================================================================================
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, 1998
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
------
DIALYSIS CORPORATION OF AMERICA
---------------------------------------------
(Name of small business issuer in its charter)
FLORIDA 59-1757642
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
27 MILLER AVENUE, LEMOYNE, PENNSYLVANIA 17043
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (717) 730-6164
--------------
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of
the Exchange Act:
TITLE OF EACH CLASS
-------------------------------
Common Stock, $.01 par value
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 11, 1999 was approximately $1,542,333.
As of March 11, 1999, the Company had 3,546,344 outstanding shares of
its common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Registration Statement on Form SB-2 dated December 22,
1995, as amended February 9, 1996, April 2, 1996 and April 15, 1996,
Registration No. 33-80877-A Part II, Item 27, Exhibits.
Registrant's Annual Report, Form 10-K for the years ended December 31,
1996 and 1997.
Annual Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for
the year ended December 31, 1994, Part IV, Exhibits.
================================================================================
<PAGE>
DIALYSIS CORPORATION OF AMERICA
Index to Annual Report on Form 10-K
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
Item 1. Business.......................................................................... 1
Item 2. Properties........................................................................ 17
Item 3. Legal Proceedings................................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............................... 19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......... 19
Item 6. Selected Financial Data........................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................... 21
Item 7A. Quantitative and Qualitative Disclosure About Market Risk......................... 26
Item 8. Financial Statements and Supplementary Data....................................... 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...................................................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 28
Item 11. Executive Compensation............................................................ 28
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 28
Item 13. Certain Relationships and Related Transactions.................................... 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 29
</TABLE>
<PAGE>
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 ("Securities Act"), 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 of the
Company's growth and operations, the character and development of the dialysis
industry, anticipated revenues, the Company's needs for and sources of funding
for expansion 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 Item 7, "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 ("Commission") (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.
ITEM 1. BUSINESS
HISTORICAL
Dialysis Corporation of America ("DCA" or the "Company"), a Florida
corporation organized in 1976, 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"). The Company became a public company in 1977, went private in
1979, selling all but one of its centers through 1989. The Company began
construction of new centers in 1995, and in 1996 once again became a public
company. In 1997, the Company sold its Florida dialysis operations, which
included an acute care inpatient dialysis services agreement with a Florida
hospital. DCA currently operates five outpatient dialysis facilities in Lemoyne,
Wellsboro, Carlisle and Chambersburg, Pennsylvania, through its wholly owned
subsidiaries, Dialysis Services of Pa., Inc. - Lemoyne ("DSPL"), Dialysis
Services of Pa., Inc. - Wellsboro ("DSPW"), Dialysis Services of Pa., Inc. -
Carlisle ("DSPC"), and Dialysis Services of Pa., Inc. - Chambersburg ("DSPCh"),
respectively, and operates a dialysis facility in New Jersey through its 80%
owned Dialysis Services of NJ., Inc. - Manahawkin ("DSNJ-M"). The Company treats
Method II homecare patients in Pennsylvania through its subsidiary, DCA Medical
Services, Inc. ("DCAMS"). Additional new facilities are anticipated, currently
through construction and development of new dialysis centers as opposed to
acquisition.
<PAGE>
GENERAL
Management believes the Company distinguishes itself on the basis of
quality patient care. The Company currently provides outpatient dialysis
services through its five modern outpatient facilities to approximately 112
patients in Pennsylvania and New Jersey. For the year ended December 31, 1998,
the Company performed approximately 16,750 dialysis treatments, of which
approximately 13,160 were outpatient treatments, approximately 2,190 were
homecare patients, and approximately 1,400 represented inpatient dialysis
treatments. The Company's facilities are designed for a maximum of 71 stations
to render outpatient dialysis treatment and training of home dialysis patients.
DCA's inpatient dialysis treatments are conducted under contractual
relationships currently with three hospitals located in areas serviced by three
of the Company's outpatient dialysis subsidiaries. Homecare, sometimes referred
to as Method II home patient treatment, requires the Company to provide
equipment and supplies, training, patient monitoring and follow-up assistance to
patients who are able to perform their treatments at home.
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 much 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 1997, its fourth center in Manahawkin, New
Jersey in 1998, its fifth center in Chambersburg, Pennsylvania the January, 1999
and is in the planning stage of development of its sixth center in Toms River,
New Jersey. However, there is no assurance that the Toms River facility will be
completed. Additionally, there is intense competition for retaining qualified
nephrologists, who normally are a substantial if not the sole source of patient
referrals and are responsible for the supervision of the dialysis centers, and
assist in finding nursing and technical staff at reasonable rates.
The Company's net revenues are derived primarily from four sources: (i)
outpatient hemodialysis services; (ii) home dialysis services, including Method
II 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 erythropoietin ("EPO"), a bio-engineered protein
that stimulates the production of red blood cells, since a deteriorating kidney
looses its ability to regulate red blood cell count, resulting in anemia.
Dialysis is an ongoing and necessary therapy to sustain life for kidney dialysis
patients and utilization of the Company's services is substantially predictable.
ESRD patients normally receive 156 dialysis treatments each year. For each of
the two years ended December 31, 1997 and 1998, approximately 74% of the
Company's revenues were derived from Medicare reimbursement. Average net
revenue per treatment, which includes all sources of payments, governmental or
private, for the Company's in-center and home patients, including ancillary
services, was approximately $205 for the year ended December 31, 1998, as
compared to $206 for the year ended December 31, 1997.
Essential to the operations and income of the Company is Medicare
reimbursement which is a fixed rate determined by the Health Care Financing
Administration ("HCFA") of the Department of Health and Human Services ("HHS").
The level of DCA's revenues and profitability may be adversely affected by
future legislation that could result in rate cuts. Additionally, the Company's
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
2
<PAGE>
reductions in commercial third-party reimbursement rates. See "Operations -
Medicare Reimbursement." The inpatient dialysis service agreements for treating
acute kidney disease are not subject to government fixed rates, but rather are
negotiated with the hospitals, and typically the rates are higher on a per
treatment basis. The Company's inpatient treatments have accounted for
approximately 16% and 11% of the Company's revenues for the years ended December
31, 1997 and 1998, respectively.
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 failure, or End Stage Renal
Disease ("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 complications resulting from
diabetes, hypertension, advanced age, and specific hereditary, cystic and
urological diseases. ESRD patients, in order to survive, must obtain a kidney
transplant, which procedure is limited due to lack of suitable kidney donors and
ESRD patients and the incidence of rejection of transplanted organs, or obtain
regular dialysis treatment for the rest of their lives.
Based upon information published by HCFA, the approximate number of
ESRD patients requiring dialysis treatments in the United States grew 9% to
approximately 284,000 at the end of 1996, the latest year in which there is
complete and compiled information by HCFA, due to the fact that HCFA statistics
are gathered from Medicare billing records, which take approximately two years
to be compiled. 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. HCFA reported in the 1998 United States
Renal Data System ("USRDS") Annual Report that total direct public and private
medical payments for ESRD patients were approximately $14.55 billion in 1996, of
which approximately $9.6 billion was paid by the federal government through the
Medicare program. The overall ESRD program costs increased 11.4% from 1995 to
1996.
According to estimated statistics of HCFA, at June, 1998, there were
approximately 3,470 Medicare-certified facilities, which number includes all
freestanding and hospital based centers and transplant centers. Of those,
approximately 70% are freestanding facilities and approximately 65% of the
independent dialysis facilities are non-hospital for-profit 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 non-hospital owned
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 outpatient facility.
The most prevalent form of treatment for ESRD patients is hemodialysis,
which involves the use of an artificial kidney, known as a dialyzer, to perform
the function of removing toxins and excess fluids from the bloodstream. This is
accomplished with a dialysis machine, a complex blood filtering device which
takes the place of certain functions of the kidney and which machine also
controls external blood flow and monitors the toxic and fluid removal process.
The dialyzer has two separate chambers divided
3
<PAGE>
by a semi-permeable membrane, and at the same time the blood circulates through
one chamber, a dialyzer fluid is circulated through the other chamber. The
toxins and excess fluid pass through the membrane into the dialysis fluid. On
the average, patients usually receive three treatments per week with each
treatment taking three to five hours. Dialysis treatments are performed by teams
of licensed nurses and trained technicians pursuant to the staff physician's
instructions.
Home hemodialysis treatment requires the patient to be medically
suitable and have a qualified assistant. Additionally, home hemodialysis
requires training for both the patient and the assistant, which usually takes
four to eight weeks. Such training is provided by each of the Company's
facilities. The use of conventional home hemodialysis has declined and is
minimal due to the patient's suitability and lifestyle, the need for the
presence of a partner and a dialysis machine at home, and the higher expense
involved over 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 dialysis
solution installed manually into the patient's peritoneal cavity, which does not
require the 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 22 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. The first priority is top quality patient care. In June,
1998, there were approximately 3,470 Medicare approved ESRD facilities of which
approximately 65% were independent for-profit 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 physicians and
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.
A new Vice President was added to the Company's management in 1998 to
direct and supervise the development and acquisition of new dialysis facilities.
Under his direction, the Company is actively seeking and negotiating with
several physicians to establish new outpatient dialysis facilities at several
locations. While the Company is continually pursuing new opportunities, there
are no firm agreements to acquire or develop any additional facilities or to
provide inpatient dialysis treatment, and no assurance can be given that any
such agreements will be made.
4
<PAGE>
SAME CENTER GROWTH
The Company endeavors to increase same center growth by adding quality
staff and management and attracting new patients to its existing facilities. DCA
seeks to accomplish this objective by rendering high caliber patient care in
convenient, safe and serene conditions for everyone involved. The Company
believes that it has existing adequate space and stations within its facilities
to accommodate greater patient volume and maximize its treatment potential and
is working 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 patient base under the current treatment of a
local nephrologist, since the facility is primarily going to serve such
patients. Other considerations in evaluating a proposed acquisition or
development of a dialysis facility are the availability and cost of qualified
and skilled personnel, particularly nursing and technical staff, the size and
condition of the facility and its equipment, the atmosphere for the patients,
the area's demographics and population growth estimates, state regulation of
dialysis and healthcare services, and the existence of competitive factors such
as hospital or proprietary non-hospital owned and existing outpatient dialysis
facilities within reasonable proximity to the proposed center.
Expansion of the Company's operations is being approached presently
through the development of its own dialysis facilities. Acquisition of existing
outpatient dialysis centers, which the Company has not done in the past, is a
faster but much more costly means of growth. The primary reason for the sale of
independently owned centers by physicians is typically the avoidance of
administrative and financial responsibilities, freeing their time to devote to
their professional practice. Other motivating forces are the physician-owner's
desire to be part of a larger public organization allowing for economies of
scale and the ability to realize a return on their investment.
To construct and develop a new facility ready for operations may take
an average of four to six months, and approximately 12 months or longer to
generate income, all of which are subject to location, size and competitive
elements. Construction of a 12 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 to pursue or complete
such an acquisition.
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 to eliminate the administrative burdens of
providing dialysis services to their patients as well as the expense involved in
maintaining dialysis equipment, supplies and personnel. 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. DCA believes that
these arrangements are beneficial to the Company's operations, since the
contract rates are
5
<PAGE>
individually negotiated with each hospital and are not fixed by government
regulation as is the case with Medicare reimbursement fees for ESRD patient
treatment.
Management continues to consult and negotiate with nephrologists for
the acquisition or development of new dialysis facilities, as well as with
hospitals and other healthcare maintenance entities for inpatient agreements.
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
negotiations will result in an agreement or that any agreement 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. 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. See
"Business Strategy", "Operations" and "Competition" of Item 1, "Business", and
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
OPERATIONS
LOCATION, CAPACITY AND USE OF FACILITIES
The Company currently operates five outpatient dialysis facilities in
Pennsylvania and New Jersey with a total designed capacity of 71 licensed
stations. The Company owns and operates those centers through its subsidiaries,
DSPL, DSPW, DSPC, DSPCh and DSNJ-M. The Lemoyne, Pennsylvania dialysis facility
is located on property owned by the Company and leased to DSPL. See Item 2,
"Properties."
The Company also provides acute care inpatient dialysis services to
three hospitals in areas serviced by three of the Company's five dialysis
facilities and is in the process of negotiating additional contracts in the
areas surrounding its other facilities and in tandem with development of future
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 years ended December
31, 1997 and 1998, provided approximately 7,241 and 7,468 dialysis treatments,
respectively. DSPW commenced operations in September, 1995 and for the years
ended December 31, 1997 and 1998, provided 2,298 and 3,602 dialysis treatments,
respectively. DSPC commenced operations in the third quarter of 1997, providing
1,346 treatments at year end and for the year ended December 31, 1998, provided
3,483 treatments. From July, 1998 to December 31, 1998, DSNJ-M provided 247
treatments. DSPCh just commenced operations in January, 1999.
The Company estimates that on average its centers were operating at
approximately 56% of capacity as of December 31, 1998, based on the assumption
that a dialysis center is able to provide up to three treatments 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
6
<PAGE>
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. 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.
The Company maintains a team of expert dialysis specialists to provide
for the individual needs of each patient. In accordance with participation
requirements under the Medicare ESRD program, each facility retains a medical
director qualified and experienced in the practice of nephrology and the
administration of a renal dialysis facility. See "Physician Relationships"
below. Each facility is overseen by a nurse administrator who supervises the
daily operations and the staff, which consists of registered nurses, licensed
practical nurses, patient care technicians, a part-time social worker to assist
the patient and family to adjust to dialysis treatment and to provide help in
financial assistance and planning, and a part-time registered dietitian. These
individuals supervise the patient's needs and treatments. See "Employees" below.
The Company must continue to attract and retain skilled nurses and other staff,
competition for whom is intense.
The Company's facilities offer high-efficiency and conventional
hemodialysis, which, in the Company's experience, provides the most viable
treatment for most patients. The Company considers its dialysis equipment to be
both modern and efficient, providing state of the art treatment in a safe and
comfortable environment. In 1998, the Company leased an additional 17 machines
which are more advanced and include better safety features and updated
technology. The addition of the improved equipment enhances the Company's
ability to provide more efficient treatment in the opinion of management.
The Company's facilities also offer home dialysis, primarily CAPD and
CCPD. Training programs for CAPD or CCPD generally encompass two to three weeks
at each facility, and such training is conducted by the facility's home training
nurse. After the patient completes training, they are able to perform treatment
at home with equipment and supplies provided by the Company.
INPATIENT DIALYSIS SERVICES
The Company presently provides inpatient dialysis services to three
hospitals in Pennsylvania under agreements with the Company's local subsidiary.
Each agreement is for a one-year term with automatic one-year renewal terms,
subject to termination by notice of either party. Inpatient services are
typically necessary for patients with acute kidney failure resulting from trauma
or similar causes, patients in the early stages of ESRD, and ESRD patients who
require hospitalization for other reasons.
ANCILLARY SERVICES
The Company's dialysis facilities provide certain ancillary services to
ESRD patients, including the administration of EPO upon a physician's
prescription. EPO is a bio-engineered protein which stimulates the production of
red blood cells and is used in connection with dialysis to treat anemia, a
medical complication frequently experienced by ESRD patients. EPO decreases the
necessity for blood transfusions in ESRD patients. Other ancillary services that
the Company provides to its patients include electrocardiograms and blood
transfusions, all of which are separately reimbursed by Medicare. See "Medicare
Reimbursement" below.
7
<PAGE>
PHYSICIAN RELATIONSHIPS
An integral element to the success of a facility is its association
with area nephrologists. A dialysis patient generally seeks treatment at a
facility near the patient's home and where such patient's nephrologist has
established its practice. Consequently, 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 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.
Agreements with medical directors are usually for a term of five years
or more with renewal provisions. Each agreement specifies the duties,
responsibilities and compensation of the medical director. Usually, physician's
fees for services are billed to the government payment authority on a direct
basis and paid directly to the physician or the professional corporation which
acts as the medical director for the facility. Under each agreement, the medical
director or professional association maintains his, her or its own medical
malpractice insurance. The agreements also provide for non-competition in a
limited geographic area surrounding that particular dialysis center during the
term of the agreement and upon termination for a limited period. However, the
agreements do not prohibit physicians providing services at the Company's
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 would
have a material adverse effect on the operations of that facility and the
Company. Compensation of medical directors is separately negotiated for each
facility and generally depends on competitive factors such as the local market,
the physician's qualifications and the size of the facility.
QUALITY ASSURANCE
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 deficiencies in that care and any
necessary improvements of the quality of care. Specifically, this program
requires each center's staff, including its medical director and/or nurse
administrator to regularly review quality assurance data, whether related to
dialysis treatment services, equipment, technical and environmental
improvements, and staff-patient and personnel relationships. These evaluations
are in addition to assuring regulatory compliance with HCFA and the Occupational
Safety and Health Administration ("OSHA"). The Company's manager of compliance,
who is a registered nurse, oversees this program in addition to ensuring that
the Company meets federal and state compliance requirements for dialysis
centers. See "Government Regulation" below.
8
<PAGE>
PATIENT REVENUES
A substantial amount of the fees for outpatient dialysis treatments are
funded under the ESRD Program established by the federal government under the
Social Security Act, and administered in accordance with rates set by HCFA. It
has been reported by HCFA that 92% of all dialysis patients were covered by
Medicare. The balance of the outpatient charges are paid by private payors
including the patient's medical insurance, private funds or state Medicaid
plans. Pennsylvania and New Jersey, presently the states in which the Company
operates, provide Medicaid or comparable benefits to qualified recipients to
supplement their Medicare coverage.
Under the ESRD Program, payments for dialysis services are determined
pursuant to Part B of the Medicare Act which presently pays 80% of the allowable
charges for each dialysis treatment furnished to patients. The maximum payments
vary based on the geographic location of the center. The remaining 20% may be
paid by Medicaid if the patient is eligible, from private insurance funds or the
patient's personal funds. Medicare and Medicaid programs are subject to
regulatory changes, statutory limitations and government funding restrictions,
which may adversely affect 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 16% and 11% of the Company's
revenues for the years ended December 31, 1997 and 1998, respectively.
MEDICARE REIMBURSEMENT
The Company is reimbursed primarily from third party payors including
Medicaid, commercial insurance companies, but substantially by Medicare under a
prospective reimbursement system for chronic dialysis services. Each of the
Company's dialysis facilities is certified to participate in the Medicare
program. Under that Medicare system, the reimbursement rates are fixed in
advance and limit the allowable charge per treatment, but provides 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
such tests as nerve conduction studies, electrocardiograms, chest x-rays and
bone density measurements, and will only pay for such tests when there is
documentation of medical necessity. The Medicare composite rate is subject to
regional differences in wage earnings.
The Company receives reimbursement for outpatient dialysis services
provided to Medicare-eligible patients at rates that are currently between $122
and $124 per treatment, depending upon regional wage variations. The Medicare
reimbursement rate is subject to change by legislation and recommendations by
the Medicare Payment Advisory Commission ("MedPAC"), a new commission mandated
by the Balanced Budget Act of 1997 and continuing the work of the Prospective
Payment Assessment Commission ("PROPAC"). 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. Any rate
increase by Congress must be considered in the context of Medicare budgetary
concerns. In 1998, MedPAC recommended a 2.7% increase in the amount paid to
dialysis facilities for performance of services, which if passed by Congress,
would constitute the second increase that has been approved for the ESRD program
since its inception.
9
<PAGE>
Congress is not required to implement such recommendation and could otherwise
increase or decrease the Medicare reimbursement rate.
Other ancillary services and items are eligible for separate
reimbursement under Medicare and are not part of the composite rate, including
certain drugs such as EPO, the allowable rate of which is currently $10 per 1000
units (proposed to be reduced to $9 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
sources of income to the Company compared to reimbursement for actual treatment.
However, the proposal to reduce the reimbursement rate of EPO could adversely
impact the Company's income from EPO if the proposal is enacted by Congress. The
Company routinely submits claims monthly and is usually paid by Medicare within
30 days of the submission.
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, as well as New Jersey, with primary
and secondary insurance coverage to those who qualify. The Company is a licensed
ESRD Medicaid provider in Pennsylvania, and has applied to be an approved
Medicaid provider in New Jersey.
POTENTIAL LIABILITY AND INSURANCE
Participants in the health care industry are subject to lawsuits based
upon alleged negligence, many of which involve large claims and significant
defense costs. DCA, although involved in chronic and acute kidney dialysis
services for approximately 22 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. The medical directors supervising
the Company's dialysis operations and other physicians practicing at the
facilities are required to maintain their own professional malpractice insurance
coverage.
GOVERNMENT REGULATION
GENERAL
Dialysis treatment centers must comply with various state and federal
health laws which are generally applicable to healthcare facilities. The
dialysis center must meet a variety of governmental standards including but not
limited to maintenance of equipment and proper records, personnel and
10
<PAGE>
quality assurance programs. Each of the dialysis facilities must be certified by
HCFA, and the Company must comply with certain rules and regulations established
by HCFA regarding charges, procedures and policies. Each dialysis center is also
subject to periodic inspections by federal and state agencies to determine if
their operations meet the appropriate regulatory standards. These requirements
have been satisfied by each of 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 or New Jersey where the Company is operating. 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 remains excellent. Regulation of healthcare facilities,
including dialysis centers, is extensive with legislation continually proposed
relating to safety, reimbursement rates, licensing and other areas of
operations. The Company is unable to predict the scope and effect of any changes
in government regulations, particularly any modifications in the reimbursement
rate for medical services or requirements to obtain certification from HCFA.
Enforcement may also become more stringent adding to compliance costs as well as
potential sanctions.
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. To date, none of DCA's business arrangements with
physicians, patients or others have been the subject of investigation by any
governmental authority. No assurance can be given, however, that DCA's business
arrangements will not be the subject of a future investigation or prosecution by
a federal or state governmental authority which could result in civil and/or
criminal sanctions.
FRAUD AND ABUSE
The Social Security Act provides Medicare coverage to most persons
regardless of age or financial condition for dialysis treatments as well as
kidney transplants. The Social Security Act further prohibits, as do many state
laws, the payment of patient referral fees for treatments that are otherwise
paid for by Medicare, Medicaid or similar state programs under the Medicare and
Medicaid Patient and Program Protection Act of 1987, or the "Anti-kickback
Statute." The Anti-kickback Statute and similar state laws impose criminal and
civil sanctions on persons who knowingly and willfully solicit, offer, receive
or pay any remuneration, directly or indirectly, in return for, or to include,
the referral of a patient for treatment, among other things. Included in the
civil penalties is exclusion of the provider from participation in the Medicare
and Medicaid programs. The language of the Anti-kickback Statute has been
construed broadly by the courts. The federal government in 1991 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, who is 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
11
<PAGE>
in their respective location, and the size of the center, and the physician's
professional qualifications. The medical director's fee is fixed in advance for
periods of one to five years and does not take into account the volume of
patient treatments or amounts of referrals to the Company's dialysis center. Two
of the Company's outpatient dialysis centers are owned jointly between the
Company and a group of physicians, who hold a minority position and who also act
as the medical director for those facilities. DCA attempts to structure its
arrangements with its physicians to comply with the Anti-Kickback Statute.
However, many of these physicians refer patients to the Company's facilities.
The Company believes that the value of the minority interest represented by
stock of the Company's subsidiaries issued to physicians has been consistent
with the fair market value of assets transferred to, or services performed by
such physicians for the Company, and in certain cases, monetary compensation,
and there is no intent to induce referrals to the Company's facilities. 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.
Management believes that the illegal remuneration provisions described
above are primarily directed at abusive practices that increase the utilization
and cost of services covered by governmentally funded programs. The dialysis
services provided by the Company generally cannot, by their very nature, be
over-utilized, since dialysis treatment is not elective and cannot be prescribed
unless there is temporary or permanent kidney failure. There are safe harbors
for certain arrangements. However, these relationships with medical director
ownership of a minority interest in a Company facility does not satisfy all of
the criteria for the safe harbor, and there can be no assurance that these
relationships will not subject the Company to investigation or prosecution by
enforcement agencies.
With respect to the Company's inpatient dialysis services, it provides
the hospital or similar healthcare entity with dialysis services, including
qualified nursing and technical personnel, supplies, equipment and technical
services. In certain instances, medical directors of a Company facility who have
a minority interest in that facility may refer patients to hospitals with which
the Company has an inpatient dialysis services arrangement. The federal
Anti-kickback Statute could apply, but the Company believes its acute inpatient
hospital services are in compliance with the law. See "Stark II" below.
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 group practices meeting specific conditions. If
Stark II is found to be applicable to the facility, the entity is prohibited
from claiming payment for such services under the Medicare or Medicaid programs,
is liable for the refund of amounts received pursuant to prohibited claims, 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. Last year,
HCFA released proposed rules
12
<PAGE>
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 further
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. There can be no assurance, though, that final Stark
II regulations will adopt such a position. No final rules have been promulgated,
however, and are not expected to be published until the end of 1999 or beginning
of 2000.
If the provisions of Stark II were found to apply to the Company's
arrangements however, the Company believes that it would be in compliance. DCA
compensates its nephrologist-physicians as medical directors of its dialysis
centers 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.
Medical directors of DCA's facilities in which they hold a minority
investment interest may refer patients to hospitals with which DCA has an acute
inpatient dialysis service arrangement. Stark II may be interpreted to apply to
these types of interests. 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.
If HCFA or any other government entity takes a contrary position in the
Stark II final regulations or otherwise, the Company may be required to
restructure certain existing compensation agreements with its medical directors,
or, in the alternative, to refuse to accept referrals for designated health
services from certain physicians. That legislation prohibits Medicare or Medi-
caid reimbursement of items or services provided pursuant to a prohibited
referral, and imposes substantial civil monetary penalties on facilities which
submit claims for reimbursement. If such were to be the case, the Company could
be required to repay amounts reimbursed for drugs, equipment and services that
HCFA determines to have been furnished in violation of Stark II, in addition
to substantial civil monetary penalties, which may adversely affect the
Company's operations and future financial results. The Company believes that if
Stark II is interpreted by HCFA or any other governmental entity to apply to the
Company's arrangements, it is possible that the Company will be permitted to
bring its financial relationships with referring physicians into material com-
pliance with the provisions of Stark II on a prospective basis.
13
<PAGE>
However, prospective compliance may not eliminate the amounts or penalties, if
any, that might be determined to be owed for past conduct, and there can be no
assurance that such prospective compliance, if permissible, would not have a
material adverse effect on the Company.
HEALTH INSURANCE REFORM ACT
Congress has taken action in 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, future legislation or regulations may
be enacted that could significantly modify the ESRD program or substantially
reduce the amount paid to the Company for its services. Further, statutes or
regulations may be adopted which demand 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, which is funded
by the Medicare Hospital Insurance Trust Fund, will enable HHS, the Department
of Justice and the FBI to monitor and review specifically Medicare fraud.
Under these programs, these governmental entities will undertake a
variety of monitoring activities which were previously left to providers to
conduct, including medical utilization and fraud review, cost report audits,
secondary payor determinations, reports of fraud and abuse actions against
providers will be shared as well as encouraged by rewarding whistleblowers with
money collected from civil fines. The Incentive Program for Fraud and Abuse
Information, a new program from HIPA, began in January, 1999 rewarding Medicare
recipients 10% of the overpayment up to $1,000 for reporting Medicare fraud and
abuse. HIPA further extends coverage of the fraud and abuse laws to all
federally funded health care programs and to private health plans; but the
Anti-kickback Statute does not apply to private health plans.
HIPA also sets forth a program intended to assist providers in
understanding the requirements of the fraud and abuse laws. HIPA first permits
individuals to petition 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 and abuse laws or satisfies the requirements of an
existing safe harbor. These opinions are published by HHS. 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
14
<PAGE>
practices, namely (1) submitting a claim that the person knows or has reason to
know is for medical items or services that are not medically necessary, (2)
transferring remuneration to Medicare and Medicaid beneficiaries that is likely
to influence such beneficiary to order or receive items or services, (3)
certifying the need for home health services knowing that all of the coverage
requirements have not been met, and (4) engaging in a pattern or practice of
upcoding claims in order to obtain greater reimbursement. However, HIPA creates
a tougher burden of proof for the government by requiring that the government
establish that the person "knew or should have known" a false or fraudulent
claim was presented. The "knew or should have known" standard is defined to
require "deliberate ignorance or reckless disregard of the truth or falsity of
the information," thus merely negligent conduct should not violate the Civil
False Claims Act.
As for criminal penalties, HIPA adds healthcare fraud, theft,
embezzlement, obstruction of investigations and false statements to the general
federal criminal code with respect to federally funded health programs, thus
subjecting such acts to criminal penalties. Persons convicted of these crimes
face up to 10 years imprisonment and/or fines. Moreover, a court imposing a
sentence on a person convicted of federal healthcare offense may order the
person to forfeit all real or personal property that is derived from the
criminal offense. The Attorney General is also provided with a greatly expanded
subpoena power under 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 and continually changing 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
approval as a certified provider under the Medicare or Medicaid programs or its
licenses under the laws of any state or other governmental authority from which
a substantial portion of its revenues is derived or a change resulting from
healthcare reform, a reduction of dialysis reimbursement or a reduction or
complete elimination of coverage for dialysis services would have a material
adverse effect on 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. Most of the Company's waste is
non-hazardous. HCFA requires that all dialysis facilities have a contract with a
licensed medical waste handler for any hazardous waste. The Company also follows
OSHA's Hazardous Waste Communications Policy, which requires all employees to be
knowledgeable of the presence of and familiar with the use and disposal of
hazardous chemicals in the facility. Medical waste of each facility is handled
by licensed local medical waste sanitation agencies who are primarily
responsible for compliance with such laws.
There are a variety of regulations promulgated under OSHA relating to
employees exposed to blood and other potentially infectious materials requiring
employers, including dialysis centers, to provide protection. The Company
adheres to OSHA's protective guidelines, including regularly testing employees
and patients for exposure to hepatitis B and providing employees subject to such
exposure with hepatitis B vaccinations on an as-needed basis, protective
equipment, a written exposure control plan and training in infection control and
waste disposal.
15
<PAGE>
OTHER REGULATION
There are also federal and state laws prohibiting anyone from
presenting false claims or fraudulent information for payments by Medicare,
Medicaid and other third-party payors. These laws provide for both criminal and
civil penalties, exclusion from Medicare and Medicaid participation, repayment
of previously collected amounts and other financial penalties under the False
Claims Act. The submission of Medicare cost reports and requests for payment by
dialysis centers are covered by these laws. The Company believes it has the
proper internal controls and procedures for issuance of accounts and complete
cost reports and payment requests. However, there is no assurance that such
reports and requests are materially accurate and complete and therefore subject
to a challenge under these laws.
Certain states have anti-kickback legislation and laws dealing with
self-referral provisions similar to the federal Anti-kickback Statute and Stark
II. The Company has no reason to believe that it is not in compliance with such
state laws.
COMPETITION
The dialysis industry is highly competitive. There are numerous
providers who have facilities in the same areas as the Company. Many are owned
by physicians or major corporations which operate dialysis facilities regionally
and nationally. The Company's operations are small in comparison with those
corporations. Some of these major companies are public, including Fresenius AG,
Renal Care Group, Inc., Total Renal Care Holdings, Inc., and Everest Healthcare
Service Corp., and most of which have substantially greater financial resources,
many more centers, patients and services than the Company, and by virtue of such
have a significant advantage over the Company in competing for nephrologists and
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.
Competitive factors most important in dialysis treatment are quality of
care and service, convenience of location and pleasantness of the environment.
Another significant competitive factor is the ability to attract and retain
qualified nephrologists. These physicians are a substantial source of patients
for the dialysis centers, are required as medical directors of the dialysis
facility for it to participate in the Medicare ESRD program, and are responsible
for the supervision and operations of the center. The Company's medical
directors usually are subject to non-compete restrictions within a limited
geographic area from the center they administer. Additionally, there is always
substantial competition for obtaining qualified, competent nurses and technical
staff at reasonable labor costs.
Based upon advances in surgical techniques, immune suppression and
computerized tissue typing, cross-matching of donor cells and donor organ
availability, renal transplantation in lieu of dialysis is becoming a
competitive factor. It is presently the second most commonly used modality in
ESRD therapy. With greater availability of kidney donations, currently the most
limiting factor, renal transplantations could become a more significant
competitive aspect to 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 March 10, 1999, DCA had 42 full time employees, including nurse
administrators, clinical registered nurse managers, registered nurses, chief
technician, technical specialists, patient care technicians, and clerical
employees. DCA retains sixteen part time employees consisting of registered
nurses, patient care
16
<PAGE>
technicians and clerical employees. Occasionally, DCA utilizes employees on a
"per diem" basis to supplement staffing.
DCA retains nine part-time independent contractors who include the
social workers and dietitians at each facility. These are in addition to the
medical directors, who are independent contractors and who supervise patient
treatment at each facility.
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 represented
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
7,400 square feet which is leased to the purchaser (in 1989) of one of DCA's
dialysis centers and a competitor of DCA. The lease was renewed for an
additional five years through March 31, 2003. The lease is guaranteed by the
tenant's parent company.
The Lemoyne property of approximately 15,000 square feet houses DCA's
dialysis center of approximately 5,400 square feet, approved for 13 dialysis
stations with space available for expansion. DCA uses approximately 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 23,
1998 at an annual rental of $43,088 per annum plus separately metered utilities,
insurance and additional rent of $5,386 per year covering common area
maintenance expenses, with two renewals of five years each at escalating base
rent for each renewal period.
The Easton, Maryland and Lemoyne, Pennsylvania properties are subject
to mortgages from a Maryland banking institution. As of December 31, 1998, the
remaining principal amount of the mortgage on the Lemoyne property was
approximately $160,000 and on the Easton property was approximately $200,000.
Each mortgage is under the same terms and extends through November, 2003, bears
interest at 1% over the prime rate, and is secured by the real property and the
Company's personal property at each respective location. The bank also has a
lien on rents due the Company and security deposits from leases of the
properties, and each tenant is required to sign a tenant subordination agreement
as part of its lease with the Company.
Written approval of the bank is required for all leases, assignments or
subletting, alterations and improvements and sales of the properties. See Item
7, "Management's Discussions and Analysis of Financial Condition and Results of
Operations" and Note 2 to "Notes to Consolidated Financial Statements."
As lessor, DCA also leases space at its Lemoyne, Pennsylvania property
to one other unrelated party for its own business activities unrelated to
dialysis services or to the Company. The lease for approximately 1,500 square
feet through December 31, 2002, at an aggregate rental of approximately $13,500
per annum.
17
<PAGE>
The dialysis facility in Wellsboro, Pennsylvania consists of
approximately 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.
DSNJ-M signed a five year lease for its new dialysis facility in
Manahawkin, New Jersey for approximately 3,700 square feet at an annual rate of
approximately $34,760 per annum plus its proportionate share of the real estate
taxes and casualty insurance premiums, renewable for two consecutive five year
periods, the commencement date for such lease being December 1, 1998. An
Addendum to that lease which commenced on the same date as the original lease
provides for an additional 940 square feet of space free of rent until June 30,
2000, after which time DSNJ-M will pay the agreed per square foot price as
stipulated in the original lease. The facility is designed for 12 dialysis
stations and the facility began treating patients in July, 1998 as a requirement
for and pending Medicare regulatory approval. In December, 1998 the facility
received final regulatory approval from Medicare to treat patients and receive
reimbursement for such treatment.
DCA opened its Chambersburg, Pennsylvania facility on January 14, 1999.
That facility is designed for 18 dialysis stations, with initial approval to
operate nine stations. The facility is leased by DSPCh for a five year term with
two consecutive renewal periods of five years each at an annual rental of
$52,500 plus utilities and additional rent representing the facility's
proportionate share of common area maintenance expenses. The term of the lease
commenced January 1, 1999 and is for 7,000 square feet of which the Company
sublet approximately 1,800 square feet to physicians.
The Company's new subsidiary, DSNJ-TR, signed a lease agreement to
construct a new facility in Toms River, New Jersey for a term of five years with
two renewal periods of five years each. The lease provided for a commencement
date of October 18, 1998, at which time DSNJ-TR paid 50% of the rent for a
period of 50 days. Payment of the full annual rental of $57,665 became effective
on December 8, 1998. Development of the center is in progress, but there is no
assurance when, if at all, this proposed center will become operational.
The Lemoyne and Wellsboro facilities, both of which initiated
operations in 1995, are currently operating at approximately 72% and 68%
capacity, respectively, and Carlisle has operated at 47% capacity for 1998.
Since DSNJ-M recently commenced operations and was only approved for treatment
reimbursement in December, 1998, and an accurate operational capacity is not
presently known.
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.
DCA is actively pursuing the additional 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, but no
additional contracts or leases have been entered into in any other areas.
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 Manahawkin, New Jersey and Chambersburg,
18
<PAGE>
Pennsylvania facilities beginning May and November, 1998, respectively, under
the 1996 Master Lease in addition to the leases commenced in June and July, 1997
for equipment at the Lemoyne and Carlisle, Pennsylvania facilities.
DCA maintains executive offices at 27 Miller Street, Suite 2, Lemoyne,
Pennsylvania 17043 as well as with its parent, Medicore ("Medicore" or the
"Parent"), at 2337 West 76th Street, Hialeah, Florida.
ITEM 3. LEGAL PROCEEDINGS
The Company 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 68% of DCA, proxies are not solicited, but DCA
has in the past provided and continues to provide its shareholders with an
Information Statement and an Annual Report. The Information Statement provides
similar information to shareholders as does a proxy statement, except there is
no solicitation of proxies.
PART II
ITEM 5. MARKET FOR 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 four quarters for the years ended December 31, 1997 and 1998
as reported by Nasdaq.
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
BID PRICE
---------------
1998 HIGH LOW
---- ------ ------
1st Quarter................... $ 2.56 $ 1.31
2nd Quarter................... 1.94 1.25
3rd Quarter................... 1.94 0.88
4th Quarter................... 1.25 0.56
At March 11, 1999, the high and low sales price of DCA common stock was
the same, $1.50. The common stock has not traded actively for the last year.
Bid and asked prices are without adjustments for retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions.
19
<PAGE>
At March 11, 1999, the Company had 97 shareholders of record and has
approximately 640 beneficial owners of its common stock.
The Company does not anticipate that it will pay dividends in the
foreseeable future. The board of directors intends to retain earnings, if any,
for use in the business. Future dividend policy will be at the discretion of the
board of directors, and will depend on the Company's earnings, capital
requirements, financial condition and other similar relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December
31, 1998 is derived from the audited consolidated financial statements of the
Company. The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Years Ended December 31,
-----------------------------------------------
1998 1997(1) 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues ................................. $ 4,004 $ 9,221 $ 4,137 $ 2,668 $ 2,201
Net (loss) income ........................ (204) 1,993 (23) (167) 75
(Loss) earnings per share.................
Basic .................................. (.06) .56 (.01) (.07) .03
Diluted ................................ (.06) .55 (.01) (.07) .03
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA
(IN THOUSANDS)
December 31,
-----------------------------------------------
1998 1997(1) 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital .......................... $ 5,115 $ 7,062 $ 4,529 $ 651 $ 187
Total assets ............................. 9,349 11,638 7,522 3,972 6,847
Intercompany receivable from
Medicore (non-current portion)(2) ...... 3,134
Long term debt, net of current portion(3) 633 693 585 152
Stockholders' equity ..................... 7,771 8,049 6,000 2,569 5,899
</TABLE>
- -------------------------
(1) Reflects the sale of substantially all the assets of its Florida
subsidiary, Dialysis Services of Florida, Inc. Fort Walton Beach ("DSF") and
related Florida dialysis operations, including the homecare operations of
another subsidiary, Dialysis Medical, Inc. ("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 owned
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."
20
<PAGE>
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Medical service revenues decreased approximately $823,000 (19%) for the
year ended December 31, 1998 compared to the preceding year. This decrease
reflects the loss of revenues, which amounted to approximately $1,663,000 for
the preceding year, from the sale of the Company's Florida dialysis operations
on October 31, 1997, which was offset to some degree by increased revenues of
the Company's Pennsylvania dialysis centers of approximately $782,000 including
increased revenues of approximately $510,000 at the Company's dialysis center
located in Carlisle, Pennsylvania, which commenced operations in July 1997 and
$58,000 from a new dialysis center located in Manahawkin, New Jersey, which
received regulatory approval in December, 1998. Although the operations of
these centers have resulted in additional revenues, they are in the develop-
mental stage and, accordingly, their operating results will 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 $37,000 for the
year ended December 31, 1998 compared to the preceding year. This increase is
largely due to interest earned on proceeds invested from the October 1997 sale
of the Company's Florida dialysis operations.
Revenues for 1997 included a gain of approximately $4,431,000 upon the
sale of substantially all of the assets of the Company's Florida subsidiary, and
its related operations.
Cost of medical services sales increased to 71% in 1998 compared to 62%
in 1997 reflecting increases in healthcare salaries and supply costs as a
percentage of sales, including the operations of the Company's two new centers
in Carlisle, Pennsylvania and Manahawkin, New Jersey which are still in their
developmental stage. The preceding year included higher hospital treatment
revenues, which have a substantially lower cost of sales, with the Company's
Florida hospital operations having been sold on October 31, 1997.
Selling, general and administrative expenses decreased by approximately
$308,000 (14%) for 1998 compared to the preceding year. This decrease included a
decrease resulting from the sale of the Florida dialysis operations offset by
increases in expenses at the dialysis center in Carlisle, Pennsylvania, which
commenced operations in July, 1997, expenses in connection with the startup of
the new dialysis center in Manahawkin, New Jersey and the start up of a new
center in Chambersburg, Pennsylvania, which commenced operations in January,
1999, and another center presently under construction in New Jersey. Also,
contributing to the decrease was the fact that 1997 included an expense for
stock compensation of approximately $322,000 in conjunction with forgiveness of
notes from option exercises.
Interest expense decreased by approximately $5,000 during the compara-
ble periods largely as a result of reduced average outstanding borrowings.
21
<PAGE>
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.
Selling, general and administrative expenses increased by approximately
$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."
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $5,115,000 at December 1998, which reflected a
decrease of approximately $1,947,000 during the current year. Included in the
changes in components of working capital was a decrease in cash and cash
equivalents of $2,736,000, which included net cash used in operating activities
of $1,161,000 (including a decrease in income taxes payable of $1,423,000
primarily resulting from tax payments on the gain on the sale of the Florida
dialysis operations), net cash used in investing activities of $1,065,000
(including additions to property and equipment of $905,000 primarily related to
new centers, funds used for redemption of minority interest in subsidiaries of
$385,000 and proceeds from a sale of securities of $253,000) and net cash used
in financing activities of $511,000 (including a decrease in the advances from
the Parent of $250,000, repurchase of stock of $109,000 and debt payment of
$152,000).
The Company has mortgages on its two buildings, one in Lemoyne,
Pennsylvania and the other in Easton, Maryland, with a combined balance of
$360,000 at December 31, 1998. In 1998, the Company was in default of certain
covenants relating to these mortgages. The covenants principally related to debt
service ratio requirements for which the lender has waived compliance through
December 31, 1998.
The debt service ratio requirement is tested on an annual basis and
thus, is effectively waived through December 31, 1999 as compliance with the
covenant will not be determined until final results for 1999 are available in
early 2000.
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. An unaffiliated Maryland dialysis center, competitive
with the Company, 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 the property that 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 $245,000 during
1998 pursuant to this agreement. There was an outstanding balance of $449,000
at December 31, 1998 and $285,000 at December 31, 1997. See Note 2 to "Notes
to Consolidated Financial Statements."
During 1998, the Company repurchased 105,000 shares of its outstanding
common stock for approximately $109,000. See Note 10 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 sale for a total consideration of $625,000, including $385,000 cash
and one-half of the purchaser's securities valued at $240,000 with the total
value of $480,000 for securities received having been guaranteed by the
purchaser.
The Company opened its fourth center in Manahawkin, New Jersey and
received regulatory approval as a Medicare provider during the fourth quarter of
1998 and opened its fifth center in
23
<PAGE>
Chambersburg, Pennsylvania during the first quarter of 1999 and is developing
another dialysis center in New Jersey.
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 de-
pending 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 operation, which most likely would be generating in-
come. 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
additional facilities in the New Jersey and Pennsylvania area.
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."
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.
YEAR 2000 READINESS
The Year 2000 computer information processing challenge associated with
the upcoming millennium change concerns the ability of computerized information
systems to properly recognize date sensitive information, with which many
companies, public and private, are faced to ensure continued proper operations
and reporting of financial condition. Failure to correct and comply with the
Year 2000 change may cause systems that cannot recognize the new date and
millenium information to generate erroneous data or to fail to operate.
Management is fully aware of the Year 2000 issues, has made its assessments and
has basically evaluated its computerized systems and equipment, and communicated
with its major vendors, and has made the operations of the Company Year 2000
compliant.
One of the most significant risks in the Company's operations with
respect to the upcoming millenium change relates to billing and collection from
third-party payors, and, in particular, Medicare. The Company receives
approximately 74% of its revenues from Medicare for treatment of dialysis
patients and related services. Although recent reports from the federal
government have indicated the potential for certain agencies and commissions not
to be Year 2000 compliant by January 1, 2000, HCFA, through whom the Medicare
program and payments are effected, has indicated it has done and continues to
accomplish all it can to insure the Medicare ESRD program continues operating
smoothly and that dialysis providers, like the Company, may continue to timely
bill electronically for patient services with Medicare payments to be made
timely. In fact, in 1998, the Company installed a new electronic billing
software program that was developed according to Medicare's compliance
guidelines, which guidelines require not only system but also Year 2000
compatibility. The software designer has successfully tested the software for
Year 2000 compliance and the Company initiated its electronic
24
<PAGE>
Medicare billing in January, 1999 without any problems. Other third-party
payors, such as insurance companies, are presently and will continue to be
billed with hard copy. The costs of the software modifications have been
minimal, approximately $1,000, and the Company does not anticipate that any
costs involved in any future Year 2000 compliance will be material or that they
will have a material adverse effect on its business.
With respect to non-information technology systems, which typically
include embedded technology, such as microcontrollers, the major equipment used
in patient dialysis treatment is not date sensitive and should not pose any
threat of a system breakdown due to the Year 2000 issue. Most of the Company's
dialysis equipment is new. See Item 1, "Business - Operations of Dialysis
Facilities" and Item 2, "Properties." The Company retains technicians who test
and maintain dialysis operations equipment.
In addition to addressing its own internal software system, the Company
has communicated with all its suppliers, service providers and other key third
parties, including payroll system providers, banks, hospitals and insurance
companies with whom it deals to determine the extent of their Year 2000
compliance, what actions they are taking to assess and address that issue, and
whether they will be compliant by the end of 1999. To the extent such third
parties are materially adversely affected by the Year 2000 issue and their
problem has not been timely corrected, the Company's operations could be
affected. The Company has received written assurance from many of these third
parties indicating that they are Year 2000 compliant or are working on it and
expect to be by the end of 1999, and that the crucial supplies and services that
are necessary to the Company's operation and patient treatment including drug
and chemical supplies, utilities, cable, waste removal, water and sewer services
will not be affected by the millenium change.
The Company's current bookkeeping, financial records and statements,
and accounting are accomplished through certain common officers and personnel
and facilities with Medicore, its parent. See Item 13, "Certain Relationships
and Related Transactions." The system covering these programs was recently
installed by Medicore's other public subsidiary, Techdyne, Inc., which utilizes
the Visual Manufacturing System for other purposes as well, including inventory
maintenance, manufacturing and for overall operations. Management is evaluating
new, Year 2000 compliant accounting packages, which would provide the Company
with its own independent system of bookkeeping, accounting and financial records
and reduce its dependence on its parent's personnel and facilities. Management
anticipates such new, Year 2000 compliant accounting and bookkeeping system to
be ready mid-1999. The cost of such new accounting system is estimated in a
range of approximately $10,000 to $20,000.
Another area that could significantly impact the Company's operations
in providing dialysis treatment to patients relates to third-party providers,
specifically, the utility companies providing water, an extremely necessary
resource for dialysis treatments, and electricity. These providers and services
are beyond the control of the Company, and the Company does not have a separate
generator for electricity nor other sources for water. Should any of these
utilities fail to provide services, such would seriously adversely impact the
Company, its patients, as well as the Company's competitors in such affected
areas.
There can be no assurance, however, that the Year 2000 issues, whether
internal and believed to have been addressed, or from third parties, although
the Company has checked and been assured that its third-party payors and
suppliers are Year 2000 compliant or will be prior to the end of 1999, will not
have a material adverse effect on the Company's business, results of operations
or financial condition.
25
<PAGE>
OTHER MATTERS
The Company does not consider its exposure to market risks, principally
changes in interest rates, to be significant.
Sensitivity of results of operations to interest rate risks on the
Company's investments is managed by conservatively investing liquid funds in
short-term government securities of which the Company held approximately
$5,000,000 at December 31, 1998.
Interest rate risk on debt is managed by negotiation of appropriate
rates for equipment financing obligations based on current market rates. There
is an interest rate risk associated with the Company's variable rate mortgage
obligations which totaled $360,000 at December 31, 1998.
The Company has exposure to both rising and falling interest rates. A
1/2% decrease in rates on its year-end investments in government securities and
a 1% increase in rates on its year-end mortgage debt would result in a negative
impact of approximately $18,000 on its result of operations.
The Company does not utilize financial instruments for trading or spec-
ulative purposes and does not currently use interest rate derivatives.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Finan-
cial Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for fiscal
quarters of fiscal years beginning after June 15, 1999. FAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires, among other things, that all derivatives be recognized
as either assets or liabilities in the statement of financial position and that
those instruments be measured at fair value. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its con-
solidated financial statements.
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 "Operations - Medicare
Reimbursement" and "Government Regulation" under Item 1, "Business." Therefore,
dialysis services revenues cannot be voluntary increased to keep pace with
increases in nursing and other patient care costs. Increased operating costs
without a corresponding increase in reimbursement rates may adversely affect
the Company's earnings in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This discussion is presented under the heading "Other Matters" within
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and incorporated herein by reference.
26
<PAGE>
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.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are appointed each year by the
board of directors at its first meeting following the Annual Meeting of Share-
holders, to serve during the ensuing year. The following information indicates
their positions with the Company and age of the executive officers at March 15,
1999. There are no family relationships between any of the executive officers
and directors of the Company.
Name Age Position Held Since
- ---- --- -------- ----------
Thomas K. Langbein 53 Chairman of the Board and 1980
Chief Executive Officer 1986
Bart Pelstring 58 President 1986
and Director 1985
Daniel R. Ouzts 53 Vice President (Finance)
and Treasurer 1996
For more detailed information about executive officers and directors
of the Company you are referred to the caption "Information About Directors and
Executive Officers" of the Company's Information Statement relating to the
Annual Meeting of Shareholders to be held on June 9, 1999, which is incorporated
herein by reference.
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 June 9, 1999, 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 "Exec-
utive Compensation" of the Company's Information Statement relating to the
Annual Meeting of Shareholders to be held on June 9, 1999, incorporated herein
by reference), and by any person known to beneficially own more than 5% of any
class of voting security of the Company, is included under the caption "Bene-
ficial Ownership of the Company's Securities" of the Company's Information
Statement relating to the Annual Meeting of Shareholders to be held on June 9,
1999, incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions is in-
cluded 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 June 9, 1999, incorporated herein by reference.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this report.
1. All financial statements - See Index to Consolidated Financial
Statements.
2. Financial statement schedules - See Index to Consolidated Financial
Statements.
3. Refer to subparagraph (c) below.
(b) Reports on Form 8-K
None
(c) Exhibits +
(3) (i) Articles of Incorporation ++
(ii) By-Laws of the Company ++
(4) (i) Form of Common Stock Certificate of the Company ++
(ii) Form of 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. ++
(v) Amendment No. 1 to Warrant Agreement between the Company,
Continental Stock Transfer & Trust Co. and Joseph Dillon &
Co., Inc. dated March 9, 1999 (incorporated by reference to
the Company's Current Report on Form 8-K dated March 9, 1999,
Item 7(c)(4)(i)).
(10) Material Contracts
(i) Lease between Dialysis Services of Pennsylvania, Inc. -
Wellsboro(1) and James and Roger Stager dated January 15, 1995
(incorporated by reference to Medicore, Inc.'s(2) Annual
Report on Form 10-K for the year ended December 31, 1994
("1994 Medicore Form 10-K"), Part IV, Item 14(a) 3
(10)(lxii)).
(ii) Lease between the Company and Dialysis Services of
Pennsylvania, Inc. - Lemoyne(1) dated December 1, 1998.
(iii) Loan Agreement between the Company and Mercantile-Safe Deposit
and Trust Company dated November 30, 1988(3) (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 ("March, 1998 Form 10-Q"),
Part II, Item 6(a), Part II, Item 10(iii)).
29
<PAGE>
(iv) First Amendment to Loan Agreement between the Company and
Mercantile-Safe Deposit and Trust Company dated December 1,
1997(3) (incorporated by reference to the Company's Annual
Report on Form 10-K for the period ended December 31, 1997
("1997 Form 10-K"), Part IV, Item 14(c)(xxviii)).
(v) Promissory Note to Mercantile-Safe Deposit and Trust Company
dated November 30, 1988(3) (incorporated by reference to the
March, 1998 Form 10-Q, Part II, Item 6(a), Part II, Item
10(ii)).
(vi) First Amendment and Modification to Promissory Note to
Mercantile-Safe Deposit and Trust Company(3) (incorporated by
reference to the 1997 Form 10-K, Part IV, Item 14(c)(xxix)).
(vii) Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Wellsboro(2) and George Dy, M.D. dated
September 29, 1994 [*] (incorporated by reference to Medicore,
Inc.'s(2) Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994 as amended January, 1995 ("September, 1994
Medicore(2) Form 10-Q"), Part II, Item 6(a)(10)(i)).
(viii) Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Lemoyne(1) and Herbert I. Soller, M.D.
dated January 30, 1995 [*] (incorporated by reference to the
1994 Medicore(2) Form 10-K, Part IV, Item 14(a)(3)(10)(lx)).
(ix) Agreement for In-Hospital Dialysis Services between Dialysis
Services of Pennsylvania, Inc. - Wellsboro(1) and Soldiers &
Sailors Memorial Hospital dated September 28, 1994 [*]
(incorporated by reference to September, 1994 Medicore(2) Form
10-Q, Part II, Item 6(a)(10)(ii)).
(x) Agreement for In-Hospital Dialysis Services between Dialysis
Services of Pennsylvania, Inc. - Lemoyne(1) and Pinnacle
Health Hospitals dated June 1, 1997 [*] (incorporated by
reference to the Company's Current Report on Form 8-K dated
June 19, 1997, Item 7(c)(10)(i)).
(xi) 1995 Stock Option Plan of the Company (November 10, 1995). ++
(xii) Form of Stock Option Certificate under 1995 Stock Option Plan
(November 10, 1995).++
(xiii) 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)).
(xiv) Lease between Dialysis Services of PA., Inc. - Carlisle(1) 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)).
[*] Confidential portions omitted have been filed separately with
the Securities and Exchange Commission.
30
<PAGE>
(xv) Lease between Dialysis Services of NJ., Inc. - Manahawkin(4)
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)).
(xvi) Addendum to Lease Agreement between William P. Thomas and
Dialysis Services of NJ., Inc. - Manahawkin(4) dated June 4,
1997 (incorporated by reference to the 1997 Form 10-K, Part
IV, Item 14(c)(xviii)).
(xvii) Medical Director Agreement between Dialysis Services of PA.,
Inc.-Carlisle(1) and Herb Soller, M.D. dated October 1,
1996(5) [*] (incorporated by reference to the Company's
September 30, 1996 Quarterly Report on Form 10-Q ("September,
1996 Form 10-Q"), Part II, Item 6(a), Part II, Item 10(ii)).
(xviii) 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)).
(xix) Schedule of Leased Equipment 0597 commencing June 1, 1997 to
Master Lease BC-105 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 ("June, 1997 10-Q"), Part II, Item 6(a), Part
II, Item 10(i)).(6)
(xx) Agreement for In-Hospital Dialysis Services between Dialysis
Services of Pennsylvania, Inc. - Carlisle(1) and Carlisle
Hospital dated August 15, 1997 [*] (incorporated by reference
to the Company's Current Report on Form 8-K dated August 29,
1997, Item 7(c)(10)(i)).
(xxi) Asset Purchase Agreement by and among the Company, Dialysis
Services of Florida, Inc. - Fort Walton Beach(7), DCA Medical
Services, Inc.(1), Dialysis Medical, Inc.(7), 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 Company's Current Report on Form 8-K dated
November 12, 1997, Part II, Item 7(c)(2.1)).
(xxii) Medical Director Agreement between Dialysis Services of NJ,
Inc. - Manahawkin(4) and Atlantic Nephrology Group, Inc. dated
January 21, 1998(8)(9) [*] (incorporated by reference to the
Company's September, 1996 Form 10-Q, Part II, Item 6(a), Part
II, Item 10(i)).
(xxiii) Stock Purchase Agreement between the Company and Atlantic
Nephrology Group, Inc. (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, Part II, Item 6(a), Part II, Item 10(i)).
(xxiv) Lease between Dialysis Services of Pa., Inc. - Chambersburg(1)
and BPS Development Group dated April 13, 1998 (incorporated
by reference to the Company's March, 1998 Form 10-Q, Part II,
Item 6(a), Part II, Item 10(i)).
[*] Confidential portions omitted have been filed separately with
the Securities and Exchange Commission.
31
<PAGE>
(xxv) Lease between Dialysis Services of NJ, Inc. - Toms River(4)
and Lotano Development, Inc. dated July 1, 1998.
(xxvi) Lease between the Company and Wirehead Networking Solutions,
Inc. dated December 1, 1998.
(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) Wholly-owned subsidiary.
(2) Parent of the Company owning approximately 68% of the Company's
outstanding common stock. Medicore is subject to Section 13(a)
reporting requirements of the Exchange Act, with its common stock
listed for trading on the Nasdaq National Market.
(3) Dialysis Corporation of America has two loans with Mercantile Safe
Deposit and Trust Company and such loan documents and promissory notes
conform to the exhibit filed but for the amount of each loan.
(4) 80% owned facility with Atlantic Nephrology Group, Inc.
(5) There are two Medical Director Agreements with Herbert I. Soller, M.D.
and such agreements conform to the exhibit filed but for the facility,
the other being is located in Chambersburg, Pennsylvania.
(6) Dialysis equipment is leased from time to time and a new schedule is
added to the Master Lease; other than the nature of the equipment and
the length of the lease, the Schedules conform to the exhibit filed and
the terms of the Master Lease remain the same.
(7) 100% owned subsidiary, assets sold; now inactive.
(8) Previously filed with the same Medical Director under the name
Oceanview Medical Group, P.A.
(9) There are two Medical Director Agreements with Atlantic Nephrology
Group, Inc. and such Medical Director Agreements conform to the exhibit
filed but for the compensation and facility.
32
<PAGE>
(d) Schedule II - Valuation and Qualifying Accounts
Dialysis Corporation of America, Inc. and Subsidiaries
December 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------ --------- ----------------------- ------------ ---------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------ --------- ----------------------- ------------ ---------
Additions
(Deductions) Additions Other
Charged Charged Changes
Balance at (Credited) to Other Add Balance
Beginning to Cost and Accounts (Deduct) at End of
Classification of Period Expenses Describe Describe Period
- ------------------------------------------ --------- ----------------------- ------------ ---------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 52,000 $ 101,000 $ (9,000)(1) $ 144,000
Valuation allowance for deferred tax asset --- 80,000 --- 80,000
--------- --------- --------- --------- ---------
$ 52,000 $ 181,000 $ 0 $ (9,000) $ 224,000
========= ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 154,000 $ 37,000 $ (93,000)(1) $ 52,000
(46,000)(2)
Valuation allowance for deferred tax asset 17,000 (17,000) --- ---
--------- --------- --------- --------- ---------
$ 171,000 $ 20,000 $ 0 $(139,000) $ 52,000
========= ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 128,000 $ 140,000 $(114,000)(1) $ 154,000
Valuation allowance for deferred tax asset 247,000 (230,000) --- 17,000
--------- --------- --------- --------- ---------
$ 375,000 $ (90,000) $ 0 $(114,000) $ 171,000
========= ========= ========= ========= =========
(1) Uncollectable accounts written off, net of recoveries.
(2) Sale of subsidiaries' assets.
<PAGE>
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 22, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
</TABLE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ THOMAS K. LANGBEIN Chairman of the Board of Directors March 22, 1999
- ---------------------------
Thomas K. Langbein
/s/ BART PELSTRING President and Director March 22, 1999
- ---------------------------
Bart Pelstring
/s/ DANIEL R. OUZTS Vice President, Treasurer, Chief March 22, 1999
- --------------------------- Financial Officer and Controller
Daniel R. Ouzts
/s/ STEPHEN EVERETT Vice President March 22, 1999
- ---------------------------
Stephen Everett
/s/ ROBERT W. TRAUSE Director March 22, 1999
- ---------------------------
Robert W. Trause
/s/ DR. HERBERT I. SOLLER Director March 22, 1999
- ---------------------------
Dr. Herbert I. Soller
</TABLE>
<PAGE>
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, 1998
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:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and 1997. F-3
Consolidated Statements of Operations - Years ended December 31, 1998,
1997, and 1996. F-4
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1998, 1997 and 1996. F-5
Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997
and 1996. F-6
Notes to Consolidated Financial Statements - December 31, 1998. F-7
</TABLE>
The following financial statement schedule of Dialysis Corporation of America
and subsidiaries is included in Item 14(d):
Schedule II - Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE>
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, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, 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 22, 1999
Miami, Florida
F-2
<PAGE>
<TABLE>
<CAPTION>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,366,837 $ 8,102,920
Marketable securities -- 443,936
Accounts receivable, less allowance
of $144,000 at December 31, 1998;
$52,000 at December 31, 1997 460,786 494,163
Inventories 179,189 113,815
Prepaid expenses and other current assets 52,934 156,823
------------ ------------
Total current assets 6,059,746 9,311,657
Property and equipment:
Land 168,358 168,358
Buildings and improvements 1,404,573 1,402,319
Machinery and equipment 1,381,460 949,749
Leasehold improvements 1,149,300 442,464
------------ ------------
4,103,691 2,962,890
Less accumulated depreciation and amortization 1,003,995 679,870
------------ ------------
3,099,696 2,283,020
Advances to parent 120,865 --
Deferred expenses and other assets 68,617 43,088
------------ ------------
$ 9,348,924 $ 11,637,765
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 243,968 $ 72,531
Accrued expenses 292,594 370,099
Current portion of long-term debt 175,902 151,844
Income taxes payable 232,306 1,655,164
------------ ------------
Total current liabilities 944,770 2,249,638
Long-term debt, less current portion 632,664 564,673
Advances from parent -- 128,727
Minority interest in subsidiaries -- 645,809
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized
20,000,000 shares; 3,751,344 shares issued:
3,546,344 shares outstanding in 1998;
3,651,344 shares outstanding in 1997 37,513 37,513
Capital in excess of par value 4,044,154 4,008,720
Retained earnings 4,004,763 4,208,935
Treasury stock at cost; 205,000 shares at December 31, 1998;
100,000 shares at December 31, 1997 (314,940) (206,250)
------------ ------------
Total stockholders' equity 7,771,490 8,048,918
------------ ------------
$ 9,348,924 $ 11,637,765
============ ============
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Medical service revenue $ 3,552,279 $ 4,375,165 $ 3,830,809
Gain on sale of subsidiaries' assets -- 4,430,663 --
Interest and other income 451,656 414,970 305,706
----------- ----------- -----------
4,003,935 9,220,798 4,136,515
Cost and expenses:
Cost of medical services 2,516,239 2,712,527 2,508,323
Selling, general and administrative expenses 1,847,175 2,155,459 1,577,487
Interest expense 81,531 86,129 86,694
----------- ----------- -----------
4,444,945 4,954,115 4,172,504
----------- ----------- -----------
(Loss) income before income taxes and minority interest (441,010) 4,266,683 (35,989)
Income tax (benefit) provision (236,838) 1,699,000 --
----------- ----------- -----------
(Loss) income before minority interest (204,172) 2,567,683 (35,989)
Minority interest in income (loss)
of consolidated subsidiaries -- 574,303 (13,028)
----------- ----------- -----------
Net (loss) income $ (204,172) $ 1,993,380 $ (22,961)
=========== =========== ===========
(Loss) earnings per share:
Basic $ (.06) $ .56 $ (.01)
=========== =========== ===========
Diluted $ (.06) $ .55 $ (.01)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL IN
COMMON EXCESS OF RETAINED TREASURY
STOCK PAR VALUE EARNINGS STOCK TOTAL
--------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 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
Net loss (204,172) (204,172)
Repurchase of 105,000 shares (108,690) (108,690)
Redemption of minority interest in
subsidiaries 35,434 35,434
--------- ------------ ----------- ---------- -----------
Balance at December 31, 1998 $ 37,513 $ 4,044,154 $ 4,004,763 $ (314,940) $ 7,771,490
========= ============ =========== ========== ===========
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net (loss) income $ (204,172) $ 1,993,380 $ (22,961)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Gain on sale of subsidiaries' assets -- (4,430,663) --
Depreciation 332,697 278,761 199,315
Amortization 1,690 11,116 11,235
Bad debt expense 100,856 36,726 139,802
Deferred income taxes 24,000 -- --
Gain on sale of securities (12,780) -- --
Minority interest -- 574,303 (13,028)
Stock compensation expense -- 322,125 --
Increase (decrease) relating to operating activities from:
Accounts receivable (67,479) (357,280) (97,487)
Inventories (65,374) (5,223) (68,325)
Prepaid expenses and other current assets 43,825 (12,087) (64,257)
Accounts payable 171,437 (76,129) (177,505)
Accrued expenses (62,505) 58,341 (36,966)
Income taxes payable (1,422,858) 1,649,164 --
----------- ----------- -----------
Net cash (used in) provided by operating activities (1,160,663) 42,534 (130,177)
Investing activities:
Proceeds from sale of subsidiaries' assets -- 4,583,662 --
Redemption of minority interest in subsidiaries (385,375) --
Additions to property and equipment, net of minor disposals (904,873) (631,103) (159,180)
Proceeds from sale of securities 252,780 -- --
Deferred expenses and other assets (27,219) (23,429) 110,904
----------- ----------- -----------
Net cash (used in) provided by investing activities (1,064,687) 3,929,130 (48,276)
Financing activities:
Net proceeds of securities offering -- -- 3,445,158
Advances (to) from parent (249,592) (240,820) 369,547
Repurchase of stock (108,690) (206,250) --
Payments on long-term debt (152,451) (136,502) (113,856)
Exercise of stock options -- 1,625 9,000
Dividend payments to minority shareholders -- (3,966) (7,467)
----------- ----------- -----------
Net cash (used in) provided by financing activities (510,733) (585,913) 3,702,382
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (2,736,083) 3,385,751 3,523,929
Cash and cash equivalents at beginning of year 8,102,920 4,717,169 1,193,240
----------- ----------- -----------
Cash and cash equivalents at end of period $ 5,366,837 $ 8,102,920 $ 4,717,169
=========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company is in one business segment, kidney dialysis operations, and
operates five kidney dialysis centers, four located in Pennsylvania and one in
New Jersey, 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 68.0% 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
A substantial portion of the Company's revenues are attributable to
payments received under Medicare, which is supplemented by Medicaid or
comparable benefits in the 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 regulatory action including fines,
penalties, and exclusions from the Medicare and Medicaid programs.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
reported in the balance sheet for cash and cash equivalents approximate their
fair values. The credit risk associated with cash and cash equivalents is
considered low due to the high quality of the financial institutions in which
these assets are invested.
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 equity 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 was guaranteed by the purchaser at their
F-7
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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 was
recorded as a receivable and included in other current assets at December 31,
1997. One-half of these securities were included in the consideration to redeem
the 20% minority interest in two of the subsidiaries whose assets were sold in
October 1997 and the remaining one-half were sold in 1998.
INVENTORIES
Inventories, which consist primarily of supplies used in dialysis
treatments, are valued at the lower of cost (first-in, first-out method) or
market value.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets, which range from 5 to 34 years for buildings and improvements; 4 to 10
years for machinery, computer and office equipment, and furniture; and 5 to 10
years for leasehold improvements. Replacements and betterments that extend the
lives of assets are capitalized. Maintenance and repairs are expensed as
incurred upon the sale or retirement of assets, the related cost and accumulated
depreciation are removed and any gain on loss is recognized.
LONG-LIVED ASSET IMPAIRMENT
Pursuant to Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of",
impairment of long-lived assets, including intangibles related to such assets,
is recognized whenever events or changes in circumstances indicate that the
carrying amount of the asset, or related groups of assets, may not be fully
recoverable from estimated future cash flows and the fair value of the related
assets is less than their carrying value. The Company, based on current
circumstances, does not believe any indicators of impairment are present.
DEFERRED EXPENSES
Deferred expenses, except for deferred loan costs, are amortized on the
straight-line method, over their estimated benefit period ranging to 60 months.
Deferred loan costs are amortized over the lives of the respective loans.
INCOME TAXES
Deferred income taxes are determined by applying enacted tax rates
applicable to future periods in which the taxes are expected to be paid or
recovered to differences between financial accounting and tax basis of assets
and liabilities.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB25) and related Interpretations
in accounting for its employee stock options. Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation" permits a
company to elect to follow the accounting provisions of APB 25 rather than the
alternative fair value accounting provided under FAS 123 but requires pro forma
net income and earnings per share disclosures as well as various other
disclosures not required under APB 25 for companies following APB 25.
F-8
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
EARNINGS PER SHARE
Diluted earning per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants, calculated using the treasury stock method and average market price.
Following is a reconciliation of amounts used in the basic and diluted
computations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net (loss) income $ (204,172) $ 1,993,380 $ (22,961)
=========== =========== ===========
Weighted average shares-denominator basic computation 3,626,330 3,531,584 3,237,243
Effect of dilutive stock options:
Stock options granted November 1995 -- 86,539 --
----------- ----------- -----------
Weighted average shares, as adjusted-denominator diluted computation 3,626,330 3,618,123 3,237,243
=========== =========== ===========
Earnings (loss) per share:
Basic $ (.06) $ .56 $ (.01)
=========== =========== ===========
Diluted $ (.06) $ .55 $ (.01)
=========== =========== ===========
</TABLE>
In addition to the dilutive stock options included in the
reconciliation 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.
INTEREST AND OTHER INCOME
Interest and other income is comprised as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Rental income $ 121,835 $ 119,792 $ 101,161
Interest income 296,943 227,789 168,950
Other 32,878 67,389 35,595
--------- --------- ---------
$ 451,656 $ 414,970 $ 305,706
========= ========= =========
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, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation.
NEW PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative In-
struments and hedging Activities" (FAS 133). FAS 133 is effective for fiscal
quarters of fiscal years beginning after June 15, 1999. FAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires, among other things, that all derivatives be recognized
as either assets or liabilities in the statement of financial position and that
those instruments be measured at fair value. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its consoli-
dated financial statements.
NOTE 2--LONG-TERM DEBT
Long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
Mortgage note secured by land and building with a net book value of
$414,000 at December 31, 1998. Monthly principal payments of
$3,333 plus interest at 1% over the prime rate through November 2003. $ 200,040 $ 240,036
Mortgage note secured by land and building with a net book value of
$706,000 at December 31, 1998. Monthly principal payments of
$2,667 plus interest at 1% over the prime rate through November 2003. 159,960 191,963
Equipment financing agreement secured by equipment with a net book
value of $487,000 at December 31, 1998. Monthly payments
totaling $8,582 as of December 31, 1998 as described below
pursuant to, various schedules, including principal and
interest, with interest at rates ranging from 5.47% to 11.84%. 448,566 284,518
--------- ---------
808,566 716,517
Less current portion 175,902 151,844
--------- ---------
$ 632,664 $ 564,673
========= =========
</TABLE>
F-10
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 2--LONG-TERM DEBT--CONTINUED
The equipment financing agreement provides financing for kidney dialysis
machines for the Company's facilities in Pennsylvania and New Jersey 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 approximately $124,000 in 1996, $190,000 in 1997 and $245,000 in 1998.
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. Payments under the agreement are pursuant to various
schedules extending through October 2003. 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 7.75% as of December 31, 1998 and 8.50% as of December
31, 1997.
Scheduled maturities of long-term debt outstanding at December 31, 1998 are
approximately: 1999-$176,000; 2000-$197,000; 2001-$177,000; 2002-$153,000;
2003-$106,000;. Interest payments on the above debt amounted to approximately
$64,000 in 1998, $77,000 in 1997, and $73,000 in 1996, respectively.
The Company's various debt agreements contain certain restrictive covenants
that, among other things, restrict the payment of dividends, rent commitments,
additional indebtedness and prohibit issuance or redemption of capital stock and
require maintenance of certain financial ratios. In 1998, the Company was in
default of certain covenants relating to its mortgage agreements totaling
$360,000. The covenants principally related to debt service ratio requirements
for which the lender has waived compliance through December 31, 1998.
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 differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31,
------------------
1998 1997
------- -------
Deferred tax liabilities:
Depreciation $ -- $27,000
------- -------
Total deferred tax liabilities -- 27,000
Deferred tax assets:
Depreciation 3,000 --
Amortization 8,000 18,000
Accrued expenses 15,000 13,000
Bad debt allowance 54,000 20,000
------- -------
Total deferred tax assets 80,000 51,000
Valuation allowance for deferred tax assets (80,000) --
------- -------
Net deferred tax asset $ -- $24,000
======= =======
A valuation allowance has been provided that fully offsets the deferred tax
asset recorded at December 31, 1998 as management believes that it is more
likely than not that, based on the weight of the available evidence, the
deferred tax asset will not be realized.
F-11
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 3--INCOME TAXES--CONTINUED
Significant components of the income tax provision (benefit) are as follows:
1998 1997
----------- -----------
Current:
Federal $ (301,000) $ 1,488,000
State 40,162 235,000
----------- -----------
(260,838) 1,723,000
Deferred 24,000 (24,000)
----------- -----------
$ (236,838) $ 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Statutory tax rate (34%) applied to income (loss)
before income taxes $ (149,943) $ 1,450,700 $ (12,200)
Adjustments due to:
State taxes, net of federal benefit 25,049 155,200 (1,300)
Change in valuation allowance 80,000 (17,300) 230,000
Benefits of net operating losses -- -- (213,000)
Non-deductible items 2,973 2,900 --
Prior year tax return accrual adjustment (194,917) 107,500 (3,500)
----------- ----------- -----------
$ (236,838) $ 1,699,000 $ --
=========== =========== ===========
</TABLE>
Income tax payments were approximately $1,162,000 in 1998, $50,000 in
1997 with no payments in 1996.
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,
1998, 1997 and 1996.
As of December 31, 1998, the Company had an intercompany advance receivable
from the Parent of approximately $121,000 and at December 31, 1997 had an
intercompany advance payable to the Parent of approximately $129,000,
respectively both of which bore interest at the short-term Treasury Bill rate.
Interest income on the intercompany advance receivable amounted to approximately
$1,000 for the year ended December 31, 1998. Interest on the intercompany
advance payable amounted to approximately $6,000 and $7,000 for the years ended
December 31, 1998 and December 31, 1997, respectively. Interest is included in
the intercompany advance balance. The Company has agreed not to require
repayment of the intercompany advance receivable from the Parent prior to
January 1, 2000, and therefore, the advance has been classified as long-term at
December 31, 1998.
F-12
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 5--OTHER RELATED PARTY TRANSACTIONS
For the years ended December 31, 1998, 1997 and 1996, respectively, the
Company paid premiums of approximately $124,000, $87,000 and $80,000 for
insurance obtained through two persons, one a director of the Company and the
Parent, and the other a relative of an officer and director of the Company and
the Parent.
For the years ended December 31, 1998, 1997 and 1996, respectively, legal
fees of $80,000 , $61,000 and $63,000 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 and
consultants of which 4,500 options were outstanding at December 31, 1998. These
options vested immediately and are exercisable for a period of five years
through November 9, 2000 at $1.50 per share. On June 10, 1998, the board of
directors granted an option under the 1995 plan to a new board member for 5,000
shares exercisable at $2.25 per share through June 9, 2003. 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 options to medical directors
of its kidney dialysis centers, of which 10,000 options were outstanding at
December 31, 1998. These options vested immediately and were originally
exercisable for a period of three years through August 18, 1999 at $4.75 per
share, except the exercise price of 5,000 of the options was reduced to $2.25
per share, the fair market value on June 10, 1998.
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 granted/modified during 1998 and the options granted
during 1996, respectively: risk-free interest rates of 5.55% and 5.75%; no
dividend yield; volatility factor of the expected market price of the Company's
common stock of .93 for the 1998 options and .50 for the 1996 options; and a
weighted-average expected life of the options of 2.0 years for options
granted/modified in 1998 and 1.5 years for the 1996 options.
F-13
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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 restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective input assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period, and since the options
vested immediately, the Company's pro forma disclosure recognizes expense upon
issuance of the options. No pro forma information is provided for 1997 as no
options were granted. The Company's pro forma information follows:
1998 1996
---------- ---------
Pro forma net loss $ (209,039) $ (35,051)
========== =========
Pro forma loss per share $ (.06) $ (.01)
========== =========
A summary of the Company's stock option activity, and related information
for the options issued in 1998, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ -------------------------- ---------------------------
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 29,000 209,000 210,000
Granted 10,000 $2.25 -- 15,000 $4.75
Cancellations (5,000) 4.75 -- --
Exercised -- (162,500) $1.50 (6,000) 1.50
Forfeited -- -- --
Expired (14,500) 1.50 (17,500) 2.43 (10,000) 1.50
------- -------- -------
Outstanding-end of year 19,500 29,000 209,000
======= ======== =======
Outstanding and exercisable
at end of year
November 1995 options 4,500 1.50 19,000 1.50 194,000 1.50
August 1996 and June 1998 options 10,000 2.25 10,000 4.75 15,000 4.75
August 1996 options 5,000 4.75 -- --
------- -------- -------
19,500 29,000 209,000
======= ======== =======
Weighted-average fair value of options
granted during the year $ .79 $ 1.30
======= =======
</TABLE>
The remaining contractual life at December 31, 1998 is 4.4 years, .6 years
and 1.9 years for the options issued in June 1998, August 1996 and November
1995, respectively.
The Company has 2,619,500 shares reserved for future issuance, including:
2,300,000 shares for Warrants; 9,500 shares under the 1995 plan; 10,000 shares
for 1996 options; and 300,000 shares for underwriter options.
F-14
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
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 October 16, 1999, pursuant to an extension in March 1999
of the original expiration date of 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.
NOTE 8--COMMITMENTS
The Company has leases on facilities housing its dialysis operations. The
aggregate lease commitments at December 31, 1998 are approximately:
1999-$202,000 ; 2000-$182,000 ; 2001-$188,000 ; 2002-$174,000 ; 2003-$143,000.
Total rent expense was approximately $49,000, $73,000 and $65,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1997, the Company established a 401(k) savings plan
(salary deferral plan) with an eligibility requirement of one year of service
and 21 year old age requirement. The Company has made no contributions under
this plan as of December 31, 1998.
NOTE 9--SALE OF SUBSIDIARIES' ASSETS
On October 31, 1997, the Company concluded a sale ("Sale") of substantially
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 agreed to make up any difference by which the sales proceeds were
less than $480,000 in cash or additional registered shares of the purchaser at
its discretion. These shares were 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 transaction 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
remaining shares were sold in September 1998 for approximately $253,000
resulting in a gain of approximately $13,000.
The pro forma consolidated condensed financial information presented below
reflects the Sale as if it had occurred on January 1, 1997. 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 amounted to approximately $125,000 for the year ended December 31,
1997. No assumption has been
F-15
<PAGE>
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
NOTE 9--SALE OF SUBSIDIARIES' ASSETS--CONTINUED
included in the pro forma information as to investment income to be realized
from investment of the proceeds of the sale.
The summary pro forma financial 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 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.
NOTE 10--REPURCHASE OF COMMON STOCK
In September 1998, the Company announced its intent to repurchase up to an
additional 300,000 shares of its common stock at current market prices after
having acquired 100,000 shares in June 1997 for approximately $206,000. The
Company repurchased 105,000 shares for approximately $109,000 during 1998.
NOTE 11--CAPITAL EXPENDITURES
Capital expenditures were as follows:
1998 1997 1996
---------- ---------- ----------
$1,149,372 $ 825,427 $ 386,502
========== ========== ==========
F-16
COMMERCIAL LEASE
THIS LEASE is made this 1st day of July, 1998, BY AND BETWEEN:
Lotano Development, Inc.
22 Hyers Street
Toms River, NJ 08753
(hereinafter referred to as "Landlord")
AND
Dialysis Services of NJ, Inc. - Toms River
Suites 1-5
1182 Fischer Boulevard
Toms River, NJ 08753
(hereinafter refereed to as "Tenant")
IN CONSIDERATION of the mutual promises and covenants contained
herein, the parties agree as follows:
1. Leased Premises: Landlord hereby leases to Tenant the portion
---------------
of the building commonly known as Suites 1-5 consisting of approximately
6,070 square feet of rentable space, to be specifically determined and
adjusted upon final plan acceptance, which acceptance will be deemed an
amendment to this Lease (the "Space"), with specifications for the
Space attached as Exhibit A, located at 1182 Fischer Boulevard, Toms
River, New Jersey (the "Building") to be used for an outpatient medical
and dialysis center and for related offices, as well as storage purposes
("Use"). Tenant shall not use or permit the use of the Space or any
part thereof, or suffer or permit anything to be brought into or kept
in the Space which would in any way:
(A) Violate any law or requirement of public authority, and
more specifically, any requirement of the Board of Health, municipal,
county or state agencies;
(B) Cause structural injury to the Building or any part
thereof;
(C) Interfere with the normal operation of the heating, air
conditioning, ventilation, plumbing or other mechanical or electrical
systems of the Building; or
(D) Store hazardous materials except as may be required for
the Use, but in no event shall such storage violate subparagraph 2(A).
Tenant shall be solely responsible to obtain any permits, approvals and
licenses to permit such storage.
2. Commencement of Term:
--------------------
(i) The term of the Lease shall be five (5) years, commencing on
the Commencement Date defined below (the "Term"). In the event the
Lease commences on a day other than the first day of the month, then
the rent shall be paid pro rata for such fractional month. The Tenant
shall have a period of 110 days from the date of signing of the within
Lease during which time Tenant shall be responsible to obtain any and
all approvals necessary for its possession and Use, and which shall be
prior to Tenant's taking possession of the Space. Landlord has
warranted the zoning for Tenant's Use (see Section 24(v)), and to the
extent Tenant is required to obtain any variance for its Use, that
additional time
<PAGE> 1
required to obtain such variance, for which Tenant will use its due
diligence and best efforts, shall be added to and so extend the 110
day period, but any such extension not to exceed 30 days (collectively
"Approval Period"). For a period of fifty (50) days immediately subse-
quent to the Approval Period it is agreed that Tenant shall pay 50% of
the Rent. Thereafter the Rent shall be due and payable in full whether
or not Tenant has obtained its necessary approvals and licenses. The
Term and the payment of the 50% Rent shall commence at the earlier of
(i) the business day immediately next succeeding the Approval Date; or
(ii) when the Lessee takes possession of the Space to operate for its
Use (the "Commencement Date"). Notwithstanding anything to the
contrary, prior to there being a Commencement Date, the service
facilities and systems of the Building serving the Space shall be
stubbed into the Space and in good operating condition and working
order.
(ii) Possession of the Space includes the exclusive use of the
same, together with the use, concurrent with any other occupants of the
Building and of the parking areas. Tenant, its agents, invitees,
employees, servants, visitors and patients shall have the right of
ingress and egress to and from the Space and Building. Landlord
covenants that it will not at any time during the Term or any Renewal
Period become a party or consent to any action, proceeding, lease
within the Building or project which might in any manner compete or
interfere with Tenant's business of providing dialysis services,
Tenant's Use of the Space, or deprive Tenant, its agents, employees,
servants, invitees and visitors or patients of ingress and egress to
or from the Space and Building. Notwithstanding anything herein to
the contrary, Landlord reserves its right to take whatever lawful action
it deems necessary, including the filing of suit and/or defending
against any civil or other actions in order to protect its interests
as the Landlord and owner of the Building.
(iii) It shall be Tenant's responsibility to determine and, if
necessary, submit the appropriate applications for the Use of the Space
to the appropriate governmental officials, agencies, commissions and
boards having jurisdiction over the Use of the Space. Landlord will
use its best efforts to assist Tenant in submitting and obtaining any
such applications and approvals with no expense to the Landlord.
(iv) For a period of four (4) months prior to the expiration of
the Term or any Renewal Period, Landlord shall have the right to display
on the exterior of the Space and the Building the customary "For Rent"
sign, and during such period, Landlord may show the Space upon rea-
sonable written notice to Tenant, but not in such fashion or frequency
as to interfere with the Tenant's Use.
3. Rent: Subject to adjustment based upon the final square
----
footage determination of the Space, Tenant agrees to pay as base rent to
Landlord for the Use of the Space during the Term $9.50 per square foot
or Fifty-Seven Thousand Six Hundred Sixty-Five and 00/100 ($57,665.00)
Dollars per year for the first two years of the Term, $9.75 per square
foot or Fifty-Nine Thousand One Hundred Eighty-Two and 50/100
($59,182.50) Dollars for the third year of the Term, $10.00 per square
foot or Sixty Thousand Seven Hundred ($60,700.00) Dollars for the
fourth year of the Term, and $10.50 per square foot or Sixty-Three
Thousand Seven Hundred Thirty-Five ($63,735.00) Dollars for the fifth
year of the Term ("Rent"). The Rent is to be paid in equal monthly
installments which shall be the annual aggregate Rent divided by 12;
e.g., the first year of the Term the monthly installments will be Four
Thousand Eight Hundred Five and 42/100 ($4,805.42) Dollars, payable
monthly in advance on the due date, which is the first day of each
calendar month during the Term. Tenant shall be permitted a grace
period of ten (10) days for the purpose of processing its Rent checks
and delivery of the same to Landlord.
In the event the Rent due is not received by the Landlord on or
before the tenth calendar day of the month, the Tenant shall pay a late
charge of $100 plus $15 per day for each day past the tenth calendar day
that the Rent continues in arrears. Any late charge shall be considered
as Additional Rent and will be added to each payment for each month that
it remains past due.
<PAGE> 2
Tenant shall pay to Landlord upon the execution of this Lease Four
Thousand Eight Hundred Five and 42/100 ($4,805.42) Dollars, which Land-
lord shall credit Tenant for the first month's Rent, to be adjusted if
the square footage is adjusted as provided in this Lease, and if pro-
rated due to the Commencement Date falling on a date later than the
first day of the month, the balance to be applied to the second month's
Rent (which pro rata portion shall be applicable to any Additional Rent).
4. Renewal Option:
--------------
This Lease shall be renewable for two consecutive periods of five
(5) years each under the terms and conditions of this Lease, which
renewal (s) shall be automatic provided that:
(i) Tenant is not in default hereunder; and
(ii) Tenant has not given notice of its intent to terminate
the Lease and not enter into any renewal; provided that any such notice
to terminate this Lease and not to renew shall be given at least ninety
(90) days prior to the expiration of the current Term or Renewal Period,
as the case may be; and
(iii) The rent for any Renewal Period will commence on the day
of the month immediately following the expiration of the Term, which rent
shall be prorated for any portion of a month, and will be for the first
five year Renewal Period at a rental of $11.00 per square foot for the
first two years, $11.25 per square foot for the third year and $11.50 per
square foot for the fourth and fifth years, and for the second five year
Renewal Period at $12.00 per square foot for the first year, $12.60 per
square foot for the second and third years, and $13.25 per square foot
for the fourth and fifth years.
5. End of Term: The Tenant shall, at the expiration of the Term,
-----------
surrender the Space in as good condition as the same shall have been at
the time possession was delivered to the Tenant, except for ordinary wear
and tear.
6. Additional Rent:
---------------
The Tenant shall pay as additional rent above the Rent ("Additional
Rent") % ("Tenant's Proportionate Share") for all common area
maintenance expenses attributable to the operations and maintenance of
the Building. Landlord shall provide itemization to Tenant of the
common area maintenance expenses, which include real estate taxes, snow
and ice removal, garbage removal, common area maintenance and land-
scaping. Tenant's Proportionate Share is determined by dividing the
square footage of the Space (to be determined upon final plan acceptance
as per Section 1) by the square footage of the Building. Any additions
to the Building shall proportionately reduce Tenant's Proportionate
Share. Landlord shall promptly notify Tenant of any such additions and
the new computation of Tenant's Proportionate Share.
The Tenant shall promptly pay when due, directly to the utility
company, all bills for water, sewer, electricity, heat and air con-
ditioning, and all other utilities that are furnished to the Space and
which will be separately billed and metered. To the extent that any
such utilities are not separately metered with respect to the Space,
then Tenant shall pay Tenant's Proportionate Share of such utility.
With respect to each fiscal year or portion thereof during the
Term, or any Renewal Period, the Tenant shall pay to the Landlord, as
Additional Rent any real estate taxes, levies and special assessments
assessed by any governmental authority only with respect to the Space.
Should any such assessment be provided upon the Building rather than
directly for the Space, then Tenant shall pay Tenant's Proportionate
Share. The payment of Additional Rent for such assessment shall be
pro-rated should
<PAGE> 3
the Lease or any Renewal Period terminate before the end of any fiscal
year. Tenant shall make such tax payments semi-annually or on a
quarterly basis, as determined by the billing method used by the
Township of Dover, or the County of Ocean, as the case may be, within
thirty (30) days of written notice from Landlord that such taxes are
payable by Landlord together with the written assessment and tax bill.
7. Repair and Care: The Tenant shall take good care of the Space
---------------
and shall, at the Tenant's own cost and expense, make all repairs,
including painting and decorating and shall maintain the Space,
including plumbing and electric within the Space, in good condition
and state of repair and at the end or other expiration of the Term or
any Renewal Period, shall deliver up the Space in good order and con-
dition, wear and tear from a reasonable use thereof and damage by the
elements not resulting from neglect or the fault of the Tenant excepted.
In case of the destruction of or any damage to the glass in the Space,
the Tenant shall repair the said damage or replace or restore any
destroyed parts of the Space as speedily as possible, at Tenant's own
cost and expenses, except if due to the negligence of Landlord or its
agents, employees and representatives.
Tenant shall maintain the HVAC relating solely to the Space
subsequent to the one year warranty of the Landlord relating thereto
which Landlord warranty commences immediately upon expiration of the
Approval Period; provided Tenant's maintenance of the HVAC is con-
tingent upon Tenant's obtaining, at Tenant's sole cost and expense, the
balance of the warranty for the HVAC (parts and labor) including the
compressor, and an extended warranty to the extent offered by the
manufacturer; and provided further, the HVAC is in good working order
and condition satisfactory in size and capacity to meet the basic
heating and cooling standards of the Space and which HVAC must be
commercial and 80% efficiency and 10-SEER meeting the 1993 New Jersey
ASHRAE Code at the time of this Lease and at the end of the Landlord's
one year warranty of the HVAC as provided herein.
8. Maintenance: The Tenant shall be responsible to provide for
-----------
regular maintenance in order to keep the Space, as well as any signage
and/or fixtures installed in or on the Space or Building in good
condition or repair.
9. Alterations and Improvements: No alterations, additions or
----------------------------
improvements shall be made which are structural in nature, and no
climate regulating, air conditioning, cooling, heating or sprinkler
systems, television or radio antenna, heavy equipment, apparatus and
fixtures shall be installed in or attached to the Space without the
prior written consent of the Landlord, which shall not be unreasonably
withheld, delayed or qualified, and consent will be deemed given within
ten (10) days receipt of a written request from the Tenant. Unless
otherwise provided herein, all such alterations, additions or improve-
ments in systems, when made, installed or attached to the Space, other
than the Tenant's trade fixtures and equipment, shall belong to and
become the property of the Landlord and shall be surrendered with the
Space as part thereof upon the expiration or sooner termination of this
Lease, without hindrance, molestation or injury. Fixtures and equipment
that are standard and necessary for the operation of a dialysis facility
and the construction and operation of a dialysis center and Tenant's
Use shall not be deemed in violation of this Section 9. Notwith-
standing anything herein to the contrary, the Tenant shall be
responsible, subject to Sections 7 and 8, to repair the Space and
return it to its original condition as a result of damage done due to
its removal of its trade fixtures and equipment upon the expiration or
termination of the Term.
10. Signs: Interior and exterior signs may be erected by Tenant on
-----
or in front of the Space or the Building identifying the Tenant and its
business, such signs to be reasonable in number, size and design.
Any signs erected by the Tenant shall be in compliance with the
applicable zoning codes and/or ordinances. Tenant shall be responsible
to repair the Space and Building, as applicable, and return them
<PAGE> 4
to their original condition as a result of any damage done due to removal
of any signs installed in or on the Space or Building.
11. Compliance with Laws: Landlord represents that the Space and
--------------------
Building meet all applicable laws, ordinances and regulations at the
time of occupancy and were constructed in accordance with and comply
with all orders, regulations, requirements and directives of the Board
of Fire Underwriters or similar authority and of any insurance
companies who have issued or issue policies of insurance covering the
Space and Building for the prevention of fire or other casualty, damage
or injury. The Tenant, in its Use and occupancy of the Space, shall
promptly comply with all laws, ordinances, rules, regulations, require-
ments and directives of the federal, state, county and municipal
governments or public authorities and of all their departments, bureaus
and subdivisions, applicable to and affecting the Space and Tenant's Use
and occupancy thereof. Tenant shall be responsible, both financially
and otherwise, for the correction, prevention and abatement of nuisances,
violations and other grievances in, upon or in connection with the Space
solely by virtue of Tenant's Use during the Term or any Renewal Period,
and additionally, Tenant shall promptly comply with all orders, regu-
lations, requirements and directives of the Board of Fire Underwriters
or similar authority and of any insurance companies which have issued
or issue policies of insurance covering the Space and its contents, for
the prevention of fire or other casualty, damage or injury, at the
Tenant's own cost and expense.
12. Liens and Encumbrances: Tenant will not do any act which in
----------------------
any way encumbers the title of Landlord in and to the Space nor will
the interest or estate of Landlord in the Space be in any way subject
to any claim by way of lien or encumbrance, whether by operation of
law or by virtue of any express or implied contract by Tenant. Any
claim to, or lien upon, the Space arising from any act or omission of
the Tenant will accrue only against the leasehold estate of Tenant and
will be subject and subordinate to the paramount right and title of
Landlord in and to the Space. Tenant will not suffer or permit any
liens, including mechanic's liens or construction law liens, to stand
against the Space, the Building or any part thereof, by reason of any
work, labor, services or material done for or supplied or claimed to
have been done for or supplied to the Tenant, or anyone holding the
Space or any part thereof, through or under the Tenant. If any such
lien is at any time filed against the Space or Building, Tenant will
cause the same to be discharged of record with thirty (30) days after
the date of the filing of same, by either payment deposit or bond.
13. Insurance: (a) The Tenant, at Tenant's own cost and expense,
---------
shall obtain or provide and keep in full force during the Term, general
public liability insurance, insuring Tenant and as an additional insured
the Landlord, against any and all liability or claims of liability
arising out of, occasioned by or resulting from any accident or otherwise
in or about the Space, for injuries to any person or persons, for limits
not less than $1,000,000 for injuries to one person and $2,000,000 for
injuries to more than one person, in any one accident or occurrence, and
for the loss or damage to the property of any person or persons for not
less than $50,000. A copy of the insurance policy obtained by the Tenant
shall be forwarded to the Landlord. The Tenant also agrees to and shall
save from, hold and keep harmless and indemnify the Landlord for any and
all payments, expenses, costs, reasonable attorney fees and from any and
all claims and liability for losses or damage to property or injury to
persons occasioned totally or in part, by, or resulting from, any acts
or omissions by the Tenant or the Tenant's agents, employees, guests,
licensees, invitees, subtenants, assignees or successors, or for any
cause or reason whatsoever arising out of or by reason of the Use and
occupancy by Tenant and/or the conduct of Tenant's business.
(b) Landlord shall obtain and maintain combined Single Limit
Bodily Injury and Property Damage Insurance insuring against any
liability arising out of the ownership or maintenance of the Building
and areas appurtenant thereto in an amount not less than $1,000,000 for
injuries to one person and $2,000,000 for injuries to more than one
person, in any one accident or occurrence, and for the
<PAGE> 5
loss or damage to the property of any person or persons for not less
than $50,000. A copy of such insurance policy obtained by the Landlord
shall be forwarded to the Tenant.
Landlord also agrees to and shall save from, hold and keep
harmless and indemnify the Tenant for any and all payments, expenses,
costs, reasonable attorneys' fees from any and all claims and liability
for losses or damage to property or injury to persons occasioned totally
or in part, by or resulting from, any acts or omissions by the Landlord
or the Landlord's agents, employees, guests, licensees, invitees,
assigns or successors, or for any cause or reason whatsoever arising out
of or by reason of the operation, maintenance or leasing of the Building
and/or the conduct of Landlord's business.
14. Assignment or Sublet: Tenant shall have the privilege of
--------------------
assigning or subletting the Space to another who has the approximate
capitalization or financial condition of Tenant at the time of execution
of this Lease, after first obtaining written consent of Landlord, such
consent to be reasonable and shall not be arbitrarily withheld, and any
costs and expenses necessary to obtain such approval for any such
assignment or subletting to be solely that of the Tenant. Notwith-
standing any provisions hereof, Tenant may assign or sublet the Space
or any portion thereof, without Landlord's consent, to (i) Tenant's
medical director or similar physician; and (ii) any corporation which
controls, is controlled by or is under common control with Tenant, or
to any corporation resulting from the merger or consolidation with
Tenant, or to any person or entity which acquires substantially all of
the assets of Tenant, provided that said assignee assumes, in full, the
obligations of Tenant under this Lease. Any such subletting or assign-
ment shall terminate from that time on any and all liabilities of
Tenant to pay rent or perform under the Lease. Consent to one assignment
or subletting by Landlord shall not be deemed consent to any subsequent
assignment or subletting.
15. Restriction of Use: The Tenant shall not occupy or use the
------------------
Space or any part thereof nor permit or suffer the same to be occupied
or used for any purposes other than as herein listed, nor for any
purposes deemed unlawful, disreputable or extra hazardous on account of
fire or other casualty.
16. Mortgage Priority: This Lease shall not be a lien against the
-----------------
Space in respect to any mortgages that may hereafter be placed upon said
Space. The recording of such mortgage or mortgages shall have
preference and precedence and be superior and prior in lien to this
Lease, irrespective of the date of recording, and Tenant agrees to
execute any instrument without cost which may be deemed necessary or
desirable to further effect the subordination of this Lease to any
such mortgage or mortgages. A refusal by the Tenant to execute such
instrument shall entitle the Landlord to the option of canceling this
Lease, and the term hereof is hereby expressly limited accordingly.
The Landlord will use its best efforts in the event the mortgage is
placed on the Space other than those that are currently in existence in
order and shall have a reasonable period of time to obtain a non-dis-
turbance agreement or similar agreement which protects the rights of
the Tenant. If Landlord is unable to so obtain such a non-disturbance
agreement within a reasonable period of time the Tenant has the option
to immediately terminate this Lease, without further obligations except
for any sums due at such termination.
17. Condemnation: If the land, Building and Space, or any portion
------------
thereof, shall be taken under Eminent Domain or condemnation proceedings,
or if suit or other action shall be instituted for the taking or condem-
nation thereof, or if in lieu of any formal condemnation proceedings or
actions, the Landlord shall grant an option to purchase or shall sell
and convey the said Space or any part thereof to the government or other
public authority agency, body or public utility, seeking to take said
land, Building and Space or any portion thereof, then this Lease shall
terminate, and the term hereof shall end as of such date on which
possession of the Space is required to be surrendered. The Tenant shall
have no claim or right to claim or be entitled to any portion of any
amount which may be awarded as damages or paid as a result of such
condemnation proceedings or paid as the purchase price for such sale or
conveyance in lieu of formal condemnation proceedings. All rights of
the Tenant to damages, if any, are
<PAGE> 6
hereby assigned to the Landlord. The Tenant agrees to execute and
deliver any instrument, at the expense of the Landlord, as may be
deemed necessary or required to expedite any condemnation proceedings
or to effectuate a proper transfer of title to such governmental or
other public authority, agency, body or public utility seeking to take
or acquire the said land, Building and Space or any portion thereof.
The Tenant covenants and agrees to vacate the said Space, remove all
of the Tenant's personal property therefrom and deliver up peaceable
possession thereof to the Landlord or to such other party designated by
the Landlord on such date possession of the Space is required to be
surrendered. Landlord shall provide Tenant with notice of such
condemnation or other conveyance of the Space as provided in this
Section 17 no less than 120 days prior to Tenant having to surrender
possession. Failure by the Tenant to comply with any provisions of
this clause shall subject the Tenant to such costs, expenses, damages
and losses as the Landlord may incur by reason of the Tenant's breach
thereof. Tenant shall have the right, to the extent that the same shall
not diminish Landlord's award, to make a separate claim against the
condemning authority (but not Landlord) for such compensation as may be
separately awarded or recoverable by Tenant for moving expenses and
damage to Tenant's trade fixtures, if a separate award for such items
is made to Tenant.
18. Hazardous Waste: Tenant shall not dump, flush or in any way
---------------
introduce any hazardous substances or any other toxic substances into
the septic, sewage or other waste disposal system serving the Space and
Building. Tenant and Landlord shall not dispose of any hazardous or
toxic substances or wastes in or on the Space or Building nor generate,
store, use or dispose of any hazardous or toxic substances, except as
may be permitted by applicable law, therein or thereon. To the best of
Landlord's knowledge and belief, Landlord states that it has not
generated any hazardous waste in or upon the Space or the Building, nor
does it have knowledge that any other lessee of the property has done
the same. Tenant shall indemnify, save and hold Landlord harmless from
and against all costs, fees, expenses, including reasonable attorneys'
fees, losses and damages resulting from or arising out of the genera-
tion, storage, use or disposal of hazardous wastes by Tenant's Use and
occupancy of the Space, including the transport or leaching of any
hazardous wastes from the Space. Tenant shall not make any use of the
Space which is improper, offensive or contrary to any law or ordinance
or which will invalidate any of the Lessor's insurance. The provisions
of this Section 18 shall survive the expiration or termination of this
Lease for a period of two years from such expiration or termination.
19. Tax Increase: If in any calendar year during the Term and of
------------
any Renewal Period the annual municipal taxes assessed against the land
and improvements leased hereunder or of which the Space herein leased is
a part, shall be greater than the municipal taxes assessed against the
said lands and improvements for the calendar year 1998, which is hereby
designated as the base year, then in addition to the Rent herein fixed,
the Tenant agrees to pay Tenant's Proportionate Share of the amount by
which said tax exceeds the annual tax for the base year, inclusive of
any increase during any such calendar year. The said sum shall be
considered as Additional Rent and be paid in as many equal installments
as there are months remaining in the calendar year in which said taxes
exceed the taxes for the base year, on the first day of each month in
advance, during the remaining months of that year. If the Term hereof
shall commence after the first day of January or shall terminate prior
to the last day of December in any year, then such Additional Rent
resulting from a tax increase shall be proportionately adjusted for the
fraction of the calendar year involved.
20. Reimbursement of Landlord: If the Tenant shall fail or refuse
-------------------------
to comply with and perform any conditions and covenants of the within
Lease ("Event of Default"), the Landlord may, after having given Tenant
thirty (30) days written notice of the Event of Default and an oppor-
tunity to cure, at the Landlord's option, carry out and perform such
conditions and covenants, at the reasonable cost and expense of the
Tenant, and the said cost and expense shall be payable on demand, or at
the option of the Landlord, be Additional Rent due immediately there-
after, but in no case later than one month after such demand, whichever
occurs sooner, and shall be due and payable as such. This remedy shall
be in addition
<PAGE> 7
to such other remedies as the Landlord may have hereunder by reason of
the breach by the Tenant of any of the covenants and conditions in this
Lease.
21. Inspection and Repair: Tenant agrees that the Landlord and
---------------------
Landlord's agents, employees or other representatives, shall have the
right to enter into and upon the Space or any part thereof, at all
reasonable hours, and upon notice to the Tenant, if possible, for the
purpose of examining the same or making such repairs or alterations
therein as may be necessary for the safety and preservation thereof.
Landlord agrees not to interrupt the business of the Tenant, if
reasonably possible, when performing such examinations, repairs or
alterations to the Space. This clause shall not be deemed to be a
covenant by the Landlord nor be construed to create an obligation on
the part of the Landlord to make such inspection or repairs except as
required in this Lease.
22. Remedies Upon Tenant's Default: If there should occur an
------------------------------
Event of Default on the part of the Tenant in performance of any
conditions and covenants herein contained, the Landlord, in addition
to any other remedies herein contained or as may be permitted by law
other than reimbursement as per Section 20 which will preclude
repossession as provided in this Section 22, may re-enter the Space
for Landlord's benefit, and as agent for the Tenant or otherwise,
relet the Space and receive the rents therefor and apply the same,
first to the payment of such expenses, reasonable attorney fees and
costs and the Landlord may have been put to in re-entering and
repossessing the Space and in making such repairs and alterations as
may be necessary, and second to the payment of such Rent due hereunder.
The Tenant shall remain liable for such Rent as may be in arrears and
also the Rent as may accrue subsequent to the re-entry by the Landlord,
to the extent of the difference between the Rent reserved hereunder and
the rents, if any, received by the Landlord during the remainder of the
unexpired term hereof, after deducting the aforementioned expenses,
fees and costs, the same to be paid as such deficiencies arise and are
ascertained each month.
23. Nonliability of Landlord: Except for the negligence of the
------------------------
Landlord or its breach of any of its responsibilities and obligations
under this Lease, the Landlord shall not be liable for any damage or
injury which may be sustained by the Tenant or any other person, as a
consequence of the failure, breakage, leakage or obstruction of the
water, plumbing, steam, sewer, waste or soil pipes, roof, drains,
leaders, gutters, valleys, down spouts or the like or of any elec-
trical, gas, power conveyor, refrigerator, sprinkler, air conditioning
or heat systems, or by reason of the elements, or resulting from the
carelessness, negligence or improper conduct on the part of any other
tenant or any of the Tenant's agents, employees, guests, licensees,
invitees, subtenants, assignees or successors, or attributable to any
interference with, interruption of or failure, beyond the control of
the Landlord of any services to be furnished or supplied by Landlord.
24. Operating Responsibilities of the Landlord:
------------------------------------------
Landlord shall be responsible for the following during the Term and
any Renewal Period:
(i) To keep and maintain in good, clean, safe and sanitary
order, condition and repair the roof, exterior walls, structure,
foundation, floor slabs, paving and outside walks and other structural
components of the Building, and surrounding grounds, and all common
areas within and without the Building;
(ii) To keep and maintain in good and sanitary order,
condition and repair the main plumbing and electrical components leading
into and the overall plumbing and electrical components of the Building,
other than those installed by Tenant and within the Space, the latter to
be the responsibility of the Tenant;
<PAGE> 8
(iii) Subject to Section 6, to keep and maintain in good and
sanitary order, condition and repair, the parking area; and to mark the
parking spaces for the Tenant's staff and, if applicable (see Section 33
below), for the Tenant's patients;
(iv) Subject to Section 6, to handle in an expeditious manner
the snow and ice removal from the Building, all parking areas, walk-ways
leading up to the Building, provided it shall be Landlord's sole
responsibility to remove snow and ice from the roof of the Building;
(v) To use diligence in obtaining all necessary permits and
licenses from any and all regulatory agencies for the continuous opera-
tion of the Building, which will comply with all safety, health and
other governmental codes and regulations. Landlord warrants to Tenant
that the Building is located in an area which is zoned Highway/Business
and may be used as a dialysis center for Tenant's Use as per the letter
of Assistant Zoning Officer addressed to the Landlord dated May 29,
1998, attached as Exhibit B and made a part of this Lease, with the
understanding that the Approval Period will be extended to the extent
Tenant's Use requires a variance that exceeds the 110 day period as
provided in Section 2(i) of this Lease, but any such extension not to
exceed 30 days. Notwithstanding anything herein to the contrary but
subject to Section 2(iii), the Landlord shall not be responsible for
obtaining permits and/or licenses permitting the Tenant's Use;
(vi) To allow the patients and staff of Tenant free and easy
access through all exits and entrances of the Building;
(vii) To keep and maintain separate metering for the utilities
for the Space and insure no other party's utilities are connected or
charged to Tenant's meters for the Space;
(viii) Subject to Section 6, to provide and maintain sufficient
landscaping around the Building in such a manner and capacity as to
create a pleasing and attractive environment;
(ix) To provide utilities and services, in particular
sufficient water, electric and gas lines and telephone conduits to meet
the needs of Tenant's Use; the Space shall have available 400 amp
dedicated service "3 Phase"; Landlord shall provide no less than a 2"
water line and sewer lines together with a natural gas line from the
street to the Building;
(x) To install and maintain adequate exterior lighting to
the Building in compliance with all local zoning regulations and/or
ordinances;
(xi) To keep and maintain in good and sanitary order,
condition and repair the air conditioning, heating, and ventilation
("HVAC Systems"), satisfactory in size and capacity to meet basic
heating and cooling standards for a period of one year from the Approval
Date as provided in Section 7 of this Lease, which HVAC Systems must be
commercial and high efficiency meeting the 1993 New Jersey ASHRAE Code;
and
(xii) To provide five (5) gas fixed heating systems (100,000
BTUs); five (5) central air conditioning units (3.5 tons each) to and
for the Space; the Tenant shall be responsible for the proper distri-
bution of the service in the Space.
25. Remedies of Tenant: In the event of a default under the terms,
------------------
covenants or conditions of this Lease on the part of the Landlord which
shall include but not be limited to unreasonably withholding consents,
failure to maintain facilities for the introduction of water, gas, and
electric into the Space, failure to maintain the Building and the Space
as required herein, failure to use due care with respect to the persons
and property of Tenant, failure of Landlord's warranties as to the good
operating condition of
<PAGE> 9
the services to the Space, and otherwise interfering with, whether
negligently or intentionally, the business of Tenant and its peaceable
and quiet enjoyment of the Space for the Term or any Renewal Term, Tenant
shall notify Landlord in writing of said default and Landlord shall have
thirty (30) days to cure or commence to cure said default; provided that
if the nature of the default is such that it cannot be reasonably cured
within said thirty (30) days, Landlord shall not be deemed to be in
default if it shall commence performance within said thirty (30) day
period and diligently proceeds to so cure the default thereafter. If
Landlord shall not cure or commence to cure the said default within the
thirty (30) day period, Tenant has the option to either terminate this
Lease and vacate the Space immediately without any further liability
under the Lease and take whatever other lawful remedies that may be
available to it upon such default, or cure the default and at Tenant's
option deduct reasonable costs and expenses for such cure from Rent or
Additional Rent or any other amounts accrued hereunder due, or other-
wise be immediately reimbursed by Landlord.
In the event of emergent circumstances requiring repairs to the
Space, the Tenant shall be responsible to make a diligent effort to
notify the Landlord as to the emergent circumstances and the required
repairs in order to give the Landlord the opportunity to arrange for
such repairs itself. However, if the Tenant is unable to notify the
Landlord of same within a reasonable time, in light of said emergent
circumstances, the Tenant shall be entitled to make such repairs and
deduct the cost thereof from the Rent and Additional Rent accruing for
the month following the date of such repairs.
26. Nonwaiver: The various rights, remedies, options and elec-
---------
tions of Landlord and Tenant expressed herein are cumulative and the
failure of the Landlord or Tenant to enforce strict performance by the
other of the other party's conditions and covenants of this Lease, or
to exercise any election or option, or to restore or have recourse of
any remedy herein conferred, or the acceptance by the Landlord of any
installment of Rent after the breach by the Tenant of any one or more
instances, shall not be construed or deemed to be a waiver or relin-
quishment for the future by Landlord or Tenant, as the case may be, of
any such conditions and covenants, options, elections or remedies, but
the same shall continue in full force and effect.
27. Validity of Lease: The terms, conditions, covenants and
-----------------
provisions of this Lease shall be deemed to be severable. If any clause
or provision herein contained shall be adjudged to be invalid or unen-
forceable by a court of competent jurisdiction or by operation of any
applicable law, it shall not affect the validity of any other clause
or provision herein, but such other clauses or provisions shall remain
in full force and effect.
28. Notices: All Rent payments, notices, requests, demands and
-------
other communications under this Lease shall be in writing and shall be
deemed to have been duly given on the date of service if served
personally on the party to whom notice is to be given, or on the third
day after mailing if mailed to the party to whom notice is to be given,
by first class mail, registered or certified, postage prepaid, or the
next day or second day if effected by such overnight mail, and properly
addressed as follows:
To Landlord: Lotano Development, Inc.
22 Hyers Street
Toms River, NJ 08753
Attn: Gary Lotano, President
Copy To: Robert M. McKeon, Esq.
Novins, York & Pentony, P.A.
202 Main Street
Toms River, NJ 08753
<PAGE> 10
To Lessee: Dialysis Services of NJ, Inc. - Toms River
Suites 1-5
1182 Fischer Boulevard
Toms River, NJ 08753
Attn: Bart Pelstring, President
Copy To: Lawrence E. Jaffe, Esq.
Heights Plaza - 5th Floor
777 Terrace Avenue
Hasbrouck Heights, NJ 07604
Any party may change its address for purposes of this Section 28
by giving the other parties written notice of the new address in the
manner set forth above.
29. Title and Quiet Enjoyment: So long as Tenant pays the Rent
-------------------------
provided herein for the premises and observes and performs all of the
covenants, conditions and provisions required of it herein, Tenant shall
and may peacefully and quietly have, hold and enjoy the Space free from
disturbances by Landlord, Landlord's successors, assigns or subleases
for the entire Term hereof and any Renewal Periods, subject to all
provisions of this Lease. Tenant hereby subordinates Tenant's interest
in the Space under this Lease to any mortgage or deed of trust now or
hereafter created by Landlord upon the Space. Tenant shall, at any time
upon request of Landlord, execute for recording, an agreement, of which
a copy shall be delivered to Tenant, further evidencing this subordina-
tion herein made.
30. Entire Contract: This Lease contains the entire contract
---------------
between the parties. No representative, agent or employee of the
Landlord has been authorized to make any representations or promises
with reference to the within letting to vary, alter or modify the terms
hereof. No additions, changes or modifications, renewals or extensions
hereof shall be binding unless reduced to writing and signed by the
Landlord and Tenant.
31. Security: Tenant has this date deposited with the Landlord
--------
the refundable sum of Nine Thousand Six Hundred Ten and 84/100
($9,610.84) Dollars as security for the payment of Rent hereunder and
the full and faithful performance by Tenant of the covenants and
conditions on the part of the Tenant to be performed. Said sum shall
be returnable to the Tenant, without interest, within thirty (30) days
after the expiration of the Term, provided that Tenant has fully and
faithfully performed all such covenants and conditions, no Event of
Default then exists, and Tenant is not in arrears in Rent. During the
Term Landlord may, if Landlord so elects, have recourse to such
security to make good in accordance with the terms of this Lease any
Event of Default by the Tenant in which event Tenant shall, on demand,
promptly restore said security to its original amount. Liability to
repay said security to the Tenant shall run with the reversion and
title to the Space, whether any change in ownership thereof be by
voluntary alienation or as the result of judicial sale, foreclosure or
other proceedings, or the exercise of a right to taking or re-entry by
any mortgagee. Landlord shall assign or transfer said security, for
the benefit of Tenant, to any subsequent owner or holder of the
reversion of title to said Space, in which case the assignee shall
become liable for repayment thereof as herein provided, and the
assignor shall be deemed to be released by Tenant from all liability
to return said security. This provision shall be applicable to every
alienation or change in title. Tenant shall not mortgage, encumber or
assign said security without the written consent of Landlord.
32. Appearance: It is understood and agreed that the Tenant shall
----------
store all trash and garbage within the Space or in such a place as may
be designated by the Landlord, provided Tenant has the right to place
dumpsters adjacent to the Building in which the Space is located for
Tenant's exclusive use, and
<PAGE> 11
shall arrange for the regular pickup of all trash and garbage. The
Tenant shall not burn any trash of any kind in or about the Building
nor shall the Tenant permit rubbish, refuse or garbage to accumulate
or exist about the Space.
33. Parking Areas: Landlord is to ensure adequate and free
-------------
parking adjacent to the Space, including a reserved space and ramp for
delivery of supplies, for Tenant's staff and patients, and to the extent
and at such time parking becomes inadequate for the Building, then
Landlord will ensure a minimum of thirty (30) assigned and clearly
marked parking spaces for the sole use of Tenant's patients, of which
five (5) parking spaces will be designated and so marked for the handi-
capped and placed at the front entrance of the Building closest to the
Space, and to allow Tenant's patients and staff to use additional
parking facilities as may be available.
34. Business Operations: Tenant shall Use the Space in accordance
-------------------
with the purpose stated in this Lease. The Tenant shall undertake its
business diligently and energetically and shall keep the Space open and
available for business during all usual business hours. It is intended
that the usual business hours shall be from 6:00 a.m. to 6:00 p.m.,
Monday through Saturday, and occasionally on Sunday. These hours are
basic guidelines and may be modified by the parties.
35. Closure: In the event the Tenant fails to operate the business
-------
for a period of fourteen (14) consecutive business days and at the same
time fails to pay the Rent on said Space, said act shall be deemed an
abandonment by the Tenant. Upon such abandonment, the execution of this
Lease shall allow the Landlord to immediately take possession of the
Space without further act. Any and all materials left in the Space may
be removed by the Landlord and either stored, sold or disposed of in any
reasonable fashion.
36. Bankruptcy: In the event that the Tenant files bankruptcy,
----------
the Tenant agrees to vacate the space within thirty (30) days.
37. Property Ownership: The Landlord covenants and represents that
------------------
the Landlord is the owner of the Space and has the right and authority
to enter into, execute and deliver this Lease, and does further covenant
that the Tenant, on paying the Rent and performing the conditions and
covenants contained herein, shall and may peaceably and quietly have,
hold and enjoy the Space for the Term and any Renewal Period. Landlord
further represents and agrees that it will only rent space in the
Building to professional-type entities and not to their opposites, such
as but not limited to billiard parlors, arcades, fast food purveyors,
discount job lots, etc.
38. Fire or Casualty: In the event that the Building or the
----------------
Space shall be totally or substantially damaged by fire or other
casualty or happening, to the extent that the business of the Tenant
cannot reasonably be conducted therein and if such damage cannot be or
is not repaired, restored, or rebuilt by the Landlord, as the case may
be, to substantially the same condition as it was immediately prior
to such damage or destruction within three (3) months after such damage,
then either the Landlord or Tenant shall have the option of terminating
this Lease by written notice delivered to the other party not later than
thirty (30) days following such failure to rebuild; in either event
Tenant shall immediately vacate and surrender possession of the Space
to Landlord. If neither Tenant nor Landlord elects to terminate this
Lease, or if the Building or the Space is not damaged to the extent
that the damage unreasonably interferes with Tenant's Use, Landlord
shall proceed with said repairs with all reasonable diligence, but in
no event shall the repairs exceed ninety (90) days. The rent payable
hereunder shall entirely abate in case the Space or the Building is
substantially destroyed or so damaged as to render the Space untenant-
able or not useable or convenient or in a condition for patients of
Tenant noting the Use of the Space, or abate proportionately according
to the extent of the injury or damage sustained by the Building or the
Space, if such is not substantially destroyed or is rendered partially
untenantable, until the Building and the Space
<PAGE> 12
shall have been restored, repaired, or rebuilt and put in proper
condition for the Use and occupancy of Tenant. Landlord agrees to
institute such repairs immediately after such damage and to complete
the same with due diligence and within a reasonable time as provided
in this Lease.
IN WITNESS WHEREOF, the parties hereto have hereunto set their
hands and seals, or caused these presents to be signed by their
corporate officers and their proper corporate seals to be hereto
affixed, the day and year first above written.
Landlord: LOTANO DEVELOPMENT, INC.
/s/ Gary Lotano
Date: July 1, 1998 By:-------------------------------
GARY LOTANO, President
Tenant: DIALYSIS SERVICES OF NJ,
INC. - TOMS RIVER
/s/ Bart Pelstring
Date: July 1, 1998 By:-------------------------------
BART PELSTRING, President
<PAGE> 13
EXHIBIT A
SPACE SPECIFICATIONS
[Bart Pelstring to provide]
<PAGE>
EXHIBIT B
TOWNSHIP OF DOVER
County of Ocean
Toms River, New Jersey 08753
Reply to: Telephone: (732) 341-1000
Fax Number: (732) 341-3586
Planning Board
33 Washington Street
Toms River, N.J. 08753
May 29, 1998
Lotano Development, Inc.
Hyers Street
Toms River, N.J. 08753
Attn: Gary Lotano
Re: Administrative Approval Request-Proposed Tenant-Block 420-6,
Lots 2 & 3
Major Site Plan-LPC Construction Company
Dear Mr. Lotano:
Pursuant to the recommendation made by the members of the Planning Board
present at the Conference Workshop Meeting of May 27, 1998, this office
hereby issues a zoning permit to establish a dialysis therapy use within
the building now under construction on the referenced site.
The Planning Board is satisfied that you have furnished sufficient data
pursuant to Section 101-8.20 P. that supports your contention that
adequate parking will be available on the site for the proposed use.
It is expected that the dialysis therapy use will occupy 78% of the
building. In the event the dialysis therapy use does not opt to rent
tenant space on the property, physical therapy use of a similar
intensity will be allowed within the building.
If you should have any questions, please so advise.
Very truly yours,
/s/ Bernard M. Mackle
BERNARD M. MACKLE
ASST. ZONING OFFICER/PLANNER
5pb4.doc
BMM/cf
cc: Lawrence P. Cagliostro, Twp. Engineer
Robert Shea, Esq.
Planning Board Members
LEASE AGREEMENT
THIS LEASE AGREEMENT, made this 1st day of December, 1998, by and
between DIALYSIS CORPORATION OF AMERICA, a Florida corporation, with
offices at 27 Miller Street, Lemoyne, Pennsylvania 17043 (hereinafter
referred to as "Lessor") and Wirehead Networking Solutions, Inc., a
Pennsylvania corporation, with offices at 27 Miller Street, Suite 3A,
Lemoyne, Pennsylvania 17043 (hereinafter referred to as "Lessee").
1. PREMISES
--------
Lessor, in consideration of the rents and covenants hereinafter
mentioned, does demise and lease unto Lessee, all that certain space
consisting of 1,496 square feet of rentable space (the "Space"), with
specifications for the Space attached as Exhibit A in the building
located at 27 Miller Street, Suite 3A, Lemoyne, Pennsylvania 17043
(the "Building").
2. TERM
----
2.1 Term This Lease is for the term of three (3) years, com-
----
mencing on the first day of January, 1999 (the "Term"). In the event
this Lease commences on a day other than the first day of the month,
then the rent shall be paid pro rata for such fractional month.
2.2 Renewal Option
--------------
This Lease shall be renewable for one additional period of three
(3) years ("Renewal Period") each under the terms and conditions of this
Lease, provided that:
(i) Lessee is not in default hereunder;
(ii) Lessee has given written notice of its intent to renew
the Lease not less than one hundred twenty (120) days prior to the
expiration of the current Term; and
(iii) The rent for such Renewal Period will be $9.00 per
square foot for the first and second years of the Renewal Period and
$10.00 per square foot for the third year of the Renewal Period, and
such rent will commence on the day of the month immediately following
the expiration of the Term, which rent shall be pro rated for any
portion of a month.
2.3 Holdover as Renewal
-------------------
A holdover by Lessee beyond the Term of this Lease or any Renewal
Term shall, at the option of Lessor, be deemed a renewal of this Lease
on a year to year basis, with the renewal being under and subject to
all provisions contained in this Lease; provided, any holdover renewal
being under and subject to an automatic ten percent (10%) increase in
the Base Rent and Additional Rent with respect to the CAM expenses as
those terms are defined in Article 4.
<PAGE> 1
3. POSSESSION AND USE
------------------
3.1 Acceptance of Premises
----------------------
Lessee shall accept the Space in its condition as of the commence-
ment date of the Term, subject to all applicable laws, ordinances,
regulations, covenants and restrictions. Lessor has made no represen-
tation or warranty as to the suitability of the Space for the conduct
of Lessee's business, and Lessee waives any implied warranty that the
Space is suitable for Lessee's intended purposes and Use. Except as
provided in Section 6, in no event shall Lessor have any obligation for
any defects in the Space or any limitation on its Use. The taking of
possession of the Space shall be conclusive evidence that Lessee
accepts the Space and that the Space was in good condition at the time
possession was taken except for items that are Lessor's responsibility
under Section 6 and any punchlist items agreed to in writing by Lessor
and Lessee.
3.2 Possession
----------
Possession of the Space includes the exclusive use of the same,
together with the use, concurrent with any other occupants of the
Building, of the common hallways, stairs, elevators (if any), toilet
rooms, parking areas, air conditioning, storage, waste removal,
electric, heat, light and water. Lessee, its agents, invitees,
employees, servants and visitors (collectively "Agents") shall have
the right of ingress and egress to and from the said Space and the
Building.
3.3 Use Availability
----------------
The Space shall be used only for the purpose of general business
offices and marketing (not a retail store) and other lawful purposes as
may be incidental thereto ("Use").
It shall be Lessee's responsibility at its own expense to determine
and, if necessary, submit the appropriate applications for the Use of the
Space to and comply with all the requirements of the appropriate govern-
mental officials, agencies, commissions and boards having jurisdiction
over the Use of the Space, including but not limited to the Americans
With Disabilities Act ("Government Compliance"). Lessor will use its
best efforts to assist Lessee in submitting and obtaining any such
applications and approvals. If Lessee is unable to obtain the
appropriate permits, variances, licenses and/or other approvals for the
Use of the Space, Lessor may, at its option but is not otherwise
required, obtain such Government Compliance, and Lessee will use its
best efforts to assist Lessor in obtaining such compliance, and all
costs and expenses to effect such Government Compliance to be charged
to Lessee as Additional Rent as defined in Section 4.2 accruing for
the month following effectuation of such compliance; or if Lessor
does not exercise its option to obtain the Government Compliance,
this Lease will automatically and immediately terminate and become
null and void.
4. RENT
----
4.1 Base Rent
---------
Lessee agrees to pay as base rent to Lessor for the Use of the
Space during the Term $6.00, $7.00 and $8.00 per square foot for each
of the first, second and third years of the Term, respectively, or
Eight Thousand Nine Hundred Seventy-Six and 00/100 ($8,976.00) Dollars
the first year of the Term to be paid in monthly installments of Seven
Hundred Forty-Eight and 00/100 ($748.00) Dollars, Ten Thousand Four
Hundred and Seventy-Two and 00/100 ($10,472.00) Dollars the second year
of the Term to be paid in monthly installments of Eight Hundred Seventy-
Two and 67/100 ($872.67) Dollars, and Eleven Thousand Nine Hundred
Sixty-Eight and 00/100 ($11,968.00) Dollars the third year of the Term
to be
<PAGE> 2
paid in monthly installments of Nine Hundred Ninety-Seven and 33/100
($997.33) Dollars, payable monthly in advance, without demand, deduc-
tion or set-off, on the first day of each calendar month during the
Term, allowing five (5) day check processing time ("Base Rent").
Lessee shall pay to Lessor upon the execution of this Lease One
Thousand One Hundred Twenty Two and 00/100 ($1,122.00) Dollars which
Lessor shall credit Lessee for the first month's Base Rent and
Additional Rent (CAM charges) (pro-rated if the commencement date of
the Term falls on a date later than the first day of the month).
4.2 Additional Rent
---------------
The Lessee shall pay as additional rent above the Base Rent
("Additional Rent") $3.00 per square foot of the rentable Space for
an annual aggregate of Four Thousand Four Hundred Eighty-Eight and
00/100 ($4,488.00) Dollars for all common area maintenance and other
operating costs and expenses attributable to the operation and
maintenance of the Building (collectively "CAM"), which include but
are not limited to electric, water and sewer charges, snow and ice
removal from sidewalks and parking areas, trash removal, janitorial
services of common areas and exterior and landscape maintenance,
insurance, real estate taxes, levies and special assessments on the
Building, fuel oil, repair, maintenance and security expenses, and
all utilities except to the extent such are separately metered. The
CAM expenses will be adjusted each year based upon the prior year's
actual CAM expenses and any new CAM expenses, which adjustment may
increase or decrease the Additional Rent with respect to the CAM
expenses.
The CAM charges as Additional Rent shall be due and payable in
monthly installments with the Rent of Three Hundred Seventy Four and
00/100 ($374.00) Dollars. Subject to the provisions of Section 4.1,
if any installment of Base Rent or Additional Rent is not paid within
five (5) days of its due date then Lessor may assess a late charge of
five (5%) percent of the total amount of Base Rent or Additional Rent
then due until the date of payment, which charge shall be immediately
due and payable as further Additional Rent. Payments, when received
by the Lessor, shall be applied first to delinquent rents and late
charges, if any. Base and Additional Rent may be referred to collec-
tively throughout this Lease as "Rent."
4.3 Security Deposit
----------------
Lessee shall pay to Lessor on the execution of this Lease a
refundable Seven Hundred Forty-Eight and 00/100 ($748.00) Dollar
security deposit.
The security deposit is held by Lessor subject to the terms hereof
as debtor not trustee and will be returned to Lessee without interest
thirty (30) days after Lessee has surrendered the Space as per Section
17 of this Lease provided Lessor is reasonably satisfied with the
condition of said Space, reasonable wear and tear excepted, keys
surrendered and Lessee shall not be in default of the terms and con-
ditions of this Lease.
In the event of any delinquent payments or breach of any terms,
covenants and conditions of this Lease or upon each occurrence of an
Event of Default (hereinafter defined in Section 11 of this Lease),
the security deposit will be credited immediately in the amount due
to the Lessor. If all or any part of the security deposit is applied
to an obligation of Lessee hereunder, Lessee shall immediately upon
request by Lessor restore the security deposit to the amount held.
Upon any conveyance by Lessor of its interest under this Lease, the
security deposit shall be delivered by Lessor to Lessor's grantee or
transferee. Upon any such delivery, and after Lessor has provided
Lessee with written notice of such delivery, Lessee hereby releases
Lessor, herein named, of any and all liability with respect to the
security deposit, its
<PAGE> 3
application and return, and Lessee agrees to look solely to such
grantee or transferee. It is further understood that this provision
shall also apply to subsequent grantees and transferees.
The security deposit is not an advance Rent payment or Rent deposit
or any measure of damages to Lessor in case of Lessee's default and no
part of the security deposit is or may be used as any Rent payment.
5. UTILITIES
---------
In the event Lessee requires additional utilities or equipment,
the installation and maintenance thereof shall be at Lessee's sole
obligation, provided that such installation shall be subject to Lessor's
written consent which shall not be unreasonably withheld or delayed.
Lessee covenants and agrees that at all times its use of the
utilities and services shall never exceed the capacity provided by
Lessor. Lessor shall not be liable to Lessee or its Agents for any
interruption of or failure to provide electrical service, heating, air
conditioning, or water, or other utility service, or any change in the
quality or character of the utility services or for such no longer
being suitable for Lessee's requirements which is due to any energy
shortage, power failure, or other cause beyond the control of Lessor,
or is required in order to enable Lessor to perform required and
necessary maintenance or repairs within the Building; nor shall any
non-supply or change in supply of any utility service in any way
effect the tenancy or relieve Lessee of any obligation under the terms
of this Lease.
Any telephone, fax, e-mail modem and similar services, including
installation and charges therefor, are the sole responsibility and
expense of Lessee.
6. OPERATING RESPONSIBILITIES OF THE LESSOR
----------------------------------------
Lessor shall be responsible the repair and maintenance of the
following during the Term, the expenses for which are included as CAM
charges and included in Additional Rent, Section 4.2 above.
(i) To keep and maintain in good condition and repair the
roof, exterior walls, structure, foundation, and outside walks and
other structural components of the Building, and surrounding grounds,
and all common areas within and without the Building, and uninsured
losses and damages caused by Lessee and its Agents excluded. The term
"walls" as used in this Section 6 shall not include windows, glass or
plate glass, doors or overhead doors, special fronts or office entries;
(ii) To keep and maintain in good condition and repair the
main plumbing and electrical components leading into and the overall
plumbing and electrical components of the Building, other than those
installed by Lessee and within the Space, the latter to be the respon-
sibility of the Lessee;
(iii) To keep and maintain in good condition and repair, the
parking area, if any;
(iv) To handle the snow and ice removal from the Building,
all parking areas and walk-ways leading up to the Building;
(v) To provide a trash dumpster to the Building to handle
the containment and removal of trash;
(vi) Subject to Section 7(iii) of this Lease, to permit
Lessee's installation of interior and exterior signs identifying the
Lessee and its business, such signs to be reasonable in number, size
and design, subject to Lessor's written approval which shall not be
unreasonably withheld;
<PAGE> 4
(vii) To maintain existing exterior lighting to the Building;
and
(viii) To keep and maintain in good condition and repair the
air conditioning and heating systems, including but not limited to all
necessary plumbing, electrical and ventilation ("HVAC Systems"), satis-
factory in size and capacity to meet basic heating and cooling standards
of the Building; provided Lessee shall be responsible for the condition
and repair of the HVAC Systems designated for use in the Space at
Lessee's sole cost as per Section 7(v), the costs of which shall be
excluded from any CAM charges.
7. OPERATING RESPONSIBILITIES OF LESSEE
------------------------------------
Lessee shall be responsible at its sole expense for the following
during the Term:
(i) To Use the Space in a proper, safe and careful manner;
(ii) To make and pay for all necessary alterations and
improvements to the Space, which Lessee has the right to do for Lessee's
own purposes, which shall be made at Lessee's expense; Lessee shall
obtain Lessor's prior written approval for any alterations and
improvements; all such work shall be done at such time and in such
manner as shall minimize and inconvenience to other occupants of the
Building. As a condition precedent to Lessor's consent, Lessee shall
deliver to Lessor written plans and specifications for all work and
written plans and specifications for all heating, ventilating and air
conditioning. Lessor shall have the right to approve any contractor to
be used by Lessee in connection with any approved alterations and im-
provements to the Space. Lessee shall comply with all governmental
rules and regulations in connection with such work. Lessee may remove
furniture, fixtures, and movable improvements installed within the Space
at the expiration of the Lease; Lessee shall promptly repair any damage
to the Space and the Building as a result of such removal, other than
normal wear and tear.
Notwithstanding anything herein to the contrary, the Lessee
shall not make structural alterations or additions to the Building or
the Space, nor erect or paint any sign or other identification on any
window or part of the Building, except as provided in Sections 6(vi) and
7, provided Lessor consents thereto in writing. All structural altera-
tions or improvements made by Lessee shall be at Lessee's sole cost and
expense and shall become the property of the Lessor at the termination of
this Lease; or alternatively, at Lessor's option and request, Lessee shall
remove such alterations and improvements and be subject to Section 8.1.
Lessee shall not permit any mechanic's liens, or similar liens,
to remain upon the Building or the Space for labor and material furnished
to Lessee or claimed to have been furnished to Lessee in connection with
work of any character performed or claimed to have been performed at the
direction of Lessee and shall cause any such lien to be released and an
instrument evidencing discharge of same to be recorded forthwith without
any cost to Lessor. Lessee shall indemnify and save Lessor harmless from
all injury, loss, claims, liens or damage to any person or property
occasioned by or arising from such work. If Lessor incurs any costs and
expenses, including reasonable attorney's fees, then Lessee shall pay the
Lessor that sum so incurred as Additional Rent.
(iii) To provide janitorial services and supplies for the
Space, trash removal from the Space, and maintain the Space in good
condition and repair. All refuse and rubbish must be placed inside
the dumpster, not on top or outside around the dumpster. In addition,
Lessee shall pay to Lessor the cost of removal from the Building and
the Space of any of Lessee's refuse and rubbish which exceeds the
refuse and rubbish usually attendant upon the Use of such Space. Such
excess refuse removal charges
<PAGE> 5
will be billed to the Lessee at the end of the month in which incurred
and is due and payable as Additional Rent.
(iv) Installation of any signs, subject to Section 6(vi),
shall be at the sole expense of the Lessee; and Lessee shall be respon-
sible for the removal of all such signs at the termination of this
Lease and any expenses therefor as well as repairing any damage to the
Building and Space as a result of such removal; and
(v) Subject to Lessor's obligations in Section 6, Lessee at
its expense shall repair, replace and maintain in good condition all
portions of the Space and all areas, improvements and systems exclusively
serving the Space, including, without limitation, dock and loading areas,
truck doors, plumbing, water, and sewer lines up to points of common
connection, fire sprinklers and fire protection systems, entries, doors,
ceilings and roof membrane, windows, interior walls, and the interior
side of demising walls, and heating, ventilation and air conditioning
systems. Such repair and replacements include capital expenditures and
repairs whose benefit may extend beyond the Term and any Renewal Period.
Heating, ventilation and air conditioning systems and other mechanical
and Building systems serving the Space shall be maintained at Lessee's
expense pursuant to maintenance service contracts entered into by Lessee
or, at Lessor's election, by Lessor. The scope of services and con-
tractors under such maintenance contracts shall be reasonably approved by
Lessor. If Lessee fails to perform any repair or replacement for which
it is responsible, Lessor may perform such work and be reimbursed by
Lessee within 10 days after demand therefor, or alternatively, at the
sole discretion of the Lessor, be included as Additional Rent for the
month immediately succeeding the month in which such charges, costs and
expenses were incurred. Subject to Sections 14 and 15, Lessee shall
bear the full cost of any repair or replacement to any part of the
Building that results from damage caused by Lessee or its Agents.
8. NEGATIVE COVENANTS OF LESSEE
----------------------------
8.1 Waste, Damage, or Injury to Space; Restoration. No waste,
----------------------------------------------
damage or injury to the Space shall be committed, and at the end of the
Term, the Space shall be restored to the same condition in which it was
at the commencement of the Term, unless otherwise agreed to in writing
by the Lessor, and the cost of said restoration shall be paid by
Lessee, which cost shall be treated as Additional Rent due and owing
under the terms of this Lease. This Section 8.1 is subject to the
exceptions of ordinary wear and tear.
8.2 Lawful Possession, Fire Precautions, Machinery Weights. Lessee
------------------------------------------------------
shall not carry on any unlawful or immoral business in or about the
Space, and shall not carry on any business which will endanger the
Building from fire or cause the forfeiture of any fire insurance, and
Lessee will indemnify Lessor for and replace lost insurance and/or any
deductible under existing insurance policy if caused by Lessee. Lessee
shall not operate any machinery or equipment that may be harmful to the
Building or disturbing to other occupants of the Building, nor place
anything in any portion of the Space with such weight that is beyond
the safe carrying capacity of the Building. Any violation will be
grounds for immediate eviction and deemed a material breach of the
Lease.
8.3 Vacation. Lessee shall neither vacate nor desert the Space
--------
during the Term nor permit the Space to be empty and unoccupied.
8.4 Assigning, etc. by Lessee. Lessee shall not have the
-------------------------
privilege of assigning or subletting the Space, or mortgaging any
interest it may have by virtue of this Lease; provided, however,
Lessee may assign or sublet the Space upon prior written consent of
the Lessor, and Lessee shall be responsible for all costs and expenses,
including attorney's fees, with respect to Lessor's review and con-
sideration of any such proposed assignment or subletting; and provided
nothing herein shall require Lessor to consent to
<PAGE> 6
such assignment or subletting, and should such consent be granted, Lessee
shall continue to be responsible for all the terms, conditions and
provisions of the Lease, including actions of the sublessee or assignee.
8.5 Encumbrance. The Lessee shall not, by any act or omission,
-----------
encumber the title of the Lessor nor shall the interest or estate of the
Lessor be in any way subject to any claim by way of lien or encumbrance,
whether claimed by operation of law or by virtue of any express or
implied contract by Lessee. Lessee will hold harmless the Lessor
against any such claims. Any such claims may be charged against the
security deposit in accordance with Section 4.3.
8.6 Building Security. Lessee and Lessee's Agents shall use
-----------------
their best efforts in maintaining the security of the Building,
including, if Lessee or Lessee's Agents remain in the Building after
6 p.m., and upon leaving the Building, locking outside access doors for
which they have a key, insuring all doors and windows are closed in the
Space, turning out all lights in hallways and in the Space, and turning
back the temperature for any air conditioning and/or heat pumps.
8.7 Conduct. Lessee shall not conduct or give notice of any
-------
auction, liquidation, or going out of business sale at the Space.
Lessee shall not permit any objectionable or unpleasant odors, smoke,
dust, gas, noise, or vibrations to emanate from the Space, or take any
other action that would constitute a nuisance or would disturb,
unreasonably interfere with, or endanger Lessor or any tenants of the
Building. Outside storage, including without limitation, storage of
trucks and other vehicles, is prohibited. The Space shall not be used
as a place of public accommodation under the Americans With Disabili-
ties Act or similar state statutes or local ordinances or any
regulations promulgated thereunder, all as may be amended from time
to time. If any increase in the cost of any insurance at the Space
or the Building is caused by the Lessee's Use of the Space, or because
Lessee vacates the Space, then Lessee shall pay the amount of such
increase to Lessor. Any occupation of the Space by Lessee prior to
the commencement date of the Term shall be subject to all obligations
of Lessee under this Lease; provided, however, Lessee shall be entitled
to complete improvements to the Space that are being accomplished in
accordance with the terms of this Lease during the period of December
1 to December 31, 1998.
8.8 Parking. Lessee acknowledges the parking adjacent to and for
-------
the Building is limited and is available to all tenants, including
Lessee, the Lessor and their invitees, and such limited parking is on
a first come, first serve basis; and Lessee agrees to use its best
efforts and to so advise and cause its employees, invitees and Agents
to use its and their best efforts to first use on-street parking prior
to attempting to use the limited parking facilities adjacent to the
Building. Lessor shall not be responsible for enforcing any parking
rights of any tenant's against each other or third parties. Lessor has
the right at any time to designate reserved and handicap spaces for its
own use and purposes.
9. LESSOR'S RIGHTS
---------------
9.1 Right of Inspection. It is agreed and understood that Lessor
-------------------
and Lessor's duly authorized agents, employees, representatives and
contractors ("Lessor's Agents") may enter the Space during normal
business hours and at any other reasonable times during the Term, for
the purpose of inspecting and maintaining the Space. Lessor may erect
a suitable sign on the Space and/or Building stating the Space is
available to let or that the Building is available for sale. Lessor
may grant easements, make public dedications, designate common areas
and create restrictions on or about the Space, provided that no such
easement, dedication, designation or restriction materially interferes
with Lessee's Use. At Lessor's request, Lessee shall execute such
instruments as may be necessary for such easements, dedications or
restrictions.
<PAGE> 7
9.2 Rules and Regulations. Lessor may from time to time establish
reasonable rules and regulations for the safety, care, and cleanliness
of the Space, and for the preservation of good order therein. Such
rules and regulations shall, when notice thereof is given to Lessee,
form a part of this Lease and to which Lessee shall be bound.
10. RESPONSIBILITIES OF LESSEE
--------------------------
10.1 Damages or Injury to Property. All damages or injuries done
-----------------------------
to the Space or to the HVAC relating to the Space by the Lessee and/or
Lessee's customers, clerks, Agents, visitors, invitees of Lessee, and
individuals for whom Lessee is responsible other than those caused by
ordinary wear and tear, shall be the sole responsibility of Lessee and
shall be repaired by Lessee at its expense. Lessee covenants and agrees
to make such repairs within ten (10) days' written notice given to Lessee
by Lessor, and if Lessee shall neglect to make said repairs or commence
to make the same promptly or complete the same within ten (10) days after
receiving such notice, Lessor shall have the right to make such repairs
at the expense and cost of Lessee, and the amount thereof may be charged
against the security deposit in accordance with Section 4.3 or otherwise
charged directly to Lessee as Additional Rent accruing for the month
following the date of repair.
10.2 Payment of Judgments, etc. Lessee shall bear, pay and dis-
-------------------------
charge, when and as the same become due and payable, all judgments and
lawful claims for damages or otherwise against Lessor, arising from
Lessee's and the Lessee's Agent's, customers', clerks', visitors' and
invitees' use or occupancy of the Space and Lessee will assume the
burden and expense of defending all such suits, whether brought before
or after the expiration of this Lease, and will protect, indemnify and
save harmless Lessor or Lessor's Agents and the public at large, and
Lessee will pay Lessor's reasonable legal fees in bringing an action
against or defending an action caused by Lessee or Lessee's Agents,
customers, clerks, visitors and invitees.
10.3 Discharge of Liability. In consideration of securing this
----------------------
Lease at the above-stated Rent, Lessee does hereby release and discharge
the Lessor and its Agents, and said Lessor's successors and/or assigns,
from any and all liability by reason of any injury, loss and/or damage
to any person or property, caused by any fire, the breaking, bursting,
stoppage and/or leakage of any water pipe, gas pipe, sewer, basin, water
closet, steam pipe, and drain in any part or portion of the Space and/or
any part or portion of the Building, and from all liability for any and
all injury, loss and/or damage caused by the water, gas, steam, waste,
and contents of said water pipes, gas pipes, steam pipes, sewers,
basins, water closets, and drains or the elements or from any kind of
injury, loss, and/or damage which may arise from any other cause in the
Space, on the premises or in the Building.
11. EVENTS OF DEFAULT
-----------------
Each of the following events shall be an event of default ("Event
of Default") by Lessee under this Lease:
(i) Lessee shall fail to pay any installment of Rent or any
other payment required herein when due, and such failure shall continue
for a period of five days from the date such payment was due.
(ii) Lessee shall (A) make a general assignment for the
benefit of creditors; (B) commence any case, proceeding or other action
seeking to have an order for relief entered on its behalf as a debtor or
to adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it
or its debts or seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or of any substantial part
of its property (collectively a
<PAGE> 8
"proceeding for relief"); (C) become the subject to any proceeding for
relief which is not dismissed within 60 days of its filing or entry; or
(D) be dissolved or otherwise fail to maintain its legal existence.
(iii) Any insurance required to be maintained by Lessee
pursuant to this lease shall be canceled or terminated or shall expire
or shall be materially reduced or changed, except, in each case, as
permitted in this Lease.
(iv) Lessee shall not occupy or shall vacate the Space or
shall fail to continuously operate its business at the Space for the
Use during the Term or Renewal Period, if applicable, whether or not
Lessee is in monetary or other default under this Lease.
(v) Lessee shall attempt or there shall occur any assign-
ment, subleasing or other transfer of Lessee's interest in or with
respect to this Lease except as otherwise permitted in this Lease.
(vi) Lessee shall fail to discharge any lien placed upon
the Space or the Building in violation of this Lease within 30 days
after any such lien or encumbrance is filed against the Space or the
Building.
(vii) Lessee shall fail to comply with any provision of this
Lease other than those specifically referred to in this Section 11, and
except as otherwise expressly provided herein, such default shall
continue for more than 30 days after Lessor shall have given Lessee
written notice of such default.
12. REMEDIES OF LESSOR
------------------
Upon each occurrence of an Event of Default and so long as such
Event of Default shall be continuing, Lessor may at any time thereafter
at its election terminate this Lease and Lessee's right of possession
(but Lessee shall remain liable as hereinafter provided), and/or pursue
any other remedies at law or in equity. Upon the termination of this
Lease and Lessee's right of possession, it shall be lawful for Lessor
to re-enter the Space by summary dispossession proceedings or any other
action or proceeding authorized by law and to remove Lessee and all
persons and property therefrom. If Lessor re-enters the Space, Lessor
shall have the right to keep in place and use, or remove and store, all
of the furniture, fixtures and equipment at the Space.
Upon Lessor's termination of this Lease, Lessor may recover from
Lessee the sum of: all Rent, Additional Rent and all other amounts
accrued hereunder to the date of such termination; the cost of
reletting the whole or any part of the Space, including without
limitation brokerage fees and/or leasing commissions incurred by
Lessor, and costs of removing and storing Lessee's or any other
occupant's property, repairing, altering, remodeling, or otherwise
putting the Space into condition acceptable to a new tenant or tenants,
and all reasonable expenses incurred by Lessor in pursuing its remedies,
including reasonable attorneys' fees and court costs.
If the Space is relet and a sufficient sum shall not be realized
from such reletting [after first deducting therefrom, for retention by
Lessor, the unpaid Rent, Additional Rent and other amounts accrued
hereunder at the time of reletting, the cost of recovering possession
(including reasonable attorneys' fees and costs of suit), all of the
costs and expenses of repairs, changes, alterations, and additions, the
expense of such reletting (including without limitation brokerage fees
and leasing commissions) and the cost of collection of the Rent and
Additional Rent accruing therefrom] to satisfy the Rent provided for in
this Lease to be paid, then Lessee shall immediately satisfy and pay any
such deficiency.
Exercise by Lessor of any one or more remedies hereunder granted or
otherwise available shall not be deemed to be an acceptance of surrender
of the Space and/or a termination of this Lease by Lessor,
<PAGE> 9
whether by agreement or by operation of law. Any law, usage, or custom
to the contrary notwithstanding, Lessor shall have the right at all times
to enforce the provisions of this Lease in strict accordance with the
terms hereof; and the failure of Lessor at any time to enforce its rights
under this Lease strictly in accordance with same shall not be construed
as having created a custom in any way or manner contrary to the specific
terms, provisions, and covenants of this Lease or as having modified the
same. Lessee and Lessor further agree that forbearance or waiver by
Lessor to enforce its rights pursuant to this Lease or at law or in
equity, shall not be a waiver of Lessor's right to enforce one or more
of its rights in connection with any subsequent default. A receipt by
Lessor of rent or other payment with knowledge of the breach of any term
or covenant of this Lease shall not be deemed a waiver of such breach, an
no waiver by Lessor of any provision of this Lease shall be deemed to
have been made unless expressed in writing and signed by Lessor. To the
greatest extent permitted by law, Lessee waives the service of notice of
Lessor's intention to re-enter as provided for in any statute, or to
institute legal proceedings to that end, and also waives all right of
redemption in case Lessee shall be dispossessed by a judgment or by
warrant of any court or judge. Any reletting of the Space shall be on
such terms and conditions as Lessor in its sole discretion may determine
(including without limitation a term different than the remaining Term,
rental concessions, alterations and repair of the Space, lease of less
than the entire Space to any tenant and leasing any or all other portions
of the Building before reletting the Space). Lessor shall not be liable,
nor shall Lessee's obligations hereunder be diminished because of,
Lessor's failure to relet the Space or collect Rent due in respect of
such reletting.
13. REMEDIES OF LESSEE
------------------
In the event of a default under the terms, covenants or conditions
of this Lease on the part of the Lessor, Lessee shall notify Lessor in
writing of said default and Lessor shall have thirty (30) days to cure
or commence to cure said default; provided that if the nature of the
default is such that it cannot be reasonably cured within said thirty
(30) days, Lessor shall not be deemed to be in default if it shall
commence performance within said thirty (30) day period and diligently
proceeds to so cure the default thereafter. If Lessor shall not cure
or commence to cure the said default within the thirty (30) day period,
Lessee may not terminate this Lease and vacate the Space, but rather
may only cure the default and deduct reasonable costs and expenses for
such cure from Rent or Additional Rent or any other amounts accrued
hereunder due.
All obligations of Lessee hereunder shall be construed as covenants,
not conditions; and, except as may be otherwise expressly provided in
this Lease, Lessee may not terminate this Lease for breach of Lessor's
obligations hereunder. All obligations of Lessor under this Lease will
be binding upon Lessor only during the period of its ownership of the
Building and not thereafter. The term "Lessor" in this lease shall
mean only the owner, for the time being of the Building, and in the
event of the transfer by such owner of its interest in the Building,
such owner shall thereupon be released and discharged from all obliga-
tions of Lessor thereafter accruing, but such obligations shall be
binding during the Term upon each new owner for the duration of such
owner's ownership. Any liability of Lessor under this Lease shall be
limited solely to its interest in the Building, and in no event shall
any personal liability be asserted against Lessor in connection with
this Lease nor shall any recourse be had to any other property or
assets of Lessor.
14. INSURANCE
---------
14.1 Lessee Insurance. Lessee, at its cost, shall maintain a
----------------
policy of Combined Single Limit Bodily Injury and Property Damage
Insurance during the Term and any Renewal Period, such insurance to
provide protection in the amount of One Million ($1,000,000) Dollars
combined single limit, insuring Lessor and Lessee against any
liability arising out of and in connection with Lessee's Use or
occupancy of the Space. Lessee should also obtain and maintain a
policy or policies of insurance covering loss or
<PAGE> 10
damage to the Space, providing protection against all perils included
within the classification of fire, extended coverage, vandalism,
malicious mischief, flood (in the event such is required by a lender
having a lien on the Building), and special extended perils ("All risk"
as such term is used in the insurance industry). Lessee shall also
maintain workmen's compensation insurance with no less than the minimum
limits required by law. The commercial liability insurance policies
shall name Lessor as an additional insured, insure on an occurrence
and not a claims-made basis, contain a hostile fire endorsement and a
contractual liability endorsement and provide primary coverage to
Lessor (any policy issued to Lessor providing duplicate or similar
coverage shall be deemed in excess over Lessee's policies).
14.2 Lessor Insurance. Lessor shall obtain and maintain insurance
----------------
on the Building, primarily a policy of Combined Single Limit Bodily
Injury and Property Damage Insurance insuring against any liability
arising out of the ownership or maintenance of the Building and all
areas appurtenant thereto in an amount not less than combined single
limit of One Million ($1,000,000) Dollars. All such insurance shall
be included as part of the CAM charges to Lessee pursuant to Section
4.2 hereof.
14.3 Reputable Carriers. Insurance required hereunder shall be
------------------
placed with reputable insurance companies. Each party shall deliver to
the other copies of policies of liability insurance required under this
Section 14 or certificates evidencing the existence and amounts of such
insurance. No such policy shall be cancelable or subject to reduction
of coverage or other modification except after thirty (30) days prior
written notice to Lessor or Lessee, as the case may be. Lessor and
Lessee shall, at least thirty (30) days prior to the expiration of such
policies, furnish the other party with renewals or "binders" thereof, or
the other party, after ten (10) days written notice, may order such
insurance, provided such is during and for the Term or any Renewal
Period, and charge the cost thereof to the non-renewing party which
amount shall be payable upon demand. Lessor and Lessee shall not do
or permit to be done anything which shall invalidate the insurance
policies referred to in this Section 14.
14.4 Subrogation. Lessee and Lessor each hereby release and
-----------
relieve the other (which includes the other party's Agents) from any
liability, whether for negligence or otherwise, in connection with
loss covered by any insurance policies which the releasor carries with
respect to the Building and/or the Space or any interest or property
therein or thereon, but only to the extent that such loss is collected
under said insurance policies. Such release is also conditioned upon
the inclusion in the policy of a provision whereby any such release
does not adversely affect such policy or prejudice any right of the
releasor to recover thereunder. Each party's insurance policies shall
include such a provision so long as it is obtainable without extra
cost.
14.5 Business Interruption. Lessor and Lessor's Agents shall not
---------------------
be liable for, and Lessee hereby waives all claims against such parties
for, business interruption and losses occasioned thereby sustained by
Lessee or any person claiming through Lessee resulting from any accident
or occurrence in or upon the Space or the Building from any cause what-
soever, including without limitation, damage caused in whole or in part,
directly or indirectly, by the negligence of Lessor or Lessor's Agents.
15. FIRE OR CASUALTY
----------------
15.1 Substantial Damage; Rent Abatement. In the event that the
----------------------------------
Building or the Space shall be totally or substantially damaged by fire
or other casualty or happening, to the extent that the business of the
Lessee cannot reasonably be conducted therein and if such damage cannot
be or is not repaired, restored, or rebuilt by the Lessor, as the case
may be, to substantially the same condition as it was immediately prior
to such damage or destruction within three (3) months after such damage,
then either the Lessor or Lessee shall have the option of terminating
this Lease by written notice delivered to the other party not later than
thirty (30) days following such failure to rebuild; in either event
Lessee shall immediately vacate and surrender possession of the Space to
Lessor. If neither Lessee nor Lessor elects
<PAGE> 11
to terminate this Lease, or if the Building or the Space is not damaged
to the extent that the damage unreasonably interferes with Lessee's Use,
Lessor shall proceed with said repairs with all reasonable diligence,
but in no event shall the repairs exceed ninety (90) days. The Rent
payable hereunder shall entirely abate in case the Space or the
Building is substantially destroyed or so damaged as to render the
Space untenantable or not useable or convenient or in a condition for
its Use, or abate proportionately according to the extent of the injury
or damage sustained by the Building or the Space, if such is not sub-
stantially destroyed or is rendered partially untenantable, until the
Building and the Space shall have been restored, repaired, or rebuilt
and put in proper condition for the Use and occupancy of Lessee.
15.2 Damage for Interruption of Use. Lessor shall not be liable
------------------------------
for any damage, compensation or claim by reason of inconvenience of
annoyance arising from the necessity of making repairs, alterations
and/or additions to any portion of the Space, the interruption in the
Use of the Space, or the termination of this Lease by reason of the
destruction of the Space.
16. ENVIRONMENTAL REQUIREMENTS
--------------------------
Lessee shall not permit or cause any party to bring any Hazardous
Material into the Space or transport, store, use, generate, manufacture
or release any Hazardous Material in or about the Space without Lessor's
prior written consent. Lessee, at its sole cost and expense, shall
operate its business in the Space in strict compliance with all Environ-
mental Requirements and shall remediate in a manner satisfactory to
Lessor any Hazardous Materials released on or from the Building by
Lessee and/or its Agents. Lessee shall complete and certify to dis-
closure statements as requested by Lessor from time to time relating
to Lessee's transportation, storage, use, generation, manufacture, or
release of Hazardous Materials on or about the Space. The term
"Environmental Requirements" means all applicable present and future
statutes, regulations, ordinances, rules, codes, judgments, orders or
other similar enactments of any governmental authority or agency
regulating or relating to health, safety, or environmental conditions
on, under or about the Space or the environment, including without
limitation, the following: the Comprehensive Environmental Response,
Compensation and Liability Act; the Resource Conservation and Recovery
Act; and all state and local counterparts thereto, and any regulations
or policies promulgated or issued thereunder. The term "Hazardous
Materials" means and includes any substance, material, waste, pollutant,
or contaminant listed or defined as hazardous or toxic, under any
Environmental Requirements, asbestos and petroleum, including crude oil
or any fraction thereof, natural gas, or synthetic gas usable for fuel
(or mixtures of natural gas and such synthetic gas). As defined in
Environmental Requirements, Lessee is and shall be deemed to be the
"operator" of Lessee's "facility" and the "owner" of all Hazardous
Materials brought into the space by Lessee and its Agents, and the
wastes, by-products, or residues generated, resulting, or produced
therefrom.
Lessee shall indemnify, defend, and hold Lessor harmless from and
against any and all losses (including, without limitation, diminution
in value of the Space or the Building and loss of rental income from
the Building), claims, demands, actions, suits, damages (including,
without limitation, punitive damages), expenses (including, without
limitation, remediation, removal, repair, corrective action, or
cleanup expenses), and costs (including, without limitation, actual
attorneys' fees, consultant fees or expert fees and including, without
limitation, removal or management of any asbestos brought into the
Space or disturbed in breach of the requirements of this Section 16,
regardless of whether such removal or management is required by law)
which are brought or recoverable against, or suffered or incurred by
Lessor as a result of any release of Hazardous Materials for which
Lessee is obligated to remediate as provided above or any other breach
of the requirements under this Section 16 by Lessee and its Agents,
regardless of whether Lessee had knowledge of such noncompliance. The
obligations of Lessee under this Section 16 shall survive any termina-
tion of this Lease.
<PAGE> 12
Lessor shall have access to, and a right to perform inspections and
tests of, the Space to determine Lessee's compliance with Environmental
Requirements, its obligations under this Section 16, or the environ-
mental condition of the Space. Access shall be granted to Lessor upon
Lessor's prior notice to Lessee and at such times so as to minimize, so
far as may be reasonable under the circumstances, any disturbance to
Lessee's operations. Such inspections and tests shall be conducted at
Lessor's expense, unless such inspections or tests reveal that Lessee
has not complied with any Environmental Requirement, in which case
Lessee shall reimburse Lessor for the reasonable cost of such inspection
and tests. Lessor's receipt of or satisfaction with any environmental
assessment in no way waives any rights that Lessor holds against Lessee.
17. SURRENDER
---------
Upon expiration or earlier termination of the Lease in accordance
with its terms, Lessee shall surrender the Space to Lessor in the same
condition as received, broom clean, ordinary wear and tear and casualty
loss and condemnation covered by Sections 15 and 18 excepted. Any
trade fixtures, Lessee-made alterations and property not so removed
by Lessee as permitted or required herein shall be deemed abandoned
and may be stored, removed, and disposed of by Lessor at Lessee's
expense, and Lessee waives all claims against Lessor for any damages
resulting from Lessor's retention and disposition of such property.
All obligations of Lessee hereunder not fully performed as of the
termination of the Lease shall survive the termination of the Lease,
including without limitation, indemnity obligations, payment obliga-
tions with respect to Rent, and all obligations concerning the
condition and repair of the Space.
18. CONDEMNATION
------------
If any part of the Space should be taken or condemned for a public
or quasi-public use, and a part thereof remains which is susceptible
for the Use intended, this Lease shall, as to the part so taken,
terminate as of the date title shall vest in the condemnor, and the
Rent payable hereunder shall be adjusted so that the Lessee shall be
required to pay for the remainder of the Term only such portion of such
Rent at the value of the part remaining after the condemnation bears to
the value of the entire Space at the date of condemnation; but in such
event Lessor shall have the option to terminate this Lease as of the
date when title to the part so condemned vests in the condemnor. If all
the Space, or such part thereof be taken or condemned so that there
does not remain a portion susceptible for occupation hereunder, this
Lease shall thereupon terminate. Whether or not a portion of the Space
is susceptible for the Use intended shall be determined by arbitration
if the parties cannot otherwise agree on said portion. If a part of all
of the Space be taken or condemned, all compensation, except as otherwise
provided in this Section 18, awarded upon such condemnation or taking
shall, go to the Lessor and the Lessee shall have no claim thereto.
19. SUBORDINATION; ASSIGNMENT BY LESSOR
-----------------------------------
The rights and interest of Lessee under this Lease shall be subject
and subordinate to any mortgage that may be placed upon the Space and to
any and all advances to be made thereunder, and to the interest thereon,
and all renewals, replacements, and extensions thereof. Whether this
Lease is dated prior to or subsequent to the date of said mortgage,
Lessee shall execute and deliver whatever instruments may be required
for such purposes and in the event Lessee fails to do so within ten (10)
days after demand in writing, Lessee does hereby make, constitute and
irrevocably appoint Lessor as its attorney-in-fact and in its name,
place and stead so to do. Lessor may assign its interest in this Lease
or any part thereof, and such assignee shall thereupon be deemed Lessor
hereunder.
<PAGE> 13
20. QUIET ENJOYMENT
---------------
Lessee, upon paying the Rent and performing the covenants of this
Lease, on its part to be performed, shall and may peaceably and quietly
enjoy the Space for the Term and any duly authorized Renewal Period,
against any person claiming by, through or under the Lessor.
21. SPACE PREPARATION
-----------------
It is understood that the Space shall be rented by the Lessee on an
"as is" basis, and the only Space preparation work that shall be done
shall be the work as outlined on Exhibit A attached to and made a part
of this Lease.
22. AUTHORIZATON
------------
Lessor and Lessee each has all the requisite right, power, legal
capacity and authority, corporate and otherwise, to enter into this
Lease and to assume and perform their respective obligations hereunder.
The execution and delivery of this Lease and the performance by Lessor
and Lessee of their obligations hereunder have been duly authorized by
their respective boards of directors and/or partners, as the case may
be, and this Lease is a binding and enforceable Lease of Lessor and
Lessee according to its terms. The execution, delivery and performance
of this Lease by Lessor and Lessee will not result in any violation of
and will not conflict with, or result in any breach of any of the terms
of or constitute a default under, or constitute an event which with
notice or the passage of time or both would constitute a default under,
any provision of any law to which Lessor or Lessee is subject, any
partnership agreement, the articles of incorporation, and/or by-laws of
any party, or any mortgage, indenture, agreement, instrument, judgment,
decree, or rule or resolution or other restriction to which Lessor or
Lessee is bound. The representations as contained herein are only made
by Lessor and Lessee as to their own corporate acts, articles of
incorporation, by-laws and/or partnership agreements, as the case may
be, and their respective related agreements and regulations and neither
makes any representations as to the other's acts, articles of incorpora-
tion, by-laws, partnership agreements, as the case may be, and related
agreements and regulations.
No action, approval, consent or authorization, including but not
limited to any action, approval or consent of any shareholder, note
holder, partner, or order of any court or governmental agency,
commission, board, bureau or instrumentality, otherwise than as
specifically provided in this Lease, is necessary in order to constitute
this Lease as a valid, binding and enforceable obligation of the parties
hereto in accordance with its terms.
23. ESTOPPEL CERTIFICATES
---------------------
Lessee agrees, from time to time, within 10 days after request of
Lessor, to execute and deliver to Lessor, or Lessor's designee, any
estoppel certificate requested by Lessor, stating that this Lease is
in full force and effect, the date to which Rent has been paid, that
Lessor is not in default hereunder (or specifying in detail the nature
of Lessor's default), the termination date of this Lease and such other
matters pertaining to this Lease as may be requested by Lessor.
Lessee's obligation to furnish each estoppel certificate in a timely
fashion is a material inducement to Lessor's execution of this Lease.
No cure or grace period provided in this Lease shall apply to Lessee's
obligations to timely deliver an estoppel certificate. Lessee hereby
irrevocably appoints Lessor as its attorney-in-fact to execute on its
behalf and in its name any such estoppel certificate if Lessee fails to
execute and deliver the estoppel certificate within 10 days after
Lessor's written request thereof.
<PAGE> 14
24. WAIVER OF JURY TRIAL
--------------------
LESSEE AND LESSOR WAIVE ANY RIGHT TO TRIAL BY JURY OR TO HAVE A
JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE, BETWEEN LESSOR AND LESSEE ARISING OUT OF THIS LEASE
OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED
IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.
25. LANDLORD'S LIEN/SECURITY INTEREST
---------------------------------
Lessee hereby grants Lessor a security interest, and this Lease
constitutes a security agreement, within the meaning of and pursuant to
the Uniform Commercial Code of the state in which the Space is situated
as to all of Lessee's property situate in, or upon, or used in connec-
tion with the Space (except merchandise sold in the ordinary course of
business) as security for all of Lessee's obligations hereunder,
including without limitation, the obligation to pay Rent. Such person-
alty thus encumbered includes specifically all trade and other fixtures
for the purpose of this Section 25 and inventory, equipment, contract
rights, accounts receivable and the proceeds thereof. In order to
perfect such security interest, Lessee shall execute such financing
statements and file the same at Lessee's expense at the state and
county Uniform Commercial Code filing offices as often as Lessor in
its discretion shall require; and Lessee hereby irrevocably appoints
Lessor its agent for the purpose of executing and filing such financing
statements on Lessee's behalf as Lessor shall deem necessary.
26. FORCE MAJEURE
-------------
Neither Lessor nor Lessee shall be held responsible for delays in
the performance of its obligations hereunder when caused by strikes,
lockouts, labor disputes, acts of God, inability to obtain labor or
materials or reasonable substitutes therefor, and other than and
subject to Section 3.3, governmental restrictions, governmental regu-
lations, governmental controls, delay in issuance of permits, enemy or
hostile governmental action, civil commotion, fire or other casualty,
and other causes beyond the reasonable control of Lessor or Lessee
("Force Majeure"); provided, however, no Force Majeure event shall
relieve Lessee from its obligation to pay Rent, or from its obliga-
tions under Section 3.3, or from other monetary obligations hereunder.
27. NOTICES
-------
All Rent payments, notices, requests, demands and other communi-
cations under this Lease shall be in writing and shall be deemed to
have been duly given on the date of service if served personally on the
party to whom notice is to be given, or on the third day after mailing
if mailed to the party to whom notice is to be given, by first class
mail, registered or certified, postage prepaid, or the next day or
second day if effected by such overnight mail, and properly addressed
as follows:
To Lessor: Dialysis Corporation of America
27 Miller Street
Lemoyne, PA 17043
Attn: Bart Pelstring, President
Copy To: Lawrence E. Jaffe, Esq.
777 Terrace Avenue
Hasbrouck Heights, NJ 07604
<PAGE> 15
To Lessee: Wirehead Networking Solutions, Inc.
27 Miller Street, Suite 3A
Lemoyne, PA 17043
Attn: John Frisch, President
Copy To:
Any party may change its address for purposes of this Section 27 by
giving the other parties written notice of the new address in the manner
set forth above.
28. BROKERS
-------
Lessor and Lessee each represents and warrants that neither has dealt
with any broker, agent or other person in connection with this transaction
and other than Bennett Williams, Inc., for whom Lessor is solely respon-
sible, no broker, agent or other person brought about this transaction,
and Lessor and Lessee each agree to indemnify and hold the other harmless
from and against any claims by any broker, agent or other person claiming
a commission or other form of compensation by virtue of having dealt with
Lessor or Lessee, as the case may be, with regard to this leasing trans-
action; and Lessor specifically indemnifies Lessee against any claims
for commissions, fees, costs or other charges by Bennett Williams, Inc.
29. APPLICABLE LAW
--------------
This Lease shall be construed under the laws of the Commonwealth
of Pennsylvania. If any provision of this Lease, or portion thereof,
or the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease shall
not be affected thereby and each provision of this Lease shall be valid
and enforceable to the fullest extent permitted by law.
30. LEASE CONTAINS ALL AGREEMENTS
-----------------------------
It is expressly understood by the parties that the whole agreement
between them is embodied in this Lease (executed in duplicate) and that
no part or items are omitted, unless the terms are hereinafter modified
by written agreement(s).
31. SUCCESSORS
----------
This Lease shall be binding upon the parties hereto and their
respective successors and/or assigns.
32. HEADINGS NO PART OF LEASE
-------------------------
Any headings preceding the text of the several Sections and
Subsections hereof are inserted solely for convenience of reference
and shall not constitute a part of this Lease not shall they affect
its meaning, construction or effect.
33. NO ESTATE IN REALTY
-------------------
This Lease shall create the relationship of Lessor and Lessee
between the parties hereto; no estate shall pass out of Lessor. Lessee
has no interest subject to levy or sale, and Lessee's interest, which
is Use of the Space upon payment of the Rent and not being in default
of this Lease, is not assignable.
<PAGE> 16
34. EFFECT OF TERMINATION OF LEASE
------------------------------
No termination of this Lease prior to the normal ending thereof, by
lapse of time or otherwise, shall affect Lessor's right to collect Rent
for the period prior to termination thereof or for any indemnifications
of Lessee to Lessor as contained herein.
35. COUNTERPARTS
------------
This Lease may be executed in several counterparts and each such
counterpart shall be deemed an original, and all counterparts shall
constitute a single original Lease.
IN WITNESS WHEREOF, the parties hereto have each caused this instru-
ment to be signed by their respective officers thereunto duly authorized,
all on the date and year first above written.
DIALYSIS CORPORATION OF AMERICA
/s/ Bart Pelstring 1/14/99
By:---------------------------------
BART PELSTRING, President
WIREHEAD NETWORKING SOLUTIONS, INC.
/s/ John Frisch 1/14/99
By:---------------------------------
JOHN FRISCH, President
GUARANTY
In consideration of and as a material basis for Dialysis Corporation
of America ("Lessor") entering into a Lease of which this Guaranty is a
part with Wirehead Networking Solutions, Inc. ("Lessee") for the Space
located at 27 Miller Street, Lemoyne, Pennsylvania, John Frisch,
President of Lessee and Andrew Rill, Vice President of Lessee (individu-
ally and collectively referred to as "Guarantor"), jointly and severally,
hereby guarantee to Lessor the strict performance of and observance by
Lessee of all the agreements, provisions, terms, conditions, covenants
and rules in the Lease. Guarantor agrees to waive all notices when
Lessee is not paying Rent or not otherwise observing and complying with
all the provisions, terms, conditions and covenants of the Lease.
Guarantor agrees to be equally liable with Lessee so that the Lessor may
sue the Guarantor directly without first suing Lessee. Guarantor
further agrees that this Guaranty shall remain in full force and effect
even if the Lease is renewed or is not renewed, changed or extended in
any way and even if Lessor has to make a claim against Guarantor.
Lessor and Guarantor agree to waive trial by jury in any action,
proceeding or counterclaim brought against the other on any matters
concerning the Lease and this Guaranty.
JOHN FRISCH
/s/ John Frisch
By:---------------------------------
JOHN FRISCH, Individually
ANDREW RILL
/s/ Andrew Rill
By:---------------------------------
ANDREW RILL, Individually
<PAGE> 17
EXHIBIT A
SPECIFICATIONS OF SPACE
1. Lessor reinstate electric for Space
<PAGE>
EXHIBIT B
TENANT SUBORDINATION AGREEMENT
THIS TENANT SUBORDINATION AGREEMENT made as of the 1 day of
December 1998, by and between WIREHEAD NETWORK SOLUTIONS, a Pennsyl-
vania corporation (the "Tenant") and Mercantile-Safe Deposit and
Trust Company, a Maryland banking institution (the "Bank").
WHEREAS, the Tenant is the lessee under a certain lease (the "Lease")
dated December 21, 1998 from Dialysis Corporation of America, a Florida
corporation (the "Landlord"), to Tenant, of certain real property,
together with the improvements thereon, known as 27 Miller Street,
located in Lemoyne, Cumberland County, Pennsylvania, as more particu-
larly described in the Lease (the "Premises");
LEASE COMMENCEMENT DATE 1-1-1999
WHEREAS, the Bank has made a loan to Landlord and secured said loan
by a Mortgage and Security Agreement dated November 30, 1988 on the
Premises (the "Mortgage"); and
WHEREAS, at the request of the Landlord and in consideration of the
making of said loan by the Bank, the Tenant has agreed to subordinate the
Lease to the Mortgage.
NOW, THEREFORE, THIS SUBORDINATION AGREEMENT WITNESSETH, that for
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto do hereby agree and covenant as follows:
1. Tenant hereby acknowledges and agrees that the Lease is and shall
be (i) subordinate to the Mortgage, and (ii) subject and inferior to the
Mortgage.
2. Should the Premises be transferred to any person or party other
than the Landlord by reason of foreclosure of or other proceedings
brought pursuant to or under the Mortgage, Tenant shall attorn to and
be bound to said transferee under all of the terms, covenants and con-
ditions of the Lease for the remaining balance of the term thereof and
any extensions or renewals thereof, with the same force and effect as
if the transferee was the lessor under the Lease.
3. Unless Tenant is in default under the Lease, the Lease shall
not be terminated, nor shall Tenant's use, possession or enjoyment of
the Premises be interfered with, by reason of any foreclosure
proceeding or other action brought pursuant to or under the Mortgage.
4. Each party hereto does hereby agree to execute, acknowledge and
deliver to the other such further instruments as may be necessary to
effectuate the purposes of this subordination, attornment and non-
disturbance.
<PAGE>
WITNESS the following hands and seals as of the day and year first
above written.
WITNESS: TENANT:
WIREHEAD NETWORK SOLUTIONS
/s/ Linda S. Kazar /s/ John Frisch
- ----------------------------- By:---------------------------------
JOHN FRISCH, PRESIDENT
(SEAL)
WITNESS: MERCANTILE-SAFE DEPOSIT AND
TRUST COMPANY
- ----------------------------- By:---------------------------------
STEPHEN D. PALMER, Assistant
Vice President
(SEAL)
ACKNOWLEDGED AND AGREED this 22nd day of December, 1998.
WITNESS: DIALYSIS CORPORATION OF AMERICA
/s/ Marjorie Wech /s/ Bart Pelstring
- ----------------------------- By:---------------------------------
BARTON L. PELSTRING, President
(SEAL)
<PAGE>
STATE OF PENNSYLVANIA, COUNTY of DAUPHIN, to wit:
I HEREBY CERTIFY, that on this 21st day of December, 1998, before
me, the undersigned Notary Public of the State of PA, personally
appeared JOHN FRISCH, who acknowledged himself to be the PRESIDENT of
WIREHEAD NETWORK SOLUTIONS, known to me (or satisfactorily proven) to
be the person who executed the foregoing Subordination Agreement and
acknowledged that he executed the same for the purposes therein
contained by signing the name of the said Corporation, by himself as
PRESIDENT.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Linda S. Kazar
------------------------------
Notary Public
NOTARIAL SEAL My Commission Expires:
Linda S. Kazar, Notary Public 1-26-02
Middletown, Dauphin County, PA ------------------------------
My Commission Expires January 26, 2002
STATE OF MARYLAND, CITY OF BALTIMORE, to wit:
I HEREBY CERTIFY, that on this day of , 19 ,
---- --------------- ---
before me, the undersigned Notary Public of the State of Maryland,
personally appeared STEPHEN D. PALMER, who acknowledged himself to be
the ASSISTANT VICE PRESIDENT of MERCANTILE-SAFE DEPOSIT AND TRUST
COMPANY, known to me (or satisfactorily proven) to be the person who
executed the foregoing Subordination Agreement and acknowledged that
he executed the same for the purposes therein contained by signing the
name of the said company, by himself as ASSISTANT VICE PRESIDENT.
WITNESS WHEREOF, I hereunto set my hand and official seal.
------------------------------
Notary Public
My Commission Expires:
------------------------------
<PAGE>
STATE OF PA, Cumberland of County, to wit:
I HEREBY CERTIFY, that on this 22nd day of December, 1998, before
me, the undersigned Notary Public of the State of PA, personally appeared
BARTON L. PELSTRING, who acknowledged himself to be the PRESIDENT of
DIALYSIS CORPORATION OF AMERICA, known to me (or satisfactorily proven)
to be the person who executed the foregoing Subordination Agreement and
acknowledged that he executed the same for the purposes therein
contained by signing the name of the said Corporation, by himself as
PRESIDENT.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Rose Ann M. Mull
------------------------------
Notary Public
Notarial Seal My Commission Expires:
Rose Ann M. Mull, Notary Public October 25, 1999
Lemoyne Boro, Cumberland County ------------------------------
My Commission Expires October 25, 1999
Member, Pennsylvania Association of Notaries
LEASE AGREEMENT
THIS LEASE AGREEMENT, made this 23 day of December, 1998, by
----
and between DIALYSIS CORPORATION OF AMERICA, a Florida corporation, with
offices at 27 Miller Street, Lemoyne, Pennsylvania 17043 (hereinafter
referred to as "Lessor") and DIALYSIS SERVICES OF PENNSYLVANIA, INC. -
LEMOYNE, a Pennsylvania corporation, with offices at 27 Miller Street,
Lemoyne, Pennsylvania 17043 (hereinafter referred to as "Lessee").
1. PREMISES
--------
Lessor, in consideration of the rents and covenants hereinafter
mentioned, does demise and lease unto Lessee, all that certain space
consisting of 5,386 square feet of rentable space (the "Space"), with
specifications for the Space attached as Exhibit A, in the building
located at 27 Miller Street, Lemoyne, Pennsylvania 17043 (the
"Building").
2. TERM
----
2.1 Term. This Lease is for the term of five (5) years, commencing
----
on the first day of January, 1999 (the "Term"). In the event this Lease
commences on a day other than the first day of the month, then the rent
shall be paid pro rata for such fractional month.
2.2 Renewal Option.
--------------
This Lease shall be renewable for two consecutive periods of five (5)
years each ("Renewal Periods") each under the terms and conditions of
this Lease, provided that:
(i) Lessee is not in default hereunder;
(ii) Lessee has given written notice of its intent to renew
the Lease not less than one hundred twenty (120) days prior to the
expiration of the current Term or the First Renewal Period, as the case
may be; and
(iii) The rent for such Renewal Period will be at $9.00 per
square foot for the First Renewal Period and $10.00 per square foot for
the Second Renewal Period, and such rent will commence on the day of
the month immediately following the expiration of the Term or the First
Renewal Period, as the case may be, which rent shall be pro rated for
any portion of a month.
3. POSSESSION AND USE
------------------
3.1 Acceptance of Premises.
----------------------
Lessee shall accept the Space in its condition as of the commence-
ment date of the Term, subject to all applicable laws, ordinances,
regulations, covenants and restrictions. Lessor has made no represen-
tation or warranty as to the suitability of the Space for the conduct
of Lessee's business, and Lessee waives any implied warranty that the
Space is suitable for Lessee's intended purposes and Use.
<PAGE> 1
Except as provided in Section 6, in no event shall Lessor have any
obligation for any defects in the Space or any limitation on its Use.
The taking of possession of the Space shall be conclusive evidence that
Lessee accepts the Space and that the Space was in good condition at
the time possession was taken except for items that are Lessor's
responsibility under Section 6 and any punchlist items agreed to in
writing by Lessor and Lessee.
3.2 Possession.
----------
Possession of the Space includes the exclusive use of the same,
together with the use, concurrent with any other occupants of the
Building, of the common hallways, stairs, elevators (if any), toilet
rooms, parking areas, air conditioning, storage, waste removal,
electric, heat, light and water. Lessee, its agents, invitees,
employees, servants and visitors (collectively "Lessee's Agents") shall
have the right of ingress and egress to and from the said Space and the
Building.
3.3 Use Availability.
----------------
The Space shall be used only for the purpose of an out-patient
medical and dialysis center, related office, storage and other lawful
purposes as may be incidental thereto ("Use").
It shall be Lessee's responsibility at its own expense to deter-
mine and, if necessary, submit the appropriate applications for the
Use of the Space to and comply with all the requirements of the
appropriate governmental officials, agencies, commissions and boards
having jurisdiction over the Use of the Space, including but not
limited to the Americans With Disabilities Act ("Government
Compliance"). Lessor will use its best efforts to assist Lessee in
submitting and obtaining any such applications and approvals. If
Lessee is unable to obtain the appropriate permits, variances,
licenses and/or other approvals for the Use of the Space, Lessor
may, at its option but is not otherwise required, obtain such
Government Compliance, and Lessee will use its best efforts to assist
Lessor in obtaining such compliance, and all costs and expenses to
effect such Government Compliance to be charged to Lessee as Additional
Rent as defined in Section 4.2 accruing for the month following
effectuation of such compliance; or if Lessor does not exercise its
option to obtain the Government Compliance, this Lease will auto-
matically and immediately terminate and become null and void.
4. RENT
----
4.1 Base Rent.
---------
Lessee agrees to pay as base rent to Lessor for the Use of the
Space during the Term $8.00 per square foot or Forty-Three Thousand
Eighty-Eight and 00/100 ($43,088.00) Dollars per year ("Base Rent")
to be paid in monthly installments of Three Thousand Five Hundred
Ninety and 67/100 ($3,590.67) Dollars, payable monthly in advance,
without demand, deduction or set-off, on the first day of each
calendar month during the Term, allowing ten (10) day check processing
time.
Lessee shall pay to Lessor upon the execution of this Lease Four
Thousand Thirty-Nine and 50/100 ($4,039.50) Dollars, which Lessor shall
credit Lessee for the first month's Base Rent and Additional Rent (CAM
charges) (pro-rated if the commencement date of the Term falls on a
date later than the first day of the month).
4.2 Additional Rent.
---------------
The Lessee shall pay as additional rent above the Base Rent
("Additional Rent") $1.00 per square foot of the rentable Space for an
annual aggregate of Five Thousand Three Hundred Eighty-Six and
<PAGE> 2
00/100 ($5,386.00) Dollars for all common area maintenance and other
operating costs and expenses attributable to the operation and main-
tenance of the Building (collectively "CAM"), which include but are not
limited to electric, water and sewer charges, snow and ice removal from
sidewalks and parking areas, trash removal, janitorial services of
common areas and exterior and landscape maintenance, insurance, real
estate taxes, levies and special assessments on the Building, fuel oil,
repair, maintenance and security expenses, and all utilities except to
the extent such are separately metered. The CAM expenses will be
adjusted each year based upon the prior year's actual CAM expenses and
any new CAM expenses, which adjustment may increase or decrease the
Additional Rent with respect to the CAM expenses.
The CAM charges as Additional Rent shall be due and payable in
monthly installments with the Rent of Four Hundred Forty-Eight and
83/100 ($448.83) Dollars. Subject to the provisions of Section 4.1,
if any installment of Base Rent or Additional Rent is not paid within
ten (10) days of its due date then Lessor may assess a late charge of
five (5%) percent of the total amount of Base Rent or Additional Rent
then due until the date of payment, which charge shall be immediately
due and payable as further Additional Rent. Payments, when received
by the Lessor, shall be applied first to delinquent rents and late
charges, if any. Base and Additional Rent may be referred to collec-
tively throughout this Lease as "Rent."
5. UTILITIES
---------
Lessor shall maintain separate metering for the utilities for the
portion of the Space known as the South Lower Segment and the balance
of the utilities necessary for the Space will be maintained by Lessor
and are included in the CAM charges as Additional Rent under Section
4.2.
In the event Lessee requires additional utilities or equipment,
the installation and maintenance thereof shall be at Lessee's sole
obligation, provided that such installation shall be subject to
Lessor's written consent which shall not be unreasonably withheld or
delayed.
Lessee covenants and agrees that at all times its use of the
utilities and services shall never exceed the capacity provided by
Lessor. Lessor shall not be liable to Lessee or its Agents for any
interruption of or failure to provide electrical service, heating, air
conditioning, or water, or other utility service, or any change in the
quality or character of the utility services or for such no longer
being suitable for Lessee's requirements which is due to any energy
shortage, power failure, or other cause beyond the control of Lessor,
or is required in order to enable Lessor to perform required and
necessary maintenance or repairs within the Building; nor shall any
non-supply or change in supply of any utility service in any way
effect the tenancy or relieve Lessee of any obligation under the terms
of this Lease.
Any telephone, fax, e-mail modem and similar services, including
installation and charges therefor, are the sole responsibility and
expense of Lessee.
6. OPERATING RESPONSIBILITIES OF THE LESSOR
----------------------------------------
Lessor shall be responsible for the repair and maintenance of the
following during the Term, the expenses for which are included as CAM
charges and included in Additional Rent, Section 4.2 above.
(i) To keep and maintain in good condition and repair the
roof, exterior walls, structure, foundation, and outside walks and
other structural components of the Building, and surrounding grounds,
and all common areas within and without the Building, and uninsured
losses and damages caused by Lessee and its Agents excluded. The term
"walls" as used in this Section 6 shall not include windows, glass or
plate glass, doors or overhead doors, special fronts or office entries;
<PAGE> 3
(ii) To keep and maintain in good condition and repair the
main plumbing and electrical components leading into and the overall
plumbing and electrical components of the Building, other than those
installed by Lessee and within the Space, the latter to be the respon-
sibility of the Lessee;
(iii) To keep and maintain in good condition and repair, the
parking area, if any; to mark the parking spaces "handicapped" and
"reserved";
(iv) To handle the snow and ice removal from the Building,
all parking areas and walk-ways leading up to the Building;
(v) To provide for trash removal and a trash dumpster to the
Building of sufficient size and capacity to handle the daily removal of
trash from the Building;
(vi) Subject to Section 7(iv) of this Lease, to permit
Lessee's installation of interior and exterior signs identifying the
Lessee and its business, such signs to be reasonable in number, size
and design, and Lessor to include and display Lessee's business name
on all Building directories and outside signs;
(vii) To maintain existing exterior lighting to the Building;
(viii) To insure adequate and free parking adjacent to the
Building, including a reserved space for delivery of supplies, and to
insure a minimum of 11 assigned and clearly marked parking spaces for
the sole use of Lessee, its patients and staff at the southern end of
the Building, of which 3 parking spaces will be designated for the
handicapped and to include 6 to 10 additional spaces as needed for the
use of Lessee's patients and staff if parking becomes critical;
(ix) To insure the Space and the Building are free from
pests and all infestations and shall be responsible for the monthly or
bi-monthly extermination at Lessor's sole expense;
(x) To use diligence in obtaining all necessary permits
and licenses from any and all regulatory agencies for the continuous
operation of the Building, which will comply with all safety, health
and other governmental codes and regulations; Lessor warrants to
Lessee that the Space shall not violate any covenants or restrictions
of record, or Building codes, regulations or ordinances, and further
represents that the Building is located in an area which is zoned for
the Use. In the event it has been determined that this warranty has
been violated, then it shall be the obligation of Lessor to promptly, at
Lessor's sole cost and expense, rectify such violations;
(xi) To allow the patients and staff of Lessee free and easy
access through all exits and entrances of the Building;
(xii) To provide and maintain sufficient landscaping around
the Building in such a manner and capacity as to create a pleasing and
attractive environment for the Building;
(xiii) To provide and maintain for the reasonable access and
delivery of supplies via tractor-trailer;
(xiv) To pay all real estate, sales, use, licenses, income
and other taxes with respect to the Building and this Lease;
<PAGE> 4
(xv) To keep and maintain in good condition and repair the
air conditioning and heating systems, including but not limited to all
necessary plumbing, electrical and ventilation ("HVAC Systems"),
satisfactory in size and capacity to meet basic heating and cooling
standards of the Building.
7. OPERATING RESPONSIBILITIES OF LESSEE
------------------------------------
Lessee shall be responsible at its sole expense for the following
during the Term:
(i) To Use the Space in a proper, safe and careful manner;
(ii) To make and pay for all necessary alterations and
improvements to the Space, which Lessee has the right to do for Lessee's
own purposes, which shall be made at Lessee's expense; Lessee may make
any alterations and improvements to the Space; all such work shall be
done at such time and in such manner as shall minimize and inconvenience
to other occupants of the Building. Lessee shall comply with all
governmental rules and regulations in connection with such work. Lessee
may remove furniture, fixtures, and movable improvements installed
within the Space at the expiration of the Lease; Lessee shall promptly
repair any damage to the Space and the Building as a result of such
removal, other than normal wear and tear.
Notwithstanding anything herein to the contrary, the
Lessee shall not make structural alterations or additions to the
Building or the Space, except as provided in Sections 6(vi) and 7,
provided Lessor consents thereto in writing. All structural altera-
tions or improvements made by Lessee shall be at Lessee's sole cost
and expense and shall become the property of the Lessor at the
termination of this Lease.
Lessee shall not permit any mechanic's liens, or similar
liens, to remain upon the Building or the Space for labor and material
furnished to Lessee or claimed to have been furnished to Lessee in
connection with work of any character performed or claimed to have been
performed at the direction of Lessee and shall cause any such lien to
be released and an instrument evidencing discharge of same to be
recorded forthwith without any cost to Lessor.
(iii) To provide janitorial services and supplies for the
Space, trash removal from the Space, and maintain the Space in good
condition and repair.
(iv) Installation of any signs, subject to Section 6(vi),
shall be at the sole expense of the Lessee.
(v) Subject to Lessor's obligations in Section 6, Lessee at
its expense shall repair, replace and maintain in good condition all
portions of the Space and all areas, improvements and systems
exclusively serving the Space.
8. NEGATIVE COVENANTS OF LESSEE
----------------------------
8.1 Waste, Damage, or Injury to Space; Restoration. No waste,
----------------------------------------------
damage or injury to the Space shall be committed.
8.2 Lawful Possession, Fire Precautions, Machinery Weights.
------------------------------------------------------
Lessee shall not carry on any unlawful or immoral business in or about
the Space, and shall not carry on any business which will endanger the
Building from fire or cause the forfeiture of any fire insurance.
<PAGE> 5
8.3 Assigning, etc. by Lessee. Lessee shall have the privilege
-------------------------
of assigning or subletting the Space, or mortgaging any interest it may
have by virtue of this Lease; provided, however, such is done with the
written consent of Lessor, such consent to be reasonable and shall not
be arbitrarily withheld. Notwithstanding any provisions hereof, Lessee
may assign or sublet the Space or any portion thereof, without Lessor's
consent, to any corporation which controls, is controlled by or is under
common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which
acquires substantially all of the assets of Lessee, provided that said
assignee assumes, in full, the obligations of Lessee under this Lease.
Any such subletting or assignment shall terminate from that time on any
and all liabilities and obligations of Lessee to pay Rent or perform
under the Lease. Consent to one assignment or subletting by Lessor shall
not be deemed consent to any subsequent assignment or subletting.
8.4 Encumbrance. The Lessee shall not, by any act or omission,
-----------
encumber the title of the Lessor nor shall the interest or estate of the
Lessor be in any way subject to any claim by way of lien or encumbrance,
whether claimed by operation of law or by virtue of any express or
implied contract by Lessee.
9. LESSOR'S RIGHTS
---------------
It is agreed and understood that Lessor and Lessor's duly
authorized agents, employees, representatives and contractors
("Lessor's Agents") may enter the Space during normal business hours
for the purpose of inspecting and maintaining the Space. Lessor may
erect a suitable sign on the Space and/or Building stating the Space
is available to let or that the Building is available for sale.
Lessor may grant easements, make public dedications, designate common
areas and create restrictions on or about the Space, provided that no
such easement, dedication, designation or restriction materially
interferes with Lessee's Use. At Lessor's request, Lessee shall
execute such instruments as may be necessary for such easements,
dedications or restrictions.
10. RESPONSIBILITIES OF LESSEE
--------------------------
10.1 Damages or Injury to Property. All damages or injuries done
-----------------------------
to the Space by the Lessee and/or Lessee's customers, clerks, Lessee's
Agents, and individuals for whom Lessee is responsible, shall be the
sole responsibility of Lessee and shall be repaired by Lessee at its
expense, exclusive of ordinary wear and tear, or except as a result,
directly or indirectly, of Lessor's failure to maintain the Building
and the Space in accordance with the provisions of this Lease, or
except as a result of Force Majeure (as defined in Section 26) and
except for the negligence of the Lessor and/or Lessor's Agents.
Lessee covenants and agrees to make such repairs within thirty (30)
days' written notice given to Lessee by Lessor, and if Lessee shall
neglect to make said repairs or commence to make the same promptly or
complete the same within thirty (30) days after receiving such notice,
Lessor shall have the right to make such repairs at the expense and
cost of Lessee, provided Lessor gives Lessee thirty (30) days prior
written notice that Lessor is going to cure the damage or injury, and
the amount thereof may be charged directly to Lessee as Additional
Rent accruing for the month following the date of repair.
10.2 Payment of Judgments, etc. Lessee shall bear, pay and
-------------------------
discharge, when and as the same become due and payable, all judgments
and lawful claims for damages or otherwise against Lessor, arising from
Lessee's and the Lessee's Agent's, customers' and clerks' use or
occupancy of the Space and Lessee will assume the burden and expense of
defending all such suits, whether brought before or after the
expiration of this Lease, and will protect, indemnify and save
harmless Lessor or Lessor's Agents and the public at large, and
Lessee will pay Lessor's reasonable legal fees in bringing an action
against or defending an action caused by Lessee or Lessee's Agents,
customers, clerks, visitors and invitees.
<PAGE> 6
11. EVENTS OF DEFAULT
-----------------
Each of the following events shall be an event of default ("Event
of Default") by Lessee under this Lease:
(i) Lessee shall fail to pay any installment of Rent or any
other payment required herein when due, and such failure shall continue
for a period of ten days from the date such payment was due.
(ii) Lessee shall (A) make a general assignment for the
benefit of creditors; (B) commence any case, proceeding or other action
seeking to have an order for relief entered on its behalf as a debtor or
to adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or
its debts or seeking appointment of a receiver, trustee, custodian or
other similar official for it or for all or of any substantial part of
its property (collectively a "proceeding for relief"); (C) become the
subject to any proceeding for relief which is not dismissed within 60
days of its filing or entry; or (D) be dissolved or otherwise fail to
maintain its legal existence.
(iii) Any insurance required to be maintained by Lessee
pursuant to this lease shall be canceled or terminated or shall expire
or shall be materially reduced or changed, except, in each case, as
permitted in this Lease.
(iv) Lessee shall fail to discharge any lien placed upon the
Space or the Building in violation of this Lease within 30 days after
any such lien or encumbrance is filed against the Space or the Building.
(v) Lessee shall fail to comply in any material respect
with any provision of this Lease other than those specifically referred
to in this Section 11, and except as otherwise expressly provided herein,
such default shall continue for more than 30 days after Lessor shall
have given Lessee written notice of such default.
12. REMEDIES OF LESSOR
------------------
Upon each occurrence of an Event of Default and so long as such Event
of Default shall be continuing, Lessor may at any time thereafter at its
election terminate this Lease and Lessee's right of possession and pursue
any other remedies at law or in equity. Upon the termination of this
Lease and Lessee's right of possession, it shall be lawful for Lessor to
re-enter the Space by summary dispossession proceedings or any other
action or proceeding authorized by law and to peaceably remove Lessee
and all persons and property therefrom.
13. REMEDIES OF LESSEE
------------------
In the event of a default under the terms, covenants or conditions
of this Lease on the part of the Lessor, which shall include but not be
limited to unreasonably withholding consents, failure to maintain
facilities for the introduction of utilities to the Space, failure to
maintain the Building and the Space as required in this Lease, failure
to use due care with respect to the Lessee and Lessee's Agents and their
property, and otherwise interfering with, whether negligently or
intentionally, the business of the Lessee or its peaceable and quiet
enjoyment of the Space for the Term and any Renewal Period, Lessee shall
notify Lessor in writing of said default and Lessor shall have thirty
(30) days to cure or commence to cure said default; provided that if the
nature of the default is such that it cannot be reasonably cured within
said thirty (30) days, Lessor shall not be deemed to be in default if it
shall commence performance within said thirty (30) day period and
diligently proceeds to so cure the default thereafter. If Lessor shall
not cure or
<PAGE> 7
commence to cure the said default within the thirty (30) day period,
Lessee has the option to either terminate this Lease and vacate the
Space without further liability under the Lease and take whatever
limited remedies that may be available to it upon such default, or
cure the default and at Lessee's option deduct the costs and
expenses for such cure from Rent or Additional Rent or any other
amounts accrued hereunder due, or otherwise be immediately reimbursed
by Lessor.
Should there be a need to make any emergency repairs which were
otherwise the responsibility of the Lessor as provided in this Lease,
but due to emergent circumstances, Lessee makes such repairs which it
is entitled to do, the cost of such emergent repairs shall be at
Lessee's option a deduction from Rent or Additional Rent or otherwise
be immediately reimbursed by Lessor.
14. INSURANCE
---------
14.1 Lessee Insurance. Lessee, at its cost, shall maintain a
----------------
policy of Combined Single Limit Bodily Injury and Property Damage
Insurance during the Term and any Renewal Period, such insurance to
provide protection in the amount of One Million ($1,000,000) Dollars
combined single limit, insuring Lessor and Lessee against any
liability arising out of and in connection with Lessee's Use or
occupancy of the Space. Lessee should also obtain and maintain a
policy or policies of insurance covering loss or damage to the Space,
providing protection against all perils included within the classifi-
cation of fire, extended coverage, vandalism, malicious mischief,
flood (in the event such is required by a lender having a lien on the
Building), and special extended perils ("All risk" as such term is used
in the insurance industry). Lessee shall also maintain workmen's
compensation insurance with no less than the minimum limits required
by law. The commercial liability insurance policies shall name Lessor
as an additional insured, insure on an occurrence and not a claims-made
basis, contain a hostile fire endorsement and a contractual liability
endorsement and provide primary coverage to Lessor (any policy issued
to Lessor providing duplicate or similar coverage shall be deemed in
excess over Lessee's policies).
14.2 Lessor Insurance. Lessor shall obtain and maintain insurance
----------------
on the Building, primarily a policy of Combined Single Limit Bodily
Injury and Property Damage Insurance insuring against any liability
arising out of the ownership or maintenance of the Building and all
areas appurtenant thereto in an amount not less than combined single
limit of One Million ($1,000,000) Dollars. All such insurance shall be
included as part of the CAM charges to Lessee pursuant to Section 4.2
hereof. Lessor should also obtain and maintain a policy or policies of
insurance covering loss or damage to the Space, but not Lessee's
fixtures or equipment, in an amount not to exceed the full replacement
value thereof providing protection against all perils included within
the classification of fire, extended coverage, vandalism, malicious
mischief, flood (in the event such is required by a lender having a lien
on the Building), and special extended perils ("all risk" as such term
is used in the insurance industry).
14.3 Reputable Carriers. Insurance required hereunder shall be
------------------
placed with reputable insurance companies. Each party shall deliver to
the other copies of policies of liability insurance required under this
Section 14 or certificates evidencing the existence and amounts of such
insurance. No such policy shall be cancelable or subject to reduction
of coverage or other modification except after thirty (30) days prior
written notice to Lessor or Lessee, as the case may be. Lessor and
Lessee shall, at least thirty (30) days prior to the expiration of
such policies, furnish the other party with renewals or "binders"
thereof, or the other party, after ten (10) days written notice, may
order such insurance, provided such is during and for the Term or any
Renewal Period, and charge the cost thereof to the non-renewing party
which amount shall be payable upon demand. Lessor and Lessee shall not
do or permit to be done anything which shall invalidate the insurance
policies referred to in this Section 14.
14.4 Subrogation. Lessee and Lessor each hereby release and relieve
-----------
the other (which includes the other party's Agents) from any liability,
whether for negligence or otherwise, in connection
<PAGE> 8
with loss covered by any insurance policies which the releasor carries
with respect to the Building and/or the Space or any interest or
property therein or thereon, but only to the extent that such loss is
collected under said insurance policies. Such release is also
conditioned upon the inclusion in the policy of a provision whereby
any such release does not adversely affect such policy or prejudice
any right of the releasor to recover thereunder. Each party's
insurance policies shall include such a provision so long as it is
obtainable without extra cost.
15. FIRE OR CASUALTY
----------------
15.1 Substantial Damage; Rent Abatement. In the event that the
----------------------------------
Building or the Space shall be totally or substantially damaged by fire
or other casualty or happening, to the extent that the business of the
Lessee cannot reasonably be conducted therein and if such damage cannot
be or is not repaired, restored, or rebuilt by the Lessor, as the case
may be, to substantially the same condition as it was immediately prior
to such damage or destruction within three (3) months after such
damage, then either the Lessor or Lessee shall have the option of
terminating this Lease by written notice delivered to the other party
not later than thirty (30) days following such failure to rebuild; in
either event Lessee shall immediately vacate and surrender possession
of the Space to Lessor. If neither Lessee nor Lessor elects to
terminate this Lease, or if the Building or the Space is not damaged to
the extent that the damage unreasonably interferes with Lessee's Use,
Lessor shall proceed with said repairs with all reasonable diligence,
but in no event shall the repairs exceed ninety (90) days. The Rent
payable hereunder shall entirely abate in case the Space or the
Building is substantially destroyed or so damaged as to render the
Space untenantable or not useable or convenient or in a condition for
its Use, or abate proportionately according to the extent of the injury
or damage sustained by the Building or the Space, if such is not
substantially destroyed or is rendered partially untenantable, until
the Building and the Space shall have been restored, repaired, or
rebuilt and put in proper condition for the Use and occupancy of Lessee.
Lessor agrees to institute such repairs immediately after such damage
and to complete the same with due diligence and within a reasonable time.
15.2 Damage for Interruption of Use. Lessor shall not be liable for
------------------------------
any damage, compensation or claim by reason of inconvenience of annoyance
arising from the necessity of making repairs, alterations and/or
additions to any portion of the Space, the interruption in the Use of
the Space, or the termination of this Lease by reason of the destruction
of the Space.
16. ENVIRONMENTAL REQUIREMENTS
--------------------------
Lessee shall not permit or cause any party to bring any Hazardous
Material into the Space or transport, store, use, generate, manufacture
or release any Hazardous Material in or about the Space without Lessor's
prior written consent. Lessee, at its sole cost and expense, shall
operate its business in the Space in strict compliance with all
Environmental Requirements and shall remediate in a manner satisfactory
to Lessor any Hazardous Materials released on or from the Building by
Lessee and/or its Agents. The term "Environmental Requirements" means
all applicable present and future statutes, regulations, ordinances,
rules, codes, judgments, orders or other similar enactments of any
governmental authority or agency regulating or relating to health,
safety, or environmental conditions on, under or about the Space or
the environment, including without limitation, the following: the
Comprehensive Environmental Response, Compensation and Liability Act;
the Resource Conservation and Recovery Act; and all state and local
counterparts thereto, and any regulations or policies promulgated or
issued thereunder. The term "Hazardous Materials" means and includes
any substance, material, waste, pollutant, or contaminant listed or
defined as hazardous or toxic, under any Environmental Requirements,
asbestos and petroleum, including crude oil or any fraction thereof,
natural gas, or synthetic gas usable for fuel (or mixtures of natural
gas and such synthetic gas). As defined in Environmental Requirements,
Lessee is and shall be deemed to be the "operator" of Lessee's
"facility" and the "owner" of all
<PAGE> 9
Hazardous Materials brought into the space by Lessee and Lessee's Agents,
and the wastes, by-products, or residues generated, resulting, or
produced therefrom.
Lessor shall have access to, and a right to perform inspections and
tests of, the Space to determine Lessee's compliance with Environmental
Requirements, its obligations under this Section 16, or the environmental
condition of the Space. Access shall be granted to Lessor upon Lessor's
prior notice to Lessee and at such times so as to minimize, so far as may
be reasonable under the circumstances, any disturbance to Lessee's
operations. Such inspections and tests shall be conducted at Lessor's
expense, unless such inspections or tests reveal that Lessee has not
complied with any Environmental Requirement, in which case Lessee shall
reimburse Lessor for the reasonable cost of such inspection and tests.
17. SURRENDER
---------
Upon expiration or earlier termination of the Lease in accordance
with its terms, Lessee shall surrender the Space to Lessor, ordinary
wear and tear and casualty loss and condemnation covered by Sections 15
and 18 excepted. Any trade fixtures, Lessee-made alterations and
property not so removed by Lessee as permitted or required herein shall
be deemed abandoned and may be stored, removed, and disposed of by
Lessor at Lessee's expense, and Lessee waives all claims against Lessor
for any damages resulting from Lessor's retention and disposition of
such property.
18. CONDEMNATION
------------
If any part of the Space should be taken or condemned for a public
or quasi-public use, and a part thereof remains which is susceptible for
the Use intended, this Lease shall, as to the part so taken, terminate
as of the date title shall vest in the condemnor, and the Rent payable
hereunder shall be adjusted so that the Lessee shall be required to pay
for the remainder of the Term only such portion of such Rent at the
value of the part remaining after the condemnation bears to the value
of the entire Space at the date of condemnation; but in such event
Lessor shall have the option to terminate this Lease as of the date when
title to the part so condemned vests in the condemnor. If all the Space,
or such part thereof be taken or condemned so that there does not remain
a portion susceptible for occupation hereunder, this Lease shall
thereupon terminate. Whether or not a portion of the Space is
susceptible for the Use intended shall be determined by arbitration if
the parties cannot otherwise agree on said portion. If a part of all of
the Space be taken or condemned, all compensation, except as otherwise
provided in this Section 18, awarded upon such condemnation or taking
shall, go to the Lessor and the Lessee shall have no claim thereto.
Lessee shall have the right, to the extent that same shall not diminish
Lessor's award, to make a separate claim against the condemning authority
(but not Lessor) for such compensation as may be separately awarded or
recoverable by Lessee for moving expenses and damage to Lessee's trade
fixtures, if a separate award for such items is made to Lessee.
19. SUBORDINATION; ASSIGNMENT BY LESSOR
-----------------------------------
The rights and interest of Lessee under this Lease shall be subject
and subordinate to any mortgage that may be placed upon the Space and to
any and all advances to be made thereunder, and to the interest thereon,
and all renewals, replacements, and extensions thereof. Whether this
Lease is dated prior to or subsequent to the date of said mortgage,
Lessee shall execute and deliver whatever instruments may be required for
such purposes. If Lessee fully performs its obligations under the Lease
then, with respect to any mortgage or instrument now or hereafter
becoming a lien or liens on the Building, Lessee's obligation to sub-
ordinate to such mortgage or other instrument shall be conditioned upon
the mortgagee agreeing not to unreasonably disturb or interfere with
Lessee's rights, Lessee's quiet enjoyment or with Lessee's possession
of the Space. Notwithstanding the foregoing, Lessee shall not
unreasonably withhold or delay executing a subordination agreement if
the lender presents a standard subordination and non-
<PAGE> 10
interference agreement utilized industry wide. Lessor may assign its
interest in this Lease or any part thereof, and such assignee shall
thereupon be deemed Lessor hereunder.
20. QUIET ENJOYMENT
---------------
Lessor covenants and agrees that Lessee, upon paying the Rent and
performing the covenants of this Lease, on its part to be performed,
shall and may peaceably and quietly have, hold and enjoy the Space and
the common areas for the Term and any duly authorized Renewal Period.
21. SPACE PREPARATION
-----------------
It is understood that the Space shall be rented by the Lessee on an
"as is" basis, and the only Space preparation work that shall be done
shall be the work as outlined on Exhibit A attached to and made a part
of this Lease.
22. AUTHORIZATON
------------
Lessor and Lessee each has all the requisite right, power, legal
capacity and authority, corporate and otherwise, to enter into this
Lease and to assume and perform their respective obligations hereunder.
The execution and delivery of this Lease and the performance by Lessor
and Lessee of their obligations hereunder have been duly authorized by
their respective boards of directors and/or partners, as the case may
be, and this Lease is a binding and enforceable Lease of Lessor and
Lessee according to its terms. The execution, delivery and performance
of this Lease by Lessor and Lessee will not result in any violation of
and will not conflict with, or result in any breach of any of the terms
of or constitute a default under, or constitute an event which with
notice or the passage of time or both would constitute a default under,
any provision of any law to which Lessor or Lessee is subject, any
partnership agreement, the articles of incorporation, and/or by-laws
of any party, or any mortgage, indenture, agreement, instrument,
judgment, decree, or rule or resolution or other restriction to which
Lessor or Lessee is bound. The representations as contained herein
are only made by Lessor and Lessee as to their own corporate acts,
articles of incorporation, by-laws and/or partnership agreements, as
the case may be, and their respective related agreements and regula-
tions and neither makes any representations as to the other's acts,
articles of incorporation, by-laws, partnership agreements, as the
case may be, and related agreements and regulations.
No action, approval, consent or authorization, including but not
limited to any action, approval or consent of any shareholder, note
holder, partner, or order of any court or governmental agency,
commission, board, bureau or instrumentality, otherwise than as
specifically provided in this Lease, is necessary in order to
constitute this Lease as a valid, binding and enforceable obligation
of the parties hereto in accordance with its terms.
23. RIGHT OF FIRST REFUSAL
----------------------
Should Lessor notify Lessee of an acceptable bona fide offer from a
third party for leasing all or any part of space adjacent to the Space,
Lessor shall notify Lessee of the terms and conditions of such offer and
furnish Lessee with a true copy thereof. Lessee shall have ten (10)
days to notify Lessor that it agrees to lease such adjacent space on
the same terms and conditions as are contained in the offer, or as
otherwise mutually agreed between Lessor and Lessee.
Lessor may accept the third party's offer if Lessee declines to
meet the offer or otherwise cannot mutually agree on the terms with
Lessor or Lessee fails to reply to Lessor's notice of such third party
offer within the ten-day period specified above.
<PAGE> 11
If Lessee agrees by reply notice to meet such offer or otherwise
agrees with the Lessor as to terms for the additional space, the
parties shall enter into a modification of this Lease to incorporate
such additional space under the terms and conditions as agreed to by
the parties.
24. WAIVER OF JURY TRIAL
--------------------
LESSEE AND LESSOR WAIVE ANY RIGHT TO TRIAL BY JURY OR TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT,
OR OTHERWISE, BETWEEN LESSOR AND LESSEE ARISING OUT OF THIS LEASE OR ANY
OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.
25. FORCE MAJEURE
-------------
Neither Lessor nor Lessee shall be held responsible for delays in
the performance of its obligations hereunder when caused by strikes,
lockouts, labor disputes, acts of God, inability to obtain labor or
materials or reasonable substitutes therefor, and other than and subject
to Section 3.3, governmental restrictions, governmental regulations,
governmental controls, delay in issuance of permits, enemy or hostile
governmental action, civil commotion, fire or other casualty, and other
causes beyond the reasonable control of Lessor or Lessee ("Force
Majeure"); provided, however, no Force Majeure event shall relieve
Lessee from its obligation to pay Rent, or from its obligations under
Section 3.3, or from other monetary obligations hereunder.
26. NOTICES
-------
All Rent payments, notices, requests, demands and other communica-
tions under this Lease shall be in writing and shall be deemed to have
been duly given on the date of service if served personally on the party
to whom notice is to be given, or on the third day after mailing if
mailed to the party to whom notice is to be given, by first class mail,
registered or certified, postage prepaid, or the next day or second
day if effected by such overnight mail, and properly addressed as
follows:
To Lessor: Dialysis Corporation of America
777 Terrace Avenue
Hasbrouck Heights, NJ 07604
Attn: Thomas K. Langbein, CEO
Copy To: Lawrence E. Jaffe, Esq.
777 Terrace Avenue
Hasbrouck Heights, NJ 07604
To Lessee: Dialysis Services of PA, Inc. - Lemoyne
27 Miller Street
Lemoyne, PA 17043
Attn: Bart Pelstring, President
<PAGE> 12
Any party may change its address for purposes of this Section 26 by
giving the other parties written notice of the new address in the manner
set forth above.
27. BROKERS
-------
Lessor and Lessee each represents and warrants that neither has dealt
with any broker, agent or other person in connection with this transaction
and other than N/A , for whom Lessor is solely responsible, no broker,
-----
agent or other person brought about this transaction, and Lessor and Lessee
each agree to indemnify and hold the other harmless from and against any
claims by any broker, agent or other person claiming a commission or other
form of compensation by virtue of having dealt with Lessor or Lessee, as
the case may be, with regard to this leasing transaction; and Lessor
specifically indemnifies Lessee against any claims for commissions, fees,
costs or other charges by N/A .
-----
28. APPLICABLE LAW
--------------
This Lease shall be construed under the laws of the Commonwealth of
Pennsylvania. If any provision of this Lease, or portion thereof, or
the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Lease shall
not be affected thereby and each provision of this Lease shall be valid
and enforceable to the fullest extent permitted by law.
29. LEASE CONTAINS ALL AGREEMENTS
-----------------------------
It is expressly understood by the parties that the whole agreement
between them is embodied in this Lease (executed in duplicate) and that
no part or items are omitted, unless the terms are hereinafter modified
by written agreement(s).
30. SUCCESSORS
----------
This Lease shall be binding upon the parties hereto and their
respective successors and/or assigns.
31. HEADINGS NO PART OF LEASE
-------------------------
Any headings preceding the text of the several Sections and Sub-
sections hereof are inserted solely for convenience of reference and
shall not constitute a part of this Lease not shall they affect its
meaning, construction or effect.
32. NO ESTATE IN REALTY
-------------------
This Lease shall create the relationship of Lessor and Lessee
between the parties hereto; no estate shall pass out of Lessor. Lessee
has no interest subject to levy or sale, and Lessee's interest is Use of
the Space upon payment of the Rent.
33. EFFECT OF TERMINATION OF LEASE
------------------------------
No termination of this Lease prior to the normal ending thereof, by
lapse of time or otherwise, shall affect Lessor's right to collect Rent
for the period prior to termination thereof or for any indemnifications
of Lessee to Lessor as contained herein.
<PAGE> 13
34. COUNTERPARTS
------------
This Lease may be executed in several counterparts and each such
counterpart shall be deemed an original, and all counterparts shall
constitute a single original Lease.
IN WITNESS WHEREOF, the parties hereto have each caused this
instrument to be signed by their respective officers thereunto duly
authorized, all on the date and year first above written.
DIALYSIS CORPORATION OF AMERICA
/s/ Thomas K. Langbein
By:------------------------------
THOMAS K. LANGBEIN, CEO
DIALYSIS SERVICES OF PA, INC. -
LEMOYNE
/s/ Bart Pelstring
By:------------------------------
BART PELSTRING, President
<PAGE> 14
EXHIBIT A
SPECIFICATIONS OF SPACE
<PAGE> 15
EXHIBIT B
TENANT SUBORDINATION AGREEMENT
THIS TENANT SUBORDINATION AGREEMENT made as of the 22nd day of
December, 1998, by and between Dialysis Services of Pennsylvania,
Inc. - Lemoyne, a Pennsylvania corporation (the "Tenant") and Mercan-
tile-Safe Deposit and Trust Company, a Maryland banking institution
(the "Bank").
WHEREAS, the Tenant is the lessee under a certain lease (the "Lease")
dated December 22, 1998 from Dialysis Corporation of America, a Florida
corporation (the "Landlord"), to Tenant, of certain real property,
together with the improvements thereon, known as 27 Miller Street,
located in Lemoyne, Cumberland County, Pennsylvania, as more particu-
larly described in the Lease (the "Premises");
WHEREAS, the Bank has made a loan to Landlord and secured said loan
by a Mortgage and Security Agreement dated November 30, 1988 on the
Premises (the "Mortgage"); and
WHEREAS, at the request of the Landlord and in consideration of the
making of said loan by the Bank, the Tenant has agreed to subordinate the
Lease to the Mortgage.
NOW, THEREFORE, THIS SUBORDINATION AGREEMENT WITNESSETH, that for
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto do hereby agree and covenant as follows:
1. Tenant hereby acknowledges and agrees that the Lease is and
shall be (i) subordinate to the Mortgage, and (ii) subject and inferior
to the Mortgage.
2. Should the Premises be transferred to any person or party other
than the Landlord by reason of foreclosure of or other proceedings
brought pursuant to or under the Mortgage, Tenant shall attorn to and be
bound to said transferee under all of the terms, covenants and conditions
of the Lease for the remaining balance of the term thereof and any
extensions or renewals thereof, with the same force and effect as if
the transferee was the lessor under the Lease.
3. Unless Tenant is in default under the Lease, the Lease shall not
be terminated, nor shall Tenant's use, possession or enjoyment of the
Premises be interfered with, by reason of any foreclosure proceeding or
other action brought pursuant to or under the Mortgage.
4. Each party hereto does hereby agree to execute, acknowledge and
deliver to the other such further instruments as may be necessary to
effectuate the purposes of this subordination, attornment and non-
disturbance.
<PAGE> 16
WITNESS the following hands and seals as of the day and year first
above written.
WITNESS: TENANT:
DIALYSIS SERVICES OF PENNSYLVANIA,
INC. - LEMOYNE
/s/ Bart Pelstring
- ---------------------------------- By:-------------------------------
BART PELSTRING, President
(SEAL)
WITNESS: MERCANTILE-SAFE DEPOSIT AND
TRUST COMPANY
/s/ Stephen D. Palmer
- ---------------------------------- By:-------------------------------
STEPHEN D. PALMER, Assistant
Vice President
(SEAL)
ACKNOWLEDGED AND AGREED this 22nd day of December, 1998.
WITNESS: DIALYSIS CORPORATION OF AMERICA
/s/ Thomas K. Langbein
- ---------------------------------- By:-------------------------------
THOMAS K. LANGBEIN, CEO
(SEAL)
COMMONWEALTH OF PENNSYLVANIA, COUNTY of CUMBERLAND, to wit:
----------
I HEREBY CERTIFY, that on this 23rd day of December, 1998, before
----
me, the undersigned Notary Public of the Commonwealth of Pennsylvania,
personally appeared BART PELSTRING, who acknowledged himself to be the
PRESIDENT of DIALYSIS SERVICES OF PENNSYLVANIA, INC. - LEMOYNE, known
to me (or satisfactorily proven) to be the person who executed the
foregoing Subordination Agreement and acknowledged that he executed the
same for the purposes therein contained by signing the name of the said
Corporation, by himself as PRESIDENT.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Rose Ann M. Mull
---------------------------------
Notary Public
My Commission Expires:
Oct. 25, 1999
NOTARIAL SEAL ---------------------------------
ROSE ANN M. MULL, NOTARY PUBLIC
LEMOYNE BORO, CUMBERLAND COUNTY
MY COMMISSION EXPIRES OCT. 25, 1999
MEMBER, PENNSYLVANIA ASSOCIATION OF NOTARIES
<PAGE> 17
STATE OF MARYLAND, CITY OF BALTIMORE, to wit:
I HEREBY CERTIFY, that on this day of , 19 ,
---- ---------------- ---
before me, the undersigned Notary Public of the State of Maryland,
personally appeared STEPHEN D. PALMER, who acknowledged himself to be
the ASSISTANT VICE PRESIDENT of MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY,
known to me (or satisfactorily proven) to be the person who executed the
foregoing Subordination Agreement and acknowledged that he executed the
same for the purposes therein contained by signing the name of the said
company, by himself as ASSISTANT VICE PRESIDENT.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
---------------------------------
Notary Public
My Commission Expires:
---------------------------------
STATE OF NEW JERSEY, COUNTY OF BERGEN, to wit:
I HEREBY CERTIFY, that on this 22nd day of December, 1998, before
me, the undersigned Notary Public of the State of New Jersey, personally
appeared THOMAS K. LANGBEIN, who acknowledged himself to be the CHIEF
EXECUTIVE OFFICER of DIALYSIS CORPORATION OF AMERICA, known to me (or
satisfactorily proven) to be the person who executed the foregoing
Subordination Agreement and acknowledged that he executed the same for
the purposes therein contained by signing the name of the said
Corporation, by himself as CHIEF EXECUTIVE OFFICER.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ Nancy A. Cox
---------------------------------
Notary Public
My Commission Expires:
NANCY A. COX
Notary Public of New Jersey
My Commission Expires March 6, 2000
EXHIBIT 21
SUBSIDIARIES
Jurisdiction of Percentage Owned
Subsidiaries Incorporation By Registrant
DCA Medical Services, Inc. Florida 100%
Dialysis Medical, Inc.* Florida 100%
Dialysis Services of Florida, Inc.-
Fort Walton Beach* Florida 100%
Dialysis Services of NJ, Inc.-
Manahawkin New Jersey 80%
Dialysis Services of NJ, Inc. -
Toms River* New Jersey 80%
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%
* inactive.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,366,837
<SECURITIES> 0
<RECEIVABLES> 460,786
<ALLOWANCES> 0
<INVENTORY> 179,189
<CURRENT-ASSETS> 6,059,746
<PP&E> 4,103,691
<DEPRECIATION> 1,003,995
<TOTAL-ASSETS> 9,348,924
<CURRENT-LIABILITIES> 944,770
<BONDS> 632,664
0
0
<COMMON> 37,513
<OTHER-SE> 7,733,977
<TOTAL-LIABILITY-AND-EQUITY> 9,348,924
<SALES> 3,552,279
<TOTAL-REVENUES> 4,003,935
<CGS> 2,516,239
<TOTAL-COSTS> 2,516,239
<OTHER-EXPENSES> 1,847,175
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,531
<INCOME-PRETAX> (441,010)
<INCOME-TAX> (236,838)
<INCOME-CONTINUING> (204,172)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (204,172)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
<FN>
<F1>Accounts receivable are net of allowance of
$144,000at December 31, 1998.
</FN>
</TABLE>
