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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 September 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 - 3,961,272 shares as of October 31, 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 nine months ended September 30, 2003 and September 30, 2002
include the accounts of the Registrant and its subsidiaries.
Item 1. Financial Statements
- ------ --------------------
1) Consolidated Condensed Statements of Income (Unaudited) for the three
months and nine months ended September 30, 2003 and September 30,
2002.
2) Consolidated Condensed Balance Sheets as of September 30, 2003
(Unaudited) and December 31, 2002.
3) Consolidated Condensed Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 2003 and September 30, 2002.
4) Notes to Consolidated Condensed Financial Statements as of September
30, 2003 (Unaudited).
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
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PART II -- OTHER INFORMATION
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Item 5. 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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Medical service revenue $ 7,535,530 $ 6,698,140 $21,697,427 $18,501,663
Interest and other income 151,291 102,785 447,026 322,631
----------- ----------- ----------- -----------
7,686,821 6,800,925 22,144,453 18,824,294
Cost and expenses:
Cost of medical services 4,706,470 3,980,171 13,425,840 11,091,883
Selling, general and administrative
expenses 2,338,831 1,928,233 6,865,087 5,510,121
Provision for doubtful accounts 3,425 183,655 258,488 610,660
Interest expense 50,624 55,446 155,741 167,284
----------- ----------- ----------- -----------
7,099,350 6,147,505 20,705,156 17,379,948
----------- ----------- ----------- -----------
Income before income taxes, minority
interest and equity in affiliate
earnings (loss) 587,471 653,420 1,439,297 1,444,346
Income tax provision 230,920 228,308 615,271 558,130
----------- ----------- ----------- -----------
Income before minority interest and
equity in affiliate earnings (loss) 356,551 425,112 824,026 886,216
Minority interest in income of
consolidated subsidiaries 57,027 29,795 170,929 50,672
Equity in affiliate earnings (loss) 8,687 (2,232) 30,320 58,093
----------- ----------- ----------- -----------
Net income $ 308,211 $ 393,085 $ 683,417 $ 893,637
=========== =========== =========== ===========
Earnings per share:
Basic $.08 $.10 $.17 $.23
==== ==== ==== ====
Diluted $.07 $.09 $.16 $.21
==== ==== ==== ====
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
2003 2002(A)
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,721,384 $ 2,571,916
Accounts receivable, less allowance
of $733,000 at September 30, 2003;
$831,000 at December 31, 2002 4,437,415 3,515,958
Inventories 1,014,149 877,058
Deferred income taxes 392,000 392,000
Prepaid expenses and other current assets 1,550,833 1,735,001
----------- -----------
Total current assets 9,115,781 9,091,933
----------- -----------
Property and equipment:
Land 376,211 376,211
Buildings and improvements 2,333,024 2,322,663
Machinery and equipment 5,873,518 5,232,632
Leasehold improvements 2,990,718 2,712,953
----------- -----------
11,573,471 10,644,459
Less accumulated depreciation and amortization 4,736,061 3,877,738
----------- -----------
6,837,410 6,766,721
----------- -----------
Goodwill 2,291,333 923,140
Other assets 636,478 372,190
----------- -----------
Total other assets 2,927,811 1,295,330
----------- -----------
$18,881,002 $17,153,984
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,088,639 $ 1,373,190
Accrued expenses 3,021,396 2,594,066
Current portion of long-term debt 602,000 532,000
Payable subsidiaries' minority interests acquisition 670,000 ---
----------- -----------
Total current liabilities 5,382,035 4,499,256
Long-term debt, less current portion 2,237,832 2,727,105
Advances from parent 183,302 ---
Deferred income taxes 28,000 28,000
Minority interest in subsidiaries 569,708 172,165
----------- -----------
Total liabilities 8,400,877 7,426,526
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000 shares:
3,961,272 shares issued and outstanding at September 30, 2003;
3,887,344 shares issued and outstanding at December 31,2002 39,613 38,873
Capital in excess of par value 5,255,090 5,186,580
Retained earnings 5,607,022 4,923,605
Notes receivable from options exercised (421,600) (421,600)
----------- -----------
Total stockholders' equity 10,480,125 9,727,458
----------- -----------
$18,881,002 $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)
Nine Months Ended
September 30,
-------------------------
2003 2002
---- ----
Operating activities:
Net income $ 683,417 $ 893,637
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 877,431 794,821
Amortization 1,735 3,485
Bad debt expense 258,487 610,659
Minority interest 170,929 50,672
Equity in affiliate earnings (30,320) (58,093)
Increase (decrease) relating to operating activities from:
Accounts receivable (1,179,944) (512,618)
Inventories (137,091) (135,159)
Prepaid expenses and other current assets 178,314 (405,433)
Accounts payable (284,551) (773,341)
Accrued expenses 527,330 962,662
Income taxes payable --- (343,761)
----------- -----------
Net cash provided by operating activities 1,065,737 1,087,531
----------- -----------
Investing activities:
Additions to property and equipment, net of minor disposals (920,134) (514,817)
Investment in affiliate --- (8,000)
Distributions from affiliate 77,000 ---
Other assets 4,859 (20,548)
Capital contributions by subsidiaries' minority members 202,382 8,570
Loans to physician affiliates (150,000) ---
Purchase of minority interests in subsidiaries (670,000) (300,000)
Acquisition of dialysis center (75,000) (550,000)
----------- -----------
Net cash used in investing activities (1,530,893) (1,384,795)
----------- -----------
Financing activities:
Advances with parent 183,302 153,211
Payments on long-term debt (419,273) (248,429)
Distributions to subsidiaries' minority members (118,655) ---
Repurchase of stock (42,000) ---
Exercise of stock options 11,250 ---
----------- -----------
Net cash used in financing activities (385,376) (95,218)
----------- -----------
Decrease in cash and cash equivalents (850,532) (392,482)
Cash and cash equivalents at beginning of period 2,571,916 2,479,447
----------- -----------
Cash and cash equivalents at end of period $ 1,721,384 $ 2,086,965
=========== ===========
See notes to consolidated condensed financial statements.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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," "Dialysis Corporation of America," "we," "us" or "our."
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 our revenues is attributable to payments
received under Medicare, which is supplemented by Medicaid or comparable
benefits in the states in which we operate. Reimbursement rates under these
programs are subject to regulatory changes and governmental funding
restrictions. Although we are not aware of any future rate changes,
significant changes in reimbursement rates could have a material effect on
our operations.
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.
Our 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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Rental income $ 46,531 $ 44,029 $ 143,778 $ 130,198
Interest income 14,235 11,217 40,229 35,338
Management fee income 81,581 40,884 233,816 135,029
Other income 8,944 6,655 29,203 22,066
---------- ---------- ---------- ----------
$ 151,291 $ 102,785 $ 447,026 $ 322,631
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 308,211 $ 393,085 $ 683,417 $ 893,637
Weighted average shares-denominator
basic computation 3,967,794 3,887,344 3,947,824 3,887,344
Effect of dilutive stock options 410,137 423,306 394,527 452,750
---------- --------- ---------- -----------
Weighted average shares, as adjusted-
denominator diluted computation 4,377,931 4,310,650 4,342,351 4,340,094
========== ========== ========== ==========
Earnings per share:
Basic $.08 $.10 $.17 $.23
==== ==== ==== ====
Diluted $.07 $.09 $.16 $.21
==== ==== ==== ====
The company's potentially dilutive securities consist of stock options.
See Note 6.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets is comprised as follows:
September 30, December 31,
2003 2002
----------- -----------
Vendor volume discounts receivable $ 532,602 $ 321,302
Officer and employee loans receivable 106,532 104,931
Property to be sold --- 778,561
Prepaid expenses 559,242 318,839
Other 352,457 211,368
----------- -----------
$ 1,550,833 $ 1,735,001
=========== ===========
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Accrued Expenses
Accrued expenses is comprised as follows:
September 30, December 31,
2003 2002
----------- -----------
Accrued compensation $ 784,432 $ 800,318
Due to insurance companies 1,536,101 1,271,235
Insurance premiums payable 221,660 65,544
Other 479,203 456,969
---------- ----------
$3,021,396 $2,594,066
========== ==========
Vendor Concentration
We purchase erythropoietin (EPO) from one supplier which comprised 37%
of our cost of sales for the three months and nine months ended September 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 28% of medical services revenue for the three months and
nine months ended September 30, 2003 and 27% and 25% for the same periods of
the preceding year.
Revenue Recognition
We follow 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 Board Statement 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 our acquisition of minority interests in August, 2001 and June, 2003,
and the goodwill resulting from our 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
We follow the intrinsic method of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for our 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
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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. We have 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 our 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 we had
accounted for our 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 our common
stock of 1.15 and 1.14, and a weighted-average expected life of 5 years and 4
years. See Note 6.
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 our 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 our employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. Our pro
forma information follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $ 308,211 $ 393,085 $ 683,417 $ 893,637
Stock-based employee compensation expense
under fair value method, net of related
tax effects (16,799) (15,414) (47,758) (37,760)
---------- ---------- ---------- ----------
Pro forma net income $ 291,412 $ 377,671 $ 635,659 $ 855,877
========== ========== ========== ==========
Earnings per share:
Basic, as reported $.08 $.10 $.17 $.23
==== ==== ==== ====
Basic, pro forma $.07 $.10 $.16 $.22
==== ==== ==== ====
Diluted, as reported $.07 $.09 $.16 $.21
==== ==== ==== ====
Diluted, pro forma $.07 $.09 $.15 $.20
==== ==== ==== ====
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.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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 our 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 applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. We do not expect FIN
45 to have a material impact on our 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. We adopted the transition guidance and
annual disclosure provisions of FAS 148 commencing 2002 and have adopted the
interim disclosure provision of FAS 148 commencing 2003. We are subject to
the expanded disclosure requirements of FAS 148, but we do not expect FAS 148
to otherwise have a material impact on our 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. We do not expect FIN 46 to have a material impact on our
financial position or results of operations.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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. We do not expect FAS 150 to have a material impact on our results
of operations financial position or cash flows.
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months and nine months ended
September 30, 2003 and September 30, 2002, are unaudited and include, in the
opinion of our management, all adjustments (consisting of normal recurring
accruals) necessary to present fairly the earnings for such periods.
Operating results for the three months and nine months ended September 30,
2003, are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 2003.
While we believe 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 Dialysis Corporation of America's audited financial
statements for the year ended December 31, 2002.
NOTE 3--LONG-TERM DEBT
Through a December 3, 1999 loan agreement entered into by our
subsidiary, DCA of Vineland, LLC, we obtained a $700,000 development loan
with annual interest accruing at the following rates: 8.75% through December
2, 2001, 11/2% over the prime rate thereafter through December 15, 2002 and
1% over prime thereafter. The loan is secured by a mortgage on our real
property in Easton, Maryland. Outstanding borrowings were subject to monthly
interest-only payments 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 principal plus interest with any
remaining balance due December 2, 2007. This loan had an outstanding
principal balance of $643,000 at September 30, 2003, and $662,000 at December
31, 2002.
In April, 2001, we obtained a $788,000 five-year mortgage through April,
2006, on our 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 $725,000 at September 30, 2003, and $753,000 at December 31,
2002.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 3--LONG-TERM DEBT--Continued
The equipment purchase agreement provides financing for kidney dialysis
machines for our 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 $1,472,000 at September 30, 2003, and
$1,844,000 at December 31, 2002.
The prime rate was 4.00% as of September 30, 2003, and 4.25% as of
December 31, 2002.
Interest payments on debt amounted to approximately $59,000 and $86,000
for the three months and nine months ended September 30, 2003, and $109,000
and $186,000 for the same periods of the preceding year.
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 $268,000 and $604,000 for
the three months and nine months ended September 30, 2003, and $178,000 and
$903,000 for the same periods of the preceding year.
NOTE 5--TRANSACTIONS WITH PARENT
Our parent, Medicore, Inc., provides us with certain financial and
administrative services. Certain operating costs are charged on the basis of
time spent. The amount of expenses allocated by our parent totaled
approximately $50,000 and $150,000 for the three months and nine months ended
September 30, 2003, and for the same periods of the preceding year.
We had an intercompany advance payable to our parent of approximately
$183,000 at September 30, 2003 which bears interest at the short-term
Treasury Bill rate. Interest is included in the intercompany advance
balance. Our parent has agreed not to require repayment of the intercompany
advance balance prior to October 1, 2004; therefore, the advance has been
classified as long-term at September 30, 2003.
During the year 2000, we made various loans to our parent which funds
were, in turn, loaned by our parent to Linux Global Partners, Inc., a private
company investing in Linux software companies, including one which has
recently initiated marketing of a Linux desktop operating 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.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
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, we 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 our 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 we
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 the remaining 400,000
options outstanding were exercised with the exercise price satisfied by
director bonuses accrued in 2002, leaving 322,143 of these options
outstanding as of September 30, 2003.
In January, 2001, the board of directors granted to our Chief Executive
Officer and President a five-year option for 165,000 shares exercisable at
$1.25 per share with 99,000 options vested at January, 2003 and the balance
of 33,000 options vesting in equal annual increments on January 1 for each of
the next two years.
In September, 2001, the board of directors granted five-year options for
an aggregate of 75,000 shares 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
in equal increments of 15,000 options each September 5, commencing September
5, 2002. In March, 2003, 1,785 of these options were exercised with the
exercise price satisfied by director bonuses accrued in 2002. As of
September 30, 2003, an aggregate of 45,000 of these options had vested, of
which 1,785 had been exercised.
In March, 2002, the board of directors granted a five-year option to an
officer for 30,000 shares exercisable at $3.15 per share through February 28,
2007. The option was to vest in equal annual increments of 7,500 shares on
each February 28 from 2003 through 2006. The 7,500 options that had vested
in February, 2003, were exercised by the officer in October, 2003, and the
remaining 22,500 options expired unvested due to the July 31, 2003
resignation of the officer.
In May, 2002, the board of directors granted five-year options for an
aggregate of 10,500 shares to our employees of which 5,500 were outstanding
at September 30, 2003. Most of these options with respect to each individual
employee are for 500 shares of common stock, 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 5,000 shares
have been cancelled as a result of the termination of the employees holding
those options.
In June, 2003, the board of directors granted to an officer a five-year
option for 25,000 shares exercisable at $3.60 per share through June 3, 2008.
The option vests annually in increments of 6,250 shares on each June 4 from
2004 to 2007.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 6--STOCK OPTIONS--Continued
In August, 2003, the board of directors granted a three-year option to a
director who serves on several of our committees including our audit
committee, for 5,000 shares exercisable at $4.50 per share through August 18,
2006. The option vests in two annual increments of 2,500 shares commencing
on August 19, 2004.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Effective January 1, 1997, we established a 401(k) savings plan (salary
deferral plan) with an eligibility requirement of one year of service and an
age requirement of 21 years of age. We made no contributions under this
plan. Thereafter we and our parent established a new 401(k) plan effective
January 1, 2003, which allows employees, in addition to regular employee
contributions, to elect to have a portion of their bonus payments
contributed. As an incentive for our employees to save for retirement, the
401(k) plan provides that we will make a matching contribution equal to 10%
of that portion of an employee's bonus payment contributed to the plan.
NOTE 8--ACQUISITIONS
In August, 2001, we acquired the 30% minority interest in one of our
Georgia dialysis centers, giving us 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 net assets acquired. The goodwill is being amortized for tax purposes
over a 15-year period. Our decision to make this investment was based
largely on the expectation of continued profitability of this center. The
party from whom we acquired the minority interest is the medical director of
another of our subsidiaries. See Note 1.
In April, 2002, we 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 net assets acquired. The goodwill is being
amortized for tax purposes over a 15-year period. Our decision to make this
investment was based on our expectation of future profitability resulting
from our review of this dialysis center's operations prior to making the
acquisition. See Note 1.
During the second quarter of 2003, we acquired the assets of a Georgia
dialysis center and the 30% minority interests in each of two of our existing
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. Our decision to make these
acquisitions was based on our expectation of profitability resulting from
management's evaluation of the operations of these dialysis centers. The
party from whom the 30% minority interests were purchased was the medical
director of one of the facilities at which the 30% interest was acquired and
is the medical director of three other of our Georgia dialysis facilities.
See Note 1.
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
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
Dialysis Corporation of America in 2001. This physician was provided with
the right to acquire up to 49% of DCA of Vineland. In April, 2000, another
company owned by this physician acquired an interest in DCA of Vineland,
resulting in Dialysis Corporation of America holding a 51.3% ownership
interest in DCA of Vineland and this physician's companies holding a combined
48.7% ownership interest 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
We customarily fund the establishment and operations of our dialysis
facility subsidiaries, usually until they become self-sufficient, including
subsidiaries in which medical directors hold interests ranging from 20% to
49%. Except in limited circumstances, such funding is generally made without
formalized loan documents, as the operating agreements for our subsidiaries
provide for cash flow and other proceeds to first pay any such financing that
we provide, exclusive of any tax payment distributions. One such loan exists
with DCA of Vineland, LLC. In April, 2000, a company owned by the medical
director of DCA of Vineland acquired an interest in DCA of Vineland for
$203,000, which was applied to reduce our loan. At September 30, 2003 the
principal outstanding indebtedness of this loan was approximately $447,000.
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. In addition, we are a party to acute inpatient
dialysis services agreements with several hospitals through which we provide
dialysis treatments to the patients of those hospitals requiring dialysis
treatment. 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 increased slightly, but are not
related to the increasing costs of operations. As compared with rates
received under Medicare and Medicaid reimbursements, payment rates are
typically higher from private payors, such as the patient's insurance
carrier, for outpatient dialysis services, as well as from payments received
under negotiated contracts with hospitals for acute inpatient dialysis
services.
The healthcare industry is subject to extensive regulation by federal
and state authorities. There are a variety of fraud and abuse measures to
combat waste, which include anti-kickback regulations, and extensive
prohibitions relating to self-referrals, violations of any of which are
punishable by criminal or civil penalties, including exclusion from Medicare
and other governmental programs. Unanticipated changes in healthcare
programs or laws that may require us to restructure our existing business
practices could materially adversely affect our operations and financial
condition. We have a Corporate Integrity Program to assure that 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 will be
acquired or developed or inpatient service contracts with hospitals will be
implemented, the number of dialysis stations or patient treatments that may
result therefrom, or if those efforts will ultimately result in profitability
for the facility or under the service contract.
Results of Operations
Medical service revenues increased approximately $837,000 (13%) and
$3,196,000 (17%)for the three months and nine months ended September 30,
2003, compared to the same periods of the preceding year. This increase
includes increased revenues of our Pennsylvania dialysis centers of
approximately $240,000 and $1,477,000, increased revenues of approximately
$5,000 for the three months and decreased revenues of $104,000 for the nine
months for our New Jersey centers resulting from the termination in 2002 of
our two New Jersey acute care contracts; decreased revenues of approximately
$27,000 for the three months and increased revenues of $600,000 for the nine
months for our Georgia centers, revenues of approximately $419,000 and
$875,000 for our new Maryland center and revenues of approximately $200,000
and $375,000 for our new Ohio center. Revenues for the comparable nine-month
period of the prior year included $27,000 in consulting fees during the first
quarter of 2002.
Interest and other income increased by approximately $49,000 and
$124,000 for the three months and nine months ended September 30, 2003,
compared to the same periods of the preceding year. This increase includes:
increases in interest income of $3,000 and $5,000; increases in management
fee income of $41,000 and $99,000 pursuant to management services agreements
with our 40% owned Toledo, Ohio affiliate and an unaffiliated Georgia center
with which we entered into a management services agreement effective
September, 2002; increases in rental income of $3,000 and $13,000; and
increases in miscellaneous other income of $2,000 and $7,000. See Note 1 to
"Notes to Consolidated Condensed Financial Statements."
Cost of medical services as a percentage of medical service revenue
increased to 62% for the three months and nine months ended September 30,
2003 compared to 59% and 60% for the same periods of the preceding year
relating to (i) treatments at new dialysis centers prior to Medicare approval
of those centers for which there are no corresponding medical service
revenues and (ii) increases in the cost of EPO as a percentage of EPO sales
revenues. Approximately 28% of our medical services revenues for the three
months and nine months ended September 30, 2003, and 27% and 25% for the same
periods of the preceding year, were from the administration of EPO to our
patients. Cost of EPO as a percentage of EPO sales revenues increased to 83%
and 82% for the three months and nine months ended September 30, 2003
compared to 76% and 80% for the same periods of the preceding year. 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
whether further price increases, if any, will be instituted, the extent of
such increases if instituted by the manufacturer or our ability to offset any
such increases.
Selling, general and administrative expenses, increased by approximately
$411,000 and $1,355,000 for the three months and nine months ended September
30, 2003, compared to the same periods of the preceding year. This increase
reflects operational costs of our new dialysis centers in Maryland and Ohio,
as well as increased support activities resulting from expanded operations.
Selling, general and administrative expenses, as a percent of medical service
revenues increased by 2% to approximately 31% and 32% for the three months
and nine months ended September 30, 2003, compared to 29% and 30% for the
same periods of the preceding year, notwithstanding the fact that these
expenses for the three and nine month periods ended September 30, 2003
included expenses of new centers incurred prior to Medicare approval for
which there were no corresponding medical service revenues.
Provision for doubtful accounts decreased approximately $180,000 and
$352,000 for the three months and nine months ended September 30, 2003,
compared to the same periods of the preceding year primarily attributable to
Medicare bad debt recoveries of $150,000 and $215,000 recorded during the
three months and nine months ended September 30, 2003. Without the effect of
the Medicare bad debt recoveries the provision would have amounted to 2% of
sales for the three months and nine months ended September 30, 2003, compared
to 3% 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 in the long term, have adversely
affected our short term results of operations due to start-up costs and
expenses for each such facility and a smaller patient base. With respect to
facilities that we own and manage, we opened our 13th and 14th dialysis
centers in Cincinnati, Ohio and Chevy Chase, Maryland in February, 2003, and
acquired a dialysis center in Adel, Georgia in April, 2003. We also ceased
operations at our Homerville, Georgia center, which had not been performing
up to expectations. The new centers, as anticipated, have adversely impacted
net income for the three month and nine month periods ended September 30,
2003. Also negatively impacting net income was the atypical action of our
closing of the Homerville, Georgia dialysis center.
As we progress with new dialysis centers, presently four in the initial
development stages, of which one is under construction, we expect growth in
revenues, but a negative short term effect on our net income based on
development stage expenses.
Interest expense decreased by approximately $5,000 and $12,000 for the
three months and nine months ended September 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 September 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 $3,734,000 at September 30, 2003, which
reflected a decrease of approximately $859,000 (19%) during the nine months
ended September 30, 2003. Included in the changes in components of working
capital was a decrease in cash and cash equivalents of $851,000, including
net cash provided by operating activities of $1,066,000, net cash used in
investing activities of $1,531,000 (including additions to property and
equipment of $920,000, subsidiary minority acquisition payments to a member
in two dialysis facilities, which member is also a medical director of three
of our dialysis facilities, to acquire an aggregate of 30% of such member's
interests, a $75,000 payment for acquisition of a dialysis center, $150,000
in loans to physician affiliates, $202,000 in capital contributions by
subsidiary minority members, and $77,000 of distributions received from the
company's 40% owned Ohio affiliate), and net cash used in financing
activities of $385,000 (including an increase in advances payable to our
parent of $183,000, debt repayments of $419,000, $119,000 in distributions to
subsidiary minority members and $42,000 for the repurchase of shares of our
common stock).
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
$643,000 at September 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 $725,000 at September 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 $1,472,000 at September 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 amounts include
equipment and initial working capital requirements. Although an acquisition
would provide us with an immediate ongoing operation, which most likely would
be generating income, the acquisition of an existing dialysis facility is
more expensive than construction. We presently plan to expand our operations
primarily through construction of new centers, rather than acquisition.
Development of a dialysis facility through the commencement of its initial
operations generally takes four to six months and usually up to 12 months and
possibly longer, depending on the resulting growth of that facility's patient
base, for it to generate net income. We consider some of our centers to be
in the developmental stage, since they have not yet developed a patient base
sufficient to generate and sustain earnings.
We are seeking to expand our services with respect to both outpatient
dialysis treatment facilities and inpatient dialysis care. We are presently
developing a new dialysis center in Virginia, have completed leases for three
new dialysis facilities in South Carolina, 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.
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 pursue the foregoing expansion of
dialysis facilities.
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 our 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. We do not expect FIN 45 to have a
material impact on our 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 our 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. We do not expect FIN 46 to have a material impact on our
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. We do
not expect FAS 150 to have a material impact on our 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 cautionary advice to elicit more
precise disclosure in this Item 2, MD&A, about accounting policies management
believes are most critical in portraying our 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 for our outpatient dialysis treatments through
reimbursement from Medicare and Medicaid, as well as patients' private
payments, individually and through private third-party insurers. The
substantial portion of our revenues are derived from the Medicare ERSD
program, where outpatient reimbursement rates are fixed under a composite
rate structure which includes dialysis services and certain supplies, drugs
and laboratory tests. Certain of the ancillary services, however, are
reimbursable outside of the composite rate. Medicaid reimbursement is
similar and supplemental to the Medicare program. Outpatient dialysis
reimbursement from patient private payments, either individually or through
third party insurance coverage, is generally higher than Medicare/Medicaid
reimbursement levels. In addition, our acute inpatient dialysis operations
are paid under contractual arrangements, which are usually negotiated rates
that are higher than Medicare/Medicaid reimbursement rates for dialysis
services.
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 charges 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 voluntarily 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 $1,713,000 at September 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 $1,368,000 at September 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 $6,000 on our results of operations for the first nine months
of 2003.
Item 4. Controls and Procedures
As of the end of the period of this quarterly report on Form 10-Q for
the third quarter ended September 30, 2003, management carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and President, and the Vice President of Finance and
Principal Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934 (the "Exchange Act"). 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, our Chief Executive Officer and
President, and our Vice President of Finance and Principal Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us, including our
consolidated subsidiaries, required to be included in our 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
------------------------------
Item 5. Other Information.
- ------- ------------------
Wiss & Company, LLP, our independent accountants, have determined to
discontinue providing audit services to substantially all of its SEC
registrants, including us, and solely as a result of such determination, have
resigned as our independent accountants effective as of the date of filing of
this report with the SEC.
Wiss's report on our financial statements for the last two fiscal years
ended December 31, 2002 contained no adverse opinion or a disclaimer of
opinion, nor was qualified or modified as to any uncertainty, audit scope, or
accounting principles.
During the two most recent fiscal years ended December 31, 2002 and the
subsequent interim period to the date of Wiss's resignation, which is the
date of this quarterly report, (a) we had no disagreements with Wiss on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which, if not resolved to the satisfaction of
Wiss, would have caused Wiss to make reference to the subject matter of the
disagreement in connection with its report, and (b) there were no "reportable
events" as that term is defined in Item 304(a)(1)(v) of Regulation S-K
promulgated by the SEC.
We have provided Wiss with a copy of the disclosures contained in this
quarterly report and have requested that Wiss furnish to us a letter
addressed to the SEC stating whether it agrees with the statements made in
Item 5 of this quarterly report. A copy of Wiss's letter to the SEC, dated
November 7, 2003, is attached as Exhibit 16 to this quarterly report.
The audit committee of our board of directors has authorized the
appointment of Moore Stephens, P.C. to serve as our independent accountants
for the fiscal year ending December 31, 2003, subject to the execution of an
engagement letter. At such time Moore Stephens is formally engaged, we will
file a current report on Form 8-K reflecting the occurrence of such event.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits
(16) Letter of Wiss & Company, LLP addressed to the Securities and
Exchange Commission dated November 7, 2003.
(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) July 24, 2003, Item 5, "Other Events and Required FD
Disclosures" as to minority interest in two subsidiaries and
loan agreement with a physician. (no financial statements).
(ii) August 6, 2003, Item 5, "Other Events and Required FD
Disclosures" as to seven year lease of a subsidiary (no
financial statements).
(iii) August 27, 2003, Item 5, "Other Events and Required FD
Disclosures" as to ten year lese of a subsidiary.
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
By: /s/ DANIEL R. OUZTS
-----------------------------
DANIEL R. OUZTS, Vice President,
Finance, Principal Financial
Officer
Dated: November 7, 2003
EXHIBIT INDEX
Exhibit No.
- -----------
(16) Letter of Wiss & Company, LLP addressed to the Securities and Exchange
Commission dated November 7, 2003.
(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 (16)
[Letterhead of Wiss & Company LLP]
November 7, 2003
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Ladies and Gentlemen:
We have read Item 5 of Part II of Form 10-Q, the quarterly report for
the third quarter ended September 30, 2003 of Dialysis Corporation of America
dated November 7, 2003, and are in agreement with the statements contained
in the first four paragraphs contained therein. We have no basis to agree
or disagree with statements of the registrant in the fifth paragraph of
Item 5.
/s/ Wiss & Company, LLP
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 September 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)) 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) 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 quarterly report
based on such evaluation; and
(c) 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 material 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: November 7, 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 September 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)) 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) 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 quarterly report
based on such evaluation; and
(c) 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 material 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: November 7, 2003 --------------------------------------
DANIEL R. OUZTS, Principal Financial Officer
Exhibit 32(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 third quarter ended September
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: November 7, 2003