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FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 0-8527
DIALYSIS CORPORATION OF AMERICA
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(Exact name of registrant as specified in its charter)
Florida 59-1757642
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1344 Ashton Road, Hanover, Maryland 21076
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(Address of principal executive offices) (Zip Code)
(410) 694-0500
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check 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] or No [ ]
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] or No [X]
Common Stock Outstanding
Common Stock, $.01 par value - 3,971,986 shares as of August 11, 2003.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
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INDEX
PART I -- FINANCIAL INFORMATION
- ------ ---------------------
The Consolidated Condensed Statements of Income (Unaudited) for the
three months and six months ended June 30, 2003 and June 30, 2002 include the
accounts of the Registrant and its subsidiaries.
Item 1. Financial Statements
- ------ --------------------
1) Consolidated Condensed Statements of Income for the three months and
six months ended June 30, 2003 and June 30, 2002.
2) Consolidated Condensed Balance Sheets as of June 30, 2003 and
December 31, 2002.
3) Consolidated Condensed Statements of Cash Flows for the six months
ended June 30, 2003 and June 30, 2002.
4) Notes to Consolidated Condensed Financial Statements as of June 30,
2003.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
- ---------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------ ----------------------------------------------------------
Item 4. Controls and Procedures
- ------ -----------------------
PART II -- OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
PART I -- FINANCIAL INFORMATION
------ ---------------------
Item 1. Financial Statements
- ------ --------------------
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Medical service revenue $ 7,423,946 $ 6,315,478 $14,161,897 $11,803,523
Interest and other income 154,668 102,052 295,735 219,846
----------- ----------- ----------- -----------
7,578,614 6,417,530 14,457,632 12,023,369
Cost and expenses:
Cost of medical services 4,516,757 3,717,051 8,719,370 7,111,712
Selling, general and administrative
expenses 2,377,810 1,850,539 4,526,256 3,581,888
Provision for doubtful accounts 159,165 241,591 255,063 427,005
Interest expense 51,331 57,520 105,117 111,838
----------- ----------- ----------- -----------
7,105,063 5,866,701 13,605,806 11,232,443
----------- ----------- ----------- -----------
Income before income taxes, minority
interest and equity in affiliate
earnings 473,551 550,829 851,826 790,926
Income tax provision 201,086 211,087 384,351 329,822
----------- ----------- ----------- -----------
Income before minority interest and
equity in affiliate earnings 272,465 339,742 467,475 461,104
Minority interest in income
of consolidated subsidiaries 59,116 14,709 113,902 20,877
Equity in affiliate earnings 6,214 13,621 21,633 60,325
----------- ----------- ----------- -----------
Net income $ 219,653 $ 338,654 $ 375,206 $ 500,552
=========== =========== =========== ===========
Earnings per share:
Basic $.06 $.09 $.10 $.13
==== ==== ==== ====
Diluted $.05 $.08 $.09 $.11
==== ==== ==== ====
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
2003 2002(A)
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 901,452 $ 2,571,916
Accounts receivable, less allowance
of $704,000 at June 30, 2003;
$831,000 at December 31, 2002 4,836,263 3,515,958
Inventories 1,143,623 877,058
Deferred income taxes 392,000 392,000
Prepaid expenses and other current assets 1,524,120 1,735,001
----------- -----------
Total current assets 8,797,458 9,091,933
----------- -----------
Property and equipment:
Land 376,211 376,211
Buildings and improvements 2,333,564 2,322,663
Machinery and equipment 5,737,678 5,232,632
Leasehold improvements 2,860,680 2,712,953
----------- -----------
11,308,133 10,644,459
Less accumulated depreciation and amortization 4,433,639 3,877,738
----------- -----------
6,874,494 6,766,721
----------- -----------
Goodwill 2,291,333 923,140
Other assets 652,794 372,190
----------- -----------
Total other assets 2,944,127 1,295,330
----------- -----------
$18,616,079 $17,153,984
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,156,414 $ 1,373,190
Accrued expenses 2,963,755 2,594,066
Current portion of long-term debt 580,000 532,000
Payable subsidiaries' minority interests acquisition 670,000 ---
----------- -----------
Total current liabilities 5,370,169 4,499,256
Long-term debt, less current portion 2,392,644 2,727,105
Advances from parent 130,513 ---
Deferred income taxes 28,000 28,000
Minority interest in subsidiaries 480,839 172,165
----------- -----------
Total liabilities 8,402,165 7,426,526
----------- -----------
Commitments and Contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000 shares:
3,971,986 shares issued and outstanding at June 30, 2003;
3,887,344 shares issued and outstanding at December 31,2002 39,720 38,873
Capital in excess of par value 5,296,983 5,186,580
Retained earnings 5,298,811 4,923,605
Notes receivable from options exercised (421,600) (421,600)
----------- -----------
Total stockholders' equity 10,213,914 9,727,458
----------- -----------
$18,616,079 $17,153,984
=========== ===========
(A) Reference is made to the company's Annual Report on Form 10-K for the
year ended December 31, 2002 filed with the Securities and Exchange
Commission in February 2003.
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
-------------------------
2003 2002
---- ----
Operating activities:
Net income $ 375,206 $ 500,552
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 575,010 518,986
Amortization 1,157 4,067
Bad debt expense 255,063 427,005
Minority interest 113,902 20,877
Equity in affiliate earnings (21,633) (60,325)
Increase (decrease) relating to operating activities from:
Accounts receivable (1,575,368) (333,089)
Inventories (266,565) 20,638
Prepaid expenses and other current assets 210,881 (341,561)
Accounts payable (216,776) (542,631)
Accrued expenses 469,689 562,668
Income taxes payable --- (393,852)
----------- -----------
Net cash (used in) provided by operating activities (79,434) 383,335
----------- -----------
Investing activities:
Additions to property and equipment, net of minor disposals (654,797) (461,065)
Distributions from affiliate 77,000 ---
Other assets 3,532 (22,029)
Capital contributions by subsidiaries' minority members 141,588 8,570
Loans to physician affiliates (150,000) ---
Purchase of minority interests in subsidiaries (670,000) ---
Acquisition of dialysis center (75,000) (550,000)
----------- -----------
Net cash used in investing activities (1,327,677) (1,024,524)
----------- -----------
Financing activities:
Advances with parent 130,513 102,392
Payments on long-term debt (286,461) (168,441)
Distributions to subsidiaries' minority members (118,655) ---
Exercise of stock options 11,250 ---
----------- -----------
Net cash used in financing activities (263,353) (66,049)
----------- -----------
Decrease in cash and cash equivalents (1,670,464) (707,238)
Cash and cash equivalents at beginning of period 2,571,916 2,479,447
----------- -----------
Cash and cash equivalents at end of period $ 901,452 $ 1,772,209
=========== ===========
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated condensed financial statements include the accounts of
Dialysis Corporation of America and its subsidiaries, collectively referred
to as the "company" or "Dialysis Corporation of America." All material
intercompany accounts and transactions have been eliminated in consolidation.
The company is a 61% owned subsidiary of Medicore, Inc., sometimes referred
to as the "parent." See Note 5.
Government Regulation
A substantial portion of the company's revenues is attributable to
payments received under Medicare, which is supplemented by Medicaid or
comparable benefits in the states in which the company operates.
Reimbursement rates under these programs are subject to regulatory changes
and governmental funding restrictions. Although the company is not aware of
any future rate changes, significant changes in reimbursement rates could
have a material effect on the company's operations. The company believes
that it is presently in compliance with all applicable laws and regulations.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes.
The company's principal estimates are for estimated uncollectible
accounts receivable as provided for in our allowance for doubtful accounts,
estimated useful lives of depreciable assets, estimates for patient revenues
from non-contracted payors, and the valuation allowance for deferred tax
assets based on the estimated realizability of deferred tax assets. Our
estimates are based on historical experience and assumptions believed to be
reasonable given the available evidence at the time of the estimates. Actual
results could differ from those estimates.
Interest and Other Income
Interest and other income is comprised as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Rental income $ 53,245 $ 43,599 $ 97,247 $ 86,169
Interest income 13,051 10,240 25,994 24,121
Management fee income 79,175 42,985 152,235 94,145
Other income 9,197 5,228 20,259 15,411
--------- --------- --------- ---------
$ 154,668 $ 102,052 $ 295,735 $ 219,846
========= ========= ========= =========
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Earnings per Share
Diluted earnings per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options,
calculated using the treasury stock method and average market price.
Following is a reconciliation of amounts used in the basic and diluted
computations:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 219,653 $ 338,654 $ 375,206 $ 500,552
========== ========== ========== ==========
Weighted average shares-denominator basic
computation 3,968,195 3,887,344 3,937,673 3,887,344
Effect of dilutive stock options 381,789 498,898 387,111 467,472
---------- ---------- ---------- ----------
Weighted average shares, as adjusted-
denominator diluted computation 4,349,984 4,386,242 4,324,784 4,354,816
========== ========== ========== ==========
Earnings per share:
Basic $.06 $.09 $.10 $.13
==== ==== ==== ====
Diluted $.05 $.08 $.09 $.11
==== ==== ==== ====
The company's potentially dilutive securities consist of stock options.
See Note 6.
Accrued Expenses
Accrued expenses is comprised as follows:
June 30, December 31,
----------- -----------
2003 2002
---- ----
Accrued compensation $ 689,980 $ 800,318
Due to insurance companies 1,425,032 1,271,235
Insurance premiums payable 318,154 65,544
Other 530,589 456,969
----------- -----------
$ 2,963,755 $ 2,594,066
=========== ===========
Vendor Concentration
The company purchases erythropoietin (EPO) from one supplier which
comprised 36% and 37% of the company's cost of sales for the three months and
six months ended June 30, 2003 and 34% and 33% for the same periods of the
preceding year. There is only one supplier of EPO in the United States
without alternative products available to dialysis treatment providers.
Revenues from the administration of EPO comprised 27% and 28% of medical
services revenue for the three months and six months ended June 30, 2003 and
25% and 24% for the same periods of the preceding year.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Revenue Recognition
The company follows the guidelines of SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB 101). Medical
service revenues are recorded as services are rendered.
Goodwill
Goodwill represents cost in excess of net assets acquired. Pursuant to
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (FAS 142), goodwill and intangible assets with indefinite
lives are no longer amortized but are reviewed annually (or more frequently
if impairment indicators are present) for impairment. Pursuant to the
provisions of FAS 142, the goodwill resulting from the company's acquisition
of minority interests in August 2001 and June 2003 and the goodwill resulting
from the company's acquisition of Georgia dialysis centers in April, 2002 and
April, 2003, are not being amortized for book purposes and are subject to the
annual impairment testing provisions of FAS 142. See Note 8.
Stock-Based Compensation
The company follows the intrinsic method of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for its employee stock options because,
as discussed below, Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" (FAS 123) requires use of option
valuation models that were not developed for use in valuing employee stock
options. FAS 123 permits a company to elect to follow the intrinsic method
of APB 25 rather than the alternative fair value accounting provided under
FAS 123, but requires pro forma net income and earnings per share disclosures
as well as various other disclosures not required under APB 25 for companies
following APB 25. The company has adopted the disclosure provisions required
under Financial Accounting Standards Board Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (FAS 148). Under APB
25, because the exercise price of the company's stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense was recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123 and FAS 148, and has been determined as if the company
had accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for options granted during 2002 and 2001,
respectively and vesting during 2003: risk-free interest rate of 3.73% and
5.40%; no dividend yield; volatility factor of the expected market price of
the company's common stock of 1.15 and 1.14, and a weighted-average expected
life of 5 years and 4 years. See Note 6.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective input assumptions including the
expected stock price volatility. Because the company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. The
company's pro forma information follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $ 219,653 $ 338,654 $ 375,206 $ 500,552
Stock-based employee compensation expense
under fair value method, net of related
tax effects (15,414) (13,306) (30,828) (22,346)
---------- ---------- ---------- ----------
Pro forma net income $ 204,239 $ 325,348 $ 344,378 $ 478,206
========== ========== ========== ==========
Earnings per share:
Basic, as reported $.06 $.09 $.10 $.13
==== ==== ==== ====
Basic, pro forma $.05 $.08 $.09 $.12
==== ==== ==== ====
Diluted, as reported $.05 $.08 $.09 $.11
==== ==== ==== ====
Diluted, pro forma $.05 $.07 $.08 $.11
==== ==== ==== ====
New Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146) which addresses the
accounting and reporting for costs associated with exit or disposal
activities. FAS 146 requires that a liability for a cost associated in an
exit or disposal activity be recognized when the liability is incurred rather
than being recognized at the date of an entity's commitment to an exit plan,
which had been the method of recognition under Emerging Issues Task Force
Issue No. 94-3, which FAS 146 supercedes. FAS 146, which is effective for
exit or disposal activities initiated after December 31, 2002, is not
expected to have a material impact on the company's results of operation,
financial position or cash flows.
In November, 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which elaborates on the
existing disclosure requirements for most guarantees and clarifies that at
the time a company issues a guarantee, it must recognize a liability for the
fair value of the obligations it assumes under the guarantee and must
disclose that information in its interim and annual financial statements.
The disclosure requirements of FIN 45 are effective for financial statements
for periods ending after December 15, 2002. The initial recognition and
measurement provisions of FIN 45 are
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The company does not expect FIN 45 to have a material
impact on its financial position or results of operations.
In December, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (FAS 148), which amends FAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition when voluntarily
changing to the fair value based method of accounting for stock-based
employee compensation. FAS 148 also amends FAS 123 disclosure requirements
to require prominent disclosures in annual and interim financial statements
about the method used to account for stock-based employee compensation and
its effect on results of operations. The company adopted the transition
guidance and annual disclosure provisions of FAS 148 commencing 2002 and has
adopted the interim disclosure provision of FAS 148 commencing 2003. The
company is subject to the expanded disclosure requirements of FAS 148, but
does not expect FAS 148 to otherwise have a material impact on its
consolidated results of operations, financial position or cash flows.
In January, 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated support
from other parties. FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or is entitled to
receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements
apply to variable interest entities created before February 1, 2003, in the
first fiscal year or interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply to financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The company does not expect FIN 46 to have a material impact on
its financial position or results of operations.
In May, 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" (FAS 150), which addresses
how to classify and measure certain financial instruments with
characteristics of both liabilities (or an asset in some circumstances) and
equity. FAS 150 applies to issuers' classification and measurement of
freestanding financial instruments, including those that comprise more than
one option or forward contract. FAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. The company does not expect FAS 150 to have a material impact on
its results of operations financial position or cash flows.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months and six months ended June
30, 2003 and June 30, 2002, are unaudited and include, in the opinion of
management of the company, all adjustments (consisting of normal recurring
accruals) necessary to present fairly the earnings for such periods.
Operating results for the three months and six months ended June 30, 2003,
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 2003.
While the company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these
consolidated condensed financial statements be read in conjunction with the
financial statements and notes included in the company's audited financial
statements for the year ended December 31, 2002.
NOTE 3--LONG-TERM DEBT
The company through its subsidiary, DCA of Vineland, LLC, pursuant to
a December 3, 1999 loan agreement obtained a $700,000 development loan with
interest at 8.75% through December 2, 2001, 11/2% over the prime rate
thereafter through December 15, 2002 and 1% over prime thereafter secured by
a mortgage on the company's real property in Easton, Maryland. Outstanding
borrowings were subject to monthly payments of interest only through December
2, 2001, with monthly payments thereafter of $2,917 principal plus interest
through December 2, 2002, and monthly payments thereafter of $2,217 plus
interest with any remaining balance due December 2, 2007. This loan had an
outstanding principal balance of $649,000 at June 30, 2003, and $662,000 at
December 31, 2002.
In April, 2001, the company obtained a $788,000 five-year mortgage
through April, 2006, on its building in Valdosta, Georgia with interest at
8.29% until March, 2002, 7.59% thereafter until December 16, 2002, and prime
plus 1/2% with a minimum of 6.0% effective December 16, 2002. Payments are
$6,800 including principal and interest having commenced May, 2001, with a
final payment consisting of a balloon payment and any unpaid interest due
April, 2006. The remaining principal balance under this mortgage amounted to
approximately $734,000 at June 30, 2003, and $753,000 at December 31, 2002.
The equipment purchase agreement provides financing for kidney dialysis
machines for the company's dialysis facilities. Payments under the agreement
are pursuant to various schedules extending through August, 2007, with
interest at rates ranging from 4.14% to 10.48%. Financing under the
equipment purchase agreement is a noncash financing activity which is a
supplemental disclosure required by Financial Accounting Standards Board
Statement No. 95, "Statement of Cash Flows." The remaining principal balance
under this financing amounted to approximately $1,589,000 at June 30, 2003,
and $1,844,000 at December 31, 2002.
The prime rate was 4.00% as of June 30, 2003, and 4.25% as of December
31, 2002.
Interest payments on debt amounted to approximately $42,000 and $86,000
for the three months and six months ended June 30, 2003, and $31,000 and
$77,000 for the same periods of the preceding year.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE 4--INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
For financial reporting purposes, a valuation allowance has been recognized
to offset a portion of the deferred tax assets.
Income tax payments amounted to approximately $139,000 and $336,000 for
the three months and six months ended June 30, 2003, and $122,000 and
$665,000 for the same periods of the preceding year.
NOTE 5--TRANSACTIONS WITH PARENT
The parent provides certain financial and administrative services to the
company. Central operating costs are charged on the basis of time spent.
The amount of expenses allocated by the parent totaled approximately $50,000
and $100,000 for the three months and six months ended June 30, 2003, and for
the same periods of the preceding year.
The company had an intercompany advance payable to the parent of
approximately $131,000 at June 30, 2003 which bears interest at the short-
term Treasury Bill rate. Interest is included in the intercompany advance
balance. The company's parent has agreed not to require repayment of the
intercompany advance balance prior to July 1, 2004; therefore, the advance
has been classified as long-term at June 30, 2003.
During the period January, 2000 through December, 2002, the company made
various loans to its parent which funds were loaned by the parent to Linux
Global Partners, Inc., a private company investing in Linux software
companies and recently having initiated the development and marketing of a
Linux desktop software system. We extended the maturity of the loans to our
parent, as our parent did with Linux Global Partners, in consideration for
which we received shares of common stock of Linux Global Partners. Our
ownership in Linux Global Partners is approximately 2%. In May and June
2001, our parent repaid the outstanding loans and accrued interest due to us.
NOTE 6--STOCK OPTIONS
In June, 1998, the board of directors granted an option under the now
expired 1995 Stock Option Plan to a board member for 5,000 shares exercisable
at $2.25 per share through June 9, 2003. This option was exercised in June,
2003.
In April, 1999, the company adopted a stock option plan pursuant to
which the board of directors granted 800,000 options exercisable at $1.25 per
share to certain of its officers, directors, employees and consultants with
340,000 options exercisable through April 20, 2000 and 460,000 options
exercisable through April 20, 2004, of which 60,000 options to date have been
cancelled. In April, 2000, the 340,000 one-year options were exercised for
which the company received cash payment of the par value amount of $3,400 and
the balance in three-year promissory notes with the interest at 6.2% and
which maturity was extended to April 20, 2004. In March, 2003, 77,857 of
these options were exercised with the exercise price satisfied by director
bonuses accrued in 2002, leaving 322,143 options outstanding as of June 30,
2003.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE 6--STOCK OPTIONS--Continued
In January, 2001, the company's board of directors granted to the
company's President a five-year option for 165,000 shares exercisable at
$1.25 per share with 99,000 options vested at January, 2003 and 33,000
options vesting January 1 for each of the next two years.
In September, 2001, the board of directors granted 75,000 five-year
options exercisable at $1.50 per share through September 5, 2006, to certain
officers, directors and key employees. 15,000 of the options vested
immediately with the remaining 60,000 options to vest 15,000 options each
September 5, having commenced September 5, 2002. In March, 2003, 1,785 of
these options were exercised with the exercise price satisfied by director
bonuses accrued in 2002, leaving 73,215 options outstanding as of June 30,
2003.
In March, 2002, the board of directors granted a five-year option for
30,000 shares exercisable at $3.15 per share through February 28, 2007, to an
officer. The option vests for 7,500 shares each February 28 from 2003
through 2006.
In May, 2002, the board of directors granted 10,500 five-year options to
employees of which 6,500 remain outstanding at June 30, 2003. Most options
are for 500 shares of common stock of the company, with one option for 1,500
shares. These options are exercisable at $4.10 per share through May 28,
2007, with all options vesting on May 29, 2004. Options for 4,000 shares
have been cancelled.
In June, 2003, the board of directors granted a five-year option to an
officer for 25,000 shares exercisable at $3.60 per share through June 3,
2008. The option vests for 6,250 shares each June 4 from 2004 to 2007.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Effective January 1, 1997, the company established a 401(k) savings plan
(salary deferral plan) with an eligibility requirement of one year of service
and 21 year old age requirement. The company made no contributions under
this plan. The company and its parent established a new 401(k) plan
effective January, 2003, which allows employees, in addition to regular
employee contributions, to elect to have a portion of bonus payments
contributed. As an incentive to save for retirement, the company will match
10% of an employee's contribution.
NOTE 8--ACQUISITIONS
In August, 2001, the company acquired the 30% minority interest in one
of its Georgia dialysis centers, giving the company a 100% ownership
interest in that subsidiary. 50% of the purchase price was paid in August,
2001 with the balance paid in August, 2002. This transaction resulted in
$523,000 of goodwill representing the excess of the purchase price over the
fair value of the assets acquired. The goodwill is being amortized for tax
purposes over a 15-year period. The company's decision to make this
investment was based largely on the expectation of continued profitability of
this center. The party from whom the company acquired the minority interest
is the medical director of another of the company's subsidiaries. See Note
1.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)
NOTE 8--ACQUISITIONS--Continued
In April, 2002, the company acquired a Georgia dialysis center. This
transaction resulted in $400,000 of goodwill representing the excess of the
purchase price over the fair value of the assets acquired. The goodwill is
being amortized for tax purposes over a 15-year period. The company's
decision to make this investment was based on its expectation of future
profitability resulting from its review of this dialysis center's operations
prior to making the acquisition. See Note 1.
During the second quarter of 2003, the company acquired the assets of a
Georgia dialysis center and the 30% minority interests in two of its Georgia
dialysis centers for a total consideration of $1,415,000, of which $745,000
was paid and $670,000 is payable in June, 2004. These acquisitions resulted
in $1,368,000 of goodwill, representing the excess of the purchase price over
the fair value of the net assets acquired. The goodwill is being amortized
for tax purposes over a 15-year period. The company's decision to make these
acquisitions was based on the expectation of profitability resulting from
management's evaluation of these dialysis centers' operations. The party from
whom the 30% minority interests were purchased was the medical director of
one of the facilities and is the medical director of three other of the
company's Georgia dialysis facilities. See Note 1.
NOTE 9--RELATED PARTY TRANSACTIONS
The 20% minority interest in DCA of Vineland, LLC was held by a company
owned by the medical director of that facility, who became a director of our
company in 2001. This physician was provided with the right to acquire up
to 49% of DCA of Vineland, LLC. In April, 2000, another company owned by
this physician acquired an interest in DCA of Vineland, resulting in our
company holding a 51.3% interest in DCA of Vineland and this physician's
companies holding a combined 48.7% ownership of DCA of Vineland. See Note
10.
In July, 2000, one of the companies owned by this physician acquired a
20% interest in DCA of Manahawkin, Inc. (formerly known as Dialysis Services
of NJ, Inc. - Manahawkin). Under agreements with DCA of Vineland and DCA of
Manahawkin, this physician serves as medical director for each of those
dialysis facilities.
NOTE 10--LOAN TRANSACTIONS
The company customarily funds the establishment and operations of its
dialysis facilities, usually until they become self-sufficient, without any
formalized loan documents, except in limited instances, including
subsidiaries in which our medical directors hold interests ranging from 20%
to 49%. The operating agreements for our subsidiaries provide for cash flow
and other proceeds to first pay any such financing provided by the company,
exclusive of any tax payment distributions. One loan is with DCA of
Vineland, LLC. In April, 2000, a company owned by our Vineland medical
director acquired an interest in DCA of Vineland, LLC for $203,000, which was
applied to reduce the loan, which loan at June 30, 2003 reflected a principal
indebtedness of approximately $482,000. See Note 9.
Item 2. 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
condensed financial statements, including the notes, contained in this
Quarterly Report on Form 10-Q.
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q 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 the 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 MD&A. Words such
as "anticipate," "estimate," "expects," "projects," "intends," "plans" and
"believes" and such words and terms of similar substance used in connection
with any discussions of future operations 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 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 (Item 1, "Business") included in our
Annual Report on Form 10-K, as filed with the SEC and provided to our
shareholders. If any such events occur or circumstances arise that we have
not assessed, they could have a material adverse effect upon our revenues,
earnings, financial condition and business, as well as the trading price of
our common stock, which could adversely affect your investment in the
company. Accordingly, readers are cautioned not to place undue 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.
Dialysis Corporation of America provides dialysis services, primarily
kidney dialysis treatments through 16 outpatient dialysis centers, including
one in which it holds a minority interest and one unaffiliated dialysis
facility which it manages. Our company also, through 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 to dialysis patients of
EPO, a drug used in connection with dialysis to treat anemia.
A substantial portion of our medical service revenues are derived from
Medicare and Medicaid reimbursement with rates established by the Center for
Medicare and Medicaid Services ("CMS"), and which rates are subject to
legislative changes. Medicare rates have slightly increased, but 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. We have a Corporate Integrity
Program to assure our company provides the highest level of patient care and
services in a professional and ethical manner consistent with applicable
federal and state laws and regulations.
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 these new potential dialysis centers at costs
within our budget while competing with larger companies, some of which are
public companies or divisions of public companies with more personnel and
financial resources, in acquiring and/or developing facilities in areas
targeted by us. Additionally, there is intense competition 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 dialysis stations, or patient treatments such may involve, or if such will
ultimately be profitable.
Results of Operations
Medical service revenues increased approximately $1,108,000 (18%) and
$2,358,000(20%)for the three months and six months ended June 30, 2003,
compared to the same periods of the preceding year. This increase includes
increased revenues of our Pennsylvania dialysis centers of approximately
$499,000 and $1,237,000, decreased revenues of approximately $7,000 and
$110,000 for our New Jersey centers reflecting termination in 2002 of our two
New Jersey acute care contracts; increased revenues of approximately $58,000
and $627,000 for our Georgia centers, $409,000 and $456,000 revenues for our
new Maryland center and $149,000 and $175,000 revenues for our new Ohio
center. Revenues for the prior year included $27,000 consulting fees during
the first quarter of 2003.
Interest and other income increased by approximately $53,000 and $76,000
for the three months and six months ended June 30, 2003, compared to the same
periods of the preceding year. This increase includes: increases in interest
income of $3,000 and $2,000; increases in management fee income of $36,000
and $58,000 pursuant to a management services agreement with our 40% owned
Toledo, Ohio affiliate and an unaffiliated Georgia center with which we
entered a management services agreement effective September, 2002; increases
in rental income of $10,000 and $11,000; and increases in miscellaneous other
income of $4,000 and $5,000. See Note 1 to "Notes to Consolidated Condensed
Financial Statements."
Cost of medical services as a percentage of medical service revenue
increased to 61% and 62% for the three months and six months ended June 30,
2003 compared to 59% and 60% for the same periods of the preceding year
largely due to costs related to treatments at new centers prior to Medicare
approval for which there are no corresponding medical service revenues.
Approximately 27% and 28% of our medical services revenues for the three
months and six months ended June 30, 2003, and 25% and 24% for the same
periods of the preceding year, were from the administration of EPO to our
patients. This
drug is only available from one manufacturer in the United States which
raised its price for the product in January, 2003. Continued price increases
for this product without our ability to increase our charges will increase
our costs and thereby adversely impact our earnings. We cannot predict the
price increases, if any, or the extent of such by the manufacturer, or our
ability to offset any such increases.
Selling, general and administrative expenses, increased by approximately
$527,000 and $944,000 for the three months and six months ended June 30,
2003, compared to the same periods of the preceding year. This increase
reflects operations of our new dialysis centers in Maryland and Ohio and the
Georgia dialysis center we acquired in April, 2003, as well as increased
support activities resulting from expanded operations. Selling, general and
administrative expenses, as a percent of medical service revenues amounted to
approximately 32% for the three months and six months ended June 30, 2003,
and 29% and 30% for the same periods of the preceding year which includes
expenses of new centers incurred prior to Medicare approval for which there
are no corresponding medical service revenues.
Provision for doubtful accounts decreased approximately $82,000 and
$172,000 for the three months and six months ended June 30, 2003, compared to
the same periods of the preceding year. The provision amounted to 2% of
sales for the three months and six months ended June 30, 2003, compared to 4%
for the same periods of the preceding year. This change reflects our
collection experience with the impact of that experience included in accounts
receivable presently reserved plus recovery of uncollectible accounts from
our Medicare cost report filings. The provision for doubtful accounts is
determined under a variety of criteria, primarily aging of the receivables
and payor mix. Accounts receivable are estimated to be uncollectible based
upon various criteria including the age of the receivable, historical
collection trends and our understanding of the nature and collectibility of
the receivables with doubtful accounts reserved for in the allowance for
doubtful accounts until they are written off or collected.
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. We opened our 13th and 14th dialysis centers in Cincinnati,
Ohio and Chevy Chase, Maryland in February, 2003. We acquired a dialysis
center in Adel, Georgia in April, 2003, and ceased operations at our
Homerville, Georgia center, which had not been performing up to expectations.
These new centers, as anticipated, have adversely impacted net income for the
three month and six month periods ended June 30, 2003. As we progress with
new dialysis centers, presently five in the initial development stages of
which one is under construction, we expect growth in revenues, but a negative
short term effect on net income based on expenses and development stage
issues. Also negatively impacting net income was an atypical occurrence of
closing a dialysis center in Homerville, Georgia.
Interest expense decreased by approximately $6,000 for the three months
and six months ended June 30, 2003, compared to the same periods of the
preceding year, reflecting lower interest rates on variable rate debt and
reduced average borrowings.
The prime rate was 4.00% at June 30, 2003, and 4.25% at December 31,
2002.
Equity in affiliate earnings represents equity in the results of
operations of our Ohio affiliate, in which we have a 40% ownership interest.
Liquidity and Capital Resources
Working capital totaled $3,427,000 at June 30, 2003, which reflected a
decrease of approximately $1,165,000 (25%) during the six months ended June
30, 2003. Included in the changes in components of working capital was a
decrease in cash and cash equivalents of $1,671,000, including net cash used
in operating activities of $79,000, net cash used in investing activities of
$1,328,000 (including additions to property and equipment of $655,000,
subsidiary minority acquisition payments to a member for a 30% interest each
in two dialysis facilities, who is also a medical director of three of our
dialysis facilities, a $75,000 payment for acquisition of a dialysis center,
$150,000 loans to physician affiliates, $142,000 capital contribution by
subsidiary minority members and $77,000 distributions received from the
company's 40% owned Ohio affiliate), and net cash used in financing
activities of $263,000 (including an increase in advances payable to our
parent of $131,000, debt repayments of $286,000 and $119,000 distributions to
a subsidiary minority member who is also medical director of two of our
dialysis facilities and a director of the company).
Our Easton, Maryland building has a mortgage to secure a three-year
$700,000 loan for development of our Vineland, New Jersey subsidiary. This
loan, which is guaranteed by the company, had an outstanding balance of
$649,000 at June 30, 2003 and $662,000 at December 31, 2002. In April, 2001,
we obtained a $788,000 five-year mortgage on our building in Valdosta,
Georgia, which had an outstanding balance of $734,000 at June 30, 2003 and
$753,000 at December 31, 2002. We have an equipment financing agreement for
kidney dialysis machines for our facilities, which had an outstanding balance
of approximately $1,589,000 at June 30, 2003, and $1,844,000 at December 31,
2002. See Note 3 to "Notes to Consolidated Condensed Financial Statements."
Capital is needed primarily for the development of outpatient dialysis
centers. The construction of a 15 station facility, typically the size of our
dialysis facilities, costs in the range of $600,000 to $750,000 depending on
location, size and related services to be provided, which includes equipment
and initial working capital requirements. Acquisition of an existing dialysis
facility is more expensive than construction, although acquisition would
provide us with an immediate ongoing operation, which most likely would be
generating income. We presently plan to expand our operations primarily
through construction of new centers, rather than acquisition. Development of
a dialysis facility to initiate operations takes four to six months and
usually up to 12 months or longer to generate income. We consider some of
our centers to be in the developmental stage, since they have not developed a
patient base sufficient to generate and sustain earnings.
We are seeking to expand our outpatient dialysis treatment facilities
and inpatient dialysis care. We are presently developing a new center in
Virginia, in the process of completing leases for new dialysis facilities in
Georgia, Maryland and Pennsylvania, and are in different phases of
negotiations with physicians for additional outpatient centers, as well as
contract negotiations with hospitals for inpatient dialysis services. Such
expansion requires capital. Although we presently have the capital and
financing capabilities for the current rate of expansion, no assurance can be
given that we will be successful in implementing our growth strategy or that
financing will be available to support such expansion.
We believe that current levels of working capital and available
financing alternatives will enable us to meet our liquidity demands for at
least the next 12 months as well as expand our dialysis facilities and
thereby our patient base.
New Accounting Pronouncements
In June, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, " Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146). FAS 146, which is
effective for exit or disposal activities initiated after December 31, 2002,
is not expected to have a material impact on the company's results of
operation, financial position or cash flows. See Note 1 to "Notes to
Consolidated Condensed Financial Statements."
In November, 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which is effective for
periods ending after December 15, 2002. The company does not expect FIN 45
to have a material impact on its financial position or results of operations.
See Note 1 to "Notes to Consolidated Condensed Financial Statements."
In December, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" (FAS 148), which amends FAS 123, "Accounting for Stock-Based
Compensation," transition requirements when voluntarily changing to the fair
value based method of accounting for stock-based compensation and also amends
FAS 123 disclosure requirements. FAS 148 is not expected to have a material
impact on the company's results of operations, financial position or cash
flows. See Note 1 to "Notes to Consolidated Condensed Financial Statements."
In January, 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46), for which certain disclosure
requirements apply to financial statements issued after January 31, 2003.
FIN 46 contains consolidation requirements regarding variable interest
entities which are applicable depending on when the variable interest entity
was created. The company does not expect FIN 46 to have a material impact on
its financial position or results of operations. See Note 1 to "Notes to
Consolidated Condensed Financial Statements."
In May, 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" (FAS 150), which is effective
for financial instruments entered into or modified after May 31, 2003. The
company does not expect FAS 150 to have a material impact on its results of
operations, financial position or cash flows. See Note 1 to "Notes to
Consolidated Condensed Financial Statements."
Critical Accounting Policies
In December, 2001, the SEC issued a cautionary advice to elicit more
precise disclosure in this Item 2, MD&A, about accounting policies management
believes are most critical in portraying the company's financial results and
in requiring management's most difficult subjective or complex judgments.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make judgments and estimates. On an on-going basis, we
evaluate our estimates, the most significant of which include establishing
allowances for doubtful accounts, a valuation allowance for our deferred tax
assets and determining the recoverability of our long-lived assets. The
basis for our estimates are historical experience and various assumptions
that are believed to be reasonable under the circumstances, given the
available information at the time of the estimate, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily available from other sources. Actual
results may differ from the amounts estimated and recorded in our financial
statements.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition: Revenues are recognized as services are rendered.
We receive payments through reimbursement from Medicare and Medicaid for our
outpatient dialysis treatments coupled with patients' private payments,
individually and through private third-party insurers. A substantial portion
of our revenues are derived from the Medicare ERSD program, which outpatient
reimbursement rates are fixed under a composite rate structure, which
includes the dialysis services and certain supplies, drugs and laboratory
tests. Certain of these ancillary services are reimbursable outside of the
composite rate. Medicaid reimbursement is similar and supplemental to the
Medicare program. Our acute inpatient dialysis operations are paid under
contractual arrangements, usually at higher contractually established rates,
as are certain of the private pay insurers for outpatient dialysis.
Allowance for Doubtful Accounts: We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our patients or
their insurance carriers to make required payments. Based on historical
information, we believe that our allowance is adequate. Changes in general
economic, business and market conditions could result in an impairment in the
ability of our patients and the insurance companies to make their required
payments, which would have an adverse effect on cash flows and our results of
operations. The allowance for doubtful accounts is reviewed monthly and
changes to the allowance are updated based on actual collection experience.
We use a combination of percentage of sales and the aging of accounts
receivable to establish an allowance for losses on accounts receivable.
Valuation Allowance for Deferred Tax Assets: The carrying value of
deferred tax assets assumes that we will be able to generate sufficient
future taxable income to realize the deferred tax assets based on estimates
and assumptions. If these estimates and assumptions change in the future, we
may be required to adjust our valuation allowance for deferred tax assets
which could result in additional income tax expense.
Long-Lived Assets: We state our property and equipment at acquisition
cost and compute depreciation for book purposes by the straight-line method
over estimated useful lives of the assets. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived
assets are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to the future cash flows
expected to be generated by the asset. If the carrying amount of the asset
exceeds its estimated future cash flows, an impairment charge is recognized
to the extent the carrying amount of the asset exceeds the fair value of the
asset. These computations are complex and subjective.
Goodwill and Intangible Asset Impairment: In assessing the
recoverability of our goodwill and other intangibles we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. This impairment test requires the
determination of the fair value of the intangible asset. If the fair value
of the intangible asset is less than its carrying value, an impairment loss
will be recognized in an amount equal to the difference. If these estimates
or their related assumptions change in the future, we may be required to
record impairment changes for these assets. We adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," (FAS 142) effective January 1, 2002, and are required to analyze
goodwill and indefinite lived intangible assets for impairment on at least an
annual basis.
Impact of Inflation
Inflationary factors have not had a significant effect on our
operations. A substantial portion of our revenue is subject to reimbursement
rates established and regulated by the federal government. These rates do not
automatically adjust for inflation. Any rate adjustments relate to
legislation and executive and Congressional budget demands, and have little
to do with the actual cost of doing business. Therefore, dialysis services
revenues cannot be voluntary increased to keep pace with increases in nursing
and other patient care costs. Increased operating costs without a
corresponding increase in reimbursement rates may adversely affect our
earnings in the future.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- ------ ----------------------------------------------------------
We do not consider our exposure to market risks, principally changes in
interest rates, to be significant.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in interest
bearing accounts of which we held approximately $760,000 at June 30, 2003.
Interest rate risk on debt is managed by negotiation of appropriate
rates for equipment financing and other fixed rate obligations based on
current market rates. There is an interest rate risk associated with our
variable rate mortgage obligations, which totaled $1,384,000 at June 30,
2003.
We have exposure to both rising and falling interest rates. Assuming a
relative 15% decrease in rates on our period-end investments in interest
bearing accounts and a relative 15% increase in rates on our period-end
variable rate mortgage debt would result in a negative impact of
approximately $4,000 on our results of operations for the first half of 2003.
Item 4. Controls and Procedures
- ------ -----------------------
As of the end of the period of this quarterly report on Form 10-Q for
the second quarter ended June 30, 2003, management carried out an evaluation,
under the supervision and with the participation of our Chief Executive
Officer and President, and Daniel R. Ouzts, our Vice President of Finance and
Principal Financial Officer, of the effectiveness of the design and operation
of the company's disclosure controls and procedures pursuant to Rule 13a-15
of the Securities Exchange Act of 1934 (the "Exchange Act"). Mr. Ouzts
replaced Tim Rumrill as Vice President (Finance) and Principal Financial
Officer upon Mr. Rumrill's resignation on July 31, 2003 to pursue other
interests. Mr. Ouzts held those positions with the company since 1996 until
Mr. Rumrill joined the company in 2002. Mr. Ouzts, a certified public
accountant, serves as Vice President (Finance) and Principal Financial
Officer of the company's public parent, Medicore, Inc. The disclosure
controls and procedures are designed to ensure that information required to
be disclosed by a company in the reports that it files under the Exchange
Act, as is this quarterly report on Form 10-Q, is recorded, processed,
summarized and reported within required time periods specified by the SEC's
rules and forms. Based upon that evaluation, the Chief Executive Officer and
President, and Vice President of Finance and Principal Financial Officer
concluded that the company's disclosure controls and procedures are effective
in timely alerting them to material information relating to the company,
including its consolidated subsidiaries, required to be included in the
company's periodic SEC filings.
There were no significant changes in our internal controls over
financial reporting during our most recent fiscal quarter or in other factors
that have materially affected or are reasonably likely to materially affect,
internal controls over financial reporting, including any corrective actions
with regard to significant deficiencies and material weaknesses, of which
there were none.
PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K.
- ------ ---------------------------------
(a) Exhibits
(31) Rule 13a-14(a)/15d-14(a) Certifications
(i) Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.
(ii) Certification of the Principal Financial Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934.
(32) Section 1350 Certifications
(i) Certification of Chief Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
Current Reports on Form 8-K were filed as follows:
(i) April 19, 2003, Item 5, "Other Events and Required FD
Disclosures" as to acquisition of assets for new dialysis
center (no financial statements).
(ii) June 13, 2003, Item 5, "Other Events and Required FD
Disclosures" as to appointment of new Chief Executive Officer
(no financial statements).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIALYSIS CORPORATION OF AMERICA
/s/ DANIEL R. OUZTS
By:---------------------------------
DANIEL R. OUZTS, Vice President,
Finance, Principal Financial
Officer
Dated: August 13, 2003
EXHIBIT INDEX
Exhibit No.
- -----------
(31) Rule 13a-14(a)/15d-14(a) Certifications
(i) Certification of the Chief Executive Officer pursuant to Rule 13a-
14(a) of the Securities Exchange Act of 1934.
(ii) Certification of the Principal Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
(32) Section 1350 Certifications
(i) Certification of Chief Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350.
Exhibit (31)(i)
CERTIFICATION
I, Stephen W. Everett, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter
ended June 30, 2003 of Dialysis Corporation of America;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and internal weaknesses in the
design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Stephen W. Everett
Date: August 13, 2003 -------------------------------------
STEPHEN W. EVERETT, Chief Executive Officer
and President
Exhibit (31)(ii)
CERTIFICATION
I, Daniel R. Ouzts, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter
ended June 30, 2003 of Dialysis Corporation of America;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and internal weaknesses in the
design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Daniel R. Ouzts
Date: August 13, 2003 -------------------------------------
DANIEL R. OUZTS, Principal Financial Officer
Exhibit 99(i)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934 AND
18 U.S.C. SECTION 1350
In connection with the Quarterly Report of Dialysis Corporation of
America (the "Company") on Form 10-Q for the second quarter ended June 30,
2003 as filed with the Securities and Exchange Commission on the date therein
specified (the "Report"), the undersigned, Stephen W. Everett, Chief
Executive Officer and President of the Company, and Daniel R. Ouzts, Vice
President (Finance) and Principal Financial Officer of the Company, each
certify pursuant to 18 U.S.C. Section 1350, that to the best of our
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Stephen W. Everett
------------------------------------
STEPHEN W. EVERETT, Chief Executive Officer
and President
/s/ Daniel R. Ouzts
------------------------------------
DANIEL R. OUZTS, Vice President (Finance)
and Principal Financial Officer
Dated: August 13, 2003