-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IZqxdUcu+SfAzNGsdBPtsTYtyLlPSghIWnGuK/72GvtjPVOzW6Smm/9k0NV35Cyu MYmJ1Stfxmu+0qe1XRQVhQ== 0001144204-04-003594.txt : 20040326 0001144204-04-003594.hdr.sgml : 20040326 20040326161537 ACCESSION NUMBER: 0001144204-04-003594 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIALYSIS CORP OF AMERICA CENTRAL INDEX KEY: 0000201653 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 591757642 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08527 FILM NUMBER: 04693168 BUSINESS ADDRESS: STREET 1: 27 MILLER AVENUE CITY: LEMOYNE STATE: PA ZIP: 17043 BUSINESS PHONE: 7177306164 MAIL ADDRESS: STREET 1: 27 MILLER AVENUE CITY: LEMOYNE STATE: PA ZIP: 17043 10-K 1 v02245_10k.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 2003 ----------------- OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from____________ to __________ Commission file number 0-8527 DIALYSIS CORPORATION OF AMERICA ------------------------------------------------------ (Exact name of registrant as specified in its charter) FLORIDA 59-1757642 ----------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1344 ASHTON ROAD, HANOVER, MARYLAND 21076 ----------------------------------------- ---------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (410) 694-0500 -------------- Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Exchange Act: Title of each class ---------------------------- common stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]. The aggregate market value of the voting stock held by non-affiliates of the registrant computed by reference to the closing price at which the common stock was sold on June 30, 2003 was approximately $ 10,142,000. As of March 10, 2004, the Company had 8,184,336 shares of its common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporating information by reference from the Information Statement in connection with the Registrant's Annual Meeting of Shareholders anticipated to be on June 3, 2004. Registrant's Registration Statement on Form SB-2 dated December 22, 1995, as amended February 9, 1996, April 2, 1996 and April 15, 1996, Registration No. 33-80877-A Part II, Item 27, Exhibits, incorporated in Part IV of this Annual Report, Registrant's Annual Report, Form 10-K for the year ended December 31, 1996 and for the five years ended December 31, 2002, Part IV, Exhibits, incorporated in Part IV of this Annual Report. Annual Reports for Registrant's Parent, Medicore, Inc., Forms 10-K for the year ended December 31, 1994, Part IV, Exhibits, incorporated in Part IV of this Annual Report. ================================================================================ DIALYSIS CORPORATION OF AMERICA Index to Annual Report on Form 10-K Year Ended December 31, 2003 PART I Page ---- Item 1. Business........................................................ 1 Item 2. Properties...................................................... 28 Item 3. Legal Proceedings............................................... 30 Item 4. Submission of Matters to a Vote of Security Holders............. 30 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities............... 31 Item 6. Selected Financial Data......................................... 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 33 Item 7A. Quantitative and Qualitative Disclosure About Market Risk....... 44 Item 8. Financial Statements and Supplementary Data..................... 44 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................ 44 Item 9A. Controls and Procedures......................................... 45 PART III Item 10. Directors and Executive Officers of the Registrant.............. 46 Item 11. Executive Compensation.......................................... 46 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters................................. 46 Item 13. Certain Relationships and Related Transactions.................. 47 Item 14. Principal Accountant Fees and Services.......................... 47 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 48 Signatures ................................................................ 54 53 PART I CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION The statements contained in this Annual Report on Form 10-K that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 contains certain safe harbors for forward-looking statements. Certain of the forward-looking statements include management's expectations, intentions, beliefs and strategies regarding the growth of our company and our future operations, the character and development of the dialysis industry, anticipated revenues, our need for and sources of funding for expansion opportunities and construction, expenditures, costs and income, our business strategies and plans for future operations, and similar expressions concerning matters that are not considered historical facts. Forward-looking statements also include our statements regarding liquidity, anticipated cash needs and availability, and anticipated expense levels in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Words such as "anticipate," "estimate," "expects," "projects," "intends," "plans" and "believes," and words and terms of similar substance used in connection with any discussions of future operating or financial performance identify forward-looking statements. Such forward-looking statements, like all statements about expected future events, are subject to substantial risks and uncertainties that could cause actual results to materially differ from those expressed in the statements, including the general economic, market and business conditions, opportunities pursued or not pursued, competition, changes in federal and state laws or regulations affecting the company and our operations, and other factors discussed periodically in our filings. Many of the foregoing factors are beyond our control. Among the factors that could cause actual results to differ materially are the factors detailed in the risks discussed in the "Risk Factors" section below. If any of 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 too much reliance on such forward-looking statements, which speak only as of the date made and which we undertake no obligation to revise to reflect events after the date made. ITEM 1. BUSINESS HISTORICAL We are a Florida corporation organized in 1976. We develop and operate outpatient kidney dialysis centers that provide quality dialysis and ancillary services to patients suffering from chronic kidney failure, generally referred to as end stage renal disease, or ESRD. We also provide acute inpatient dialysis treatments in hospitals, provide homecare services through our wholly owned subsidiary, DCA Medical Services, Inc. and provide dialysis center management services. We became a public company in 1977, and went private in 1979. We began construction of new centers in 1995, and in 1996 once again became a public company. In 1997, we sold our Florida dialysis operations. We currently operate 19 outpatient dialysis facilities including a dialysis center in Ohio in which we hold a 40% interest and an unaffiliated center in Georgia, each of which we manage pursuant to management services agreements. In early 2004, we opened three new centers, one each in Pennsylvania, South Carolina and Virginia and we are in the process of constructing a new center in Maryland. Our principal executive offices are located at 1344 Ashton Road, Suite 201, Hanover, Maryland 21076, and you may contact us as follows: telephone: (410) 694-0500 fax: (410) 694-0596 email: info@dialysiscorporation.com GENERAL Management believes the company distinguishes itself on the basis of quality patient care, and a patient-focused, courteous, highly trained professional staff. Our acute inpatient dialysis treatments are conducted under contractual relationships currently with seven hospitals and medical centers located in areas and states serviced by our outpatient dialysis facilities. Homecare, sometimes referred to as "method II home patient treatment," requires us to provide equipment and supplies, training, monitoring and follow-up assistance to patients who are able to perform their treatments at home. Our growth depends primarily on the availability of suitable dialysis centers for development or acquisition in appropriate and acceptable areas, and our ability to develop new potential dialysis centers at costs within our budget. We acquired a dialysis unit in Georgia in the second quarter of 2003. We opened two new centers in February, 2003, one in Ohio and one in Maryland and three new centers in early 2004, one each in Pennsylvania, South Carolina and Virginia. We are in the process of constructing a new dialysis facility in Maryland. Our medical service revenues are derived primarily from four sources: (i) outpatient hemodialysis services (50%, 49% and 47% of medical services revenues for 2003, 2002 and 2001, respectively); (ii) home peritoneal dialysis services, including method II services (4%, 3%, and 3% of medical services revenues for 2003, 2002 and 2001, respectively); (iii) inpatient hemodialysis services for acute patient care provided through agreements with hospitals and medical centers (7%, 10% and 15% of medical services revenues for 2003, 2002 and 2001, respectively); and (iv) ancillary services associated with dialysis treatments, primarily the administration of erythropoietin ("EPO"), a bio-engineered protein that stimulates the production of red blood cells (a deteriorating kidney loses its ability to regulate red blood cell count, resulting in anemia), (39%, 38% and 35% of medical services revenue for 2003, 2002 and 2001, respectively). Dialysis is an ongoing and necessary therapy to sustain life for kidney dialysis patients. ESRD patients normally receive 156 dialysis treatments each year. Essential to our operations and income is Medicare reimbursement which is a fixed rate determined by the Center for Medicare and Medicaid Services ("CMS") of the Department of Health and Human Services ("HHS"). The level of our revenues and profitability may be adversely affected by future legislation that could result in rate cuts. Further, our operating costs tend to increase over the years in excess of increases in the prescribed dialysis treatment rates. From commencement of the Medicare ESRD program in 1972 through 1983, the ESRD composite rate was unchanged, and thereafter decreased over the years until January, 2000, when the rate was minimally increased by Congress, and further minimally increased in January, 2001. Thereafter, there have been no further increases. However, Congress has proposed a 1.6% composite rate increase for 2005. Commercial third-party reimbursement rates, which have increased as a percentage of our revenues over the last two years, are also susceptible to reduction. See "Operations - Medicare Reimbursement." The inpatient dialysis service agreements for treating acute kidney disease are not subject to government fixed rates, but rather are negotiated with hospitals. Typically these rates are at least equivalent to or higher than the government fixed rates on a per treatment basis. 2 STOCK SPLIT On January 28, 2004, the company effected a two-for-one stock split. All share and per share data, including option information, in this Annual Report on Form 10-K for the year ended December 31, 2003, have been adjusted to reflect the stock split. DIALYSIS INDUSTRY Kidneys act as a filter removing harmful substances and excess water from the blood, enabling the body to maintain proper and healthy balances of chemicals and water. Chronic kidney failure, ESRD, results from chemical imbalance and buildup of toxic chemicals, and is a state of kidney disease characterized by advanced irreversible renal impairment. ESRD is a likely consequence of complications resulting from diabetes, hypertension, advanced age, and specific hereditary, cystic and urological diseases. ESRD patients, in order to survive, must either obtain a kidney transplant, which procedure is limited due to lack of suitable kidney donors and the incidence of rejection of transplanted organs, or obtain dialysis treatments for the rest of their lives. Based upon information published by CMS, the number of ESRD patients requiring dialysis treatments in the United States is approximately 300,000, and continues to grow at a rate of approximately 6% a year. This is thought to be attributable primarily to the aging of the population and greater patient longevity as a result of improved dialysis technology. The statistics further reflect approximately 4,200 dialysis facilities, with the current annual cost of treating ESRD patients in the United States at approximately $22.8 billion. ESRD Treatment Options Treatment options for ESRD patients include (1) hemodialysis, performed either at (i) an outpatient facility, or (ii) inpatient hospital facility, or (iii) the patient's home; (2) peritoneal dialysis, either continuous ambulatory peritoneal dialysis or continuous cycling peritoneal dialysis; and/or (3) kidney transplant. A significant portion of ESRD patients receive treatments at non-hospital owned outpatient dialysis facilities (according to CMS, approximately 80%) with most of the remaining patients treated at home through hemodialysis or peritoneal dialysis. Patients treated at home are monitored by a designated outpatient facility. The most prevalent form of treatment for ESRD patients is hemodialysis, which involves the use of an artificial kidney, known as a dialyzer, to perform the function of removing toxins and excess fluids from the bloodstream. This is accomplished with a dialysis machine, a complex blood filtering device which takes the place of certain functions of the kidney and also controls external blood flow and monitors the toxic and fluid removal process. The dialyzer has two separate chambers divided by a semi-permeable membrane, and simultaneously with the blood circulating through one chamber, dialyzer fluid is circulated through the other chamber. The toxins and excess fluid pass through the membrane into the dialysis fluid. On the average, patients usually receive three treatments per week with each treatment taking three to five hours. Dialysis treatments are performed by teams of licensed nurses and trained technicians pursuant to the staff physician's instructions. Home hemodialysis treatment requires the patient to be medically suitable and have a qualified assistant. Additionally, home hemodialysis requires training for both the patient and the patient's 3 assistant, which usually encompasses four to eight weeks. Dialysis Corporation of America does not currently provide home hemodialysis (non-peritoneal) services. The use of conventional home hemodialysis has declined and is minimal due to the patient's suitability and lifestyle, the need for the presence of a caregiver and a dialysis machine at home, and the higher expense involved as compared with continuous ambulatory peritoneal dialysis. A second home treatment for ESRD patients is peritoneal dialysis. There are several variations of peritoneal dialysis, the most common being continuous ambulatory peritoneal dialysis and continuous cycling peritoneal dialysis. All forms of peritoneal dialysis use the patient's peritoneal (abdominal) cavity to eliminate fluid and toxins from the patient. Continuous ambulatory peritoneal dialysis utilizes dialysis solution infused manually into the patient's peritoneal cavity through a surgically-placed catheter. The solution is allowed to remain in the abdominal cavity for a three to five hour period and is then drained. The cycle is then repeated. Continuous cycling peritoneal dialysis is performed in a manner similar to continuous ambulatory peritoneal dialysis, but utilizes a mechanical device to cycle the dialysis solution while the patient is sleeping. Peritoneal dialysis is the third most common form of ESRD therapy following center hemodialysis and renal transplant. While kidney transplantation, another treatment option for patients with ESRD, is typically the most desirable form of therapeutic intervention, the scarcity of suitable donors and possibility of donee rejection limits the availability of this surgical procedure as a treatment option. BUSINESS STRATEGY Dialysis Corporation of America has 27 years' experience in developing and operating dialysis treatment facilities. Our priority is to provide quality patient care. We intend to continue to establish alliances with physicians and hospitals, attempt to initiate dialysis service arrangements with nursing homes and managed care organizations, and to continue to emphasize our high quality patient care. We continue to actively seek and negotiate with physicians and others to establish new outpatient dialysis facilities. We are in the process of constructing a new dialysis center in Maryland. We are in different phases of negotiations with physicians for potential new facilities in a variety of states. Same Center Growth We endeavor to increase same center growth by adding quality staff and management and attracting new patients to our existing facilities. We seek to accomplish this objective by rendering high caliber patient care in convenient, safe and pleasant conditions. We believe that we have adequate space and stations within our facilities to accommodate greater patient volume and maximize our treatment potential. During fiscal 2003, we experienced approximately 7% growth in the total number of treatments for our 13 dialysis centers that were in existence as of December 31, 2002, and a 9% growth in medical services revenue for these centers. We had an increase of over 50% in peritoneal dialysis patients in fiscal 2003. Development and Acquisition of Facilities One of the primary elements in developing or acquiring facilities is locating an area with an existing patient base under the current treatment of local nephrologists, since the proposed facility would primarily be serving such patients. Other considerations in evaluating development of a dialysis facility 4 or a proposed acquisition are the availability and cost of qualified and skilled personnel, particularly nursing and technical staff, the size and condition of the facility and its equipment, the atmosphere for the patients, the area's demographics and population growth estimates, state regulation of dialysis and healthcare services, and the existence of competitive factors such as existing outpatient dialysis facilities within reasonable proximity to the proposed center. Expansion is approached primarily through the development of our own dialysis facilities. Acquisition of existing outpatient dialysis centers is a faster but more costly means of growth. The primary reason for physicians selling or participating in the development of independently owned centers is the avoidance of administrative and financial responsibilities, freeing their time to devote to their professional practice. Other motivating forces are the physician's desire to be part of a larger organization allowing for economies of scale and the ability to realize a return on their investment if they have an interest in the dialysis entity. To construct and develop a new facility ready for operation takes an average of six to eight months, and approximately 12 months or longer to generate income, all of which are subject to variables based on location, size and competitive elements. Some of our centers are in the developmental stage, since they have not reached the point where the patient base is sufficient to generate and sustain earnings. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Construction of a 15 station facility typically costs in a range of $600,000 to $750,000 depending on location, size and related services to be provided by the proposed facility. Acquisition of existing facilities is substantially more expensive, and is usually based primarily upon the patient base and earnings, and to a lesser extent, location and competition. Any significant expansion, whether through acquisition or development of new facilities, is dependent upon existing funds or financing from other sources. Inpatient Services Management is also seeking to increase acute dialysis care contracts with hospitals for inpatient dialysis services. These contracts are sought with hospitals in areas serviced by our facilities. Hospitals are willing to enter into such inpatient care arrangements to eliminate the administrative burdens of providing dialysis services to their patients as well as the expense involved in maintaining dialysis equipment, supplies and personnel. We believe that these arrangements are beneficial to our operations, since the contract rates are individually negotiated with each hospital and are not fixed by government regulation as is the case with Medicare reimbursement fees for ESRD patient treatment. There is no certainty as to when any additional centers or service contracts will be implemented, or, to the extent implemented, the number of dialysis stations or patient treatments these centers or service contracts may involve, or if they will ultimately be profitable. There is no assurance that we will be able to continue to enter into favorable relationships with physicians who would become medical directors of such proposed dialysis facilities, or that we will be able to acquire or develop any new dialysis centers within a favorable geographic area. Newly established dialysis centers, although contributing to increased revenues, also adversely affect results of operations due to their start-up costs and expenses and to their having a smaller and slower developing patient base. See "Business Strategy," "Operations" and "Competition" of Item 1, "Business," and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." 5 OPERATIONS Location, Capacity and Use of Facilities We operate 19 outpatient dialysis facilities in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and South Carolina, including an Ohio dialysis center in which we hold a 40% interest and which we operate in conjunction with the majority owner, the medical director of that center, and an unaffiliated center in Georgia which we manage. These dialysis facilities have a total designed capacity of 280 licensed stations. We own and operate our centers through subsidiaries of which a majority are 100% owned by us, with the balance of the centers owned by us as a majority owner in conjunction with the medical directors of those centers who hold minority interests. We have a minority 40% interest in a dialysis facility in Toledo, Ohio which we manage. The Lemoyne, Pennsylvania, and one of the Georgia dialysis centers are located on properties that we own and lease to our subsidiaries. Our Cincinnati, Ohio dialysis center is leased from a corporation owned by the medical director of that center who, together with his wife, holds a minority interest in the subsidiary operating that center. See Item 2, "Properties." We also manage an unaffiliated dialysis center in Georgia. Additionally, the company provides acute care inpatient dialysis services to seven hospitals in areas serviced by our dialysis facilities, two less than we serviced at this time last year. We are in the process of negotiating additional acute dialysis services contracts in the areas surrounding our facilities and in tandem with development of future proposed sites. Furthermore, each of our dialysis facilities has the capacity to provide training, supplies and on-call support services for home peritoneal patients. Dialysis Corporation of America provided approximately 92,000 hemodialysis treatments in 2003, an increase of approximately 12,000 treatments compared to fiscal 2002. Management estimates that on average its centers were operating at approximately 55% of capacity as of December 31, 2003, based on the assumption that a dialysis center is able to provide up to three treatments a day per station, six days a week. We believe we can increase the number of dialysis treatments at our centers without making significant additional capital expenditures. Operations of Dialysis Facilities Our dialysis facilities are designed specifically for outpatient hemodialysis and generally contain, in addition to space for dialysis treatments, a nurses' station, a patient weigh-in area, a supply room, water treatment space used to purify the water used in hemodialysis treatments, a dialyzer reprocessing room (where, with both the patient's and physician's consent, the patient's dialyzer is sterilized for reuse), staff work area, offices and a staff lounge. Our facilities also have a designated area for training patients in home dialysis. Each facility also offers amenities for the patients, such as a color television with headsets for each dialysis station, to ensure the patients are comfortable and relaxed. We maintain a team of dialysis specialists to provide for the individual needs of each patient. In accordance with participation requirements under the Medicare ESRD program, each facility retains a medical director qualified and experienced in the practice of nephrology and the administration of a renal dialysis facility. See "Physician Relationships" below. Each facility is overseen by an administrator who supervises the daily operations and the staff, which consists of registered nurses, licensed practical nurses, patient care technicians, a social worker to assist the patient and family to adjust to dialysis treatment and to provide help in financial assistance and planning, and a registered dietitian. In addition, there are independent consultants who visit with our dialysis patients. These individuals supervise the patient's 6 needs and treatments. See "Employees" below. We must continue to attract and retain skilled nurses and other staff, competition for whom is intense. Our dialysis facilities offer high-efficiency conventional hemodialysis, which, in our experience, provides the most viable treatment for most patients. We consider our dialysis equipment to be both modern and efficient, providing state of the art treatment in a safe and comfortable environment. Our facilities also offer home dialysis, primarily continuous ambulatory peritoneal dialysis and continuous cycling peritoneal dialysis. Training programs for continuous ambulatory peritoneal dialysis or continuous cycling peritoneal dialysis generally encompass two to three weeks at the dialysis facility, and such training is conducted by the facility's home training nurse. After the patient completes training, they are able to perform treatment at home with equipment and supplies provided by the company. Inpatient Dialysis Services We presently provide inpatient dialysis services to seven hospitals in Georgia, Ohio and Pennsylvania, under agreements either with us or with one of our subsidiaries in the area. The agreements are for a term ranging from one to five years, with automatic renewal terms, subject to termination by notice of either party. Inpatient services are typically necessary for patients with acute kidney failure resulting from trauma or similar causes, patients in the early stages of ESRD, and ESRD patients who require hospitalization for other reasons. Ancillary Services Our dialysis facilities provide certain ancillary services to ESRD patients, including the administration of certain prescription drugs, such as EPO upon a physician's prescription. EPO is a bio-engineered protein which stimulates the production of red blood cells and is used in connection with dialysis to treat anemia, a medical complication frequently experienced by ESRD patients. EPO decreases the necessity for blood transfusions in ESRD patients. There is only one manufacturer of EPO in the United States and there are currently no alternative products that perform the functions of EPO available to dialysis treatment providers. Although we have a good relationship with this manufacturer and have not experienced any problems in receipt of our supply of EPO, any loss or limitation of supply of this product could have a material adverse effect on our operating revenue and income. Physician Relationships An integral element to the success of a facility is its association with area nephrologists. A dialysis patient generally seeks treatment at a facility near the patient's home where the patient's nephrologist has an established practice. Consequently, we rely on our ability to develop affiliations with area nephrologists. The conditions of a facility's participation in the Medicare ESRD program mandate that treatment at a dialysis facility be under the general supervision of a medical director who is a physician. We retain by written agreement qualified physicians or groups of qualified physicians to serve as medical directors for each of our facilities. Generally, the medical directors are board eligible or board certified in internal medicine by a professional board specializing in nephrology and have had at least 12 months of experience or training in the care of dialysis patients at ESRD facilities. The medical directors are typically a source of patients treated at the particular center served. Our dialysis centers are operated through subsidiaries, either corporations or limited liability companies. The medical directors of six of 7 our centers have acquired a minority ownership interest in the center they service. Our Ohio affiliate is majority owned by the physician. We make every effort to comply with federal and state regulations concerning our relationship with the physicians and the medical directors treating patients at our facilities. See "Government Regulation" below. We know of no limitations on physician ownership in our subsidiaries. Agreements with medical directors typically range from a term of five to 10 years, with renewal provisions, usually two renewal options each for five years. Each agreement specifies the duties, responsibilities and compensation of the medical director. Under each agreement, the medical director or professional association maintains his, her or its own medical malpractice insurance. The agreements also typically provide for non-competition in a limited geographic area surrounding that particular dialysis center during the term of the agreement and upon termination for a limited period. These agreements, however, do not prohibit physicians providing services at our facilities from providing direct patient care services at other locations; and consistent with the federal and state law, such agreements do not require a physician to refer patients to our dialysis centers. Usually, physician's professional fees for services are billed directly to the patient or to government payment authorities by the treating physician and paid directly to the physician or the professional association. Our ability to establish and operate a dialysis facility in a particular area is substantially dependent on the availability of a qualified physician or nephrologist to serve as the medical director. The loss of a medical director who could not be readily replaced would have a material adverse effect on the operations of that facility, most likely resulting in closure. Compensation of medical directors is separately negotiated for each facility and generally depends on competitive factors such as the local market, the physician's qualifications and the size of the facility. Quality Assurance Dialysis Corporation of America implements a quality assurance program to maintain and improve the quality of dialysis treatment and care we provide to our patients in each facility. Quality assurance activities involve the ongoing examination of care provided, the identification of therapy deficiencies, the need for any necessary improvements in the quality of care, and evaluation of improved technology. Specifically, this program requires each center's staff, including its medical director and/or nurse administrator, to regularly review quality assurance data and initiate programs for improvement, including dialysis treatment services, equipment, technical and environmental improvements, and staff-patient and personnel relationships. These evaluations are in addition to assuring regulatory compliance with CMS and the Occupational Safety and Health Administration. Our Vice President of Clinical Services, who is a certified nephrology nurse, oversees this program in addition to ensuring that we meet federal and state compliance requirements for our dialysis centers. See "Government Regulation" below. Patient Revenues A substantial amount of the fees for outpatient dialysis treatments are funded under the ESRD Program established by the federal government under the Social Security Act, and administered in accordance with rates set by CMS. A majority of dialysis patients are covered under Medicare. The balance of the outpatient charges are paid by private payors including the patient's medical insurance, private funds or state Medicaid plans. The states in which we operate provide Medicaid or comparable benefits to qualified recipients to supplement their Medicare coverage. 8 Under the ESRD Program, payments for dialysis services are determined pursuant to Part B of the Medicare Act which presently pays 80% of the allowable charges for each dialysis treatment furnished to patients. The maximum payments vary based on the geographic location of the center. The remaining 20% may be paid by Medicaid if the patient is eligible, from private insurance funds or the patient's personal funds. If there is no secondary payor to cover the remaining 20%, Medicare may reimburse us for part of that balance as part of our annual cost report filings. Medicare and Medicaid programs are subject to regulatory changes, statutory limitations and government funding restrictions, which may adversely affect dialysis services payments and, consequently, our revenues. See "Medicare Reimbursement" below. The inpatient dialysis services are paid for by each contracted hospital pursuant to contractual pre-determined fees for the different dialysis treatments. Medicare Reimbursement We are reimbursed primarily by Medicare under a prospective reimbursement system for chronic dialysis services, and by third party payors including Medicaid and commercial insurance companies. Each of our dialysis facilities is certified to participate in the Medicare program. Under the Medicare system, the reimbursement rates are fixed in advance and limit the allowable charge per treatment, but provide us with predictable and recurring per treatment revenues and allows us to retain any profit earned. An established composite rate set by CMS governs the Medicare reimbursement available for a designated group of dialysis services, including dialysis treatments, supplies used for such treatments, certain laboratory tests and medications. The Medicare composite rate is subject to regional differences. We receive reimbursement for outpatient dialysis services provided to Medicare-eligible patients at rates that are currently between approximately $121 and $136 per treatment, depending upon regional wage variations. The Medicare reimbursement rate is subject to change by legislation. The average ESRD reimbursement rate is approximately $131 per treatment for outpatient dialysis services. The Medicare ESRD composite reimbursement rate is subject to regional differences, particularly labor costs, among other criteria. Congress has requested studies of the ESRD composite rate structure as well as other related ancillary services to determine whether the composite rate is subject to an annual inflationary increase. To date this issue is still pending. Other ancillary services and items are eligible for separate reimbursement under Medicare and are not part of the composite rate, including certain drugs such as EPO, the allowable rate of which is currently $10 per 1000 units for amounts in excess of three units per patient per year, and certain physician-ordered tests provided to dialysis patients. Approximately 28% of our medical services revenue in 2003 was derived from providing dialysis patients with EPO. CMS limits the EPO reimbursement based upon patients' hematocrit levels. Other ancillary services, mostly other drugs, account for approximately an additional 11% of our medical services revenue. We submit claims monthly and are usually paid by Medicare within 14 days of the submission. There have been a variety of proposals to Congress for Medicare reform. We are unable to predict what, if any, future changes may occur in the rate of reimbursement. Congress has approved a 1.6% composite rate increase for 2005. This is the first increase in the Medicare ESRD composite rate since 2001. Any reduction in the Medicare composite reimbursement rate could have a material adverse effect on our business, revenues and net earnings. 9 Medicaid Reimbursement Medicaid programs are state administered programs partially funded by the federal government. These programs are intended to provide coverage for patients whose income and assets fall below state defined levels and who are otherwise uninsured. The programs also serve as supplemental insurance programs for the Medicare co-insurance portion and provide certain coverages (e.g., oral medications) that are not covered by Medicare. State regulations generally follow Medicare reimbursement levels and coverages without any co-insurance amounts. Certain states, however, require beneficiaries to pay a monthly share of the cost based upon levels of income or assets. Pennsylvania and New Jersey have Medical Assistance Programs comparable to Medicaid, with primary and secondary insurance coverage to those who qualify. We are a licensed ESRD provider in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and Virginia. SOURCES OF MEDICAL SERVICES REVENUE Year Ended December 31, ---------------------- 2003 2002 ---- ---- Medicare 54% 49% Medicaid and Comparable Programs 8% 9% Hospital inpatient dialysis services 7% 10% Commercial and private payors 31% 32% Management Services Dialysis Corporation of America has a management services agreement with each of its wholly- and majority-owned subsidiaries, with its 40% owned affiliate DCA of Toledo, LLC, and with an unaffiliated Georgia dialysis center, providing each of them with administrative and management services, including, but not limited to, assisting in procuring capital equipment, preparing budgets, bookkeeping, accounting, data processing, and other corporate based information services, materials and human resource management, billing and collection, and accounts receivable and payable processing. These services are provided for a percentage of net revenues of each particular facility. CORPORATE INTEGRITY PROGRAM Dialysis Corporation of America has developed a Corporate Integrity Program to assure we continue to achieve our goal of providing the highest level of care and service in a professional and ethical manner consistent with applicable federal and state laws and regulations. This program is intended to reinforce our management's, employees' and professional affiliates' awareness of their responsibilities to comply with applicable laws in the increased and complex regulatory environment relating to our operations. This program is expected to benefit the overall care and services for our dialysis patients and assure our operations are in compliance with the law, which, in turn, should assist us in operating in a cost-effective manner, and accordingly, benefit our shareholders. The board of directors has established an audit committee consisting of three independent members of the board who oversee audits, accounting, financial reporting, and who have established 10 procedures for receipt, retention and resolution of complaints relating to those areas (none to date), among other responsibilities. The audit committee operates under a charter providing for its detailed responsibilities. We have developed a Compliance Program to assure compliance with fraud and abuse laws, enhance communication of information, and provide a mechanism to quickly identify and correct any problems that may arise. This Compliance Program supplements and enhances our existing policies, including those applicable to claims submission, cost report preparation, internal audit and human resources. Code of Ethics As part of our Corporate Integrity Program, we have also developed a Code of Ethics and Business Conduct covering management and all employees to assure all persons affiliated with our company and our operations act in an ethical and lawful manner. The Code of Ethics and Business Conduct covers relationships among and between affiliated persons, patients, payors, and relates to information processing, compliance, workplace conduct, environmental practices, training, education and development, among other areas. In our commitment to delivering quality care to dialysis patients, we have mandated rigorous standards of ethics and integrity. Our Code of Ethics and Business Conduct is designed to provide: o ethical handling of actual or apparent conflicts of interest between personal and professional relationships o full, fair, accurate, timely, and understandable disclosure in reports and documents we file with the SEC and in our other public communications o compliance with applicable governmental laws, rules and regulations o prompt internal reporting of violations of the Code to an appropriate person identified in the Code o accountability for adherence to the Code The portion of our Code of Ethics and Business Conduct as it applies to our principal executive officer, principal financial officer, principal accounting officer, and persons performing similar functions, may be obtained without charge upon request to our Secretary and general counsel, Lawrence E. Jaffe, Esq., Jaffe & Falk, LLC, at 777 Terrace Avenue, Hasbrouck Heights, New Jersey 07604. The Corporate Integrity Program is implemented, and reviewed and upgraded from time to time, to provide a highly professional work environment and lawful and efficient business operations to better serve our patients and our shareholders. POTENTIAL LIABILITY AND INSURANCE Participants in the health care industry are subject to lawsuits based upon alleged negligence, many of which involve large claims and significant defense costs. We are very proud of the fact that, although we have been involved in chronic and acute kidney dialysis services for approximately 27 years, we have never been subject to any suit relating to the providing of dialysis treatments. We initiated a breach of contract dispute that was recently settled. See Item 3, "Legal Proceedings." We currently have 11 general and umbrella liability insurance, as well as professional and products liability. Our insurance policies provide coverage on an "occurrence" basis and are subject to annual renewal. A hypothetical successful claim against us in excess of our insurance coverage could have a material adverse effect upon our business and results of operations. The medical directors supervising our dialysis operations and other physicians practicing at the facilities are required to maintain their own professional malpractice insurance coverage. GOVERNMENT REGULATION General Regulation of healthcare facilities, including dialysis facilities, is extensive, with legislation continually proposed relating to safety, maintenance of equipment and proper records, quality assurance programs, reimbursement rates, confidentiality of medical records, licensing and other areas of operations. Each of the dialysis facilities must be certified by CMS, and we must comply with certain rules and regulations established by CMS regarding charges, procedures and policies. Each dialysis center is also subject to periodic inspections by federal and state agencies to determine if their operations meet the appropriate regulatory standards. Our operations are also subject to the Occupational Safety and Health Administration, known as OSHA, relating to workplace safety and employee exposure to blood and other potentially infectious material. Many states have eliminated the requirement to obtain a certificate of need prior to the establishment or expansion of a dialysis center. There are no certificate of need requirements in the states in which we are presently operating. Our record of compliance with federal, state and local governmental laws and regulations remains excellent. Regulation of healthcare facilities, including dialysis centers, is extensive with legislation continually proposed relating to safety, reimbursement rates, licensing and other areas of operations. We are unable to predict the scope and effect of any changes in government regulations, particularly any modifications in the reimbursement rate for medical services or requirements to obtain certification from CMS. Enforcement, both privately and by the government, has become more stringent, particularly in attempts to combat fraud and waste. Since our inception in 1976, we have maintained all of our licenses, including our Medicare and Medicaid and equivalent certifications. The loss of any licenses and certifications would have a material adverse effect on our operations, revenues and earnings. We regularly review legislative and regulatory changes and developments and will restructure a business arrangement if we determine such might place our operations in material noncompliance with such law or regulation. See "Fraud and Abuse" and "Stark II" below. To date, none of our business arrangements with physicians, patients or others have been the subject of investigation by any governmental authority. No assurance can be given, however, that our business arrangements will not be the subject of future investigation or prosecution by federal or state governmental authorities which could result in civil and/or criminal sanctions. Certification and Reimbursement Our dialysis centers must meet certain requirements, including, among others, those relating to patient care, patient rights, medical records, the physical set-up of the center, and personnel, in order to be 12 certified by CMS, to be covered under the Medicare program and to receive Medicare reimbursement. See above under "Operations - Medicare Reimbursement." All of our dialysis centers are certified under the Medicare program and applicable state Medicaid programs. We understand that the conditions for coverage for ESRD services are in the process of revision by CMS, but the revisions are not yet published. We are unable to predict when said revisions for Medicare coverage will be published or what such revisions will entail. Any changes in the Medicare programs for ESRD treatments could require us to restructure our operations. We are unable to predict at this time whether we could satisfactorily respond to such changes in a cost effective manner or at all, the result of which could negatively impact our operations. Any reduction in Medicare payments or coverage for dialysis services would have an adverse effect on our business and profitability. Fraud and Abuse Certain aspects of our business are subject to federal and state laws governing financial relationships between health care providers and referral sources and the accuracy of information submitted in connection with reimbursement. These laws, collectively referred to as "fraud and abuse" laws, include the Anti-Kickback Statute, Stark II, other federal fraud laws, and similar state laws. The fraud and abuse laws apply because our medical directors have financial relationships with the dialysis facilities and also refer patients to those facilities for items and services reimbursed by federal and state health care programs. Financial relationships with patients who are federal program beneficiaries also implicate the fraud and abuse laws. Other financial relationships which bear scrutiny under the fraud and abuse laws include relationships with hospitals, nursing homes, and various vendors. Anti-Kickback Statutes The federal Anti-Kickback Statute prohibits the knowing and willful solicitation, receipt, offer, or payment of any remuneration, directly or indirectly, in return for or to induce the referral of patients or the ordering or purchasing of items or services payable under the Medicare, Medicaid, or other federal health care program. Sanctions for violations of the Anti-Kickback Statute include criminal penalties, such as imprisonment and fines of up to $25,000 per violation, and civil penalties of up to $50,000 per violation, as well as exclusion from Medicare, Medicaid, and other federal health care programs. The language of the Anti-kickback Statute has been construed broadly by the courts. Over the years, the federal government has published regulations that established "safe harbors" to the Anti-Kickback Statute. An arrangement that meets all of the elements of the safe harbor is immunized from prosecution under the Anti-Kickback Statute. The failure to satisfy all elements, however, does not necessarily mean the arrangement violates the Anti-Kickback Statute. Some states have enacted laws similar to the Anti-Kickback Statute. These laws may apply regardless of payor source, may include criminal and civil penalties, and may contain exceptions that differ from the safe harbors to the Anti-Kickback Statute. 13 As required by Medicare regulations, each of our dialysis centers is supervised by a medical director, who is a licensed nephrologist or otherwise qualified physician. The compensation of our company's medical directors, who are independent contractors, is fixed by a medical director agreement and reflects competitive factors in each respective location, the size of the center, and the physician's professional qualifications. The medical director's fee is fixed in advance, typically for periods of one to five years and does not take into account the volume or value of any referrals to the dialysis center. Eight of our outpatient dialysis centers are owned jointly between us and physicians who, in most cases, hold a minority position through a professional association. Our Ohio affiliate is majority-owned by a physician. These physicians, except in one instance, also act as the medical directors for those facilities. We attempt to structure our arrangements with our physicians to comply with the Anti-Kickback Statute. Many of these physicians' patients are treated at our facilities. We believe that the value of the minority interest in a subsidiary acquired by the physician has been consistent with the fair market value of the cash consideration paid, assets transferred to, and/or services performed by that physician for the subsidiary, and there is no intent to induce referrals to any of our centers. See "Business - Physician Relationships" above. We have never been challenged under the fraud and abuse laws and believe our arrangements with our medical directors are in material compliance with applicable law. Several states in which we operate have laws prohibiting physicians from holding financial interests in various types of medical facilities. If these statutes are interpreted to apply to relationships we have with our medical directors who hold a percentage ownership in our dialysis facilities, we would restructure our relationship with these physicians but could be subject to penalties. Management believes that the Anti-Kickback Statute and other fraud and abuse laws are primarily directed at abusive practices that increase the utilization and cost of services covered by governmentally funded programs. The dialysis services we provide generally cannot, by their very nature, be over-utilized since dialysis treatment is not elective, and is only indicated when there is temporary or permanent kidney failure. Medical necessity is capable of being supported by objective documentation, drastically reducing the possibility of over-utilization. Additionally, there are safe harbors for certain arrangements. Nevertheless, while relationships created by medical director ownership of minority interests in our facilities satisfy many but not all of the criteria for the safe harbor, there can be no assurance that these relationships will not subject us to investigation or prosecution by enforcement agencies. In an effort to further our compliance with the law, we have adopted a corporate Compliance Program that addresses medical necessity and medical chart audits to confirm medical necessity of referrals. With respect to our inpatient dialysis services, we provide hospitals with dialysis services, including qualified nursing and technical personnel, supplies, equipment and technical services. In certain instances, the medical director of our dialysis center who has a minority interest in that facility may refer patients to hospitals with which we have an inpatient dialysis services arrangement. Although these arrangements may implicate the federal fraud and abuse laws, we believe our acute inpatient hospital services are in compliance with the law. See "Stark II" below. We endeavor in good faith to comply with all governmental regulations. However, there can be no assurance that we will not be required to change our practices or experience a material adverse effect as a result of any such potential challenge. We cannot predict the outcome of the rule-making process, enforcement procedures, or whether changes in the safe harbor rules will affect our position with respect to the Anti-Kickback Statute, but we will make every effort to remain in compliance. 14 Stark II The Physician Ownership and Referral Act, known as Stark II, bans physician referrals, with certain exceptions, for certain "designated health services" as defined in the statute to entities in which a physician or an immediate family member has a "financial relationship" which includes an ownership or investment interest in, or a compensation arrangement between the physician and the entity. For purposes of Stark II, "designated health services" include, among others, clinical laboratory services, durable medical equipment, parenteral and enteral nutrients, home health services, and inpatient and outpatient hospital services. Dialysis treatments are not included in the statutory list of "designated health services." This ban is subject to several exceptions including personal service arrangements, employment relationships and group practices meeting specific conditions. If Stark II is found to be applicable to the facility, the entity is prohibited from claiming payment for such services under the Medicare or Medicaid programs, is liable for the refund of amounts received pursuant to prohibited claims, is subject to civil penalties of up to $15,000 per referral and can be excluded from participation in the Medicare and Medicaid programs. HHS' regulations to Stark II became effective in January, 2002. These regulations exclude from covered designated health services and referral prohibitions, services included in the ESRD composite rate and EPO and other drugs required as part of dialysis treatments under certain conditions. Also excluded from "inpatient hospital services" are dialysis services provided by a hospital not certified by CMS to provide outpatient dialysis services, which would exclude our inpatient hospital services agreements from Stark II. Equipment and supplies used in connection with home dialysis are excluded from the Stark II definition of "durable medical equipment." HHS is revisiting its regulations and intends to issue additional regulations to the Stark legislation. We are unable to predict the extent or nature of such revised and/or new HHS regulations, which may negatively impact our operations or require us to restructure different aspects of our business. Phase I of the federal Stark II regulations and the legislative history of Stark II indicates that the purpose behind the Stark II prohibition on physician referral is to prevent Medicare and Medicaid program and patient abuse. Since dialysis is a necessary medical treatment for those with temporary or permanent kidney failure it is not highly susceptible to that type of abuse. We believe, based upon the proposed rules and the industry practice, that Congress did not intend to include dialysis services and the services and items we provide that are incidental to dialysis services within the Stark II prohibitions. If the provisions of Stark II were found to apply to our arrangements however, we believe that we would be in compliance. We compensate our nephrologist-physicians as medical directors of our dialysis centers pursuant to medical director agreements, which we believe meet the exception for personal service arrangements under Stark II. Non-affiliated physicians who send their patients to or treat their patients at any of our facilities do not receive any compensation from the company. Medical directors of our dialysis centers who hold a minority investment interest in the subsidiaries operating those centers may refer patients to hospitals with which we have an acute inpatient dialysis service arrangement. Although the regulations of Stark II may be interpreted to apply to these types of transactions, we believe that our contractual arrangements with hospitals for acute care inpatient dialysis services are in compliance with Stark II. If CMS or any other government entity otherwise interprets the Stark II regulations, we may be required to restructure certain existing compensation or investment agreements with our medical 15 directors, or, in the alternative, to refuse to accept referrals for designated health services from certain physicians. Stark II prohibits Medicare or Medicaid reimbursement of items or services provided pursuant to a prohibited referral, and imposes substantial civil monetary penalties on facilities which submit claims for reimbursement. If such were to be the case, we could be required to repay amounts reimbursed for drugs, equipment and services that CMS determines to have been furnished in violation of Stark II, in addition to substantial civil monetary penalties, which could adversely affect our operations and financial results. We believe that if Stark II is interpreted by CMS or any other governmental entity to apply to our arrangements, it is possible that we could be permitted to bring our financial relationships with referring physicians into material compliance with the provisions of Stark II on a prospective basis. However, prospective compliance may not eliminate the amounts or penalties, if any, that might be determined to be owed for past conduct, and there can be no assurance that the costs and expenses associated with such prospective compliance, if permissible, would not have a material adverse effect on the company. Health Insurance Reform Act Congress has taken action in recent legislative sessions to modify the Medicare program for the purpose of reducing the amounts otherwise payable from the program to healthcare providers. Future legislation or regulations may be enacted that could significantly modify the ESRD program or substantially reduce the amount paid to us for our services, or impose further regulation or restrictions on healthcare providers. Further, statutes or regulations may be adopted which demand additional requirements in order for us to be eligible to participate in the federal and state payment programs. Any new legislation or regulations may adversely affect our business and operations, as well as our competitors. The Health Insurance Portability and Accountability Act of 1996, known as HIPAA, provided for health insurance reforms which included a variety of provisions important to healthcare providers, such as significant changes to the Medicare and Medicaid fraud and abuse laws, which were expanded. HIPAA established two programs that coordinate federal, state and local healthcare fraud and abuse activities, known as the "Fraud and Abuse Control Program" and the "Medicare Integrity Program." The Fraud and Abuse Control Program is conducted jointly by HHS and the Attorney General while the Medicare Integrity Program enables HHS, the Department of Justice and the FBI to monitor and review Medicare fraud. Under these programs, these governmental entities undertake a variety of monitoring activities previously left to providers to conduct, including medical utilization and fraud review, cost report audits and secondary payor determinations. The Incentive Program for Fraud and Abuse Information rewards Medicare recipients 10% of the overpayment up to $1,000 for reporting Medicare fraud and abuse. HIPAA further created Health Care Fraud Crimes and extended their applicability to private health plans. As part of the administrative simplification provisions of HIPAA, final regulations governing electronic transactions relating to healthcare information were published by HHS. These regulations require a party transmitting or receiving healthcare transactions electronically to send and receive data in single format. This regulation applies to our submissions and processing of healthcare claims and also applies to many of our payors. October 16, 2003 was the deadline for covered entities to comply with HIPAA's electronic transaction requirements. We believe that we are in compliance with the transactions standards rule. 16 HIPAA also includes provisions relating to the privacy of healthcare information. HHS' privacy rules cover all individually identifiable healthcare information known as "protected health information" and apply to healthcare providers, health plans, and healthcare clearing houses, known as "covered entities." The regulations are quite extensive and complex, but basically require companies to: (i) obtain patient acknowledgement of receipt of a notice of privacy practices; (ii) obtain patient authorization before certain uses and disclosures of protected health information; (iii) respond to patient requests for access to their healthcare information; and (iv) develop policies and procedures with respect to uses and disclosures of protected health information. Covered entities were required to be in compliance no later than April 14, 2003. During 2003, we expended significant resources to develop and implement policies and procedures to address privacy issues, and we believe we are in compliance with the HIPAA privacy rules. The final HIPAA security regulations were published on February 20, 2003. Although the security standards had an effective date of April 21, 2003, most covered entities will have until April 21, 2005 to comply with the standards. We are currently undergoing a review of our policies and procedures to determine whether revisions are necessary and expect to be in compliance with the HIPAA security standards on or before the compliance date. HIPAA increases significantly the civil and criminal penalties for offenses related to healthcare fraud and abuse. HIPAA increased civil monetary penalties from $2,000 plus twice the amount for each false claim to $10,000 plus three times the amount for each false claim. HIPAA expressly prohibits four practices, namely (1) submitting a claim that the person knows or has reason to know is for medical items or services that are not medically necessary, (2) transferring remuneration to Medicare and Medicaid beneficiaries that is likely to influence such beneficiary to order or receive items or services, (3) certifying the need for home health services knowing that all of the coverage requirements have not been met, and (4) engaging in a pattern or practice of upcoding claims in order to obtain greater reimbursement. However, HIPAA creates a tougher burden of proof for the government by requiring that the government establish that the person "knew or should have known" a false or fraudulent claim was presented. The "knew or should have known" standard is defined to require "deliberate ignorance or reckless disregard of the truth or falsity of the information," thus merely negligent conduct or billing errors should not violate the Civil False Claims Act. As for criminal penalties, HIPAA adds healthcare fraud, theft, embezzlement, obstruction of investigations and false statements to the general federal criminal code with respect to federally funded health programs, thus subjecting such acts to criminal penalties. Persons convicted of these crimes face up to 10 years imprisonment and/or fines. Moreover, a court imposing a sentence on a person convicted of federal healthcare offense may order the person to forfeit all real or personal property that is derived from the criminal offense. The Attorney General is also provided with a greatly expanded subpoena power under HIPAA to investigate fraudulent criminal activities, and federal prosecutors may utilize asset freezes, injunctive relief and forfeiture of proceeds to limit fraud during such an investigation. Although we believe we substantially comply with currently applicable state and federal laws and regulations and to date have not had any difficulty in maintaining our licenses and Medicare and Medicaid authorizations, the healthcare service industry is and will continue to be subject to substantial and continually changing regulation at the federal and state levels, and the scope and effect of such and its impact on our operations cannot be predicted. No assurance can be given that our activities will not be reviewed or challenged by regulatory authorities. We continue to work with our healthcare counsel in 17 reviewing our policies and procedures and make every effort to comply with HIPAA and other applicable federal and state laws and regulations. Any loss by us of our various federal certifications, our approval as a certified provider under the Medicare or Medicaid programs or our licenses under the laws of any state or other governmental authority from which a substantial portion of our revenues are derived or a change resulting from healthcare reform, a reduction of dialysis reimbursement or a reduction or complete elimination of coverage for dialysis services, would have a material adverse effect on our business. Environmental and Health Regulations Our dialysis centers are subject to hazardous waste laws and non-hazardous medical waste regulation. Most of our waste is non-hazardous. CMS requires that all dialysis facilities have a contract with a licensed medical waste handler for any hazardous waste. We also follow OSHA's Hazardous Waste Communications Policy, which requires all employees to be knowledgeable of the presence of and familiar with the use and disposal of hazardous chemicals in the facility. Medical waste of each facility is handled by licensed local medical waste sanitation agencies who are primarily responsible for compliance with such laws. There are a variety of regulations promulgated under OSHA relating to employees exposed to blood and other potentially infectious materials requiring employers, including dialysis centers, to provide protection. We adhere to OSHA's protective guidelines, including regularly testing employees and patients for exposure to hepatitis B and providing employees subject to such exposure with hepatitis B vaccinations on an as-needed basis, protective equipment, a written exposure control plan and training in infection control and waste disposal. Other Regulation There are also federal and state laws prohibiting anyone from presenting false claims or fraudulent information to obtain payments from Medicare, Medicaid and other third-party payors, such as the federal False Claims Act. These laws provide for both criminal and civil penalties, exclusion from Medicare and Medicaid participation, repayment of previously collected amounts and other financial penalties. The submission of Medicare cost reports and requests for payment by dialysis centers are covered by these laws. The False Claims Act has been used to prosecute for fraud, for coding errors, billing for services not provided, and billing for services at a higher than allowable billing rate. We believe we have the proper internal controls and procedures for issuance of accounts and complete cost reports and payment requests. Such reports and requests are subject to a challenge under these laws. Certain states have anti-kickback legislation and laws dealing with self-referral provisions similar to the federal Anti-Kickback Statute and Stark II. We have no reason to believe that we are not in compliance with such state laws. Dialysis Corporation of America has developed a Compliance Program as part of its Corporate Integrity Program, designed to assure compliance with fraud and abuse laws and regulations. See above under the caption "Corporate Integrity Program." The establishment and implementation of our Compliance Program, coupled with our existing policies and internal controls, could have the effect of mitigating any civil or criminal penalties for potential violations, of which we have had none since our inception in 1976. We will continue to use our best efforts to fully comply with federal and state laws, regulations and requirements as applicable to our operations and business. 18 Recent Regulatory Developments We monitor regulatory developments that may potentially impact the dialysis industry and our operations. During 2003, regulatory items of interest included the following: The OIG issued a report, "Home Dialysis Payment Vulnerabilities," which addressed billing for continuous cycling peritoneal dialysis, or CCPD, for home patients under Method II. Some of the OIG's recommendations were to limit payment for Method II CCPD kits to the composite rate payable under Method I, to ensure that claims are not paid unless a method selection form has been recorded, and to collect incorrect payments made to providers. CMS issued a letter describing its plan to undertake a review of its current policy on EPO utilization in ESRD. In the letter, CMS solicited scientific evidence regarding EPO dosing and hemotocrit/hemoglobin levels to assist CMS to develop a policy to ensure appropriate administration of EPO to ESRD patients. A draft policy is expected on May 1, 2004, and CMS is scheduled to issue a final policy or memorandum on this matter on July 2, 2004. The OIG Office of Audit Services published a report, "End Stage Renal Disease Pricing Errors at Independent Facilities." This report discussed the findings of an audit of Medicare overpayments made by AdminaStar Federal to independent ESRD providers. The overpayments involved reimbursement of supplies used to administer injectable drugs that are billed outside of the Medicare composite rate. The OIG recommendations included recovery of identified overpayments. CMS finalized a rule eliminating the cap on ESRD bad debt reimbursement, which had limited payment of allowable bad debt to the facility's unrecovered costs. The Government Accounting Office, or GAO, released a report, "Dialysis Facilities: Problems Remain in Ensuring Compliance with Medicare Quality Standards," concluding that a substantial number of dialysis facilities do not achieve minimum patient outcomes specified in clinical practice guidelines, with significant proportions of patients receiving inadequate dialysis or treatment for anemia. GAO suggested that Congress consider authorizing CMS to impose sanctions on facilities cited with serious deficiencies in consecutive surveys and also recommended creating incentives for facilities to maintain compliance with quality standards. The OIG's 2004 Work Plan indicates that it will focus on Method II dialysis in nursing homes. The OIG noted that a physician must certify that a Method II patient is capable of home dialysis and questioned who performs dialysis in the nursing home setting and whether these patients receive adequate clinical support. The Medicare Payment Advisory Commission, or MedPAC, released a report entitled "Modernizing the Outpatient Dialysis Payment System, which outlined steps to better achieve the Medicare objectives of controlling costs and promoting access to quality services." Another MedPAC report, "Variation and Innovation in Medicare," assessed the relationship between quality and dialysis providers' costs. In each report, MedPAC recommended refinement of the dialysis payment system by bundling certain currently excluded services, such as laboratory tests, supplies, and blood products, into the composite rate and accounting for factors that affect provider costs, such as dialysis method, doses, and patient case mix. 19 CMS announced a four-year ESRD disease management demonstration designed to test the effectiveness of disease management models to increase quality of care for ESRD patients while ensuring that this care is provided more effectively and efficiently. Several Medicare studies concerning dialysis that were expected to be released in 2003 are pending, including a Composite Rate Bundling Study and updated Conditions of Coverage. COMPETITION The dialysis industry is highly competitive. There are numerous providers who have dialysis centers in the same areas as our centers. Many are owned by larger corporations, which operate dialysis centers regionally, nationally and internationally. Our operations are small in comparison with those corporations. Some of our major competitors are public companies, including Fresenius Medical Care, Inc., A.G., Gambro Healthcare, Inc., Renal Care Group, Inc. and DaVita, Inc. These companies have substantially greater financial resources, many more centers, patients and services than we do, and by virtue of such may have an advantage over us in competing for nephrologists and acquisitions of dialysis facilities in areas and markets we target. Moreover, competition for acquisitions has increased the cost of acquiring existing dialysis centers. Fresenius and Gambro also manufacture and sell dialysis equipment and supplies, which may provide them with a greater competitive edge. We also face competition from hospitals and physicians that operate their own dialysis facilities. Competitive factors most important in dialysis treatment are quality of care and service, convenience of location and pleasantness of the environment. Another significant competitive factor is the ability to attract and retain qualified nephrologists. These physicians are a substantial source of patients for the dialysis centers, are required as medical directors of the dialysis center for it to participate in the Medicare ESRD program, and are responsible for the supervision of the medical operations of the center. Our medical directors usually are subject to non-compete restrictions within a limited geographic area from the center they administer. Additionally, there is always substantial competition for obtaining qualified, competent nurses and technical staff at reasonable labor costs. Based upon advances in surgical techniques, immune suppression and computerized tissue typing, cross-matching of donor cells and donor organ availability, renal transplantation in lieu of dialysis is a competitive factor. It is presently the second most commonly used modality in ESRD therapy. With greater availability of kidney donations, currently the most limiting factor in the growth of this modality, renal transplantations could become a more significant competitive aspect to the dialysis treatments we provide. Although kidney transplant is a preferred treatment for ESRD, certain patients who have undergone such transplants have lost their transplant function and returned to dialysis treatments. EMPLOYEES As of January, 2004, our company had 235 full time employees, including nurse administrators, licensed practical nurses, registered nurses, technical service manager, technical specialists, patient care technicians, clerical employees, and social workers and dietitians. We retain 15 part-time employees consisting of registered nurses, patient care technicians and clerical employees. We also utilize 43 "per diem" personnel to supplement staffing. 20 We retain 14 independent contractors who include social workers and dietitians at our Pennsylvania, New Jersey and certain Georgia facilities. These are in addition to the medical directors, who supervise patient treatment at each facility. We believe our relationship with our employees is excellent and we have not suffered any strikes or work stoppages. None of our employees is represented by any labor union. We are an equal opportunity employer. RISK FACTORS We have listed below certain of the risk factors relating to Dialysis Corporation of America and our securities. There may be other risks and uncertainties that we may face and of which we are currently unaware which could also adversely affect our business, operations and financial condition. If any of such risks or uncertainties arise, or the risks listed below occur, our operations, earnings and financial condition could be materially harmed, which, in turn, would most likely adversely affect the trading price of our common stock. Any such event could negatively impact a shareholder's investment in the company. UNTIL FISCAL 2001, WE HAD EXPERIENCED OPERATIONAL LOSSES Since 1989, when we sold four of our five dialysis centers, we had experienced operational losses. Not until fiscal 2001 did we reflect net income. We initiated an expansion program in 1995, opening two new dialysis centers that year, and to date operate and/or manage 19 centers in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and South Carolina, and we have one center under construction. Some of our dialysis centers have generated losses since their commencement of operations and, although typical to newly established facilities, some continue to generate losses after 12 months of operations. This is due to operational costs and time needed to reach full capacity of dialysis treatments. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." DIALYSIS OPERATIONS ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION Our dialysis operations are subject to extensive federal and state government regulations, which include: o licensing requirements for each dialysis center o patient referral prohibitions o false claims prohibitions for health care reimbursement and other fraud and abuse regulations o record keeping requirements o health, safety and environmental compliance o expanded protection of the privacy and security of personal medical data o establishing standards for the exchange of electronic health information; electronic transactions and code sets; unique identifiers for providers, employers, health plans and individuals 21 Many of these laws and regulations are complex and open to further judicial and legislative interpretations. If we are forced to change our method of operations because of these regulations, our earnings, financial condition and business could be adversely affected. In addition, any violation of these governmental regulations could involve substantial civil and criminal penalties and fines, revocation of our licenses, closure of one or more of our centers, and our exclusion from participating in Medicare and Medicaid programs. Any loss of federal or state certifications or licenses would materially adversely impact our business. OUR ARRANGEMENTS WITH OUR PHYSICIAN MEDICAL DIRECTORS DO NOT MEET THE SAFE HARBOR PROVISIONS OF FEDERAL AND STATE LAWS, AND MAY SUBJECT US TO GREATER GOVERNMENTAL SCRUTINY Neither our arrangements with the medical directors of our facilities nor the minority ownership interests of referring physicians in certain of our dialysis facilities meet all of the requirements of published safe harbors to the illegal remuneration provisions of the Social Security Act and similar state laws. These laws impose civil and criminal sanctions on persons who receive or make payments for referring a patient for treatment that is paid for in whole or in part by Medicare, Medicaid or similar state programs. Transactions that do not fall within the safe harbor may be subject to greater scrutiny by enforcement agencies. OUR OPERATIONS ARE SUBJECT TO MEDICARE AND MEDICAID AUDITS WITH CONCURRENT POTENTIAL CIVIL AND CRIMINAL PENALTIES FOR FAILURE TO COMPLY We are subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies if they assert that we have overcharged the programs or failed to comply with program requirements, none of which we have done. Rights and remedies available under these programs include repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us. These programs may also impose fines, criminal penalties or program exclusions. In the ordinary course of our business, we receive notices of deficiencies for failure to comply with various regulatory requirements. We review such notices and take appropriate corrective action. In most cases, we and the reviewing agency will agree upon the measures that will bring the center or services into compliance. In some cases or upon repeat violations, none of which we have experienced, the reviewing agency may take various adverse actions against a provider, including but not limited to: o the imposition of fines; o suspension of payments for new admissions to the center; and o in extreme circumstances, decertification from participation in the Medicare or Medicaid programs and revocation of a center's license. Any such regulatory actions could adversely affect a center's ability to continue to operate, to provide certain services, and/or its eligibility to participate in Medicare or Medicaid programs or to receive payments from other payors. Moreover, regulatory actions against one center may subject our other centers, which may be deemed under our common control or ownership, to similar adverse remedies. 22 THERE HAS BEEN INCREASED GOVERNMENTAL FOCUS AND ENFORCEMENT WITH RESPECT TO ANTI-FRAUD INITIATIVES AS THEY RELATE TO HEALTHCARE PROVIDERS State and federal governments are devoting increased attention and resources to anti-fraud initiatives against healthcare providers. Legislation has expanded the penalties for heath care fraud, including broader provisions for the exclusion of providers from the Medicaid program. We have established policies and procedures that we believe are sufficient to ensure that our facilities will operate in substantial compliance with these anti-fraud requirements. While we believe that our business practices are consistent with Medicare and Medicaid criteria, those criteria are often vague and subject to change and interpretation. Anti-fraud actions, however, could have an adverse effect on our financial position and results of operations. OUR REVENUES AND FINANCIAL STABILITY ARE DEPENDENT ON FIXED REIMBURSEMENT RATES UNDER MEDICARE AND MEDICAID During 2003, approximately 54% of our patient revenues was derived from Medicare reimbursement and 8% of our patient revenues was derived from Medicaid and equivalent programs. Decreases in Medicare and Medicaid and equivalent rates and programs for our dialysis treatments would adversely affect our revenues and profitability. Furthermore, operating costs tend to increase over the years without comparable increases in the prescribed dialysis treatment rates. DECREASES IN REIMBURSEMENT PAYMENTS FROM THIRD-PARTY, NON-GOVERNMENT PAYORS COULD ADVERSELY AFFECT OUR EARNINGS Any reduction in the rates paid by private insurers, hospitals and other non-governmental third-party organizations would adversely affect our business. Alternatively, any change in patient coverage, such as Medicare eligibility as opposed to higher private insurance coverage, would result in a reduction of revenue. We estimate approximately 38% of our patient revenues for 2003 was obtained from sources other than Medicare or Medicaid and equivalent programs. We generally charge non-governmental organizations for dialysis treatment rates which exceed the fixed Medicare and Medicaid and equivalent rates. Any limitation on our ability to charge these higher rates, which may be affected by expanded coverage by Medicare under the fixed corporate rate, or expanded coverage of dialysis treatments by managed care organizations, which commonly have lower rates than we charge, could adversely affect our business, results of operations, and financial condition. ANY DECREASE IN THE AVAILABILITY OF OR THE REIMBURSEMENT RATE OF EPO WOULD REDUCE OUR REVENUES AND EARNINGS EPO, the bio-engineered drug used for treating anemia in dialysis patients, is currently available from a single manufacturer, Amgen, Inc. On January 1, 2003, Amgen increased the price of EPO, and there is no assurance there will not be further price increases. There currently is no alternative drug available to us for the treatment of anemia in our dialysis patients. The available supply of EPO could be delayed or reduced, whether by Amgen itself, through unforeseen circumstances, or as a result of excessive demand. This would adversely impact our revenues and profitability, since approximately 28% 23 of our medical revenues in 2003 were based upon the administration of EPO to our dialysis patients. Most of our EPO reimbursement is from government programs. We are unsure whether there will be an EPO reimbursement rate reduction, but if such occurs, it would adversely affect our revenues and earnings. NEW AMGEN DRUG COULD AFFECT USE OF EPO, ADVERSELY IMPACTING OUR PROFITABILITY. Amgen is the sole manufacturer of EPO, which is administered in conjunction with dialysis treatments to address a patient's anemia. Amgen has developed and obtained FDA approval for its new drug Aranesp(R), which is also to be used to treat anemia, and which is indicated to be effective for two to three weeks. Should Amgen market Aranesp(R) to treat anemia in dialysis patients, it could reduce the use of EPO by dialysis providers. Based on its longer lasting capabilities, potential profit margins on Aranesp(R) could be significantly lower than on EPO, and furthermore, Aranesp(R) could be administered by a dialysis patient's physician, further eliminating potential revenues from the treatment of anemia in our dialysis patients. The introduction of Aranesp(R) as an anemia treatment for dialysis patients, therefore, could adversely impact our revenues and profitability. OUR ABILITY TO GROW IS SUBJECT TO OUR RESOURCES AND AVAILABLE LOCATIONS Other than two center acquisitions in 2002 and 2003, expansion of our operations has been through construction of dialysis centers, primarily due to the substantial costs involved in an acquisition. We seek areas with qualified and cost-effective nursing and technical personnel and a sufficient population to sustain a dialysis center. These opportunities are limited and we compete with much larger dialysis companies for appropriate locations. The time period from the beginning of construction through commencement of operations of a dialysis center generally takes four to six months and sometimes longer. Once the center is operable, it generates revenues, but usually does not operate at full capacity, and may incur losses for approximately 12 months or longer. Our growth strategy based on construction also involves the risks of our ability to identify suitable locations to develop additional centers. Those we do develop may never achieve profitability, and additional financing may not be available to finance future development. Our inability to acquire or develop dialysis centers in a cost-effective manner would adversely affect our ability to expand our business and as a result, our profitability. Growth places significant demands on our financial and management skills. Inability on our behalf to meet the challenges of expansion and to manage any such growth would have an adverse effect on our management, results of operations and financial condition. OUR ATTEMPT TO EXPAND THROUGH DEVELOPMENT OR ACQUISITION OF DIALYSIS CENTERS WHICH ARE NOT CURRENTLY IDENTIFIED ENTAILS RISKS WHICH SHAREHOLDERS AND INVESTORS WILL NOT HAVE A BASIS TO EVALUATE We expand generally by seeking an appropriate location for development of a dialysis center and by taking into consideration the potential geographic patient base and the availability of a physician nephrologist to be our medical director as well as and a skilled work force. Construction and equipment costs for a new dialysis center with 15 stations typically range from $600,000 to $750,000. The cost of acquiring a center is usually much greater. We cannot assure you that we will be successful in developing 24 or acquiring dialysis facilities, or otherwise successfully expanding our operations. We are negotiating with nephrologists and others to establish new dialysis centers, but we cannot assure you that these negotiations will result in the development of new centers. Furthermore, there is no basis for shareholders and investors to evaluate the specific merits or risks of any potential development or acquisition of dialysis facilities. WE DEPEND ON PHYSICIAN REFERRALS, AND THE LIMITATION OR CESSATION OF SUCH REFERRALS WOULD ADVERSELY IMPACT OUR REVENUES AND EARNINGS Our existing dialysis facilities and those facilities we seek to develop are and will be dependent upon referrals of ESRD patients for treatment by physicians specializing in nephrology. We retain by written agreement qualified physicians or groups of qualified physicians to serve as medical directors for each of our facilities. The medical directors are typically a source of patients treated at the particular facility served. There is no requirement for these physicians to refer their patients to us, and they are free to refer patients to any other conveniently located dialysis facility. We may not be able to renew or otherwise negotiate compensation under the medical director agreements with our medical director physicians which could terminate the relationship, and without a suitable medical director replacement could result in closure of the facility. Accordingly, the loss of these key physicians at a particular facility could have a material adverse effect on the operations of the facility and could adversely affect our revenues and earnings. Some of our medical directors or the medical groups with whom they are associated own minority interests in certain of our subsidiaries operating dialysis centers. If these interests are deemed to violate applicable federal or state law, these physicians may be forced to dispose of their ownership interests. We are unable to predict how this would affect our relationship with these key physicians, their medical groups or their patients, who may seek dialysis treatment elsewhere. The resulting loss of these patients would have an adverse effect on our business and financial condition. INDUSTRY CHANGES COULD ADVERSELY AFFECT OUR BUSINESS Healthcare organizations, public and private, continue to change the manner in which they operate and pay for services. Our business is designed to function within the current healthcare financing and reimbursement system. In recent years, the healthcare industry has been subject to increasing levels of government regulation of reimbursement rates and capital expenditures, among other things. In addition, proposals to reform the healthcare system have been considered by Congress, and still remain a priority issue. Any new legislative initiatives, if enacted, may (i) further increase government regulation of or other involvement in healthcare, (ii) lower reimbursement rates, and (iii) otherwise change the operating environment for healthcare companies. We cannot predict the likelihood of those events or what impact they may have on our earnings, financial condition or business. OUR BUSINESS IS SUBJECT TO SUBSTANTIAL COMPETITION, AND WE MUST COMPETE EFFECTIVELY, OTHERWISE OUR GROWTH COULD SLOW We are operating in a highly competitive environment in terms of operation, development and acquisition of existing dialysis centers. Our competition comes from other dialysis centers, many of which are owned by much larger companies, and from hospitals. The dialysis industry is rapidly consolidating, resulting in several very large dialysis companies competing for the acquisition of existing 25 dialysis centers and the development of relationships with referring physicians. Most of our competitors have significantly greater financial resources, more dialysis facilities and a larger patient base. In addition, technological advances by our competitors may provide more effective dialysis treatments than the services provided by our centers. We also compete with physicians who open their own dialysis facilities. Competition for existing centers has increased the costs of acquiring such facilities. Competition is also intense for qualified nursing and technical staff as well as for nephrologists with an adequate patient base. Management can provide no assurance that we will compete effectively. Our failure to do so could impair our continued growth. MEDICORE, INC., OUR PARENT, WHICH OWNS APPROXIMATELY 59% OF OUR VOTING SECURITIES, HAS SOME COMMON OFFICERS AND DIRECTORS, WHICH PRESENTS THE POTENTIAL FOR CONFLICTS OF INTEREST Medicore owns approximately 59% of our common stock, and is able to elect all of our directors and otherwise control our management and operations. Such control is also complemented by the fact that Thomas K. Langbein is Chairman of the Board of both us and Medicore, where he is also the President and Chief Executive Officer; and Daniel R. Ouzts is Vice President and Treasurer of both companies. Neither Mr. Langbein nor Mr. Ouzts devotes full time to our management. Lawrence E. Jaffe, Esq., a member of Jaffe & Falk, LLC, our general counsel, is our corporate Secretary, as well as corporate Secretary and a director of Medicore. The costs of executive salaries and other shared corporate overhead for these companies are allocated on the basis of time spent. The amount of expenses charged to us by Medicore for 2003 amounted to approximately $200,000. Additionally, there have been past and there are current transactions between our company and Medicore and their directors, including loans and insurance coverage. We advanced funds to Medicore for working capital requirements until Medicore sold Techdyne, Inc., another of its public subsidiaries, in June, 2001. We also loaned Medicore $2,200,000 for its financing and investment in Linux Global Partners, Inc. ("LGP"), a private company involved, through its subsidiary, Xandros, Inc., in the development of a Linux desktop product. LGP also invests in Linux software companies. Each of LGP and Xandros is in the developmental stage, and are in need of financing. Medicore repaid our loan in May and June, 2001, including approximately $294,000 of accrued interest. In March, 2004, Medicore agreed to provide us with up to $1,500,000 in dialysis equipment financing under a demand promissory note with individual advances with interest at prime plus 1.25%. Since Medicore holds a majority interest in us, there exists the potential for conflicts between Medicore and us, and the responsibilities of our management to our shareholders could conflict with the responsibilities owed by management of Medicore to its shareholders. THE LOSS OF CERTAIN EXECUTIVE PERSONNEL WITHOUT RETAINING QUALIFIED REPLACEMENTS COULD ADVERSELY AFFECT OUR BUSINESS OPERATIONS, AND AS A RESULT, OUR REVENUES AND EARNINGS COULD DECLINE We are dependent upon the services of our executive officers, Thomas K. Langbein, Chairman of the Board, who also holds that position with our parent, Medicore, of which company he is also President and Chief Executive Officer, and Stephen W. Everett, our Chief Executive Officer, President and a director. Mr. Langbein has been involved with Medicore since 1971, when his investment banking firm, 26 Todd & Company, Inc., took it public, and with us since we became a public company in 1977 (originally a wholly-owned subsidiary of Medicore organized in 1976). Mr. Everett joined us in November, 1998 as Vice President, became Executive Vice President in June, 1999, President on March 1, 2000, and Chief Executive Officer in May, 2003. Mr. Everett has been involved in the healthcare industry for 24 years. Mr. Langbein has an employment agreement with our parent through February 28, 2009, which provides for non-competition within 20 miles of Medicore's primary operations, with an option for Medicore to pay $4,000 per month for 12 months for additional non-competition provisions. Mr. Everett has an employment agreement with us through December 31, 2005 with a one-year non-competition provision within the United States. It would be very difficult to replace the services of these individuals, whose services, both individually and combined, if lost, would adversely affect our operations and earnings, and most likely as a result, the trading price of our common stock. There is no key-man life insurance on any of our officers. POSSIBLE DELISTING AND RISKS OF LOW PRICED STOCKS Our common stock trades on the Nasdaq SmallCap Market. There are certain criteria for continued listing on the Nasdaq SmallCap Market, known as maintenance requirements. Failure to satisfy any one of these maintenance listing requirements could result in our securities being delisted from the Nasdaq SmallCap Market. These criteria include two active market makers, maintenance of $2,500,000 of stockholders' equity (or market capitalization of $35,000,000 or net income of $500,000 for our most recently completed fiscal year or in two of the last three most recently completed fiscal years), a minimum bid price for our common stock of $1.00, and at least 500,000 publicly held shares with a market value of at least $1,000,000, among other criteria. For SmallCap companies, as is our company, there are different types of deficiencies that may occur, with different cure periods: o failure to meet the continued inclusion requirement for two active market makers for 10 consecutive business days; cure period, 30 calendar days from Nasdaq notification; compliance required for a minimum of 10 consecutive business days o failure to meet the continued inclusion requirement for $1,000,000 of market value of publicly held common stock for 30 consecutive business days; cure period, 90 calendar days from Nasdaq notification; compliance required for a minimum of 10 consecutive business days o failure to meet the continued inclusion requirement for $1.00 minimum bid price for 30 consecutive business days; cure period of 180 calendar days from Nasdaq notification; issuer is afforded an additional 180 day compliance period, provided on the 180th day from Nasdaq notification of the issuers demonstrate compliance with the core initial listing standards of the SmallCap Market, which is either net income of $750,000 (determined from the most recently completed fiscal year or two of the most recently completed fiscal years), stockholders' equity of $5,000,000, or market capitalization of $50,000,000 If a company is unable to demonstrate compliance, assuming any of the above deficiencies, the security is subject to delisting. The security might be able to trade on the OTC Bulletin Board, a less transparent trading market which may not provide the same visibility for that company or liquidity for its securities, as does the Nasdaq SmallCap Market. As a consequence, an investor may find it more difficult to dispose of or obtain prompt quotations as to the price of that company's securities, and may be exposed to a risk of decline in the market price of the common stock. 27 In November, 2000 and again in April, 2001, we received notification from the Nasdaq Listing Qualifications Department of the Nasdaq Stock Market that our common stock failed to maintain a closing bid price greater than or equal to $1.00 per share for 30 consecutive days, as required by Marketplace Rule 4310(c)(4). In each instance, we maintained our Nasdaq SmallCap Market listing. In December, 2000, we received notice from Nasdaq's Listing Qualifications Department that our common stock failed to maintain a market value of public float greater than $1,000,000 as required under Marketplace Rule 4310(c)(7), which was ultimately complied with. These situations relating to the trading market qualifications are beyond our control. We cannot assure you we will not be deficient in one or more listing maintenance criteria, whether within or beyond our control that, without a timely cure and continued compliance, could cause our common stock to be delisted from the Nasdaq SmallCap Market. SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT SHAREHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE Our parent company owns 4,821,244 shares or approximately 59% of our outstanding common stock. Our officers and directors and officers and directors of our parent own approximately 981,000 shares of our common stock and approximately 628,000 options exercisable into an additional 628,000 shares of common stock. Most of the shares held by these officers and directors are not freely tradable and are restricted from public sale. However, a registration statement covering the sale of shares held by these officers, directors and Medicore, may be effected, since these are controlling persons of the company, and all their shares, including those issuable upon exercise of their options, would then be eligible for resale in the public market without restriction. Also, the officers' and directors' common stock now owned, as well as the shares obtainable upon exercise of their options, upon satisfying the conditions of Rule 144 under the Securities Act, may be sold without complying with the registration provisions of the Securities Act. These conditions include holding the shares for one year from acquisition, volume limits of selling every three months an amount of shares which does not exceed the greater of 1% of the outstanding common stock, or the average weekly volume of trading as reported by Nasdaq during the four calendar weeks prior to the sale, the filing of a Form 144, our continuing to timely file our reports under the Exchange Act, and the shares are sold directly to a market maker or otherwise sold through a typical broker's transaction, with normal commissions and no prearranged solicitations of the purchase order. Our publicly tradable common stock, known as the float, is approximately 2,212,000 shares. Approximately 981,000 shares of our common stock are directly owned by our officers and directors and the officers and directors of our parent, representing approximately 44% of the float, and including the options for approximately 628,000 additional shares, approximately 73% of the float. Accordingly, the sale by such officers and directors, whether through a registration statement or under Rule 144, may have an adverse affect on the market price of our common stock, and may inhibit our ability to manage subsequent equity or debt financing. If these shareholders sell substantial amounts of our common stock, including shares issued upon the exercise of their options, into the public market, the market price of our common stock could fall. ITEM 2. PROPERTIES Dialysis Corporation of America owns three properties, one located in Lemoyne, Pennsylvania, a second in Easton, Maryland, and a third in Valdosta, Georgia. The Maryland property consists of approximately 7,500 square feet, most of which is leased to a competitor under a 10-year lease through June 30, 2009 with two renewals of five years each. The lease is guaranteed by the tenant's parent company. We use approximately 600 square feet at that property for an administrative office. 28 The Lemoyne property consists of approximately 15,000 square feet and houses one of our dialysis centers which accounts for approximately 5,400 square feet, under a five year lease with us through December 22, 2008, with one additional renewal period of five years. The center is approved for 17 dialysis stations with space available for expansion. We use approximately 4,000 square feet of the Lemoyne property for administrative offices. We paid off the remaining balance on first mortgages on our Easton, Maryland and Lemoyne, Pennsylvania properties in December 2002. The Easton, Maryland property has a mortgage to secure a $700,000 development loan to our Vineland, New Jersey subsidiary at an annual interest rate of 1% over the prime rate, maturing in December 2007, which loan we guaranty. This loan had a remaining principal balance of approximately $636,000 at December 31, 2003. See Item 7, "Management's Discussions and Analysis of Financial Condition and Results of Operations" and Note 2 to "Notes to Consolidated Financial Statements." We acquired property in Valdosta, Georgia in 2000, which property is subject to a five year $788,000 mortgage obtained in April, 2001 with interest at the prime rate plus 1/2% with a minimum rate of 6%, maturing in April, 2006. This mortgage had a remaining principal balance of approximately $715,000 at December 31, 2003. We constructed a dialysis center at this property comprising approximately 6,000 square feet which we have leased to one of our subsidiaries for $90,600 per year under a 10-year lease, with two additional renewal periods of five years each. For our Cincinnati, Ohio facility, we purchased the property, and completed the construction of an approximately 5,000 square foot dialysis facility at a cost of approximately $740,000. In February, 2003, we sold the property to a corporation owned by the medical director of that facility, which, in turn, leased the facility to our Cincinnati subsidiary for an initial term of 10 years from the commencement date of February 6, 2003, with two additional five-year renewal periods. Annual rental fees remain the same for the first four years of the lease, and thereafter increase annually based upon a percentage increase in the CPI for the Cincinnati, Ohio area. $75,000 of tenant improvements were funded by a loan by us to our majority owned Cincinnati subsidiary operating this center for which the subsidiary issued to us a five-year promissory note. The loan must be paid prior to that subsidiary paying any other of its indebtedness, and earlier if at such time the subsidiary has cash flow or other proceeds available for distribution to its members under its operating agreement, subject to tax payment distributions which have a priority. Should our subsidiary sell additional limited liability interests, the proceeds will first be used to repay the loan. In addition to our Lemoyne, Pennsylvania, Valdosta, Georgia and Cincinnati, Ohio facilities, we presently have 15 other dialysis centers, including the facility in Toledo, Ohio in which we have a 40% interest, that lease their respective facilities from unaffiliated parties, most under five to ten year initial terms, usually with two additional renewal periods of five years each, for space ranging from approximately 3,000 to 7,000 square feet. We sublet a minimal amount of space at two of our dialysis centers to the physicians who are our medical directors at those centers for their medical offices. The subleases are on a commercially reasonable basis and are structured to comply with the safe harbor provisions of the "Anti-Kickback Statute." See Item 1, "Business - Government Regulation - Fraud and Abuse." We lease approximately 2,300 square feet in Hanover, Maryland for executive offices pursuant to a five year lease with one five year renewal option. We are in the process of negotiating a lease for approximately twice the space in Linthicum, Maryland, where we anticipate moving our executive offices in the summer of 2004. 29 We are constructing a new center in Maryland and are actively pursuing the additional development and acquisition of dialysis facilities in other areas which would entail the acquisition or lease of additional property. We construct most of our dialysis centers, which have state-of-the-art equipment and facilities. Dialysis stations at our centers are equipped with modern dialysis machines, most of which had been financed under a November, 1996 master lease/purchase agreement. We now acquire our equipment, currently from advances by our parent under a demand promissory note for up to $1,500,000 with annual interest on advances at 1.25% over the prime rate. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," Item 13, "Certain Relationships and Related Transactions," and Notes 2 and 15 to "Notes to Consolidated Financial Statements." None of our dialysis facilities are operating at full capacity. See "Business - Operations - Location, Capacity and Use of Facilities" above. The existing dialysis facilities could accommodate greater patient volume, particularly if we increase hours and/or days of operation without adding additional dialysis stations or any additional capital expenditures. We also have the ability and space at most of our facilities to expand to increase patient volume subject to obtaining appropriate governmental approval. We maintain executive offices at 1344 Ashton Road, Suite 201, Hanover, Maryland 21076, and administrative offices at 27 Miller Street, Suite 2, Lemoyne, Pennsylvania 17043, as well as at our parent's facility at 2337 West 76th Street, Hialeah, Florida 33016. ITEM 3. LEGAL PROCEEDINGS In July, 2002, the company initiated an action against Lawrence Weber Medical, Inc. d/b/a Omnicare Renal Services in the United States District Court for the Middle District of Pennsylvania asserting a breach by Omnicare of a Consulting Services Agreement. The company was seeking damages and costs of the legal action. Omnicare filed an answer and counterclaims against the company and its subsidiary alleging breaches of the Consulting Services Agreement and related agreements between the parties seeking damages. On February 19, 2004, the case was settled, the specific terms of which are confidential. On that date, the court ordered the dismissal of the action by each party, with a right to reinstate for good cause, and the parties to consummate the settlement within 60 days. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of our fiscal year ended December 31, 2003 to a vote of security holders through the solicitation of proxies or otherwise. Medicore owns approximately 59% of our equity. We provide our shareholders with an Information Statement and an Annual Report. The Information Statement provides similar information to shareholders as does a proxy statement, but based upon the controlling interest our parent holds in us, we are not required to and do not solicit proxies. Shareholders of record on April 16, 2004 are entitled to vote at the annual meeting scheduled for June 3, 2004 will receive an Information Statement which provides, among other information as to the annual meeting, certain information relating to "Directors and 30 Executive Officers," "Executive Compensation," "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" "Certain Relationships and Related Transactions," and "Principal Accountant Fees and Services," which information is incorporated by reference into this Annual Report on Form 10-K. See Part III of this Annual Report, Items 10 through 14. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES PRICE RANGE Our common stock trades on the Nasdaq SmallCap Market under the symbol "DCAI." The following table indicates the high and low bid prices for our common stock for each of the four quarters for the years ended December 31, 2002 and 2003 as reported by Nasdaq. BID PRICE ------------------ 2002 HIGH LOW ---- ----- ----- 1st Quarter $1.90 $1.40 2nd Quarter 3.68 1.18 3rd Quarter 2.25 1.00 4th Quarter 2.19 1.46 BID PRICE ------------------ 2003 HIGH LOW ---- ----- ----- 1st Quarter $2.09 $1.70 2nd Quarter 2.21 1.70 3rd Quarter 2.66 1.63 4th Quarter 4.26 2.37 At March 15, 2004, the high and low sales prices of our common stock were $4.78 and $4.52, respectively. Bid prices represent prices between brokers, and do not include retail mark-ups, mark-downs or any commission, and may not necessarily represent prices in actual transactions. STOCKHOLDERS At March 15, 2004, we had 121 shareholders of record as reported by our transfer agent. We have been advised by ADP, which organization holds securities for banks, brokers and depositories, that there are currently approximately 1,272 beneficial owners of our common stock. DIVIDEND POLICY Dialysis Corporation of America has never paid a dividend and does not anticipate that it will pay dividends in the foreseeable future. The board of directors intends to retain earnings for use in the business. Future dividend policy will be at the discretion of the board of directors, and will depend on our 31 earnings, capital requirements, financial condition and other similar relevant factors. Any determination to pay a dividend is also subject to one of the covenants in the mortgage on our Valdosta, Georgia property (see Item 2, "Properties") which restricts the payment of dividends above 25% of our net worth. Also, until 2001, we had experienced operational losses and were not able to pay dividends. See Item I, "Business - Risk Factors," Item 6, "Selected Financial Data," and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." EQUITY COMPENSATION PLAN The following table provides certain information with respect to the one equity compensation plan approved by shareholders in effect at December 31, 2003. There are no equity compensation plans outstanding that were not approved by shareholders.
Number of securities remaining available for Number of securities to be Weighted-average future issuance under equity issued upon exercise of exercise price of compensation plans outstanding options, warrants outstanding options, (excluding securities reflected and rights warrants and rights in column (a)) ----------------------------- -------------------- ------------------------------- Plan Category (a) (b) (c) - ------------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders: (1) 1,191,716(1) $.716 954,000
- ------------ (1) The options are five years in duration (except 10,000 options for three years), 994,716 vested and 197,000 non-vested, expire at various dates between April 20, 2004 and August 18, 2006, contain anti-dilution provisions providing for adjustments of the exercise price under certain circumstances and have termination provisions. SALE OF SECURITIES NOT REGISTERED UNDER THE SECURITIES ACT There were no sales of our securities, registered or unregistered, under the Securities Act of 1933, as amended (the "Securities Act"), except under option exercises which were exempt from the registration requirements of Section 5 of the Securities Act under the private placement exemption of Section 4(2) and/or Regulation D of the Securities Act, based on the limited number of optionees who are officers, directors and/or key employees. See Item 11, "Executive Compensation," Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," and Note 6 to "Notes to Consolidated Financial Statements." STOCK REPURCHASES In September, 2000, the board of directors authorized the company to buy back up to 600,000 shares of its common stock within the range of the then prevailing market price of $.44 per share. In the fourth quarter of 2003, the company made no repurchases of its common stock. See Note 9 to "Notes to Consolidated Financial Statements." 32 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the five years ended December 31, 2003 is derived from the audited consolidated financial statements of the company and its subsidiaries. The consolidated financial statements and related notes for the three years ended December 31, 2003, together with the related Reports of Independent Certified Public Accountants, are included elsewhere in this Annual Report on Form 10-K. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein, and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
CONSOLIDATED STATEMENTS OF OPERATIONS DATA (in thousands except per share amounts) Years Ended December 31, ------------------------------------------------------ 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Revenues ............................. $ 30,278 $ 25,607 $ 19,441 $ 9,247 $ 5,866 Net income (loss) .................... 1,150 1,242 784 (356) (668) Earnings (loss) per share(1) Basic .............................. .15 .16 .10 (.05) (.09) Diluted ............................ .13 .14 .10 (.05) (.09) CONSOLIDATED BALANCE SHEET DATA (in thousands) December 31, ------------------------------------------------------ 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Working capital ...................... $ 3,773 $ 4,593 $ 3,883 $ 3,869 $ 4,152 Total assets ......................... 19,604 17,154 15,683 11,177 9,036 Intercompany payable (receivable) from Medicore (non-current portion) ..... 234 -- (201) (414) (105) Long term debt, net of current portion 2,097 2,727 2,935 1,755 870 Stockholders' equity ................. 10,970 9,727 8,485 7,799 7,260
- ---------- (1) All share and per share data retroactively adjusted for two-for-one stock split effected January 28, 2004. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations, commonly known as MD&A, is our attempt to provide 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. Our discussion of MD&A should be read in conjunction 33 with our consolidated financial statements, including the notes, included elsewhere in this Annual Report on Form 10-K. Please also review the Cautionary Notice Regarding Forward-Looking Information on page one of this Annual Report. OVERVIEW Dialysis Corporation of America provides dialysis services, primarily kidney dialysis treatments through 19 outpatient dialysis centers, including a 40% owned Ohio affiliate and one unaffiliated dialysis center which it manages, to patients with chronic kidney failure, also know as end-stage renal disease or ESRD. We provide dialysis treatments to dialysis patients of seven hospitals and medical centers through acute inpatient dialysis services agreements with those entities. We provide homecare services, including home peritoneal dialysis through method II services, the latter relating to providing patients with supplies and equipment. The following table shows the number of in-center, home peritoneal and acute inpatient treatments performed by us through the dialysis centers we operate, including the two centers we manage, one in which we have a 40% ownership interest, and those hospitals and medical centers with which we have inpatient acute service agreements for the periods presented: YEAR ENDED DECEMBER 31, ------------------------------------ 2003 2002 2001 ------- ------- ------- In center 103,025 86,475 63,803 Home peritoneal 7,193 4,504 2,824 Acute 8,010 9,116 9,412 ------- ------- ------- 118,228(1) 100,095(1) 76,039(1) ======= ======= ======= - --------- (1) Treatments by the two managed centers included: in-center treatments of 11,081, 6,563 and 3,156, respectively, for 2003, 2002 and 2001; no home peritoneal treatments; and acute treatments of 156, 87 and 157, respectively, for 2003, 2002 and 2001. We also provide ancillary services associated with dialysis treatments, including the administration of EPO for the treatment of anemia in our dialysis patients. EPO is currently available from only one manufacturer, and no alternative drug has been available to us for the treatment of anemia in our dialysis patients. If our available supply of EPO were reduced either by the manufacturer or due to excessive demand, our revenues and net income would be adversely affected. The manufacturer of EPO increased its price in early 2003, and could implement further price increases which would adversely affect our net income. This manufacturer has developed another anemia drug that could possibly substantially reduce our revenues and profit from the treatment of anemia in our patients. ESRD patients must either obtain a kidney transplant or obtain regular dialysis treatments for the rest of their lives. Due to a lack of suitable donors and the possibility of transplanted organ rejection, the most prevalent form of treatment for ESRD patients is hemodialysis through a kidney dialysis machine. Hemodialysis patients usually receive three treatments each week with each treatment lasting between three and five hours on an outpatient basis. Although not as common as hemodialysis in an outpatient facility, home peritoneal dialysis is an available treatment option, representing the third most common type of ESRD treatment after outpatient hemodialysis and kidney transplantation. 34 Approximately 62% of our medical service revenues are derived from Medicare and Medicaid reimbursement with rates established by CMS, and which rates are subject to legislative changes. Over the last two years, Medicare reimbursement rates have not increased. Dialysis is typically reimbursed at higher rates from private payors, such as a patient's insurance carrier, as well as higher payments received under negotiated contracts with hospitals for acute inpatient dialysis services. The following table shows the breakdown of our revenues by type of payor for the periods presented: YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 2001 ---- ---- ---- Medicare 54% 49% 48% Medicaid and comparable programs 8% 9% 11% Hospital inpatient dialysis services 7% 10% 15% Commercial insurers and other private payors 31% 32% 26% ---- ---- ---- 100% 100% 100% ==== ==== ==== Our medical service revenues are derived primarily from four sources: outpatient hemodialysis services, home peritoneal dialysis services, inpatient hemodialysis services and ancillary services. The following table shows the breakdown of our medical service revenues (in thousands) derived from our primary revenue sources and the percentage of total medical service revenue represented by each source for the periods presented:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2003 2002 2001 ----------------- ----------------- ----------------- Outpatient hemodialysis services $14,760 50% $12,796 51% $ 9,167 48% Home peritoneal dialysis services 1,294 4% 823 3% 475 3% Inpatient hemodialysis services 2,114 7% 2,546 10% 2,742 14% Ancillary services 11,508 39% 8,997 36% 6,536 35% ------- ------- ------- ------- ------- ------- $29,676 100% $25,162 100% $18,920 100% ======= ======= ======= ======= ======= =======
The healthcare industry is subject to extensive regulation by federal and state authorities. There are a variety of fraud and abuse measures to combat waste, including anti-kickback regulations and extensive prohibitions relating to self-referrals, violations of which are punishable by criminal or civil penalties, including exclusion from Medicare and other governmental programs. Unanticipated changes in healthcare programs or laws could require us to restructure our business practices which, in turn, could materially adversely affect our business, operations and financial condition. See Item 1, "Business - Government Regulation." We have developed a Corporate Integrity Program to assure that we provide the highest level of patient care and services in a professional and ethical manner consistent with applicable federal and state laws and regulations. Among the different programs is our Compliance Program, which has been implemented to assure our compliance with fraud and abuse laws and to supplement our existing policies relating to claims submission, cost report preparation, initial audit and human resources, all geared towards a cost-efficient operation beneficial to patients and shareholders. See Item 1, "Business - Corporate Integrity Program." Dialysis Corporation of America's future growth depends primarily on the availability of suitable dialysis centers for development or acquisition in appropriate and acceptable areas, and our ability to manage the development costs for these potential dialysis centers while competing with larger companies, some of which are public companies or divisions of public companies with greater numbers of personnel and 35 financial resources available for acquiring and/or developing dialysis centers in areas targeted by us. Additionally, there is intense competition for qualified nephrologists who would serve as medical directors of dialysis facilities, and be responsible for the supervision of those dialysis centers. There is no assurance as to when any new dialysis centers or inpatient service contracts with hospitals will be implemented, or the number of stations, or patient treatments such center or service contract may involve, or if such center or service contract will ultimately be profitable. It has been our experience that newly established dialysis centers, although contributing to increased revenues, have adversely affected our results of operations in the short term due to start-up costs and expenses and a smaller patient base. RESULTS OF OPERATIONS The following table shows our results of operations (in thousands) and the percentage of medical service revenue represented by each line item for the periods presented:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2003 2002 2001 ----------------- ----------------- ------------------ Medical service revenue $ 29,676 100.0% $ 25,162 100.0% $ 18,920 100.0% Interest and other income 602 2.0% 444 1.8% 521 2.8% -------- ----- -------- ----- -------- ----- Total revenues 30,278 102.0% 25,606 101.8% 19,441 102.8% Cost of medical services 18,221 61.4% 15,067 59.9% 12,022 63.5% Selling, general and administrative expenses 9,357 31.5% 7,500 29.8% 5,583 29.5% Provision for doubtful accounts 290 1.0% 720 2.9% 659 3.5% Interest expense 203 0.7% 220 0.9% 211 1.1% -------- ----- -------- ----- -------- ----- Total cost and expenses 28,071 94.6% 23,507 93.4% 18,475 97.6% -------- ----- -------- ----- -------- ----- Income before income taxes, minority interest and equity in affiliate earnings 2,207 7.4% 2,099 8.3% 966 5.1% Income tax provision 878 3.0% 771 3.1% 80 0.4% -------- ----- -------- ----- -------- ----- Income before minority interest and equity in affiliate earnings 1,329 4.5% 1,328 5.3% 886 4.7% Minority interest in income of consolidated subsidiaries 223 0.8% 155 0.6% 86 0.5% Equity in affiliate earnings (loss) 44 0.1% 69 0.3% (16) (0.1)% -------- ----- -------- ----- -------- ----- Net income $ 1,150 3.9% $ 1,242 4.9% $ 784 4.1% ======== ===== ======== ===== ======== =====
2003 COMPARED TO 2002 Medical service revenues increased approximately $4,514,000 (18%) for the year ended December 31, 2003, compared to the preceding year with the increase largely attributable to a 14% increase in total dialysis treatments performed by us from 93,445 in 2002 to 106,991 in 2003. This increase reflects increased revenues of approximately $1,998,000 for our Pennsylvania dialysis centers, 36 decreased revenues of $95,000 for our New Jersey centers reflecting termination of our two New Jersey acute care contracts during 2002; increased revenues of $674,000 for our Georgia centers, revenues of approximately $1,255,000 for our new Maryland center; revenues of approximately $709,000 for our new Ohio center; and a decrease in consulting and license income of approximately $27,000. Interest and other income increased by approximately $158,000 for the year ended December 31, 2003, compared to the preceding year. This includes an increase in interest income of $7,000; an increase in management fee income of $129,000 pursuant to management service agreements with our 40% owned Toledo, Ohio affiliate and an unaffiliated Georgia center with which we entered a management services agreement effective September 2002; an increase in miscellaneous other income of $6,000 and an increase in rental income of $16,000. Cost of medical services sales as a percentage of sales increased to 61% for the year ended December 31, 2003, compared to 60% for the preceding year which increase is primarily attributable to costs for treatments at new dialysis centers prior to Medicare approval of those centers for which there were no corresponding medical service revenues; increases in the cost of EPO as a percentage of EPO sales revenues; and increases in the cost of professional liability insurance. The cost of our professional liability insurance coverage increased by $43,000 or 62% for the year ended December 31, 2003, compared to the preceding year. While a portion of this increase is attributable to our new centers and overall increase in treatments, a substantial portion of the cost increase relates to the general market conditions for professional liability coverage of reduced availability and higher costs for this coverage. Continued cost increases for professional liability coverage could adversely impact our earnings. Approximately 28% of our medical services revenues for the year ended December 31, 2003 was derived from the administration of EPO to our dialysis patients compared to 26% for the preceding year. This drug is only available from one manufacturer in the United States which raised the price for its product in January, 2003. Continued price increases for this product without our ability to increase our charges would increase our costs and thereby adversely impact our earnings. We cannot predict the timing, if any, or extent of any future price increases by the manufacturer, or our ability to offset any such increases. Selling, general and administrative expenses, those corporate and facility costs not directly related to the care of patients, including, among others, administration, accounting and billing, increased by approximately $1,857,000 for the year ended December 31, 2003, compared to the preceding year. This increase reflects operations of our new dialysis centers in Ohio and Maryland, and increased support activities resulting from expanded operations. Selling, general and administrative expenses as a percentage of medical services revenues increased to approximately 32% for the year ended December 31, 2003, compared to 30% for the preceding year, including patient treatment expenses of new centers incurred prior to Medicare approval for which there were no corresponding medical service revenues. Provision for doubtful accounts decreased approximately $430,000, largely as a result of Medicare bad debt recoveries of approximately $341,000 during 2003 compared to approximately $52,000 for the preceding year. Without the effect of the Medicare bad debt recoveries the provision would have amounted to 2% of sales for the year ended December 31, 2003 compared to 3% for the preceding year. This change reflects our collection experience with the impact of that experience included in accounts receivable presently reserved, plus recovery of accounts previously considered 37 uncollectible 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, and are reserved for in the allowance for doubtful accounts until they are written off. Although operations of additional centers have resulted in additional revenues, certain of these centers are still in the developmental stage and, accordingly, their operating results adversely impact our overall results of operations until they achieve a patient count sufficient to sustain profitable operations. We experienced same-center growth in total treatments of approximately 7% in 2003, and same-center revenues grew approximately 9% in fiscal 2003. Management continues to search for ways to operate more efficiently and reduce costs through process improvements. In addition, we are reviewing technological improvements and intend to make capital investments to the extent we are confident such improvements will improve patient care and operating performance. Interest expense decreased by approximately $17,000 for the year ended December 31, 2003, compared to the preceding year, reflecting lower interest rates on variable rate debt and reduced average borrowings by us. Minority interest represents the proportionate equity interests of minority owners of our subsidiaries whose financial results are included in our consolidated results. The increase in minority interest resulted from financial improvements of the related subsidiaries. Equity in affiliate earnings represents our proportionate interest in the earnings of our 40% owned Ohio affiliate. The prime rate was 4.00% at December 31, 2003 and 4.25% at December 31, 2002. Accrued compensation of $186,000 was bonused to the board of directors relating to the exercise of a portion of their outstanding stock options, amounting to an aggregate of 95,619 shares acquired at exercise prices ranging from $1.25 to $1.50. 2002 COMPARED TO 2001 Medical service revenues increased approximately $6,243,000 (33%) for the year ended December 31, 2002, compared to the preceding year. This increase reflects increased revenues of our Pennsylvania dialysis centers of approximately $1,947,000, including revenues of $874,000 for our new Pennsylvania facility which commenced operations in January 2002; decreased revenues of $71,000 for our New Jersey centers reflecting a reduction in patients at one of our New Jersey facilities and termination of our two New Jersey acute care contracts; and increased revenues of $4,454,000 for our Georgia centers, two of which became operational during 2001 which contributed $3,263,000 additional revenues in 2002 and another being acquired in April 2002 for which 2002 revenues amounted to $1,212,000; and a decrease in consulting and license income of approximately $87,000. Interest and other income decreased by approximately $77,000 for the year ended December 31, 2002, compared to the preceding year. This includes a decrease in interest from our parent of $120,000 for the year ended December 31, 2002 compared to the preceding year, consisting of interest on a note 38 receivable and an advance receivable, primarily due to our parent's repayment of the note; a decrease in other interest income of $13,000 primarily due to a decrease in average interest rates; an increase in management fee income of $76,000 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; a decrease in miscellaneous other income of $26,000 and an increase in rental income of $6,000. Cost of medical services sales as a percentage of sales decreased to 60% for the year ended December 31, 2002, compared to 64% for the preceding year as a result of decreases in both supply costs and payroll costs as a percentage of sales. We receive approximately 26% of our medical services revenues 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 would 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, those corporate and facility costs not directly related to the care of patients, including, among others, administration, accounting and billing, increased by approximately $1,917,000 for the year ended December 31, 2002, compared to the preceding year. This increase reflects operations of our new dialysis center in Pennsylvania, the Georgia center acquired in April 2002 and a full year's operations for the two Georgia centers opened during 2001; and increased support activities resulting from expanded operations. Although selling, general and administrative expenses increased, as a percent of medical service revenues these expenses remained relatively constant amounting to 30% for the year ended December 31, 2002, and for the preceding year. Provision for doubtful accounts increased approximately $61,000, largely as a result of increased sales revenues. The provision remained relatively constant amounting to 3% of sales for the year ended December 31, 2002 and for the preceding year. 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, and are reserved for in the allowance for doubtful accounts until they are written off. Although operations of additional centers have resulted in additional revenues, some are still in the developmental stage and, accordingly, their operating results will adversely affect results of operations until they achieve a sufficient patient count to sustain profitable operations. The company experienced same-center growth in total treatments of approximately 18% in 2002. Same-center revenues grew 22% in fiscal 2002. The company made an acquisition in May 2002 of a facility in Georgia that added 4% to revenue. Management continues to search for ways to operate more efficiently and reduce costs through process improvements and improve our bottom line. We are reviewing technological improvements as well, and will make the capital investment if we are confident such improvements will improve patient care and operating performance. Interest expense increased by approximately $9,000 for the year ended December 31, 2002, compared to the preceding year primarily as a result of additional equipment financing agreements with the increase tempered to some extent by decreased interest rates. 39 The prime rate was 4.25% at December 31, 2002 and 4.75% at December 31, 2001. Accrued compensation of approximately $100,000 was bonused to the board of directors on a pro rata basis for exercise of a portion of their options, amounting to 79,642 shares at exercise prices ranging from $1.25 to $1.50, representing approximately 14% of the directors' aggregate options and approximately 12% of all outstanding options. LIQUIDITY AND CAPITAL RESOURCES Working capital totaled approximately $3,773,000 at December 31, 2003, which reflected a decrease of $820,000 (18%) during the current year. Included in the changes in components of working capital was a decrease in cash and cash equivalents of $1,057,000, which included net cash provided by operating activities of $1,696,000, net cash used in investing activities of $2,479,000 (including additions to property and equipment of $1,656,000, acquisition payments to a minority member in two of our subsidiary dialysis centers to acquire an aggregate of 30% of such member's interest in each of such subsidiaries, $75,000 for the acquisition of a Georgia dialysis center; $150,000 in loans to physician affiliates, and $77,000 distributions received from our 40% owned Ohio affiliate); and net cash used in financing activities of $274,000 (including an increase in advances to our parent of $234,000, debt repayments of $587,000, $204,000 in capital contributions by a subsidiary minority member, distributions to subsidiary minority members of $119,000, $42,000 for the repurchase of shares of our common stock and $35,000 of receipts from the exercise of stock options). In addition to an increase of $1,397,000 in accounts receivable due primarily to the operation of new centers, working capital reflects an increase in amounts refundable to insurance companies of $488,000 and a payable of $670,000 on subsidiary minority interest acquisitions. See Notes 1 and 11 to "Notes to Consolidated Financial Statements." Our Easton, Maryland building has a mortgage to secure a development loan for our Vineland, New Jersey subsidiary, which loan is guaranteed by us. This loan had a remaining principal balance of $636,000 at December 31, 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 principal balance of approximately $715,000 at December 31, 2003 and $753,000 at December 31, 2002. See Item 2, "Properties" and Note 2 to "Notes to Consolidated Financial Statements." We have an equipment financing agreement for kidney dialysis machines for our facilities, which had an outstanding balance of approximately $1,321,000 at December 31, 2003, and $1,844,000 at December 31, 2002. There was no additional equipment financing during 2003. See Note 2 to "Notes to Consolidated Financial Statements." We opened centers in Cincinnati, Ohio and Chevy Chase, Maryland in February, 2003 and acquired a center in Georgia in April, 2003. We ceased operations at our Homerville, Georgia center during 2003 as a result of that center not performing up to expectations. We opened three new centers in the first quarter of 2004, one each in Pennsylvania, Virginia and South Carolina, and we are in the process of constructing a new center in Maryland. 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 40 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 and are presently in different phases of negotiations with physicians for the development of additional outpatient centers. Such expansion requires capital. We have been funding our expansion through internally generated cash flow. Our future expansion may require us to seek outside financing. While we anticipate that financing will be available either from a financial institution or our parent company, Medicore, which is currently providing us with equipment financing, no assurance can be given that we will be successful in implementing our growth strategy or that adequate financing will be available to support our expansion. See Item 1, "Business - Business Strategy." AGGREGATE CONTRACTUAL OBLIGATIONS As of December 31, 2003, the Company's contractual obligations, including payments due by period, are as follows:
Payments due by period ----------------------------------------------------------------------- Less than More than Total 1 year 1-3 years 3-5 years 5 years ----------- ----------- ----------- ----------- ----------- Long-term debt $ 2,672,355 $ 574,871 $ 1,465,546 $ 631,938 $ -- Operating leases 6,362,737 1,008,571 1,853,583 1,531,247 1,969,336 Purchase obligations: Medical services 2,065,406 622,406 862,457 428,567 151,976 Construction contracts 661,512 661,512 -- -- -- ----------- ----------- ----------- ----------- ----------- Total purchase obligations 2,726,918 1,283,918 862,457 428,567 151,976 ----------- ----------- ----------- ----------- ----------- $11,762,010 $ 2,867,360 $ 4,181,586 $ 2,591,752 $ 2,121,312 =========== =========== =========== =========== ===========
NEW ACCOUNTING PRONOUNCEMENTS In June, 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146, " Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146). FAS 146, which is effective for exit or disposal activities initiated after December 31, 2002, is not expected to have a material impact on our results of operation, financial position or cash flows. See Note 1 to "Notes to Consolidated Financial Statements." In November, 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45), which is effective for periods ending after December 15, 2002. We do not expect FIN 45 to have a material impact on our financial position or results of operations. See Note 1 to "Notes to Consolidated Financial Statements." 41 In December, 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" (FAS 148), which amends FAS 123, "Accounting for Stock-Based Compensation," transition requirements when voluntarily changing to the fair value based method of accounting for stock-based compensation and also amends FAS 123 disclosure requirements. FAS 148 is not expected to have a material impact on our results of operations, financial position or cash flows. See Note 1 to "Notes to Consolidated Financial Statements." In January, 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), for which certain disclosure requirements apply to financial statements issued after January 31, 2003. FIN 46 contains consolidation requirements regarding variable interest entities which are applicable depending on when the variable interest entity was created. We do not expect FIN 46 to have a material impact on our financial position or results of operations. See Note 1 to "Notes to Consolidated Financial Statements." In May, 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (FAS 150), which is effective for financial instruments entered into or modified after May 31, 2003. We do not expect FAS 150 to have a material impact on our results of operations, financial position or cash flows. See Note 1 to "Notes to Consolidated Financial Statements." CRITICAL ACCOUNTING POLICIES AND ESTIMATES In December, 2001, the SEC issued a cautionary advice to elicit more precise disclosure in this Item 7, 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 net of contractual provisions. Contractual provisions are the difference between our gross billed revenues and what we expect to collect. 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 42 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. We have developed a sophisticated information and computerized coding system, but due to the complexity of the payor mix and regulations, we sometimes receive more or less than the amount expected when the services are provided. We reconcile any differences at least quarterly. 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 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 assets 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 43 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. See "Operations - Medicare Reimbursement," "Government Regulation," and "Risk Factors" under Item 1, "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 7A. 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 funds in liquid interest bearing accounts of which we held approximately $1,510,000 December 31, 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 approximately $1,351,000 at December 31, 2003. On March 17, 2004, we issued a demand promissory note to our parent, Medicore, for up to $1,500,000 of financing for equipment purchases at an interest rate of 1.25% over the prime rate. Variable rate debt may result in higher costs to us if interest rates rise. We have exposure to both rising and falling interest rates. Assuming a relative 15% decrease in rates on our year-end investments in interest bearing accounts and a relative 15% increase in rates on our year-end variable rate mortgage debt would result in a negative annual impact of approximately $8,000 on our results of operations. We do not utilize financial instruments for trading or speculative purposes and do not currently use interest rate derivatives. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section to this annual report, specifically, Part IV, Item 15, "Exhibits, Financial Statement Schedules and Reports on Form 8-K," subpart (a)1, "All Financial Statements - See Index to Consolidated Financial Statements," and subpart (a)2, "Financial Statement Schedules - See Index to Consolidated Financial Statements." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective on November 7, 2003, the filing date of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 ("September Quarterly Report"), our independent accountants, Wiss & Company, 44 LLP, determined to discontinue audit services to its SEC registrant clients, including us. Our audit committee authorized the appointment of Moore Stephens, P.C. to serve as our new independent auditors and for tax preparation services for fiscal 2003. Moore Stephens was formally engaged on January 9, 2004. Wiss & Company's resignation was reported in our September Quarterly Report, and the retention of Moore Stephens was reported on our Current Report on Form 8-K dated January 12, 2004, as amended on Current Report on Form 8-K/A#1 dated February 3, 2004. For further details of the termination of Wiss & Company and the retention of Moore Stephens, you are referred to the caption "Proposal No. 2, Ratification of Moore Stephens, P.C. as Independent Auditors" of our Information Statement relating to our Annual meeting of Shareholders anticipated to be held on June 3, 2004, which is incorporated herein by reference. ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this Annual Report on Form 10-K for the year ended December 31, 2003, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and President, and the Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the "Exchange Act"), which disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files under the Exchange Act 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 the Principal Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings. (b) Changes in Internal Control. Subsequent to the date of such evaluation as described in subparagraph (a) above, there were no significant changes in our internal controls or other factors that could significantly affect these controls, including any corrective action with regard to significant deficiencies and material weaknesses. 45 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers are appointed each year by our board of directors at its first meeting following the annual meeting of shareholders, to serve during the ensuing year. The following information indicates each of their positions and ages at March 12, 2004. There are no family relationships between any of our executive officers and directors. Name Age Position Held Since - ---- --- -------- ---------- Thomas K. Langbein 58 Chairman of the Board 1980 Stephen W. Everett 47 Chief Executive Officer 2003 President and director 2000 Mike Rowe 42 Vice President of Operations 2002 Daniel R. Ouzts 57 Vice President of Finance, and Treasurer (Principal Financial Officer) 2003* * Vice President of Finance and Treasurer from 1996 until January, 2002, and from July, 2003, to the present; was not Principal Financial Officer for 2002 and the six months ended June 30, 2003. For more detailed information about our executive officers and directors you are referred to the caption "Information About Directors and Executive Officers" of our Information Statement relating to the annual meeting of shareholders anticipated to be held on June 3, 2004, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information on executive compensation is included under the caption "Executive Compensation" of our Information Statement relating to the annual meeting of shareholders anticipated to be held on June 3, 2004, incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information on beneficial ownership of our voting securities by each director and all officers and directors as a group, and for each of the named executive officers disclosed in the Summary Compensation Table (see "Executive Compensation" of our Information Statement relating to the annual meeting of shareholders anticipated to be held on June 3, 2004, incorporated herein by reference), and by any person known to beneficially own more than 5% of any class of our voting security, is included under the caption "Beneficial Ownership of the Company's Securities" of our Information Statement relating to the annual meeting of shareholders anticipated to be held on June 3, 2004, incorporated herein by reference. 46 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information on certain relationships and related transactions is included under the caption "Certain Relationships and Related Transactions" of our Information Statement relating to the annual meeting of shareholders anticipated to be held on June 3, 2004, incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information relating to principal accountant fees and services is included under the caption "Proposal No. 2 - Ratification of the Appointment of the Independent Auditors" of our Information Statement relating to the annual meeting of shareholders anticipated to be held on June 3, 2004, incorporated herein by reference. 47 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following is a list of documents filed as part of this report. 1. All financial statements - See Index to Consolidated Financial Statements. 2. Financial statement schedules - See Index to Consolidated Financial Statements. 3. Refer to subparagraph (c) below. (b) Current Reports on Form 8-K filed during the fourth quarter. One Current Report on Form 8-K was filed on October 28, 2003 re: Item 5, "Other Events and Required FD Disclosure," concerning two new dialysis facility leases. (c) Exhibits + 3.1 Articles of Incorporation++ 3.2 By-Laws of the Company++ 4.1 Form of Common Stock Certificate of the Company++ 10 Material Contracts 10.1 Lease between DCA of Wellsboro, Inc. (formerly Dialysis Services of Pennsylvania, Inc. - Wellsboro)(1) and James and Roger Stager dated January 15, 1995 (incorporated by reference to Medicore, Inc.'s(2) Annual Report on Form 10-K for the year ended December 31, 1994 ("1994 Medicore Form 10-K"), Part IV, Item 14(a) 3 (10)(lxii)). 10.2 Lease between the Company and DCA of Lemoyne, Inc. (formerly Dialysis Services of Pennsylvania, Inc. - Lemoyne)(1) dated December 23, 1998 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 ("1998 Form 10-K"), Part IV, Item 14(c)(10)(ii)). 10.3 Renewal of Lease between the Company and DCA of Lemoyne, Inc.(1) dated December 30, 2003. 10.4 Medical Director Agreement between DCA of Wellsboro, Inc. (formerly Dialysis Services of Pennsylvania, Inc. - Wellsboro)(1) and George Dy, M.D. dated September 29, 1994 [*] (incorporated by reference to Medicore, Inc.'s(2) Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 as amended January, 1995 ("September, 1994 Medicore(2) Form 10-Q"), Part II, Item 6(a)(10)(i)).(3) 48 10.5 Agreement for In-Hospital Dialysis Services(4) between Dialysis Services of Pennsylvania, Inc. - Wellsboro(1) and Soldiers & Sailors Memorial Hospital dated September 28, 1994 [*] (incorporated by reference to September, 1994 Medicore(2) Form 10-Q, Part II, Item 6(a)(10)(ii)). 10.6 Lease between DCA of Carlisle, Inc. (formerly Dialysis Services of PA., Inc. - Carlisle)(5) and Lester P. Burkholder, Jr. and Kirby K. Burkholder dated November 1, 1996 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 ("1996 Form 10-K"), Part IV, Item 14(a) 3 (10)(xxiii)). 10.7 Lease between DCA of Manahawkin, Inc. (formerly Dialysis Services of NJ., Inc. - Manahawkin)(5) and William P. Thomas dated January 30, 1997 (incorporated by reference to the Company's 1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxiv)). 10.8 Renewal of Lease between DCA of Manahawkin, Inc.(5) and William P. Thomas dated February 20, 2004. 10.9 Equipment Master Lease Agreement BC-105 between the Company and B. Braun Medical, Inc. dated November 22, 1996 (incorporated by reference to the Company's 1996 Form 10-K, Part IV, Item 14(a) 3 (10)(xxvii)). 10.10 Schedule of Leased Equipment 0597 commencing June 1, 1997 to Master Lease BC-105 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 ("June, 1997 10-Q"), Part II, Item 6(a), Part II, Item 10(i)).(6) 10.11 Lease between DCA of Chambersburg, Inc. (formerly Dialysis Services of Pa., Inc. - Chambersburg)(5) and BPS Development Group dated April 13, 1998 (incorporated by reference to the Company's March, 1998 Form 10-Q, Part II, Item 6(a), Part II, Item 10(i)). 10.12 1999 Stock Option Plan of the Company (May 21, 1999) (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 ("1999 Form 10-K"), Part IV, Item 14(c)(10)(xxiii)). 10.13 Form of Stock Option Certificate under the 1999 Stock Option Plan (May 21, 1999) (incorporated by reference to the Company's 1999 Form 10-K, Part IV, Item 14(c)(10)(xxiv)). 10.14 Lease between DCA of Vineland, LLC(7) and Maintree Office Center, L.L.C. dated May 10, 1999 (incorporated by reference to the Company's 1999 Form 10-K, Part IV, Item 14(c)(10)(xxv)). 10.15 Management Services Agreement(8) between the Company and DCA of Vineland, LLC(7) dated April 30, 1999 (incorporated by reference to the Company's 1999 Form 10-K, Part IV, Item 14(c)(10)(xxviii)).(7) 10.16 Amendment No. 1 to Management Services Agreement between the Company and DCA of Vineland, LLC(7) dated October 27, 1999 (incorporated by reference to the Company's 1999 Form 10-K, Part IV, Item 14(c)(10)(xxix)). 49 10.17 Indemnity Deed of Trust from the Company to Trustees for the benefit of St. Michaels Bank dated December 3, 1999 (incorporated by reference to the Company's Current Report on Form 8-K dated December 13, 1999 ("December Form 8-K"), Item 7(c)(99)(i)). 10.18 Guaranty Agreement from the Company to St. Michaels Bank dated December 3, 1999 (incorporated by reference to the Company's December Form 8-K, Item 7(c)(99)(ii)). 10.19 Lease between the Company and DCA of So. Ga., LLC (1) dated November 8, 2000 (incorporated by reference to the Company's Current Report on Form 8-K dated January 3, 2001 ("January 2001 Form 8-K"), Item 7(c)(10)(i)). 10.20 Lease between DCA of Fitzgerald, LLC (1) and Hospital Authority of Ben Hill County, d/b/a Dorminy Medical Center, dated February 8, 2001 (incorporated by reference to the Company's Current Report on Form 8-K dated March 5, 2001, Item 7(c)(10)(i)). 10.21 Employment Agreement between Stephen W. Everett and the Company dated December 29, 2000 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 ("2000 Form 10-K"), Part IV, Item 14(c)(10)(xii)). 10.22 Lease between the Company and Renal Treatment Centers - Mid-Atlantic, Inc. dated July 1, 1999 (incorporated by reference to the Company's 2000 Form 10-K, Part IV, Item 14(c)(10((xlii)). 10.23 Commercial Loan Agreement between the Company and Heritage Community Bank, dated April 3, 2001 (incorporated by reference to the Company's Current Report on Form 8-K dated June 14, 2001 ("June, 2001 Form 8-K"), Item 7(c)(i)). 10.24 Promissory Note by the Company to Heritage Community Bank, dated April 3, 2001 (incorporated by reference to the Company's June, 2001 Form 8-K, Item 7(c)(ii)). 10.25 Modification Agreement to Promissory Note to Heritage Community Bank dated December 16, 2002 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2002 ("2002 Form 10-K"), Part IV, Item 15(c)10.25). 10.26 Lease between the Company and Commons Office Research dated June 11, 2001 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 ("June, 2001 Form 10-Q"), Part II, Item 6(a)(10((i)). 10.27 Lease between DCA of Mechanicsburg, LLC(1) and Pinnacle Health Hospitals dated July 24, 2001 (incorporated by reference to the Company's June, 2001 Form 10-Q, Part II, Item 6(a)(10)(ii)). 10.28 Lease between the Company and Clinch Memorial Hospital dated September 29, 2000 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 ("2001 Form 10-K"), Part IV, Item 14(c) 10.37). 50 10.29 Lease between DCA of Central Valdosta, LLC(1) and W. Wayne Fann dated March 20, 2001 (incorporated by reference to the Company's 2001 Form 10-K, Part IV, Item 14(c) 10.38). 10.30 Promissory Note Modification Agreement between DCA of Vineland, LLC(7) and St. Michaels Bank dated December 27, 2002 (incorporated by reference to the Company's 2002 Form 10-K, Part IV, Item 15(c)10.30). 10.31 Lease between the Company and Dr. Gerald Light dated February 15, 2002 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, Part II, Item 6(a)(99)(i)). 10.32 Lease between DCA of Royston, LLC(1) and Ty Cobb Healthcare System, Inc. dated March 15, 2002 (incorporated by reference to the Company's Current Report on Form 8-K dated April 22, 2002, Item 7(c)(10)(i)). 10.33 Lease Agreement between DCA of Chevy Chase, LLC(5) and BRE/Metrocenter LLC and Guaranty of the Company dated August 8, 2002 (incorporated by reference to the Company's Current Report on Form 8-K dated September 25, 2002, Item 7(c)(10)(i)). 10.34 The Company's Section 125 Plan effective September 1, 2002 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, Part II, Item 6(99)). 10.35 Lease Agreement between Pupizion, Inc. and DCA of Cincinnati, LLC(9) dated December 11, 2002 (incorporated by reference to the Company's 2002 Form 10-K, Part IV, Item 15(c)10.35). 10.36 Promissory Note from DCA of Cincinnati, LLC(9) to the Company dated February 3, 2003 (incorporated by reference to the Company's 2002 Form 10-K, Part IV, Item 15(c)10.36). 10.37 Asset Sale Agreement between the Company and Gambro Healthcare Renal Care, Inc. dated April 7, 2003 (incorporated by reference to the Company's Current Report on Form 8-K dated April 9, 2003 ("April, 2003 Form 8-K"), Item 7(c)(10((i)). 10.38 Lease Agreement between Russell Acree, M.D. and Community Dialysis Centers, Inc. (now Gambro Healthcare Renal Care, Inc.) dated February 1, 1998 (incorporated by reference to the Company's April, 2003 Form 8-K, Item 7(c)(10)(ii)). 10.39 First Amendment to Lease Agreement between Russell Acree, M.D. and Gambro Healthcare Renal Care, Inc. (formerly Community Dialysis Centers, Inc.) dated April 30, 1998 (incorporated by reference to the Company's April, 2003 Form 8-K, Item 7(c)(10((iii)). 10.40 Second Amendment to Lease Agreement between Russell Acree, M.D. and Gambro Healthcare Renal Care, Inc. (formerly Community Dialysis Centers, Inc.) dated November 12, 2002 (incorporated by reference to the Company's April, 2003 Form 8-K, Item 7(c)(10((iv)). 51 10.41 Landlord's Consent to Assignment of Lease Agreement dated April 1, 2003 (incorporated by reference to the Company's April, 2003 Form 8-K, Item 7(c)(10)(iv)). 10.42 Loan Agreement between the Company and a Physician dated April 22, 2003 [*] (incorporated by reference to the Company's Current Report on Form 8-K dated July 15, 2003 ("July, 2003 Form 8-K"), Item 7(c)(10)(i)). 10.43 Promissory Note and Security Agreement from a Physician dated April 22, 2003 [*] (incorporated by reference to the Company's July, 2003 Form 8-K, Item 7(c)(10((ii)). 10.44 Lease Agreement between DCA of Warsaw, LLC(1) and Warsaw Village, L.P. dated July 23, 2003 (incorporated by reference to the Company's Current Report on Form 8-K dated August 5, 2003, Item 7(c)(10)(i)). 10.45 Lease Agreement between DCA of Pottstown, LLC(5) and Fisher Scheler, LLC dated August 19, 2003 (incorporated by reference to the Company's Current Report on Form 8-K dated August 27, 2003, Item 7(c)(iv)(i)). 10.46 Demand Promissory Note from the Company to Medicore, Inc. dated March 1, 2004. 16 Letter re: Change in Certifying Accountant 16.1 Letter of Wiss & Company, LLP addressed to the Securities and Exchange Commission dated November 7, 2003 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the third quarter ended September 30, 2003, Part II, Item 6(a)(16)). 21 Subsidiaries of the Company. 31 Rule 13a-14(a)/15d-14(a) Certifications. 31.1 Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 31.2 Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 32 Section 1350 Certifications 32.1 Certification of the Chief Executive Officer and the Principal Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. - ---------- [*] Confidential portions omitted have been filed separately with the Securities and Exchange Commission. + Documents incorporated by reference not included in Exhibit Volume. 52 ++ Incorporated by reference to the company's registration statement on Form SB-2 dated December 22, 1995 as amended February 9, 1996, April 2, 1996 and April 15, 1996, registration no. 33-80877-A, Part II, Item 27. (1) Wholly-owned subsidiary. (2) Parent of the company owning approximately 59% of the company's outstanding common stock. Medicore is subject to Section 13(a) reporting requirements of the Exchange Act, with its common stock listed for trading on the Nasdaq SmallCap Market. (3) Each subsidiary has a Medical Director Agreement which is substantially similar to the exhibit filed but for area of non-competition and compensation. Our affiliate, DCA of Toledo, LLC (40% owned), has a substantially similar Medical Director Agreement. (4) The acute inpatient services agreements referred to as Agreement for In-Hospital Dialysis Services are substantially similar to the exhibit filed, but for the hospital involved, the term and the service compensation rates. Agreements for In-Hospital Dialysis Services include the following areas: Valdosta and Fitzgerald, Georgia; Carlisle, Chambersburg, Lemoyne and Wellsboro, Pennsylvania; Toledo, Ohio. (5) 80% owned subsidiary. (6) Certain dialysis equipment is leased from time to time and for each lease a new schedule is added to the Master Lease; other than the nature of the equipment and length of the lease, the schedules conform to the exhibit filed and the terms of the Master Lease remain the same. (7) 51% owned subsidiary. (8) The Company has a Management Services Agreement with each of its subsidiaries each of which is substantially similar to the exhibit filed but for the name of the particular subsidiary which entered into the Agreement and the compensation. The Company has a Management Services Agreement with DCA of Toledo, LLC in which it holds a 40% interest. (9) 60% owned subsidiary. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIALYSIS CORPORATION OF AMERICA By: /s/ STEPHEN W. EVERETT ------------------------------------- Stephen W. Everett Chief Executive Officer and President March 25, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ THOMAS K. LANGBEIN Chairman of the Board of Directors March 25, 2004 - ----------------------------- Thomas K. Langbein /s/ STEPHEN W. EVERETT Chief Executive Officer, President - ----------------------------- and Director March 25, 2004 Stephen W. Everett /s/ DANIEL R. OUZTS Vice President of Finance and - ----------------------------- Treasurer (Principal Financial Officer) March 25, 2004 Daniel R. Ouzts /s/ BART PELSTRING Director March 25, 2004 - ----------------------------- Bart Pelstring /s/ ROBERT W. TRAUSE Director March 25, 2004 - ----------------------------- Robert W. Trause /s/ ALEXANDER BIENENSTOCK Director March 25, 2004 - ----------------------------- Alexander Bienenstock /s/ DR. DAVID L. BLECKER Director March 25, 2004 - ----------------------------- Dr. David L. Blecker
54 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 15(a) (1) AND (2), AND (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 2003 DIALYSIS CORPORATION OF AMERICA HANOVER, MARYLAND FORM 10-K--ITEM 15(a)(1) AND (2) DIALYSIS CORPORATION OF AMERICA LIST OF FINANCIAL STATEMENTS The following consolidated financial statements of Dialysis Corporation of America and subsidiaries are included in Item 8 of the Annual Report on Form 10-K: Page ---- Consolidated Balance Sheets as of December 31, 2003 and 2002 F-4 Consolidated Statements of Operations - Years ended December 31, 2003, 2002, and 2001 F-5 Consolidated Statements of Stockholders' Equity - Years ended December 31, 2003, 2002 and 2001 F-6 Consolidated Statements of Cash Flows - Years ended December 31, 2003, 2002 and 2001 F-7 Notes to Consolidated Financial Statements - December 31, 2003 F-8 The following financial statement schedule of Dialysis Corporation of America and subsidiaries is included in Item 15(d): Schedule II - Valuation and qualifying accounts F-26 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Stockholders and Board of Directors Dialysis Corporation of America We have audited the accompanying consolidated balance sheet of Dialysis Corporation of America and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dialysis Corporation of America and subsidiaries at December 31, 2003, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ MOORE STEPHENS, P.C. ------------------------- MOORE STEPHENS, P.C. February 12, 2004, except for Note 15, for which the date is March 17, 2004 Cranford, New Jersey F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Stockholders and Board of Directors Dialysis Corporation of America We have audited the accompanying consolidated balance sheet of Dialysis Corporation of America and subsidiaries as of December 31, 2002, and the related consolidated statements of income, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2002. Our audits also included the information related to each of the two years in the period ended December 31, 2002 on the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dialysis Corporation of America and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule for the two years in the period ended December 31, 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/WISS & COMPANY, LLP ------------------------ WISS & COMPANY, LLP February 7, 2003 Livingston, New Jersey F-3 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31, 2003 2002 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 1,515,202 $ 2,571,916 Accounts receivable, less allowance of $785,000 at December 31, 2003; $831,000 at December 31, 2002 4,913,318 3,515,958 Inventories 1,043,710 877,058 Deferred income taxes 412,000 392,000 Officer loan and interest receivable 107,503 103,531 Prepaid expenses and other current assets 1,392,721 1,631,470 ------------ ------------ Total current assets 9,384,454 9,091,933 ------------ ------------ Property and equipment: Land 376,211 376,211 Buildings and improvements 2,332,904 2,322,663 Machinery and equipment 6,039,256 5,232,632 Leasehold improvements 3,548,875 2,712,953 ------------ ------------ 12,297,246 10,644,459 Less accumulated depreciation and amortization 5,030,550 3,877,738 ------------ ------------ 7,266,696 6,766,721 ------------ ------------ Goodwill 2,291,333 923,140 Other assets 661,891 372,190 ------------ ------------ Total other assets 2,953,224 1,295,330 ------------ ------------ $ 19,604,374 $ 17,153,984 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,167,213 $ 1,373,190 Accrued expenses 3,170,269 2,594,066 Current portion of long-term debt 575,000 532,000 Income taxes payable 28,949 -- Payable minority interest acquisition 670,000 -- ------------ ------------ Total current liabilities 5,611,431 4,499,256 Advances from parent 234,094 -- Long-term debt, less current portion 2,097,355 2,727,105 Deferred income taxes 59,000 28,000 Total liabilities 8,001,880 7,254,361 ------------ ------------ Minority interest in subsidiaries 632,177 172,165 ------------ ------------ Commitments Stockholders' equity: Common stock, $.01 par value, authorized 20,000,000 shares; 7,937,544 shares issued and outstanding in 2003 7,774,688 shares issued and outstanding in 2002 79,376 77,746 Capital in excess of par value 5,238,952 5,147,707 Retained earnings 6,073,589 4,923,605 Notes receivable from options exercised (421,600) (421,600) ------------ ------------ Total stockholders' equity 10,970,317 9,727,458 ------------ ------------ $ 19,604,374 $ 17,153,984 ============ ============
See notes to consolidated financial statements F-4 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------------- 2003 2002 2001 ------------ ------------ ------------ Revenues: Medical service revenue $ 29,676,388 $ 25,162,380 $ 18,919,752 Interest income on officer note 3,972 4,575 3,956 Interest and other income 597,746 439,722 517,462 ------------ ------------ ------------ 30,278,106 25,606,677 19,441,170 ------------ ------------ ------------ Cost and expenses: Cost of medical services 18,220,891 15,066,551 12,021,907 Selling, general and administrative expenses 9,357,552 7,500,029 5,583,062 Provision for doubtful accounts 289,582 720,500 659,007 Interest expense 202,949 220,441 210,805 ------------ ------------ ------------ 28,070,974 23,507,521 18,474,781 ------------ ------------ ------------ Income before income taxes, minority interest and equity in affiliate earnings (loss) 2,207,132 2,099,156 966,389 Income tax provision 878,211 771,180 80,078 ------------ ------------ ------------ Income before minority interest and equity in affiliate earnings (loss) 1,328,921 1,327,976 886,311 Minority interest in income of consolidated subsidiaries 223,291 155,412 85,983 Equity in affiliate earnings (loss) 44,354 69,533 (16,345) ------------ ------------ ------------ Net income $ 1,149,984 $ 1,242,097 $ 783,983 ============ ============ ============ Earning per share: Basic $.15 $.16 $.10 ==== ==== ==== Diluted $.13 $.14 $.10 ==== ==== ====
See notes to consolidated financial statements. F-5 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL IN COMMON EXCESS OF RETAINED NOTES STOCK PAR VALUE EARNINGS RECEIVABLE TOTAL --------- ----------- ----------- ----------- ----------- Balance at January 1, 2001 $ 79,596 $ 5,243,787 $ 2,897,525 $ (421,600) $ 7,799,308 Net income 783,983 783,983 Repurchase and cancellation of 185,000 shares (1,850) (96,080) (97,930) --------- ----------- ----------- ----------- ----------- Balance at December 31, 2001 77,746 5,147,707 3,681,508 (421,600) 8,485,361 Net income 1,242,097 1,242,097 --------- ----------- ----------- ----------- ----------- Balance at December 21, 2002 77,746 5,147,707 4,923,605 (421,600) 9,727,458 Net income 1,149,984 1,149,984 Repurchase and cancellation of 21,428 shares (214) (41,786) (42,000) Exercise of stock options for 159,284 shares of common stock 1,844 133,031 134,875 --------- ----------- ----------- ----------- ----------- Balance December 31, 2003 $ 79,376 $ 5,238,952 $ 6,073,589 $ (421,600) $10,970,317 ========= =========== =========== =========== ===========
See notes to consolidated financial statements. F-6 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------- 2003 2002 2001 ----------- ----------- ----------- Operating activities: Net income $ 1,149,984 $ 1,242,097 $ 783,983 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,183,920 1,059,697 804,592 Amortization 2,314 6,190 4,067 Bad debt expense 289,582 720,500 659,007 Deferred income taxes 11,000 54,000 (418,000) Minority interest 223,291 155,412 85,983 Equity in affiliate (earnings) loss (44,354) (69,533) 16,345 Increase (decrease) relating to operating activities from: Accounts receivable (1,686,942) (216,880) (2,918,650) Inventories (166,652) (137,937) (404,994) Interest receivable on officer loan (3,972) (4,575) (3,956) Prepaid expenses and other current assets 230,805 (1,090,143) (209,606) Accounts payable (205,977) (231,946) 1,051,432 Accrued expenses 676,203 1,064,223 868,726 Income taxes payable 28,949 (455,000) 373,549 ----------- ----------- ----------- Net cash provided by operating activities 1,696,095 2,096,105 692,478 ----------- ----------- ----------- Investing activities: Decrease (increase) in notes receivable from parent -- -- 2,200,000 Loans to physician affiliates (150,000) -- (20,332) Loan to officer -- -- (95,000) Additions to property and equipment, net of minor disposals (1,655,909) (927,352) (1,233,183) Acquisition of dialysis center (75,000) (550,000) Investment in affiliate -- -- (152,811) Distributions from affiliate 77,000 22,800 Purchase of minority interests in subsidiaries (670,000) (300,000) (300,000) Other assets (4,846) (19,048) (3,330) ----------- ----------- ----------- Net cash (used in) provided by investing activities (2,478,755) (1,773,600) 403,344 ----------- ----------- ----------- Financing activities: Decrease (increase) in advances to parent 234,094 200,728 213,611 Repurchase of stock (42,000) -- (97,930) Long-term borrowings -- -- 787,500 Payments on long-term debt (586,750) (431,334) (297,650) Exercise of stock options 34,875 -- -- Deferred financing costs -- -- (11,572) Capital contributions by subsidiaries' minority members 204,382 10,570 4,000 ----------- ----------- ----------- Distribution to subsidiaries minority members (118,655) (10,000) -- ----------- ----------- ----------- Net cash (used in) provided by financing activities (274,054) (230,036) 597,959 ----------- ----------- ----------- Decrease (increase) in cash and cash equivalents (1,056,714) 92,469 1,685,781 Cash and cash equivalents at beginning of year 2,571,916 2,479,447 793,666 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 1,515,202 $ 2,571,916 $ 2,479,447 =========== =========== ===========
See notes to consolidated financial statements. F-7 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS The company is in one business segment, kidney dialysis operations, providing outpatient hemodialysis services, home dialysis services, inpatient dialysis services and ancillary services associated with dialysis treatments. The company owns 17 operating dialysis centers located in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and Virginia, manages two other dialysis facilities, one a 40% owned Ohio affiliate and the other an unaffiliated Georgia center, and has one dialysis facility under construction; has agreements to provide inpatient dialysis treatments to seven hospitals; and provides supplies and equipment for dialysis home patients. See "Consolidation." CONSOLIDATION The consolidated financial statements include the accounts of Dialysis Corporation of America and its subsidiaries, collectively referred to as the "company." All material intercompany accounts and transactions have been eliminated in consolidation. The company was a 61% owned subsidiary of Medicore, Inc., our parent, as of December 31, 2003. Medicore currently owns 59% of our company. We have a 40% interest in an Ohio dialysis center which we manage, which is accounted for on the equity method and not consolidated for financial reporting purposes. STOCK SPLIT On January 28, 2004, the company effected a two-for-one stock split. All share and per share data in the consolidated financial statements and notes have been adjusted to reflect the two-for-one split. See Note 15. 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. Actual results could differ from those estimates. 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. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates." GOVERNMENT REGULATION A substantial portion of the company's revenues are attributable to payments received under Medicare, which is supplemented by Medicaid or comparable benefits in the states in which the company operates. F-8 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED Reimbursement rates under these programs are subject to regulatory changes and governmental funding restrictions. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusions from the Medicare and Medicaid programs. See Item 1, "Business - Government Regulation." CASH AND CASH EQUIVALENTS The company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values. Although cash and cash equivalents are largely not federally insured, the credit risk associated with these deposits that typically may be redeemed upon demand is considered low due to the high quality of the financial institutions in which they are invested. CREDIT RISK The company's primary concentration of credit risk is with accounts receivable, which consist of amounts owed by governmental agencies, insurance companies and private patients. Receivables from Medicare and Medicaid comprised 59% of receivables at December 31, 2003 and 60% at December 31, 2002. INVENTORIES Inventories, which consist primarily of supplies used in dialysis treatments, are valued at the lower of cost (first-in, first-out method) or market value. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets is comprised as follows: DECEMBER 31, ----------------------- 2003 2002 ---------- ---------- Vendor volume discounts receivable $ 610,150 $ 321,302 Receivable from management service contracts 130,916 47,756 Property to be sold (See Note 12) -- 778,561 Prepaid expenses 478,079 318,839 Other 173,576 165,012 ---------- ---------- $1,392,721 $1,631,470 ========== ========== F-9 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED ACCRUED EXPENSES Accrued expenses is comprised as follows: DECEMBER 31, ----------------------- 2003 2002 ---------- ---------- Accrued compensation $ 985,330 $ 800,318 Due to insurance companies 1,759,397 1,271,235 Other 425,542 522,513 ---------- ---------- $3,170,269 $2,594,066 ========== ========== VENDOR CONCENTRATION The company purchases erythropoietin (EPO) from one supplier which comprised 37% in 2003, 34% in 2002 and 32% in 2001 of the company's cost of sales. There is only one supplier of EPO in the United States, and this supplier has recently received FDA approval for an alternative product available for dialysis patients; but there are no other suppliers of any similar drug available to dialysis treatment providers. Revenues from the administration of EPO comprised 28% in 2003, 26% in 2002 and 25% in 2001 of medical service revenue. PROPERTY AND EQUIPMENT Property and equipment is stated on the basis of cost. Depreciation is computed for book purposes by the straight-line method over the estimated useful lives of the assets, which range from 5 to 34 years for buildings and improvements; 3 to 10 years for machinery, computer and office equipment, and furniture; and 5 to 10 years for leasehold improvements based on the shorter of the lease term or estimated useful life of the property. Replacements and betterments that extend the lives of assets are capitalized. Maintenance and repairs are expensed as incurred. Upon the sale or retirement of assets, the related cost and accumulated depreciation are removed and any gain on loss is recognized. LONG-LIVED ASSET IMPAIRMENT Pursuant to Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of," impairment of long-lived assets, including intangibles related to such assets, is recognized whenever events or changes in circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be fully recoverable from estimated future cash flows and the fair value of the related assets is less than their carrying value. Financial Accounting Standards Board Statement No. 144, "Accounting for the Impairment of Disposal of Long-lived Assets" (FAS 144) clarified when a long-lived asset held for sale should be classified as such. It also clarifies previous guidance under FAS 121. The company, based on current circumstances, does not believe any indicators of impairment are present. F-10 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED COMPREHENSIVE INCOME The company follows Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income" (FAS 130) which contains rules for the reporting of comprehensive income and its components. Comprehensive income (loss) consists of net income (loss). REVENUE RECOGNITION Net revenue is recognized as services are rendered at the net realizable amount from Medicare, Medicaid, commercial insurers and other third party payors. The company occasionally provides dialysis treatments on a charity basis to patients who cannot afford to pay. The amount is not significant. GOODWILL Goodwill represents cost in excess of net assets acquired. The company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142) effective January 1, 2002. Under 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 our acquisition of Georgia dialysis centers in April, 2002 and April, 2003, are not being amortized for book purposes and are subject to the annual impairment testing provisions of FAS 142, which testing indicated no impairment for goodwill. DEFERRED EXPENSES Deferred expenses, except for deferred loan costs, are amortized on the straight-line method over their estimated benefit period with deferred loan costs amortized over the lives of the respective loans. INCOME TAXES Deferred income taxes are determined by applying enacted tax rates applicable to future periods in which the taxes are expected to be paid or recovered to differences between financial accounting and tax basis of assets and liabilities. 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 F-11 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED 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. See "New Pronouncements." 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 2003, 2002 and 2001, respectively: risk-free interest rate of 1.44%, 3.73%, and 5.40%; no dividend yield; volatility factor of the expected market price of the company's common stock of 1.07, 1.15, and 1.14, and a weighted-average expected life of 4.7 years, 5 years, and 4 years. 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:
2003 2002 2001 ----------- ----------- ----------- Net income, as reported $ 1,150,000 $ 1,242,000 $ 784,000 Stock-based employee compensation expense under fair value method, net of related tax effects (64,000) (46,000) (24,000) ----------- ----------- ----------- Pro forma net income $ 1,086,000 $ 1,196,000 $ 760,000 =========== =========== =========== Earnings per share: Basic, as reported $.15 $.16 $.10 ==== ==== ==== Basic, pro forma $.14 $.15 $.10 ==== ==== ==== Diluted, as reported $.13 $.14 $.10 ==== ==== ==== Diluted, pro forma $.12 $.14 $.09 ==== ==== ====
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 and warrants, calculated using the treasury stock method and average market price. F-12 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
YEAR ENDED DECEMBER 31, ------------------------------------ 2003 2002 2001 ---------- ---------- ---------- Net income $1,149,984 $1,242,097 $ 783,983 ========== ========== ========== Weighted average shares-denominator basic computation 7,904,874 7,774,688 7,827,512 Effect of dilutive stock options 830,612 892,366 207,938 ---------- ---------- ---------- Weighted average shares, as adjusted-denominator diluted computation 8,735,486 8,667,054 8,035,450 ========== ========== ========== Earnings per share: Basic $.15 $.16 $.10 ==== ==== ==== Diluted $.13 $.14 $.10 ==== ==== ====
The company had various potentially dilutive securities during the periods presented, including stock options and warrants. See Notes 6 and 7. INTEREST AND OTHER INCOME Interest and other income is comprised as follows: YEAR ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- -------- -------- Rental income $190,308 $174,227 $168,224 Interest income from Medicore -- 2,957 122,867 Interest income 49,914 40,314 53,546 Management fee income 320,580 191,213 115,715 Other income 36,944 31,011 57,110 -------- -------- -------- $597,746 $439,722 $517,462 ======== ======== ======== ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash, accounts receivable and debt in the accompanying financial statements approximate their fair value because of the short-term maturity of these instruments, and in the case of debt because such instruments either bear variable interest rates which approximate market or have interest rates approximating those currently available to the company for loans with similar terms and maturities. F-13 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED 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 will be effective for exit or disposal activities initiated after December 31, 2002, is not expected to have a material impact on our results of operation, financial position or cash flows. In November, 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45), which elaborates on the existing disclosure requirements for most guarantees and clarifies that at the time a company issues a guarantee, it must recognize a liability for the fair value of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The disclosure requirements of FIN 45 are effective for financial statements for periods ending after December 15, 2002. The initial recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We do not expect FIN 45 to have a material impact on our financial position or results of operations. In December, 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (FAS 148), which amends FAS 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition when voluntarily changing to the fair value based method of accounting for stock-based employee compensation. FAS 148 also amends FAS 123 disclosure requirements to require prominent disclosures in annual and interim financial statements about the method used to account for stock-based employee compensation and its effect on results of operations. We adopted the transition guidance and annual disclosure provisions of FAS 148 commencing 2002, and we have adopted the interim disclosure provision of FAS 148 commencing 2003. We are subject to the expanded disclosure requirements of FAS 148, but we do not expect FAS 148 to otherwise have a material impact on our consolidated results of operations, financial position or cash flows. In January, 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46), which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to variable interest entities created before February 1, 2003, in the first fiscal year or interim period beginning after June 15, 2003. Certain of the F-14 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED disclosure requirements apply to financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We do not expect FIN 46 to have a material impact on our financial position or results of operations. In May, 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (FAS 150), which addresses how to classify and measure certain financial instruments with characteristics of both liabilities (or an asset in some circumstances) and equity. FAS 150 applies to issuers' classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not expect FAS 150 to have a material impact on our results of operations financial position or cash flows. NOTE 2--LONG-TERM DEBT Long-term debt is as follows:
DECEMBER 31, -------------------------- 2003 2002 ---------- ---------- Development loan secured by land and building with a net book value of $336,000 at December 31, 2003. Monthly principal payments of $2,217 plus interest at 1% over the prime rate effective December 16, 2002 with remaining balance due December 2, 2007. $ 636,182 $ 662,084 Mortgage note secured by land and building with a net book value of $896,000 at December 31, 2003. Interest of prime plus 1/2% with a minimum rate of 6.0% effective December 16, 2002. Monthly payments of $6,800 including principal and interest with remaining balance due April, 2006. 714,979 752,619 Equipment financing agreement secured by equipment with a net book value of $1,749,000 at December 31, 2003. Monthly payments totaling approximately $59,000 as of December 31, 2003, including principal and interest, as described below, pursuant to various schedules extending through August, 2007 with interest at rates ranging from 4.13% to 10.48%. 1,321,194 1,844,402 ---------- ---------- 2,672,355 3,259,105 Less current portion 575,000 532,000 ---------- ---------- $2,097,355 $2,727,105 ========== ==========
F-15 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 2--LONG-TERM DEBT--CONTINUED 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, 1 1/2% 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 $636,000 at December 31, 2003 and $662,000 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 commencing 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 $715,000 at December 31, 2003 and $753,000 at December 31, 2002. The equipment financing agreement is for financing for kidney dialysis machines for the company's dialysis facilities. Additional financing totaled approximately $399,000 in 2002 and $752,000 in 2001, with no such financing in 2003. Payments under the agreement are pursuant to various schedules extending through August, 2007. 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." See Note 14. The remaining principal balance under this financing amounted to approximately $1,321,000 at December 31, 2003 and $1,844,000 at December 31, 2002. The prime rate was 4.00% as of December 31, 2003 and 4.25% as of December 31, 2002. Scheduled maturities of long-term debt outstanding at December 31, 2003 are approximately: 2004- $575,000; 2005-$511,000; 2006-$954,000; 2007-$632,000, 2008-$--- thereafter $---. For interest payments, see Note 14. The company's two mortgage agreements contain certain restrictive covenants that, among other things, restrict the payment of dividends above 25% of the company's net worth, require lenders' approval for a merger, sale of substantially all the assets, or other business combination of the company, and require maintenance of certain financial ratios. F-16 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 3--INCOME TAXES The income tax provision consists of the following income tax expense (benefit) components: 2003 2002 2001 --------- --------- --------- Current: Federal $ 602,906 $ 601,967 $ 360,000 State 264,305 115,213 138,078 --------- --------- --------- 867,211 717,180 498,078 --------- --------- --------- Deferred: Federal 28,000 274,000 (390,583) State (17,000) (220,000) (27,417) --------- --------- --------- 11,000 54,000 (418,000) --------- --------- --------- $ 878,211 $ 771,180 $ 80,078 ========= ========= ========= 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. Significant components of the company's deferred tax liabilities and assets are as follows: DECEMBER 31, ----------------------- 2003 2002 --------- --------- Deferred tax liabilities: Depreciation and amortization $ 285,000 $ 225,000 --------- --------- Total deferred tax liabilities 285,000 225,000 Deferred tax assets: Accrued expenses 111,000 93,000 Bad debt allowance 306,000 303,000 Startup costs 47,000 17,000 --------- --------- Subtotal 464,000 413,000 State net operating loss carryforwards 226,000 248,000 --------- --------- Total deferred tax assets 690,000 661,000 Valuation allowance for deferred tax assets (52,000) (72,000) --------- --------- Deferred tax asset, net of valuation allowance 638,000 589,000 --------- --------- Net deferred tax asset $ 353,000 $ 364,000 ========= ========= A valuation allowance was provided that offsets a portion of the deferred tax assets recorded at December 31, 2003, as management believed that it was more likely than not that, based on the weight of the available evidence, that this portion of deferred tax assets would not be realized. The valuation allowance, which relates to state income tax net operating loss carryforwards, decreased by $20,000 during 2003. F-17 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 3--INCOME TAXES--CONTINUED The reconciliation of income tax (benefit) attributable to income (loss) before income taxes computed at the U.S. federal statutory rate is:
YEAR ENDED DECEMBER 31, ------------------------------------- 2003 2002 2001 --------- --------- --------- Statutory tax rate (34%) applied to income (loss) before income taxes, minority interest and equity in affiliate earnings $ 750,425 $ 702,874 $ 323,015 Adjustments due to: State taxes, net of federal benefit 189,116 103,101 57,003 Change in valuation allowance -- (145,000) (223,000) Non-deductible items 11,197 11,982 8,146 Prior year tax return accrual adjustment -- (14,456) -- Other (72,527) 112,679 (85,086) --------- --------- --------- $ 878,211 $ 771,180 $ 80,078 ========= ========= =========
The company has equity positions in 13 limited liability companies ("LLC's"), each possessing a finite life. Based on their limited liability status, its members are not liable for the LLC's debts, liabilities, or obligations. Each LLC has complied with the criteria for tax treatment as a partnership. As a result, taxable income or loss is to be reported on each member's respective tax returns. Income and losses attributable to the company's equity position in these LLC's has been included as a component of retained earnings as of December 31, 2003. For income tax payments, see Note 14. NOTE 4--TRANSACTIONS WITH PARENT Our parent provides certain financial and administrative services for us. Central operating costs are charged on the basis of time spent. In the opinion of management, this method of allocation is reasonable. The amount of expenses allocated by the parent totaled approximately $200,000 for the years ended December 31, 2003, 2002 and 2001. As of December 31, 2003 we had an intercompany advance payable to our parent of approximately $234,000 which bears interest at the short-term Treasury Bill rate. Interest expense on intercompany advances payable was approximately $2,000. Interest is included in the intercompany advance balance. Our parent has agreed not to require repayment of the intercompany advance balance prior to January 1, 2005; therefore, the advance has been classified as long-term at December 31, 2003. As of December 31, 2001, we had an intercompany advance receivable from our parent of approximately $201,000, which bore interest at the short-term Treasury Bill rate. Interest income on intercompany advances receivable was approximately $3,000 and $14,000 for the years ended December 31, 2002 and 2001, respectively. Interest is included in the intercompany advance balance. The advance was repaid during 2002. F-18 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 4--TRANSACTIONS WITH PARENT--CONTINUED During the year 2000, we made various loans to our parent which funds were, in turn, loaned by our parent to Linux Global Partners, Inc., a private company investing in Linux software companies, including its subsidiary, Xandros, Inc., which initiated marketing of a Linux desktop operating system in November, 2002. 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. Interest income on the notes receivable from the parent amounted to $109,000 for 2001. NOTE 5--OTHER RELATED PARTY TRANSACTIONS For the years ended December 31, 2003, 2002 and 2001, respectively, the company paid premiums of approximately $425,000, $275,000 and $133,000 for insurance obtained through two persons, one a director of the parent, and the other a relative of an officer and director of the company and the parent. For the years ended December 31, 2003, 2002 and 2001, respectively, legal fees of $156,000, $156,000 and $144,000 were paid to an attorney who acts as general counsel and Secretary for the company and the parent and who is a director of the parent. The 20% minority interest in DCA of Vineland, LLC was held by a company owned by the medical director of that facility, who became a director of Dialysis Corporation of America in 2001. This physician was provided with the right to acquire up to 49% of DCA of Vineland. In April, 2000, another company owned by this physician acquired an interest in DCA of Vineland, resulting in Dialysis Corporation of America holding a 51.3% ownership interest in DCA of Vineland and this physician's companies holding a combined 48.7% ownership interest of DCA of Vineland. See Note 12. 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. In May 2001, the company loaned its president $95,000 to be repaid with accrued interest at prime minus 1% (floating prime) on or before maturity on May 11, 2006. This demand loan is collateralized by all of the President's stock options in the company, as well as common stock from exercise of the options and proceeds from sale of such stock. Interest income on the loan amounted to approximately $4,000, $5,000 and $4,000 for 2003, 2002 and 2001, respectively. Minority members in subsidiaries in certain situations may fund their portion of required capital contributions by issuance of an interest bearing note payable to the company which the minority member may repay through their portion of capital distributions of the subsidiary. The 20% member in DCA of Chevy Chase, LLC funded approximately $223,000 in capital contributions during 2003 under a note accruing interest at prime plus 2%, with interest totaling approximately $9,000 during 2003, with F-19 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 5--OTHER RELATED PARTY TRANSACTIONS--CONTINUED approximately $54,000 of distributions to the member applied against the note and accrued interest. These represent non cash investing activities, which is a supplemental disclosure required by Financial Accounts Standards Board Statement No. 95, "Statement of Cash Flows." See Note 14. 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 10,000 shares exercisable at $1.13 per share through June 9, 2003. This option was exercised in June, 2003. In April, 1999, we adopted a stock option plan pursuant to which the board of directors granted 1,600,000 options exercisable at $.63 per share to certain of our officers, directors, employees and consultants with 680,000 options exercisable through April 20, 2000 and 920,000 options exercisable through April 20, 2004, of which 120,000 options to date have been cancelled. In April, 2000, the 680,000 one-year options were exercised for which we received cash payment of the par value amount of $3,400 and the balance in three-year promissory notes with the interest at 6.2% and which maturity was extended to April 20, 2004. Interest income on the notes amounted to approximately $26,000 each year for 2003, 2002 and 2001. All the notes were repaid with stock at fair market value on February 9, 2004. In March, 2003, 155,714 of the remaining 800,000 options outstanding were exercised for $97,322 with the exercise price satisfied by director bonuses accrued in 2002, leaving 644,286 of these options outstanding as of December 31, 2003. The exercise represents a noncash investing activity, which is a supplemental disclosure required by Financial Accounting Standards Board Statement No. 95, "Statement of Cash Flows." See Note 14. In January, 2001, the board of directors granted to our Chief Executive Officer and President a five-year option for 330,000 shares exercisable at $.63 per share with 66,000 options vesting at January, 2001 and 66,000 options vesting in equal annual increments on January 1 for each of the next four years. In September, 2001, the board of directors granted five-year options for an aggregate of 150,000 shares exercisable at $.75 per share through September 5, 2006, to certain officers, directors and key employees. 30,000 of the options vested immediately with the remaining 120,000 options to vest in equal increments of 30,000 options each September 5, commencing September 5, 2002. In March, 2003, 3,570 of these options were exercised for $2,678 with the exercise price satisfied by director bonuses accrued in 2002. The exercise represents a noncash investing activity, which is a supplemental disclosure required by Financial Accounting Standards Board Statement No. 95, "Statement of Cash Flows." See Note 14. As of December 31, 2003, an aggregate of 120,000 of these options had vested, of which 3,570 had been exercised. In March, 2002, the board of directors granted a five-year option to an officer for 60,000 shares exercisable at $1.58 per share through February 28, 2007. The option was to vest in equal annual increments of 15,000 shares on each February 28 from 2003 through 2006. The 15,000 options that had vested in February, 2003, were exercised by the officer in October, 2003, and the remaining 45,000 options expired unvested due to the July 31, 2003 resignation of the officer. F-20 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 6--STOCK OPTIONS--CONTINUED In May, 2002, the board of directors granted five-year options for an aggregate of 21,000 shares to our employees of which 11,000 were outstanding at December 31, 2003. Most of these options with respect to each individual employee are for 1,000 shares of common stock, with one option for 3,000 shares. These options are exercisable at $2.05 per share through May 28, 2007, with all options vesting on May 29, 2004. Options for 10,000 shares have been cancelled as a result of the termination of the employees holding those options, with 6,000 options having been cancelled during 2003. In June, 2003, the board of directors granted to an officer a five-year option for 50,000 shares exercisable at $1.80 per share through June 3, 2008. The option vests annually in increments of 12,500 shares on each June 4 from 2004 to 2007. In August, 2003, the board of directors granted a three-year option to a director who serves on several of our committees including our audit committee, for 10,000 shares exercisable at $2.25 per share through August 18, 2006. The option vests in two annual increments of 5,000 shares commencing on August 19, 2004. A summary of the company's stock option activity and related information for the years ended December 31 follows:
2003 2002 2001 ------------------------------ ------------------------------ ----------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ---------- ------------- ---------- ------------- ---------- ------------- Outstanding-beginning of year 1,367,000 1,410,000 930,000 Granted 60,000 $ 1.88 81,000 $ 2.05 480,000 $ .67 Cancellations (51,000) $ 1.63 (124,000) $ .67 -- -- Exercised (184,284) $ .73 -- -- -- -- Expired -- -- -- -- -- -- ---------- ---------- ---------- Outstanding-end of year 1,191,716 1,367,000 1,410,000 ========== ========== ========== Outstanding-end of year: August 2003 options 10,000 $ 2.25 -- -- -- -- June 2003 options 50,000 $ 1.80 -- -- -- -- May 2002 options 11,000 $ 2.05 17,000 $ 2.05 -- -- March 2002 options -- -- 60,000 $ 1.58 -- -- September 2001 options 146,430 $ .75 150,000 $ .75 150,000 $ .75 January 2001 options 330,000 $ .63 330,000 $ .63 330,000 $ .63 April 1999 options 644,286 $ .63 800,000 $ .63 920,000 $ .63 June 1998 options -- -- 10,000 $ 1.13 10,000 $ 1.13 ---------- ---------- ---------- 1,191,716 1,367,000 1,410,000 ========== ========== ========== Outstanding and exercisable end of year: September 2001 options 90,000 $ .75 60,000 $ .75 30,000 $ .75 January 2001 options 198,000 $ .63 132,000 $ .63 66,000 $ .63 April 1999 options 644,286 $ .63 800,000 $ .63 920,000 $ .63 June 1998 options -- -- 10,000 $ 1.13 10,000 $ 1.13 ---------- ---------- ---------- 932,286 1,002,000 1,026,000 ========== ========== ========== Weighted-average fair value of options granted during the year $1.41 $1.28 $.31 ===== ===== ====
F-21 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 6--STOCK OPTIONS--CONTINUED The remaining contractual life at December 31, 2003 is 4.4 years for the June, 2003 options, 2.7 years for the August, 2003 options, 3.4 years for the May, 2002 options, 2.7 years for the September, 2001 options, 2 years for the January, 2001 options and .3 years for the April, 1999 options. The company has 1,191,716 shares reserved for issuance, including: 644,286 shares for the April, 1999 options, 330,000 shares for the January, 2001 options, 146,430 shares for the September, 2001 options, 11,000 shares for the May, 2002 options, 50,000 shares for the June, 2003 options and 10,000 shares for the August, 2003 options. All options were issued at fair market value on date of grant. The number and exercise price of the options have been adjusted based upon a two-for-one stock split effected by the company in February, 2004. See Note 15. NOTE 7--COMMON STOCK Pursuant to a 1996 public offering 2,300,000 shares of common stock were issued, including 300,000 shares from exercise of the underwriters overallotment option, and 4,600,000 redeemable common stock purchase warrants to purchase one common share each at an exercise price of $2.25 originally exercisable through April 16, 1999, and extended to June 30, 2000, at which time the remaining options expired. During 2000, approximately 340,000 warrants were exercised with net proceeds to the company of approximately $765,000. The underwriters received options to purchase 200,000 units each consisting of one share of common stock and two common stock purchase warrants, the options exercisable at $2.25 per unit from April 17, 1997 through their expiration on April 16, 2001, for a total of 200,000 shares of common stock and 400,000 common stock purchase warrants exercisable at $2.70 per share. All of the options and warrants expired unexercised. NOTE 8--COMMITMENTS The company has leases on facilities housing its dialysis operations. The aggregate lease commitments at December 31, 2003 are approximately: 2004-$1,009,000; 2005-$941,000; 2006-$913,000; 2007-$781,000; 2008-$750,000; thereafter-$1,969,000. Total rent expense was approximately $778,000, $521,000 and $316,000 for the years ended December 31, 2003, 2002 and 2001, respectively. 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 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 resulting from any bonus paid during the year and may make a discretionary contribution with the percentage of any discretionary contribution to be determined each year with only employee contributions up to 6% of annual compensation considered when determining employer matching. F-22 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 8--COMMITMENTS--CONTINUED Stephen W. Everett, CEO, President and director of the company, has a five-year employment contract through December 31, 2005, currently at an annual salary of $180,000. His compensation will increase in fiscal 2005 by an amount equal to the lesser of 3% of pre-tax profits or $10,000. The employment agreement also provides for certain fringe benefits, reimbursement of reasonable out-of-pocket expenses, and a one-year non-compete within the United States. NOTE 9--REPURCHASE OF COMMON STOCK In September, 2000, the company announced its intent to repurchase up to 600,000 shares of its common stock at current market prices. The company repurchased and cancelled approximately 154,000 shares in the fourth quarter of 2000 with a repurchase cost of approximately $65,000, and a total of approximately 185,000 shares at a cost of approximately $98,000 during 2001 and a total of approximately 21,000 shares at a cost of approximately $42,000 during 2003. NOTE 10--CAPITAL EXPENDITURES AND DEPRECIATION Capital expenditures and depreciation expense were as follows: 2003 2002 2001 ---------- ---------- ---------- Capital expenditures $1,656,000 $1,326,000 $1,985,000 ========== ========== ========== Depreciation expense $1,184,000 $1,060,000 $ 805,000 ========== ========== ========== NOTE 11--ACQUISITIONS In August 2001, the company acquired the remaining 30% minority interest in DCA of So. Ga., LLC, giving the company a 100% ownership interest, for $600,000 of which $300,000 was paid in August, 2001 and $300,000 was paid in August, 2002. This transaction resulted in $523,000 goodwill representing the excess of the $600,000 purchase price over the $77,000 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 profitability of DCA of So. Ga. The party from whom the company acquired the minority interest has agreements to act as medical director of two other subsidiaries of the company. See Note 1. In April 2002, the company acquired a dialysis center in Royston, Georgia for $550,000. This transaction resulted in $400,000 goodwill representing the excess of the $550,000 purchase price over the $150,000 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. F-23 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 11--ACQUISITIONS--CONTINUED During the second quarter of 2003, we acquired the assets of a Georgia dialysis center and the 30% minority interests in each of two of our existing Georgia dialysis centers for a total consideration of $1,415,000, of which $745,000 was paid and $670,000 is payable in June, 2004, which has been presented as a current liability as of December 31, 2003. These acquisitions resulted in $1,368,000 of goodwill, representing the excess of the purchase price over the fair value of the net assets acquired. The goodwill is being amortized for tax purposes over a 15-year period. Our decision to make these acquisitions was based on our expectation of profitability resulting from management's evaluation of the operations of these dialysis centers. The party from whom the 30% minority interests were purchased was the medical director of one of the facilities at which the 30% interest was acquired and is the medical director of three other of our Georgia dialysis facilities. See Note 1. NOTE 12--LOAN TRANSACTIONS We customarily fund the establishment and operations of our dialysis facility subsidiaries, usually until they become self-sufficient, including subsidiaries in which medical directors hold interests ranging from 20% to 49%. Except in limited circumstances, such funding is generally made without formalized loan documents, as the operating agreements for our subsidiaries provide for cash flow and other proceeds to first pay any such financing that we provide, exclusive of any tax payment distributions. One such loan exists with DCA of Vineland, LLC. In April, 2000, a company owned by the medical director of DCA of Vineland acquired an interest in DCA of Vineland for $203,000, which was applied to reduce our loan. The outstanding principal indebtedness of this loan was approximately $425,000 at December 31, 2003 and $347,000 at December 31, 2002. See Note 5. NOTE 13--QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following summarizes certain quarterly operating data:
Year Ended December 31, 2003 Year Ended December 31, 2002 ------------------------------------- -------------------------------------- March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31 ------- ------ ------ ------ ------- ------ ------ ------ (In thousands except per share data) Net Sales $6,738 $7,424 $7,535 $7,979 $5,488 $6,315 $6,698 $6,661 Gross profit 2,535 2,907 2,829 3,184 2,093 2,598 2,718 2,686 Net income 156 220 308 466 162 339 393 348 Earnings per shares: Basic $.02 $.03 $.04 $.06 $.02 $.04 $.05 $.04 Diluted $.02 $.03 $.04 $.05 $.02 $.04 $.05 $.04
Since the computation of earnings per share is made independently for each quarter using the treasury stock method, the total of four quarters earnings do not necessarily equal earnings per share for the year. F-24 DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 NOTE 14--SUPPLEMENTAL CASH FLOW INFORMATION The following represents non-cash financing and investing activities and other cash flow information:
2003 2002 2001 ---------- ---------- ---------- Interest paid (see Note 2) $ 189,000 $ 234,000 $ 152,000 Income taxes paid (see Note 3) 777,000 1,234,000 123,000 Equipment financing (see Note 2) -- 399,000 752,000 Options exercise bonus (see Note 6) 100,000 -- -- Subsidiary minority member capital contributions funded by notes (see Note 5) 223,000 -- -- Subsidiary minority member distributions applied against notes and accrued interest (see Note 5) 54,000 -- --
NOTE 15--SUBSEQUENT EVENTS The board of directors declared a two-for-one stock split with respect to the company's 3,968,772 shares of outstanding common stock. The record date of the split was January 28, 2004; the distribution date was February 9, 2004; and the date Nasdaq reported the adjusted price of the common stock was February 10, 2004. The two-for-one stock split increased the outstanding shares of common stock at that time to 7,937,544 shares. The split also required adjustment in the outstanding stock options by doubling the number of shares obtainable upon exercise, and halving the exercise price of the options. See Note 6. On March 17, 2004, the company issued a demand promissory note to its parent for up to $1,500,000 of financing for equipment purchases with annual interest of 1.25% over the prime rate at the time of each advance. As of that date the company had borrowed approximately $485,000. F-25 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS DIALYSIS CORPORATION OF AMERICA, INC. AND SUBSIDIARIES DECEMBER 31, 2003
- ------------------------------------------------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------------------------------------ Additions Balance at Additions (Deductions) Charged to Other Changes Balance Beginning Charged (Credited) to Other Accounts Add (Deduct) at End of Classification Of Period Cost and Expenses Describe Describe Period - ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2003: Reserves and allowances deducted from asset accounts: Allowance for uncollectable accounts $ 831,000 $ 290,000 $(336,000)(1) $ 785,000 Valuation allowance for deferred tax asset 72,000 (20,000) -- 52,000 --------- --------- --------- --------- $ 903,000 $ 270,000 $(336,000) $ 837,000 ========= ========= ========= ========= YEAR ENDED DECEMBER 31, 2002: Reserves and allowances deducted from asset accounts: Allowance for uncollectable accounts $ 727,000 $ 721,000 $(617,000)(1) $ 831,000 Valuation allowance for deferred tax asset 217,000 (145,000) -- 72,000 --------- --------- --------- --------- $ 944,000 $ 576,000 $(617,000) $ 903,000 ========= ========= ========= ========= YEAR ENDED DECEMBER 31, 2001: Reserves and allowances deducted from asset accounts: Allowance for uncollectable accounts $ 306,000 $ 659,000 $(238,000)(1) $ 727,000 Valuation allowance for deferred tax asset 440,000 (223,000) -- 217,000 --------- --------- --------- --------- $ 746,000 $ 436,000 $(238,000) $ 944,000 ========= ========= ========= =========
(1) Uncollectable accounts written off, net of recoveries. F-26 EXHIBITS TO DIALYSIS CORPORATION OF AMERICA ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 10.3 Renewal of Lease between the Company and DCA of Lemoyne, Inc.(1) dated December 30, 2004. 10.8 Renewal of Lease between DCA of Manahawkin, Inc.(5) and William P. Thomas dated February 20, 2004. 10.46 Demand Promissory Note from the Company to Medicore, Inc. dated March 1, 2004. 21 Subsidiaries of the Company. 31.1 Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 31.2 Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. 32.1 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. EX-10.3 3 v02245_ex10-3.txt RENEWAL AND AMENDMENT NO. 1 TO LEASE AGREEMENT WHEREAS, DIALYSIS CORPORATION OF AMERICA, a Florida corporation with offices at 1344 Ashton Road, Suite 201, Hanover, Maryland (the "Lessor"), and DCA OF LEMOYNE, INC., a Pennsylvania corporation (formerly Dialysis Services of Pennsylvania, Inc. - Lemoyne), with offices at 27 Miller Street, Lemoyne, Pennsylvania (the "Lessee"), entered into a Lease Agreement dated December 23, 1998 (the "Lease") for 5,386 square feet of rentable space (the "Space"); and WHEREAS, Lessor and Lessee wish to renew the Lease for an additional five (5) years through December 31, 2008. NOW, THEREFORE, Lessor and Lessee, in consideration of the mutual covenants and promises contained in this Renewal and Amendment No. 1 to the Lease (hereinafter "First Renewal"), and the consideration provided herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and the parties intending to be legally bound, agree as follows: 1. All capitalized terms shall have the meaning as provided for in the Lease, except as otherwise defined in this First Renewal. 2. Lessor waives compliance with Section 2.2(ii) of the Lease and accepts Lessee's execution of this First Renewal as the first five (5) year renewal of the Lease through December 31, 2008. 3. Section 2.2 (iii) is amended to provide for the Base Rent for the First Renewal to be $9.72 per square foot, which will aggregate Fifty-Two Thousand Three Hundred Fifty-Two and 00/100 Dollars ($52,352.00), or Four Thousand Three Hundred Sixty-Three and 00/100 Dollars ($4,363.00) per month. The Base Rent for the Second Renewal Period shall be $12.46 per square foot. 4. Section 4.1 is amended to reflect the new Base Rent as provided for in Section 3 of this First Renewal. All other terms of the Lease, otherwise than as modified in this First Renewal, shall continue in full force and effect. IN WITNESS WHEREOF, Lessor and Lessee have each caused this First Renewal to be signed by their respective officers thereunto duly authorized, as of the date set opposite their respective names. DIALYSIS CORPORATION OF AMERICA /s/ Thomas K. Langbein DATED: December 30, 2003 By:------------------------------------- THOMAS K. LANGBEIN, Chairman of the Board DCA OF LEMOYNE, INC. /s/ Stephen W. Everett DATED: December 30, 2003 By:------------------------------------- STEPHEN W. EVERETT, CEO and President EX-10.8 4 v02245_ex10-8.txt Lawrence E. Jaffe Attorney at Law 777 Terrace Avenue Hasbrouck Heights, NJ 07604 (201) 288-8282 Fax: 201-288-8208 February 20, 2004 William P. Thomas c/o Prudential Zach Realtors 675 Route 72 East Manahawkin, NJ 08050 RE: Lease Renewal DCA of Manahawkin, Inc. and William Thomas 675 Route 72 East, Manahawkin, NJ Dear Mr. Thomas: You had forwarded a letter to Bart Pelstring for the lease renewal for space leased from you as Lessor and Dialysis Services, of NJ, Inc. - Manahawkin, now DCA of Manahawkin, Inc. ("Lessee") located at 675 Route 72 East, Manahawkin, NJ. My client provided the materials to me, but I was out of the country and apologize for the delay. As you know, the space consists of 3,659 square feet under the January, 1997 lease and 944 square feet under the June, 1997 Addendum, for an aggregate of actual rental space of 4,603 square feet (the "Space"). The January, 1997 lease and June, 1997 Addendum will be collectively referred to as the "Lease." Lessee acknowledges your letter of January 21, 2004 and confirms your assumption that it did not deliver notice of its intent not to renew the Lease for the Space. As a consequence, the automatic renewal of the Lease for the first five-year renewal period, as provided for in Article 5 of the Lease ("First Renewal Period") has been triggered. While we are not confirming or denying your statement that rent charges have increased along Route 72 in Manahawkin, with respect to the Space, Lessee is prepared, subject to the discussion below, to accept a one-time increase in the rent fee to be charged for the First Renewal Period. In your January 21st letter, you submitted a rent increase for this First Renewal Period equal to 14.416% of the annual rent fee paid by Lessee during the initial Lease term. You based such increase upon the percentage increase in the Consumer Price Index (CPI-U) for the period of October, 1998 through October, 2003. Please note the Commencement Date of the Lease was December 1, 1998.(1) Your application of the CPI-U was based upon the United States Department of Labor's ("USDOL") published index applicable to the region encompassing New York, Northern New Jersey and Long Island. However, the Space (our Facility) is geographically located in the southeastern portion of - --------------- (1) See your "Release" dated 8/9/00 (enclosed); this Commencement Date will actually be beneficial to you, since it increases the computation of the rent for the First Renewal Period by approximately $40 per year. New Jersey. Therefore, the appropriate index to apply is the USDOL's published index for the region encompassing Philadelphia, Wilmington, Atlantic City (for these purposes, the "Mid-Atlantic Region"). The difference in the CPI-U index for the Mid-Atlantic Region for the period from December, 1998 (CPI-U of 169.0) through December, 2003 (CPI-U of 189.0), reflects a percentage increase of 11.834%. Consequently, Lessee is prepared to accept a one-time 11.834% increase in the annual rent fee to be charged during the First Renewal Period. By our calculations, such percentage increase will result in a $5,174.83 increase in the annual rent due (11.834% of the $43,728.50 annual rent paid by Lessee during the initial term of the Lease), to $48,903.33 per annum, for a monthly rent fee during the term of the renewal period of $4,075.28. Please note that the foregoing adjustment of the rent fee for the term of the First Renewal Period shall have no impact or otherwise amend or adjust the additional rent or any other costs or charges as set forth in the Lease and, except as otherwise specifically provided for in the Lease, shall not act or be deemed to amend or modify any other term or provision of the Lease. Attached is the recalculation of the rent owed for December, 2003, January and February, 2004 based upon the new rental for the First Renewal Period and the casualty insurance and real estate taxes as you had provided. If you agree with the Lessee's proposal for the one-time increase in the rent fee for the term of the First Renewal Period, please indicate such acceptance by executing in the appropriate signature block below and return a countersigned copy of this letter to the undersigned by facsimile and regular mail. We will adjust the March, 2004 rent payment as per the attached chart. Very truly yours, /s/ Lawrence E. Jaffe By:------------------------------ LAWRENCE E. JAFFE, ESQ. Reviewed, acknowledged and accepted: WILLIAM P. THOMAS /s/ William P. Thomas By:----------------------------- WILLIAM P. THOMAS DCA of Manahawkin, Inc. February 19, 2004 Due 12/1/03 $ 3,644.04 December, 2003 rent Received payment (3,874.37) Received check # 23465 dated 11/26/03 for Dec., 2003 rent & casualty insurance *Due immediately 431.24 Adjusted Dec., 2003 rent due to rent renewal Due 1/1/04 3,644.04 January, 2004 rent Received payment (3,782.92) Received check #24029 dated 12/31/03 for January, 2004 rent & casualty insurance *Due immediately 431.24 Adjusted January, 2004 rent due to rent renewal *Due 2/1/04 4,075.28 February, 2004 rent *Due 2/1/04 129.92 Cas. insurance for February, 2004 *Due 2/1/04 2,633.20 2004 first quarter rent property taxes ($4,724.34 x 46% = $2,633.20) **Received payment 7,981.38 Received check #24505 dated 1/29/04 for rent of $4,168.781(2); cas. insurance and real property taxes okay. *Due $ 431.24 431.24 4,075.28 129.92 2,633.20 --------- *Total Due $7,700.88 **Total Paid 7,981.38 To be credited to --------- March, 2004 rent $ 280.50 ========= - --------------- (2) Overpayment erroneously paid without proper authorization; readjusted, see attached letter. EX-10.46 5 v02245_ex10-46.txt DEMAND PROMISSORY NOTE $1,500,000.00 March 1, 2004 FOR VALUE RECEIVED, the undersigned, DIALYSIS CORPORATION OF AMERICA, a Florida corporation (the "Borrower"), hereby promises to pay the Principal Sum (as defined below) to the order of MEDICORE, INC., a Florida corporation, or its successors and assigns (hereinafter, with any subsequent holder, the "Holder"), at its principal offices located at 2337 West 76th Street, Hialeah, Florida 33016, or at such other place or to such other party as Holder of this demand promissory note ("Note") may from time to time designate in writing, up to the maximum principal sum of One Million Five Hundred Thousand and 00/100 ($1,500,000.00) Dollars ("Maximum Sum") in accordance with this Note, together with accrued interest on the Principal Sum (as defined below)at the rate of 1 1/4% per annum in excess of the prime rate as reported by the Wall Street Journal (the "Prime Rate," which term plus 1 1/4% is referred to as the "Interest"), which Interest shall be computed daily, with Interest calculated as of the date each Advance (as defined below) is made by Holder to Borrower. Advance shall mean those funds advanced by Holder to Borrower in amounts of no less than Twenty-Five Thousand and 00/100 ($25,000.00) Dollars, upon the detailed request of Borrower solely for dialysis equipment purchases; and the Advances shall be recorded and endorsed on the "Schedule of Advances and Payments" attached to and made a part of this Note. The failure of Holder to make any such record or endorsement shall in no way detract from or add to Borrower's obligations under this Note. The Principal Sum shall mean all outstanding Advances to the date of calculation of the Principal Sum. All payments of this Note shall be made in lawful currency of the United States and in immediately available funds. If the Principal Sum due under this Note is not paid in full upon demand of Holder, Borrower agrees to pay, in addition to the Principal Sum due under this Note, all costs of collection, including reasonable attorneys' fees and expenses, whether suit is brought or not. Borrower shall have the right to prepay all or any part of the Principal Sum, together with all accrued Interest thereon, at any time without penalty. Upon the occurrence of Borrower's failure to pay upon demand by Holder, and during the continuance of such default, the rate of Interest accruing on the Principal Sum and accrued Interest shall be increased to a fixed rate of 5% over the Prime Rate. This Note is subject to the express condition that at no time shall Borrower be obligated or required to pay Interest hereunder at a rate that could subject Holder to either civil or criminal liability as a result of being in excess of the maximum lawful rate which Borrower is permitted by law to contract or agree to pay. If, by the terms of this Note, Borrower is at any time required or obligated to pay Interest at a rate in excess of such maximum lawful rate, the rate of Interest under this Note shall be deemed to be immediately reduced to such maximum lawful rate and Interest payable hereunder shall be computed at such maximum lawful rate and the portion of all prior Interest payments in excess of such maximum lawful rate shall be applied and shall be deemed to have been payments in reduction of the Principal Sum. Borrower waives all exemption rights, whether under any state constitution, homestead exemption or otherwise, and also waives demand, presentment for payment, notice of dishonor, protest valuation and appraisal, notice of protest, notice of dishonor, and any other notice required to be given by law in connection with the delivery, acceptance, performance, default or enforcement of this Note, and consents to all forbearance or waiver of any term hereof or release or discharge by Holder of Borrower, or the failure to act on the part of Holder or any other indulgence shown by Holder from time to time, in one or more instances (without notice to or further assent from Borrower), and Borrower agrees that no such action, failure to act or failure to exercise any right or remedy on the part of Holder shall in any way affect or impair the obligations of Borrower under this Note or be construed as a waiver by Holder of or otherwise affect any of Holder's rights under this Note. All agreements, covenants, representations and warranties contained in this Note or made in writing by or on behalf of Borrower in connection with the transactions contemplated hereby shall survive the execution and delivery of this Note until the Note is fully paid and performed. No termination or cancellation (regardless of cause or procedure) of this Note shall in any way affect or impair the powers, obligations, duties, rights and liabilities of the parties hereto in any way with respect to any transaction or event occurring prior to such termination or cancellation. Borrower further agrees that to the extent that Borrower makes a payment or payments to Holder, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy, insolvency or similar state or federal law, common law or equitable cause, then, to the extent of such payment or repayment, the obligation or part thereof intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been received by Holder. This Note shall be governed by, and construed in accordance with, the laws of the State of Florida. In the event any one or more of the provisions contained in this Note shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Note and this Note shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. This Note may not be changed orally, but only by an agreement in writing signed by the parties against whom enforcement of any waiver, change, modification or discharge is sought. Borrower represents that it has full power, authority and legal right to execute and deliver this Note and that the debt hereunder constitutes the valid and binding liability and obligation of Borrower. IF THIS NOTE IS NOT PAID UPON DEMAND, BORROWER IRREVOCABLY AUTHORIZES ANY CLERK OF ANY COURT OF RECORD OR ANY ATTORNEY TO ENTER IN ANY COURT OF COMPETENT JURISDICTION IN THE STATE OF FLORIDA, JUDGMENT BY CONFESSION AGAINST BORROWER AND IN FAVOR OF HOLDER OF THIS NOTE FOR THE ENTIRE AMOUNT OF THIS NOTE THEN REMAINING UNPAID (INCLUDING PRINCIPAL, ACCRUED INTEREST AND LATE CHARGES), TOGETHER WITH REASONABLE ATTORNEY'S FEES AND COURT COSTS, WITHOUT ISSUANCE OR SERVICE OF PROCESS, STAY OF EXECUTION OR RIGHT OF APPEAL, AND EXPRESSLY WAIVING THE BENEFIT OF ALL EXEMPTION LAWS (WHETHER BY STATE CONSTITUTION, HOMESTEAD EXEMPTION OR OTHERWISE) AND ALL IRREGULARITY OR ERROR IN ENTERING SAID JUDGMENT OR THE EXECUTION THEREON AND ALL RIGHTS OF APPEAL AND STAYS OF EXECUTION, AND WILL REPRESENT A DEBT JUSTLY DUE HOLDER. NO SINGLE EXERCISE OF THE FOREGOING POWER TO CONFESS JUDGMENT SHALL BE DEEMED TO EXHAUST THE POWER, WHETHER OR NOT ANY SUCH EXERCISE SHALL BE HELD BY ANY COURT TO BE INVALID, VOIDABLE OR VOID, BUT THE POWER SHALL CONTINUE UNDIMINISHED, AND IT MAY BE EXERCISED FROM TIME TO TIME AS OFTEN AS HOLDER OF THIS NOTE SHALL ELECT, UNTIL SUCH TIME AS HOLDER OF THIS NOTE SHALL HAVE RECEIVED PAYMENT IN FULL OF ALL INDEBTEDNESS OF BORROWER TO HOLDER OF THIS NOTE UNDER THE TERMS HEREOF. THE EXECUTION OF THIS NOTE WILL BE DEEMED THE EXECUTION OF THE AFFIDAVIT OF CONFESSION OF JUDGMENT FOR ENTRY OF THE JUDGMENT WHICH HOLDER MAY ENFORCE IN ANY COURT OF COMPETENT JURISDICTION. BORROWER KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHTS HE MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED HEREON, OR ARISING OUT OF, OR IN CONNECTION WITH THIS NOTE. This Note and Borrower's obligations may not be assigned by Borrower without the prior written consent of Holder. This Note shall be binding upon Borrower and its successors and assigns and shall inure to the benefit of Holder and its successors and assigns. IN WITNESS WHEREOF, Borrower has duly executed this Note by its duly authorized officer as of the day and year first above written. ATTEST: BORROWER: DIALYSIS CORPORATION OF AMERICA /s/ Mike Rowe /s/ Stephen W. Everett - ----------------------------- By:------------------------------- STEPHEN W. EVERETT, CEO and President STATE OF MARYLAND ) ) SS: COUNTY OF ANNE ARUNDEL ) The foregoing instrument was acknowledged before me this 1st day of March, 2004 by STEPHEN W. EVERETT, as Chief Executive Officer and President of DIALYSIS CORPORATION OF AMERICA, a Florida corporation, the individual who I am satisfied is the person mentioned in the within instrument and thereupon he acknowledged that he signed and delivered the foregoing instrument for the uses and purposes therein expressed, on behalf of the corporation. /s/ Priscilla Jackson --------------------------------- Notary Public SCHEDULE OF ADVANCES AND PAYMENTS - ------------------------------------------------------------------------ Amount of Amount of Amount of Principal Interest Principal Endorsed Date Advance Prepaid Paid Balance By Lender - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ EX-21 6 v02245_ex21.txt EXHIBIT 21 SUBSIDIARIES Jurisdiction of Percentage Owned Subsidiaries Incorporation By Registrant - ------------ --------------- ---------------- DCA Medical Services, Inc. Florida 100% DCA of Adel, LLC Georgia 100% DCA of Central Valdosta, LLC Georgia 100% DCA of Fitzgerald, LLC Georgia 100% DCA of Hawkinsville, LLC (1) Georgia 100% DCA of So. Ga., LLC Georgia 100% DCA of Royston, LLC Georgia 100% DCA of Chevy Chase, LLC Maryland 80% DCA of Rockville, LLC Maryland 100% DCA of Manahawkin, Inc. New Jersey 80% DCA of Vineland, LLC New Jersey 51% DCA of Cincinnati, LLC Ohio 60% DCA of Carlisle, Inc. Pennsylvania 80% DCA of Chambersburg, Inc. Pennsylvania 80% DCA of Lemoyne, Inc. Pennsylvania 100% DCA of Mechanicsburg, LLC Pennsylvania 100% DCA of Pottstown, LLC Pennsylvania 80% DCA of Wellsboro, Inc. Pennsylvania 100% DCA of Warsaw, LLC Virginia 100% DCA of Aiken, LLC South Carolina 100% (1) Inactive subsidiary EX-31.1 7 v02245_ex31-1.txt EXHIBIT 31.1 CERTIFICATION I, Stephen W. Everett, certify that: 1. I have reviewed this annual report on Form 10-K of Dialysis Corporation of America; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we 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 annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of any annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control 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 controls. /s/ Stephen W. Everett Date: March 25, 2004 ------------------------------------------- STEPHEN W. EVERETT, Chief Executive Officer and President EX-31.2 8 v02245_ex31-2.txt EXHIBIT 31.2 CERTIFICATION I, Daniel R. Ouzts, certify that: 1. I have reviewed this annual report on Form 10-K of Dialysis Corporation of America; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we 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 annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of any annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control 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 controls. /s/ Daniel R. Ouzts Date: March 25, 2004 -------------------------------------------- DANIEL R. OUZTS, Principal Financial Officer EX-32.1 9 v02245_ex32-1.txt EXHIBIT 32.1 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 Annual Report of Dialysis Corporation of America (the "Company") on Form 10-K for the fiscal year ended December 31, 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 of Finance and Treasurer 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 of Finance and Treasurer (Principal Financial Officer) Dated: March 25, 2004 -----END PRIVACY-ENHANCED MESSAGE-----