-----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, Lcgz2EbHh+0DLv9XMIcmLVZFE/pBOZec8K7M/Vcx/Sit5VaIfeLajTUUro43X3Zd AIVnEHtzbiUoJf8FcItCjg== 0001188112-06-003454.txt : 20061114 0001188112-06-003454.hdr.sgml : 20061114 20061114152210 ACCESSION NUMBER: 0001188112-06-003454 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061114 DATE AS OF CHANGE: 20061114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08527 FILM NUMBER: 061214476 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-Q 1 t12025_10q.htm FORM 10-Q Form 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10—Q

(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ___________

Commission file number 0-8527
 

 
DIALYSIS CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
 
 

Florida
 
59-1757642
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

1302 Concourse Drive, Suite 204, Linthicum, Maryland
 
21090
(Address of principal executive offices)
 
(Zip Code)

(410) 694-0500   
(Registrant’s telephone number, including area code)

Indicate by check ü 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 o

Indicate by check ü whether the registrant is a large-accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o     Accelerated Filer o     Non-Accelerated Filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o or No x

Common Stock Outstanding

Common Stock, $.01 par value: 9,554,346 shares as of November 10, 2006.

 
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

INDEX

 
The Consolidated Financial Statements (Unaudited) for the three months and nine months ended September 30, 2006 and September 30, 2005, include the accounts of the Registrant and its subsidiaries.

Financial Statements    
         
 
1)
Consolidated Statements of Income for the three months and nine months ended September 30, 2006 and September 30, 2005 (Unaudited).
  
 1
         
 
2)
Consolidated Balance Sheets as of September 30, 2006 (Unaudited) and December 31, 2005.
  
 
2
         
 
3)
Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and September 30, 2005 (Unaudited).
  
 3
         
 
4)
Notes to Consolidated Financial Statements as of September 30, 2006 (Unaudited).
  
 4
         
Management’s Discussion and Analysis of Financial Condition and Results of Operations  
 18
         
Quantitative and Qualitative Disclosures about Market Risk  
 28
       
 
Controls and Procedures  
 29
         
PART II — OTHER INFORMATION
    
         
Unregistered Sales of Equity Securities and Use of Proceeds  
 30
         
Other Information  
 30
         
Exhibits  
 31
 
i

PART I -- FINANCIAL INFORMATION



CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
   
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
  
   
2006
  
 2005
  
2006
  
 2005
  
Operating revenues:
                  
Sales
                  
Medical services revenue
  
$
16,280,763
  
$
11,372,722
  
$
43,219,316
  
$
32,878,347
  
Product sales
    
223,651
    
—
    
677,281
    
—
  
Total sales revenues
    
16,504,414
    
11,372,722
    
43,896,597
    
32,878,347
  
Other income
    
82,010
    
108,321
    
364,877
    
356,618
  
     
16,586,424
    
11,481,043
    
44,261,474
    
33,234,965
  
Operating costs and expenses:
                          
Cost of sales
                          
Cost of medical services
    
9,895,768
    
7,178,936
    
26,385,709
    
20,446,406
  
Cost of product sales
    
144,635
    
—
    
420,246
    
—
  
Total cost of sales revenues
    
10,040,403
    
7,178,936
    
26,805,955
    
20,446,406
  
Selling, general and administrative expenses
                          
Corporate
    
1,676,894
    
889,797
    
4,696,022
    
3,302,732
  
Facility
    
2,329,274
    
1,793,585
    
6,517,481
    
5,257,418
  
Total
    
4,006,168
    
2,683,382
    
11,213,503
    
8,560,150
  
Stock compensation expense
    
122,070
    
—
    
292,972
    
—
  
Depreciation and amortization
    
618,169
    
422,858
    
1,704,177
    
1,244,101
  
Provision for doubtful accounts
    
345,436
    
222,130
    
738,349
    
674,773
  
     
15,132,246
    
10,507,306
    
40,754,956
    
30,925,430
  
                           
Operating income
    
1,454,178
    
973,737
    
3,506,518
    
2,309,535
  
                           
Other income (expense)
                          
Interest income on officer/director note
    
—
    
1,578
    
—
    
4,291
  
Interest expense on note and advances payable to parent
    
—
    
(67,780
)
  
—
    
(157,591
)
Other income, net
    
255,166
    
50,857
    
388,440
    
127,250
  
     
255,166
    
(15,345
)
  
388,440
    
(26,050
)
Income before income taxes, minority and other
                          
equity interests and equity in affiliate earnings
    
1,709,344
    
958,392
    
3,894,958
    
2,283,485
  
                           
Income tax provision
    
504,933
    
352,202
    
1,364,318
    
971,110
  
                           
Income before minority and other equity interests
                          
and equity in affiliate earnings
   
1,204,411
    
606,190
    
2,530,640
    
1,312,375
  
                           
Minority and other equity interests in income
                          
of consolidated subsidiaries
    
(414,482
)
  
(128,230
)
  
(818,996
)
  
(280,631
)
                           
Equity in affiliate earnings
    
24,459
    
59,024
    
216,927
    
273,822
  
                           
Net income
  
$
814,388
  
$
536,984
  
$
1,928,571
  
$
1,305,566
  
                           
Earnings per share:
                          
Basic
  
$
.09
  
$
.06
  
$
.20
  
$
.15
  
Diluted
  
$
.08
  
$
.06
  
$
.20
  
$
.14
  
                           
Weighted average shares outstanding:
                          
Basic
    
9,549,079
    
8,715,136
    
9,460,570
    
8,957,843
  
Diluted
    
9,599,004
    
9,171,192
    
9,565,308
    
9,499,951
  
 
See notes to consolidated financial statements.



CONSOLIDATED BALANCE SHEETS

   
September 30,
 
December 31,
 
 
 
2006
 
2005(A) 
  
ASSETS
  
(Unaudited)
      
Current assets:
          
Cash and cash equivalents
  
$
542,313
  
$
2,937,557
  
Accounts receivable, less allowance
              
of $2,044,000 at September 30, 2006;
              
$1,886,000 at December 31, 2005
    
15,445,368
    
10,538,033
  
Inventories, less allowance for obsolescence
              
of $77,000 at September 30, 2006 and at December 31, 2005
    
1,935,603
    
1,457,566
  
Deferred income tax asset
    
838,000
    
838,000
  
Prepaid expenses and other current assets
    
3,710,651
    
1,425,112
  
Refundable income taxes
    
1,027,745
    
1,227,306
  
Total current assets
    
23,499,680
    
18,423,574
  
               
Property and equipment:
              
Land
   
1,221,192
    
1,571,975
  
Buildings and improvements
    
5,322,855
    
4,411,670
  
Machinery and equipment
    
11,893,177
    
9,686,962
  
Leasehold improvements
   
7,201,088
    
6,735,727
  
 
    
25,638,312
    
22,406,334
  
Less accumulated depreciation and amortization
    
10,493,590
    
8,622,822
  
     
15,144,722
    
13,783,512
  
               
Deferred income taxes
    
499,251
    
1,680,234
  
Goodwill
    
3,974,517
    
3,649,014
  
Other assets
    
859,460
    
1,266,789
  
Total other assets
    
5,333,228
    
6,596,037
  
   
$
43,977,630
  
$
38,803,123
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
Current liabilities:
              
Accounts payable
  
$
1,602,145
  
$
1,775,352
  
Accrued expenses
    
5,599,064
    
5,739,266
  
Employment contract liability
    
—
    
1,960,000
  
Current portion of long-term debt
    
157,000
    
952,000
  
Acquisition liabilities - current portion
    
—
    
380,298
  
Total current liabilities
    
7,358,209
    
10,806,916
  
               
Long-term debt, less current portion
    
5,130,662
    
635,003
  
Total liabilities
    
12,488,871
    
11,441,919
  
               
Minority interest in subsidiaries
    
3,719,085
    
1,748,130
  
               
Commitments and Contingencies
              
               
Stockholders' equity:
              
Common stock, $.01 par value, authorized 20,000,000 shares: 9,553,596 shares issued and outstanding
at September 30, 2006; 9,265,534 shares issued and outstanding at December 31, 2005
    
95,535
    
92,655
  
Additional paid-in capital
    
15,558,124
    
15,332,975
  
Retained earnings
   
12,116,015
    
10,187,444
  
Total stockholders' equity
   
27,769,674
    
25,613,074
  
   
$
43,977,630
  
$
38,803,123
  
 
(A) Reference is made to the company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission in March, 2006.

See notes to consolidated financial statements.

2


CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
 
 Nine Months Ended
September 30, 
  
   
2006
  
2005
  
Operating activities:
          
Net income
  
$
1,928,571
  
$
1,305,566
  
Adjustments to reconcile net income to net cash
              
provided by operating activities:
              
Depreciation
    
1,692,895
    
1,233,869
  
Amortization
    
11,282
    
10,232
  
Bad debt expense
    
738,349
    
674,773
  
Deferred income taxes (benefit)
    
908,983
    
(59,923
)
Stock compensation expense
    
292,972
    
—
  
Minority and other equity interests
    
818,996
    
280,631
  
Equity in affiliate earnings
    
(216,927
)
  
(273,822
)
Increase (decrease) relating to operating activities from:
              
Accounts receivable
    
(4,787,776
)
  
(1,206,382
)
Inventories
    
(361,744
)
  
(119,868
)
Interest receivable on officer loan
    
—
    
(4,291
)
Prepaid expenses and other current assets
    
(1,671,984
)
  
(49,795
)
Refundable income taxes
    
199,561
    
(322,751
)
Accounts payable
    
(234,714
)
  
(265,792
)
Accrued interest on note payable to parent
    
—
    
37,443
  
Accrued expenses
    
(442,432
)
  
(379,946
)
Net cash (used in) provided by operating activities
    
(1,123,968
)
  
859,944
  
               
Investing activities:
              
Acquisition of former parent
    
—
    
2,736,500
  
Additions to property and equipment, net of minor disposals
    
(3,377,542
)
  
(4,155,433
)
Payments received on physician affiliate loans
    
13,261
    
13,632
  
Distribution from affiliate
    
163,821
    
277,321
  
Payment of employment contract liability
    
(1,960,000
)
  
—
  
Payment dissenting merger shareholders
    
(2,100
)
  
—
  
Acquisition of dialysis centers
    
(861,304
)
  
—
  
Consolidation of former affiliate
    
149,225
    
—
  
Other assets
    
(27,106
)
  
(49,981
)
Net cash used in investing activities
   
(5,901,745
)
  
(1,177,961
)
               
Financing activities:
              
Advances from former parent
    
—
    
161,929
  
Note payable to former parent
    
—
    
3,096,000
  
Line of credit borrowings
    
4,000,000
    
—
  
Payments on long-term debt
   
(300,245
)
  
(400,626
)
Exercise of stock options
    
383,249
    
149,850
  
Capital contributions by subsidiaries’ minority members
    
821,717
    
434,000
  
Distribution to subsidiary minority members
    
(274,252
)
  
(312,844
)
Net cash provided by financing activities
    
4,630,469
    
3,128,309
  
               
(Decrease) increase in cash and cash equivalents
    
(2,395,244
)
  
2,810,292
  
               
Cash and cash equivalents at beginning of period
    
2,937,557
    
601,603
  
               
Cash and cash equivalents at end of period
  
$
542,313
  
$
3,411,895
  
 
See notes to consolidated financial statements.
 
3
 
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

The company is primarily engaged in kidney dialysis operations which include providing outpatient hemodialysis services, home dialysis services, inpatient dialysis services and ancillary services associated with dialysis treatments. The company has 32 operating dialysis centers (including three centers acquired and an additional facility opened in the first quarter of 2006 and two new facilities opened in July, 2006) located in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and Virginia. The company also manages an unaffiliated Georgia center, and has two dialysis facilities under development. In addition, the company has agreements to provide inpatient dialysis treatments to nine hospitals; and provides supplies and equipment for dialysis home patients. Subsequent to the completion of the company’s merger with Medicore, Inc., its former parent, the company also engages in medical product sales. The medical products operations are not a significant component of the company’s operations contributing sales revenues of $224,000 and $677,000 for the three months and nine months ended September 30, 2006 (approximately 1.3% and 1.5% of operating revenues for these periods). See “Consolidation” below in this Note 1 and Notes 4, 5 and 14.

The company’s 40% owned Ohio subsidiary has been consolidated since August, 2006 due to the company taking control of this facility. This subsidiary was previously accounted for using the equity method of accounting. See Notes 13 and 15.

Medical Services Revenue

Our medical services revenue by payor is as follows:

   
Three Months Ended
September 30, 
 
Nine Months Ended
September 30, 
  
   
2006
  
2005
  
2006
  
2005
  
Medicare
    
50
 %    51 %   51 %   51 %
Medicaid and comparable programs
    
8
    
4
    
9
    
7
  
Hospital inpatient dialysis services
    
4
    
4
    
4
    
5
  
Commercial insurers and other private payors
    
38
    
41
    
36
    
37
  
     
100
%
  
100
%
  
100
%
  
100
%
 
Our sources of medical services revenue (in thousands) are as follows:

 
 
Three Months Ended
September 30, 
 
Nine Months Ended
September 30, 
 
 
 
2006 
2005 
 
2006 
 
2005  
  
Outpatient hemodialysis services
  
$
8,746
    
54
%
$
5,911
    
52
%
$
23,411
    
54
%
$
17,045
    
52
%
Home peritoneal dialysis services
    
870
    
5
    
820
    
7
    
2,666
    
6
    
2,361
    
7
  
Inpatient hemodialysis services
    
564
    
3
    
458
    
4
    
1,541
    
4
    
1,568
    
5
  
Ancillary services
    
6,101
    
38
    
4,184
    
37
    
15,601
    
36
    
11,904
    
36
  
   
$
16,281
    
100
%
$
11,373
    
100
%
$
43,219
    
100
%
$
32,878
    
100
%
 
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 formerly a majority owned subsidiary of Medicore, Inc., until the merger of Medicore into the company effected on September 21, 2005. See “Business” above in this Note 1 and Notes 4, 5 and 14. We have a 40% interest in an Ohio dialysis center that is consolidated for financial reporting purposes effective August, 2006, which was previously accounted for on the equity method. See “Business” above in this Note 1, and Notes 13 and 15.

4

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued

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 revenue recognition in connection with the resolution of excess insurance liability, estimated useful lives of depreciable assets, and estimates for patient revenues from non-contracted payors. 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.

Vendor Volume Discounts

The company has contractual arrangements with certain vendors pursuant to which it receives discounts based on volume of purchases. These discounts are recorded in accordance with EITF 02-16 as a reduction in inventory costs resulting in reduced costs of sales as the related inventory is utilized.

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.

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.

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 47% of receivables at September 30, 2006 and 45% at December 31, 2005.
 
 
5

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued

Inventories

Inventories are valued at the lower of cost (first-in, first-out method) or market value and consist of supplies used in dialysis treatments and inventory of the company’s medical products division acquired pursuant to the company’s merger with its former parent. See “Consolidation” above in this Note 1 and Notes 4, 5 and 14.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets are comprised as follows:
 
 
   
September 30,
2006
  
 December 31, 
2005
  
Property to be sold (see Note 6)
  
$
1,750,360
  
$
—
  
Prepaid expenses
    
1,411,064
    
993,277
  
Other
    
549,227
    
431,835
  
   
$
3,710,651
  
$
1,425,112
  
               
 
Accrued Expenses
 
Accrued expenses are comprised as follows:
 
 
   
 September 30,
2006
  
  December 31,
2005 
  
Accrued compensation
  
$
1,399,166
  
$
1,059,791
  
Excess insurance liability
    
2,993,394
    
3,195,520
  
Other
    
1,206,504
    
1,483,955
  
   
$
5,599,064
  
$
5,739,266
  
               
 
 
Excess insurance liability represents amounts paid by insurance companies in excess of the amounts expected by the company from the insurers. The company communicates with the payors regarding these amounts, which can result from duplicate payments, payments in excess of contractual agreements, payments as primary when payor is secondary, and underbillings by the company based on estimated fee schedules. These amounts remain in excess insurance liability until resolution, at which time some of these amounts are being recorded as revenues.

Vendor Concentration

There is only one supplier of erythropoietin (EPO) in the United States. This supplier received FDA approval for an alternative product available for dialysis patients, which is indicated to be effective for a longer period than EPO. The alternative drug also could be administered by the patient’s physician. Accordingly, the use of this drug could reduce our revenues from our current treatment of anemia, thereby adversely impacting our revenues and profitability. There are no other suppliers of any similar drugs available to dialysis treatment providers. Revenues from the administration of EPO, which amounted to approximately $4,521,000 and $11,613,000 for the three months and nine months ended September 30, 2006 and $3,242,000 and $9,084,000 for the same periods of the preceding year comprised 28% and 27% and 29% and 28% of medical services revenues for these periods, respectively.
 
6

DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued

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, which testing has 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. Deferred expenses of approximately $89,000 at September 30, 2006 and $67,000 at December 31, 2005 are included in other assets. Amortization expense was approximately $5,000 and $11,000 for the three months and nine months ended September 30, 2006 and $3,000 and $10,000 for the same periods of the preceding year.

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 adopted Statement of Financial Accounting Standards No. 123 (revised), “Share-Based Payment” (“FAS 123(R)”) effective January 1, 2006. Provisions of FAS 123(R) require companies to recognize the fair value of stock option grants as a compensation costs in their financial statements. In addition to stock options granted after the effective date, companies are required to recognize a compensation cost with respect to any unvested stock options outstanding as of the effective date equal to the grant date fair value of those options with the cost related to the unvested options to be recognized over the vesting period of the options. The board of directors approved accelerated vesting of all unvested options as of December 31, 2005 resulting in there being no unvested options as of December 31, 2005.

Pro forma information regarding net income and earnings per share is required by FAS 123(R) 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 2004, 2003, 2002 and 2001, respectively: risk-free interest rate of 3.83%, 1.44%, 3.73%, and 5.40%; no dividend yield; volatility factor of the expected market price of the company’s common stock of 1.31, 1.07, 1.15, and 1.14, and a weighted-average expected life of 5 years, 4.7 years, 5 years, and 4 years.
 
7
 
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective input assumptions including the expected stock price volatility. Because the company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options’ vesting period. The company’s pro forma information for the three months and nine months ended September 30, 2005 follows:
 
   
Three Months Ended
  September 30, 2005
  
Nine Months Ended
September 30, 2005
  
Net income, as reported
  
$
536,984
  
$
1,305,566
  
Stock-based employee compensation expense under fair value method, net of related tax effects
    
(45,810
)
  
(139,557
)
Pro forma net income
  
$
491,174
  
$
1,166,009
  
Earnings per share:
              
Basic, as reported
  
$
.06
  
$
.15
  
Basic, pro forma
  
$
.06
  
$
.13
  
Diluted, as reported
  
$
.06
  
$
.14
  
Diluted, pro forma
  
$
.05
  
$
.12
  
 
Earnings per Share

Diluted earnings per share gives effect to potential dilutive common shares during the period, such as stock options and warrants, calculated using the treasury stock method and average market price.
 
   
Three Months Ended
September 30,
  
Nine Months
Ended September 30,
  
   
2006
  
2005
  
2006
  
2005
  
Net income
  
$
814,388
  
$
536,984
  
$
1,928,571
  
$
1,305,566
  
                           
Weighted average shares outstanding
    
9,549,079
    
8,715,136
    
9,460,570
    
8,957,843
  
                           
Weighted average shares outstanding
    
9,549,079
    
8,715,136
    
9,460,570
    
8,957,843
  
Non-vested shares issuable for employee stock awards and director fees
    
34,750
    
---
    
12,459
    
---
  
Weighted average shares diluted computation
    
9,583,829
    
8,715,136
    
9,473,029
    
8,957,843
  
Effect of dilutive stock options
    
15,175
    
456,056
    
92,279
    
542,108
  
Weighted average shares, as adjusted diluted computation
    
9,599,004
    
9,171,192
    
9,565,308
    
9,499,951
  
                           
Earnings per share:
                          
Basic
 
$
.09
  
$
.06
  
$
.20
  
$
.15
  
Diluted
 
$
.08
  
$
.06
  
$
.20
  
$
.14
  
                           
 
The company had various potentially dilutive outstanding stock options during the periods presented. See Note 7.
 
8
 
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES–Continued

Other Income

Operating:

Other operating income is comprised as follows:

   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
   
2006
  
2005
  
2006
  
2005
  
Management fee income
  
$
82,010
  
$
108,321
  
$
364,877
  
$
356,618
  
 
Non-operating:

Other non-operating income (expense) is comprised as follows:
 
   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
   
2006
  
2005
  
2006
  
2005
  
Rental income
  
$
92,118
  
$
50,422
  
$
274,232
  
$
148,812
  
Interest income
    
58,129
    
22,145
    
149,850
    
57,004
  
Interest expense
    
(113,471
)
  
(33,826
)
  
(270,457
)
  
(100,301
)
Other
    
3,390
    
12,116
    
19,815
    
21,735
  
Litigation settlement income
    
215,000
    
—
    
215,000
    
—
  
Other income, net
  
$
255,166
  
$
50,857
  
$
388,440
  
$
127,250
  
 
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.

Reclassification

Certain prior year amounts have been reclassified to conform with the current year’s presentation.

New Pronouncements

In June, 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, Accounting for Income Taxes,” which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires that a company recognize in its financial statements, the impact of a tax position, if that position is more likely than not to be sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The company is evaluating the impact of adopting FIN 48 but does not expect FIN 48 to have a significant effect on its financial statements.
 
9
 
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES–Continued

In September, 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require fair value measurement in which the FASB concluded that fair value was the relevant measurement, but does not require any new fair value measurements. SFAS 157 will be effective for the company beginning in 2009. The company is evaluating the impact on its financial statements of adopting SFAS 157.

In September, 2006, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on how the effects of prior year misstatements should be considered in quantifying current year financial statement misstatements. The interpretations by the SEC staff in SAB 108 were issued to address the diversity in the practice of quantifying financial statements misstatements and the potential for a build up of improper amounts on the balance sheet. The SEC staff indicated that companies should quantify errors using both a balance sheet and income statement approach and determine whether either approach results in material misstatement. SAB 108 is effective for fiscal years ending after November 15, 2006. The company is evaluating the impact of the adoption of SAB 108, but does not expect SAB 108 to have a significant effect on its financial statements.

NOTE 2–INTERIM ADJUSTMENTS

The financial summaries for the three months and nine months ended September 30, 2006 and September 30, 2005 are unaudited and include, in the opinion of management of the company, all adjustments (consisting of normal recurring accruals) necessary to present fairly the earnings for such periods. Operating results for the three months and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2006.

While the company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes included in the company’s audited financial statements for the year ended December 31, 2005.

NOTE 3–LONG-TERM DEBT

The company through its subsidiary, DCA of Vineland, LLC, pursuant to a December 3, 1999 loan agreement obtained a $700,000 development loan with interest at 8.75% through December 2, 2001, 1½% 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. The bank subsequently released DCA of Vineland, LLC’s assets as security leaving the company as the remaining obligor on this loan agreement. 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 was modified in May, 2006 to extend the maturity to May 2, 2026 and reduce the interest rate to prime. This loan had an outstanding principal balance of approximately $562,000 at September 30, 2006 and $583,000 at December 31, 2005.

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 ½% with a minimum of 6.0% effective December 16, 2002. Payments were $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 company refinanced this mortgage through the existing lender for an additional five years with interest at prime with a rate floor of 5.75% and a rate ceiling of 8.00%, with payments of $6,000 per month. The remaining principal balance under this mortgage amounted to approximately $622,000 at September 30, 2006 and $633,000 at December 31, 2005.
 
10

 
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 3–LONG-TERM DEBT–Continued
 
The equipment financing agreement represents financing for kidney dialysis machines for the company’s dialysis facilities. There were no financings under this agreement in 2006 or 2005. 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 11. The remaining principal balance under this financing amounted to approximately $104,000 at September 30, 2006 and $371,000 at December 31, 2005.

The prime rate was 8.25% as of September 30, 2006 and 7.25% as of December 31, 2005. For interest payments, see Note 11.

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 combinations of the company, and require maintenance of certain financial ratios. The company was in compliance with the debt covenants at September 30, 2006 and December 31, 2005.

On October 24, 2005, the company entered into a three year, $15,000,000 revolving line of credit with a maturity date of October 24, 2008. Each of the company’s wholly-owned subsidiaries has guaranteed this credit facility, as will any future wholly-owned subsidiaries. Further, the obligation under the revolving line of credit are secured by the company’s pledge of its ownership in its subsidiaries. The credit facility, which has provisions for both base rate and LIBOR loans, is intended to provide funds for the development and acquisition of new dialysis facilities, to meet general working capital requirements, and for other general corporate purposes. Borrowings under the revolving line of credit accrue interest at a rate based upon the applicable margin for base rate and LIBOR loans plus the base rate for base rate loans and the LIBOR rate for LIBOR loans, as those terms are defined in the agreement. The company has the right to convert the base rate loan to a LIBOR loan, and vice versa. The agreement contains customary reporting and financial covenant requirements for this type of credit facility. The company was in compliance with the requirements of this credit facility at September 30, 2006 and December 31, 2005.

The company has $4,000,000 in outstanding borrowings under its line of credit at September 30, 2006, including two LIBOR loans totaling $2,500,000 LIBOR and $1,500,000 in base rate loans. One LIBOR loan is a $1,500,000 three month loan with an interest rate of 6.8125%, including the LIBOR rate of 5.5625% plus an applicable margin of 1.25%. The other LIBOR loan is a $1,000,000 three month loan with an interest rate of 6.6875%, including the LIBOR rate of 5.4325% plus an applicable margin of 1.25%. The base rate loans have an interest rate of 8.25% as of September 30, 2006.

NOTE 4–INCOME TAXES

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

No valuation allowance was recorded for deferred tax assets at September 30, 2006 or December 31, 2005, due to the company’s anticipated prospects for future taxable income in an amount sufficient to realize deferred tax assets.
 
11
 
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)

NOTE 4–INCOME TAXES–Continued

As a result of the company’s merger with its former parent, the company acquired a deferred tax asset of approximately $3,300,000, representing tax benefits from the former parent’s net operating loss carryforwards that the company can utilize to satisfy future income tax liabilities. The company has applied approximately $617,000 of the acquired deferred tax asset to offset a deferred income tax liability of the same amount, which would otherwise represent a future tax liability of the company. The company has also applied approximately $2,200,000 toward its 2005 and 2006 tax liabilities. Refundable income taxes of approximately $1,028,000 at September 30, 2006, which is reflected as a current asset, resulted from the application of the acquired deferred tax asset toward the 2005 tax liability. See Notes 1, 5, 11 and 14.

For income tax payments, see Note 11.

NOTE 5–TRANSACTIONS WITH FORMER PARENT

Our former parent provided certain financial and administrative services for us. Central operating costs were charged on the basis of time spent. In the opinion of management, this method of allocation was reasonable. The amount of expenses allocated by the former parent totaled approximately $50,000 and $150,000 for the three months and nine months ended September 30, 2005 with this allocation ceasing when the company and its former parent merged in September, 2005, (see Notes 1, 4, 11 and 14), which is included in selling, general and administrative expenses in the Consolidated Statements of Income.

We had an intercompany advance payable to our former parent which bore interest at the short-term Treasury Bill rate. Interest expense on intercompany advances payable was approximately $4,000 and $9,000 for the three months and nine months ended September 30, 2005, with the interest ceasing when the company and its former parent merged. Interest was included in the intercompany advance balance. The intercompany advance balance of approximately $611,000 was forgiven as a result of the company’s merger with its former parent. See Notes 1, 4, 11 and 14.

On March 17, 2004, the company issued a demand promissory note to its former parent for up to $1,500,000 of financing for equipment purchases with annual interest of 1.25% over the prime rate. The note was subsequently modified by increasing the maximum amount of advances that could be made to $5,000,000, and by adding to the purposes of the financing, working capital and other corporate needs. The outstanding note balance of approximately $4,531,000 was forgiven as a result of the company’s merger with its former parent. The weighted average interest rate on the note was 7.26% and 7.58% for the three months and nine months ended September 30, 2005. Interest expense on the note amounted to approximately $64,000 and $149,000 for the three months and nine months ended September 30, 2005 with the interest ceasing when the company and its former parent merged. Accrued interest on the note of approximately $64,000 was forgiven as a result of the company’s merger with its former parent. See Notes 1, 4, 11 and 14.

NOTE 6–OTHER RELATED PARTY TRANSACTIONS

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 was 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 $2,000 and $4,000 for the three months and nine months ended September 30, 2005. The note and accrued interest of approximately $22,000 were repaid in December, 2005.
 
12
 
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 6–OTHER RELATED PARTY TRANSACTIONS–Continued
 
        Minority members in subsidiaries in certain situations may fund a portion of required capital contributions by issuance of an interest bearing note payable to the company which minority members may repay directly or through their portion of capital distributions of the subsidiary. The minority members did not fund capital contributions during the nine months of 2006 and funded approximately $15,000 during the first nine months of 2005 under such notes, which typically accrue interest at prime plus 2%. An aggregate of approximately $110,000 of distributions were applied against the notes and accrued interest during the first nine months of 2006, and $22,000 during the same period of the preceding year. 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 Notes 10 and 11.

The company has constructed and is constructing dialysis facilities, two of which are anticipated to be sold upon completion to a medical director of the company. The company’s subsidiaries that will operate those dialysis facilities will lease the facilities from the purchasers, which leases are on terms which are as favorable as could be obtained from unaffiliated parties. The cost of the land and construction costs are included in Prepaid Expenses and Other Current Assets. See Note 1.

NOTE 7–STOCK OPTIONS AND STOCK AWARDS

In January, 2001, the board of directors granted to the company’s Chief Executive Officer and President a five-year option for 330,000 shares exercisable at $.63 per share. In January, 2004, 56,384 of these options were exercised for $35,240 with the exercise price satisfied by a director bonus. In March, 2005, 150,000 of these options were exercised with the company receiving a $93,750 cash payment for the exercise price. In December, 2005, the remaining 123,616 of these options were exercised with the company receiving a $76,024 cash payment for the exercise price.

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. In 2003 and 2004, 8,146 of these options were exercised, with the exercise prices satisfied by director bonuses. These exercises represent non-cash investing activity, which is a supplemental disclosure required by Financial Accounting Standards Board Statement No. 95, “Statement of Cash Flows.” See Note 11. In January, 2004, 7,200 options were exercised. In February, 2005, 15,000 options were exercised for cash. 14,654 options were cancelled due to the resignation of a director in June, 2004. 100,000 options were exercised in March, 2006 and the balance of 5,000 options were exercised in April with the company receiving cash payments totaling $78,750 for the exercise price.

In May, 2002, the board of directors granted five-year options for an aggregate of 21,000 shares to certain of the company’s employees. Options for 14,000 shares have been cancelled as a result of the termination of several employee option holders. During 2005, 7,000 of these options were exercised with the company receiving $14,350 cash payments for the exercise price.

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. These options were exercised in March, 2006 with the company receiving a $90,000 cash payment for the exercise price.

In August, 2003, the board of directors granted a three-year option to a director for 10,000 shares exercisable at $2.25 per share through August 18, 2006. These options were exercised in June, 2006 with the company receiving a $22,500 cash payment.

13
 
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 7–STOCK OPTIONS AND STOCK AWARDS–Continued

In January, 2004, the board of directors granted a five year option to an employee for 20,000 shares exercisable at $3.09 per share through January 12, 2009. In February, 2005, a portion of this option was exercised for 5,000 shares with the company receiving a cash payment of $15,425. 5,000 options were exercised in January, 2006 with the company receiving a cash payment of $15,425 for the exercise price, and the balance of 10,000 options were exercised in June, 2006 with the company receiving a $30,850 cash payment.
 
In June, 2004, the board of directors granted 160,000 stock options to officers, directors and a key employee exercisable at $4.02 per share through June 6, 2009. 3,750 options were exercised in July, 2005 with the company receiving a cash payment of $15,075 and an additional 13,750 options were exercised in December, 2005 with the company receiving $55,275 cash payments. 25,000 options were exercised in March, 2006 with the company receiving a $100,500 cash payment for the exercise price. An additional 87,500 options were exercised in March, 2006 with an exercise price of $351,750 that was satisfied through payment of 27,205 shares of company stock. 7,500 options were exercised in May and June, 2006 and 3,750 options were exercised in August, 2006 with the company receiving a total of $45,225 cash payments, leaving 18,750 options outstanding.

In August, 2004, the board of directors granted 50,000 incentive stock options to an officer exercisable at $4.02 per share through August 15, 2009. The options were to vest 25% annually commencing August 16, 2005 with 12,500 vested options exercised in December, 2005 and the company receiving a cash payment of $50,250. The remaining 37,500 options were cancelled due to the officer’s resignation.

On June 8, 2006, the company’s shareholders approved an amendment to the company’s stock option plan to allow for the grant of stock awards in addition to options. The employment agreement of Stephen W. Everett, President, CEO and a director of the company, contains provisions for the receipt of 40,000 shares of the company’s company stock as described in Note 8. The company has granted stock awards of 1,000 shares each to each of its independent directors with the shares to vest in 250 share increments for each director at the end of each quarter of 2006. On June 27, 2006, the company granted stock awards of 64,000 shares to officers and key employees with the awards to vest in equal yearly increments over four years commencing December 31, 2006 with one of the awards for 30,000 shares, which contained performance criteria, recently cancelled upon resignation of the officer.

NOTE 8–COMMITMENTS

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. That plan was replaced in 2003 by the company and its former parent with another 401(k) plan, 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. To date, employer matching expense has been minimal.

The company and Stephen W. Everett, President, CEO and a director of the company, finalized a new five-year employment agreement, effective January 3, 2006 with an initial annual salary of $275,000 and minimum increases of $10,000 per year thereafter. The agreement contains provisions for receipt of 40,000 shares of the company’s common stock of which 10,000 shares were issued in June, 2006, upon shareholder approval of an amendment to the company’s 1999 Stock Option Plan for the issuance of stock awards. Issuance of the remaining 30,000 shares is based upon performance criteria with the potential for up to 10,000 shares to be issued annually over the next three years. The agreement provides for certain fringe benefits, reimbursement of reasonable out-of-pocket expenses, and a non-competition agreement with the company during the term of the agreement and for one year after termination.

14
 
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 8–COMMITMENTS–Continued

A put option was recently exercised for the purchase of the remaining 60% interest in an Ohio facility in which the company holds a 40% interest. See Note 15. The company has two joint venture agreements that contain provisions pursuant to which the minority owners could sell their interests to the company under certain circumstances, including non-exercise of rights of refusal among the minority interests, sale of the company, and in one instance, sale of the subsidiary. A sale of the interests under these provisions would be based on contracted formulas. The company has evaluated these situations and determined that the potential costs under the sale provisions do not exceed fair market value of the ownership interests that would be acquired.
 
NOTE 9–ACQUISITIONS

The company has made various acquisitions commencing in 2001. These acquisitions were made either on the basis of existing profitability or expectation of future profitability for the interest acquired based on the company’s analysis of the potential for each acquisition, and the value of the relationship with the physician affiliated with the selling entity. Each acquisition was intended to either strengthen our market share within a geographic area or provide us with the opportunity to enter a new geographic area and market.

In addition to potential future profitability, market share, physician relationships and geographic considerations, the company reviews the purchase price and any resulting goodwill based on established current per patient valuations for dialysis centers. The company also considers the synergistic effects of a potential acquisition, including potential costs integration and the effect of the acquisition on the overall valuation of the company.

Effective as of the close of business on August 31, 2004, the company acquired a Pennsylvania dialysis company for an estimated net purchase price in excess of $1,500,000. The balance of $381,000 due on the purchase price was paid during the third quarter of 2006.

During the first quarter of 2006, the company acquired a Virginia dialysis center and a Maryland dialysis company with two dialysis centers. These transactions resulted in approximately $326,000 of goodwill amortizable over 15 years for tax purposes.

See Note 14 for information on the company’s merger with its former parent company, Medicore, Inc.

NOTE 10–LOAN TRANSACTIONS

The company has provided funds in excess of capital contributions to meet working capital requirements of some of its dialysis facility subsidiaries. The operating agreements for the subsidiaries provide for cash flow and other proceeds to first pay any such financing, exclusive of any tax payment distributions. See Notes 6 and 11.

NOTE 11–SUPPLEMENTAL CASH FLOW INFORMATION

The following amounts represent (rounded to the nearest thousand) non-cash financing and investing activities and other cash flow information in addition to information disclosed in Notes 3 to 7:
 
   
 Nine Months Ended
September 30,
 
   
2006
  
2005
  
Interest paid (see Notes 3 and 5)
  
$
249,000
  
$
180,000
  
Income taxes paid (see Note 4)
    
280,000
    
1,352,000
  
Subsidiary minority member capital contributions funded by notes (see Note 6)
    
—
    
15,000
  
Subsidiary minority member distributions applied against notes and accrued interest (see Note 6)
    
110,000
    
22,000
  
Share payment (87,500 options exercised; 27,205 shares paid) for stock option exercises (see Note 7)
    
352,000
    
—
  
 
 
15
 
DIALYSIS CORPORATION OF AMERICA AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 12–STOCKHOLDERS’ EQUITY

The changes in stockholders’ equity for the nine months ended September 30, 2006 are summarized as follows:
 
   
 
Common
Stock
 
Additional
Paid-in
  Capital
 
 
Retained
Earnings
 
Total
  
Balance at December 31, 2005
  
$
92,655
  
$
15,332,975
  
$
10,187,444
  
$
25,613,074
  
Exercise of stock options
    
2,765
    
380,484
    
—
    
383,249
  
Share issuance employment agreement and director services
    
115
    
118,765
    
—
    
118,880
  
Payment to dissenting merger shareholder
    
—
    
(2,100
)
  
—
    
(2,100
)
Merger deferred tax adjustment
          
(272,000
)
        
(272,000
)
Net income
    
—
    
—
    
1,928,571
    
1,928,571
  
Balance September 30, 2006
  
$
95,535
  
$
15,558,124
  
$
12,116,015
  
$
27,769,674
  
 
NOTE 13–PRO FORMA FINANCIAL INFORMATION FORMER AFFILIATE

The following amounts (in thousands) represent certain pro forma consolidated operating data reflecting consolidation of the company’s 40% owned Ohio subsidiary as if this subsidiary had been consolidated effective January 1, 2005. This subsidiary is consolidated for financial reporting purposes effective August 1, 2006 due to the company taking control of the facility which was previously accounted for in the equity method and not consolidated (see Notes 1 and 15):
 
   
 Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
   
2006
  
2005
  
2006
  
2005
  
Operating revenues
  
$
16,865
  
$
12,039
  
$
45,907
  
$
35,133
  
Gross profit
  
$
6,281
  
$
4,486
  
$
18,056
  
$
13,605
  
Net income
  
$
514
  
$
537
  
$
1,929
  
$
1,306
  
                           
Earnings per share:
                          
Basic
  
$
.09
  
$
.06
  
$
.20
  
$
.15
  
Diluted
  
$
.08
  
$
.06
  
$
.20
  
$
.15
  
 
The following amounts (in thousands) represent certain pro forma consolidated balance sheet data as if the company’s 40% owned Ohio subsidiary had been consolidated effective December 31, 2005:
 
   
December 31, 2005
  
ASSETS
      
Current assets
  
$
19,350
  
Property and equipment, net
    
13,908
  
Other assets
    
6,262
  
   
$
39,520
  
         
LIABILITES AND STOCKHOLDERS’ EQUITY
        
Current liabilities
  
$
11,023
  
Long-term debt, less current portion
    
635
  
Minority and other equity interests
    
2,249
  
Stockholders’ equity
    
25,613
  
   
$
39,520
  
 
16
 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)
 
NOTE 14–ACQUISITION OF PARENT COMPANY

On June 2, 2005, the company and its former parent, Medicore, Inc., which owned approximately 56% of the company, entered into an Agreement and Plan of Merger for Medicore to merge into the company for consideration consisting of approximately 5,271,000 shares of the company’s common stock. On September 21, 2005, the shareholders of Medicore and the company approved the merger, the articles of merger were filed, and the merger was completed. Each Medicore shareholder received .68 shares of the company’s common stock for each share of Medicore common stock, and Medicore’s ownership in the company of approximately 4,821,000 of the company’s common stock was retired resulting in approximately 9,116,000 shares of the company outstanding after the merger. See Notes 1, 4 and 5.

A deferred tax asset of approximately $3,300,000 resulted from benefits from net operating loss carryforwards of the company’s former parent that can be utilized to satisfy future income tax liabilities of the company. Pursuant to Section 382 of the Internal Revenue Code, utilization of the acquired net operating losses are limited to certain amounts annually, though the company anticipates using all acquired net operating loss carryforwards prior to their expiration date. See Notes 1, 4 and 5.

In conjunction with the merger, a payment of $1,960,000 due pursuant to the employment agreement buyout of the CEO of the former parent, who is Chairman of the Board of the company, was deferred and reflected as a current liability on the company’s consolidated balance sheet at December 31, 2005. Payment of this liability was made in January, 2006.

The merger simplified the corporate structure and enabled the ownership of the control interest in the company to be in the hands of the public shareholders. The merger provided the company with additional capital resources to continue to build its dialysis business.

The results of operations of the company’s former parent are included in the company’s consolidated operating results effective with the merger. Pro forma results of operations if the merger had completed as of January 1, 2005 are as follows (in thousands except per share data):

   
Three Months Ended
September 30, 2005
  
Nine Months Ended
September 30, 2005
  
Operating revenues
  
$
11,703
  
$
33,851
  
Net income
  
$
624
  
$
1,498
  
               
Earnings per share:
              
Basic
  
$
.07
  
$
.17
  
Diluted
  
$
.07
  
$
.16
  

NOTE 15–SUBSEQUENT EVENTS

A former medical director of the company’s 40% owned dialysis facility in Ohio exercised a put for the company to acquire the 60% interest which he owned. The valuation of the put was resolved on November 2, 2006, which will be paid within the next 30 days, resulting in DCA of Toledo, LLC being a wholly-owned subsidiary of the company. The company has determined that there will be no impairment of goodwill that results from this transaction. See Notes 1 and 13.
 
 
17
 

Cautionary Notice Regarding Forward-Looking Information

The statements contained in this quarterly report on Form 10-Q for the quarter ended September 30, 2006, that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). In addition, from time to time, we or our representatives have made or may make forward looking statements, orally or in writing, and in press releases. 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 this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” commonly known as MD&A. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan” and “belief,” 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 based on assumptions and 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 Item 1A, “Risk Factors,” beginning on page 21 of our Annual Report on Form 10-K for the year ended December 31, 2005. 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 our company. Accordingly, readers are cautioned not to place too much reliance on such forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements contained in this quarterly report. You should read this quarterly report, with any of the exhibits attached and the documents incorporated by reference, completely and with the understanding that the company’s actual results may be materially different from what we expect.

The forward-looking statements speak only as of the date of this quarterly report, and except as required by law, we undertake no obligation to rewrite or update such statements to reflect subsequent events.

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.

Overview

Dialysis Corporation of America provides dialysis services, primarily kidney dialysis treatments through 32 outpatient dialysis centers, including three centers acquired and one center opened in the first quarter of 2006, two centers opened at the beginning of the third quarter, and one unaffiliated dialysis center which it manages, to patients with chronic kidney failure, also known as end-stage renal disease or ESRD. We provide dialysis treatments to dialysis patients of nine hospitals and medical centers through acute inpatient dialysis services agreements with those entities. We provide homecare services, including home peritoneal dialysis.
 
18
 
Quality Clinical Results

Our goal is to provide consistent quality clinical care to our patients from caring and qualified doctors, nurses, patient care technicians, social workers and dieticians. We have demonstrated an unwavering commitment to quality renal care through our continuous quality improvement initiatives. We strive to maintain a leadership position as a quality provider in the dialysis industry and often set our goals to exceed the national average standards.

Kt/V is a formula that measures the amount of dialysis delivered to the patient, based on the removal of urea, an end product of protein metabolism. Kt/V provides a means to determine an individual dialysis prescription and to monitor the effectiveness or adequacy of the dialysis treatment as delivered to the patient. It is critical to strive to achieve a Kt/V level of greater than 1.2 for as many patients as possible. 96% of our patients had a Kt/V level greater than 1.2 for the nine months ended September 30, 2006, and 95% for the same period in 2005.

Anemia is a shortage of oxygen-carrying red blood cells. Because red blood cells bring oxygen to all the cells in the body, anemia causes severe fatigue, heart disorders, difficulty concentrating, reduced immune function, and other problems. Anemia is common among renal patients, caused by insufficient erythropoietin, iron deficiency, repeated blood losses, and other factors. Anemia can be detected with a blood test for hemoglobin or hematocrit. It is ideal to have as many patients as possible with hemoglobin levels above 11. 80.4% of our patients had a hemoglobin level greater than 11 for the nine months ended September 30, 2006, and 80.3% for the same period in 2005.

Vascular access is the “lifeline” for hemodialysis patients. The Center for Medicare and Medicaid Services, CMS, has indicated that fistulas are the “gold standard” for establishing access to a patient’s circulatory system. 47% of DCA patients were dialyzed with a fistula during the nine months ended September 30, 2006 and 43% for the same period in 2005.

Patient Treatments

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 center we manage, and those hospitals and medical centers with which we have inpatient acute service agreements for the periods presented:

   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
   
2006
  
2005
  
2006
  
2005
  
In-center
    
51,936
    
39,627
    
143,585
    
113,747
  
Home peritoneal
    
4,140
    
4,358
    
11,877
    
12,339
  
Acute
    
1,618
    
1,461
    
4,814
    
5,540
  
     
57,694(1
)
  
46,446(1
)
  
160,279(1
)
  
131,626(1
)
 
 
(1)
Treatments by the managed center included: in-center treatments of 2,373 and 6,890 respectively, for the three months and nine months ended September 30, 2006, and 2,369 and 6,587 for the same period of the preceding year; and home peritoneal treatments of 110 and 161 for the three and nine months ended September 30, 2006, with no such treatments during the same periods of the preceding year. Treatments for the Ohio center in which we have a 40% interest that is consolidated effective August, 2006 included in-center treatments of 2,148 and 5,668, home peritoneal treatments of 92 and 252 and acute treatments of 84 and 288, of which 1,473 in-center, 56 home peritoneal and 61 acute treatments were performed subsequent to the center becoming consolidated for financial reporting purposes, compared to 1,560 in-center and 44 acute treatments for the three months ended September 30, 2006 and 4,781 in-center and 170 acute treatments for the nine months ended September 30, 2005. See Notes 1, 13 and 15 to “Notes to Consolidated Financial Statements.”

 
19

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. We experienced approximately a 9% increase in dialysis treatments for the first nine months of 2006 compared to the same period of the preceding year at centers that were operable during the entire first nine months of 2005. This includes treatment at the Ohio center in which we have a 40% ownership interest and we are acquiring the remaining 60% interest, and the Georgia Center we manage, but does not include acute treatments. See Notes 1, 13 and 15 to “Notes to Consolidated Financial Statements.”

New Business Development

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 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. The company has recently completed construction of two dialysis facilities and is currently constructing two new dialysis centers and is in various stages of development with others. 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.

Start-up Losses

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. These losses are typically a result of several months of pre-opening costs, and six to eighteen months of post opening costs, in excess of revenues. We consider new dialysis centers to be “start-up centers” until the earlier of their initial twelve months of operations, or when they achieve consistent profitability. During the first nine months of 2006, we incurred an aggregate of approximately $1,171,000 in pre-tax losses for start-up centers, including $324,000 incurred in the third quarter of 2006.

EPO Utilization

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 could implement price increases which would adversely affect our net income. This manufacturer 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.
 
20
 
Reimbursement

Approximately 58% and 60% of our medical services revenues were derived from Medicare and Medicaid reimbursement for the three months and nine months ended September 30, 2006 compared to 55% and 58% for the same periods of the preceding year with rates established by CMS, and which rates are subject to legislative changes. 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 medical services revenue by type of payor for the periods presented:

   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
   
2006
  
2005
  
2006
  
2005
  
Medicare
    
50
%
  
51
%
  
51
%
  
51
%
Medicaid and comparable programs
    
8
    
4
    
9
    
7
  
Hospital inpatient dialysis services
    
4
    
4
    
4
    
5
  
Commercial insurers and other private payors
    
38
    
41
    
36
    
37
  
     
100
%
  
100
%
  
100
%
  
100
%
 
Our medical services 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 services revenues (in thousands) derived from our primary revenue sources and the percentage of total medical services revenue represented by each source for the periods presented:
 
   
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
  
   
2006
  
2005
  
2006
  
2005
  
Outpatient hemodialysis services
  
$
8,746
    
54
%
$
5,911
    
52
%
$
23,441
    
54
%
$
17,045
    
52
%
Home peritoneal dialysis services
    
870
    
5
    
820
    
7
    
2,666
    
6
    
2,361
    
7
  
Inpatient hemodialysis services
    
564
    
3
    
458
    
4
    
1,541
    
4
    
1,568
    
5
  
Ancillary services
    
6,101
    
38
    
4,184
    
37
    
15,601
    
34
    
11,904
    
36
  
   
$
16,281
    
100
%
$
11,373
    
100
%
$
43,219
    
100
%
$
32,878
    
100
%
 
Compliance

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. 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, internal audit and human resources, all geared towards a cost-efficient operation beneficial to patients and shareholders.
 
21
 
Results of Operations

The following table shows our results of operations (in thousands):
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
  
Operating revenues:
    
2006
 
 
2005
 
 
2006
 
 
2005
  
Medical service revenue
  
$
16,281
  
$
11,373
  
$
43,219
  
$
32,878
  
Product sales
    
223
    
—
    
677
    
—
  
Total sales
   
16,504
    
11,373
    
43,896
    
32,878
  
Other income
    
82
    
108
    
365
    
357
  
Total operating revenues
    
16,586
    
11,481
    
44,261
    
33,235
  
                           
Operating costs and expenses:
                          
Cost of medical services
    
9,896
    
7,179
    
26,386
    
20,446
  
Cost of product sales
    
145
    
—
    
420
    
—
  
Total cost of sales
    
10,041
    
7,179
    
26,806
    
20,446
  
Corporate selling, general and administrative expenses
    
1,677
    
890
    
4,696
    
3,303
  
Facility selling, general and administrative expenses
    
2,329
    
1,794
    
6,517
    
5,257
  
Total, selling, general and administrative expenses
    
4,006
    
2,684
    
11,213
    
8,560
  
Stock compensation expense
    
122
    
—
    
293
    
—
  
Depreciation and amortization
    
618
    
422
    
1,704
    
1,244
  
Provision for doubtful accounts
    
345
    
222
    
738
    
675
  
Total operating costs and expenses
    
15,132
    
10,507
    
40,754
    
30,925
  
                           
Operating income
    
1,454
    
974
    
3,507
    
2,310
  
                           
Other income (expense)
    
255
    
(16
)
  
388
    
(26
)
                           
Income before income taxes, minority and other equity interests and equity in affiliate earnings
    
1,709
    
958
    
3,895
    
2,284
  
                           
Income tax provision
    
505
    
352
    
1,364
    
971
  
                           
Income before minority interest and other equity interests and equity in affiliate earnings
    
1,204
    
606
    
2,531
    
1,313
  
                           
Minority and other equity interests in income of  consolidated subsidiaries
    
(414
)
  
(128
 )  
(819
)
  
(281
)
                           
Equity in affiliate earnings
    
24
    
59
    
217
    
274
  
                           
Net income
  
$
814
  
$
537
  
$
1,929
  
$
1,306
  
 
Medical services revenues increased approximately $4,908,000 (43%) and $10,341,000 (31%) for the three months and nine months ended September 30, 2006, compared to the same periods of the preceding year with the increase largely attributable to a 31% increase in total dialysis treatments performed by our centers from 41,473 during the third quarter of 2005 to 54,477 during the third quarter of 2006, and a 20% increase in total dialysis treatments performed by the company from 120,088 during the first nine months of 2005 to 148,607 during the first nine months of 2006. The increase in treatments resulted in increases of approximately $2,991,000 (42%) and $6,644,000 (32%) in treatment revenues during the three months and nine months ended September 30, 2006, compared to the same periods of the preceding year. Medical services revenue for our Toledo, Ohio subsidiary, which has been consolidated for financial reporting purposes since August 1, were approximately $698,000. The increase in treatments includes treatments at the three new centers we opened during 2005 which were in operation throughout the first half of 2006, three centers we acquired and one additional center opened during the first quarter of 2006 and two centers opened during the third quarter of 2006. The increase in treatments is also attributable to the consolidation of our Toledo, Ohio facility, with 1,473 in-center, 56 home peritoneal and 61 acute treatments for this facility since its consolidation effective August, 2006. Some of our patients carry commercial insurance which may require an out of pocket co-pay by the patient, which is often uncollectible by us. This co-pay is typically limited, and therefore may lead to our under-recognition of revenue at the time of service. We routinely recognize these revenues as we become aware that these limits have been met. See Notes 1, 13 and 15 to “Notes to Consolidated Financial Statements.”
 
22
 
We record contractual adjustments based on fee schedules for a patient’s insurance plan except in circumstances where the schedules are not readily determinable, in which case rates are estimated based on similar insurance plans and subsequently adjusted when actual rates are determined. Out-of-network providers generally do not provide fee schedules and coinsurance information and, consequently, represent the largest portion of contractual adjustment changes. Based on historical data we do not anticipate that a change in estimates would have a significant impact on our financial condition or results of operations.

Our medical products division was acquired pursuant to our merger with our former parent company in September, 2005. Operations of the medical products division are included in our operating results subsequent to the merger. These operations represent a minor portion of our operations with sales revenues of $224,000 and $677,000 during the three months and nine months ended September 30, 2006, which represent 1.3% and 1.5% respectively, of operating revenues for these periods.

Operating income increased approximately $480,000 (49%) and $1,197,000 (52%) for the three months and nine months ended September 30, 2006, compared to the preceding year, including start-up costs associated with our new centers. This includes operating income of approximately $317,000 for our Toledo, Ohio subsidiary, which has been consolidated for financial reporting purposes since August 1, 2006. See Notes 1, 13 and 15 to “Notes to Consolidated Financial Statements.”

Cost of medical services sales as a percentage of medical services revenue amounted to 61% for the three months and nine months ended September 30, 2006, compared to 63% and 62% for the same periods of the preceding year with the decrease largely attributable to decrease in salaries expense as a percentage of medical service revenues.

Cost of sales for our medical products division amounted to 65% and 62% of medical product sales for the three months and nine months ended September 30, 2006. Cost of sales for this division is largely related to product mix.

Approximately 28% and 27% of our medical services revenues for the three and nine months ended September 30, 2006, and 29% and 28% for the same periods of the preceding year, derived from the administration of EPO to our dialysis patients. This drug is only available from one manufacturer in the United States. 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. Effective January 1, 2006, Medicare is reimbursing dialysis providers for the top ten most utilized ESRD drugs at an amount equal to the cost of such drugs as determined by the Inspector General of HHS, with complementary increases in the composite rate. Management believes these changes will have little impact on the company’s average Medicare revenue per treatment.

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 $1,323,000 (49%) and $2,653,000 (31%) for the three months and nine months ended September 30, 2006, compared to the same periods of the preceding year. Corporate selling, general and administrative expenses includes $163,000 and $177,000 review and implementation costs related to Sarbanes-Oxley Section 404 compliance. Non-cash stock compensation expense of approximately $122,000 and $293,000 for the three months and nine months ended September 30, 2006, has been shown separately on the statements of income. The increase in selling, general and administrative expenses reflects operations of our new dialysis centers and increased support activities resulting from expanded operations. Included are expenses of new centers incurred prior to Medicare approval for which there were no corresponding medical services revenues. Selling, general and administrative expenses as a percentage of sales revenues amounted to approximately 29% and 30% for the three months and nine months ended September 30, 2006, and 27% and 30% for the same periods of the preceding year.
 
23
 
Provision for doubtful accounts increased approximately $123,000 and $64,000 for the three months and nine months ended September 30, 2006 compared to the same periods of the preceding year. The provision amounted to 2% of sales for the three months and nine months ended September 30, 2006 and for the same periods of the preceding year. Medicare bad debt recoveries of $176,000 and $361,000 were recorded during the three months and nine months ended September 30, 2006, compared to approximately $6,000 and $173,000 for the same periods of the preceding year. Without the effect of the Medicare bad debt recoveries, the provision would have amounted to 3% sales for the three months and nine months ended September 30, 2006, compared to 2% and 3% for the same periods of the preceding year. The provision for doubtful accounts reflects our collection experience with the impact of that experience included in accounts receivable presently reserved, plus recovery of accounts previously considered 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.

After a patient’s insurer has paid the applicable coverage for the patient, the patient is billed for the applicable co-payment or balance due. If payment is not received from the patient for its applicable portion, collection letters and billings are sent to that patient until such time as the patient’s account is determined to be uncollectible, at which time the account will be charged against the allowance for doubtful accounts. Patient accounts that remain outstanding four months after initial collection efforts are generally considered uncollectible.

Other non-operating income increased approximately $204,000 and $261,000 for the three months and nine months ended September 30, 2006, compared to the same periods of the preceding year. This includes an increase in interest income of $36,000 and $93,000, an increase in rental income of $42,000 and $125,000, a decrease in miscellaneous other income of $9,000 and $2,000 for the three months and nine months ended September 30, 2006, $215,000 litigation settlement income in the third quarter of 2006 and an increase in interest expense to unrelated parties of $80,000 and $170,000 for the three months and nine months ended September 30, 2006, due to increased average non-intercompany borrowings and interest rate increases. Interest expense to our former parent, Medicore, Inc., on an intercompany note and intercompany advances was $68,000 and $158,000 for the three months and nine months ended September 30, 2005 with no such expense during the first nine months of 2006 as a result of our merger with our former parent in September, 2005. The prime rate was 8.25% at September 30, 2006, and 7.25% at December 31, 2005. See Notes 1, 3, 4, 5 and 14 of “Notes to the Consolidated Financial Statements.”

Although operations of additional centers have resulted in additional revenues, certain of these centers are still in the start-up stage and, accordingly, their operating results will adversely impact our overall results of operations until they achieve a patient count sufficient to sustain profitable operations.

Minority and other equity interests represents the proportionate equity interests of minority owners of our subsidiaries in which we own a minority interest and the 60% outside ownership interest in our Toledo, Ohio subsidiary, DCA of Toledo, LLC, whose financial results are included in our consolidated results. Equity in affiliate earnings represents our proportionate interest in the earnings of our 40% owned Ohio subsidiary up until the time we took control of this facility and began consolidating it for financial reporting purposes August 1, 2006. We are currently in the process of purchasing the 60% interest, which will result in DCA of Toledo, LLC becoming a wholly-owned subsidiary of our company. See Notes 1, 13 and 15 to “Notes to Consolidated Financial Statements.”
 
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Liquidity and Capital Resources

Working capital totaled approximately $16,141,000 at September 30, 2006, which reflected an increase of $8,525,000 (112%) during the nine months ended September 30, 2006. Included in the changes in components of working capital was a decrease in cash and cash equivalents of $2,395,000, which included net cash used in operating activities of $1,124,000; net cash used in investing activities of $5,902,000 (including payment on an employment contract liability of $1,960,000, acquisition of dialysis centers of $861,304, additions to property and equipment of $3,378,000 and distributions of $163,000 received from our 40% owned Ohio subsidiary prior to August 1, 2006 when it became consolidated for financial reporting purposes (the company should complete the purchase of the remaining 60% interest in the immediate future); and net cash provided by financing activities of $4,630,000 (including borrowings under our line of credit of $4,000,000, debt repayments of $300,000, distributions to subsidiary minority members of $274,000, receipts of $383,000 from the exercise of stock options, and capital contributions of $828,000 by subsidiary minority members).

Net cash provided by operating activities consists of net income before non-cash items, consisting of depreciation and amortization of $1,693,000, bad debt expense of $738,000, deferred income taxes, including utilization of net operating loss carryforwards of $909,000, stock compensation expense of $293,000, income applicable to minority and other equity interests of $819,000, and equity in affiliate earnings of $217,000, as adjusted for changes in components of working capital. Significant changes in components of working capital, in addition to the $2,395,000 decrease in cash, included, an increase in accounts receivable of $4,788,000, an increase in prepaid expenses and other current assets of $1,672,000 (including land and construction costs associated with property to be sold to either medical directors of certain subsidiaries of the company or unaffiliated physicians of $1,750,000), a decrease in an employment contract liability of $1,960,000 as a result of payment, a decrease in current debt of $795,000 primarily resulting from refinancing a Georgia mortgage and modifying our Maryland mortgage, a decrease in accounts payable of $173,000, and a decrease in accrued expenses of $140,000. The major source of cash from operating activities is medical services revenue. The major uses of cash in operating activities are supply costs, payroll, independent contractor costs, and costs for our leased facilities.

Our Easton, Maryland building has a mortgage to secure a subsidiary development loan. This loan had a remaining principal balance of $562,000 at September 30, 2006 and $583,000 at December 31, 2005. 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 $622,000 at September 30, 2006 and $633,000 at December 31, 2005. We have refinanced the Georgia mortgage for another five years with the same financial institution and modified our Maryland mortgage including extending the term. See Note 3 to “Notes to Consolidated Financial Statements.”

We have an equipment financing agreement for kidney dialysis machines that had an outstanding balance of approximately $104,000 at September 30, 2006, and $371,000 at December 31, 2005. There was no additional equipment financing under this agreement during the first nine months of 2006. See Note 3 to “Notes to Consolidated Financial Statements.”

We opened centers in Baltimore, Maryland, Edgefield, South Carolina, and Norwood, Ohio during 2005, our second center in Aiken, South Carolina in the first quarter of 2006, and recently opened a center in York, Pennsylvania and a center in Calhoun, Georgia. We are in the process of developing a new dialysis center in Georgia and a new center in South Carolina. Payment of approximately $381,000 was made during 2005 on our Keystone Kidney Care acquisition, leaving a remaining balance of approximately $381,000 which was paid in August, 2006. During the first quarter of 2006, the company acquired a Virginia dialysis center and a Maryland dialysis company with two dialysis centers. See Note 9 to “Notes to Consolidated Financial Statements.”

Capital is needed primarily for the development of outpatient dialysis centers. The construction of a 15 station facility, typically the size of our dialysis facilities, costs in the range of $750,000 to $1,000,000, depending on location, size and related services to be provided, which includes equipment and initial working capital requirements. Acquisition of an existing dialysis facility is more expensive than construction, although acquisition would provide us with an immediate ongoing operation, which most likely would be generating income. Although our expansion strategy focuses primarily on construction of new centers, we have expanded through acquisition of dialysis facilities and continue to review potential acquisitions. 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 start-up stage since they have not developed a patient base sufficient to generate and sustain earnings.
 
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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 had been funding our expansion through internally generated cash flow and financing from our former parent, Medicore, Inc. See Notes 1, 4, 5 and 14 to “Notes to Consolidated Financial Statements.” To assist with our future expansion we entered into a $15,000,000, three year credit agreement for a revolving line of credit with KeyBank National Association in October, 2005. We borrowed $4,000,000 under this new credit facility during the first nine months of 2006. No assurance can be given that we will be successful in implementing our growth strategy or that available financing will be adequate to support our expansion. See Note 3 to “Notes to Consolidated Financial Statements.”

Merger with Our Former Parent, Medicore, Inc.

Effective September 21, 2005, the company and Medicore, Inc., the company’s former parent, completed the merger of Medicore with and into the company pursuant to the provisions of the Agreement and Plan of Merger between the company and Medicore, dated June 2, 2005. In accordance with the terms of that Agreement, on September 21, 2005, the outstanding shares of Medicore common stock were deemed cancelled and converted into the right to receive .68 of a share of the company for each common share of Medicore outstanding on that date.

In connection with the merger there was a net issuance of approximately 449,000 common shares of the company resulting in approximately 9,116,000 common shares of the company outstanding after the merger. The net issuance gives effect to an aggregate of approximately 5,271,000 common shares issued by the company to former shareholders of Medicore based upon the .68 exchange ratio, and the cancellation of 4,821,244 common shares of the company owned by Medicore prior to the merger.

The merger enabled the control interest in the company to be in the hands of the public stockholders and provided the company with additional capital resources to continue its growth. See Notes 1, 4, 5, and 14 to “Notes to Consolidated Financial Statements.”

New Accounting Pronouncements

In June, 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, Accounting for Income Taxes,” which clarifies the accounting for uncertainty in income taxes. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The company is evaluating the impact of adopting FIN 48, but does not expect FIN 48 to have a significant effect on its financial statements. See Note 1 to “Notes to Consolidated Financial Statements.”

In September, 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 will be effective for us beginning in 2009. The company is evaluating the impact on its financial statements of adopting SFAS 157. See Note 1 to “Notes to Consolidated Financial Statements.”

In September, 2006, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletion No. 108 ("SAB 108"), which provides interpretive guidance on how the effects of prior year misstatements should be considered in quantifying current year financial statement misstatements. SAB 108 is effective for fiscal years ending after November 15, 2006. The company is evaluating the impact of adopting SAB 108 but does not expect SAB 108 to have a significant effect on its financial statements. See Note 1 to “Notes to Consolidated Financial Statements.”
 
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Critical Accounting Policies and Estimates

The SEC has issued cautionary advice to elicit more precise disclosure in this Item 7, MD&A, about accounting policies management believes are most critical in portraying our financial results and in requiring management’s most difficult subjective or complex judgments.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments and estimates. On an on-going basis, we evaluate our estimates, the most significant of which include establishing allowances for doubtful accounts, a valuation allowance for our deferred tax assets and determining the recoverability of our long-lived assets. The basis for our estimates are historical experience and various assumptions that are believed to be reasonable under the circumstances, given the available information at the time of the estimate, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from the amounts estimated and recorded in our financial statements.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition: Revenues are recognized net of contractual provisions at the expected collectable amount. We receive payments through reimbursement from Medicare and Medicaid for our outpatient dialysis treatments coupled with patients’ private payments, individually and through private third-party insurers. A substantial portion of our revenues are derived from the Medicare ERSD program, which outpatient reimbursement rates are fixed under a composite rate structure, which includes the dialysis services and certain supplies, drugs and laboratory tests. Certain of these ancillary services are reimbursable outside of the composite rate. Medicaid reimbursement is similar and supplemental to the Medicare program. Our acute inpatient dialysis operations are paid under contractual arrangements, usually at higher contractually established rates, as are certain of the private pay insurers for outpatient dialysis. 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.

In those situations where a patient’s insurance fee schedule cannot be readily determined, which typically occurs with out of network providers, we estimate fees based on our knowledge base of historical data for patients with similar insurance plans. Our internal controls, including an ongoing review and follow-up on estimated fees, allows us to make necessary changes to estimated fees on a timely basis. When the actual fee schedule is determined, we adjust the amounts originally estimated, and then use the actual fees to estimate fees for similar future situations. We adhere to the guidelines of SAB Topic 13 (SAB 104) in regard to recording reasonable estimates of revenue based on our historical experience and identifying on a timely basis necessary changes to estimates, including our estimates of revenue recognized in connection with the resolution of excess insurance liability.

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. We adhere to the guidelines of SFAS 5 in determining reasonable estimates of accounts for which uncollectibility is possible.
 
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Valuation Allowance for Deferred Tax Assets: The carrying value of deferred tax assets assumes that we will be able to generate sufficient future taxable income to realize the deferred tax assets based on estimates and assumptions. If these estimates and assumptions change in the future, we may be required to adjust our valuation allowance for deferred tax assets which could result in additional income tax expense.

Long-Lived Assets: We state our property and equipment at acquisition cost and compute depreciation for book purposes by the straight-line method over estimated useful lives of the assets. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset to the future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent the carrying amount of the asset exceeds the fair value of the asset. These computations are complex and subjective.

Goodwill and Intangible Asset Impairment: In assessing the recoverability of our goodwill and other intangibles we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. This impairment test requires the determination of the fair value of the intangible asset. If the fair value of the intangible asset is less than its carrying value, an impairment loss will be recognized in an amount equal to the difference. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. We adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (FAS 142) effective January 1, 2002, and are required to analyze goodwill and indefinite lived intangible assets for impairment on at least an annual basis.

Impact of Inflation

Inflationary factors have not had a significant effect on our operations. A substantial portion of our revenue is subject to reimbursement rates established and regulated by the federal government. These rates do not automatically adjust for inflation. Any rate adjustments relate to legislation and executive and Congressional budget demands, and have little to do with the actual cost of doing business. Therefore, dialysis services revenues cannot be voluntarily increased to keep pace with increases in nursing and other patient care costs. Increased operating costs without a corresponding increase in reimbursement rates may adversely affect our earnings in the future.

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 $1,002,000 at September 30, 2006.

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 debt obligations, which totaled approximately $5,184,000 at September 30, 2006.

We have exposure to both rising and falling interest rates. Assuming a relative 15% decrease in rates on our period-end investments in interest bearing accounts, and a relative 15% increase in rates on our period-end variable rate debt would have resulted in a negative impact of approximately $30,000 on our results of operations for the nine months ended September 30, 2006.

We do not utilize financial instruments for trading or speculative purposes and do not currently use interest rate derivatives.
 
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(a)  Disclosure Controls and Procedures.

As of the end of the period of this quarterly report on Form 10-Q for the third quarter ended September 30, 2006, management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer, and the Vice President of Finance and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), which disclosure controls and procedures are designed to provide reasonable assurance that, among other things, information is accumulated and communicated to our management, including our President and Chief Executive Officer, and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon such evaluation, our President and Chief Executive Officer, and our Chief Financial Officer, have concluded that, as of the end of such period, our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by our 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.

(b) Internal Control Over Financial Reporting.

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our control over financial reporting.
 
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PART II -- OTHER INFORMATION


Equity Securities Sold by the Company During the Third Quarter Ended September 30, 2006 and Not Registered Under the Securities Act

Securities sold by the company in the third quarter of 2006 include (i) an option exercise by an officer of the company in August, 2006 for 3,750 shares of common stock at an exercise price of $4.02 for options which had been granted in June, 2004; and (ii) 750 shares of common stock, 250 shares each, to the company’s three independent directors, which had vested under a stock award granted in March, 2006, previously reported in the company’s quarterly report on Form 10-Q for the first quarter ended March 31, 2006, Part II, Item 2.

All the shares were issued pursuant to the non-public offering exemption contained in Section 4(2) of the Securities Act of 1933 (the “Securities Act”), or Regulation D promulgated under the Securities Act. All persons who acquired the company’s common stock, which shares are “restricted” shares as defined in Rule 144(a)(3) of the Securities Act, are officers or directors of the company, and are knowledgeable about the affairs and financial condition of the company, and have acquired the common stock for investment purposes and not with a view to distribution.

For details relating to the issuance of 10,000 shares of common stock to the company’s new Chief Operating Officer subsequent to the end of the third quarter, see Item 5, “Other Information,” below.

The company has contracted with Don Waite to serve as interim Chief Operating Officer (“COO”) commencing November 8, 2006, as the replacement for Mike Rowe, who left the company as of November 7, 2006 to pursue new opportunities. Mr. Waite previously served as the company’s Vice President of Finance and Chief Financial Officer from August, 2004 through November, 2005 before leaving the company to attend to personal matters. He is a partner in an insurance premium financing company. From 1999 through 2004, Mr. Waite was Vice President and Partner of Nephrology Specialty Group, Inc., a dialysis company which established and operated a chain of outpatient dialysis centers prior to its sale in 2004 to an international dialysis services company. The agreement with Mr. Waite is for an initial term of six months and calls for Mr. Waite to provide the COO services as an independent contractor. After the initial six month period, the agreement will extend automatically for one month periods subject to termination by either party. As consideration for his services Mr. Waite is receiving, in lieu of cash consideration, 10,000 restricted shares of the company’s common stock under the company’s 1999 Stock Incentive Plan. The issued shares are to be earned by Mr. Waite on a pro rata basis over the course of the initial six-month period, and to the extent that Mr. Waite voluntarily terminates his agreement or is terminated by the company for breach of the agreement prior to the expiration of the initial six-month period, unearned shares are to be returned to the company. In the event of the company’s termination of Mr. Waite without his breach of the agreement prior to the expiration of the six-month period, Mr. Waite will be entitled to retain all of the issued shares. After the completion of the six-month period, for each month Mr. Waite continues his services as COO, Mr. Waite will receive $10,000 per month as compensation until such time as either party terminates the agreement, or an employment agreement is entered into.

Mr. Waite has no family relationship with any other director or executive officer of the company and other than the agreement described above has no interest, direct or indirect, in any transaction involving the company or any of its subsidiaries.
 
30
 
Item 6. Exhibits

10 Material Contracts

 
10.1
Contractor Agreement dated November 8, 2006.

31 Rule 13a-14(a)/15d-14(a) Certifications

 
31.1
Certifications of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
31.2
Certifications of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32 Section 1350 Certifications

 
32.1*
Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and U.S.C. Section 1350.

99 Additional exhibits

 
99.1
Press Release dated November 9, 2006 reporting financial results for the three months and the nine months ended September 30, 2006 together with Consolidated Statements of Income (incorporated herein by reference to the Company’s Current Report on Form 8-K dated November 13, 2006, Item 9.01(d)(99)(i)).
_______________
 
*
In accordance with Release No. 34-47551, this exhibit is furnished to the SEC as an accompanying document and is not deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, and the document will not be deemed incorporated by reference into any filing under the Securities Act of 1933.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DIALYSIS CORPORATION OF AMERICA


By: /s/ DANIEL R. OUZTS    
DANIEL R. OUZTS, Vice President of Finance,
Chief Financial Officer, Chief Accounting Officer and
Treasurer

Dated: November 14, 2006

 
31
 
EXHIBIT INDEX

 Exhibit No.

10
Material contracts

 
10.1
Contractor Agreement dated November 8, 2006.

31
Rule 13a-14(a)/15d-14(a) Certifications

 
31.1
Certifications of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

32
Section 1350 Certifications

 
32.1*
Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and U.S.C. Section 1350.

99
Additional exhibits

 
99.1
Press Release dated November 9, 2006 reporting financial results for the three months and the nine months ended September 30, 2006 together with Consolidated Statements of Income (incorporated herein by reference to the Company’s Current Report on Form 8-K dated November 13, 2006, Item 9.01(d)(99)(i)).
 
*  
In accordance with Release No. 34-47551, this exhibit is furnished to the SEC as an accompanying document and is not deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, and the document will not be deemed incorporated by reference into any filing under the Securities Act of 1933.
 
 
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 EX-10.1 2 ex10-1.htm EXHIBIT 10.1 Exhibit 10.1
 
Exhibit 10.1
 

INDEPENDENT CONTRACTOR AGREEMENT


THIS AGREEMENT is made as of November 8, 2006, by and among Dialysis Corporation of America, incorporated under the laws of the State Florida (the “Company”), and Don Waite (“Contractor”).

WHEREAS, the Company desires to engage Contractor to provide operational management services to the Company and Contractor desires to be so engaged, on the terms and conditions set forth in this Agreement;
 
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other and other good and sufficient consideration the receipt of which is hereby acknowledged, the parties hereto agree as follows:

1.  
Engagement and Duties. The Company hereby agrees to engage Contractor, and Contractor hereby accepts and agrees to such engagement pursuant to the terms and conditions of this Agreement. During the term of this Agreement, Contractor shall provide the following services:

a.  
serve as the Company’s interim Chief Operations Officer;
b.  
oversee the Company-wide operations of the Company’s dialysis centers;
c.  
direct the Company’s operations management team, as needed;
d.  
provide the Company with guidance and direction regarding all aspects of the operations of the Company; and
e.  
work in concert with other Company department heads in furthering the Company’s business.

2.  
Term. The term of this Agreement shall be for six months (the “Initial Term”) commencing on November 8, 2006 (the “Commencement Date”). After the expiration of the Initial Term, this Agreement shall be automatically renewed for additional one month extensions subject to termination as provided for herein.

3.  
Financial Terms. 

a.  Contractor will receive 10,000 restricted shares (the “Contractor Shares”) of the Company’s common stock, par value $.01 per share, in consideration for services performed hereby during the Initial Term of this Agreement, payable in advance on the Commencement Date. Contractor warrants that he will cooperate with the Company in the execution of any additional reasonable documents or instruments requested by Company or its counsel in effectuating the issuance of such Contractor Shares. Should (a) Contractor terminate this Agreement or (b) the Company terminate this Agreement as a result of Contractor breach, in either case prior to the Contractor’s completion of the Initial Term, Contractor shall be entitled to retain only a prorated number of Contactor Shares for the period of time in which he provided the services pursuant to this Agreement and as such will return to the Company the balance of Contractor Shares to which Contractor is not entitled pursuant hereto. Should the Company terminate this Agreement prior to the Contractor’s completion of the Initial Term, other than for breach of this Agreement by Contractor, Contractor shall be entitled to retain the entire 10,000 Contractor Shares.
 
b.  If after the Initial Term of this Agreement Contractor’s services are extended pursuant to Section 2 of this Agreement, Contractor shall receive $10,000 for each additional month of service.

c.  The Company hereby agrees to reimburse Contractor all reasonable out-of-pocket expenses incurred by Contractor in connection with the performance of the duties as described in Section 1 above.

4.  
Professional Fees. Contractor and Company understand that Contractor is engaged as an independent contractor, and as such, Company is not responsible for any tax liabilities (withholding or otherwise), benefits, or other compensation, other than as agreed herein. Contractor is responsible to fulfill his obligations hereunder through his own scheduling and time management.

5.  
Termination. In addition to the Company’s right to terminate this Agreement upon a breach by Contractor of any term or provision hereof, the Company may terminate this Agreement without cause at any time immediately upon written notice to Contractor.

6.  
Disclosure of Information. All records, files, reports and documents pertaining to services rendered by Contractor hereunder or to the operations of the Company, in whatever form or media transmitted, maintained or stored, belong to and shall remain the property of the Company, and shall be promptly returned to the Company in full upon the expiration or earlier termination of this Agreement. Contractor recognizes and acknowledges that the terms of this Agreement, the Company’s proprietary information and trade secrets as they may exist from time to time, are invaluable, special and unique assets of the Company’s business. Contractor also recognizes and acknowledges that the systems, protocols, policies, procedures, manuals, reports, data bases, documents, instruments and other materials used by the Company are proprietary to the Company, and are valuable, special and unique assets of the Company’s business. Contractor shall not, during or after the term of the Contractor’s engagement hereunder, disclose the Company’s proprietary information or trade secrets to any other person, or entity for any reason or purpose whatsoever, without the prior written consent of the Company.

7.  
Indemnification. The Company shall indemnify and hold harmless the Contractor from and against any and all judgments, fines, penalties, liabilities, losses, costs and expenses (including reasonable attorney’s fees and costs in defending same) incurred by Contractor in any action, claim, proceeding or investigation arising or resulting from acts or omissions of the Contractor taken or made in the course of performing his duties and services for the Company pursuant to this Agreement, or having acted as an officer of the Company in situations provided in Article XXV of the Company’s By-Laws, even if later amended, and under Article IX(d) of the Company’s Articles of Incorporation, even if later amended, and to the maximum extent permitted by law, including Section 607.0850 of the Florida Business Corporation Act (including the advancement of expense provisions thereof); provided however, that such indemnity shall not apply to acts or omissions of the Contractor which constitute wilfull misconduct, gross negligence, or which wer intended by the Contractor to improperly personally benefit the Contractor, or were a violation of criminal law, unless the Contractor had reasonable cause to believe that his conduct was lawful or had no reasonable cause to believe his conduct was unlawful.

 
 
8. 
Reporting Obligations. Contractor acknowledges that the Company is a publicly traded corporation subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the rules and regulations promulgated thereby by the Securities and Exchange Commission, and in that regard will cooperate with the Company and provide, upon request from the Company or its counsel, all relevant information relating to Contractor necessary to effect, on a timely basis, the requisite public filings pursuant to the Exchange Act, on behalf of Contractor and/or the Company.
 
9.  Governing Law. This Agreement shall be governed by and interpreted in accordance with, and the rights of the parties shall be determined by, the laws of the State of Maryland.

10.  Assignment. Contractor shall not assign any rights or delegate any duties relating to the services to be performed under this Agreement.

11.  Notices. Any notices or other communication by one party to the other shall be in writing and shall be given, and be deemed to have been given (a) if hand delivered, on the date of such delivery, or (b) if mailed, postage prepaid, certified mail (return receipt requested), on the third day following the date deposited with the United States postal service, in either case addressed as follows:
 
Company:       Dialysis Corporation of America
1302 Concourse Drive, Suite 204
Linthicum, MD 21090
Attn: President

Copy to:         Jaffe & Falk, LLC
777 Terrace Ave, 5th Floor
Hasbrouck Heights, NJ 07604
Attn: Joshua M. Jaffe
Fax (201) 288-8208
 
 

 
Don Waite:                    Don Waite
1405 Thorndon Drive
Bel Air, Maryland 21015

Any party may change the address for notice by notifying the other party, in writing, of the new address.
 
12.  Entire Agreement. This Agreement contains all of the terms and conditions agreed upon by the parties with respect to the subject matter hereof.
 
13.  Survival. The covenants contained in paragraphs 4, 6, and 7 shall survive any termination or expiration of the Agreement.

 
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written.


DIALYSIS CORPORATION OF AMERICA

/s/ Stephen W. Everett_________________
Stephen W. Everett
President & CEO
 
 
CONTRACTOR

/s/ Don Waite________________________
Don Waite
 
 EX-31.1 3 ex31-1.htm EXHIBIT 31.1 Exhibit 31.1

Exhibit 31.1
 
Certification of Chief Executive Officer Pursuant To
Rule 13a-14(a) of the Securities Exchange Act of 1934

I, Stephen W. Everett, certify that:
 
1.     I have reviewed this quarterly report on Form 10-Q of Dialysis Corporation of America;

2.     Based on my knowledge, this 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 report;

3.     Based on my knowledge, the financial statements and other financial information included in this 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 report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 (a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 (b)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 (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 that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of the 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 control over financial reporting.
 
 
 Date: November 14, 2006     /s/ Stephen W. Everett
   
STEPHEN W. EVERETT, President and Chief
Executive Officer

EX-31.2 4 ex31-2.htm EXHIBIT 31.2 Exhibit 31.2

Exhibit 31.2
Certification of Chief Financial Officer Pursuant To
Rule 13a-14(a) of the Securities Exchange Act of 1934

I, Daniel R. Ouzts, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Dialysis Corporation of America;

2.     Based on my knowledge, this 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 report;

3.     Based on my knowledge, the financial statements and other financial information included in this 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 report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(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 that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of the 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 control over financial reporting.
 
 
 Date: November 14, 2006     /s/ Daniel R. Ouzts
   
DANIEL R. OUZTS, Vice President of Finance,
Chief Financial Officer, Chief Accounting Officer and
Treasurer
 


 EX-32.1 5 ex32-1.htm EXHIBIT 32.1 Exhibit 32.1

Exhibit 32.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Dialysis Corporation of America (the “Company”) on Form 10-Q for the third quarter ended September 30, 2006 as filed with the Securities and Exchange Commission on the date therein specified (the “Report”), the undersigned, Stephen W. Everett, President and Chief Executive Officer of the Company, and Daniel R. Ouzts, Vice President of Finance, Chief Financial Officer, Chief Accounting Officer 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 at the dates and for the periods covered by the Report.
 
    /s/ Stephen W. Everett
   
STEPHEN W. EVERETT, President and Chief
Executive Officer
 
      /s/ Daniel R. Ouzts
   
DANIEL R. OUZTS, Vice President of Finance,
Chief Financial Officer, Chief Accounting Officer and
Treasurer
 
Dated: November 14, 2006

It is not intended that this statement be deemed to be filed for the purpose of the Securities Exchange Act of 1934.
 
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