or an important referring physician at any facility would have a
material adverse effect on the operations of that facility and the Company.
Compensation of medical directors is separately negotiated for each
facility and generally depends on competitive factors in the local
market, the physician's qualifications and the size of the facility.
Quality Assurance
Under the direction of Charles Coe, Vice President of the Company and
a registered nurse, the Company implements a quality assurance program to
maintain and improve the quality of dialysis treatment and care it provides
to its patients in every facility. Quality assurance activities involve
the ongoing examination of care provided, the identification of de-
ficiencies in that care and any necessary improvements of the quality
of care. Specifically, this program requires each center's staff,
including its medical director and/or nurse administrator to regularly
review quality assurance data, whether related to dialysis treatment
services, equipment, technical and environmental improvements, and
staff-patient or personnel relationships. These evaluations are in
addition to assuring regulatory compliance with HCFA and the Occupa-
tional Safety and Health Administration ("OSHA"). See "Government
Regulation" below.
Patient Revenues
Substantially all of the fees for outpatient dialysis treatments are
funded under the ESRD Program established by the federal government under
the Social Security Act, and administered in accordance with rates set by
HCFA. The balance of the outpatient charges are paid by private payors
including the patient's medical insurance, private funds or state
Medicaid plans. Pennsylvania, presently the state in which the Company
operates, provides Medicaid or comparable benefits to qualified recipients
to supplement their Medicare coverage. Medicaid payments to the Company
have not been significant.
Under the ESRD Program, payments for dialysis services are determined
pursuant to Part B of the Medicare Act which presently pays approximately
80% of the allowable charges for each dialysis treatment furnished to
patients. The maximum payments vary based on location of the center. The
remaining 20% may be paid by Medicaid if the patient is eligible, from
private insurance funds or the patient's personal funds. Medicare and
Medicaid programs are subject to regulatory changes, statutory
<PAGE> 7
limitations and governmental funding restrictions, which may adversely
affect the Company's revenues and dialysis services payments. See
"Medicare Reimbursement" below.
The inpatient dialysis services are paid for by the hospital pursuant
to contractual pre-determined fees for the different dialysis treatments.
Inpatient treatments accounted for approximately 12% and 16% of the
Company's revenues for the years ended December 31, 1996 and 1997, respec-
tively.
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.
Under this system, the reimbursement rates are fixed in advance and have
been adjusted from time to time by Congress. This form of reimbursement
limits the allowable charge per treatment, but provides the Company with
predictable and recurring per treatment revenues and allows the Company
to retain any profit earned. An established composite rate set by HCFA
governs the Medicare reimbursement available for a designated group of
dialysis services, including dialysis treatments, supplies used for such
treatments, certain laboratory tests and medications. HCFA eliminated
routine Medicare coverage for nerve conduction studies, electrocardiograms,
chest x-rays and bone density measurements, and will only pay for such
tests when there is documentation of medical necessity. The Medicare
composite rate is subject to regional differences.
Certain other services and items are eligible for separate reimburse-
ment 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. These
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 reim-
bursement rate from a fixed fee of $138 per treatment in 1983 to approx-
imately $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 for outpatient dialysis
services. 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 1996, PROPAC recommended that the
ESRD composite reimbursement rate be increased by 2.0% for freestanding
facilities for the fiscal year 1997. In August, 1996, and in response to
the March, 1996 report of PROPAC, HCFA indicated that an increase in the
composite rate may be appropriate within the next few years and that any
rate increase must be considered in the context of Medicare budgetary
concerns. For fiscal year 1998, PROPAC recommended a 2.8% increase in
the amount paid to dialysis facilities for performance of services. If
approved by Congress, it will represent only the second increase that has
been approved for the ESRD program. However, Congress is not required to
implement this recommendation and could either raise or lower the reim-
bursement rate.
<PAGE> 8
In January, 1996, HCFA announced a three-year demonstration project
which would adjust payment rates based upon treatment status, age groups,
and the cause of renal failure. Based upon the results of the demonstra-
tion project, HCFA has stated it would make recommendations to Congress
concerning the appropriateness of paying for ESRD services on a capitated
basis. The Company is unable to predict what, if any, future changes may
occur in the rate of reimbursement. Any reduction in the Medicare
composite reimbursement rate could have a material adverse effect on
the Company's business, revenues and net earnings.
Medicaid Reimbursement
Medicaid programs are state administered programs partially funded by
the federal government. These programs are intended to provide coverage
for patients whose income and assets fall below state defined levels and
who are otherwise uninsured. The programs also serve as supplemental
insurance programs for the Medicare co-insurance portion and provide
certain coverages (e.g., oral medications) that are not covered by
Medicare. State regulations generally follow Medicare reimbursement
levels and coverages without any co-insurance amounts. Certain states,
however, require beneficiaries to pay a monthly share of the cost based
upon levels of income or assets. Pennsylvania has a Medical Assistance
Program comparable to Medicaid, with primary and secondary insurance
coverage to those who qualify. The Company is a licensed ESRD Medicaid
provider in Pennsylvania.
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. DCA, although involved in chronic and acute kidney dialysis
services for approximately 21 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 inspec-
tions by state agencies to determine if the operations meet these regu-
latory standards. The Company must comply with certain rules and
regulations established by HCFA regarding charges, procedures and policies.
In addition, each of the dialysis facilities must be certified by HCFA.
These requirements have been satisfied by the Company's dialysis facilities.
Many states have eliminated the requirement for dialysis centers to
obtain a certificate of need, a condition for regulating the establishment
and expansion of dialysis centers. There are no certificate of need
requirements in Pennsylvania where the Company has operated, nor in New
Jersey where it will be
<PAGE> 9
establishing two new centers in 1998. In past years, the Company has
always been able to comply with applicable certificate of need laws.
DCA's record of compliance with federal, state and local governmental
laws and regulations has been excellent. Regulation of healthcare
facilities, including dialysis centers, is extensive with legislation
continually proposed relating to safety, reimbursement rates, licensing
and other areas of operations. 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 require-
ments to obtain certification from HCFA. Enforcement may also become
more stringent adding to compliance costs as well as potential sanctions.
The Company regularly 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 "Fraud and Abuse" and "Stark II" below. None of DCA's business
arrangements with physicians, patients or others has been the subject of
investigation by any governmental authority. No assurance can be given
that DCA's business arrangements will not be the subject of an investiga-
tion or prosecution by a federal or state governmental authority which
could result in civil and/or criminal sanctions.
Fraud and Abuse
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 "Business - Operations" above. The Social Security Act further
prohibits, as do many state laws, the payment of patient referral fees
for treatments that are otherwise paid for by Medicare, Medicaid or
similar state programs under the Medicare and Medicaid Patient and
Program Protection Act of 1987, or the "Anti-kickback Statute." The
Anti-kickback Statute and similar state laws impose criminal and civil
sanctions on persons who knowingly and willfully solicit, offer, receive
or pay any remuneration, directly or indirectly, in return for, or to
include, the referral of a patient for treatment, among other things.
Included in the civil penalties is exclusion of the provider from partici-
pation in the Medicare and Medicaid programs. The language of the Anti-
kickback Statute has been construed broadly by the courts. The federal
government in 1991 and 1992 published regulations that established
exceptions, "safe harbors," to the Anti-kickback Statute for certain
business arrangements that would not be deemed to violate the illegal
remuneration provisions of the federal statute. All conditions of the
safe harbor must be satisfied to meet the exception, 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 each physician's patients that primarily
utilize the services of the facility. The compensation of the Company's
medical directors is fixed by a Medical Director Agreement and reflects
competitive factors in their respective location, and the size of the
center. See "Business - Physician Relationships" above. DCA has never
been challenged under these statutes and believes its arrangements with
its medical directors are in material compliance with applicable law.
The Company believes that the illegal remuneration provisions described
above are primarily directed at abusive practices that increase the
utilization and cost of services covered by governmentally funded
programs. The dialysis services provided by the Company generally
cannot, by their very nature, be over-utilized, because dialysis
<PAGE> 10
treatments are not elective and cannot be prescribed unless there is
temporary or permanent kidney failure.
DCA attempts to structure its arrangements with its physicians to
comply with the Anti-kickback Statute and similar state laws. However,
there can be no assurance that the enforcement agencies, particularly the
Office of the Inspector General within HHS, would not take a contrary
position. Certain of the Company's medical directors join with the
Company in forming subsidiaries to establish new dialysis facilities
and have received a minority interest in that subsidiary in which they
will be the medical director. Such interest does not fall within the
"safe harbor" of the Anti-kickback Statute. To date this arrangement has
not been challenged. 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 cannot predict the outcome of the rule-making process or whether
changes in the safe harbor rules will affect the Company's position with
respect to the Anti-kickback Statute, but does believe it will remain in
compliance.
Stark II
The Physician Ownership and Referral Act ("Stark II") was adopted and
incorporated into the Omnibus Budget Reconciliation Act of 1993 and became
effective January 1, 1995. Stark II bans physician referrals, with certain
exceptions, for certain "designated health services" as defined in the
statute to entities in which a physician or an immediate family member
has a "financial relationship" which includes an ownership or investment
interest in, or a compensation arrangement between the physician and the
entity. This ban is subject to several exceptions including personal
service arrangements, employment relationships and for group practices
meeting specific conditions. If applicable, 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 referral and can be excluded from participation in the Medicare and
Medicaid programs. HCFA recently released proposed rules that interpret
the provisions of Stark II and Congress' legislative intent behind their
enactment ("Proposed Rules").
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. In the Proposed Rules, HCFA clarified the definitions
of designated health services, delineating what supplies and services are
intended to be included and excepted from each category. In particular,
dialysis equipment, supplies and services were specifically excepted from
the definitions of durable medical equipment, and inpatient and outpatient
health services. HCFA indicated that the purpose behind the Stark II
prohibition on physician referral is to prevent Medicare program and
patient abuse, and that dialysis is a necessary medical treatment for
those with temporary or permanent kidney failure that is not susceptible
to that type of abuse. HCFA additionally excluded EPO (see "Business -
Operations - Ancillary Services" above) from the definition of outpatient
prescription drugs under the same reasoning.
The Company believes, based upon the Proposed Rules and the industry
practice, that Congress did not intend to include dialysis services and
the services and items provided by the Company incident to dialysis
services within the Stark II prohibitions.
The Company believes however that if the provisions of Stark II were
to apply that it would be in compliance. DCA compensates its nephrologist-
physicians as medical directors of its dialysis centers
<PAGE> 11
pursuant to Medical Director Agreements, which the Company believes meet
the exception for personal service arrangements under Stark II. Non-
affiliated physicians who send or treat their patients at any of DCA's
facilities do not receive any compensation from DCA. The Company sold
its only operating facility in which a medical director had a financial
ownership interest in October, 1997 and believes that it was in
substantial compliance with all applicable laws at the time of sale.
Medical directors of DCA's facilities in which they hold a minority
investment interest may refer patients from hospitals with which DCA has
an acute inpatient dialysis service arrangement. In the past, DCA has
created a separate subsidiary that solely handles the inpatient service
contracts for inpatient treatment in which subsidiary no physician has
any investment or ownership interest to comply with Stark II. According
to the Proposed Rules, however, acute care inpatient hospital arrangements
for dialysis services are excluded from the prohibition on physician
referrals based upon the fact that the services provided under these
arrangements are rendered under emergency circumstances and are necessary
treatments. The Company believes that its contractual arrangements with
hospitals for acute care inpatient dialysis services are in compliance
with this exception.
Health Insurance Reform Act
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 healthcare providers, but there
are no significant proposed cuts in dialysis payments. The ESRD program
received a five year waiver from reduction in Medicare outlays to allow
for the results of the HCFA project. See "Medicare Reimbursement" above.
However, 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.
Any new legislation or regulations may adversely affect the Company's
business operations, as well as its competitors.
In 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 healthcare providers,
such as significant changes to the Medicare and Medicaid fraud and abuse
laws. Some of the fraud and abuse provisions were effective January 1,
1997. While many of the provisions were self-implementing, some required
further rulemaking by HHS which rules became effective July 1, 1997.
HIPA established two programs that will coordinate federal, state and
local healthcare fraud and abuse activities, to be known as the "Fraud
and Abuse Control Program" and the "Medicare Integrity Program." The
Fraud and Abuse Control Program will be conducted jointly by HHS and the
Attorney General while the Medicare Integrity Program will enable HHS,
the Department of Justice and the FBI to monitor and review specifically
Medicare fraud. Under these programs, these governmental entities may
undertake a variety of activities, including medical utilization and
fraud review, cost report audits, secondary payor determinations, reports
of fraud and abuse actions against providers will be shared as well as
encouraged by rewarding whistleblowers with money collected from civil
fines. A new safe harbor was created that excepts certain managed care
plans from the Anti-kickback Statute. 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 under-
standing the requirements of the fraud and abuse laws. HIPA first permits
individuals to petition HHS for written advisory opinions regarding whether
an arrangement gives rise to prohibited remuneration under the federal
anti-fraud abuse laws, constitutes grounds for imposition of civil and
criminal sanctions under the federal anti-fraud
<PAGE> 12
and abuse laws or satisfies the requirements of an existing safe harbor.
These opinions are published. While these opinions are helpful to gain
insight into what is permissible without having a safe harbor, such
opinions will only be binding on HHS and the party receiving the opinion.
HIPA increases significantly the civil and criminal penalties for
offenses related to healthcare fraud and abuse. HIPA increased civil
monetary penalties from $2,000 plus twice the amount for each false
claim to $10,000 plus three times the amount for each false claim. 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 require-
ments have not been met, and (4) engaging in a pattern or practice of
upcoding claims in order to obtain greater reimbursement. However, HIPA
creates a tougher burden of proof for the government by requiring that
the government establish that the person "knew or should have known" a
false or fraudulent claim was presented. The "knew or should have known"
standard is defined to require "deliberate ignorance or reckless disregard
of the truth or falsity of the information," thus merely negligent conduct
should not violate the Civil False Claims Act.
As for criminal penalties, HIPA adds healthcare fraud, theft, embezzle-
ment, obstruction of investigations and false statements to the general
federal criminal code with respect to federally funded health programs,
thus subjecting such acts to criminal penalties. Persons convicted of
these crimes face up to 10 years imprisonment and/or fines. Moreover, a
court imposing a sentence on a person convicted of federal healthcare
offense may order the person to forfeit all real or personal property
that is derived from the criminal offense. The Attorney General is also
provided with a greatly expanded subpoena power under HIPA to investigate
fraudulent criminal activities, and federal prosecutors may utilize asset
freezes, injunctive relief and forfeiture of proceeds to limit fraud
during such an investigation.
Although the Company believes it substantially complies with currently
applicable state and federal laws and regulations and to date has not had
any difficulty in maintaining its licenses or its Medicare and Medicaid
authorizations, the healthcare service industry is and will continue to be
subject to substantial 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 re-
sulting from healthcare reform reducing dialysis reimbursement or
reducing or eliminating coverage for dialysis services would have a
material adverse effect on the Company's business.
Environmental and Health 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 separately 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
<PAGE> 13
provide protection, including providing employees subject to such exposure
with hepatitis B vaccinations, protective equipment, a written exposure
control plan and training in infection control and waste disposal.
Competition
The dialysis industry is highly competitive. There are numerous
providers in the same areas as the Company's facilities, many owned by
physicians, and several major corporations which operate dialysis
facilities regionally and nationally. Some of these major companies are
public and most of whom have substantially greater financial resources,
many more centers, patients and services locally and nationally provided
than the Company, and by virtue of such have a significant advantage in
competing for acquisitions of dialysis facilities in areas and markets
targeted by DCA. Competition for acquisitions has increased the cost of
acquiring existing dialysis facilities. DCA also faces competition from
hospitals that provide dialysis treatments. Based upon its ownership of
three centers in Pennsylvania with several others planned for or under
construction and others in negotiation, DCA is not a significant competi-
tive force.
Competitive factors most important in dialysis treatment are quality
of care and service, convenience of location and pleasantness of the
environment. Its facility in Lemoyne, Pennsylvania is in a more urban
area than the other centers 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. The
Carlisle facility is in a suburban area and faces competition from
approximately one other dialysis center.
Another significant competitive factor is the ability to attract and
retain qualified nephrologists who normally are a substantial source of
patients for the dialysis center and who are responsible for the super-
vision 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 in lieu of dialysis is
becoming a competitive factor. It is presently the second most commonly
used modality in ESRD therapy. With greater availability of kidney
donations, currently the most limiting factor, renal transplantations
could become a more significant competitive aspect to dialysis treatments
provided by the Company. Although kidney transplant is a preferred
treatment for ESRD, certain patients who have undergone such transplants
have lost their transplant function and must return to dialysis treatments.
Employees
As of February 20, 1998, DCA had 31 full time employees, exclusive of
its four executive officers, including two nurse administrators, three
clinical registered nurse managers, ten registered nurses, one chief
technician, two technical specialists, ten patient care technicians, and
three clerical employees. DCA retains seven part time employees consisting
of three registered nurses, three patient care technicians and one clerical
employee. Additionally, DCA utilizes five registered nurses and one
clerical employee on a "per diem" basis to supplement staffing.
DCA retains as independent contractors a social worker, dietitian and
medical director at each facility.
<PAGE> 14
DCA believes its relationship with its employees is good and it has not
suffered any strikes or work stoppages. None of DCA's employees is repre-
sented by any labor union. DCA is an equal opportunity employer.
Item 2. Properties
DCA owns two properties, one located in Lemoyne, Pennsylvania and the
second in Easton, Maryland. The Maryland property consists of approximately
8,000 square feet of which 5,400 square feet is leased to the purchaser
(in 1989) of one of DCA's dialysis centers and a competitor of DCA. The
lease expires March 31, 1998 and has a five year renewal option. That
tenant also leases an additional 2,040 square feet on a month-to-month
basis through the term of the original lease. DCA maintained an office
for its President at this facility until November, 1997 when the President
relocated his office to the Lemoyne facility.
The Lemoyne property of approximately 15,000 square feet houses DCA's
dialysis center of approximately 3,400 square feet, approved for 13
dialysis stations with space available for expansion. DCA uses approxi-
mately 2,500 square feet for its executive offices. DSPL, 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 $33,730 per annum
plus utilities, insurance and real estate taxes, with two renewals of five
years each.
The Easton, Maryland and Lemoyne, Pennsylvania properties are subject
to mortgages from a Maryland banking institution. As of December 31, 1997,
the remaining principal amount of the mortgage on the Lemoyne property was
approximately $192,000 and on the Easton property was approximately
$240,000. 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 bank is required for all leases, assignments
or subletting, alterations and improvements and sales of the properties.
The Company has received waivers regarding possible defaults under the
loans for sale of assets securing the loan, including assets sold in DCA's
sale of its Florida dialysis operations. See Item 7, "Management's Dis-
cussions and Analysis of Financial Condition and Results of Operations"
and Note 2 to "Notes to Consolidated Financial Statements."
As lessor, DCA 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.
One lease is for approximately 250 square feet through February 28, 1999.
The other lease is for approximately 1,950 square feet through March 31,
1998. Both rentals aggregate approximately $20,000 per annum.
The dialysis facility in Wellsboro, Pennsylvania consists of approxi-
mately 3,500 square feet, with 12 dialysis stations and is leased by DSPW
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, which became operational
in July, 1997, is leased by DSPC under a five year lease through June 30,
2002, with two renewals of five years each. The facility consists of
4,340 square feet of space accommodating 12 dialysis stations at an annual
rental of $32,550.
<PAGE> 15
DSNJ signed a five year lease for its new dialysis facility in Mana-
hawkin, 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, renewable for two
consecutive five year periods. An Addendum to that lease provides for
an additional 1,000 square feet of space free of rent for the first 19
months of rental, after which time DSNJ will pay the agreed per square
foot price as stipulated in the original lease. The facility is designed
for 12 dialysis stations. Construction of this facility is underway.
The Lemoyne and Wellsboro facilities, both of which initiated opera-
tions in 1995, are currently operating at approximately 68% and 77%
capacity, respectively, and Carlisle has operated at 55% capacity since
opening in July, 1997. The existing dialysis facilities could accommodate
greater patient volume, particularly if the Company increases hours and/or
days of operation without adding additional dialysis stations or any
additional capital expenditures. DCA has the ability and space at each
of its facilities to expand to increase patient volume subject to
obtaining appropriate governmental approval.
Renal Services leased approximately 300 square feet of office space
in New Jersey on a month-to-month basis at a monthly rental of $490.
DCA leased its 17 station dialysis facility in Fort Walton Beach,
Florida under a lease renewed through October 31, 1999. The lease was
through DSF, and was assumed by the purchasers of the facility beginning
on November 1, 1997. DCA had guaranteed DSF's performance and obligations
under the lease but was released from such guaranty by the present operator
of the facility as part of the Asset Purchase Agreement of October 31, 1997.
DCA is actively pursuing the development of dialysis facilities in
Pennsylvania and New Jersey as well as other areas of the country which
would entail the acquisition or lease of additional property.
The dialysis stations are equipped with modern dialysis equipment
under a November, 1996 master-lease/purchase agreement ("1996 Master
Lease") with a $1.00 purchase option at the end of the term. The Company
leased new equipment for its Lemoyne and Carlisle facilities beginning
June 1, 1997 and July 1, 1997, respectively, under the 1996 Master Lease.
The lease for the equipment located at the Company's former Florida
facility was assumed by the buyer under an Assignment and Assumption of
Lease and Release approved by the equipment lessor.
DCA maintains executive offices at 27 Miller Avenue, Suites 2 & 3,
Lemoyne, Pennsylvania 17043 as well as with its parent, Medicore
("Medicore" or the "Parent"), at 2337 West 76th Street, Hialeah, Florida.
<PAGE> 16
Item 3. Legal Proceedings
DCA is not involved in or subject to any material pending legal
actions.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the Company's
fiscal year to a vote of security holders through the solicitation of
proxies or otherwise. Since Medicore owns 66% of DCA, proxies are not
solicited. DCA does provide shareholders with an Information Statement,
which is similar to a proxy statement except there is no solicitation of
proxies, and an Annual Report.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company 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 three quarters of 1996 and the four quarters
for the year ended December 31, 1997 as reported by Nasdaq.
Bid Price
---------
1996 High Low
---- ---- ---
2nd Quarter(partial) ................ $6.25 $3.50
3rd Quarter.......................... $5.63 $4.06
4th Quarter.......................... $4.25 $2.50
Bid Price
---------
1997 High Low
---- ---- ---
1st Quarter.......................... $4.63 $3.00
2nd Quarter.......................... $3.86 $2.00
3rd Quarter.......................... $3.63 $1.13
4th Quarter.......................... $3.88 $1.94
At March 4, 1998, the high and low sales prices of DCA Common Stock
were $1.56 and $1.53, respectively.
Bid and asked prices are without adjustments for retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions.
At March 4, 1998, the Company had 92 shareholders of record and has
approximately 665 beneficial owners of its Common Stock.
In November, 1995, the Company effected a 50% stock dividend in-
creasing 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, capital requirements,
financial condition and similar relevant factors.
<PAGE> 17
Item 6. Selected Financial Data
The following selected financial data for the five years ended
December 31, 1997 is derived from the audited consolidated financial
statements. The selected financial data for the year ended December
31, 1993 is 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.
Consolidated Statements of Operations Data
(in thousands except per share amounts)
Years Ended December 31,
---------------------------------------------
1997(1) 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues.................... $9,221 $4,137 $2,668 $2,201 $2,090
Net income (loss)........... 1,993 (23) (167) 75 85
Earnings (Loss) per share
Basic................... .56 (.01) (.07) .03 .03
Diluted................. .55 (.01) (.07) .03 .03
Consolidated Balance Sheet Data
(in thousands)
December 31,
-------------------------------------------
1997(1) 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital............. $ 7,062 $4,529 $ 651 $ 187 $ 260
Total assets................ 11,638 7,552 3,972 6,847 6,851
Intercompany receivable
from Medicore (non-
current portion)(2)....... 3,134 4,284
Long-term debt, net of
current portion(3) 693 215 152
Stockholders'
equity ................... 8,049 6,000 2,569 5,899 5,824
- ----------
(1) Reflects the sale of substantially all the assets of DSF and related
Florida dialysis operations, including the homecare operations of DMI, to
Renal Care Group, Inc. and its affiliates ("RCG") for $5,065,000 of which
consideration $4,585,000 was cash with the balance consisting of 13,873
shares of RCG common stock. DCA owns 80% of DSF and DMI and on February
20, 1998 the 20% interest of DSF owned by its former medical director and
his 20% interest in DMI were redeemed for approximately $625,000 of which
sum included 6,936 shares of the RCG common stock valued at $240,000 with
the balance in cash. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 9 to "Notes to
Consolidated Financial Statements."
(2) $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."
(3) Includes advances from Parent.
<PAGE> 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Information
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of the 1934. The Private Securities Litigation
Reform Act of 1995 (the "Reform Act") contains certain safe harbors for
forward-looking statements. Certain of the forward-looking statements
include management's expectations, intentions, beliefs and strategies
regarding the future and the Company's growth, the character and development
of the dialysis industry, anticipated growth and revenues, the Company's
needs for and sources of funding for growth opportunities and construction,
expenditures, costs and income and similar expressions concerning matters
that are not considered historical facts. Forward-looking statements also
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."
Such forward-looking statements are subject to substantial risks and
uncertainties that could cause actual results to materially differ from
those expressed in the statements, including the general economic, market
and business conditions, opportunities pursued or not pursued by the
Company, competition, changes in federal and state laws or regulations
affecting the Company, and other factors discussed periodically in the
Company's filings. Many of the foregoing factors are beyond the control
of the Company. 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 ("Com-
mission") (effective on April 17, 1996). Accordingly, readers are
cautioned not to place undue reliance on such forward-looking statements,
which speak only as of the date made and which the Company undertakes no
obligation to revise to reflect events after the date made.
Essential to DCA is Medicare reimbursement which is a fixed rate deter-
mined by HCFA. The level of DCA's revenues and profitability may be
adversely affected by potential legislation resulting in rate cuts.
Additionally, operating costs tend to increase over the years without
any comparable increases, if any, in the prescribed dialysis treatment
rates, which usually remain fixed and have decreased over the years.
There also may be reductions in commercial third-party reimbursement rates.
The Company bills Medicare, Medicaid and private third-party payors and
handles its records of such reimbursements electronically.
The year 2000 computer information processing challenge associated
with the upcoming millennium change, with which all companies, public
and private, are faced to ensure continued proper operations and re-
porting of financial condition, has been assessed by management and is
being addressed. The singular area impacting the Company is in its
electronic billing. No other significant computer issues, particularly
any potential breakdown of the system due to its hardware or software not
being year 2000 compliant, are presently known that would affect the
Company's ability to provide dialysis services, purchase equipment or
conduct general operations. With respect to any financial impact in
view of electronic billing and maintenance of receivables, management
has evaluated its computer systems and discussed the year 2000 issue
with its computer software provider. The software provider is proceeding
to deal with modifying the software used by the Company to alleviate any
interruptions in electronic billing and to have the new software system
available during fiscal 1998. The Company believes the conversion of its
internal software program will be completed in a timely manner. While the
Company does not have a precise estimate of the cost of the software
modifications, it does not anticipate that the costs will be material or
that they will have a material adverse effect on its business.
<PAGE> 19
In addition to addressing its own internal software system, the Company
is communicating with its suppliers and other key third parties with whom
it deals to determine the extent of their year 2000 problem and what
actions they are taking to assess and address that issue. To the extent
such third parties are materially adversely affected by the year 2000
issue which is not timely corrected, that could disrupt the Company's
relationship with such parties and its operations. No assurance can be
given that the modifications of the Company's software system or those of
its key suppliers and payors will be successful and that any such year
2000 compliance failures will not have a material adverse effect on the
Company's business or results of operations.
The dialysis industry is subject to stringent and extensive regula-
tions of federal and state authorities. There are a variety of anti-
kickback regulations, prohibitions relating to self-referrals, violations
of which are punishable by criminal or civil penalties, including
exclusion from Medicare and other governmental programs. Although the
Company has never been challenged under these regulations and believes
it complies in all material respects with such laws and regulations,
there can be no assurance that there will not be unanticipated changes in
healthcare programs or laws which may make the Company change its practices
or experience material adverse effects as a result of any such challenges
or changes.
DCA's future growth depends primarily on the availability of suitable
dialysis centers for acquisition or development in appropriate and
acceptable areas, and its ability to develop these new potential dialysis
centers at costs within the budget of the Company while competing with
larger companies, some of which are public companies or divisions of
public companies with greater personnel and financial resources who have
a significant advantage in acquiring and/or developing facilities in areas
targeted by the Company. DCA opened its center in Carlisle, Pennsylvania
in July, 1997, its fourth center in Manahawkin, New Jersey is presently
under construction, and its fifth center in Toms River, New Jersey is in
the planning and architectural stage. 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, and for finding nursing and technical staff at
reasonable rates. Management continues to consult and negotiate with
nephrologists for the acquisition or development of new dialysis facili-
ties, as well as with hospitals and other healthcare maintenance entities.
Several agreements for acute inpatient services with several hospitals,
nursing homes and managed care facilities in the areas surrounding present
and future facilities are under negotiation 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. There is no assurance that the Company will
be able to enter into favorable relationships with physicians who would
become medical directors of such proposed dialysis facilities, or that
the Company will be able to acquire or develop any new dialysis centers
within a favorable geographic area. 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.
Dialysis Operations Generally
Dialysis Corporation of America is a specialized provider of nephrology
services to patients suffering primarily from chronic kidney disease. The
Company has been providing dialysis services since the mid-to-late 1970's,
became a public company in 1977, became a private company in 1979, sold
all but one of its centers up through 1989, started construction of new
centers in 1995, and became a public company again in 1996. In 1997, it
sold its Florida dialysis operations and opened a new dialysis center in
Carlisle, Pennsylvania, with two New Jersey centers and one Pennsylvania
center presently in varying stages of development.
<PAGE> 20
The Company's net revenues are derived primarily from four sources:
(i) outpatient hemodialysis services; (ii) home dialysis services,
including Method 2 services; (iii) inpatient hemodialysis services for
acute patient care provided through agreements with hospitals and other
healthcare entities; and (iv) ancillary services associated with dialysis
treatments, primarily certain tests and the administration of EPO. Dialysis
is an ongoing and necessary therapy to sustain life for kidney dialysis
patients and utilization of the Company's services is substantially
predictable. ESRD patients normally receive 156 dialysis treatments each
year. Reimbursement for the Company's outpatient dialysis services are
based on rates fixed by HCFA. For the years ended December 31, 1996 and
1997, approximately 84% and 74%, respectively, of the Company's revenues
were derived from Medicare reimbursement. Average net revenue per treat-
ment, which includes all sources of payments, governmental or private,
for the Company's in-center and home patients, including ancillary
services, was approximately $206 for the year ended December 31, 1997, as
compared to $202 for the year ended December 31, 1996. Medicare reimburse-
ment is subject to rate and other legislative changes which could reduce
dialysis treatment reimbursement under the ESRD program. The inpatient
dialysis service agreements for treating acute kidney disease are not
subject to government fixed rates, but rather are negotiated with the
hospitals, and typically the rates are higher on a per treatment basis.
The Company's inpatient treatments have accounted for approximately 12%
and 16% of the Company's revenues for the years ended December 31, 1996
and 1997, respectively.
Results of Operations
1997 Compared to 1996
Medical service revenues increased approximately $544,000 (14%) for the
year ended December 31, 1997 compared to the preceding year. This growth
was largely attributable to increased revenues of approximately $533,000
at the Company's Lemoyne, Pennsylvania facility, which commenced operations
in June 1995 and approximately $329,000 from a new dialysis center located
in Carlisle, Pennsylvania, which commenced operations in July 1997. These
increased revenues were offset by approximately $312,000 of lost revenues
from the sale of the Company's Florida dialysis operations on October 31,
1997. Although the operations of the new Carlisle center have resulted in
additional revenues during 1997, it is in the developmental stage, and
accordingly, its operating results will likely adversely affect the
Company's results of operations until they achieve a sufficient patient
Count to cover fixed operating costs.
Interest and other income increased by approximately $109,000 for the
year ended December 31, 1997 compared to the preceding year. This increase
is largely due to investment earnings derived from proceeds of the (i)
Company's public offering completed in the second quarter of 1996 and
(ii) the October, 1997 sale of its Florida dialysis operations.
1997 revenues included a gain of approximately $4,431,000 on the sale
of substantially all of the assets of Dialysis Services of Florida, Inc. -
Fort Walton Beach, and its related operations.
Cost of medical services increased by approximately $204,000 (8%) for
the year ended December 31, 1997 compared to the preceding year with the
net increase mainly attributable to the increase in revenues for the
Lemoyne, Pennsylvania facility and the commencement of operations at the
new dialysis center located in Carlisle, Pennsylvania offset by the cost
decreases resulting from the sale of the Fort Walton Beach, Florida
facility. Cost of medical services as a percentage of sales decreased to
62% for the year ended December 31, 1997 compared to 65% for the preceding
year. This decline was primarily attributable to diminuated supply costs
as a percentage of sales.
<PAGE> 21
Selling, general and administrative expenses increased by approxi-
mately $578,000 (37%) for 1997 compared to the preceding year. Selling,
general and administrative expenses as a percentage of medical services
revenues amounted to 49% compared to 41% in the preceding year. This
increase included expenses involved in the opening of the Company's new
Pennsylvania dialysis center in Carlisle and expansion of the operations
of its facility in Lemoyne, Pennsylvania offset by decreases resulting
from the sale of Florida dialysis operations. Also, included in this
increase was stock compensation expense during the fourth quarter of 1997
of approximately $322,000 in conjunction with forgiveness of notes from
option exercises.
Interest expense showed no significant increases or decreases during
the comparable periods.
For fiscal 1998, the Company will adopt the provisions of Financial
Accounting Standards Board Statements No. 130, "Reporting Comprehensive
Income" and No. 131, "Disclosure About Segments of an Enterprise and
Related Information," which it is anticipated will not have a material
effect on its consolidated financial statements or significantly change
its segment reporting disclosures. See Note 1 to "Notes to Consolidated
Financial Statements."
1996 Compared to 1995
Medical service revenues increased approximately $1,526,000 (66%) for
the year ended December 31, 1996 compared to the preceding year. This
growth was largely credited to increased revenues of approximately
$1,292,000 (243%) compared to the preceding year at the Company's new
dialysis centers located in Lemoyne, Pennsylvania which commenced
treatments in June, 1995 and in Wellsboro, Pennsylvania which 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 the inter-
company receivable from the Parent on which the Company had been earning
interest income was repaid. See "Liquidity and Capital Resources" below.
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 declined to 65% for the year ended
December 31, 1996 compared to 69% for the preceding year largely as a
result of a reduction 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
<PAGE> 22
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 in such expense was an
increase as a result of the equipment purchase agreements for dialysis
machines and a decrease in interest payments as a result of reduced
mortgages. The prime rate was 8.25% at December 31, 1996 and 8.5% at
December 31, 1995.
Liquidity and Capital Resources
Working capital totaled $7,062,000 at December 31, 1997, which
reflected an increase of approximately $2,533,000 during the year, largely
as a result of the sale of substantially all of the assets of Dialysis
Services of Florida, Inc. - Fort Walton Beach, and its related operations.
The increase in working capital included an increase in cash and cash
equivalents of $3,386,000, an increase of approximately $444,000 for
marketable securities received from the sale of the Fort Walton Beach
operations, an increase in income taxes payable of $1,655,000 resulting
from the sale of dialysis operations, and a decrease in current debt of
$408,000 from modification of bank loan agreements.
Net cash provided by operating activities was $43,000 for the twelve
months ended December 31, 1997. Net cash provided by investing activities
was $3,929,000, primarily from the sale of the Fort Walton Beach operations
($4,584,000), offset to some degree by additions to property and equipment
($631,000). Net cash used by financing activities amounted to $586,000,
primarily consisting of repayment of advances to the Company's Parent
($241,000), repurchase of 100,000 shares common stock in June 1997
($206,000) and payments on long-term debt ($136,000). See Note 9 to
"Notes to Consolidated Financial Statements."
In 1996, the Company was in default of certain covenants relating to
mortgages with a combined balance of $504,000 at December 31, 1996.
The covenants principally related to net worth and debt service ratio
requirements for which the lender waived compliance through December 31,
1997. The Company is in compliance with these covenants at 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. Through November 30, 1997, the loans contained a
provision allowing the bank mandatory repayment upon 90 days written
notice after five years which resulted in the unpaid principal balances
being reflected as a current liability. The loans were modified effective
December 1, 1997 and the call provision was removed thereby eliminating
the necessity of carrying the entire debt balance as current. 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 dialysis facility at that property
which commenced treatments in June 1995. See Note 2 to "Notes to
Consolidated Financial Statements."
The Company has an equipment financing agreement for kidney dialysis
machines for its facilities. There was additional financing of $190,000
during 1997 pursuant to this agreement, as well as a reduction of $112,000
due to the purchaser of the Florida operations assuming the equipment
financing
<PAGE> 23
obligations related to those operations. The agreement had an outstanding
balance of $285,000 at December 31, 1997 and $272,000 at December 31, 1996.
Capital is needed primarily for the development of outpatient dialysis
centers. The construction of a 10 station facility, typically the size of
the Company's dialysis facilities, costs in the range of $600,000 to
$750,000 depending on location, size and related services to be provided,
which includes equipment and initial working capital requirements.
Acquisition of an existing dialysis facility may range from $40,000 to
$70,000 per patient, and, therefore, is more expensive than construction,
although acquisition provides the Company with an immediate ongoing opera-
tion which most likely would be generating income. Development of a
dialysis facility to initiate operations takes four to six months and
usually 12 months or longer to generate income. The Company has entered
into agreements with medical directors, and intends to establish dialysis
centers in New Jersey and in Pennsylvania. It is anticipated that a New
Jersey facility, which is currently under construction, will be operational
in the third quarter of 1998 and lease negotiations are currently under
way for facilities in New Jersey and Pennsylvania.
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 in 1996 and sale
of its Florida dialysis operations in 1997. No assurance can be given
that the Company will be successful in implementing its growth strategy or
that the funds from its securities offering and Florida dialysis operations
sale will be adequate to finance such expansion. See Item 1, "Business -
Business Strategy" and Notes 7 and 9 to "Notes to Consolidated Financial
Statements."
In February 1998, the Company redeemed the 20% minority interest in
two of its subsidiaries whose assets were included in the Florida dialysis
operations sold for a total consideration of $625,000. The consideration
included $385,000 in cash and securities valued at $240,000.
The Company believes that current levels of working capital, including
the proceeds of its securities offering and the sale of its Florida
dialysis operations, will enable it to successfully meet its liquidity
demands for at least the next twelve months as well as expand its dialysis
facilities and thereby its patient base.
Impact of Inflation
Inflationary factors have not had a significant effect on the Company's
operations. 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 voluntary increased to keep pace with
increases in nursing and other patient care costs. Increased operating
costs without a corresponding increase in reimbursement rates may
adversely affect the Company's earnings in the future.
<PAGE> 24
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section to
this Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of
the Registrant
Information with respect to directors of the Company is included under
the caption "Election of Directors" of the Company's Information Statement
relating to the Annual Meeting of Shareholders to be held on Wednesday,
June 10, 1998, which is incorporated herein by reference.
<PAGE> 25
The executive officers of the Company are appointed each year by the
board of directors at its first meeting following the Annual Meeting of
Shareholders to serve during the ensuing year. There are no family rela-
tionships between any of the directors or executive officers of the Company.
The following information indicates the position and age of the
executive officers at February 28, 1998, and their business experience
during the prior five years.
Name Age Position with the Company Position Held Since
- ---- --- ------------------------- -------------------
Thomas K. Langbein 52 Chairman of the Board of 1980
Directors, and Chief Executive 1986
Officer
Bart Pelstring 57 President and 1986
Director 1985
Daniel R. Ouzts 51 Vice President (Finance) and 1996
Treasurer
Charles Coe 35 Vice President (Operations) 1996
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 also Chairman of the Board and Chief Executive Officer
of each of the Company's subsidiaries. Mr. Langbein also holds the
position 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, and a
director of certain of Techdyne's domestic and foreign subsidiaries.
Mr. Langbein is President, sole shareholder and director of Todd &
Company, Inc. ("Todd"), a broker-dealer registered with the 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 Relationships
and Related Transactions" of the Company's Information Statement relating
to the Annual Meeting of Shareholders to be held on Wednesday, June 10,
1998, 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 Medicore, and is Vice President
of Finance and Controller of Techdyne. Mr. Ouzts is a certified public
accountant. See "Certain Relationships and Related Transactions" of the
Company's Information Statement relating to the Annual Meeting of Share-
holders to be held on Wednesday, June 10, 1998, incorporated herein by
reference.
Charles Coe has been affiliated with the Company since January, 1989,
initially as nurse administrator and then administrator in 1993. Mr. Coe
became an Assistant Vice President in 1995 and in April, 1996 he was
appointed Vice President of Operations.
<PAGE> 26
Item 11. Executive Compensation
Information on executive compensation is included under the caption
"Executive Compensation" of the Company's Information Statement relating
to the Annual Meeting of Shareholders to be held on Wednesday, June 10,
1998, 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 Information Statement
relating to the Annual Meeting of Shareholders to be held on Wednesday,
June 10, 1998, which is incorporated herein by reference), and by any
person known to the Company 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
Information Statement relating to the Annual Meeting of Shareholders to be
held on Wednesday, June 10, 1998, 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 Relationships and Related Transactions"
of the Company's Information Statement relating to the Annual Meeting of
Shareholders to be held on Wednesday, June 10, 1998, which is incorporated
herein by reference.
<PAGE> 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following is a list of documents filed as part of this report.
1. All financial statements - See Index to Consolidated Financial
Statements.
2. Financial statement schedules - See Index to Consolidated
Financial Statements.
3. Refer to subparagraph (c) below.
(b) Reports on Form 8-K
1. Asset Purchase Agreement by and among the Company, Dialysis
Services of Florida, Inc. - Fort Walton Beach, DCA Medical
Services, Inc., Dialysis Medical, Inc., Renal Care Group, Inc.,
Renal Care Group of the Southeast, Inc. and Henry M. Haire, M.D.,
dated October 31, 1997 as reported in the Company's Current
Report on Form 8-K dated November 12, 1997.
(c) Exhibits +
(3)(i) -Articles of Incorporation ++
(ii) -By-Laws of the Company ++
(4)(i) -Form of Common Stock Certificate of the Company ++
(ii) -Form of 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) Material Contracts
(i) -Assignment and Assumption of Lease and Release by and among
Dialysis Services of Florida, Inc. - Fort Walton Beach(1),
Renal Care Group of the Southeast, Inc., Renal Care Group,
Inc. and JACO, L.C. dated October 31, 1997 (incorporated by
reference to the Company's Current Report on Form 8-K dated
November 12, 1997 ("November 1997 Form 8-K"), Part II, Item
7(c)(2.2)).
(ii) -Lease between Dialysis Services of Pennsylvania, Inc. -
Wellsboro(2) and James and Roger Stager dated January 15,
1995 (incorporated by reference to Medicore, Inc.'s(3)
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)).
(iii) -Lease between the Company and Service All Group, Inc. and
Terry Sheppard dated March 24, 1995 (incorporated by ref-
erence to the 1994 Medicore(3) Form 10-K, Part IV, Item
14(a) 3 (10)(lxviii)).
<PAGE> 28
(iv) -Lease between the Company and Dialysis Services of
Pennsylvania, Inc. - Lemoyne(2) dated December 1, 1995
(incorporated by reference to Medicore, Inc.'s(3) Annual
Report on Form 10-K for the year ended December 31, 1995,
Part IV, Item 14(a) 3 (10)(lxii)).
(v) -Loan Agreement between the Company and Mercantile-Safe
Deposit and Trust Company dated November 30, 1988.
(vi) -Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Wellsboro(2) and George Dy, M.D. dated
September 29, 1994 [*] (incorporated by reference to Medicore,
Inc.'s(3) 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)).
(vii) -Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Lemoyne(2) and Herbert I. Soller, M.D.
dated January 30, 1995 [*] (incorporated by reference to
the 1994 Medicore(3) Form 10-K, Part IV, Item 14(a)(3)(10)
(lx)).
(viii) -Agreement for In-Hospital Dialysis Services between
Dialysis Services of Pennsylvania, Inc. - Wellsboro(2)
and Soldiers & Sailors Memorial Hospital dated September
28, 1994 [*] (incorporated by reference to September, 1994
Medicore(3) Form 10-Q, Part II, Item 6(a)(10)(ii)).
(ix) -Assignment and Assumption of In-Patient Hospital Agreement
between DCA Medical Services, Inc.(2), Fort Walton Beach
Medical Center and Renal Care Group of the Southeast, Inc.
dated October 31, 1997 (incorporated by reference to the
November 1997 Form 8-K, Part II, Item 7(c)(2.3)).
(x) -Agreement for In-Hospital Dialysis Services between
Dialysis Services of Pennsylvania, Inc. - Lemoyne(2) and
Capital Health System, Inc. d/b/a Harrisburg Hospital dated
June 1, 1995. [*] ++
(xi) -Agreement for In-Hospital Dialysis Services between
Dialysis Services of Pennsylvania, Inc. - Lemoyne(2) and
Pinnacle Health Hospitals dated June 1, 1997 [*] (incor-
porated by reference to the Company's June 1997 Form 8-K,
Part II, Item 7(c)(10)(i)).
(xii) -Agreement between Renal Services of Pa., Inc.(2) and
Christine Durr dated December 1, 1995. ++
(xiii) -1995 Stock Option Plan of the Company (November 10, 1995). ++
(xiv) -Form of Stock Option Certificate under 1995 Stock Option
Plan (November 10, 1995).++
(xv) -Form of Non-Qualified Stock Option granted to Medical
Directors (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996
("1996 Form 10-K"), Part IV, Item 14(a) 3 (10)(xxi)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
<PAGE> 29
(xvi) -Lease between Dialysis Services of PA., Inc. - Carlisle(2)
and Lester P. Burkholder, Jr. and Kirby K. Burkholder dated
November 1, 1996 (incorporated by reference to the Company's
1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxiii)).
(xvii) -Lease between Dialysis Services of NJ., Inc. - Manahawkin(2)
and William P. Thomas dated January 30, 1997 (incorporated
by reference to the Company's 1996 Form 10-K, Part IV, Item
14(a) 3 (10)(xxiv)).
(xviii) -Addendum to Lease Agreement between William P. Thomas and
Dialysis Services of NJ., Inc. - Manahawkin(2) dated June 4,
1997.
(xix) -Medical Director Agreement between Dialysis Services of
NJ, Inc.-Manahawkin(2) 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)).
(xx) -Medical Director Agreement between Dialysis Services of
PA., Inc.-Carlisle(2) 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)).
(xxi) -Equipment Master Lease Agreement BC-105 between the
Company and B. Braun Medical, Inc. dated November 22, 1996
(incorporated by reference to the Company's 1996 Form 10-K,
Part IV, Item 14(a) 3 (10)(xxvii)).
(xxii) -Schedule of Leased Equipment 0597 commencing June 1, 1997
to Master Lease BC-105 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 ("June 30, 1997 10-Q"), Part II,
Item 6(a), Part II, Exhibit 10(i)).
(xxiii) -Schedule of Leased Equipment 0697 commencing July 1, 1997
to Master Lease BC-105 (incorporated by reference to the
Company's June 30, 1997 Form 10-Q, Part II, Item 6(a), Part
II, Exhibit 10(ii)).
(xxiv) -Assignment and Assumption of Lease and Release by and
among Dialysis Corporation of America, Renal Care Group of
the Southeast, Inc., Renal Care Group, Inc. and B. Braun
Medical, Inc. dated October 31, 1997 (incorporated by
reference to the November 1997 Form 8-K, Part II, Item
7(c)(2.4)).
(xxv) -Tenant Subordination Agreement dated February 1997
between J.A. Hunt Services, Inc. and Mercantile-Safe
Deposit and Trust Company (incorporated by reference to
the Company's 1996 Form 10-K, Part IV, Item 14(a) 3
(10)(xxviii)).
(xxvi) -Agreement for In-Hospital Dialysis Services between
Dialysis Services of Pennsylvania, Inc. - Carlisle(2) and
Carlisle Hospital dated August 15, 1997 [*] (incorporated
by reference to the Company's Current Report on Form 8-K
dated August 29, 1997, Part II, Item 7(c)(10)(i)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
<PAGE> 30
(xxvii) -Asset Purchase Agreement by and among the Company,
Dialysis Services of Florida, Inc. - Fort Walton Beach(1),
DCA Medical Services, Inc.(2), Dialysis Medical, Inc.(1),
Renal Care Group, Inc., Renal Care Group of the Southeast,
Inc. and Henry M. Haire, M.D. dated October 31, 1997
(incorporated by reference to the November 1997 Form 8-K,
Part II, Item 7(c)(2.1)).
(xxviii) -First Amendment to Loan Agreement between the Company and
Mercantile-Safe Deposit and Trust Company made as of
December 1, 1997(4).
(xxix) -First Amendment and Modification to Promissory Note to
Mercantile-Safe Deposit and Trust Company(4).
(21) Subsidiaries of the Company.
(27) Financial Data Schedule (for SEC use only).
- ----------
+ Documents incorporated by reference not included in Exhibit Volume.
++ Incorporated by reference to the Company's Registration Statement on
Form SB-2 dated December 22, 1995 as amended February 9, 1996, April 2,
1996 and April 15, 1996, Registration No. 33-80877-A, Part II, Item 27.
(1) 80% owned subsidiary, now inactive.
(2) Wholly-owned subsidiary.
(3) Parent of the Company owning approximately 66% of the Company's out-
standing 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.
(4) Dialysis Corporation of America has two loans with Mercantile-Safe
Deposit and Trust Company and such loan documents and promissory
notes conform to the exhibit filed but for the amounts of each loan.
<PAGE> 31
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 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ THOMAS K. LANGBEIN Chairman of the Board of Directors March 27, 1998
- -------------------------
Thomas K. Langbein
/s/ BART PELSTRING President and Director March 27, 1998
- -------------------------
Bart Pelstring
/s/ DANIEL R. OUZTS Vice President, Treasurer, Chief March 27, 1998
- -------------------------
Daniel R. Ouzts Financial Officer and Controller
/s/ CHARLES COE Vice President March 27, 1998
- -------------------------
Charles Coe
/s/ ROBERT W. TRAUSE Director March 27, 1998
- -------------------------
Robert W. Trause
/s/ DR. HERBERT I. SOLLER Director March 27, 1998
- -------------------------
Dr. Herbert I. Soller
<PAGE> 32
ANNUAL REPORT ON FORM 10-K
ITEM I, ITEM 14(a) (1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1997
DIALYSIS CORPORATION OF AMERICA
HIALEAH, FLORIDA
<PAGE>
FORM 10-K--ITEM 14(a)(1) and (2)
DIALYSIS CORPORATION OF AMERICA
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Dialysis Corporation
of America and subsidiaries are included in Item 8:
Page
----
Consolidated Balance Sheets as of December 31, 1997 and 1996. F-3
Consolidated Statements of Operations--Years ended December 31,
1997, 1996, and 1995. F-3
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1997, 1996 and 1995. F-5
Consolidated Statements of Cash Flows--Years ended December 31,
1997, 1996 and 1995. F-6
Notes to Consolidated Financial Statements--December 31, 1997. F-7
The following financial statement schedule of Dialysis Corporation of
America and Subsidiaries is included in Item 14(d):
Schedule II--Valuation and qualifying accounts.
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>
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, 1997 and 1996,
and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
March 25, 1998
Miami, Florida
F-2
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1997 1996
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $8,102,920 $4,717,169
Marketable securities 443,936
Accounts receivable, less allowance
of $52,000 at December 31, 1997;
$154,000 at December 31, 1996 494,163 461,269
Inventories 113,815 156,648
Prepaid expenses and other current assets 156,823 85,278
----------- -----------
Total current assets 9,311,657 5,420,364
Property and Equipment:
Land 168,358 168,358
Buildings and improvements 1,402,319 1,221,531
Machinery and equipment 949,749 1,144,191
Leasehold improvements 442,464 265,556
----------- -----------
2,962,890 2,799,636
Less accumulated depreciation 679,870 716,728
----------- -----------
2,283,020 2,082,908
Deferred expenses and other assets 43,088 49,017
----------- -----------
$11,637,765 $7,552,289
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 72,531 $ 148,660
Accrued expenses 370,099 182,986
Current portion of long-term debt 151,844 560,120
Income taxes payable 1,655,164
----------- ----------
Total current liabilities 2,249,638 891,766
Long-term debt, less current portion 564,673 215,466
Advances from parent 128,727 369,547
Minority interest in subsidiaries 645,809 75,472
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.01 par value, authorized
20,000,000 shares; 3,751,344 shares
issued, 3,651,344 shares outstanding
in 1997; 3,588,844 shares issued and
outstandingin 1996 37,513 35,888
Capital in excess of par value 4,008,720 3,748,595
Retained earnings 4,208,935 2,215,555
Treasury stock at cost; 100,000
shares at December 31, 1997 (206,250)
----------- ---------
Total stockholders' equity 8,048,918 6,000,038
----------- ----------
$11,637,765 $7,552,289
=========== ==========
See notes to consolidated financial statements.
F-3
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Medical service revenue $4,375,165 $3,830,809 $2,304,773
Gain on sale of subsidiaries' assets 4,430,663
Interest and other income 414,970 305,706 363,413
---------- ---------- ----------
9,220,798 4,136,515 2,668,186
Cost and expenses:
Cost of medical services 2,712,527 2,508,323 1,592,666
Selling, general and
administrative expenses 2,155,459 1,577,487 1,199,213
Interest expense 86,129 86,694 67,704
---------- ---------- ----------
4,954,115 4,172,504 2,859,583
---------- ---------- ----------
Income (loss) before income
taxes and minority interest 4,266,683 (35,989) (191,397)
Income tax provision 1,699,000
--------- ---------- ----------
Income (loss) before minority interest 2,567,683 (35,989) (191,397)
Minority interest in income (loss)
of consolidated subsidiaries 574,303 (13,028) (24,126)
---------- ----------- ----------
Net income (loss) $1,993,380 $ (22,961) $ (167,271)
========== ========== ==========
Earnings (loss) per share:
Basic $.56 $(.01) $(.07)
==== ===== ====
Diluted $.55 $(.01) $(.07)
==== ===== ====
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in
Common Excess of Retained Treasury
Stock Par Value Earnings Stock Total
-------- ----------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 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
Net income 1,993,380 1,993,380
Repurchase of 100,000 shares $(206,250) (206,250)
Exercise of stock options 1,625 260,125 261,750
---------- ---------- ---------- --------- ----------
Balance at December 31, 1997 $ 37,513 $4,008,720 $4,208,935 $(206,250) $8,048,918
========== ========== ========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss) $1,993,380 $ (22,961) $ (167,271)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on sale of subsidiaries' assets (4,430,663)
Depreciation 278,761 199,315 116,510
Amortization 11,116 11,235 9,190
Bad debt expense 36,726 139,802 51,181
Minority interest 574,303 (13,028) (24,126)
Stock compensation expense 322,125
Increase (decrease) relating to operating activities from:
Accounts receivable (357,280) (97,487) (415,098)
Inventories (5,223) (68,325) (51,821)
Prepaid expenses and other current assets (12,087) (64,257) (8,984)
Accounts payable (76,129) (177,505) 271,898
Accrued expenses 58,341 (36,966) 36,930
Income taxes payable 1,649,164
----------- ---------- ----------
Net cash provided by (used in) operating activities 42,534 (130,177) (181,591)
Investing activities:
Proceeds from sale of subsidiaries' assets 4,583,662
Additions to property and equipment, net of minor disposals (631,103) (159,180) (661,569)
Deferred expenses and other assets (23,429) 110,904 (52,020)
Purchase portion of minority interest in subsidiary (15,000)
----------- ---------- ----------
Net cash provided by (used in) investing activities 3,929,130 (48,276) (728,589)
Financing activities:
Net proceeds of securities offering 3,445,158
(Decrease) increase in advances from parent (240,820) 369,547 1,410,327
Repurchase of stock (206,250)
Payments on long-term debt (136,502) (113,856) (91,058)
Exercise of stock options 1,625 9,000
Dividend payments to minority shareholders (3,966) (7,467) (28,841)
----------- ---------- ----------
Net cash (used in) provided by financing activities (585,913) 3,702,382 1,290,428
----------- ---------- ---------
Increase in cash and cash equivalents 3,385,751 3,523,929 380,248
Cash and cash equivalents at beginning of year 4,717,169 1,193,240 812,992
---------- ---------- ----------
Cash and cash equivalents at end of period $8,102,920 $4,717,169 $1,193,240
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company operates three kidney dialysis centers, which are located
in Pennsylvania, has agreements to provide inpatient dialysis treatments to
various hospitals and provides supplies and equipment for dialysis home
patients.
Consolidation
The consolidated financial statements include the accounts of Dialysis
Corporation of America ("DCA") and its subsidiaries, collectively referred to as
the "Company". All material intercompany accounts and transactions have been
eliminated in consolidation. The Company is a 66.0% owned subsidiary of
Medicore, Inc. (the "Parent").
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 state in which the Company operates. Reimbursement
rates under these programs are subject to regulatory changes and governmental
funding restrictions. Laws and regulations governing the Medicare and
Medicaid programs are complex and subject to interpretation. The Company
believes that it is in compliance with all applicable laws and regulations
and is not aware of any pending or threatened investigations involving
allegations of potential wrongdoing. While no such regulatory inquiries
have been made, compliance with such laws and regulations can be subject to
future government review and interpretations as well as significant regu-
latory action including fines, penalties, and exclusions from the Medicare
and Medicaid programs.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying
amounts reported in the balance sheet for cash and cash equivalents
approximate their fair values. The credit risk associated with cash and
cash equivalents is considered low due to the high quality of the financial
institutions in which these assets are invested.
Marketable Securities
The Company follows Financial Accounting Standards Board Statement No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
Under this Statement, the Company is required to classify its marketable
equity securities as either trading or available for sale. The Company
does not purchase securities for the purpose of short-term sales;
accordingly, its securities are classified as available for sale.
Marketable securities are recorded at fair value. The marketable
securities at December 31, 1997 resulted from the sale of the Company's
Florida operations in October 1997. Since the value of these securities
has been guaranteed by the purchaser at their originally recorded valuation
of $480,000, the $36,064 difference between the market value of $443,936 at
December 31, 1997 and the guaranteed value has been recorded as a receivable
and included in other current assets at December 31, 1997.
F-7
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Inventories
Inventories, which consist primarily of supplies used in dialysis
treatments, are valued at the lower of cost (first-in, first-out method) or
market value.
Property and Equipment
Property and equipment is stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets for financial reporting purposes and by accelerated methods for income
tax purposes. Effective January 1, 1996, the Company adopted the provisions
of 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.
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 Interpre-
tations 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.
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued FAS
128, "Earnings Per Share", which was adopted on December 31, 1997. The
Company has adopted FAS 128 which requires it to change the method previ-
ously used for computing earnings per share and to restate all prior
periods. The new requirements for calculating basic earnings per share
exclude the dilutive effect of stock options and warrants. Earnings per
share under the diluted computation required under FAS 128 includes stock
options and warrants using the treasury stock method and average market
price.
F-8
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Following is a reconciliation of amounts used in the basic and
diluted computations:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ 1,993,380 $ (22,961) $(167,271)
=========== ========== =========
Weighted average shares-denominator
basic computation 3,531,584 3,237,243 2,432,844
Effect of dilutive stock options:
Stock options granted November 1995 86,539
---------- ---------- ---------
Weighted average shares, as adjusted- 3,618,123 3,237,243 2,432,844
denominator diluted computation ========== ========== =========
Earnings (loss) per share:
Basic $.56 $(.01) $(.07)
==== ====== ======
Diluted $.55 $(.01) $(.07)
==== ====== ======
</TABLE>
In addition to the dilutive stock options included in the reconcili-
ation above, which have an exercise price of $1.50 per share, there were
10,000 medical director options, 2,300,000 common stock purchase warrants
and underwriter options to purchase 100,000 shares of common of common stock
and 200,000 common stock purchase warrants which have not been included in
the earnings per share computation since they are anti-dilutive.
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:
Year Ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
Rental income $119,792 $101,161 $127,565
Interest income from Medicore 198,463
Other interest income 227,789 168,950 31,448
Other 67,289 35,595 5,937
-------- -------- --------
$414,970 $305,706 $363,413
======== ======== ========
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
Estimated Fair Value of Financial Instruments
The carrying value of cash, accounts receivable and debt in the
accompanying financial statements approximate their fair value because of
the short-term maturity of these instruments, and in the case of debt
because such instruments bear variable interest rates which approximate
market.
F-9
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
New Pronouncements
The Company will adopt the provisions of Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income"
(FAS 130) in 1998 which is required by FAS 130 for fiscal years beginning
after December 15, 1997. FAS 130 requires the presentation of comprehensive
income and its components in the financial statements and the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid in capital in the equity section of the balance sheet.
The Company does not believe that adoption of FAS 130 will have a material
effect on its financial statements. The Company will also adopt the
provisions of Financial Accounting Standards Board Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
(FAS 131) in 1998 which is required by FAS 131 for fiscal years beginning
after December 15, 1997. FAS 131 establishes standards for reporting
information about operating segments in annual financial statements with
operating segments representing components of an enterprise evaluated by
the enterprise's chief operating decision maker for purposes of making
decisions regarding resource allocation and performance evaluation. The
Company does not believe that adoption of FAS 131 will significantly
change its segment reporting disclosures.
NOTE 2--LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Mortgage note secured by land and building with a net book value of
$436,000 at December 31, 1997. Monthly principal payments of
$3,333 plus interest at 1% over the prime rate through
November 2003. The loan was redeemable at the bank's option
after November 30, 1993, and is, therefore, reflected as
current at December 31, 1996. Loan modified in December 1997
with the call provision removed. $240,036 $280,032
Mortgage note secured by land and building with
a net book value of $742,000 at December 31, 1997. Monthly
principal payments of $2,667 plus interest at 1% over the
prime rate through November 2003. The loan was redeemable at
the bank's option after November 30, 1993, and is, therefore,
reflected as current at December 31, 1996. Loan modified in
December 1997 with the call provision
removed. 191,963 223,968
Equipment financing agreement secured by equipment
with a net book value of $311,000 at December 31,
1997. Monthly payments totaling $8,179 as of
December 31, 1997 as described below pursuant to
various schedules, including principal and interest, with
interest at rates ranging from 8% to 12%. 284,518 271,586
-------- ---------
716,517 775,586
Less current portion 151,844 560,120
--------- ---------
$564,673 $215,466
========= =======
</TABLE>
F-10
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
NOTE 2--LONG-TERM DEBT--Continued
The equipment financing agreement provides financing for kidney dialysis
machines for the Company's facilities in Pennsylvania and was amended in 1996 to
include equipment for the Company's Florida facility. The initial principal
balance was approximately $195,000. Additional financing totaled approxi-
mately $124,000 in 1996 and $190,000 in 1997. In conjunction with the
Company's sale of its Florida dialysis operations on October 31, 1997, the
purchaser assumed approximately $112,000 of these financing obligations.
The balance outstanding under this agreement amounted to approximately
$285,000 at December 31, 1997 and $272,000 at December 31, 1996. Payments
under the agreement are pursuant to various schedules extending through
July 2002. Financing under the equipment purchase agreement is a noncash
financing activity which is a supplemental disclosure required by Financial
Accounting Standards Board Statement No 95, "Statement of Cash Flows".
The prime rate was 8.50% as of December 31, 1997 and 8.25% as of December
31, 1996.
Scheduled maturities of long-term debt outstanding at December 31, 1997
are approximately: 1998-$152,000; 1999-$154,000; 2000-$136,000;
2001-$112,000; 2002-$90,000; thereafter-$72,000. Interest payments on
the above debt amounted to approximately $77,000; $73,000 and $68,000 in
1997, 1996 and 1995, respectively.
The Company's various debt arrangements contain certain restrictive
covenants that, among other things, restrict the payment of dividends,
rent commitments, additional indebtedness and prohibit issuance or re-
demption of capital stock and require maintenance of certain financial
ratios.
NOTE 3--INCOME TAXES
Subsequent to the completion of the Company's public offering in April
1996, the Company files separate federal and state income tax returns. The
net operating loss carryforwards that were available at December 31, 1995
were utilized prior to the completion of its public offering. The Company
had net operating loss carryforwards of approximately $6,000 at December 31,
1996 which were fully utilized in 1997.
Deferred income taxes reflect the net tax effect of temporary differ-
ences 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:
December 31,
-------------------------
1997 1996
---- ----
Deferred tax liabilities:
Depreciation $ 27,000 $ 62,000
Prepaid expenses 4,000
-------- --------
Total deferred tax liabilities 27,000 66,000
Deferred tax assets:
Amortization 18,000 12,000
Accrued expenses 13,000 11,000
Bad debt allowance 20,000 58,000
-------- --------
Sub-total 51,000 81,000
Net operating loss carryforward 2,000
-------- --------
Total deferred tax assets 51,000 83,000
Valuation allowance for deferred tax assets (17,000)
-------- --------
Net deferred tax asset $ 24,000 $ -0-
======== ========
Due to uncertainty as to the realizability of deferred tax assets, a
valuation allowance was recorded as of December 31, 1996. For the year
ended December 31, 1997, Management has concluded that a valuation allowance
is not necessary.
F-11
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
NOTE 3--INCOME TAXES--Contined
Significant components of the income tax provision (benefit) are as
follows:
1997
----
Current
Federal $1,488,000
State 235,000
----------
$1,723,000
Deferred (7,000)
Change in valuation Allowance (17,000)
----------
$1,699,000
==========
The reconciliation of income tax attributable to income (loss) before
income taxes computed at the U.S. federal statutory rate to income tax
expense (benefit) is:
Year Ended December 31,
----------------------------------
1997 1996 1995
---- ---- ----
Statutory tax rate (34%) applied
to income (loss)
before income taxes $1,450,700 $ (12,200) $(65,000)
Adjustments due to:
State taxes, net of federal benefit 155,200 (1,300) (6,900)
Change in valuation allowance (17,300) 230,000 73,000
Benefits of net operating losses --- (213,000) ---
Non-deductible items 2,900 --- ---
Other 107,500 (3,500) (1,100)
---------- --------- --------
$1,699,000 $ --- $ ---
========== ========= ========
Income tax payments were approximately $50,000 in 1997 with no payments
in 1996 or 1995.
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, 1997, 1996 and 1995.
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 the Parent. As a result of this dividend and repayments
by the Parent, the intercompany receivable from the Parent, on which the
Company had been earning interest income, had been repaid. Interest on
these advances receivable from the Parent amounted to approximately
$198,000 in 1995. 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.
F-12
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
NOTE 4--TRANSACTIONS WITH PARENT--Continued
As of December 31, 1997 and December 31, 1996, the Company had an
intercompany advance payable to the Parent of approximately $129,000 and
$370,000, respectively, which bears interest at the short-term Treasury
Bill rate. Interest on this intercompany advance amounted to approximately
$7,000 and $14,000 for the years ended December 31, 1997 and December 31,
1996, respectively, and is included in the intercompany advance payable.
The Parent has agreed not to require repayment of the intercompany advances
prior to January 1, 1999, and therefore, the advances have been classified
as long-term at December 31, 1997.
NOTE 5--OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 1997, 1996 and 1995, respectively,
the Company paid premiums of approximately $87,000, $80,000 and $73,000
for insurance obtained through a relative of an officer and director of
the Company and the Parent.
For the years ended December 31, 1997, 1996 and 1995, respectively,
legal fees of $61,000, $63,000 and $22,000 were paid to an attorney who
acts as counsel and Secretary for the Company and the Parent.
NOTE 6--STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
is discussed below, the alternative fair value accounting provided for under
Financial Accounting Standard Board Statement No. 123 "Accounting for
Stock-Based Compensation," requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense
was recognized.
In November, 1995, the Company adopted a stock option plan for up
to 250,000 options. Pursuant to this plan, in November, 1995, the board
of directors granted 210,000 options to certain of its officers, directors,
and employees of which 19,000 options were outstanding at December 31, 1997.
These options vested immediately and are exercisable for a period of five
years through November 9, 2000 at $1.50 per share. On December 31, 1997
162,500 options were exercised by officers for which the Company received
cash payments of the par value and the Company forgave the remaining
balance due and recorded compensation expense of approximately $322,000.
In August 1996, the board of directors granted 15,000 options to the
medical directors at its three kidney dialysis centers. Following the
sale of the Company's Florida operations on October 31, 1997, 5,000 of
these options were not exercised and expired. 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 1996 and 1995,
respectively: risk-free interest rates of and 5.75% and 6.5%; 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 1.5 years and 2.5 years.
F-13
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
NOTE 6--STOCK OPTIONS--Continued
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting re-
strictions 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. No pro forma information
is provided for 1997 as no options were granted. The Company's pro forma
information follows:
1996 1995
---- ----
Pro forma net loss $(35,051) $(268,359)
======== =========
Pro forma loss per share $(.01) $(.11)
===== =====
A summary of the Company's stock option activity, and related
information for the options issued in 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year: 209,000 210,000
Granted 15,000 4.75 210,000 $1.50
Exercised (162,500) 1.50 (6,000) 1.50
Forfeited
Expired (17,500) 2.43 (10,000) 1.50
-------- ---- ------- ---- ------- -----
Outstanding-end of year 29,000 209,000 210,000
======== ======= =======
Outstanding and exercisable
at end of year
November 1995 options 19,000 1.50 194,000 1.50 210,000 1.50
August 1996 options 10,000 4.75 15,000 4.75
-------- ---- ------- ---- -------
29,000 209,000 210,000
======== ======= =======
Weighted-average fair value of
options granted during the year $1.30 $ .54
===== =====
</TABLE>
The remaining contractual life for the August 1996 options is 1.6
years and for the November 1995 options is 2.9 years.
The Company has 2,629,000 shares reserved for future issuance.
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.
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
issued to purchase one common share each at an exercise price of $4.50
exercisable from April 17, 1997 through April 16, 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 16, 2001 with the underlying warrants being substantially identical
to the public warrants except that they are exercisable at $5.40 per share.
F-14
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
NOTE 7--COMMON STOCK--Continued
In June 1997, the Company reacquired 100,000 shares of its common
stock at a cost of $206,250.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Commitments
The Company has leases on facilities housing its dialysis operations.
The aggregate lease commitments at December 31, 1997 are approximately:
1998-$82,000; 1999-$96,000; 2000-$80,000; 2001-$80,000; 2002-$64,000.
Total rent expense was approximately $73,000, $65,000 and $52,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Effective January 1, 1997, the Company established a 401(k) savings
plan (salary deferral plan) with an eligibility requirement of 1 year of
service and 21 year old age requirement. The Company has made no contri-
butions under this plan as of December 31, 1997.
NOTE 9--SALE OF SUBSIDIARIES' ASSETS
On October 31, 1997, the Company concluded a sale ("Sale") of sub-
stantially all of the assets of two of its 80% owned subsidiaries,
Dialysis Services of Florida, Inc. - Ft. Walton Beach ("DSF") (dialysis
operations) and Dialysis Medical, Inc. ("DMI") (Florida Method 2 home
patient operations), and an in-patient hospital service agreement of its
100% owned subsidiary, DCA Medical Services, Inc. pursuant to an Asset
Purchase Agreement. Consideration for the assets sold was $5,065,000
consisting of $4,585,000 in cash and $480,000 of the purchaser's common
stock which the purchaser has agreed to register within one year. Provided
that the shares are sold within 30 days of their registration, the
purchaser has agreed to make up any difference by which the sales proceeds
are less than $480,000 in cash or additional registered shares of the
purchaser at its discretion. These shares are carried at their market
value of approximately $444,000 at December 31, 1997 with the difference
between the guaranteed value and the market value reflected as a receivable
from the purchaser. In February 1998, the Company acquired, in a transac-
tion accounted for as a purchase, the remaining 20% minority interests in
two of the subsidiaries whose assets were sold. The purchase price totaled
$625,000, which included one-half of the common shares originally received
as part of the consideration of the Sale.
The pro forma consolidated condensed financial information presented
below reflects the Sale as if it had occurred on January 1, 1996. For
purposes of pro forma statement of operations information, no assumption
has been made that expenses have been eliminated which were included in
corporate expense allocations by the Company and its Parent, to the business
operations sold and which were included in the actual results of operations
of these businesses. Such expenses which amounted to approximately $125,000
and $253,000 for the years ended December 31, 1997 and December 31, 1996,
respectively. No assumption has been included in the pro forma information
as to investment income to be realized from investment of the proceeds of
the sale.
F-15
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
NOTE 9--SALE OF SUBSIDIARIES' ASSETS--Continued
The summary pro forma information, which excludes the gain on the Sale,
is not necessarily representative of what the Company's results of opera-
tions would have been if the Sale had actually occurred as of January 1,
1996 and may not be indicative of the Company's operating results for any
future periods.
SUMMARY PRO FORMA INFORMATION
Year Ended
December 31,
------------
1997 1996
---- ----
Total revenue $3,079,000 $2,102,000
========== ==========
Net loss $ (530,000) $ (422,000)
========== ==========
Loss per share:
Basic $(.15) $(.13)
===== =====
Diluted $(.15) $(.13)
===== =====
The Company has recorded a gain on the Sale of approximately
$2,747,000, representing a pre-tax gain of $4,431,000, net of estimated
income taxes of approximately $1,684,000, of which approximately $537,000
of the net after tax gain relates to the 20% minority interest in two of
the subsidiaries whose assets were sold. This gain is not reflected in
the above pro forma information.
<PAGE>
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) Material Contracts
(i) -Assignment and Assumption of Lease and Release by and among
Dialysis Services of Florida, Inc. - Fort Walton Beach(1),
Renal Care Group of the Southeast, Inc., Renal Care Group,
Inc. and JACO, L.C. dated October 31, 1997 (incorporated by
reference to the Company's Current Report on Form 8-K dated
November 12, 1997 ("November 1997 Form 8-K"), Part II, Item
7(c)(2.2)).
(ii) -Lease between Dialysis Services of Pennsylvania, Inc. -
Wellsboro(2) and James and Roger Stager dated January 15,
1995 (incorporated by reference to Medicore, Inc.'s(3)
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)).
(iii) -Lease between the Company and Service All Group, Inc. and
Terry Sheppard dated March 24, 1995 (incorporated by ref-
erence to the 1994 Medicore(3) Form 10-K, Part IV, Item
14(a) 3 (10)(lxviii)).
(iv) -Lease between the Company and Dialysis Services of
Pennsylvania, Inc. - Lemoyne(2) dated December 1, 1995
(incorporated by reference to Medicore, Inc.'s(3) Annual
Report on Form 10-K for the year ended December 31, 1995,
Part IV, Item 14(a) 3 (10)(lxii)).
(v) -Loan Agreement between the Company and Mercantile-Safe
Deposit and Trust Company dated November 30, 1988.
(vi) -Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Wellsboro(2) and George Dy, M.D. dated
September 29, 1994 [*] (incorporated by reference to Medicore,
Inc.'s(3) 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)).
(vii) -Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Lemoyne(2) and Herbert I. Soller, M.D.
dated January 30, 1995 [*] (incorporated by reference to
the 1994 Medicore(3) Form 10-K, Part IV, Item 14(a)(3)(10)
(lx)).
(viii) -Agreement for In-Hospital Dialysis Services between
Dialysis Services of Pennsylvania, Inc. - Wellsboro(2)
and Soldiers & Sailors Memorial Hospital dated September
28, 1994 [*] (incorporated by reference to September, 1994
Medicore(3) Form 10-Q, Part II, Item 6(a)(10)(ii)).
(ix) -Assignment and Assumption of In-Patient Hospital Agreement
between DCA Medical Services, Inc.(2), Fort Walton Beach
Medical Center and Renal Care Group of the Southeast, Inc.
dated October 31, 1997 (incorporated by reference to the
November 1997 Form 8-K, Part II, Item 7(c)(2.3)).
(x) -Agreement for In-Hospital Dialysis Services between
Dialysis Services of Pennsylvania, Inc. - Lemoyne(2) and
Capital Health System, Inc. d/b/a Harrisburg Hospital dated
June 1, 1995. [*] ++
(xi) -Agreement for In-Hospital Dialysis Services between
Dialysis Services of Pennsylvania, Inc. - Lemoyne(2) and
Pinnacle Health Hospitals dated June 1, 1997 [*] (incor-
porated by reference to the Company's June 1997 Form 8-K,
Part II, Item 7(c)(10)(i)).
(xii) -Agreement between Renal Services of Pa., Inc.(2) and
Christine Durr dated December 1, 1995. ++
(xiii) -1995 Stock Option Plan of the Company (November 10, 1995). ++
(xiv) -Form of Stock Option Certificate under 1995 Stock Option
Plan (November 10, 1995).++
(xv) -Form of Non-Qualified Stock Option granted to Medical
Directors (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996
("1996 Form 10-K"), Part IV, Item 14(a) 3 (10)(xxi)).
(xvi) -Lease between Dialysis Services of PA., Inc. - Carlisle(2)
and Lester P. Burkholder, Jr. and Kirby K. Burkholder dated
November 1, 1996 (incorporated by reference to the Company's
1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxiii)).
(xvii) -Lease between Dialysis Services of NJ., Inc. - Manahawkin(2)
and William P. Thomas dated January 30, 1997 (incorporated
by reference to the Company's 1996 Form 10-K, Part IV, Item
14(a) 3 (10)(xxiv)).
(xviii) -Addendum to Lease Agreement between William P. Thomas and
Dialysis Services of NJ., Inc. - Manahawkin(2) dated June 4,
1997.
(xix) -Medical Director Agreement between Dialysis Services of
NJ, Inc.-Manahawkin(2) 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)).
(xx) -Medical Director Agreement between Dialysis Services of
PA., Inc.-Carlisle(2) 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)).
(xxi) -Equipment Master Lease Agreement BC-105 between the
Company and B. Braun Medical, Inc. dated November 22, 1996
(incorporated by reference to the Company's 1996 Form 10-K,
Part IV, Item 14(a) 3 (10)(xxvii)).
(xxii) -Schedule of Leased Equipment 0597 commencing June 1, 1997
to Master Lease BC-105 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 ("June 30, 1997 10-Q"), Part II,
Item 6(a), Part II, Exhibit 10(i)).
(xxiii) -Schedule of Leased Equipment 0697 commencing July 1, 1997
to Master Lease BC-105 (incorporated by reference to the
Company's June 30, 1997 Form 10-Q, Part II, Item 6(a), Part
II, Exhibit 10(ii)).
(xxiv) -Assignment and Assumption of Lease and Release by and
among Dialysis Corporation of America, Renal Care Group of
the Southeast, Inc., Renal Care Group, Inc. and B. Braun
Medical, Inc. dated October 31, 1997 (incorporated by
reference to the November 1997 Form 8-K, Part II, Item
7(c)(2.4)).
(xxv) -Tenant Subordination Agreement dated February 1997
between J.A. Hunt Services, Inc. and Mercantile-Safe
Deposit and Trust Company (incorporated by reference to
the Company's 1996 Form 10-K, Part IV, Item 14(a) 3
(10)(xxviii)).
(xxvi) -Agreement for In-Hospital Dialysis Services between
Dialysis Services of Pennsylvania, Inc. - Carlisle(2) and
Carlisle Hospital dated August 15, 1997 [*] (incorporated
by reference to the Company's Current Report on Form 8-K
dated August 29, 1997, Part II, Item 7(c)(10)(i)).
(xxvii) -Asset Purchase Agreement by and among the Company,
Dialysis Services of Florida, Inc. - Fort Walton Beach(1),
DCA Medical Services, Inc.(2), Dialysis Medical, Inc.(1),
Renal Care Group, Inc., Renal Care Group of the Southeast,
Inc. and Henry M. Haire, M.D. dated October 31, 1997
(incorporated by reference to the November 1997 Form 8-K,
Part II, Item 7(c)(2.1)).
(xxviii) -First Amendment to Loan Agreement between the Company and
Mercantile-Safe Deposit and Trust Company made as of
December 1, 1997(4).
(xxix) -First Amendment and Modification to Promissory Note to
Mercantile-Safe Deposit and Trust Company(4).
(21) Subsidiaries of the Company.
(27) Financial Data Schedule (for SEC use only).
- ----------
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
+ Documents incorporated by reference not included in Exhibit Volume.
++ Incorporated by reference to the Company's Registration Statement on
Form SB-2 dated December 22, 1995 as amended February 9, 1996, April 2,
1996 and April 15, 1996, Registration No. 33-80877-A, Part II, Item 27.
Addendum To Lease Agreement
This Addendum dated June 4, 1997 ("Addendum") to the Lease Agreement
between WILLIAM P. THOMAS ("Lessor") and DIALYSIS SERVICES OF NJ, INC. -
MANAHAWKIN ("Lessee"), dated January, 1997 ("Lease") provides Lessee with
an additional 1,000 square feet of space to the Space already leased by
Lessor to Lessee.
In consideration of the Lease and the promises contained therein and
the rents and covenants in the Lease and hereafter mentioned, the parties
intending to be legally bound, agree as follows:
1. ADDITIONAL PREMISES
-------------------
In order for Lessor to induce Lessee to continue under the terms of
the Lease, the Lessor hereby demises and leases to Lessee an additional
1,000 square feet of rentable space ("Additional Space") adjacent to the
Space presently leased to Lessee in the Building to be used by Lessee as
offices.
2. TERM
----
Lessor represents that said Additional Space shall be ready and
available Site Prepared as provided in Section 3 of the Lease for Lessee's
Use on or before but no later then December 1, 1997, otherwise Lessee shall
have the option, at its sole discretion, to terminate the Lease and the
Addendum and recover any and all sums as provided for in Section 3 of the
Lease including renovations; Section 3 of the Lease shall apply to the
Additional Space, and the term for the Additional Space will commence on
the Commencement Date as defined in Section 3 of the Lease.
3. RENT
----
Lessor hereby provides Lessee with free rent for the Additional Space
for the first 19 months from the Commencement Date ("Free Rent Period);
and thereafter, Lessee agrees to pay Lessor for the Additional Space the
same per square foot rental, to wit $9.50 per square foot, as is requiring
for the Space as per Section 4 of the Lease.
During the Free Rent Period and through the remainder of the Term of
the Lease the Additional Space shall be added to Lessee's Proportionate
Share as such relates to additional rent as provided in Section 4 of the
Lease.
4. OTHER TERMS
-----------
All capitalized terms shall have the meaning and definitions as
provided in the Lease, except for the capitalized terms as clarified in
this Addendum; provided however, the term Space as defined in Section 1
of the Lease (presently defined as 4,000 square feet of rentable space)
shall be defined to include the actual rentable space as determined by
specific measurements of Lessor and Lessee in the immediate future, and
based upon such, the base rent as now presented in Section 4 of the Lease
will be adjusted to reflect the new and specific definition of Space as
provided herein, it being understood that the square foot rent shall
remain at $9.50 per square foot.
For purposes of the Lease, other than as provided for in this
Addendum, the term Space shall include the Additional Space.
Other than pursuant to this Addendum, the Lease shall otherwise
remain in full force and effect in accordance with its terms.
Lessor: WILLIAM P. THOMAS
/s/ William P. Thomas
By:---------------------------------
WILLIAM P. THOMAS
Lessee: DIALYSIS SERVICES OF NJ, INC. -
MANAHAWKIN
/s/ Bart Pelstring
By-----------------------------------
BART PELSTRING, President
AMENDMENT TO
LOAN AGREEMENT
THIS AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made as of
December 1, 1997, by and between DIALYSIS CORPORATION OF AMERICA, a
Florida corporation (the "Borrower"), having an address at 2337 West 76th
Street, Hialeah, FL 33016, and MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
a Maryland banking institution (the "Bank").
RECITALS
Pursuant to a certain Loan Agreement (which Loan Agreement, as the
same has or may at any time and from time to time be amended, restated,
supplemented or otherwise modified, is herein called the "Loan Agreement")
dated November 30, 1988, between the Borrower and the Bank, the Borrower
obtained a loan (the "Loan") from the Bank in accordance with and subject
to the provisions of the Loan Agreement.
The Borrower's obligation to repay the Loan with interest is
evidenced by a Promissory Note dated November 30, 1988 in the principal
amount of $600,000.00 from the Borrower to the Bank (the "Note"). The
Note has been amended pursuant to a First Amendment to Promissory Note of
even date herewith.
The Note is secured by a Deed of Trust and Security Agreement from
the Borrower to Stephen D. Palmer and William W. Duncan, Jr., trustees,
for the benefit of the Bank, covering certain real property as described
therein (the "Deed of Trust"). The Borrower's obligations under the Note
are also secured by an Assignment of Rents and Leases dated November 30,
1988 by and between the Borrower and the Bank (the "Assignment of Rents
and Leases").
The Borrower has requested the Bank to delete the call provisions of
the Loan Agreement and to make certain other accommodations and the Bank
has agreed to do so provided that, among other things, the provisions of
the Loan Agreement are amended and modified in accordance with the pro-
visions of this Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, the Bank and the Borrower agree as
follows:
1. Recitals. The Bank and the Borrower acknowledge that the above
--------
Recitals to this Amendment are true and correct, and agree that the same
are incorporated by reference into the body of this Amendment. Unless
otherwise specifically defined herein, all terms defined by the provisions
(including, without limitation, the terms "Loan Documents", "Default",
"Event of Default", "Lease", "Loan", Tenant" and "Trust Property" shall
have the same meanings ascribed to
<PAGE> 1
such terms by the provisions of the Note, Deed of Trust or the Loan Agree-
ment (as the case may be) when used herein.
2. Amendments and Modifications to Loan Agreement.
----------------------------------------------
2.1. The Loan Agreement is hereby amended and modified by
deleting Subsection D. of Section 1 of the Loan Agreement in its entirety.
2.2. The Loan Agreement is hereby amended and modified by
modifying the language of Subsection G(8) of Section 7 to read as follows:
(8) Make loans or advances to any company, person or
other entity, except for loans or advances to subsidiaries or to
Medicore which do not cause a violation of paragraph (3) above.
2.3. The Loan Agreement is hereby amended and modified by
modifying the language of Subsection G(10) of Section 7 to read as follows:
(10) At fiscal year end permit the Borrower's ratio
of the sum of net income before taxes plus interest expense
divided by interest expense of the Borrower to be less than
2.0 to 1.0.
2.4. The Loan Agreement is hereby amended and modified
by modifying the language of Subsection G(12) of Section 7 to read as
follows:
(12) Suffer or permit dissolution or liquidation
either in whole or in part of any shares of its own stock.
2.5. The Loan Agreement is hereby amended and modified by
deleting Subsection (13) of Section 7(G) and by deleting Subsection H of
Section 7 of the Loan Agreement in their entirety.
2.6. The Loan Agreement is hereby amended and modified by
deleting the notice address provided for the Borrower in Section 12 and
inserting the following in lieu thereof:
27 Miller Street
Lemoyne, PA 17043
with copies to:
Lawrence E. Jaffe, Esquire
777 Terrace Avenue
Hasbrouck Heights, NJ 07604
2.7. The Loan Agreement is hereby amended and modified
by adding the following new Section 13 to the end hereof:
<PAGE> 2
"13. Leases; Alterations to Trust Property.
-------------------------------------
13.1. Approval of Leases. Notwithstanding any-
------------------
thing to the contrary contained in this Loan Agreement, the Deed of Trust
and/or the Assignment of Rents and Leases, all Leases shall be subject to
the prior written approval of the Bank which approval shall not be unrea-
sonably withheld. All other terms and conditions regarding the Borrower's
covenants and obligations to the Bank as to any Leases remain in full force
and effect.
13.2. Alterations to Trust Property. Notwith-
-----------------------------
standing anything to the contrary contained in this Loan Agreement, in
Section 7.08 of the Deed of Trust or in any of the other Loan Documents,
the Borrower shall be permitted to make, without the Bank's prior written
approval, alterations and/or improvements to the Trust Property that are
either non-structural in nature or related to the buildout of leasehold
improvements for a Tenant under a Lease approved by the Bank. The Borrower
shall notify the Bank, in writing, of any and all such alterations upon
completion thereof.
3. Fees, Costs and Expenses. The Borrower shall pay to the Bank on
------------------------
demand all costs and expenses both now and hereafter paid or incurred with
respect to the preparation, negotiation, execution, administration and
enforcement of this Amendment and all documents related thereto, including,
without limitation, attorney's fees and expenses, recording costs, recorda-
tion and other taxes, appraisal fees, costs of record searches, title
company premiums and costs, fees and expenses for environmental audits and
survey costs.
4. Representations and Warranties. In order to induce the Bank to
------------------------------
enter into this Amendment, the Borrower represents and warrants to the Bank
that as of the date hereof (i) no Default or Event of Default exists under
the provisions of the Loan Agreement, the Note and the other Loan Documents;
(ii) no event exists which, with the giving of notice or lapse of time, or
both, could or would constitute a Default or Event of Default under the
provisions of the Loan Agreement, the Note and the other Loan Documents;
(iii) all of the representations and warranties of the Borrower in the
Loan Agreement and the other Loan Documents, are true and correct on the
date hereof as if the same were made on the date hereof; (iv) all collateral
pledged as security of the Loan is free and clear of all assignments,
security interests, liens and other encumbrances of any kind and nature
whatsoever except for those granted or permitted under the provisions of
the Loan Agreement and the other Loan Documents; (v) no material adverse
change has occurred in the business, financial condition, prospects or
operations of the Borrower since the date of the financial statements of
the Borrower most recently furnished to the Bank; and (vi) the Agreement
(as amended by this Amendment) and the other Loan Documents constitute the
legal, valid and binding obligations of the Borrower enforceable in
accordance with their terms except as enforceability may be limited by
bankruptcy, insolvency or similar laws affecting the enforcement of
creditors' rights generally. If any of the foregoing representations
and warranties shall prove to be false, incorrect or misleading in any
material respect, the Bank may, in its absolute and sole discretion,
declare (a) that an Event of Default has occurred and exists under the
provisions of the Loan Agreement and/or (b) any of the provisions of this
Amendment to be null, void and of no force and effect.
<PAGE> 3
5. Amendment and Modification Only. This Amendment is only an agree-
-------------------------------
ment amending and modifying certain provisions of the Loan Agreement. All
of the provisions of the Loan Agreement are incorporated herein by reference
and shall remain and continue in full force and effect as amended by this
Amendment. The Borrower hereby ratifies and confirms all of its obliga-
tions, liabilities and indebtedness under the provisions of the Loan
Agreement as amended by this Amendment. The Bank and the Borrower agree
it is their intention that nothing herein shall be construed to extinguish,
release or discharge or constitute, create or effect a novation of, or an
agreement to extinguish, any of the obligations, indebtedness and liabili-
ties of the Borrower under the provisions of the Loan Agreement or under
the other Loan Documents, or any assignment or pledge to the Bank of, or
any security interest or lien granted to the Bank in or on, any collateral
and security for such obligations, indebtedness and liabilities.
6. Applicable Law, Etc. This Amendment shall be governed by the
-------------------
laws of the State of Maryland and may be executed in any number of dupli-
cate originals or counterparts, each of such duplicate originals or
counterparts shall be deemed to be an original and all taken together
shall constitute one and the same instrument.
7. Binding Effect. This Amendment shall be binding upon and inure
--------------
to the benefit of the Bank and the Borrower and their respective successors
and assigns.
IN WITNESS WHEREOF, the Borrower and the Bank have executed this
Amendment under their respective seals, the day and year first written
above.
ATTEST: DIALYSIS CORPORATION OF AMERICA
/s/ Daniel R. Ouzts
- ----------------------------- By:--------------------------- (Seal)
Secretary Daniel R. Ouzts, Vice President/Finance
WITNESS: MERCANTILE-SAFE DEPOSIT AND TRUST
COMPANY
/s/ Stephen D. Palmer
- ----------------------------- By:--------------------------- (Seal)
Stephen D. Palmer, Vice President
AMENDMENT TO
LOAN AGREEMENT
THIS AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made as of
December 1, 1997, by and between DIALYSIS CORPORATION OF AMERICA, a
Florida corporation (the "Borrower") having an address at 2337 West 76th
Street, Hialeah, FL 33016 and MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
a Maryland banking institution (the "Bank").
RECITALS
Pursuant to a certain Loan Agreement (which Loan Agreement, as the
same has or may at any time and from time to time be amended, restated,
supplemented or otherwise modified, is herein called the "Loan Agreement")
dated November 30, 1988, between the Borrower and the Bank, the Borrower
obtained a loan (the "Loan") from the Bank in accordance with and subject
to the provisions of the Loan Agreement.
The Borrower's obligation to repay the Loan with interest is evidenced
by a Promissory Note dated November 30, 1988 in the principal amount of
$480,000.00 from the Borrower to the Bank (the "Note"). The Note has been
amended pursuant to a First Amendment to Promissory Note of even date here-
with.
The Note is secured by a Mortgage and Security Agreement from the
Borrower for the benefit of the Bank, covering certain real property as
described therein (the "Mortgage"). The Borrower's obligations under the
Note are also secured by an Assignment of Rents and Leases dated November
30, 1988 by and between the Borrower and the Bank (the "Assignment of
Rents and Leases").
The Borrower has requested the Bank to delete the call provisions of
the Loan Agreement and to make certain other accommodations and the Bank
has agreed to do so provided that, among other things, the provisions of
the Loan Agreement are amended and modified in accordance with the pro-
visions of this Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, the Bank and the Borrower agree as
follows:
1. Recitals. The Bank and the Borrower acknowledge that the above
--------
Recitals to this Amendment are true and correct, and agree that the same
are incorporated by reference into the body of this Amendment. Unless
otherwise specifically defined herein, all terms defined by the provisions
(including, without limitation, the terms "Loan Documents", "Default",
"Event of Default", "Lease", "Loan", Tenant" and "Trust Property" shall
have the same meanings ascribed to
<PAGE> 1
such terms by the provisions of the Note, Mortgage or the Loan Agreement
(as the case may be) when used herein.
2. Amendments and Modifications to Loan Agreement.
----------------------------------------------
2.1. The Loan Agreement is hereby amended and modified by
deleting Subsection D. of Section 1 of the Loan Agreement in its entirety.
2.2. The Loan Agreement is hereby amended and modified by
modifying the language of Subsection G(8) of Section 7 to read as follows:
(8) Make loans or advances to any company, person or
other entity, except for loans or advances to subsidiaries or to
Medicore which do not cause a violation of paragraph (3) above.
2.3. The Loan Agreement is hereby amended and modified by
modifying the language of Subsection G(10) of Section 7 to read as follows:
(10) At fiscal year end permit the Borrower's ratio of
the sum of net income before taxes plus interest expense divided
by interest expense of the Borrower to be less than 2.0 to 1.0.
2.4. The Loan Agreement is hereby amended and modified by
modifying the language of Subsection G(12) of Section 7 to read as follows:
(12) Suffer or permit dissolution or liquidation either
in whole or in part of any shares of its own stock.
2.5. The Loan Agreement is hereby amended and modified by
deleting Subsection (13) of Section 7(G) and by deleting Subsection H of
Section 7 of the Loan Agreement in their entirety.
2.6. The Loan Agreement is hereby amended and modified by
deleting the notice address provided for the Borrower in Section 12 and
inserting the following in lieu thereof:
27 Miller Street
Lemoyne, PA 17043
with copies to:
Lawrence E. Jaffe, Esquire
777 Terrace Avenue
Hasbrouck Heights, NJ 07604
2.7. The Loan Agreement is hereby amended and modified by
adding the following new Section 13 to the end hereof:
<PAGE> 2
"13. Leases; Alterations to Trust Property.
-------------------------------------
13.1. Approval of Leases. Notwithstanding any-
------------------
thing to the contrary contained in this Loan Agreement, the Mortgage and/or
the Assignment of Rents and Leases, all Leases shall be subject to the
prior written approval of the Bank which approval shall not be unreasonably
withheld. All other terms and conditions regarding the Borrower's covenants
and obligations to the Bank as to any Leases remain in full force and effect.
13.2. Alterations to Trust Property. Notwith-
-----------------------------
standing anything to the contrary contained in this Loan Agreement, in
Section 7.08 of the Mortgage or in any of the other Loan Documents, the
Borrower shall be permitted to make, without the Bank's prior written
approval, alterations and/or improvements to the Trust Property that are
either non-structural in nature or related to the buildout of leasehold
improvements for a Tenant under a Lease approved by the Bank. The Borrower
shall notify the Bank, in writing, of any and all such alterations upon
completion thereof."
3. Fees, Costs and Expenses. The Borrower shall pay to the Bank on
------------------------
demand all costs and expenses both now and hereafter paid or incurred with
respect to the preparation, negotiation, execution, administration and
enforcement of this Amendment and all documents related thereto, including,
without limitation, attorney's fees and expenses, recording costs, recorda-
tion and other taxes, appraisal fees, costs of record searches, title
company premiums and costs, fees and expenses for environmental audits
and survey costs.
4. Representations and Warranties. In order to induce the Bank to
------------------------------
enter into this Amendment, the Borrower represents and warrants to the
Bank that as of the date hereof (i) no Default or Event of Default exists
under the provisions of the Loan Agreement, the Note and the other Loan
Documents; (ii) no event exists which, with the giving of notice or lapse
of time, or both, could or would constitute a Default or Event of Default
under the provisions of the Loan Agreement, the Note and the other Loan
Documents; (iii) all of the representations and warranties of the Borrower
in the Loan Agreement and the other Loan Documents, are true and correct
on the date hereof as if the same were made on the date hereof; (iv) all
collateral pledged as security of the Loan is free and clear of all
assignments, security interests, liens and other encumbrances of any kind
and nature whatsoever except for those granted or permitted under the
provisions of the Loan Agreement and the other Loan Documents; (v) no
material adverse change has occurred in the business, financial condition,
prospects or operations of the Borrower since the date of the financial
statements of the Borrower most recently furnished to the Bank; and (vi)
the Agreement (as amended by this Amendment) and the other Loan Documents
constitute the legal, valid and binding obligations of the Borrower
enforceable in accordance with their terms except as enforceability may
be limited by bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally. If any of the foregoing
representations and warranties shall prove to be false, incorrect or
misleading in any material respect, the Bank may, in its absolute and
sole discretion, declare (a) that an Event of Default has occurred and
exists under the provisions of the Loan Agreement and/or (b) any of the
provisions of this Amendment to be null, void and of no force and effect.
<PAGE> 3
5. Amendment and Modification Only. This Amendment is only an
-------------------------------
agreement amending and modifying certain provisions of the Loan Agreement.
All of the provisions of the Loan Agreement are incorporated herein by
reference and shall remain and continue in full force and effect as
amended by this Amendment. The Borrower hereby ratifies and confirms
all of its obligations, liabilities and indebtedness under the provisions
of the Loan Agreement as amended by this Amendment. The Bank and the
Borrower agree it is their intention that nothing herein shall be construed
to extinguish, release or discharge or constitute, create or effect a
novation of, or an agreement to extinguish, any of the obligations,
indebtedness and liabilities of the Borrower under the provisions of the
Loan Agreement or under the other Loan Documents, or any assignment or
pledge to the Bank of, or any security interest or lien granted to the
Bank in or on, any collateral and security for such obligations, indebted-
ness and liabilities.
6. Applicable Law, Etc. This Amendment shall be governed by the
-------------------
laws of the State of Maryland and may be executed in any number of dupli-
cate originals or counterparts, each of such duplicate originals or
counterparts shall be deemed to be an original and all taken together
shall constitute one and the same instrument.
7. Binding Effect. This Amendment shall be binding upon and inure
--------------
to the benefit of the Bank and the Borrower and their respective successors
and assigns.
IN WITNESS WHEREOF, the Borrower and the Bank have executed this
Amendment under their respective seals, the day and year first written
above.
ATTEST: DIALYSIS CORPORATION OF AMERICA
/s/ Daniel R. Ouzts
- ----------------------------- By:--------------------------- (Seal)
Secretary Daniel R. Ouzts, Vice President/Finance
WITNESS: MERCANTILE-SAFE DEPOSIT AND TRUST
COMPANY
/s/ Stephen D. Palmer
- ----------------------------- By:--------------------------- (Seal)
Stephen D. Palmer, Vice President
AMENDMENT AND MODIFICATION
TO PROMISSORY NOTE
THIS AMENDMENT AND MODIFICATION TO PROMISSORY NOTE (this "Amendment")
is made as of December 1, 1997, by and between DIALYSIS CORPORATION OF
AMERICA, a Florida corporation (the "Borrower"), having an address at 2337
West 76th Street, Hialeah, FL 33016, and MERCANTILE-SAFE DEPOSIT AND TRUST
COMPANY, a Maryland banking institution (the "Bank").
RECITALS
Pursuant to a certain Loan Agreement (which Loan Agreement, as the
same has or may at any time and from time to time be amended, restated,
supplemented or otherwise modified, is herein called the "Loan Agreement")
dated November 30, 1988, between the Borrower and the Bank, the Borrower
obtained a loan (the "Loan") from the Bank in accordance with and subject
to the provisions of the Loan Agreement. The Borrower's obligation to
repay the Loan with interest is evidenced by a Promissory Note dated
November 30, 1988 in the principal amount of $600,000.00 from the Borrower
to the Bank (the "Note").
The Note is secured by a Deed of Trust and Security Agreement from
the Borrower to Stephen D. Palmer and William W. Duncan, Jr., trustees,
for the benefit of the Bank, covering certain real property as described
therein (the "Deed of Trust"). The Note is also secured by an Assignment
of Rents and Leases dated November 30, 1988 by and between the Borrower
and the Bank (the "Assignment of Rents and Leases").
The Borrower has requested the Bank to delete the call provisions of
the Note and to make certain other accommodations and the Bank has agreed
to do so provided that, among other things, the provisions of the Note are
amended and modified in accordance with the provisions of this Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, the Bank and the Borrower agree as
follows:
1. Recitals. The Bank and the Borrower acknowledge that the above
--------
Recitals to this Amendment are true and correct, and agree that the same
are incorporated by reference into the body of this Amendment. Unless
otherwise specifically defined herein, all terms defined by the provisions
of the Note or the Loan Agreement (including, without limitation, the
terms "Loan Documents" and "Event of Default" shall have the same meanings
ascribed to such terms by the provisions of the Note or the Loan Agreement
(as the case may be) when used herein.
2. Unpaid Balance of Note. The unpaid balance of the principal
----------------------
amount of the Note
<PAGE> 1
as of December 1, 1997 is $243,369.00.
3. Amendments and Modifications to Note.
------------------------------------
The Note is hereby amended and modified by deleting Section 6
in its entirety.
4. Fees, Costs and Expenses. The Borrower shall pay to the Bank on
------------------------
demand all costs and expenses both now and hereafter paid or incurred with
respect to the preparation, negotiation, execution, administration and
enforcement of this Amendment and all documents related thereto, including,
without limitation, attorney's fees and expenses, recording costs, recor-
dation and other taxes, appraisal fees, costs of record searches, title
company premiums and costs, fees and expenses for environmental audits
and survey costs.
5. Amendment and Modification Only. This Amendment is only an agree-
-------------------------------
ment amending and modifying certain provisions of the Note. All of the
provisions of the Note are incorporated herein by reference and shall
remain and continue in full force and effect as amended by this Amendment.
The Borrower hereby ratifies and confirms all of its obligations, liabili-
ties and indebtedness under the provisions of the Note as amended by this
Amendment and under the provisions of the Loan Agreement. The Bank and the
Borrower agree it is their intention that nothing herein shall be construed
to extinguish, release or discharge or constitute, create or effect a
novation of, or an agreement to extinguish, any of the obligations, in-
debtedness and liabilities of the Borrower under the provisions of the
Note or of the Borrower or any other party under the provisions of the
other Loan Documents or any assignment or pledge to the Bank of, or any
security interest or lien granted to the Bank in or on, any collateral and
security for such obligations, indebtedness and liabilities.
6. Applicable Law, Etc. This Amendment shall be governed by the
-------------------
laws of the State of Maryland and may be executed in any number of dupli-
cate originals or counterparts, each of such duplicate originals or
counterparts shall be deemed to be an original and all taken together
shall constitute one and the same instrument.
7. Binding Effect. This Amendment shall be binding upon and inure to
--------------
the benefit of the Bank and the Borrower and their respective successors
and assigns.
<PAGE> 2
IN WITNESS WHEREOF, the Borrower and the Bank have executed this
Amendment under their respective seals, the day and year first written
above.
ATTEST: DIALYSIS CORPORATION OF AMERICA
/s/ Daniel R. Ouzts
- ------------------------------ By:---------------------------- (Seal)
Secretary Daniel R. Ouzts, Vice President/Finance
WITNESS: MERCANTILE-SAFE DEPOSIT AND TRUST
COMPANY
/s/ Stephen D. Palmer
- ------------------------------ By:---------------------------- (Seal)
Stephen D. Palmer, Vice President
AMENDMENT AND MODIFICATION
TO PROMISSORY NOTE
THIS AMENDMENT AND MODIFICATION TO PROMISSORY NOTE (this "Amendment")
is made as of December 1, 1997, by and between DIALYSIS CORPORATION OF
AMERICA, a Florida corporation (the "Borrower"), having an address at 2337
West 76th Street, Hialeah, FL 33016, and MERCANTILE-SAFE DEPOSIT AND TRUST
COMPANY, a Maryland banking institution (the "Bank").
RECITALS
Pursuant to a certain Loan Agreement (which Loan Agreement, as the
same has or may at any time and from time to time be amended, restated,
supplemented or otherwise modified, is herein called the "Loan Agreement")
dated November 30, 1988, between the Borrower and the Bank, the Borrower
obtained a loan (the "Loan") from the Bank in accordance with and subject
to the provisions of the Loan Agreement. The Borrower's obligation to
repay the Loan with interest is evidenced by a Promissory Note dated
November 30, 1988 in the principal amount of $480,000.00 from the Borrower
to the Bank (the "Note").
The Note is secured by a Mortgage and Security Agreement from the
Borrower for the benefit of the Bank, covering certain real property as
described therein (the "Mortgage"). The Note is also secured by an Assign-
ment of Rents and Leases dated November 30, 1988 by and between the
Borrower and the Bank (the "Assignment of Rents and Leases").
The Borrower has requested the Bank to delete the call provisions of
the Note and to make certain other accommodations and the Bank has agreed
to do so provided that, among other things, the provisions of the Note are
amended and modified in accordance with the provisions of this Agreement.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, the Bank and the Borrower agree as
follows:
1. Recitals. The Bank and the Borrower acknowledge that the above
--------
Recitals to this Amendment are true and correct, and agree that the same
are incorporated by reference into the body of this Amendment. Unless
otherwise specifically defined herein, all terms defined by the provisions
of the Note or the Loan Agreement (including, without limitation, the
terms "Loan Documents" and "Event of Default" shall have the same meanings
ascribed to such terms by the provisions of the Note or the Loan Agreement
(as the case may be) when used herein.
2. Unpaid Balance of Note. The unpaid balance of the principal
----------------------
amount of the Note as of December 1, 1997 is $194,631.00.
<PAGE> 1
3. Amendments and Modifications to Note.
------------------------------------
The Note is hereby amended and modified by deleting Section 6 in its
entirety.
4. Fees, Costs and Expenses. The Borrower shall pay to the Bank on
------------------------
demand all costs and expenses both now and hereafter paid or incurred with
respect to the preparation, negotiation, execution, administration and
enforcement of this Amendment and all documents related thereto,
including, without limitation, attorney's fees and expenses, recording
costs, recordation and other taxes, appraisal fees, costs of record
searches, title company premiums and costs, fees and expenses for environ-
mental audits and survey costs.
5. Amendment and Modification Only. This Amendment is only an
-------------------------------
agreement amending and modifying certain provisions of the Note. All of
the provisions of the Note are incorporated herein by reference and shall
remain and continue in full force and effect as amended by this Amendment.
The Borrower hereby ratifies and confirms all of its obligations, liabil-
ities and indebtedness under the provisions of the Note as amended by this
Amendment and under the provisions of the Loan Agreement. The Bank and
the Borrower agree it is their intention that nothing herein shall be
construed to extinguish, release or discharge or constitute, create or
effect a novation of, or an agreement to extinguish, any of the obliga-
tions, indebtedness and liabilities of the Borrower under the provisions
of the Note or of the Borrower or any other party under the provisions
of the other Loan Documents or any assignment or pledge to the Bank of,
or any security interest or lien granted to the Bank in or on, any col-
lateral and security for such obligations, indebtedness and liabilities.
6. Applicable Law, Etc. This Amendment shall be governed by the
-------------------
laws of the State of Maryland and may be executed in any number of
duplicate originals or counterparts, each of such duplicate originals or
counterparts shall be deemed to be an original and all taken together
shall constitute one and the same instrument.
7. Binding Effect. This Amendment shall be binding upon and inure
--------------
to the benefit of the Bank and the Borrower and their respective successors
and assigns.
<PAGE> 2
IN WITNESS WHEREOF, the Borrower and the Bank have executed this
Amendment under their respective seals, the day and year first written
above.
ATTEST: DIALYSIS CORPORATION OF AMERICA
/s/ Daniel R. Ouzts
- ----------------------------- By:---------------------------- (Seal)
Secretary Daniel R. Ouzts, Vice President/Finance
WITNESS: MERCANTILE-SAFE DEPOSIT AND TRUST
COMPANY
/s/ Stephen D. Palmer
- ----------------------------- By:---------------------------- (Seal)
Stephen D. Palmer, Vice President
Exhibit 21
SUBSIDIARIES
------------
Jurisdiction of Percentage Owned
Subsidiaries Incorporation By Registrant
- ------------ ------------- -------------
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 NJ, Inc. -
Toms River* New Jersey 100%
Dialysis Services of Pennsylvania, Inc.-
Carlisle Pennsylvania 100%
Dialysis Services of Pennsylvania, Inc.-
Chambersburg* 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%
* presently inactive.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,102,920
<SECURITIES> 443,936
<RECEIVABLES> 494,163
<ALLOWANCES> 0
<INVENTORY> 113,815
<CURRENT-ASSETS> 9,311,657
<PP&E> 2,962,890
<DEPRECIATION> 679,870
<TOTAL-ASSETS> 11,637,765
<CURRENT-LIABILITIES> 2,249,638
<BONDS> 567,673
0
0
<COMMON> 37,513
<OTHER-SE> 8,011,405
<TOTAL-LIABILITY-AND-EQUITY> 11,637,765
<SALES> 4,375,165
<TOTAL-REVENUES> 9,220,798
<CGS> 2,712,527
<TOTAL-COSTS> 2,712,527
<OTHER-EXPENSES> 2,155,459
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,129
<INCOME-PRETAX> 4,266,683
<INCOME-TAX> 1,699,000
<INCOME-CONTINUING> 1,993,380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,993,380
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
<FN>
Accounts receivable are net of allowance of $52,000 at December 31, 1997.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<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> (.01)
<FN>
Accounts receivable are net of allowance of $154,000 at December 31, 1996.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,545,574
<SECURITIES> 0
<RECEIVABLES> 826,180
<ALLOWANCES> 0
<INVENTORY> 147,273
<CURRENT-ASSETS> 4,712,756
<PP&E> 3,568,101
<DEPRECIATION> 906,432
<TOTAL-ASSETS> 7,425,129
<CURRENT-LIABILITIES> 1,027,666
<BONDS> 301,185
0
0
<COMMON> 35,888
<OTHER-SE> 5,852,704
<TOTAL-LIABILITY-AND-EQUITY> 7,425,129
<SALES> 3,360,537
<TOTAL-REVENUES> 3,630,029
<CGS> 2,050,530
<TOTAL-COSTS> 2,050,530
<OTHER-EXPENSES> 1,349,235
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,193
<INCOME-PRETAX> 166,071
<INCOME-TAX> 62,000
<INCOME-CONTINUING> 94,804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,804
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
<FN>
Accounts receivable are net of allowance of $135,000 at September 30, 1997.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,826,028
<SECURITIES> 0
<RECEIVABLES> 552,976
<ALLOWANCES> 0
<INVENTORY> 136,693
<CURRENT-ASSETS> 4,725,729
<PP&E> 3,258,437
<DEPRECIATION> 826,562
<TOTAL-ASSETS> 7,196,809
<CURRENT-LIABILITIES> 931,199
<BONDS> 236,032
0
0
<COMMON> 35,888
<OTHER-SE> 5,800,285
<TOTAL-LIABILITY-AND-EQUITY> 7,196,809
<SALES> 2,080,454
<TOTAL-REVENUES> 2,247,975
<CGS> 1,288,698
<TOTAL-COSTS> 1,288,698
<OTHER-EXPENSES> 857,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,079
<INCOME-PRETAX> 60,006
<INCOME-TAX> 14,000
<INCOME-CONTINUING> 42,385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,385
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<FN>
Accounts receivable are net of allowance of $133,000 at June 30, 1997.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,982,400
<SECURITIES> 0
<RECEIVABLES> 529,871
<ALLOWANCES> 0
<INVENTORY> 117,199
<CURRENT-ASSETS> 4,874,506
<PP&E> 2,956,616
<DEPRECIATION> 76,256
<TOTAL-ASSETS> 7,163,783
<CURRENT-LIABILITIES> 760,827
<BONDS> 213,814
0
0
<COMMON> 35,888
<OTHER-SE> 5,986,355
<TOTAL-LIABILITY-AND-EQUITY> 7,163,783
<SALES> 1,034,488
<TOTAL-REVENUES> 1,114,371
<CGS> 626,607
<TOTAL-COSTS> 626,607
<OTHER-EXPENSES> 443,384
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,494
<INCOME-PRETAX> 21,886
<INCOME-TAX> 0
<INCOME-CONTINUING> 22,250
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,205
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<FN>
Accounts receivable are net of allowance of $144,000 at March 31, 1997.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,538,115
<SECURITIES> 0
<RECEIVABLES> 500,095
<ALLOWANCES> 0
<INVENTORY> 109,242
<CURRENT-ASSETS> 5,352,459
<PP&E> 2,714,325
<DEPRECIATION> 775,410
<TOTAL-ASSETS> 7,334,825
<CURRENT-LIABILITIES> 796,821
<BONDS> 124,503
0
0
<COMMON> 35,878
<OTHER-SE> 5,949,696
<TOTAL-LIABILITY-AND-EQUITY> 7,334,825
<SALES> 2,839,730
<TOTAL-REVENUES> 3,049,759
<CGS> 1,872,937
<TOTAL-COSTS> 1,872,937
<OTHER-EXPENSES> 1,138,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,316
<INCOME-PRETAX> (25,868)
<INCOME-TAX> 17,000
<INCOME-CONTINUING> (35,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,925)
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<FN>
Accounts receivable are net of allowance of $135,000 at September 30, 1997.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,632,527
<SECURITIES> 0
<RECEIVABLES> 526,197
<ALLOWANCES> 0
<INVENTORY> 111,544
<CURRENT-ASSETS> 5,483,247
<PP&E> 2,659,700
<DEPRECIATION> 733,579
<TOTAL-ASSETS> 7,447,406
<CURRENT-LIABILITIES> 916,479
<BONDS> 133,891
0
0
<COMMON> 35,828
<OTHER-SE> 5,923,106
<TOTAL-LIABILITY-AND-EQUITY> 7,447,406
<SALES> 1,871,025
<TOTAL-REVENUES> 1,977,520
<CGS> 1,233,500
<TOTAL-COSTS> 1,233,500
<OTHER-EXPENSES> 749,641
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,855
<INCOME-PRETAX> (47,476)
<INCOME-TAX> 10,000
<INCOME-CONTINUING> (55,065)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,065)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
<FN>
Accounts receivable are net of allowance of $97,000 at June 30, 1996.
</TABLE>
