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 ------------------------------------------------------ (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 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (410) 694-0500 ---------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE --------------------------------------------------------------- (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 ------------------------------------------------ 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 ------- ----------------- 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