DIALYSIS CORPORATION OF AMERICA
1302 Concourse Drive, Suite 204
Linthicum, MD 21090
Telephone (410) 694-0500
Telecopier: (410) 694-0596
September 4, 2009
Jim B. Rosenberg
Senior Assistant Chief Accountant
Securities and Exchange Commission
100 F Street N.E.
Washington, D.C. 20549
RE: Dialysis Corporation of America ("Company")
Form 10-K for fiscal year ended December 31, 2008 ("Form 10-K")
Form 10-Q for quarterly period ended June 30, 2009 ("Form 10-Q")
Schedule 14A filed April 27, 2009, File No. 000-08527 ("Proxy
Statement")
Dear Mr. Rosenberg:
This letter is in response to your comments to the Company's Form 10-K,
Form 10-Q and Proxy Statement. We appreciate your assistance for the
Company's compliance with the applicable disclosure requirements and to
enhance its disclosure in its filings.
The following responses are keyed to your comments.
Form 10-K
- ---------
Item 7. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------------
Results of Operations
---------------------
Results of Operations, page 38
------------------------------
1. Comment re: comparative tabular format, payor mix computations and
related aging of accounts receivables.
Response: We note the disclosure in the Company's Form 10-K for 2004 to
2006; such was the result of the 2004 staff observation that the relative
increase in the Company's then receivable balance at December 31, 2004 was
substantially higher than the relative increase in the Company's then total
sales. The subsequent disclosure in 2005 and 2006 was primarily for
comparison purposes. The Company does not believe this specific disclosure
is appropriate under its current financial position and circumstances and
accordingly did not include such in 2007 or 2008. We would like to point
out, revenues increased 16.5% from 2007 to 2008, while net accounts
receivable increased only 6.6% in the same period.
As of December 31, 2008, approximately $6.1 million of unreserved
accounts receivable, representing 26% of our total accounts receivable
balance, was more than six months old. However, in accordance with your
comment, the Company will add the following analysis to Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") which accompanies our annual audited financial on a going forward
basis:
As of December 31, 2009, approximately $XX million in unreserved
accounts receivable, representing approximately X% of our total accounts
receivable balance, were more than six months old. Approximately X% of our
treatments are classified as "patient pay." Virtually all revenue is realized
from government and commercial payors.
Please note that within MD&A, revenues are broken down by type of payor
(Medicare, Medicaid and comparable programs, hospital inpatient dialysis
services, and commercial insurors and other private payors), and a
presentation of medical services revenue (derived primarily from four
sources, to wit, outpatient hemodialysis services, home peritoneal dialysis
services, inpatient hemodialysis services, and ancillary services) is
included.
Signatures, page 56
-------------------
2. Comment re: Daniel R. Ouzts, in prior fillings, referred to as
Principal Accounting Officer and need signature as per General
Instruction D to Form 10-K.
Response: In 2008, Daniel R. Ouzts was not the Principal Accounting
Officer (no party was so named); Mr. Ouzts is being identified as the
Principal Accounting Officer and will be a signatory to future Form 10-K
filings with his specific positions identified as per General Instruction D
to Form 10-K.
Item 15. Financial Statements and Supplemental Data
----------------------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
Note 1 - Summary of Significant Accounting Policies
---------------------------------------------------
Accrued Expenses, page F-10
---------------------------
3. Comment re: excess insurance liability:
* frequency of reconciliation, process for resolving amounts, and
time frame amounts outstanding until resolved;
* explain two accounts deemed nonrefundable recorded in medical
services revenues (and periods of service); and
* refunded duplicate payments, disclose remainder at year end
periods; if not identified, describe knowledge that amounts
properly classified as a liability and not material to statement of
income.
Response:
* On a daily basis, the Company receives payments from insurance
companies usually accompanied with an explanation of benefits
("EOB"), or invoice-specific identifier. The EOB contains payment
details for dates of services provided by the Company. The payment
is applied to the patient accounts receivable at the claim level
based on date of service. At times, the payment received is in
excess of the initial amount recorded as revenue and accounts
receivable. These excess payments are reclassified from accounts
receivable to a liability account called excess insurance payments.
The Company does a quarterly analysis to determine which items in
the excess insurance liability account arise from duplicate
payments, payments in excess of contractual agreements, payments as
primary when the payor is secondary and underbillings by the
Company based on estimated fee schedules; these situations are all
described within Note 1 to the consolidated financial statements of
the Company. The determination as to the nature of the excess
payment is made through a detailed review of the payment detail and
the associated patient files, including records as to services
performed and the insurance coverage in place during the service
period. If the Company determines that the payment was proper
(that there was no excess payment), the amounts are recognized as
revenues. At the conclusion of the research process, if
appropriate, the Company contacts the payor, explains the nature of
the excess payment and waits for the payor to respond with its
preferred method of reimbursement which can vary from check,
electronic funds transfer or recoupment from future dates of
service. This process may take several months to over a year based
on the payor's response.
* Based upon a combination of legal analysis and Company
investigations and discussions with relevant payors, the Company
may subsequently determine that a payment represents a
nonrefundable amount which should be recorded as revenue (one
example of such items are payments in excess of initial estimated
fees for non-contracted payors). All of the $553,000 revenue
recognized in 2008 (which represents 0.6% of total revenues)
relates to dates of service prior to 2008. Approximately 10% of
the $442,000 revenue recognized in 2007 (which represents 0.6% of
total revenues) relates to 2007 dates of service with the remaining
90% relating to services provided prior to 2007.
* Note 1 lists excess insurance liability of $4,687,512 and
$2,789,055 for 2008 and 2007, respectively. Within this amount is
the $1,113,000 and $726,000 for 2008 and 2007, respectively,
identified as duplicate payments that are due to be refunded to
payors. Subject to the Company's research and/or responses to
inquiries from our payors, the remaining balances, $3,574,512 and
$2,063,055 for 2008 and 2007, respectively, represent amounts which
could be payments in excess of contractual agreements, payments as
primary when the payor is secondary, and underbillings by the
Company based on estimated fee schedules, which may either be
refunded to payors based on the process described above or
recognized as revenue subject to the Company's research relating to
what gave rise to the overpayment (the payment was in excess of
initial estimated fees for non-contracted payors, as the main
example). Based on historical results, the Company does not
anticipate that future amounts that may be included in medical
services revenues would be material to the Company's consolidated
statements of income.
Note 7 - Acquisitions
---------------------
4. Comment re: consideration given to recording customer-related
intangible assets (with reference paragraphs of Appendix A of SFAS 141
and EITF 02-17).
Response: For each acquisition, the Company follows Financial Accounting
Standard 141r, Business Combinations ("FAS 141r"). Specifically, the Company
follows the acquisition process in paragraphs 6 and 7 of FAS 141r. As part
of the process, the Company considers whether it has acquired any intangible
assets that are different than goodwill by determining if an intangible asset
meets either the separability criterion or the contractual-legal criterion
described in paragraph 3(k) of FAS 141r. For the acquisitions in 2007 and
2008, the Company determined that no patient intangible asset, apart from
goodwill, exists in connection with the acquisitions referred to in Note 7.
The Company has not entered into any contractual relationship with patients
which would obligate either the patient or the Company for future services,
and no separable patient relationship intangible exists that can be sold,
transferred or licensed. The Company's experience is total patient turnover
averaging approximately 30% per year. Further, approximately 85% of patient
treatments are paid for by government programs, principally Medicare. Under
Medicare regulations the Company may not promote, develop or maintain any
kind of contractual relationship with patients which would, directly or
indirectly, obligate a patient to use or continue to use the Company's
services, or give the Company any rights other than those related to
collecting payments for services provided.
Form 10-Q For the Quarterly Period Ended June 30, 2009
- ------------------------------------------------------
Item 1. Financial Statements
----------------------------
Consolidated Statements of Cash Flows, page 3
---------------------------------------------
5. Comment re: cash flow presentation.
Response: The presentation shall be revised in future quarterly reports
to reconcile "Net income" to cash flow from operating activities.
Schedule 14A
- ------------
Compensation of Directors, page 10
----------------------------------
6. Comment re: director compensation table.
Response: The forthcoming Proxy Statement will include a director
compensation table and will discuss the terms of all share issuance awards,
if any, that may be listed in such table. No table was included in the
recent Proxy Statement since (i) the director compensation was not material,
(ii) there are only five directors, one of which is also the President and
CEO, and as disclosed, employee directors receive no compensation as a
director, and his compensation is otherwise disclosed in the Summary
Compensation Table, and (iii) in accordance with the instructions to Item
402, three of the remaining four directors can be and were grouped together
since their compensation was identical, and each was identified, as was the
remaining director and his compensation, as such. Further, there were no
specific terms to the 1,000 shares (2,000 shares to the Chairman) granted to
those directors (their shares would be "control" shares by virtue of these
directors being affiliates of the Company).
Performance Shares and Performance Units, page 14
-------------------------------------------------
7. Comment re: draft disclosure for next Proxy Statement providing:
* performance goals established by the Compensation Committee under
2009 Omnibus Incentive Plan, including company and individual
goals; and
* discussion of how level of achievement of each goal will effect
performance shares (units) to be awarded to each named executive
officer.
Response: The Company's 2009 Proxy Statement provided for, among other
items, shareholder approval of the Dialysis Corporation of America 2009
Omnibus Incentive Plan (the "Plan"), which Plan was fully described and
attached as Appendix A, which shareholders did approve at the June 11, 2009
annual meeting. Among types of awards which the Compensation Committee (the
"Committee") may award under the Plan include Performance Shares and
Performance Units (collectively hereinafter referred to as "Performance
Shares"). No Performance Shares have been issued and the disclosure
primarily related to the "Committee may grant [P]erformance [S]hares,"
"performance goals may vary from participant to participant," "Business
criteria may be measured on an absolute or relative basis," etc. Twenty-two
business criteria were set forth as to what the Committee can use in
establishing performance goals.
It is currently unknown whether the Committee will establish or grant
any Performance Shares, to whom, whether on the aforementioned business
criteria or individual achievements or otherwise. Please note that
historically there was only one performance grant of shares contained in the
President/CEO's 2006 employment agreement, based on patient census, none of
which shares were earned and none issued, which over the years was so
disclosed. You might also note the issuance of options and stock awards have
been minimal and not granted every year. See the 2009 Proxy Statement, page
32, which indicates that Thomas Carey, for his appointment as Vice President
of Operations in April, 2007, received the first option grant since 2004; and
only 13,500 (.01%) restricted stock awards were granted in January, 2008 to
12 key employees; and 5,000 stock awards granted in the aggregate in 2009 to
the Company's chairman and the three independent directors.
Although no Performance Shares are outstanding or currently anticipated,
and notwithstanding the above historical information evidencing quite limited
issuance of stock awards and options in recent years, the Company will, to
the extent then applicable, provide the appropriate disclosure in accordance
with comment 7.
Further, this is to confirm that the next Proxy Statement will discuss
the achievement of all goals as may then be established by the Committee, and
to the extent the performance goals are quantified, the discussion will also
be quantified.
Elements of Compensation, page 28
---------------------------------
8. Comment re: process by which base salaries, bonuses and other
compensation are awarded; need discussion explaining the actual
procedure including:
* most important and specific factors considered by CEO when
formulating compensation recommendations;
* the actual recommendations by the CEO to the Committee
* most important and specific factors considered by the Committee in
making recommendations to the Board
* the actual recommendations by the Committee to the Board; and
* final compensation set by the Board, and specific and most
important factors considered by the Board in setting the
compensation.
Also requested was an explanation of the compensation process for
Stephen W. Everett, President and CEO, if it differs from other NEOs.
Response: The Company confirms it will include in its next Proxy
Statement each of the bullet points set forth in comment 8; provided as to
the second bullet point relating to the actual recommendations provided to
the Committee by the CEO presupposes the discussions as to working closely
with each other, reviewing the CEO's assessments of performance, achievements
of success, changes in responsibility and the discretion used in deviating
from the recommendations; but anything more specific as to the details of the
recommendations such as amounts, adequacy of performance, etc. would
certainly have an adverse and chilling effect on the intimate and ongoing
communications in this area between the CEO and the Committee, disclosure of
which could further create unnecessary animosity, with such sensitive
information adversely affecting the favorable relationship and communications
between the CEO and the Committee, with the likely potential of improperly
impacting the independent evaluations of the Committee, none of which is in
the best interest of the shareholders or good corporate governance. Equally,
if not more important, any public disclosure of actual recommendations will
also adversely impact relationships with NEOs who will now know what the CEO
is recommending, which could be insulting and hurtful, among others, and such
would adversely affect retention and performance of the NEOs. Under Nasdaq
rules and the Committee charter, the Committee is to meet in executive
session, reflecting the participants' independence, avoidance of undue
influence of management, for free and flexible determinations, all of which
could be undercut by publicly detailing the actual recommendations to the
Committee by the CEO, none of which is to the benefit of shareholders who
already are provided with the processes, material factors and specific (and
types of) compensation. The Company, however, will discuss modifications, if
any, relating to the CEO's recommendations.
Mr. Everett's compensation and minimum annual increases (and Performance
Shares) were established in an employment agreement, which was fully
evaluated by the Committee. As to bonuses or equity awards, the process for
Mr. Everett is the same as for the other NEOs' and this has been disclosed
and the discussion will be so expanded.
Summary Compensation Table, page 36
-----------------------------------
9. Comment re: option and stock awards as disclosed in Summary
Compensation Table not discussed in Compensation Discussion and Analysis
section; if similar awards made next year, confirm Proxy Statement will
include basis for awards and Committee's determination of
appropriateness, including all terms of such awards.
Response: The terms of all awards have been disclosed throughout the
current Proxy Statement as well as the basis for the awards, typically
provided for an appointment or promotion of an executive officer. Reference
is made to the Company's 2009 Proxy Statement, page 31 (and the additional
cross-references included therein) under the subcaption "Analysis of
Executive Compensation" with respect to the terms of the awards and page 32
(and the additional cross-references included therein) under the subcaption
"Bonuses," with respect to the basis for the awards, each subcaption under
the caption entitled "Compensation Discussion and Analysis."
To the extent similar awards are made in the next fiscal year, the
Company confirms that it will continue to include information regarding the
basis for and process by which the Committee determined such awards were
appropriate, including the terms (as has always been provided) of all such
stock and option awards.
The Company acknowledges that:
* it is responsible for the adequacy and accuracy of the disclosure
in its filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with respect to the filing; and
* it may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal
securities laws of the United States.
Feel free to contact Andrew Jeanneret, Vice President, Finance and CFO,
at (410) 694-0500 to discuss the responses to the financial statements and
related matters. You may contact Lawrence Jaffe, Esq., one of our counsel, at
(305) 364-1300 with questions regarding any of the other matters. Also, do
not hesitate to call me relating to these responses at (410) 694-0500.
Thank you for your consideration and cooperation
Very truly yours,
Dialysis Corporation of America
/s/ Stephen W. Everett
By:____________________________________
Stephen W. Everett, President and
Chief Executive Officer
cc: Joel Parker, Accounting Branch Chief
James Pekienk, Staff Accountant
Laura Crotty, Staff Attorney