FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to __________________
Commission file number 0-6906
MEDICORE, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-0941551
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2337 West 76th Street, Hialeah, Florida 33016
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(Address of principal executive offices) (Zip Code)
(305) 558-4000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check (check) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X|or No|_|
Indicate by check (check) whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act.
Yes |_| or No |X|
Common Stock Outstanding
Common Stock, $.01 par value - 6,988,614 shares as of April 30, 2004.
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Financial Statements (Unaudited) for the three
months ended March 31, 2004 and March 31, 2003 include the accounts of the
Registrant and all its subsidiaries.
Item 1. Financial Statements
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1) Consolidated Condensed Statements of Operations for the three months
ended March 31, 2004 and March 31, 2003.
2) Consolidated Condensed Balance Sheets as of March 31, 2004 and
December 31, 2003.
3) Consolidated Condensed Statements of Cash Flows for the three months
ended March 31, 2004 and March 31, 2003.
4) Notes to Consolidated Condensed Financial Statements as of March 31,
2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
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Item 4. Controls and Procedures
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PART II -- OTHER INFORMATION
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Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
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Securities
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Item 6. Exhibits and Reports on Form 8-K
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i
PART I -- FINANCIAL INFORMATION
-------------------------------
ITEM 1. FINANCIAL STATEMENTS
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MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
Revenues: 2004 2003
------------ ------------
Sales:
Product sales $ 224,318 $ 209,757
Medical services revenues 8,409,524 6,737,951
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Total sales 8,633,842 6,947,708
Other income 217,045 73,060
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8,850,887 7,020,768
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Cost and expenses:
Cost of sales:
Cost of product sales 117,627 131,091
Cost of medical services 5,162,222 4,202,613
------------ ------------
Total cost of sales 5,279,849 4,333,704
Legal fees related party 79,000 79,000
Selling, general and administrative expenses 3,598,275 2,424,771
Provision for doubtful accounts 148,295 95,898
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9,105,419 6,933,373
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Operating (loss) income (254,532) 87,395
Other income (expense):
Interest income related parties 3,825 7,573
Gain on sale of former subsidiary (Note 13) 545,995 --
Other income, net 75,298 71,640
------------ ------------
Income before income taxes, minority interest and
equity in affiliate earnings 370,586 166,608
Income tax provision 216,108 111,265
------------ ------------
Income before minority interest and equity
in affiliate earnings 154,478 55,343
Minority interest in income of consolidated subsidiaries (173,923) (114,519)
Equity in affiliate earnings 19,033 15,419
------------ ------------
Net loss $ (412) $ (43,757)
============ ============
Loss per share:
Basic $.--- $ (.01)
============ ============
Diluted $.--- $ (.01)
============ ============
See notes to consolidated condensed financial statements.
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2004 2003(A)
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ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 9,304,611 $ 10,316,170
Accounts receivable, less allowance of
$822,000 at March 31, 2004 and $796,000 at December 31, 2003 5,225,529 4,963,628
Receivable from sale of former subsidiary (Note 13) 930,248 384,253
Inventories, less allowance for obsolescence
of $75,000 at March 31, 2004 and $90,000 at December 31, 2003 1,491,733 1,320,255
Related parties' loan and interest receivable 108,464 204,469
Prepaid expenses and other current assets 1,840,334 1,807,663
Deferred income taxes 488,000 477,000
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Total current assets 19,388,919 19,473,438
Property and equipment
Land and improvements 1,027,108 1,027,108
Building and building improvements 3,233,589 3,232,904
Equipment and furniture 7,248,205 6,226,312
Leasehold improvements 4,021,692 3,566,083
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15,530,594 14,052,407
Less accumulated depreciation and amortization 6,007,456 5,670,595
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9,523,138 8,381,812
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Other assets 685,097 668,763
Goodwill 2,291,333 2,291,333
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Total other assets 2,976,430 2,960,096
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$ 31,888,487 $ 30,815,346
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,697,920 $ 1,209,128
Accrued expenses and other current liabilities 4,316,541 4,228,391
Current portion of long-term debt 601,000 575,000
Income taxes payable 220,477 28,949
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Total current liabilities 6,835,938 6,041,468
Long-term debt 1,960,136 2,097,355
Deferred income taxes 683,000 742,000
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Total liabilities 9,479,074 8,880,823
Minority interest in subsidiaries 5,515,506 4,941,655
Commitments
Stockholders' equity:
Common stock, $.01 par value; authorized 12,000,000 shares;
6,988,614 shares issued and outstanding at March 31, 2004;
6,753,943 shares issued and outstanding at December 31, 2003 69,886 67,539
Capital in excess of par value 12,907,092 13,007,988
Retained earnings 3,916,929 3,917,341
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Total stockholders' equity 16,893,907 16,992,868
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$ 31,888,487 $ 30,815,346
============ ============
(A) Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2003 filed with the Securities and Exchange Commission
in March, 2004.
See notes to consolidated condensed financial statements.
2
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
Operating activities: 2004 2003
------------ ------------
Net loss $ (412) $ (43,757)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 340,875 283,510
Amortization 579 578
Bad debt expense 148,295 95,898
Deferred income tax benefit (70,000) --
Inventory obsolescence credit (15,459) (11,894)
Stock option expense 337,844 --
Minority interest 173,923 114,519
Equity in affiliate earnings (19,033) (15,419)
Gain on sale of former subsidiary (545,995) --
Increase (decrease) relating to operating activities from:
Accounts receivable (410,196) (547,998)
Inventories (156,019) (131,757)
Interest receivable related parties (3,825) (7,573)
Prepaid expenses and other current assets (46,672) 750,857
Accounts payable 488,792 (514,001)
Accrued expenses and other current liabilities 208,246 (95,724)
Income taxes payable 191,528 --
------------ ------------
Net cash provided by (used in) operating activities 622,471 (122,761)
Investing activities:
Additions to property and equipment, net of minor disposals (1,482,201) (578,146)
Distribution from affiliate 20,400 77,000
Other assets (4,078) 7,639
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Net cash used in investing activities (1,465,879) (493,507)
Financing activities:
Line of credit net payments -- (79,157)
Payments on long-term borrowings (111,218) (148,230)
Proceeds from exercise of subsidiary stock options 5,400 --
Repurchase of stock -- (66,610)
Capital contributions by subsidiaries' minority members -- 4,000
Distribution to subsidiaries' minority members (62,333) (46,600)
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Net cash used in financing activities (168,151) (336,687)
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Decrease in cash and cash equivalents (1,011,559) (952,955)
Cash and cash equivalents at beginning of year 10,316,170 8,080,903
------------ ------------
Cash and cash equivalents at end of period $ 9,304,611 $ 7,127,948
============ ============
See notes to consolidated condensed financial statements.
3
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: The company has three reported business segments. The medical
services segment, operated by Medicore's 57% owned subsidiary, Dialysis
Corporation of America and subsidiaries ("Dialysis Corporation of America"),
operates 19 kidney dialysis outpatient treatment centers located in Georgia,
Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and Virginia, including
the management of each of a 40% owned Ohio affiliate and an unaffiliated Georgia
center, and has one dialysis center under development; has agreements to provide
inpatient dialysis treatments to various hospitals; and provides supplies and
equipment for dialysis home patients. The medical products segment is engaged in
the distribution of medical products. A third segment, investment in technology
companies, was initiated in January, 2000, with investments in Linux software
companies. See "Consolidation."
Consolidation: The consolidated financial statements include the accounts
of Medicore, Inc. and Dialysis Corporation of America. Intercompany accounts and
transactions have been eliminated in consolidation. Dialysis Corporation of
America has a 40% interest in an Ohio dialysis center it manages, which is
accounted for by the equity method and not consolidated for financial reporting
purposes.
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
losses from obsolete or unsaleable inventory as provided for in our allowance
for inventory obsolescence, estimated useful lives of depreciable assets,
estimates for patient revenues from non-contracted payors, and the valuation
allowance for deferred tax assets based on the estimated realizability of
deferred tax assets. The company's 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.
Government Regulation: A substantial portion of the revenues of the
company's medical services segment 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 exclusion from the
Medicare and Medicaid programs.
4
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Vendor Concentration: The company's medical services segment purchases
erythropoietin (EPO) from one supplier which comprised 37% of medical service
cost of sales for the first quarter of 2004 and for the same period of the
preceding year. There is only one supplier of EPO in the United States, which
supplier has recently received FDA approval for an alternative product available
for dialysis patients. There are no other suppliers of any similar drug
available to dialysis treatment providers. Revenues from the administration of
EPO comprised 29% of medical services revenue for the first quarter of 2004 and
28% for the same period of the preceding year.
Inventories: Inventories are valued at the lower of cost (first-in,
first-out and/or weighted average cost method) or market value, and consist of
inventory of the company's medical products division and the company's medical
services division.
Goodwill: Goodwill represents cost in excess of net assets acquired. The
company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" (FAS 142) effective January 1, 2002. Under FAS 142,
goodwill and intangible assets with indefinite lives are no longer amortized but
are reviewed annually (or more frequently if impairment indicators are present)
for impairment. Pursuant to the provisions of FAS 142, the goodwill resulting
from Dialysis Corporation of America's acquisition of minority interests in
August, 2001, and June, 2003, and the goodwill resulting from Dialysis
Corporation of America's acquisition of Georgia dialysis centers in April, 2002,
and April, 2003, are not being amortized for book purposes and are subject to
the annual impairment testing provisions of FAS 142, which testing indicated no
impairment for goodwill. See Note 10.
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 the financial accounting and tax basis of
assets and liabilities.
Dialysis Corporation of America files separate income tax returns with its
income tax liability reflected on a separate return basis.
Other Income:
Operating:
Other operating income is comprised as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
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Management fee income $ 82,862 $ 73,060
Litigation settlement 134,183 --
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$ 217,045 $ 73,060
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5
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Non-operating:
Other income, net, is comprised as follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
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Rental income $ 85,288 $ 74,001
Interest income 18,845 30,038
Interest (expense) (42,597) (54,021)
Other 13,762 21,622
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Other income, net $ 75,298 $ 71,640
========== ==========
Accrued Expenses: Accrued expenses and other current liabilities is
comprised as follows:
MARCH 31, DECEMBER 31,
2004 2003
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Accrued compensation $ 936,852 $1,230,685
Due to insurance companies 1,985,959 1,759,397
Payable subsidiary minority interest
acquisition (See Note 10) 670,000 670,000
Other 723,730 568,309
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$4,316,541 $4,228,391
========== ==========
Stock-Based Compensation: The company follows the intrinsic value method
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its employee
stock options because, as discussed below, Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123) requires
use of option valuation models that were not developed for use in valuing
employee stock options. FAS 123 permits a company to elect to follow the
intrinsic method of APB 25 rather than the alternative fair value accounting
provided under FAS 123, but requires pro forma net income and earnings per share
disclosures as well as various other disclosures not required under APB 25 for
companies following APB 25. The company has adopted the disclosure provisions
required under Financial Accounting Standards Board Statement No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" (FAS 148).
Under APB 25, because the exercise price of the company's stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense was recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123 and FAS 148, and has been determined as if the company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for the option grants in 2003: risk-free interest rate of 1.76%; no
dividend yield; volatility factor of the expected market price of the company's
common stock of .78, and an expected life of 2.17 years.
6
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
The fair value of Dialysis Corporation of America's options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for option grants during 2004, 2003, 2002
and 2001, respectively: risk-free interest rate of 3.25%, 1.44%, 3.73% and
5.40%; no dividend yield; volatility factor of the expected market price of the
company's common stock of 1.05, 1.07, 1.15, and 1.14, and a weighted-average
expected life of 5 years, 4.7 years, 5 years, and 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective input assumptions including the expected stock price
volatility. Because the company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period. The company's pro
forma information, which includes the pro forma effects related to the company's
interest in Dialysis Corporation of America pro forma adjustments, follows:
THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
------------ ------------
Net loss, as reported $ (412) $ (43,757)
Stock-based employee compensation expense under
fair value method, net of related tax effects (7,504) (9,510)
------------ ------------
Pro forma net loss-basic computation (7,916) (53,267)
Subsidiary dilutive securities adjustments (14,335) (8,576)
------------ ------------
Pro forma net loss-diluted computation $ (22,251) $ (61,843)
============ ============
Loss per share:
Basic, as reported $.--- $ (.01)
============ ============
Basic, pro forma $.--- $ (.01)
============ ============
Diluted, as reported $.--- $ (.01)
============ ============
Diluted, pro forma $.--- $ (.01)
============ ============
Earnings (Loss) Per Share: Diluted earnings per share gives effect to
potential common shares that were dilutive and outstanding during the period,
such as stock options and warrants, using the treasury stock method and average
market price.
7
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
------------ ------------
Net loss, numerator-basic computation $ (412) $ (43,757)
Adjustment due to subsidiaries' dilutive securities (14,335) (8,576)
------------ ------------
Net loss as adjusted, numerator-diluted computation $ (14,747) $ (52,333)
============ ============
Weighted average shares 6,986,035 6,565,397
============ ============
Loss per share:
Basic $.--- $ (.01)
============ ============
Diluted $.--- $ (.01)
============ ============
The company has various stock options outstanding which have not been
included in the diluted loss per share computation since they would be
anti-dilutive due to the loss. See Note 6.
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. The credit risk associated with
cash and cash equivalents are considered low due to the high quality of the
financial institutions in which these assets are invested.
Credit Risk: The company's primary concentration of credit risk is with
accounts receivable which consist primarily of amounts owed by governmental
agencies, insurance companies and private patients to our medical services
division, and amounts owed by commercial customers to our medical products
division. Receivables of our medical services division from Medicare and
Medicaid comprised 65% of that division's receivables at March 31, 2004 and 59%
at December 31, 2003.
Customer Payment Terms: The majority of the company's sales are made at
payment terms of net amount due in 30-45 days, depending on the customer.
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 bear variable
interest rates which approximate market.
Business Segments: The company follows the provisions of Financial
Accounting Standards Board Statement No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (FAS 131) which contains standards for
reporting information about operating segments in annual financial statements
with operating segments representing components of an enterprise evaluated by
the enterprise's chief operating decision maker for purposes of making decisions
regarding resource allocation and performance evaluation. The adoption of FAS
131 has not changed the company's reported business segments, but has resulted
in changes in the company's segment reporting disclosures.
8
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Revenue Recognition: Net medical services revenues are recognized as
services are rendered at the net realizable amount from Medicare, Medicaid,
commercial insurers and other third-party payors. The medical services division
occasionally provides dialysis treatments on a charity basis to patients who
cannot afford to pay, however, the amount is not significant. Product sales are
recorded pursuant to stated shipping terms.
Advertising Costs: The company expenses advertising costs as they are
incurred. Advertising costs amounted to $32,000 for the quarter ended March 31,
2004 and $44,000 for the same period of the preceding year.
Reclassification: Certain prior year amounts have been reclassified to
conform with the current year's presentation.
NOTE 2--TRANSACTIONS WITH VIRAGEN, INC.
The company has a royalty agreement with a former subsidiary, Viragen,
Inc., pursuant to which it is to receive a royalty on Viragen's gross sales of
interferon and related products. The agreement provides for aggregate royalty
payments of $2.4 million to be paid based on the following percentages of
Viragen sales: 5% of the first $7 million, 4% of the next $10 million, and 3% of
the next $55 million. The effective date of the agreement was November 15, 1994,
with royalty payments due quarterly, commencing March 31, 1995. A payment of
approximately $108,000, earned under the original royalty agreement, is due as
the final payment under the existing royalty agreement. In August, 2002, the
company initiated a legal action against Viragen for breach of the royalty
agreement and for an accounting of sales pursuant to the royalty agreement.
In July, 2003, the company reached an agreement with Viragen pursuant to
mediation proceedings following its obtaining a partial summary judgment against
Viragen in March, 2003, for amounts owed to it under the royalty agreement with
Viragen. Viragen agreed to remit $30,000 on each of August 1, 2003, August 1,
2004, and August 1, 2005, with annual interest accruing at 5% on the August,
2004 and 2005 payments. Viragen remitted the $30,000 payment due August 1, 2003.
Viragen also agreed to commence remitting the quarterly royalty payments due
under the royalty agreement and has remitted quarterly payments of $2,580 in
October, 2003, $2,905 in January, 2004, and $3,735 in April, 2004.
NOTE 3--INTERIM ADJUSTMENTS
The financial summaries for the three months ended March 31, 2004, and
March 31, 2003, 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 ended March 31, 2004, are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 2004.
9
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 3--INTERIM ADJUSTMENTS--CONTINUED
While the company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these consolidated
condensed financial statements be read in conjunction with the financial
statements and notes included in the company's latest annual report on Form 10-K
for the year ended December 31, 2003.
NOTE 4--LONG-TERM DEBT
The company's medical products division had a $350,000 line of credit with
a local Florida bank, with interest at prime plus 1% payable monthly. This line
of credit matured January 22, 2003, and was secured by the accounts receivable
and inventory of the company's medical products division. The line of credit and
accrued interest were paid off in January, 2003, prior to maturity. The company
did not renew this line of credit.
Dialysis Corporation of America through its subsidiary, DCA of Vineland,
LLC, pursuant to a December 3, 1999 loan agreement obtained a $700,000
development loan with interest at 8.75% through December 2, 2001, 1 1/2% over
the prime rate thereafter through December 15, 2002, and 1% over prime
thereafter, with an interest rate of 5% at March 31, 2004, and 5% at December
31, 2003, which is secured by a mortgage on Dialysis Corporation of America's
real property in Easton, Maryland. Outstanding borrowings were subject to
monthly payments of interest only through December 2, 2001, with monthly
payments thereafter of $2,917 principal plus interest through December 2, 2002,
and monthly payments thereafter of $2,217 principal plus interest with any
remaining balance due December 2, 2007. This loan had an outstanding principal
balance of $630,000 at March 31, 2004, and $636,000 at December 31, 2003.
In April, 2001, Dialysis Corporation of America obtained a $788,000
five-year mortgage through April, 2006, secured by its land and building in
Valdosta, Georgia with interest at 8.29% until March, 2002, 7.59% thereafter
until December 16, 2002, and prime plus 1/2% with a minimum of 6.0% effective
December 16, 2002, with an interest rate of 6% at March 31, 2004, and December
31, 2003. Payments are $6,800 including principal and interest commencing May,
2001, with a final payment consisting of a balloon payment and any unpaid
interest due April, 2006. The remaining principal balance under this mortgage
amounted to approximately $705,000 at March 31, 2004, and $715,000 at December
31, 2003.
The Dialysis Corporation of America equipment financing agreement is for
financing for kidney dialysis machines for Dialysis Corporation of America's
facilities in Pennsylvania and Maryland, New Jersey and Georgia. Financing is
secured by the financed equipment. Monthly payments under the agreement, as of
December 31, 2003, are pursuant to various schedules extending through August,
2007, with interest at rates ranging from 4.13% to 10.48%. Financing under the
equipment financing agreement is a noncash financing activity which is a
supplemental disclosure required by FAS 95, "Statement of Cash Flows." There was
no financing under the agreement during the first quarter of 2004 or the first
quarter of 2003. The remaining principal balance under this financing amounted
to approximately $1,226,000 at March 31, 2004, and $1,321,000 at December 31,
2003.
The prime rate was 4.00% as of March 31, 2004 and as of December 31, 2003.
For interest payments, see Note 15.
10
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 4--LONG-TERM DEBT--CONTINUED
Dialysis Corporation of America's two mortgage agreements contain certain
restrictive covenants that, among other things, restrict the payment of
dividends above 25% of the net worth of Dialysis Corporation of America, require
lenders' approval for a merger, sale of substantially all the assets, or other
business combination of Dialysis Corporation of America, and require maintenance
of certain financial rations. Dialysis Corporation of America was in compliance
with the debt covenants at March 31, 2004, and December 31, 2003.
NOTE 5--INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
For income tax payments, see Note 15.
NOTE 6--STOCK OPTIONS AND STOCK COMPENSATION
On May 6, 1996, we adopted a Key Employee Stock Plan reserving 100,000
shares of our common stock for issuance from time to time to officers,
directors, key employees, advisors and consultants as bonus or compensation for
performances and or services rendered to the company or otherwise providing
substantial benefit for the company. As of March 31, 2004, 2,000 shares have
been issued under this Plan.
In July, 2000, the company granted, under our 1989 Stock Option Plan,
five-year non-qualified stock options for 820,000 shares to officers, directors
and employees of Medicore and its subsidiaries. The options have an exercise
price of $1.38, the market price on the date of grant. Options for 16,000 shares
were cancelled during 2003 due to employee terminations and resignations. In
June, 2001, 115,000 options were exercised. In September, 2003, the company's
board of directors authorized the granting of bonuses to our officers, directors
and employees, which bonuses were partially comprised of the exercise of
one-third of the options then held by these individuals as of September 11, 2003
resulting in the exercise of 229,668 options. In January, 2004, the company's
board of directors authorized the granting of bonuses to the company's officers,
directors and employees, which bonuses were partially comprised of the exercise
of a portion of the options then held by these individuals resulting in the
exercise of 234,671 options. At March 31, 2004, a total of 224,661 options were
outstanding under the 1989 Stock Option Plan.
As part consideration for a May, 2003 consulting agreement, the company
granted options to purchase 200,000 shares of common stock exercisable for two
years at $2.50 per share. The fair value of these options was $56,000 pursuant
to a Black-Scholes computation. The $56,000 expense is being deferred and
amortized over the one year life of the consulting agreement commencing June,
2003. Approximately $14,000 of such expense was recorded during the first
quarter of 2004. If the company terminates the agreement, which it may do at its
discretion, the option must be exercised within six months of such termination
date. See Note 8.
11
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 6--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
On September 25, 2003, the company granted options for 21,000 common
shares to each of two directors for their service on several of its board
committees, including our audit committee. The options were granted under the
company's 1989 Stock Option Plan and are exercisable at $2.25 per share through
September 24, 2006. The options vest in equal annual increments of 7,000 shares
each September 25, 2003, 2004 and 2005.
On January 28, 2004, Dialysis Corporation of America effected a
two-for-one stock split of its outstanding common stock. All option amounts and
exercise prices with respect to Dialysis Corporation of America have been
adjusted to reflect the stock split. Split-adjusted option exercise prices
resulting in a fraction of a cent have been rounded up to the nearest cent for
purposes of these notes to the financial statements of the company.
In June, 1998, Dialysis Corporation of America's board of directors
granted an option under its now expired 1995 Stock Option Plan to a board member
for 10,000 shares exercisable at $1.13 per share through June 9, 2003. This
option was exercised in June, 2003.
In April, 1999, Dialysis Corporation of America adopted a stock option
plan pursuant to which its board of directors granted 1,600,000 options
exercisable at $.63 per share to certain of its officers, directors, employees
and consultants with 680,000 options exercisable through April 20, 2000 and
920,000 options exercisable through April 20, 2004, of which 120,000 options
have been cancelled to date as a result of terminations. In April, 2000, the
680,000 one-year options were exercised for which Dialysis Corporation of
America received cash payment of the par value amount of $3,400 and the balance
in three-year promissory notes with interest at 6.2%. All the notes were repaid
with Dialysis Corporation of America stock at fair market value on February 9,
2004. Interest income on the notes amounted to approximately $3,000 for the
three months ended March 31, 2004, and $6,000 for the same period of the
preceding year. In March, 2003, 155,714 of the remaining 800,000 options
outstanding were exercised for $97,322 with the exercise price satisfied by
director bonuses accrued in 2002. In January, 2004, 130,278 of these options
were exercised for $81,424 with the exercise price satisfied by director bonuses
accrued in 2003. In February, 2004, 158,306 of these options were exercised for
$98,941 with the exercise price satisfied by payment of 18,152 shares of
Dialysis Corporation of America's stock for cancellation. In March, 2004,
355,702 of these options were exercised for $222,314 with the exercise price
satisfied by the optionee's payment of 54,223 shares of Dialysis Corporation of
America for cancellation. The exercises and share payments to the company
represents a noncash investing activity, which is a supplemental disclosure
required by Financial Accounting Standards Board Statement No. 95, "Statements
of Cash Flows." See Note 15.
In January, 2001, Dialysis Corporation of America's board of directors
granted to its CEO and President a five-year option for 330,000 shares
exercisable at $.63 per share with 66,000 options vesting January, 2001, and
66,000 options vesting in equal annual increments on January 1 for each of the
next four years. In January, 2004, 56,384 of these options were exercised for
$35,240, with the exercise price satisfied by a Dialysis Corporation of America
director bonuses accrued in 2003.
12
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 6--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
In September, 2001, Dialysis Corporation of America's board of directors
granted five-year options for an aggregate of 150,000 shares exercisable at $.75
per share through September 5, 2006, to certain officers, directors and key
employees. 30,000 of the options vested immediately and the remaining 120,000
options vest in equal increments of 30,000 options each September 5, commencing
September 5, 2002. In March, 2003, 3,570 of these options were exercised for
$2,678 with the exercise price satisfied by Dialysis Corporation of America
director bonuses accrued in 2002. In January, 2004, 4,576 of these options were
exercised for $3,432 with the exercise price satisfied by Dialysis Corporation
of America director bonuses accrued in 2003. These exercises represent noncash
investing activity, which is a supplemental disclosure required by Financial
Accounting Standards Board Statement No. 95, "Statement of Cash Flows." See Note
15. In January, 2004, 7,200 of these options were exercised with Dialysis
Corporation of America receiving a $5,400 cash payment for the exercise price
leaving 134,654 of these options outstanding as of March 31, 2004. As of March
31, 2004, an aggregate of 120,000 of these options had vested of which 15,346
have been exercised.
In March, 2002, Dialysis Corporation of America's board of director's
granted a five-year option to an officer for 60,000 shares exercisable at $1.58
per share through February 28, 2007. The option was to vest in equal annual
increments of 15,000 shares each February 28 from 2003 through 2006. 15,000
options that vested in February, 2003, were exercised in October, 2003, and the
remaining 45,000 options expired unvested due to the July 31, 2003 resignation
of the officer.
In May, 2002, Dialysis Corporation of America's board of directors granted
five-year options for an aggregate of 21,000 shares to its employees of which
11,000 remain outstanding at December 31, 2003. Most of these options with
respect to each individual employee are for 1,000 shares of common stock, with
one option for 3,000 shares of common stock. These options are exercisable at
$2.05 per share through May 28, 2007, with all options vesting on May 29, 2004.
Options for 10,000 shares have been cancelled as a result of the termination of
those employees holding the options, with 6,000 options having been cancelled
during 2003.
In June, 2003, Dialysis Corporation of America's board of directors
granted to an officer a five-year stock option for 50,000 shares exercisable at
$1.80 per share through June 3, 2008. The option vests annually in increments of
12,500 shares each June 4 from 2004 through 2007.
In August, 2003, Dialysis Corporation of America's board of directors
granted a three-year option to a director who is also a member of several of its
committees, for 10,000 shares exercisable at $2.25 per share through August 18,
2006. The option vests in two annual increments of 5,000 shares on August 19,
2004 and 2005.
In January, 2004, Dialysis Corporation of America's board of directors
granted a five-year option for 20,000 shares exercisable at $3.09 per share
through January 12, 2009. The option vests in annual increments of 5,000 shares
on each January 13 from 2005 through 2008.
13
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 7--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA
The following summarizes information about the company's three reported
business segments, which are managed separately. The medical products division
has been shown separately even though not required by FAS 131. Corporate
activities include general corporate revenues and expenses. Corporate assets
include unallocated cash, deferred income taxes, corporate fixed assets and
goodwill not allocated to any of the segments. Intersegment sales, of which
there were none for the periods presented, are generally intended to approximate
market price.
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
------------ ------------
BUSINESS SEGMENT OPERATING REVENUES
Medical products $ 224,318 $ 209,757
Medical services 8,626,569 6,811,011
------------ ------------
$ 8,850,887 $ 7,020,768
============ ============
BUSINESS SEGMENT PROFIT (LOSS)
Medical products $ (5,518) $ 25,246
Medical services 540,819 378,275
New technology -- 15,000
Corporate (710,710) (201,421)
------------ ------------
$ (175,409) $ 166,608
============ ============
NOTE 8--COMMITMENTS
In January, 2003, the company and Dialysis Corporation of America
established a new 401(k) plan containing employer match provisions on a portion
of employee contributions.
The company entered into a one-year consulting agreement with an
investment relations firm in May, 2003, with a monthly fee of $4,000. The
agreement also provided for the issuance of a two year option to purchase
200,000 shares of the company's common stock exercisable at $2.50 per share. At
management's discretion, the company may cancel the agreement at any time. In
June, 2003, two of the partners of the investment relations firm together with
Thomas K. Langbein, the company's Chairman, CEO and President, became three of
the five directors of Xandros, Inc., a majority owned subsidiary of Linux Global
Partners, Inc., which is a privately held Linux software company to which the
company made loans and in which the company holds an approximate 14% interest.
Mr. Langbein resigned his positions with Xandros on August 12, 2003. See Notes 6
and 12.
NOTE 9--RELATED PARTY TRANSACTIONS
In May, 2001, Dialysis Corporation of America loaned its CEO and President
$95,000 to be repaid with accrued interest at prime minus 1% (floating prime) on
or before maturity on May 11, 2006. This demand loan is collateralized by all of
such individual's Dialysis Corporation of America stock options in Dialysis
Corporation of America, 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 $1,000 for the first quarter of 2004 and for the same period of
the preceding year.
14
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 9--RELATED PARTY TRANSACTIONS--CONTINUED
The 20% minority interest in DCA of Vineland, LLC, a subsidiary of
Dialysis Corporation of America, was held by a company owned by the medical
director of that facility, who became a director of Dialysis Corporation of
America in 2001. This physician was provided with the right to acquire up to 49%
of DCA of Vineland. In April, 2000, another company owned by this physician
acquired an interest in DCA of Vineland, resulting in Dialysis Corporation of
America holding a 51% ownership interest in DCA of Vineland and this physician's
companies holding a combined 49% ownership interest in DCA of Vineland.
In July, 2000, one of the companies owned by this physician, acquired a
20% interest in DCA of Manahawkin, Inc. (formerly known as Dialysis Services of
NJ, Inc. - Manahawkin). Under agreements with DCA of Vineland and DCA of
Manahawkin, this physician serves as medical director for each of those dialysis
facilities.
Minority members in subsidiaries in certain situations may fund their
portion of required capital contributions by issuance of an interest bearing
note payable to Dialysis Corporation of America which the minority member may
repay through its portion of capital distributions of the subsidiary. The 20%
member in DCA of Chevy Chase, LLC funded approximately $30,000 in capital
contributions during the first quarter of 2004, with no such contributions
during the same period of the preceding year under a note with Dialysis
Corporation of America accruing interest at prime plus 2%, with interest
totaling approximately $ 3,000 for the three months ended March 31, 2004, with
approximately $16,000 of distributions to the member applied against the note
and accrued interest during the first quarter of 2004, with no such
distributions during the same period of the preceding year. These represent
noncash investing activities, which is a supplemental disclosure required by
Financial Accounting Standards Board Statement No. 95, "Statement of Cash
Flows." See Note 15.
The company and Dialysis Corporation of America incurred legal fees of
approximately $79,000 for the first quarter of 2004 and the same period of the
preceding year respectively, for an attorney who is general counsel and
secretary of the company (of which he is also a director), and serves as general
counsel and secretary to Dialysis Corporation of America.
NOTE 10--ACQUISITIONS
In August, 2001, Dialysis Corporation of America acquired the 30% minority
interest in one of its Georgia dialysis centers for $600,000. Half of the
purchase price was paid in August, 2001, with the remaining 50% paid in August,
2002. This transaction resulted in $523,000 of goodwill representing the excess
of the purchase price over the fair value of the net assets acquired. The
goodwill is being amortized for tax purposes over a 15-year period. Dialysis
Corporation of America's decision to make this investment was based largely on
its expectation of continued profitability of this center. The party from whom
Dialysis Corporation of America acquired the minority interest is the medical
director of another of Dialysis Corporation of America's subsidiaries. See Note
1.
15
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 10--ACQUISITIONS--CONTINUED
In April, 2002, Dialysis Corporation of America acquired a Georgia
dialysis center. This transaction resulted in $400,000 of goodwill representing
the excess of the purchase price over the fair value of the net assets acquired.
The goodwill is being amortized for tax purposes over a 15-year period. Dialysis
Corporation of America's decision to make this investment was based on its
expectation of future profitability resulting from its review of this dialysis
center's operations prior to making the acquisition. See Note 1.
Effective April 8, 2003, Dialysis Corporation of America acquired the
assets of a Georgia dialysis center, and effective June 1, 2003, acquired the
30% minority interests in each of two of its existing Georgia dialysis centers
for a total consideration of $1,415,000, of which $745,000 was paid and $670,000
is payable in June, 2004, which has been presented as a current liability as of
March 31, 2004. The results of operations of the acquired center have been
included in the consolidated financial statements since its acquisition.
Minority interest in the results of operations of the centers for which we
acquired the outstanding minority interest was included in the consolidated
financial statements until we acquired the minority interests. These
acquisitions resulted in $1,368,000 of goodwill, representing the excess of the
purchase price over the fair value of the net assets acquired. The goodwill is
being amortized for tax purposes over a 15-year period. Dialysis Corporation of
America's decision to make these acquisitions was based on its expectation of
profitability resulting from its management's evaluation of the operations of
these dialysis centers. The party from whom the 30% minority interests were
purchased was the medical director of one of the facilities at which the 30%
interest was acquired and is the medical director of two other of Dialysis
Corporation of America's Georgia dialysis facilities. See Note 1.
NOTE 11--LOAN TRANSACTIONS
Dialysis Corporation of America customarily funds the establishment and
operations of its dialysis facility subsidiaries, usually until they become
self-sufficient, including those subsidiaries in which medical directors hold
interests ranging from 20% to 49%. Except in limited circumstances, such funding
is generally made without formalized loan documents, as the operating agreements
for Dialysis Corporation of America's subsidiaries provide for cash flow and
other proceeds to first pay any such financing provided by Dialysis Corporation
of America, exclusive of any tax payment distributions. One such loan exists
with DCA of Vineland, LLC. In April, 2000, a company owned by the Vineland
medical director, acquired an interest in DCA of Vineland for $203,000, which
was applied to reduce Dialysis Corporation of America's loan. The principal
outstanding indebtedness of this loan was approximately $340,000 at March 31,
2004 and $425,000 at December 31, 2003, respectively. See Note 9.
NOTE 12--INVESTMENT
During the period January, 2000 through December, 2002, the company made
various loans aggregating approximately $2,450,000 with a 10% annual interest
rate, to Linux Global Partners, a company investing in Linux software companies,
one of which initiated the marketing of a Linux desktop
16
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 12--INVESTMENT--CONTINUED
operating system. In conjunction with the original loan the company acquired an
ownership interest in Linux Global Partners. In consideration for the company's
extending the due date on the loans on several occasions it received additional
shares of Linux Global Partners' common stock and presently own approximately
14% of Linux Global Partners. Dialysis Corporation of America also has an
ownership interest in Linux Global Partners of approximately 2%.
Interest on the notes evidencing our loans to Linux Global Partners
amounted to approximately $15,000 during 2003 (through January 24, 2003).
The unpaid loans and accrued interest were satisfied through the company's
foreclosure in January, 2003, of 4,115,815 shares of Ximian, Inc.'s series A
convertible preferred stock which were part of the collateral securing Linux
Global Partners' indebtedness to the company. On January 24, 2003, Xandros,
Inc., a 95% owned subsidiary of Linux Global Partners, purchased the Ximian
preferred shares at the public foreclosure sale and deposited 775,000 shares of
its common stock (approximately 1.5% of Xandros) as a good faith deposit with
the full amount due in cash. Upon Xandros' failure to make the payment, the
company, as the next highest bidder, obtained the Ximian preferred stock and, in
accordance with the terms of the public auction retained the Xandros shares in
satisfaction of the indebtedness due from Linux Global Partners. Thereafter, in
connection with a third-party's acquisition of Ximian in August, 2003, the
company sold the Ximian preferred stock for approximately $3,541,000 in cash
proceeds resulting in a gain of approximately $784,000. An additional
approximately $805,000 was placed in escrow, with one-half of the escrowed funds
to be released to the company in one year, and the other half in two years,
pending fulfillment by the parties to the Ximian acquisition of certain
conditions, at which time the company would record an additional gain based on
net proceeds received.
NOTE 13--SALE OF INTEREST IN FORMER SUBSIDIARY
On April 6, 2001, the company entered into an agreement with Simclar
International to sell its 71.3% ownership interest in Techdyne, Inc. (now
Simclar, Inc.) to Simclar International for $10,000,000. The agreement provided
for an earn-out consisting of 3% of consolidated Techdyne sales for the three
fiscal years commencing January 1, 2001. Limitations on the earn-out ranged from
a $5,000,000 maximum to a $2,500,000 minimum earn-out. The earn-out was payable
in cash each year for the earn-out period just ended. In April, 2002, the
company received the first earn-out payment of $1,105,000. In April, 2003, the
company received the second earn-out payment of approximately $1,011,000. At
March 31, 2004, a receivable in the amount of $930,248, representing the amount
of the third earn-out payment received in April, 2004, is reflected in the
company's Consolidated Condensed Balance Sheet as a current receivable. The
earn-out payment received in April, 2004, resulted in the company receiving
approximately $546,000 in excess of the minimum earn-out previously recorded
which is reflected in the Consolidated Condensed Statement of Operations as a
non-operating gain. Based on Techdyne (Simclar, Inc.) consolidated sales of
$36,187,105 for 2003 on which the earn-out payment is supposed to be computed
based on the Agreement for Sales and Purchase of Shares, the earn-out payment
should have been $1,085,613. The company has demanded payment of the $155,365
balance due from Simclar International, and on April 10, 2004, the company filed
an action in the 11th Judicial Circuit in and for Miami-Dade County, Florida to
collect the balance of the earn-out payment due.
17
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 14--STOCK REPURCHASES
In December, 2002, the company's board of directors authorized the
purchase of up to approximately 1,000,000 shares of the company's outstanding
common stock based on current market prices. The company repurchased and
cancelled 48,500 shares for approximately $70,000 in the first quarter of 2003.
No repurchases were made during the first quarter of 2004.
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION
The following represents non-cash financing and investing activities and
other cash flow information.
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ----------
Interest paid (see Note 4) $ 41,000 $ 44,000
Income taxes paid (see Note 5) 97,000 197,000
Option exercise bonus (see Note 6) 120,000 100,000
Subsidiary minority member capital
contributions funded by notes (see Note 9) 30,000 --
Subsidiary minority member distributions
applied against notes and accrued interest
(see Note 9) 16,000 --
Share payment to subsidiary for subsidiary
stock option exercises (see Note 6) 321,000 --
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
-------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations, commonly known as MD&A, is our attempt to provide a narrative
explanation of our financial statements, and to provide our shareholders and
investors with the dynamics of our business as seen through our eyes as
management. Generally, MD&A is intended to cover expected effects of known or
reasonably expected uncertainties, expected effects of known trends on future
operations, and prospective effects of events that have had a material effect on
past operating results. Our discussion of MD&A should be read in conjunction
with our unaudited consolidated condensed financial statements, including the
notes, included elsewhere in this Quarterly Report on Form 10-Q.
OVERVIEW
Although we have a medical products division and investment in two
affiliated technology companies, our primary operations, revenues and income are
derived from our dialysis operations through our 57% public subsidiary, Dialysis
Corporation of America. That subsidiary provides dialysis services, primarily
kidney dialysis treatments through its 19 outpatient dialysis centers, including
the management of each of a center in which it holds a 40% minority interest and
one unaffiliated dialysis center. In addition, Dialysis Corporation of America
provides dialysis treatments to patients at eight hospitals and medical centers
through its acute inpatient dialysis services agreements with these entities.
Dialysis Corporation of America also provides homecare services, including home
peritoneal dialysis and method II services, the latter relating to providing
patients with supplies and equipment.
The following table shows the number of in-center, home peritoneal and
acute inpatient treatments performed by Dialysis Corporation of America through
the dialysis centers it operates, including the two centers it manages, one in
which it has a 40% ownership interest, and those hospitals and medical centers
with which it has inpatient acute service agreements for the periods presented:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---------- ----------
In center 27,749 22,985
Home peritoneal 1,834 1,662
Acute 2,179 2,072
---------- ----------
31,762(1) 26,719(1)
========== ==========
_______________
(1) Treatments by the two managed centers included: in-center treatments
of 2,883 and 2,426, respectively, for the three months ended March
31, 2004 and March 31, 2003; no home peritoneal treatments; and
acute treatments of 12 and 53, respectively, for the three months
ended March 31, 2004 and March 31, 2003.
Dialysis Corporation of America also provides ancillary services
associated with dialysis treatments, including the administration of EPO for the
treatment of anemia in its dialysis patients. EPO is currently available from
only one manufacturer, and no alternative drug has been available to Dialysis
Corporation of America for the treatment of anemia in its dialysis patients. If
the available supply of EPO were reduced either by the manufacturer or due to
excessive demand, Dialysis Corporation of America's and our revenues and net
income would be adversely affected. The manufacturer of EPO increased its price
in early 2003, and could implement further price increases which would adversely
affect Dialysis Corporation of America's and
19
our net income. This manufacturer has also developed another anemia drug that
could possibly substantially reduce Dialysis Corporation of America's and our
revenues and profit margins from the treatment of anemia in dialysis 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.
Approximately 57% of medical service revenues from our dialysis operations
were derived from Medicare and Medicaid reimbursement for the three months ended
March 31, 2004 compared to 58% for the same period of the preceding year with
rates established by CMS, and which rates are subject to legislative changes.
Over the last two years, Medicare reimbursement rates have not increased.
Dialysis is typically reimbursed at higher rates from private payors, such as a
patient's insurance carrier, as well as higher payments received under
negotiated contracts with hospitals for acute inpatient dialysis services.
The following table shows the breakdown of medical services revenues by
type of payor for the periods presented:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
------ ------
Medicare 49% 49%
Medicaid and comparable programs 8 9
Hospital inpatient dialysis services 7 10
Commercial insurers and other private payors 36 31
------ ------
100% 100%
====== ======
The medical services revenues from our dialysis operations 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 medical service revenues from our
dialysis operations (in thousands) derived from primary revenue sources and the
percentage of total medical service revenue represented by each source for the
periods presented:
THREE MONTHS ENDED MARCH 31,
---------------------------------------
2004 2003
----------------- -----------------
Outpatient hemodialysis services $4,087 49% $3,309 49%
Home peritoneal dialysis services 411 5 289 4
Inpatient hemodialysis services 589 7 532 8
Ancillary services 3,323 39 2,608 39
------ ------ ------ ------
$8,410 100% $6,738 100%
====== ====== ====== ======
Essential to profitability of our dialysis operations is Medicare
reimbursement, which is at a fixed rate determined by CMS. Although we are not
aware of any proposals in this regard, the level of Dialysis Corporation of
America's, and therefore, our revenues and profitability may be adversely
affected by any potential legislation resulting in Medicare reimbursement rate
cuts. Increased operating costs with respect to dialysis treatment as well as
reductions in commercial third-party reimbursement rates could also adversely
affect Dialysis Corporation of America's, and therefore, our margins and
profitability.
20
The healthcare industry is subject to extensive regulation of federal and
state authorities. There are a variety of fraud and abuse measures to combat
waste, which include anti-kickback regulations and extensive prohibitions
relating to self-referrals, violations of which are punishable by criminal or
civil penalties, including exclusion from Medicare and other governmental
programs. Unanticipated changes in healthcare programs or laws would require
Dialysis Corporation of America to restructure its business practices which, in
turn, could materially adversely affect its operations and financial condition.
Dialysis Corporation of America has developed a Corporate Integrity Program to
assure that it provides the highest level of patient care and services in a
professional and ethical manner consistent with applicable federal and state
laws and regulations.
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 Dialysis Corporation of America's 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 amounts of financial
resources available for acquiring and/or developing dialysis facilities in areas
targeted by Dialysis Corporation of America. Additionally, there is intense
competition for retaining qualified nephrologists who would serve as medical
directors of and be responsible for the supervision of these dialysis centers.
There is no assurance as to when any new dialysis center or inpatient service
contract with hospitals will be implemented, or the number of stations, or
patient treatments such center or service contract may involve, or if such
center or service contract will ultimately be profitable. It has been our
experience that newly established dialysis centers, although contributing to
increased revenues, have adversely affected Dialysis Corporation of America's
results of operations in the short term due to start-up costs and expenses and a
smaller patient base.
RESULTS OF OPERATIONS
The following table shows our results of operations (in thousands) for the
periods presented:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---------- ----------
Product sales $ 224 $ 210
Medical service revenues 8,410 6,738
---------- ----------
Total sales 8,634 6,948
Other income 217 73
---------- ----------
Total revenues 8,851 7,021
Cost of product sales 118 131
Cost of medical services 5,162 4,203
---------- ----------
Total cost of sales 5,280 4,334
Selling, general and administrative expenses 3,677 2,503
Provision for doubtful accounts 148 96
---------- ----------
Total cost and expenses 9,105 6,933
---------- ----------
21
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---------- ----------
Operating loss (income) (254) (88)
Gain on sale of former subsidiary 625 79
---------- ----------
Income before income taxes, minority interest
and equity in affiliate earnings 371 167
Income tax provision 216 111
---------- ----------
Income before minority interest and equity
in affiliate earnings 155 56
Minority interest in income of
consolidated subsidiaries (174) (115)
Equity in affiliate earnings 19 15
---------- ----------
Net loss $ --- $ (44)
========== ==========
Consolidated operating revenues, increased by approximately $1,830,000
(26%) for the three months ended March 31, 2004 compared to the same period of
the preceding year. Sales revenues increased by approximately $1,686,000 (24%)
for the three months ended March 31, 2004 compared to the same period of the
preceding year. Other operating income increased by approximately $144,000 for
the three months ended March 31, 2004, compared to the same period of the
preceding year. This includes a litigation settlement of $134,000 and an
increase in management fee income of $10,000 pursuant to a management services
agreement between Dialysis Corporation of America and its 40% owned Toledo, Ohio
affiliate and a management services agreement with an unaffiliated dialysis
center. See Note 1 to "Notes to Consolidated Condensed Financial Statements."
In April, 2004, we received payment of approximately $930,000 representing
the third installment of an earn-out payment from our sale of Techdyne in 2001.
This resulted in our having received approximately $546,000 in excess of the
minimum earn-out of $2,500,000 that we had previously recorded. The $930,000 is
reflected as a current asset for the three months ended March 31, 2004, and we
have recorded a non-operating gain of $546,000 in our consolidated statement of
operations. On April 10, 2004, we filed a breach of contract legal action in
Florida state court to collect an additional approximately $155,000 which should
have been included in the April, 2004 earn-out payment based on Techdyne
consolidated sales for 2003. See Note 13 to "Notes to Consolidated Condensed
Financial Statements."
Other non-operating income increased approximately $3,000 for the three
months ended March 31, 2004 compared to the same period of the preceding year.
Interest income decreased approximately $11,000 largely due to our foreclosure
and sale of collateral in payment of loans due from Linux Global Partners. See
Note 12 to "Notes to Consolidated Financial Statements." Rental income increased
approximately $11,000, miscellaneous other income decreased by approximately
$8,000, and interest expense decreased approximately $11,000, reflecting lower
interest rates on variable rate debt and reduced average borrowings. The prime
rate was 4.00% at March 31, 2004 and December 31, 2003. See Note 1 to "Notes to
Consolidated Financial Statements."
Medical product sales revenues increased approximately $15,000 (7%) for
the three months ended March 31, 2004 compared to the same period of the
preceding year. Management is attempting to
22
be more competitive in lancet sales through overseas purchases and expansion of
its customer base. Although our medical products division has expanded its
product line with several diabetic disposable products, demand to date for these
products continues to be less than anticipated.
Medical service revenues, representing the sales revenues of our dialysis
division, Dialysis Corporation of America, increased approximately $1,672,000
(25%) for the three months ended March 31, 2004 compared to the same period of
the preceding year, with the increase largely attributable to a 19% increase in
total dialysis treatments performed by DCA from 24,240 during the first quarter
of 2003 to 28,867 during the first quarter of 2004. This increase reflects (i)
increased revenues of Dialysis Corporation of America's Pennsylvania dialysis
centers of approximately $401,000; (ii) increased revenues of approximately
$32,000 for its New Jersey centers; (iii) increased revenues of approximately
$292,000 for its Georgia centers; (iv) increased revenues of approximately
$405,000 for its Maryland center; and (v) increased revenues of approximately
$335,000 for its Ohio center (vi) revenues of approximately $135,000 for its new
Virginia center; and (vii) revenues of approximately $72,000 for its new South
Carolina center.
Cost of sales as a percentage of consolidated sales amounted to 61% for
the three months ended March 31, 2004 compared to 62% for the same period of the
preceding year.
Cost of goods sold for the medical products division as a percentage of
medical product sales was 52%, for the three months ended March 31, 2004
compared to 62% for the same period of the preceding year. Changes in cost of
goods sold for this division resulted largely from a change in product mix.
Cost of medical services sales as a percentage of medical services
revenues decreased to 61% for the three months ended March 31, 2004, compared to
62% for the same period of the preceding year, largely due to a decrease in
payroll costs as a percentage of medical service sales.
Approximately 29% of Dialysis Corporation of America's medical services
revenues for the three months ended March 31, 2004 were derived from the
administration of EPO to its patients compared to 28% for the same period of the
preceding year. EPO is only available from one manufacturer in the United
States. Price increases for this product without Dialysis Corporation of
America's ability to increase its charges would increase its costs and thereby
adversely impact its earnings. We cannot predict the timing or extent of any
future price increases by the manufacturer, or Dialysis Corporation of America's
ability to offset any such increases.
Selling, general and administrative expenses, increased approximately
$1,174,000 for the three months ended March 31, 2204, compared to the same
period of the preceding year. This increase reflects operations of Dialysis
Corporation of America's new dialysis centers in Pennsylvania, South Carolina
and Virginia and a center under construction in Maryland, the cost of additional
support activities from expanded dialysis operations and approximately $486,000
of officer, director and employee bonuses recorded in the first quarter of 2004.
Without the effect of the first quarter 2004 bonuses, selling, general and
administrative expenses increased approximately $687,000 for the first quarter
of 2004 compared to the same period of the preceding year and as a percentage of
sales revenues would have amounted to 37% for the first quarter of 2004 compared
to 36% for the same period of the preceding year, which includes expenses of new
dialysis centers incurred prior to Medicare approval for which there were no
corresponding medical service revenues.
Provision for doubtful accounts increased by approximately $52,000, for
the three months ended March 31, 2004, compared to the same period of the
preceding year. Medicare bad debt recoveries of $30,000 were recorded during the
first quarter of 2003 with no such recoveries recorded during the first quarter
of 2004. Without the effect of Medicare bad debt recoveries, the provision would
have amounted to 2% of sales for the three months ended March 31, 2004 and for
the same period of the preceding year.
23
This change 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
filing. The provision for doubtful accounts of our medical services operation,
which is the primary component of this provision, is determined under a variety
of criteria, primarily aging of the receivables and payor mix. Accounts
receivable are estimated to be uncollectible based upon various criteria
including the age of the receivable, historical collection trends and our
understanding of the nature and collectibility of the receivables, and are
reserved for in the allowance for doubtful accounts until they are written off.
Although operations of additional dialysis centers have resulted in
additional revenues, certain of these centers are still in the developmental
stage and, accordingly, their operating results will adversely impact Dialysis
Corporation of America's and our results of operations until they achieve a
patient count sufficient to sustain profitable operations.
Dialysis Corporation of America experienced same-center growth in total
treatments of approximately 14% for the first quarter of 2004 compared to the
same period of the preceding year, and same-center revenues grew approximately
19%. Dialysis Corporation of America continues to search for ways to operate
more efficiently and reduce costs through process improvements. In addition, it
is reviewing technological improvements and intends to make capital investments
to the extent it is confident such improvements will improve patient care and
operating performance.
Equity in affiliate earnings (loss) represents equity in the earnings
(loss) incurred by Dialysis Corporations of America's Ohio affiliate, in which
Dialysis Corporation of America has a 40% ownership interest. This dialysis
center commenced operations in February, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $12,553,000 at March 31, 2004, which reflects a
decrease of $879,000 (7%) during the three months ended March 31, 2004. The
change in working capital included a decrease in cash of $1,012,000 including
net cash provided by operating activities of $622,000, net cash used in
investing activities of $1,466,000 (including additions to property, plant and
equipment of $1,482,000 and $20,000 of distributions received from Dialysis
Corporation of America's 40% owned Ohio affiliate), and net cash used in
financing activities of $168,000 (including payments on long-term debt of
$111,000, $62,000 of distributions to the minority members of Dialysis
Corporation of America's subsidiaries and $5,000 of receipts from the exercise
of subsidiary stock options).
In January, 2003, we executed on certain of the collateral securing Linux
Global Partners' indebtedness to us, resulting in our acquiring 4,115,815 shares
of series A convertible preferred stock of Ximian, Inc. These shares were sold
in August, 2003, in connection with a third party's acquisition of Ximian, for
which we received $3,541,000 with an additional $805,000 placed in escrow, half
of which is expected to be released in August, 2004, and the balance in August,
2005, in all cases subject to the parties to the Ximian acquisition fulfilling
certain conditions. See Note 12 to "Notes to Consolidated Condensed Financial
Statements."
In May, 2003, we entered into a one-year, non-exclusive consulting
agreement with a public relations firm, which agreement we can terminate at any
time. The agreement provides for a $4,000 monthly fee and issuance of an option
for 200,000 shares of our common stock exercisable through May, 2005, at an
exercise price of $2.50 per share. In the event we terminate this agreement, the
option will only be exercisable for six months from such termination. See Notes
6 and 8 to "Notes to Consolidated Condensed Financial Statements."
24
In July, 2003, pursuant to a mediation proceeding following a partial
summary judgment, we obtained against Viragen, Inc., our former subsidiary,
Viragen agreed to abide by the terms of our royalty agreement and remitted
$30,000 to us in August, 2003. Additional $30,000 payments are due August 1,
2004 and 2005, with annual interest accruing on those payments at 5%. Viragen
also agreed to commence remitting royalty payments on a quarterly basis pursuant
to the royalty agreement and has remitted quarterly payments of $2,580 in
October 2003, $2,905 in January 2004 and $3,735 in April 2004. See Note 2 to
"Notes to Consolidated Condensed Financial Statements."
In April, 2004, we received a third earn-out payment of $930,248 on the
June, 2001, sale of our interest in Techdyne. Including the April, 2004 payment,
we have received approximately $3,046,000 of earn-out payments, which exceeded
the $2,500,000 minimum earn-out we originally recorded resulting in a
non-operating gain of approximately $546,000 recorded during the first quarter
of 2004. Earn-out payments were specified as 3% of Techdyne's consolidated
sales, which were $36,187,105 for 2003, and upon which the April, 2004 earn-out
payment should have been $1,085,613. We have demanded payment from and initiated
legal action in Florida against Simclar International, the purchaser of
Techdyne, for the $155,365 balance due. See Note 13 to "Notes to Consolidated
Condensed Financial Statements."
In December, 2002, we announced our intent to purchase up to 1,000,000
shares of our outstanding common stock based on then current market prices. We
repurchased and cancelled 48,500 shares of our outstanding common stock at a
cost of approximately $70,000 during the first half of 2003. We have not made
any repurchases during 2004. See Note 14 to "Notes to Consolidated Condensed
Financial Statements," and Part II, "Other Information," Item 2, "Changes in
Securities, Use of Proceeds and Issuer Purchases of Equity Securities."
Dialysis Corporation of America, has a mortgage on its real property in
Easton, Maryland securing a development loan made by a third party to one of
Dialysis Corporation of America's New Jersey dialysis centers. The outstanding
balance of the loan was $630,000 at March 31, 2004, and $636,000 at December 31,
2003. In April, 2001, Dialysis Corporation of America obtained a $788,000
five-year mortgage on its building in Valdosta, Georgia which had an outstanding
principal balance of $705,000 at March 31, 2004, and $715,000 at December 31,
2003. Dialysis Corporation of America has an equipment financing agreement with
a third party for the purchase of kidney dialysis machines for its facilities.
Dialysis Corporation of America had outstanding balances under this agreement of
$1,226,000 at March 31, 2004, and $1,321,000 at December 31, 2003. See Note 4 to
"Notes to Consolidated Condensed Financial Statements."
We have agreed to advance Dialysis Corporation of America up to $1,500,000
for the purpose of equipment financing by Dialysis Corporation of America, which
loan arrangement is evidenced by a demand promissory note from Dialysis
Corporation of America. Advances for equipment purchases under this loan
arrangement, amounted to approximately $485,000 for the first quarter of 2004.
Dialysis Corporation of America opened centers in Pottstown, Pennsylvania;
Aiken South Carolina; and Warsaw, Virginia during the first quarter of 2004, and
is in the process of constructing a new center in Maryland which is expected to
open during the second quarter of 2004. Payment of the balance due of $670,000
on the purchase of minority interests in two of Dialysis Corporation of
America's dialysis centers is due June, 2004. See Note 10 to "Notes to
Consolidated Condensed Financial Statements."
Capital is needed primarily for the development of outpatient dialysis
centers. The construction of a 15 station facility, typically the size of
Dialysis Corporation of America's dialysis facilities, costs in the range of
$600,000 to $750,000 depending on location, size and related services to be
provided, which includes equipment and initial working capital requirements.
Acquisition of an existing dialysis facility is more expensive than
construction, although acquisition would provide Dialysis Corporation of America
25
with an immediate ongoing operation, which most likely would be generating
income. Dialysis Corporation of America presently plans to expand its operations
primarily through construction of new centers, rather than acquisition.
Development of a dialysis facility to initiate operations takes four to six
months and usually up to 12 months or longer to generate income. Dialysis
Corporation of America considers some of its centers to be in the developmental
stage, since they have not developed a patient base sufficient to generate and
sustain earnings.
Dialysis Corporation of America is seeking to expand its outpatient
dialysis treatment facilities and inpatient dialysis care and is presently in
different phases of negotiations with physicians for additional outpatient
centers. Such expansion requires capital. Dialysis Corporation of America has
been funding its expansion primarily through internally generated cash flow.
While we anticipate that financing will be available to Dialysis Corporation of
America either from a financial institution or us, no assurance can be given
that Dialysis Corporation of America will be successful in implementing its
growth strategy or that adequate financing, to the extent needed, will be
available to support such expansion.
The bulk of our cash balances are carried in interest-yielding vehicles at
various rates and mature at different intervals depending on our anticipated
cash requirements.
We anticipate that current levels of working capital and working capital
from operations will be adequate to successfully meet liquidity demands for at
least the next twelve months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In December, 2001, the SEC issued a cautionary advice to elicit more
precise disclosure in this Item 2, MD&A, about accounting policies management
believes are most critical in portraying our financial results and in requiring
management's most difficult subjective or complex judgments.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make judgments and estimates. On an on-going basis, we evaluate
our estimates, the most significant of which include establishing allowances for
doubtful accounts, a valuation allowance for our deferred tax assets and
determining the recoverability of our long-lived assets. The basis for our
estimates are historical experience and various assumptions that are believed to
be reasonable under the circumstances, given the available information at the
time of the estimate, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
available from other sources. Actual results may differ from the amounts
estimated and recorded in our financial statements.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition: Revenues are recognized as services are rendered.
Dialysis Corporation of America receives payments through reimbursement from
Medicare and Medicaid for its outpatient dialysis treatments coupled with
patients' private payments, individually and through private third-party
insurers. A substantial portion of Dialysis Corporation of America's 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. Dialysis Corporation of
America's 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. Dialysis Corporation of
America has developed a sophisticated information and computerized coding
system, but due to the complexity of
26
the payor mix and regulations, it sometimes receives more or less than the
amount expected at the time the services are provided. Dialysis Corporation of
America reconciles any such differences quarterly. Product sales are recognized
pursuant to stated shipping terms.
Allowance for Doubtful Accounts: We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments and Dialysis Corporation of America's 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
customers and Dialysis Corporation of America's patients and their insurance
carriers to make their required payments, which would have an adverse effect on
cash flows and our results of operations. Therefore, 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
specific account identification and the aging of accounts receivable to
establish an allowance for losses on accounts receivable.
Allowance for Inventory Obsolescence: We maintain an allowance for
inventory obsolescence for losses resulting from inventory items becoming
unsaleable due to loss of specific customers or changes in customers'
requirements. Based on historical and projected sales information, we believe
our allowance is adequate. However, changes in general economic, business and
market conditions could cause our customers' purchasing requirements to change.
These changes could affect our inventory saleability. Therefore, the allowance
for inventory obsolescence is reviewed regularly and changes to the allowance
are updated as new information is received.
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 against deferred tax assets which
could result in additional income tax expense.
Long-Lived Assets: We state our property and equipment at acquisition cost
and compute depreciation for book purposes by the straight-line method over
estimated useful lives of the assets. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of the asset may not recoverable. Recoverability of
assets to be held and used is measured by comparison of the carrying amount of
an asset to the future cash flows expected to be generated by the asset. If the
carrying amount of the asset exceeds its estimated future cash flows, an
impairment charge is recognized to the extent the carrying amount of the asset
exceeds the fair value of the asset. These computations are complex and
subjective.
Goodwill and Intangible Asset Impairment: In assessing the recoverability
of our goodwill and other intangibles we must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of the
respective assets. This impairment test requires the determination of the fair
value of the intangible asset. If the fair value of the intangible assets is
less than its carrying value, an impairment loss will be recognized in an amount
equal to the difference. If these estimates or their related assumptions change
in the future, we may be required to record impairment 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.
27
IMPACT OF INFLATION
Inflationary factors have not had a significant effect on our operations.
We attempt to pass on increased costs and expenses incurred in our medical
products division by increasing selling prices when and where possible. In our
dialysis division, revenue per dialysis treatment 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 medical service revenues
cannot be voluntarily increased to keep pace with increases in supply costs or
nursing and other patient care costs. Increased operating costs without a
corresponding increase in reimbursement rates may adversely affect Dialysis
Corporation of America's and, accordingly, our future earnings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from changes in interest rates. We have
exposure to both rising and falling interest rates.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities and interest bearing accounts at financial institutions in
which we had approximately $9,283,000 invested as of March 31, 2004. A 15%
relative decrease in rates on our period-end investments would have resulted in
a negative impact of approximately $1,000 on our results of operations for the
quarter ended March 31, 2004.
We have an interest rate exposure on debt agreements with variable
interest rates of which we had approximately $ 1,335,000 of such debt
outstanding as of March 31, 2004. A 15% relative increase in interest rates on
our period-end variable rate debt would have resulted in a negative impact of
approximately $1,000 on our results of operations for the first quarter of 2004.
We do not utilize financial instruments for trading or speculative
purposes, and do not currently use interest rate derivatives.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period of this quarterly report on Form 10-Q for the
first quarter ended March 31, 2004, management carried out an evaluation, under
the supervision and with the participation of our Chief Executive Officer and
President, and the Vice President of Finance, who is also our Principal
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934 (the "Exchange Act"), which disclosure controls and
procedures are designed to ensure that information required to be disclosed by
our company in the reports that we file under the Exchange Act, as is this
quarterly report on Form 10-Q, is recorded, processed, summarized and reported
within required time periods specified by the SEC's rules and forms. Based upon
that evaluation, our Chief Executive Officer and President and our Vice
President of Finance and Principal Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us, including our consolidated subsidiaries,
required to be included in our periodic SEC filings.
There were no significant changes in internal controls over financial
reporting during our most recent fiscal quarter, or in other factors that have
materially affected or are reasonably likely to materially affect, internal
controls over financial reporting, including any corrective actions with regard
to significant deficiencies and material weaknesses, of which there were none.
28
PART II -- OTHER INFORMATION
----------------------------
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
- ------- ---------------------------------------------------------------------
Securities
----------
EQUITY SECURITIES SOLD BY THE COMPANY DURING THE FIRST QUARTER ENDED MARCH 31,
2004 AND NOT REGISTERED UNDER THE SECURITIES ACT
The only sales of equity securities by the company during the first
quarter ended March 31, 2004, were through the issuances of shares of common
stock pursuant to option exercises. There was only one such set of exercises
relating to options granted in July, 2000, under the company's 1989 Stock Option
Plan to 13 individuals, including the company's officers, directors and certain
employees, and including the CEO and President and one other director of
Dialysis Corporation of America. There were an aggregate of 234,671 shares
issued to these individuals upon the option exercises, each at a $1.38 per share
exercise price based upon bonuses granted by the board of directors.
The common stock issued by the company pursuant to the option exercises
discussed above was not registered under the Securities Act of 1933 (the
"Securities Act"), and was based on the Section 4(2) non-public offering
exemption from the registration requirements of the Securities Act. Each of the
individuals, of which there was a limited number, is an officer, director and/or
employee of the company, two of whom included the CEO, President and director,
and another director of Dialysis Corporation of America, and is sophisticated
and knowledgeable about and has access to information concerning the company,
its operations, financial condition and management. Restrictive legends
indicating the non-transferability of the shares have been placed on the common
stock certificates, and stop-transfer instructions placed against such shares
with our transfer agent. The shares of common stock are restricted securities as
defined in Rule 144(a)(3) of the Securities Act, and may not be publicly sold,
transferred or hypothecated without compliance with the registration
requirements of the Securities Act or an available except therefrom.
PURCHASES OF EQUITY SECURITIES BY OR ON BEHALF OF THE COMPANY DURING THE FIRST
QUARTER ENDED MARCH 31, 2004
The company has a common stock repurchase program which it announced in
December, 2002, for the repurchase of up to approximately 1,000,000 shares at
the then current market price of approximately $1.20 per share. The repurchase
program was reiterated in September, 2003, and continues, but repurchases are
unlikely at the current market prices. The closing price of our common stock on
March 13, 2004 was $3.14. Approximately 952,000 shares of common stock may yet
be purchased under this repurchase program.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certifications of the Principal Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934.
31.2 Certifications of Principal Financial Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of
1934.
29
32 Section 1350 Certifications
32.1 Certifications of the Chief Executive Officer and the
Principal Financial Officer pursuant to Rule 13a-14(b)
of the Securities Exchange Act of 1934 and U.S.C.
Section 1350.
(b) Reports on Form 8-K
A Current Report on form 8-K dated January 6, 2004 was filed
on January 13, 2004 reporting information pursuant to Item 4,
"Change in Registrant's Certifying Accountant."
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.
MEDICORE, INC.
By /s/ DANIEL R. OUZTS
------------------------------
DANIEL R. OUZTS, Vice President
(Finance), Principal
Financial Officer and Treasurer
Dated: May 14, 2004
30
EXHIBIT INDEX
Exhibit No.
- -----------
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certifications of the Principal Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certifications of Principal 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
Principal Financial Officer pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934 and U.S.C. Section 1350.