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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2001
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________ to __________
Commission file number 0-8527
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DIALYSIS CORPORATION OF AMERICA
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(Exact name of registrant as specified in its charter)
FLORIDA 59-1757642
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1344 ASHTON ROAD, HANOVER, MARYLAND 21076
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (410) 694-0500
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Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
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common stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant computed by reference to the closing price at which the common
stock was sold on March 15, 2002 was approximately $4,026,000.
As of March 15, 2002, the Company had 3,887,344 shares of its common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporating information by reference from the Information
Statement in connection with the Registrant's Annual Meeting of Shareholders
anticipated to be on May 29, 2002.
Registrant's Registration Statement on Form SB-2 dated December 22,
1995, as amended February 9, 1996, April 2, 1996 and April 15, 1996,
Registration No. 33-80877-A Part II, Item 27, Exhibits, incorporated in Part IV
of this Annual Report,
Registrant's Annual Report, Form 10-K for the five years ended December
31, 2000, Part IV, Exhibits, incorporated in Part IV of this Annual Report.
Annual Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for
the year ended December 31, 1994, Part IV, Exhibits, incorporated in Part IV of
this Annual Report.
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DIALYSIS CORPORATION OF AMERICA
Index to Annual Report on Form 10-K
Year Ended December 31, 2001
Page
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PART I
Item 1. Business........................................................... 1
Item 2. Properties......................................................... 23
Item 3. Legal Proceedings.................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders................ 24
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters................................................ 25
Item 6. Selected Financial Data............................................ 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 27
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.......... 31
Item 8. Financial Statements and Supplementary Data........................ 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 32
PART III
Item 10. Directors and Executive Officers of the Registrant................. 32
Item 11. Executive Compensation............................................. 33
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 33
Item 13. Certain Relationships and Related Transactions..................... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 34
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934. The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors for forward-looking statements. Certain of the forward-looking
statements include management's expectations, intentions, beliefs and strategies
regarding the growth of our company and our future operations, the character and
development of the dialysis industry, anticipated revenues, our need for and
sources of funding for expansion opportunities and construction, expenditures,
costs and income, our business strategies and plans for future operations, and
similar expressions concerning matters that are not considered historical facts.
Forward-looking statements also include our statements regarding liquidity,
anticipated cash needs and availability, and anticipated expense levels in Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Words such as "anticipate," "estimate," "expects," "projects,"
"intends," "plans" and "believes," and words and terms of similar substance used
in connection with any discussions of future operating or financial performance
identify forward-looking statements. Such forward-looking statements, like all
statements about expected future events, are subject to substantial risks and
uncertainties that could cause actual results to materially differ from those
expressed in the statements, including the general economic, market and business
conditions, opportunities pursued or not pursued, competition, changes in
federal and state laws or regulations affecting the company and our operations,
and other factors discussed periodically in our filings. Many of the foregoing
factors are beyond our control. Among the factors that could cause actual
results to differ materially are the factors detailed in the risks discussed in
the "Risk Factors" section below. Accordingly, readers are cautioned not to
place too much reliance on such forward-looking statements, which speak only as
of the date made and which we undertake no obligation to revise to reflect
events after the date made.
ITEM 1. BUSINESS
HISTORICAL
We are a Florida corporation which was organized in 1976. We develop
and operate outpatient kidney dialysis centers that provide quality dialysis and
ancillary services to patients suffering from chronic kidney failure, generally
referred to as end stage renal disease ("ESRD"). We also provide acute inpatient
dialysis treatments in hospitals, as well as providing homecare services through
our wholly owned subsidiary, DCA Medical Services, Inc. We became a public
company in 1977, and went private in 1979. We began construction of new centers
in 1995, and in 1996 once again became a public company. In 1997, we sold our
Florida dialysis operations. We currently operate 11 outpatient dialysis
facilities, and have a 40% interest in a dialysis center in Ohio which we
manage.
GENERAL
Management believes the company distinguishes itself on the basis of
quality patient care, and a patient-focused, courteous, highly trained
professional staff. Our acute inpatient dialysis treatments are conducted under
contractual relationships currently with eleven hospitals and medical centers
located in areas and states serviced by our outpatient dialysis facilities.
Homecare, sometimes referred to as method II home patient treatment, requires
the company to provide equipment and supplies, training, monitoring and
follow-up assistance to patients who are able to perform their treatments at
home.
Our growth depends primarily on the availability of suitable dialysis
centers for development or acquisition in appropriate and acceptable areas, and
our ability to develop new potential dialysis centers at costs within our budget
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 us. We opened two new dialysis facilities in
Georgia in 2001 and one dialysis center in the first quarter of 2002 in
Pennsylvania. A center in Ohio, in which we have a 40% interest which we manage,
opened in February, 2001. We are in the development stages for two new centers,
one in Ohio and one in Maryland. We are completing the acquisition of a dialysis
unit in Georgia, which should be operational in the second quarter of 2002.
There is intense competition for retaining qualified nephrologists, whose
patients normally seek treatment with their physicians at centers with which the
doctor is affiliated, and which physicians are responsible for the supervision
of the dialysis centers, and in finding nursing and technical staff at
reasonable rates.
Our medical service revenues are derived primarily from four sources:
(i) outpatient hemodialysis services (47%, 51% and 50% of medical services
revenues for 2001, 2000 and 1999, respectively); (ii) home peritoneal dialysis
services, including method II services (3%, 6% and 9% of medical services
revenues for 2001, 2000 and 1999, respectively); (iii) inpatient hemodialysis
services for acute patient care provided through agreements with hospitals and
medical centers (15%, 10% and 10% of medical services revenues for 2001, 2000
and 1999, respectively); and (iv) ancillary services associated with dialysis
treatments, primarily the administration of erythropoietin ("EPO"), a
bio-engineered protein that stimulates the production of red blood cells, since
a deteriorating kidney loses its ability to regulate red blood cell count,
resulting in anemia (35%, 33% and 31% of medical services revenue for 2001, 2000
and 1999, respectively). Dialysis is an ongoing and necessary therapy to sustain
life for kidney dialysis patients. ESRD patients normally receive 156 dialysis
treatments each year.
Essential to our operations and income is Medicare reimbursement which
is a fixed rate determined by the Center for Medicare and Medicaid Services
("CMS") of the Department of Health and Human Services ("HHS"). The level of our
revenues and profitability may be adversely affected by future legislation that
could result in rate cuts. Further, our operating costs tend to increase over
the years in excess of increases in the prescribed dialysis treatment rates.
From commencement of the Medicare ESRD program in 1972 through 1983, the ESRD
composite rate was unchanged, and was decreased over the years thereafter, which
was only minimally increased by Congress in January, 2000, which rate has
increased through 2002. Commercial third-party reimbursement rates are also
susceptible to reduction. See "Operations - Medicare Reimbursement." The
inpatient dialysis service agreements for treating acute kidney disease are not
subject to government fixed rates, but rather are negotiated with hospitals, and
typically the rates are higher on a per treatment basis.
DIALYSIS INDUSTRY
Kidneys act as a filter removing harmful substances and excess water
from the blood, enabling the body to maintain proper and healthy balances of
chemicals and water. Chronic kidney failure, End Stage Renal Disease, results
from chemical imbalance and buildup of toxic chemicals, and is a state of kidney
disease characterized by advanced irreversible renal impairment. ESRD is a
likely consequence of complications resulting from diabetes, hypertension,
advanced age, and specific hereditary, cystic and urological diseases. ESRD
patients, in order to survive, must either obtain a kidney transplant, which
procedure is limited due to lack of suitable kidney donors and the incidence of
rejection of transplanted organs, or obtain regular dialysis treatment for the
rest of their lives.
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Based upon information published by the National Kidney Foundation, the
number of ESRD patients requiring dialysis treatments in the United States is
approximately 240,000, and continues to grow at a rate of approximately 7% a
year. This is thought to be attributable primarily to the aging of the
population and greater patient longevity as a result of improved dialysis
technology. The statistics further reflect approximately 3,600 dialysis
facilities of which 260 are hospital-based, and the current annual cost of
treating ESRD in the United States is approximately $18 billion.
ESRD Treatment Options
Treatment options for ESRD patients include (1) hemodialysis, performed
either at (i) an outpatient facility, or (ii) inpatient hospital facility, or
(iii) the patient's home; (2) peritoneal dialysis, either continuous ambulatory
peritoneal dialysis or continuous cycling peritoneal dialysis; and/or (3) kidney
transplant. A significant portion of ESRD patients receive treatments at
non-hospital owned outpatient dialysis facilities (according to CMS,
approximately 86%) with most of the remaining patients treated at home through
hemodialysis or peritoneal dialysis. Patients treated at home are monitored by a
designated outpatient facility.
The most prevalent form of treatment for ESRD patients is hemodialysis,
which involves the use of an artificial kidney, known as a dialyzer, to perform
the function of removing toxins and excess fluids from the bloodstream. This is
accomplished with a dialysis machine, a complex blood filtering device which
takes the place of certain functions of the kidney and also controls external
blood flow and monitors the toxic and fluid removal process. The dialyzer has
two separate chambers divided by a semi-permeable membrane, and 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 patient's assistant, which
usually encompasses four to eight weeks. Dialysis Corporation of America does
not currently provide home hemodialysis (non-peritoneal) services. The use of
conventional home hemodialysis has declined and is minimal due to the patient's
suitability and lifestyle, the need for the presence of a partner and a dialysis
machine at home, and the higher expense involved over continuous ambulatory
peritoneal dialysis.
A second home treatment for ESRD patients is peritoneal dialysis. There
are several variations of peritoneal dialysis, the most common being continuous
ambulatory peritoneal dialysis and continuous cycling peritoneal dialysis. All
forms of peritoneal dialysis use the patient's peritoneal (abdominal) cavity to
eliminate fluid and toxins from the patient. Continuous ambulatory peritoneal
dialysis utilizes dialysis solution infused manually into the patient's
peritoneal cavity through a surgically-placed catheter. The solution is allowed
to remain in the abdominal cavity for a three to five hour period and is then
drained. The cycle is then repeated. Continuous cycling peritoneal dialysis is
performed in a manner similar to continuous ambulatory peritoneal dialysis, but
utilizes a mechanical device to cycle the dialysis solution while the patient is
sleeping. Peritoneal dialysis is the third most common form of ESRD therapy
following center hemodialysis and renal transplant.
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The third modality for patients with ESRD is kidney transplantation.
While this is the most desirable form of therapeutic intervention, the scarcity
of suitable donors and possibility of donor rejection limits the availability of
this surgical procedure as a treatment option.
BUSINESS STRATEGY
Dialysis Corporation of America has 25 years' experience in developing
and operating dialysis treatment facilities. Our first priority is to provide
quality patient care. We intend to continue to establish alliances with
physicians and hospitals, attempt to initiate dialysis service arrangements with
nursing homes and managed care organizations, and to continue to emphasize our
high quality patient care. Our smaller size allows us to focus on each patient's
individual needs while remaining sensitive to the physicians' professional
concerns.
We continue to actively seek and negotiate with physicians and others
to establish new outpatient dialysis facilities. We are in the development
stages for two new centers, one in Ohio, and one in Maryland, and we are
anticipating completion of an acquisition of a dialysis unit in Georgia in the
immediate future. We are currently in different phases of negotiations with
physicians for potential new facilities in different areas of the country. In
2001 through the first quarter of 2002, we have five new acute inpatient
dialysis services agreements with hospitals in Pennsylvania, Ohio, Georgia and
New Jersey.
Our parent, Medicore, Inc., sold a controlling interest in Techdyne,
Inc., another public subsidiary of Medicore, in June, 2001 for $10,000,000 plus
a three year earn-out which will amount to between $2,500,000 and $5,000,000. A
substantial portion of the after tax proceeds of that sale are anticipated to be
made available to our company for expansion of our dialysis operations.
Same Center Growth
We endeavor to increase same center growth by adding quality staff and
management and attracting new patients to our existing facilities. We seek to
accomplish this objective by rendering high caliber patient care in convenient,
safe and serene conditions for everyone involved. We believe that we have
adequate space and stations within our facilities to accommodate greater patient
volume and maximize our treatment potential.
Development and Acquisition of Facilities
One of the primary elements in developing or acquiring facilities is
locating an area with an existing patient base under the current treatment of a
local nephrologist, since the facility is primarily going to serve such
patients. Other considerations in evaluating development of a dialysis facility
or a proposed acquisition are the availability and cost of qualified and skilled
personnel, particularly nursing and technical staff, the size and condition of
the facility and its equipment, the atmosphere for the patients, the area's
demographics and population growth estimates, state regulation of dialysis and
healthcare services, and the existence of competitive factors such as hospital
or proprietary non-hospital owned and existing outpatient dialysis facilities
within reasonable proximity to the proposed center.
Expansion is approached primarily through the development of our own
dialysis facilities. Acquisition of existing outpatient dialysis centers is a
faster but more costly means of growth. The primary reason for physicians
selling or participating in the development of independently owned centers is
the avoidance of administrative and financial responsibilities, freeing their
time to devote to their
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professional practice. Other motivating forces are the physician's desire to be
part of a larger organization allowing for economies of scale and the ability to
realize a return on their investment if they have an interest in the dialysis
entity.
To construct and develop a new facility ready for operations takes an
average of six to eight months, and approximately 12 months or longer to
generate income, all of which are subject to location, size and competitive
elements. Some of our centers are in the developmental stage, since they have
not reached the point where the patient base is sufficient to generate and
sustain earnings. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Construction of a 15 station facility
typically costs in a range of $600,000 to $750,000 depending on location, size
and related services to be provided by the proposed facility. Acquisition of
existing facilities is substantially more expensive, and is usually based
primarily upon the number of patients, and to a lesser extent, location,
competition, nature of facility and negotiation. We have recently completed an
agreement to acquire a dialysis unit in Georgia with approximately 18 dialysis
stations. Assuming we complete this acquisition in the immediate future, this
center is expected to be operational in the second quarter of 2002. Any
significant expansion, whether through acquisition or development of new
facilities, is dependent upon existing funds or financing from other sources.
Inpatient Services
Management is also seeking to increase acute dialysis care contracts
with hospitals for inpatient dialysis services. These contracts are sought with
hospitals in areas serviced by our facilities. Hospitals are willing to enter
into such inpatient care arrangements to eliminate the administrative burdens of
providing dialysis services to their patients as well as the expense involved in
maintaining dialysis equipment, supplies and personnel. We believe that these
arrangements are beneficial to our operations, since the contract rates are
individually negotiated with each hospital and are not fixed by government
regulation as is the case with Medicare reimbursement fees for ESRD patient
treatment. In 2001, we entered into new acute inpatient dialysis services
agreements with hospitals in New Jersey and Georgia. The Ohio center in which we
have a 40% interest entered into an acute inpatient service agreement in 2001.
There is no certainty as to when any additional centers or service
contracts will be implemented, or the number of dialysis stations or patient
treatments such may involve, or if such will ultimately be profitable. There is
no assurance that we will be able to continue to enter into favorable
relationships with physicians who would become medical directors of such
proposed dialysis facilities, or that our company will be able to acquire or
develop any new dialysis centers within a favorable geographic area. Newly
established dialysis centers, although contributing to increased revenues, also
adversely affect results of operations due to start-up costs and expenses and
due to their having a smaller and slower developing patient base. See "Business
Strategy," "Operations" and "Competition" of Item 1, "Business," and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OPERATIONS
Location, Capacity and Use of Facilities
We operate eleven outpatient dialysis facilities in Pennsylvania, New
Jersey and Georgia, with a total designed capacity of 173 licensed stations. We
have a 40% interest in an Ohio dialysis center which we operate in conjunction
with the majority owner, which center has a total of 12 licensed dialysis
centers. We own and operate our centers through subsidiaries of which seven are
100% owned, three are
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80% owned, and one 51% owned. The Lemoyne, Pennsylvania, and one of the South
Georgia dialysis facilities are located on properties owned by Dialysis
Corporation of America and leased to those subsidiaries. See Item 2,
"Properties."
The company also provides acute care inpatient dialysis services to
nine hospitals in areas serviced by our dialysis facilities, and we are in the
process of negotiating additional acute dialysis services contracts in the areas
surrounding our facilities and in tandem with development of future proposed
sites. Each of our dialysis facilities provides training, supplies and on-call
support services for home peritoneal patients. Dialysis Corporation of America
provided approximately 61,000 hemodialysis treatments in 2001.
The company estimates that on average its centers were operating at
approximately 60% of capacity as of December 31, 2001, based on the assumption
that a dialysis center is able to provide up to three treatments a day per
station, six days a week. We believe we can increase the number of dialysis
treatments at our centers without making additional capital expenditures.
Operations of Dialysis Facilities
Our company's dialysis facilities are designed specifically for
outpatient hemodialysis and generally contain, in addition to space for dialysis
treatments, a nurses' station, a patient weigh-in area, a supply room, water
treatment space used to purify the water used in hemodialysis treatments, a
dialyzer reprocessing room (where, with both the patient's and physician's
consent, the patient's dialyzer is sterilized for reuse), staff work area,
offices and a staff lounge. Our facilities also have a designated area for
training patients in home dialysis. Each facility also offers amenities for the
patients, such as a color television with headsets for each dialysis station, to
ensure the patients are comfortable and relaxed.
Our company maintains a team of dialysis specialists to provide for the
individual needs of each patient. In accordance with participation requirements
under the Medicare ESRD program, each facility retains a medical director
qualified and experienced in the practice of nephrology and the administration
of a renal dialysis facility. See "Physician Relationships" below. Each facility
is overseen by a nurse administrator who supervises the daily operations and the
staff, which consists of registered nurses, licensed practical nurses, patient
care technicians, a part-time social worker to assist the patient and family to
adjust to dialysis treatment and to provide help in financial assistance and
planning, and a part-time registered dietitian. These individuals supervise the
patient's needs and treatments. See "Employees" below. The company must continue
to attract and retain skilled nurses and other staff, competition for whom is
intense.
The company's facilities offer high-efficiency conventional
hemodialysis, which, in our experience, provides the most viable treatment for
most patients. We consider our dialysis equipment to be both modern and
efficient, providing state of the art treatment in a safe and comfortable
environment.
Our facilities also offer home dialysis, primarily continuous
ambulatory peritoneal dialysis and continuous cycling peritoneal dialysis.
Training programs for continuous ambulatory peritoneal dialysis or continuous
cycling peritoneal dialysis generally encompass two to three weeks at the
dialysis facility, and such training is conducted by the facility's home
training nurse. After the patient completes training, they are able to perform
treatment at home with equipment and supplies provided by the company.
Inpatient Dialysis Services
The company presently provides inpatient dialysis services to nine
hospitals in New Jersey, Pennsylvania and Georgia, under agreements either with
the company or with one of our facilities in the
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area. Our Ohio affiliate in which we have a 40% interest also provides acute
inpatient services to a hospital in its area. The agreements are for a term
ranging from one to five years, with automatic renewal terms, subject to
termination by notice of either party. Inpatient services are typically
necessary for patients with acute kidney failure resulting from trauma or
similar causes, patients in the early stages of ESRD, and ESRD patients who
require hospitalization for other reasons.
Ancillary Services
Our dialysis facilities provide certain ancillary services to ESRD
patients, including the administration of certain prescription drugs, such as
EPO upon a physician's prescription. EPO is a bio-engineered protein which
stimulates the production of red blood cells and is used in connection with
dialysis to treat anemia, a medical complication frequently experienced by ESRD
patients. EPO decreases the necessity for blood transfusions in ESRD patients.
Physician Relationships
An integral element to the success of a facility is its association
with area nephrologists. A dialysis patient generally seeks treatment at a
facility near the patient's home where the patient's nephrologist has an
established practice. Consequently, we rely on our ability to develop
affiliations with area nephrologists who may provide quality dialysis care and
patients.
The conditions of a facility's participation in the Medicare ESRD
program mandate that treatment at a dialysis facility be under the general
supervision of a medical director who is a physician. We retain by written
agreement qualified physicians or groups of qualified physicians to serve as
medical directors for each of our facilities. Generally, the medical directors
are board eligible or board certified in internal medicine by a professional
board specializing in nephrology and have had at least 12 months of experience
or training in the care of dialysis patients at ESRD facilities. The medical
directors are typically a source of patients treated at the particular center
served. Our dialysis centers are operated through subsidiaries, either
corporations or limited liability companies. The medical directors of four of
our centers have acquired an ownership interest in the center they service
ranging from 20% to 49%. Our Ohio affiliate is owned 60% by the physician. We
make every effort to comply with federal and state regulations concerning our
relationship with the physicians and our medical directors treating patients at
our facilities (see "Government Regulation" below), and we know of no
limitations on physician ownership in our subsidiaries.
Agreements with medical directors typically range from a term of five
years to ten years, with renewal provisions, usually two renewal options each
for five years. Each agreement specifies the duties, responsibilities and
compensation of the medical director. Under each agreement, the medical director
or professional association maintains his, her or its own medical malpractice
insurance. The agreements also provide for non-competition in a limited
geographic area surrounding that particular dialysis center during the term of
the agreement and upon termination for a limited period. However, the agreements
do not prohibit physicians providing services at our facilities from providing
direct patient care services at other locations; and consistent with the federal
and state law, such agreements do not require a physician to refer patients to
our dialysis centers. Usually, physician's professional fees for services are
billed directly to government payment authorities by the treating physician and
paid directly to the physician or the professional association.
The company's ability to establish a dialysis facility in a particular
area is significantly geared to the availability of a qualified physician or
nephrologist to serve as the medical director. The loss of a medical director
who could not be readily replaced would have a material adverse effect on the
operations
7
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
Dialysis Corporation of America implements a quality assurance program
to maintain and improve the quality of dialysis treatment and care we provide to
our patients in each facility. Quality assurance activities involve the ongoing
examination of care provided, the identification of deficiencies in that care
and any necessary improvements in 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 CMS and the Occupational
Safety and Health Administration. Our Vice President of Clinical Services, who
is a certified nephrology nurse, oversees this program in addition to ensuring
that the company meets federal and state compliance requirements for dialysis
centers. See "Government Regulation" below.
Patient Revenues
A substantial amount of the fees for outpatient dialysis treatments are
funded under the ESRD Program established by the federal government under the
Social Security Act, and administered in accordance with rates set by CMS. A
majority of dialysis patients are covered under Medicare. The balance of the
outpatient charges are paid by private payors including the patient's medical
insurance, private funds or state Medicaid plans. Pennsylvania, New Jersey,
Georgia and Ohio, presently the states in which we operate, provide Medicaid or
comparable benefits to qualified recipients to supplement their Medicare
coverage.
Under the ESRD Program, payments for dialysis services are determined
pursuant to Part B of the Medicare Act which presently pays 80% of the allowable
charges for each dialysis treatment furnished to patients. The maximum payments
vary based on the geographic location of the center. The remaining 20% may be
paid by Medicaid if the patient is eligible, from private insurance funds or the
patient's personal funds. Medicare and Medicaid programs are subject to
regulatory changes, statutory limitations and government funding restrictions,
which may adversely affect our revenues and dialysis services payments. See
"Medicare Reimbursement" below.
The inpatient dialysis services are paid for by the hospital pursuant
to contractual pre-determined fees for the different dialysis treatments.
Medicare Reimbursement
The company is reimbursed primarily by Medicare under a prospective
reimbursement system for chronic dialysis services, and by third party payors
including Medicaid and commercial insurance companies. Each of our dialysis
facilities is certified to participate in the Medicare program. Under the
Medicare system, the reimbursement rates are fixed in advance and limit the
allowable charge per treatment, but provide us with predictable and recurring
per treatment revenues and allows us to retain any profit earned. An established
composite rate set by CMS governs the Medicare reimbursement available for a
designated group of dialysis services, including dialysis treatments, supplies
used for such treatments, certain laboratory tests and medications. CMS
eliminated routine Medicare coverage for such
8
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.
The company receives reimbursement for outpatient dialysis services
provided to Medicare-eligible patients at rates that are currently between
approximately $121 and $135 per treatment, depending upon regional wage
variations. The Medicare reimbursement rate is subject to change by legislation.
An average ESRD reimbursement rate is approximately $124 per treatment for
outpatient dialysis services. The current maximum composite reimbursement rate
is $144 per treatment. The Benefits Improvement and Protection Act of 2000
provided for a 2.7% increase in the amount paid to dialysis facilities for
performance of services in 2001. Congress has requested studies of the ESRD
composite rate structure as well as other related ancillary services to
determine whether the composite rate is subject to an annual inflationary
increase. In connection with that study, the Prospective Payment Assessment
Commission recommended to Congress no change in the compensate rate. Congress
need not implement PROPAC's recommendations.
Other ancillary services and items are eligible for separate
reimbursement under Medicare and are not part of the composite rate, including
certain drugs such as EPO, the allowable rate of which is currently $10 per 1000
units for amounts in excess of three units per patient per year, and certain
physician-ordered tests provided to dialysis patients. Approximately 26% of our
revenues in 2001 was derived from providing dialysis patients with EPO. CMS
limits the EPO reimbursement rate based upon patients' hematocrit levels. Except
for the administration of EPO, other ancillary services are not significant
sources of income to us. We routinely submit claims monthly and are usually paid
by Medicare within 30 days of the submission.
There have been a variety of proposals to Congress for Medicare reform.
We are unable to predict what, if any, future changes may occur in the rate of
reimbursement. Any reduction in the Medicare composite reimbursement rate would
have a material adverse effect on our business, revenues and net earnings.
Medicaid Reimbursement
Medicaid programs are state administered programs partially funded by
the federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state defined levels and who are
otherwise uninsured. The programs also serve as supplemental insurance programs
for the Medicare co-insurance portion and provide certain coverages (e.g., oral
medications) that are not covered by Medicare. State regulations generally
follow Medicare reimbursement levels and coverages without any co-insurance
amounts. Certain states, however, require beneficiaries to pay a monthly share
of the cost based upon levels of income or assets. Pennsylvania and New Jersey
have Medical Assistance Programs comparable to Medicaid, as well as New Jersey,
with primary and secondary insurance coverage to those who qualify. We are a
licensed ESRD provider in New Jersey, Pennsylvania and Georgia.
SOURCES OF MEDICAL SERVICES REVENUE
Year Ended December 31,
-----------------------
2001 2000
---- ----
Medicare 48% 59%
Medicaid and Comparable Programs 11% 13%
Hospital inpatient dialysis services 15% 10%
Commercial and private payors 26% 18%
9
Management Services
Dialysis Corporation of America has a management services agreement
with each subsidiary and with DCA of Toledo, LLC, in which it holds a minority
position, providing them with administrative and management services, including
but not limited to providing capital equipment, preparing budgets, bookkeeping,
accounting, data processing, and other corporate based information services,
materials and human resource management, billing and collection, and accounts
receivable and payable processing. These services are provided for a percentage
of net revenues of each particular facility.
POTENTIAL LIABILITY AND INSURANCE
Participants in the health care industry are subject to lawsuits based
upon alleged negligence, many of which involve large claims and significant
defense costs. We are very proud of the fact that, although we have been
involved in chronic and acute kidney dialysis services for approximately 25
years, the company has never been subject to any suit relating to its dialysis
operations. We currently have general and umbrella liability insurance, as well
as professional and products liability. Our insurance policies provide coverage
on an "occurrence" basis and are subject to annual renewal. A hypothetical
successful claim against us in excess of our insurance coverage could have a
material adverse effect upon our business and results of operations. The medical
directors supervising our dialysis operations and other physicians practicing at
the facilities are required to maintain their own professional malpractice
insurance coverage.
GOVERNMENT REGULATION
General
Regulation of healthcare facilities, including dialysis, is extensive,
with legislation continually proposed relating to safety, maintenance of
equipment and proper records, quality assurance programs, reimbursement rates,
confidentiality of medical records, licensing and other areas of operations.
Each of the dialysis facilities must be certified by CMS, and we must comply
with certain rules and regulations established by CMS regarding charges,
procedures and policies. Each dialysis center is also subject to periodic
inspections by federal and state agencies to determine if their operations meet
the appropriate regulatory standards. Our operations are also subject to the
Occupational Safety and Health Administration, known as OSHA, relating to
workplace safety and employee exposure to blood and other potentially infectious
material.
Many states have eliminated the requirement 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
the states in which we are presently operating.
Our record of compliance with federal, state and local governmental
laws and regulations remains excellent. Regulation of healthcare facilities,
including dialysis centers, is extensive with legislation continually proposed
relating to safety, reimbursement rates, licensing and other areas of
operations. We are unable to predict the scope and effect of any changes in
government regulations, particularly any modifications in the reimbursement rate
for medical services or requirements to obtain certification from CMS.
Enforcement, both privately and by the government, has become more stringent
adding to
10
compliance costs as well as potential sanctions. Since inception in 1976, we
have maintained all of our licenses, including our Medicare and Medicaid and
equivalent certifications. The loss of any licenses and certifications would
have a negative impact on our company.
We regularly review legislative and regulatory changes and developments
and will restructure a business arrangement if we determine such might place our
operations in material noncompliance with such law or regulation. See "Fraud and
Abuse" and "Stark II" below. To date, none of our business arrangements with
physicians, patients or others have been the subject of investigation by any
governmental authority. No assurance can be given, however, that our business
arrangements will not be the subject of future investigation or prosecution by
federal or state governmental authorities which could result in civil and/or
criminal sanctions.
Fraud and Abuse
Each year OIG publishes a general Work Plan. For the year 2002, OIG
indicated it planned to concentrate, among other things, on utilization service
patterns of beneficiaries and assess the medical necessity and accuracy of
coding of selected categories of services provided outside the composite rate,
Medicare payments for EPO, and method II billing, including the adequacy of CMS
oversight and the impact on nursing home residents. We reviewed the OIG 2002
Work Plan, and we believe that we are in compliance with applicable regulations.
Nevertheless, we will continue to review risk areas inherent to dialysis
treatment and service, and to maintain a compliance program. This program
focuses on employee education concerning applicable billing rules, regulations
and insurance carrier interpretations, as well as auditing medical records to
ensure the medical necessity of services provided and billed.
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. Over the years, the federal government has
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 and
immunize the arrangement from prosecution, 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 our dialysis centers is
supervised by a medical director, who is a licensed nephrologist or otherwise
qualified physician. The compensation of our company's medical directors, who
are independent contractors, is fixed by a medical director agreement and
reflects competitive factors in each respective location, and the size of the
center, and the physician's professional qualifications. The medical director's
fee is fixed in advance, typically for periods of one to five years and does not
take into account amount of referrals to the dialysis center. Four of our
outpatient dialysis centers are owned jointly between the company and a group of
physicians, who hold a minority position (our Ohio affiliate is majority-owned
by a physician). These physicians also act as the medical directors for those
facilities. We attempt to structure our arrangements with our physicians to
comply with the Anti-Kickback Statute. Many of these physicians' patients are
treated at our facilities. We
11
believe that the value of the minority interest represented by stock of our
subsidiaries issued to physicians has been consistent with the fair market value
of the cash consideration paid, assets transferred to, and/or services performed
by such physicians for the subsidiary, and there is no intent to induce
referrals to our facilities. See "Business - Physician Relationships" above. We
have never been challenged under these statutes and believe our arrangements
with our medical directors are in material compliance with applicable law. Two
states in which we operate, Georgia and Maryland, have similar statutes to the
federal anti-kickback laws limiting physicians from holding financial interests
in various types of medical facilities. If these statutes are interpreted to
apply to relationships we have with our medical directors who hold joint
ownership in our dialysis facilities, we would restructure our relationship with
these physicians but could be subject to penalties.
Management believes that the 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. Medical necessity is
capable of objective documentation, drastically reducing the possibility of over
utilization. There are safe harbors for certain arrangements. However, these
relationships with medical director ownership of minority interests in our
facilities satisfy many but not all of the criteria for the safe harbor, and
there can be no assurance that these relationships will not subject us to
investigation or prosecution by enforcement agencies. In an effort to further
our position of adhering to the law, we have medical and corporate compliance
plans and medical chart audits to confirm medical necessity of referrals.
With respect to our inpatient dialysis services, we provide 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
we have an inpatient dialysis services arrangement. The federal Anti-Kickback
Statute could apply, but we believe our acute inpatient hospital services are in
compliance with the law. See "Stark II" below.
We endeavor in good faith to comply with all governmental regulations.
However, there can be no assurance that we will not be required to change our
practices or experience a material adverse effect as a result of any such
potential challenge. We cannot predict the outcome of the rule-making process or
whether changes in the safe harbor rules will affect our position with respect
to the Anti-Kickback Statute, but we do believe we will remain in compliance.
Stark II
The Physician Ownership and Referral Act ("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, is
subject to civil penalties of up to $15,000 per referral and can be excluded
from participation in the Medicare and Medicaid programs.
12
HHS' regulations to Stark II became effective in January, 2002,
primarily excluding from Stark II services included in the ESRD composite rate.
These regulations exclude from covered designated health services and referral
prohibitions, EPO and other drugs required as part of dialysis treatments under
certain conditions. Also excluded from "inpatient hospital services" are
dialysis services provided by a hospital not certified by CMS to provide
outpatient dialysis services, which would exclude our inpatient hospital
services agreements from Stark II, since those hospitals are not providing
outpatient dialysis. Equipment and supplies used in connection with home
dialysis are excluded from the Stark II definition of "durable medical
equipment." HHS is revisiting its regulations and intends to issue additional
regulations to the Stark legislation. We are unable to predict the extent or
nature of such revised and/or new HHS regulations, which may negatively impact
our operations or require us to restructure different aspects of our business.
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. Dialysis treatments are not included in the statutory list of
"designated health services." Phase I of the federal Stark II regulations and
the legislative history of Stark II indicates that the purpose behind the Stark
II prohibition on physician referral is to prevent Medicare program and patient
abuse. Since dialysis is a necessary medical treatment for those with temporary
or permanent kidney failure it is not highly susceptible to that type of abuse.
We believe, based upon the proposed rules and the industry practice, that
Congress did not intend to include dialysis services and the services and items
provided by the company incident to dialysis services within the Stark II
prohibitions.
If the provisions of Stark II were found to apply to our arrangements
however, we believe that we would be in compliance. We compensate our
nephrologist-physicians as medical directors of our dialysis centers pursuant to
medical director agreements, which we believe meet the exception for personal
service arrangements under Stark II. Non-affiliated physicians who send or treat
their patients at any of our facilities do not receive any compensation from the
company.
Medical directors of our facilities which hold a minority investment
interest in those subsidiaries may refer patients to hospitals with which the
company has an acute inpatient dialysis service arrangement. Stark II may be
interpreted to apply to these types of interests. We believe that our
contractual arrangements with hospitals for acute care inpatient dialysis
services are in compliance with Stark II.
If CMS or any other government entity takes a contrary position to the
Stark II regulations or otherwise, we may be required to restructure certain
existing compensation or investment agreements with our medical directors, or,
in the alternative, to refuse to accept referrals for designated health services
from certain physicians. That legislation prohibits Medicare or Medicaid
reimbursement of items or services provided pursuant to a prohibited referral,
and imposes substantial civil monetary penalties on facilities which submit
claims for reimbursement. If such were to be the case, we could be required to
repay amounts reimbursed for drugs, equipment and services that CMS determines
to have been furnished in violation of Stark II, in addition to substantial
civil monetary penalties, which could adversely affect our operations and future
financial results. We believe that if Stark II is interpreted by CMS or any
other governmental entity to apply to our arrangements, it is possible that we
could be permitted to bring our financial relationships with referring
physicians into material compliance with the provisions of Stark II on a
prospective basis. However, prospective compliance may not eliminate the amounts
or penalties, if any, that might be determined to be owed for past conduct, and
there can be no assurance that such prospective compliance, if permissible,
would not have a material adverse effect on the company.
13
Health Insurance Reform Act
Congress has taken action in recent legislative sessions to modify the
Medicare program for the purpose of reducing the amounts otherwise payable from
the program to healthcare providers. Future legislation or regulations may be
enacted that could significantly modify the ESRD program or substantially reduce
the amount paid to the company for its services, or impose further regulation or
restrictions on healthcare providers. Further, statutes or regulations may be
adopted which demand additional requirements in order for us to be eligible to
participate in the federal and state payment programs. Any new legislation or
regulations may adversely affect our business and operations, as well as our
competitors.
The Health Insurance Portability and Accountability Act of 1996
provided for health insurance reforms which included a variety of provisions
important to healthcare providers, such as significant changes to the Medicare
and Medicaid fraud and abuse laws. HIPAA established two programs that
coordinate federal, state and local healthcare fraud and abuse activities, known
as the "Fraud and Abuse Control Program" and the "Medicare Integrity Program."
The Fraud and Abuse Control Program 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 program under HIPAA, which began in January, 1999, rewards
Medicare recipients 10% of the overpayment up to $1,000 for reporting Medicare
fraud and abuse. HIPAA further created several new Health Care Fraud Crimes and
extended their applicability to private health plans.
As part of the administrative simplification provisions of HIPAA, final
regulations governing electronic transactions relating to healthcare information
were published by HHS. These regulations require a party transmitting or
receiving healthcare transactions electronically to send and receive data in
single format, rather than the different data formats currently used. This
regulation applies to our submissions and processing of healthcare claims. We
are in the process of developing the single format transmission, which is
required to be in place in October, 2003.
HHS also published regulations relating to the exchange of healthcare
information to comply with HIPAA privacy standards. HSS' privacy rules cover all
individually identifiable healthcare information covering healthcare providers,
health plans, and healthcare clearing houses, known as "covered entities," as
well as business associates and employers, who are indirectly regulated by the
privacy rules. The regulations, which require organizations to comply no later
than April 14, 2003, require covered entities to continually obligate business
associates and employers to follow the privacy rules. Healthcare provider is
defined very broadly, and may include therapists and social workers, among
others. The regulations are quite extensive and complex, but basically require
companies to: (i) obtain patient consent before using or disclosing protected
heathcare information for heathcare, payment or other uses; (ii) respond to
patient requests for access to their healthcare information; and (iii) develop
policies and procedures with respect to uses and disclosures of protected
healthcare information. HHS recently proposed changes to these privacy
regulations to correct unintended consequences that threatened patients' access
to quality health care. These proposals include, among others, removing consent
requirements hindering access to
14
care, clarifying oral communication restrictions by allowing doctors to discuss
a patient's treatment with other doctors and professionals involved in their
care, parental access to children's records, and prohibiting use of patients'
records for marketing while allowing appropriate communications.
We have developed and continue to refine our processing of patient
healthcare information to comply with HHS' patient privacy regulations. These
regulations are complex, and require our continued efforts, which add to our
administrative and financial obligations, to insure proper patient healthcare
information protection. It is anticipated that these privacy regulations will be
further amended and developed, which could require our company to spend
additional effort and money toward compliance.
HIPAA increases significantly the civil and criminal penalties for
offenses related to healthcare fraud and abuse. HIPAA increased civil monetary
penalties from $2,000 plus twice the amount for each false claim to $10,000 plus
three times the amount for each false claim. HIPAA expressly prohibits four
practices, namely (1) submitting a claim that the person knows or has reason to
know is for medical items or services that are not medically necessary, (2)
transferring remuneration to Medicare and Medicaid beneficiaries that is likely
to influence such beneficiary to order or receive items or services, (3)
certifying the need for home health services knowing that all of the coverage
requirements have not been met, and (4) engaging in a pattern or practice of
upcoding claims in order to obtain greater reimbursement. However, HIPAA creates
a tougher burden of proof for the government by requiring that the government
establish that the person "knew or should have known" a false or fraudulent
claim was presented. The "knew or should have known" standard is defined to
require "deliberate ignorance or reckless disregard of the truth or falsity of
the information," thus merely negligent conduct or billing errors should not
violate the Civil False Claims Act.
As for criminal penalties, HIPAA adds healthcare fraud, theft,
embezzlement, obstruction of investigations and false statements to the general
federal criminal code with respect to federally funded health programs, thus
subjecting such acts to criminal penalties. Persons convicted of these crimes
face up to 10 years imprisonment and/or fines. Moreover, a court imposing a
sentence on a person convicted of federal healthcare offense may order the
person to forfeit all real or personal property that is derived from the
criminal offense. The Attorney General is also provided with a greatly expanded
subpoena power under HIPAA to investigate fraudulent criminal activities, and
federal prosecutors may utilize asset freezes, injunctive relief and forfeiture
of proceeds to limit fraud during such an investigation.
Although we believe we substantially comply with currently applicable
state and federal laws and regulations and to date have not had any difficulty
in maintaining our licenses and Medicare and Medicaid authorizations, the
healthcare service industry is and will continue to be subject to substantial
and continually changing regulation at the federal and state levels, and the
scope and effect of such and its impact on our operations cannot be predicted.
No assurance can be given that our activities will not be reviewed or challenged
by regulatory authorities.
Any loss by the company of its various federal certifications, its
approval as a certified provider under the Medicare or Medicaid programs or its
licenses under the laws of any state or other governmental authority from which
a substantial portion of our revenues are derived or a change resulting from
healthcare reform, a reduction of dialysis reimbursement or a reduction or
complete elimination of coverage for dialysis services, would have a material
adverse effect on our business.
Environmental and Health Regulations
Our dialysis centers are subject to hazardous waste laws and
non-hazardous medical waste regulation. Most of our waste is non-hazardous. CMS
requires that all dialysis facilities have a contract with a licensed medical
waste handler for any hazardous waste. We also follow OSHA's Hazardous
15
Waste Communications Policy, which requires all employees to be
knowledgeable of the presence of and familiar with the use and disposal of
hazardous chemicals in the facility. Medical waste of each facility is handled
by licensed local medical waste sanitation agencies who are primarily
responsible for compliance with such laws.
There are a variety of regulations promulgated under OSHA relating to
employees exposed to blood and other potentially infectious materials requiring
employers, including dialysis centers, to provide protection. We adhere to
OSHA's protective guidelines, including regularly testing employees and patients
for exposure to hepatitis B and providing employees subject to such exposure
with hepatitis B vaccinations on an as-needed basis, protective equipment, a
written exposure control plan and training in infection control and waste
disposal.
OTHER REGULATION
There are also federal and state laws prohibiting anyone from
presenting false claims or fraudulent information to obtain payments from
Medicare, Medicaid and other third-party payors. 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. We
believe we have the proper internal controls and procedures for issuance of
accounts and complete cost reports and payment requests. Such reports and
requests are subject to a challenge under these laws.
Certain states have anti-kickback legislation and laws dealing with
self-referral provisions similar to the federal Anti-Kickback Statute and Stark
II. We have no reason to believe that we are not in compliance with such state
laws.
COMPETITION
The dialysis industry is very competitive. There are numerous providers
who have dialysis facilities in the same areas as the company. Many are owned by
major corporations which operate dialysis facilities regionally, nationally and
internationally. Our operations are small in comparison with those corporations.
Some of our major competitors are public companies, including Fresenius Medical
Care, Gambro Healthcare, Inc., Renal Care Group, Inc. and Davita, Inc. Most of
these companies have substantially greater financial resources, many more
centers, patients and services than our company, and by virtue of such have a
significant advantage over us in competing for nephrologists and acquisitions of
dialysis facilities in areas and markets we target. Fresenius and Gambro also
manufacture and sell dialysis equipment and supplies, which may provide them
with an even greater competitive edge. Competition for acquisitions has
increased the cost of acquiring existing dialysis facilities. We also face
competition from hospitals and physicians that operate their own dialysis
facilities.
Competitive factors most important in dialysis treatment are quality of
care and service, convenience of location and pleasantness of the environment.
Another significant competitive factor is the ability to attract and retain
qualified nephrologists. These physicians are a substantial source of patients
for the dialysis centers, are required as medical directors of the dialysis
facility for it to participate in the Medicare ESRD program, and are responsible
for the supervision and operations of the center. Our medical directors usually
are subject to non-compete restrictions within a limited geographic
16
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 the dialysis treatments we provide. Although kidney
transplant is a preferred treatment for ESRD, certain patients who have
undergone such transplants have lost their transplant function and returned to
dialysis treatments.
EMPLOYEES
As of March 4, 2002, our company had 163 full time employees, including
nurse administrators, licensed practical nurses, registered nurses, technical
service manager, technical specialists, patient care technicians, and clerical
employees. We retain 27 part-time employees consisting of registered nurses,
patient care technicians and clerical employees. Occasionally, we utilize
employees on a "per diem" basis to supplement staffing.
We retain 22 independent contractors who include the social workers and
dietitians at our Pennsylvania and New Jersey facilities and our Ohio affiliate,
which dialysis facility we manage. These are in addition to the medical
directors, who supervise patient treatment at each facility, and the social
workers and dietitians at our Georgia facilities, who are independent
contractors.
We believe our relationship with our employees is good and we have not
suffered any strikes or work stoppages. None of our employees is represented by
any labor union. We are an equal opportunity employer.
RISK FACTORS
UNTIL FISCAL 2001, WE HAD EXPERIENCED OPERATIONAL LOSSES
Since 1989, when we sold four of our five dialysis centers, we had
experienced operational losses. Not until fiscal 2001 did we reflect net income.
We initiated an expansion program in 1995, opening two new dialysis centers that
year, and to date have 11 centers in New Jersey, Pennsylvania and Georgia, with
a 40% interest in a dialysis facility in Ohio which we manage, and two
facilities in the development stage in Maryland and Ohio. However, some of our
dialysis centers have generated losses since their commencement of operations
and, although typical to newly established facilities, some continue to generate
losses after 12 months of operations. This is due to operational costs and time
needed to reach full capacity of dialysis treatments. We are now developing two
new dialysis centers and are in the process of completing the acquisition of
another, which will generate greater revenues; however, until these dialysis
centers develop their patient base, they may not reflect profitable operations.
DIALYSIS OPERATIONS ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
Our dialysis operations are subject to extensive federal and state
government regulations which include:
17
o licensing requirements for each dialysis facility o patient referral
prohibitions o false claims prohibitions for health care reimbursement
o record keeping requirements o health, safety and environmental
compliance o restriction of disclosure of individually identifiable
health
information
Many of these laws and regulations are complex and open to a variety of
interpretations. If we are forced to change our method of operations because of
these regulations, our earnings, financial condition and business might be
adversely affected. In addition, any violation of these governmental regulations
could involve substantial civil and criminal penalties and fines, and exclusion
from participating in Medicare and Medicaid programs. Any loss of federal or
state certifications or licenses would adversely impact our business.
Neither our arrangements with the medical directors of our facilities
nor the minority ownership interests of referring physicians in certain of our
dialysis facilities meet all of the requirements of published safe harbors to
the illegal remuneration provisions of the Social Security Act and similar state
laws. These laws impose civil and criminal sanctions on persons who receive or
make payments for referring a patient for treatment that is paid for in whole or
in part by Medicare, Medicaid or similar state programs. Transactions that do
not fall within the safe harbor may be subject to greater scrutiny by
enforcement agencies.
OUR REVENUES AND FINANCIAL STABILITY ARE DEPENDENT ON FIXED REIMBURSEMENT RATES
UNDER MEDICARE AND MEDICAID
Approximately 48% of our patient revenues for 2001 was derived from
Medicare reimbursement. Approximately 11% of our patient revenues for 2001 was
derived from Medicaid and equivalent programs. Decreases in Medicare and
Medicaid and equivalent rates and programs for our dialysis treatments would
adversely affect our revenues and profitability. Furthermore, operating costs
tend to increase over the years without comparable increases in the prescribed
dialysis treatment rates.
DECREASES IN REIMBURSEMENT PAYMENTS FROM THIRD-PARTY, NON-GOVERNMENT PAYORS
COULD ADVERSELY AFFECT OUR EARNINGS
Any reduction in the rates paid by private insurers, hospitals and
other non-governmental third-party organizations would adversely affect our
business. We estimate approximately 41% of our patient revenues for 2001 was
obtained from sources other than Medicare or Medicaid and equivalent programs.
We generally charge non-governmental organizations for dialysis treatment rates
which exceed the fixed Medicare and Medicaid and equivalent rates. Any
limitation on our ability to charge these higher rates, which may be affected by
expanded coverage by Medicare under the fixed corporate rate, or expanded
coverage of dialysis treatments by managed care organizations, which commonly
have lower rates than we charge, would adversely affect our business, results of
operations, and financial condition.
18
ANY DECREASE IN THE AVAILABILITY OF OR THE REIMBURSEMENT RATE OF EPO WOULD
REDUCE OUR REVENUES AND EARNINGS
EPO, the bio-engineered drug used for treating anemia in dialysis
patients, is currently available from a single manufacturer, Amgen, Inc. Two
years ago, Amgen increased the price of EPO, and there is no assurance there
will not be further price increases this year or in the near future. There
currently is no alternative drug available to us for dialysis patient treatment
of anemia. The available supply could also be reduced, whether by Amgen or
through excessive demand. This would adversely impact our revenues and
profitability, since approximately 26% of our medical revenues in 2001 were
based upon the administration of EPO to our dialysis patients. Most of our EPO
reimbursement is from government programs. We are unsure whether there will be
an EPO reimbursement rate reduction, but if such occurs, it would adversely
affect our revenues and earnings.
OUR ABILITY TO GROW IS SUBJECT TO OUR RESOURCES AND AVAILABLE LOCATIONS
To date, expansion of our operations has been through construction of
dialysis facilities rather than acquisition. This is due to the substantial
costs involved in an acquisition, usually valued on a per-patient basis. We are
attempting to complete our first acquisition of a dialysis unit in Georgia. . We
look for areas with qualified and cost-effective nursing and technical
personnel, with a sufficient population to sustain a dialysis facility. These
opportunities are limited and we compete with much larger dialysis companies for
appropriate locations. Construction through commencement of operations generally
takes four to six months and sometimes longer. Once the facility is operable, it
generates revenues, but usually does not operate at full capacity, and generates
losses for 12 months or more. Our growth strategy based on construction also
involves the risks of our ability to identify suitable locations to develop
additional facilities. Those we do develop may never achieve profitability, and
additional financing may not be available to finance future development.
Our inability to acquire or develop facilities in a cost-effective
manner would adversely affect our ability to expand our business and our
profitability.
Growth places significant demands on our financial and management
skills. Inability on our behalf to meet the challenges of expansion and to
manage any such growth would have an adverse effect on our management, results
of operations and financial condition.
OUR ATTEMPT TO EXPAND THROUGH DEVELOPMENT OR ACQUISITION OF DIALYSIS FACILITIES
WHICH ARE NOT CURRENTLY IDENTIFIED ENTAILS RISKS WHICH SHAREHOLDERS AND
INVESTORS WILL NOT HAVE A BASIS TO EVALUATE
We expand generally through seeking an appropriate location considering
the patient base, availability of a physician nephrologist to be our medical
director, and a skilled work force. Construction and equipment costs for a new
dialysis facility typically range from $600,000 to $750,000. The cost of
acquiring a center is usually much greater. We cannot ensure that we will be
successful in developing or acquiring dialysis facilities, or otherwise
successfully expanding our operations. We are negotiating with nephrologists and
others to establish new dialysis centers, but we cannot ensure these
negotiations will result in the development of new centers. Furthermore, there
is no basis for shareholders and investors to evaluate the specific merits or
risks of any potential development or acquisition of dialysis facilities.
19
WE DEPEND ON PHYSICIAN REFERRALS, AND THE LIMITATION OR CESSATION OF SUCH
REFERRALS WOULD ADVERSELY IMPACT OUR REVENUES AND EARNINGS
Our dialysis facilities and those centers we seek to develop are
dependent upon referrals of ESRD patients for treatment by physicians
specializing in nephrology. Generally, the nephrologist or medical professional
association of physicians supervising a particular dialysis center's operations,
known as a medical director of that facility, account for most of the patient
base. There is no requirement for these physicians to refer their patients to
us, and they are free to refer patients to any other conveniently located
dialysis facility. The loss of these key referring physicians at a particular
center could have a material adverse effect on the operations of the center and
could adversely affect our revenues and earnings.
Some of the referring physicians own minority interests in certain of
our dialysis facilities. If these interests are deemed to violate applicable
federal or state law, these physicians may be forced to dispose of their
ownership interests. We are unable to predict how this would affect our
relationship with these referring physicians, who may move their patients
elsewhere, which would have an adverse effect on our business.
INDUSTRY CHANGES COULD ADVERSELY AFFECT OUR BUSINESS
The healthcare industry is in a period of change and uncertainty.
Healthcare organizations, public and private, continue to change the manner in
which they operate and pay for services. Our business is designed to function
within the current healthcare financing and reimbursement system. In recent
years, the healthcare industry has been subject to increasing levels of
government regulation of reimbursement rates and capital expenditures, among
other things. In addition, proposals to reform the healthcare system have been
considered by Congress, and still remain a priority issue. Any new legislative
initiatives, if enacted, may further increase government regulation of or other
involvement in healthcare, lower reimbursement rates and otherwise change the
operating environment for healthcare companies. We cannot predict the likelihood
of those events or what impact they may have on our earnings, financial
condition or business.
OUR BUSINESS IS SUBJECT TO SUBSTANTIAL COMPETITION, AND WE MUST COMPETE
EFFECTIVELY, OTHERWISE OUR GROWTH COULD SLOW
We are operating in a very competitive environment in terms of
operations and development and acquisition of existing dialysis centers. Our
competition comes from other dialysis centers, many of which are owned by much
larger companies, and from hospitals. The dialysis industry is rapidly
consolidating. There are some very large dialysis companies competing for the
acquisition of existing dialysis centers and the development of relationships
with referring physicians. Most of our competition have much greater financial
resources, more dialysis facilities and a larger patient base.
Competition also comes from technological advances that provide more
effective dialysis treatments than the services provided by our centers.
We experience competition from physicians who open their own dialysis
facilities. Competition for existing centers has increased the costs of
acquiring such facilities. Competition is also intense for qualified nursing and
technical staff as well as for nephrologists with an adequate patient base.
Management can provide no assurance our company can compete effectively, and
thereby continue its growth.
20
MEDICORE, INC., OUR PARENT, WHICH OWNS 62% OF OUR COMPANY, HAS SOME COMMON
OFFICERS AND DIRECTORS, WHICH PRESENTS THE POTENTIAL FOR CONFLICTS OF INTEREST
Medicore owns 62% of our company, and is able to elect all of our
directors and otherwise control our management and operations. Such control is
also complemented by the fact that Thomas K. Langbein is Chairman of the Board
and Chief Executive Officer of both our company and Medicore, of which company
he is also the President, and Daniel R. Ouzts is Vice President and Treasurer of
both companies. Neither Mr. Langbein nor Mr. Ouzts devotes full time to our
management. The costs of executive salaries and other shared corporate overhead
for these companies are charged first on the basis of direct usage when
identifiable, with the remainder allocated on the basis of time spent. The
amount of expenses charged by Medicore to our company for 2001 amounted to
approximately $200,000.
Additionally, there have been past and there are current transactions
between our company and Medicore and their directors, including loans and
insurance coverage. We advanced funds to Medicore for working capital
requirements until Medicore sold Techdyne, Inc., another of its public
subsidiaries, in June, 2001. We also loaned Medicore $2,200,000 over the last
two years for its financing and investment in Linux Global Partners, Inc.
("LGP"), a private company involved in developing a Linux desktop product and
investing in Linux software companies, and which company is in its developmental
stages. Medicore repaid that loan in May and June, 2001, with approximately
$294,000 of accrued interest.
Since Medicore holds a majority interest in our company, there exists
the potential for conflicts between Medicore and us, and the responsibilities of
our management to our shareholders could conflict with the responsibilities owed
by management of Medicore to its shareholders.
THERE IS A POSSIBILITY OF CONTINUED VOLATILITY IN OUR SECURITY PRICE
Our common stock trades on the Nasdaq SmallCap Market. Over the years
the market price of the common stock has significantly fluctuated. During the
last two years, the common stock has been as high as $6.88 in the first quarter
of 2000 and as low as $.23 in the second quarter of 2001. On March 15, 2002, the
closing price of the common stock was $3.42. The market price of our common
stock could fluctuate substantially based upon announcements concerning our
company, such as operating results, government regulatory changes, technological
innovations, or information concerning our competitors. In addition, security
prices fluctuate widely for reasons unrelated to operations, usually general
political, and worldwide and domestic economic conditions, and the stock
market's reaction. These fluctuations and events could adversely affect the
market price of our common stock.
POSSIBLE DELISTING AND RISKS OF LOW PRICED STOCKS
Our common stock trades on the Nasdaq SmallCap Market. There are
certain criteria for continued listing on the Nasdaq SmallCap Market, known as
maintenance requirements. Failure to satisfy any one of these maintenance
listing requirements could result in our securities being delisted from the
Nasdaq SmallCap Market. These criteria include two active market makers,
maintenance of $2,500,000 of stockholders' equity (or a market capitalization of
$35,000,000 or a net income of $500,000 for our most recently completed fiscal
year or in two of the last three most recently completed fiscal years), a
minimum bid price for our common stock of $1.00, and at least 500,000 publicly
held shares with a market value of at least $1,000,000, among others. Usually,
if a deficiency occurs for a
21
period of 30 consecutive business days, the particular company is notified by
Nasdaq and has 90 days to achieve compliance. Nasdaq has proposed adjustments to
its SmallCap Market bid price grace period from 90 days to 180 days. Following
this grace period, issuers that demonstrate compliance with the core initial
listing standards of the SmallCap Market, which is either net income of $750,000
(determined from the most recently completed fiscal year or two of the most
recently completed fiscal years), stockholders' equity of $5,000,000, or market
capitalization of $50,000,000, will be afforded an additional 180-day grace
period within which to regain compliance. If the company is unable to
demonstrate compliance, the security is subject to delisting. The security might
be able to trade on the OTC Bulletin Board, a less transparent trading market
which may not provide the same visibility for the company or liquidity for its
securities, as does the Nasdaq SmallCap Market. As a consequence, an investor
may find it more difficult to dispose of or obtain prompt quotations as to the
price of our securities, and may be exposed to a risk of decline in the market
price of the common stock.
In November, 2000 and again in April, 2001, we received notification
from the Nasdaq Listing Qualifications Department of the Nasdaq Stock Market
that our common stock failed to maintain a closing bid price greater than or
equal to $1.00 per share for 30 consecutive days, as required by Marketplace
Rule 4310(c)(4). In each instance, we maintained our Nasdaq SmallCap Market
listing. In December, 2000, we received notice from Nasdaq's Lising
Qualifications Department that our common stock failed to maintain a market
value of public float greater than $1,000,000 as required under Marketplace Rule
4310(c)(7), which was ultimately complied with. These situations dealing with
the trading market are beyond our control. There can be no assurance that some
other listing maintenance criteria will not become deficient, whether within or
beyond our control, and without a timely cure, could cause our common stock to
be delisted from the Nasdaq SmallCap Market.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT SHAREHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
Our parent company owns 2,410,622 shares of our common stock, or 62% of
our company. Officers and directors of our company and parent own approximately
300,000 shares of common stock and 486,000 options exercisable into an
additional 486,000 shares of common stock. Most of the shares held by these
officers and directors are not freely tradable and are restricted from public
sale. However, a registration statement covering the sale of shares held by
these officers, directors and Medicore, may be effected, since these are
controlling persons of the company, and all their shares, including those
issuable upon exercise of their options, would then be eligible for resale in
the public market without restriction. Also, the officers' and directors' common
stock now owned, as well as the shares obtainable upon exercise of their
options, upon satisfying the conditions of Rule 144 under the Securities Act,
may be sold without complying with the registration provisions of the Securities
Act. These conditions include holding the shares for one year from acquisition,
volume limits of selling every three months an amount of shares which does not
exceed the greater of 1% of the outstanding common stock, or the average weekly
volume of trading as reported by Nasdaq during the four calendar weeks prior to
the sale, the filing of a Form 144, our company continuing to timely file its
reports under the Exchange Act, and the sales are sold directly to a market
maker or otherwise sold through a typical broker's transaction, with normal
commissions and no prearranged solicitations of the purchase order. Our tradable
common stock, known as the float, is approximately 1,177,222 shares, and the
approximately 300,000 shares of common stock directly owned by the officers and
directors represents approximately 25% of the float, and with the options for
486,000 additional shares, would represent approximately 47% of the float.
Accordingly, the sale by such officers and directors, whether through a
registration statement or under Rule 144, may have an adverse affect on the
market price of our common stock, and may hamper our ability to manage
subsequent equity or debt financing. If these shareholders sell substantial
amounts of their common stock of our company, including shares issued upon the
exercise of their options, into the public market, the market price of our
common stock could fall.
22
ITEM 2. PROPERTIES
DCA owns three properties, one located in Lemoyne, Pennsylvania, a
second in Easton, Maryland, and a third in Valdosta, Georgia. The Maryland
property consists of approximately 7,500 square feet, most of which is leased to
a competitor under a 10-year lease through June 30, 2009 with two renewals of
five years each. The lease is guaranteed by the tenant's parent company.
The Lemoyne property of approximately 15,000 square feet houses one of
our dialysis centers of approximately 5,400 square feet, approved for 17
dialysis stations with space available for expansion under a five year lease
through December 22, 2003, with two renewals of five years each. We use
approximately 2,500 square feet for an administrative office in Lemoyne.
The Easton, Maryland property is subject to two mortgages from
affiliated Maryland banking institutions. The Lemoyne, Pennsylvania property is
also subject to a mortgage from one of the Maryland banking institutions which
holds the first mortgage on the Easton, Maryland property. As of December 31,
2001, the remaining principal amount of the mortgage on the Lemoyne property was
approximately $ 61,000 and the first mortgage on the Easton property was
approximately $77,000. Each of these mortgages 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 us. Written
approval of the bank is required for all leases, assignments or sublettings,
alterations and improvements and sales of the properties. The Easton, Maryland
property has a second mortgage to secure a three-year $700,000 loan to our
Vineland, New Jersey subsidiary at an annual interest rate of 1 1/2% over the
prime rate, which loan we guaranty, and is further secured by that subsidiary's
assets, exclusive of financed dialysis equipment. See Item 7, "Management's
Discussions and Analysis of Financial Condition and Results of Operations" and
Note 2 to "Notes to Consolidated Financial Statements."
We acquired property in Valdosta, Georgia in 2000, and constructed a
dialysis facility there. This property is subject to a five year $788,000
mortgage obtained in April, 2001 with interest at 8.29% which matures in April,
2006. This mortgage had a remaining principal balance of approximately $776,000
at December 31, 2001. We lease approximately 6,000 square feet to one of our
dialysis centers in Valdosta for $90,600 per year under a 10-year lease, with
two renewals of five years.
Dialysis Corporation of America leases space at its Lemoyne,
Pennsylvania property to unrelated parties for their own business activities
unrelated to dialysis services. One lease is for approximately 1,500 square feet
through December 31, 2002, a second lease is for approximately 530 square feet
on a month-to-month basis, and a month-to-month lease for an office.
In addition to our Lemoyne, Pennsylvania, and Valdosta, Georgia
facilities, we presently have nine other dialysis facilities. Each is leased
from unaffiliated parties, most under five to ten year leases, usually with two
renewals of five years each, for space ranging from approximately 3,000 to 7,000
square feet. The lease in Homerville, Georgia is for two years to October 15,
2002, for approximately 1,700 square feet. We sublet a minimal amount of square
feet at two of our dialysis facilities to the physicians who are our medical
directors at those facilities for their medical offices. The subleases are on a
commercially reasonable basis and are structured to comply with the safe harbor
provisions of the "Anti-Kickback Statute." See Item 1, "Business - Government
Regulation - Fraud and Abuse."
23
We lease approximately 2,300 square feet in Hanover, Maryland for
executive offices pursuant to a five year lease with one five year renewal
option.
We are actively pursuing the additional development and acquisition of
dialysis facilities in all other areas of the country which would entail the
acquisition or lease of additional property.
We construct most of our dialysis facilities, which have
state-of-the-art equipment and facilities. The dialysis stations are equipped
with modern dialysis machines under a November, 1996 master lease/purchase
agreement with a $1.00 purchase option at the end of the term. Payments under
the various schedules extend through August, 2006. See Note 2 to "Notes to
Consolidated Financial Statements."
None of our dialysis facilities are operating at full capacity. See
"Business - Operations - Location, Capacity and Use of Facilities" above. The
existing dialysis facilities could accommodate greater patient volume,
particularly if we increase hours and/or days of operation without adding
additional dialysis stations or any additional capital expenditures. We also
have the ability and space at most of our facilities to expand to increase
patient volume subject to obtaining appropriate governmental approval.
We maintain executive offices at 1344 Ashton Road, Suite 201, Hanover,
Maryland 21076, and administrative office at 27 Miller Street, Suite 2, Lemoyne,
Pennsylvania 17043, as well as with our parent at 2337 West 76th Street,
Hialeah, Florida 33016.
ITEM 3. LEGAL PROCEEDINGS
We are 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 our fiscal year
ended December 31, 2001 to a vote of security holders through the solicitation
of proxies or otherwise. Since Medicore owns approximately 62% of our equity,
proxies are not solicited, but rather we provide our shareholders with an
Information Statement and an Annual Report. The Information Statement provides
similar information to shareholders as does a proxy statement, except there is
no solicitation of proxies. Shareholders who are entitled to vote at the annual
meeting scheduled for May 29, 2002, which are those shareholders of record on
April 11, 2002, will receive an Information Statement which provides certain
information relating to "Directors and Executive Officers," "Executive
Compensation," "Security Ownership of Certain Beneficial Owners and Management,"
and "Certain Relationships and Related Transactions," and which information is
incorporated by reference into this Annual Report on Form 10-K for the year
ended December 31, 2001. See Part III of this Annual Report, Items 10, 11, 12
and 13.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock commenced trading on the Nasdaq SmallCap Market on
April 17, 1996, under the symbol "DCAI." The table below indicates the high and
low bid prices for our common stock for the four quarters for the years ended
December 31, 2000 and 2001 as reported by Nasdaq.
BID PRICE
---------
2001 HIGH LOW
---- ---- ---
1st Quarter $1.03 $ .50
2nd Quarter 1.90 .23
3rd Quarter 2.10 1.02
4th Quarter 4.20 1.28
BID PRICE
---------
2000 HIGH LOW
---- ---- ---
1st Quarter* $6.88 $4.06
2nd Quarter* 4.44 1.00
3rd Quarter* 3.34 .63
4th Quarter 1.06 .63
- ---------------
* The price increases may have been, in part or primarily, the result of
the announcement of the execution of the Merger Agreement with
MainStreet and related agreements, which transaction terminated in
August, 2000.
At March 15, 2002, the high and low sales price of our common stock was
$3.42.
Bid prices represent prices between brokers, and do not include retail
mark-ups, mark-downs or any commission, and may not necessarily represent actual
transactions.
At March 15, 2002, we had 122 shareholders of record as reported by our
transfer agent. We have been advised by ADP, which organization holds securities
for banks and depositories, that there are approximately 660 beneficial owners
of our common stock.
We do not anticipate that we will pay dividends in the foreseeable
future. The board of directors intends to retain earnings, for use in the
business. Future dividend policy will be at the discretion of the board of
directors, and will depend on our earnings, capital requirements, financial
condition and other similar relevant factors. Until 2001, we had experienced
operational losses. See Item I, "Business - Risk Factors," Item 6, "Selected
Financial Data," and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
On April 17, 2000, pursuant to the exercise of options at $1.25 per
share, five officers and/or directors of the company and its parent, and family
members of one optionee to whom the optionee gifted options, acquired an
aggregate of 340,000 shares of common stock of the company. Each paid par value
and issued a three-year non-recourse promissory note due April 16, 2003, with
interest at 6.2%. The shares were sold to the officers and directors pursuant to
the non-public offering exemption of Section 4(2) and Regulation D of the
Securities Act.
25
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December
31, 2001 is derived from the audited consolidated financial statements of the
company. The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands except per share amounts)
Years Ended December 31,
----------------------------------------------------
2001 2000 1999 1998 1997(1)
-------- -------- -------- -------- --------
Revenues .................................... $ 19,441 $ 9,247 $ 5,866 $ 4,004 $ 9,221
Net income (loss) ........................... 784 (356) (668) (204) 1,993
Earnings (loss) per share
Basic ...................................... .20 (.09) (.19) (.06) .56
Diluted .................................... .20 (.09) (.19) (.06) .55
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
December 31,
----------------------------------------------------
2001 2000 1999 1998 1997(1)
-------- -------- -------- -------- --------
Working capital ............................. $ 3,883 $ 3,869 $ 4,152 $ 5,115 $ 7,062
Total assets ................................ 15,683 11,177 9,036 9,349 11,638
Intercompany receivable from
Medicore (non-current portion) ............. 201 414 105 121
Long term debt, net of current portion ...... 2,935 1,755 870 633 693(2)
Stockholders' equity ........................ 8,485 7,799 7,260 7,771 8,049
- -------------------------
(1) Reflects the sale of substantially all the assets of our Florida subsidiary,
Dialysis Services of Florida, Inc. - Fort Walton Beach and related Florida
dialysis operations, including the homecare operations of another subsidiary,
Dialysis Medical, Inc., to Renal Care Group, Inc. and its affiliates for
$5,065,000 of which consideration $4,585,000 was cash with the balance
consisting of 13,873 shares of Renal Care Group common stock. We owned 80% of
Dialysis Services of Florida and Dialysis Medical, Inc., and on February 20,
1998 the 20% interest of Dialysis Services of Florida owned by our former
medical director and his 20% interest in Dialysis Medical, Inc. were redeemed
for approximately $625,000 of which sum included 6,936 shares of the Renal Care
Group common stock valued at $240,000 with the balance in cash.
(2) Includes advances from Medicore in 1997.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations, commonly known as MD&A, is our attempt to provide the investor
with a narrative explanation of our financial statements, and to provide our
shareholders and investors with the dynamics of our business as seen through our
eyes as management. Generally, MD&A is intended to cover expected effects of
known or reasonably expected uncertainties, expected effects of known trends on
future operations, and prospective effects of events that have had a material
effect on past operating results. In conjunction with our discussion of MD&A,
shareholders should read the company's consolidated financial statements,
including the notes, contained at the back part of this annual report on Form
10-K. Please also review the Cautionary Notice Regarding Forward-Looking
Information on page one of this annual report.
GENERAL
Dialysis Corporation of America provides dialysis services, primarily
kidney dialysis treatments through its 11 outpatient dialysis centers, plus an
additional center in which it holds a minority interest, and through its acute
inpatient dialysis services agreements with hospitals, provides dialysis
treatments to the hospital's dialysis patients. We also provide homecare
services, including home peritoneal dialysis and method II services, the latter
relating to providing patients with supplies and equipment. Dialysis Corporation
of America also provides ancillary services associated with dialysis treatments,
primarily the administration of EPO.
Approximately 59% of our medical revenues are derived from Medicare and
Medicaid reimbursement with rates established by CMS, and which rates are
subject to legislative changes. Over the last two years, Medicare rates have
slightly increased, and are not related to the increasing costs of operations.
Dialysis is typically reimbursed at higher rates from private payors, such as
the patient's insurance carrier, as well as higher payments received under
negotiated contracts with hospitals for acute inpatient dialysis services.
The healthcare industry is subject to extensive regulations of federal
and state authorities. There are a variety of fraud and abuse measures to combat
waste, which include anti-kickback regulations, extensive prohibitions relating
to self-referrals, violations of which are punishable by criminal or civil
penalties, including exclusion from Medicare and other governmental programs.
There can be no assurance that there will not be unanticipated changes in
healthcare programs or laws or that we will not be required to restructure our
practice and will not experience material adverse effects as a result of any
such challenges or changes. See Item 1, "Business - Government Regulation."
Dialysis Corporation of America's future growth depends primarily on
the availability of suitable dialysis centers for development or acquisition in
appropriate and acceptable areas, and our ability to develop these new potential
dialysis centers at costs within our budget while competing with larger
companies, some of which are public companies or divisions of public companies
with greater personnel and financial resources who have a significant advantage
in acquiring and/or developing facilities in areas targeted by us. Additionally,
there is intense competition for retaining qualified nephrologists who are
responsible for the supervision of the dialysis centers. There is no certainty
as to when any new centers or inpatient service contracts with hospitals will be
implemented, or the number of stations, or patient treatments such may involve,
or if such will ultimately be profitable. It has been our experience that newly
established dialysis centers, although contributing to increased revenues, have
adversely affected our results of operations due to start-up costs and expenses
and a smaller patient base until they develop.
27
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
Medical service revenues increased approximately $10,150,000 (116%) for
the year ended December 31, 2001, compared to the preceding year. This increase
reflects increased revenues of our Pennsylvania dialysis centers of
approximately $ 1,894,000; increased revenues of approximately $2,239,000 for
our New Jersey centers; and increased revenues of approximately $5,902,000 for
our Georgia centers, one of which commenced operations in the fourth quarter of
2000, and two centers became operational during 2001, and $115,000 consulting
and license income.
Interest and other income increased by approximately $44,000 for the
year ended December 31, 2001, compared to the preceding year. This increase
includes a decrease in interest from our parent of $76,000 for the year ended
December 31, 2001 compared to the preceding year, including interest on a note
receivable and an advance receivable with the decrease due primarily to our
parent's repayment of a note to us, a decrease in other interest income of
$33,000 primarily as a result of a decrease in average interest rates which more
than offset an increase in average invested funds, management fee income of
$116,000 pursuant to a Management Services Agreement with our 40% owned Toledo,
Ohio affiliate, an increase in miscellaneous other income of $29,000 and an
increase in rental income of $8,000.
Cost of medical services sales as a percentage of sales decreased to
64% for the year ended December 31, 2001, compared to 67% for the preceding year
as a result of decreases in both supply costs and payroll costs as a percentage
of sales.
Selling, general and administrative expenses, those corporate and
facility costs not directly related to the care of patients, including, among
others, administration, accounting and billing, increased by approximately
$2,065,000 for the year ended December 31, 2001, compared to the preceding year.
This increase reflects operations of our new dialysis centers in Georgia and
Pennsylvania as well as increased support activities resulting from expanded
operations. Although selling, general and administrative expenses increased, as
a percent of medical service revenues these expenses decreased to 30% for the
year ended December 31, 2001, compared to 40% for the preceding year reflecting
efficiencies associated with expanded operations.
Provision for doubtful accounts increased approximately $467,000 as a
result of expanded operations. The provision amounted to 3% of sales for the
year ended December 31, 2001 compared to 2% for the year ended December 31,
2000. This increase reflects different collectibility levels associated with the
company's operations in new geographic areas, such as our Georgia operations.
Although operations of additional centers have resulted in additional
revenues, some are still in the developmental stage and, accordingly, their
operating results will adversely affect results of operations until they achieve
a sufficient patient count to sustain profitable operations.
Interest expense increased by approximately $128,000 for the year ended
December 31, 2001, compared to the preceding year primarily as a result of
additional equipment financing agreements, our Vineland loan and our April, 2001
Georgia mortgage.
The prime rate was 4.75% at December 31, 2001 and 9.50% at December 31,
2000.
28
2000 COMPARED TO 1999
Medical service revenues increased approximately $3,271,000 (59%) for
the year ended December 31, 2000, compared to the preceding year. This increase
reflects increased revenues of our Pennsylvania dialysis centers of
approximately $1,174,000; increased revenues of approximately $1,834,000 for our
New Jersey centers, including revenues of approximately $1,524,000 for our
Vineland, New Jersey center which commenced operations in February, 2000; and
revenues of approximately $263,000 for our new Georgia centers in Valdosta and
Homerville, Georgia.
Interest and other income increased by approximately $111,000 for the
year ended December 31, 2000, compared to the preceding year. This increase
includes an increase in interest from our parent of $198,000 for the year ended
December 31, 2000 compared to the preceding year, including interest on a note
receivable and an advance receivable, interest on stock option notes of
approximately $19,000, and a decrease in other interest income of $103,000 as a
result of a reduction in invested funds.
Cost of medical services sales as a percentage of sales amounted to 67%
for the year ended December 31, 2000, compared to 72% for the preceding year,
reflecting a decrease in both supply costs and healthcare salaries as a
percentage of sales.
Selling, general and administrative expenses increased by approximately
$828,000 for the year ended December 31, 2000, compared to the preceding year.
This increase reflects operations of our new dialysis centers in New Jersey and
Georgia, as well as increased support activities resulting from expanded
operations. Selling, general and administrative expenses as a percent of medical
service revenues decreased to 40% for the year ended December 31, 2000, from 49%
for the preceding year reflecting efficiencies associated with expanded
operations. Provision for doubtful accounts increased approximately $94,000 as a
result of expanded operations.
Although operations of new centers result in additional revenues, while
they are in the developmental stage their operating results adversely affect
results of operations. As a result of having centers in the developmental stage
which have not achieved a sufficient patient count to sustain profitable
operations, we have continued to experience operational losses.
Interest expense increased by approximately $10,000 for the year ended
December 31, 2000, compared to the preceding year primarily as a result of
additional equipment financing agreements.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $3,883,000 at December 31, 2001, which
reflected an increase of approximately $14,000 (.4%) during the current year.
Included in the changes in components of working capital was an increase in cash
and cash equivalents of $1,686,000, which included net cash provided by
operating activities of $692,000, net cash provided by investing activities of
$399,000 (including additions to property and equipment of $1,233,000,
investment in our 40% Ohio affiliate of $153,000, repayment to us by our parent
of $2,200,000 in loans, the initial $300,000 payment on our acquisition of
subsidiary minority interest and a $95,000 loan to the company's president) and
net cash provided by financing activities of $594,000 (including a decrease in
advances to our parent of $214,000, debt repayments of $298,000, repurchases of
stock of $98,000 and proceeds from our Georgia mortgage of $788,000). The change
in working capital reflected increases of approximately $2,327,000 in accounts
receivable and $1,890,000 in accounts payable and accrued expenses due to
increased sales activity.
29
We have mortgages with a Maryland bank on two of our buildings, one in
Lemoyne, Pennsylvania and the other in Easton, Maryland, with a combined balance
of approximately $138,000 at December 31, 2001, and $210,000 at December 31,
2000. In 2001, we were in default of certain covenants relating to these
mortgages. The covenants principally related to rent cap requirements for which
the bank has waived compliance. The bank has liens on our real and personal
property, including a lien on all rents due and security deposits from the
rental of these properties. An unaffiliated competitive Maryland dialysis center
continues to lease space from us in our Maryland building. The Maryland property
has a second mortgage to secure a three-year $700,000 loan to our Vineland, New
Jersey subsidiary, which loan is guaranteed by the company and secured by that
subsidiary's personal property exclusive of its dialysis equipment. In April
2001, we obtained a $788,000 five-year mortgage on our building in Valdosta,
Georgia, which had an outstanding balance of $776,000 at December 31, 2001. See
Item 2, "Properties" and Note 2 to "Notes to Consolidated Financial Statements."
We have an equipment financing agreement for kidney dialysis machines
for our facilities, which has an outstanding balance of approximately $1,678,000
at December 31, 2001, and $1,140,000 at December 31, 2000. This included
additional equipment financing of approximately $752,000 during 2001. See Note 2
to "Notes to Consolidated Financial Statements."
We opened our ninth and tenth centers in Fitzgerald, Georgia and
Valdosta, Georgia (our second Valdosta center) in August 2001 and our eleventh
center in Mechanicsburg, Pennsylvania in January 2002. A center in Ohio which we
manage and in which we hold a minority interest (40%), opened in February, 2001.
Capital is needed primarily for the development of outpatient dialysis
centers. The construction of a 15 station facility, typically the size of our
dialysis facilities, costs in the range of $600,000 to $750,000 depending on
location, size and related services to be provided, which includes equipment and
initial working capital requirements. Acquisition of an existing dialysis
facility is more expensive than construction, although acquisition would provide
us with an immediate ongoing operation, which most likely would be generating
income. We