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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 September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-6906
MEDICORE, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-0941551
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2337 West 76th Street, Hialeah, Florida 33016
- ---------------------------------------- ----------
(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 mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [x] or No [ ]
Common Stock Outstanding
Common Stock, $.01 par value -6,592,775 shares as of October 31, 2002.
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Income (Unaudited) for the
three months and nine months ended September 30, 2002 and September 30, 2001
include the accounts of the Registrant and all its subsidiaries.
Item 1. Financial Statements
- ------ --------------------
1) Consolidated Condensed Statements of Income for the three months and
nine months ended September 30, 2002 and September 30, 2001.
2) Consolidated Condensed Balance Sheets as of September 30, 2002 and
December 31, 2001.
3) Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 2002 and September 30, 2001.
4) Notes to Consolidated Condensed Financial Statements as of September
30, 2002.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
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 1. Legal Proceedings
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Item 6. Exhibits and Reports on Form 8-K
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PART I -- FINANCIAL INFORMATION
---------------------------------
Item 1. Financial Statements
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MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Sales:
Product sales $ 215,550 $ 239,736 $ 677,270 $ 652,416
Medical service revenues 6,698,140 5,034,559 18,501,663 13,129,853
----------- ----------- ----------- -----------
Total sales 6,913,690 5,274,295 19,178,933 13,782,269
Other income 208,350 313,986 649,767 655,764
----------- ----------- ----------- -----------
7,122,040 5,588,281 19,828,700 14,438,033
Cost and expenses:
Cost of sales:
Cost of product sales 114,927 144,397 401,777 682,742
Cost of medical services 3,980,171 3,166,574 11,091,883 8,430,073
----------- ----------- ----------- -----------
Total cost of sales 4,095,098 3,310,971 11,493,660 9,112,815
Selling, general and administrative
expenses 2,194,045 1,819,506 6,415,588 5,830,190
Provision for doubtful accounts 184,183 180,552 612,366 376,635
Interest expense 69,618 56,313 188,148 164,641
----------- ----------- ----------- -----------
6,542,944 5,367,342 18,709,762 15,484,281
Income (loss) from continuing
operations before income taxes,
minority interest and equity in
affiliate earnings (loss) 579,096 220,939 1,118,938 (1,046,248)
Income tax provision (benefit) 221,307 (48,929) 459,130 (857,805)
----------- ----------- ----------- -----------
Income (loss) from continuing
operations before minority interest
and equity in affiliate earnings (loss) 357,789 269,868 659,808 (188,443)
Minority interest in income of
consolidated subsidiaries 179,168 70,887 390,255 197,567
Equity in affiliate earnings (loss) (2,232) 4,738 58,093 (41,653)
Net income (loss) from continuing
operations 176,389 203,719 327,646 (427,663)
Discontinued operations:
Loss from operations of electro-
mechanical manufacturing operations,
net of applicable income tax
provision of $25,000 in 2001 --- --- --- (962,814)
----------- ----------- ----------- -----------
Gain on disposal of electro-mechanical
manufacturing operations, net of
applicable income taxes of
$1,600,000 in 2001 --- --- --- 2,605,175
Net income $ 176,389 $ 203,719 $ 327,646 $ 1,214,698
=========== =========== =========== ===========
Earnings per share:
Basic $.03 $.03 $.05 $.20
==== ==== ==== ====
Diluted $.02 $.03 $.04 $.20
==== ==== ==== ====
See notes to consolidated condensed financial statements.
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 30,
2002 2001(A)
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,034,428 $10,359,372
Accounts receivable, less allowances of $924,000 at
September 30, 2002 and $753,000 at December 31, 2001 3,953,605 4,054,718
Note receivable 2,110,000 2,000,000
Receivable from sale of Techdyne 1,100,000 1,100,000
Inventories, less allowance for obsolescence of $155,000
at September 30, 2002 and $160,000 at December 31, 2001 1,149,518 976,596
Prepaid expenses and other current assets 1,683,096 975,894
Deferred income taxes 372,000 372,000
----------- -----------
Total current assets 18,402,647 19,838,580
Property and equipment:
Land and improvements 1,027,108 1,027,108
Building and building improvements 3,219,827 3,121,406
Equipment and furniture 4,973,174 4,728,377
Leasehold improvements 2,458,713 2,270,034
----------- -----------
11,678,822 11,146,925
Less accumulated depreciation and amortization 4,223,136 3,601,794
----------- -----------
7,455,686 7,545,131
Receivable from sale of Techdyne 295,000 1,400,000
Deferred income taxes 166,000 166,000
Other assets 405,150 360,541
Goodwill 923,140 523,140
----------- -----------
$27,647,623 $29,833,392
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 876,738 $ 1,629,391
Accrued expenses and other current liabilities 2,755,113 2,422,805
Current portion of long-term debt 1,339,000 370,000
Income taxes payable 111,239 2,322,736
----------- -----------
Total current liabilities 5,082,090 6,744,932
Long-term debt 1,881,242 3,123,645
Deferred income taxes 688,000 688,000
Minority interest in subsidiaries 3,640,871 3,242,046
Commitments
Stockholders' equity:
Common stock, $.01 par value; authorized 12,000,000 shares;
6,592,775 shares issued and outstanding at September 30, 2002;
6,600,275 shares issued and outstanding at December 31, 2001 65,927 66,002
Capital in excess of par value 12,799,978 12,806,898
Retained earnings 3,489,515 3,161,869
----------- -----------
Total stockholders' equity 16,355,420 16,034,769
----------- -----------
$27,647,623 $29,833,392
=========== ===========
(A) Reference is made to the company's Annual Report on Form 10-K for the
year ended December 31, 2001 filed with the Securities and Exchange
Commission in March, 2002.
See notes to consolidated condensed financial statements.
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
---------------------------
2002 2001
---- ----
Operating activities:
Net income $ 327,646 $ 1,214,698
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 838,705 1,289,487
Amortization 3,485 99,862
Bad debt expense 612,366 480,634
Provision for inventory obsolescence (20,000) 349,805
Write-off of goodwill --- 52,471
Minority interest 390,255 (183,751)
Gain on sale of Techdyne --- (2,605,173)
Equity in affiliate (earnings) loss (58,093) 41,654
Stock and option compensation 3,750 1,032,550
Subsidiary forgiveness of stock option notes --- 207,825
Increase (decrease) relating to operating activities from:
Accounts receivable (511,253) (1,443,021)
Inventories (152,922) 711,046
Prepaid expenses and other current assets (707,202) (497,766)
Accounts payable (752,653) (903,210)
Accrued expenses and other current liabilities 632,308 472,579
Income taxes payable (2,211,497) (987,982)
Loan receivable from Techdyne --- (2,772)
----------- -----------
Net cash used in operating activities (1,605,105) (671,064)
Investing activities:
Additions to property and equipment, net of minor disposals (531,110) (1,090,738)
Net proceeds from sale of Techdyne --- 9,852,114
Earn-out payment on sale of Techdyne 1,105,000 ---
Acquisition of dialysis center (550,000) ---
Notes receivable (110,000) 200,000
Investment in affiliate (8,000) (170,227)
Loans to subsidiary medical director practice --- (20,332)
Subsidiary minority interest acquisition payment (300,000) (300,000)
Sale of minority interest in subsidiaries 8,570 ---
Other assets 17,999 (20,378)
----------- -----------
Net cash (used in) provided by investing activities (367,541) 8,450,439
Financing activities:
Line of credit net borrowings (payments) (83,373) 493,292
Proceeds from long-term borrowings --- 787,500
Payments on long-term borrowings (258,180) (485,874)
Repurchase of company stock (10,745) (39,386)
Repurchase of stock by subsidiaries --- (85,221)
Exercise of stock options --- 1,150
Deferred financing costs --- (11,882)
----------- -----------
Net cash (used in) provided by financing activities (352,298) 659,579
Effect of exchange rate fluctuations on cash --- 32,478
----------- -----------
(Decrease) increase in cash and cash equivalents (2,324,944) 8,471,432
Cash and cash equivalents at beginning of period 10,359,372 1,464,543
----------- -----------
Cash and cash equivalents at end of period $ 8,034,428 $9,935,975
=========== ===========
See notes to consolidated condensed financial statements.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies
Consolidation
The Consolidated Financial Statements include the accounts of Medicore,
Inc., and Medicore's 62% owned subsidiary, Dialysis Corporation of America
("DCA"). Medicore and its subsidiaries are collectively referred to as the
"company." All material intercompany accounts and transactions have been
eliminated in consolidation. DCA 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.
On June 27, 2001, the company sold its 71.3% interest in its electro-
mechanical manufacturing subsidiary, Techdyne, Inc. ("Techdyne") to Simclar
International Limited ("Simclar"). All material intercompany accounts and
transactions have been eliminated in consolidation. Techdyne's results of
operations are shown as discontinued operations in the Consolidated
Condensed Statement of Operations, requiring reclassification of amounts
related to Techdyne. See Note 9.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes.
The company's principal estimates are for estimated uncollectible
accounts receivable as provided for in our allowance for doubtful accounts,
estimated useful lives of depreciable assets, estimates for patient revenues
from non-contracted payors, and the valuation allowance for deferred tax
assets based on the estimated realizability of deferred tax assets. Our
estimates are based on historical experience and assumptions believed to be
reasonable given the available evidence at the time of the estimates. Actual
results could differ from those estimates.
Revenue Recognition
The company follows the guidelines of SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB101). Medical service
revenues are recorded as services are rendered. Product sales are recorded
pursuant to agreed upon shipping terms.
Accrued Expenses
Accrued expenses is comprised as follows:
September 30, December 30,
2002 2001
------------- ------------
Accrued compensation $ 801,509 $ 813,664
Due to insurance companies 1,035,550 671,935
Payable subsidiary minority interest acquisition --- 300,000
Other 918,054 637,206
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$ 2,755,113 $ 2,422,805
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MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Other Income
Other income is comprised as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income $ 86,080 $ 171,298 $ 263,464 $ 300,939
Interest income from discontinued
operations --- --- --- 7,997
Rental income 74,029 80,069 220,198 163,154
Rental income from discontinued
operations --- --- --- 73,170
Management fee income 40,884 51,013 135,029 89,261
Other 7,357 11,606 31,076 21,243
----------- ----------- ----------- -----------
$ 208,350 $ 313,986 $ 649,767 $ 655,764
=========== =========== =========== ===========
Earnings Per Share
Diluted earnings per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants, using the treasury stock method and average market price.
Following is a reconciliation of amounts used in the basic and diluted
computations.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income, numerator-basic computation $ 176,389 $ 203,719 $ 327,646 $ 1,214,698
Adjustment due to subsidiaries'
dilutive securities (23,937) (1,288) (57,809) (1,253)
----------- ----------- ----------- -----------
Net income as adjusted, numerator-
diluted computation $ 152,452 $ 202,431 $ 269,837 $ 1,213,445
=========== =========== =========== ===========
Weighted average shares-denominator
basic computation 6,599,786 6,697,540 6,600,110 6,055,672
Effect of dilutive stock options 10,071 --- 105,526 ---
----------- ----------- ----------- -----------
Weighted average shares, as adjusted-
denominator diluted computation 6,609,857 6,697,540 6,705,636 6,055,672
=========== =========== =========== ===========
Earnings per share:
Basic $.03 $.03 $.05 $.20
==== ==== ==== ====
Diluted $.02 $.03 $.04 $.20
==== ==== ==== ====
The company's potentially dilutive securities consist of stock options.
See Note 5.
Comprehensive Income
Comprehensive income consists of net income, and in 2001, foreign
currency translation adjustments. Below is a detail of comprehensive income
for the three months and nine months ended September 30, 2002 and September
30, 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 176,389 $ 203,719 $ 327,646 $ 1,214,698
Other comprehensive income (loss):
Foreign currency translation
adjustments --- --- --- (39,416)
Reclassification adjustment foreign
currency translation adjustments
upon sale of subsidiary --- --- --- 197,934
----------- ----------- ----------- -----------
Total other comprehensive income --- --- --- 158,518
----------- ----------- ----------- -----------
Comprehensive income $ 176,389 $ 203,719 $ 327,646 $ 1,373,216
=========== =========== =========== ===========
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
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 DCA's acquisition of minority interest in
August 2001 is not being amortized for book purposes and is subject to the
impairment testing provisions of FAS 142 commencing in 2002. This goodwill
is also subject to the transitional goodwill testing provisions of FAS 142
which require testing during the first six months of 2002 for previously
recorded goodwill, which testing indicated no impairment for this goodwill.
The goodwill resulting from the company's acquisition of a Georgia dialysis
center in April 2002 is not being amortized for book purposes and is subject
to the annual impairment testing provisions of FAS 142. The company is
evaluating the impact of the impairment testing required by FAS 142, but does
not expect that it will have a significant effect on its consolidated results
of operations, financial position or cash flows.
The pro forma consolidated condensed financial information below reflects
the company's operating results excluding amortization of goodwill for
goodwill which was amortized during the nine months ended September 30, 2001.
SUMMARY PRO FORMA INFORMATION
(Unaudited)
Nine Months Ended
September 30, 2001
---------------------------------------
Goodwill Pro
Actual Amortization Forma
----------- ------------ -----------
Net loss from continuing operations $ (427,663) $ 6,975 $ (420,688)
Loss from discontinued operations, net of tax (962,814) 88,818 (873,996)
Gain on disposal of discontinued operations,
net of tax 2,605,175 --- 2,605,175
----------- ----------- -----------
Net income $ 1,214,698 $ 95,793 $ 1,310,491
=========== =========== ===========
Earnings per share:
Basic $.20 $.22
==== ====
Diluted $.20 $.22
==== ====
Pursuant to Statement of Financial Accounting Standards No. 142, since
the company's remaining goodwill was acquired after June 30, 2001 it will
not be amortized but will be subject to impairment testing commencing in
2002. See Note 10.
New Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146) which addresses the
accounting and reporting for costs associated with exit or disposal activities.
FAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred rather than
being recognized at the date of an entity's commitment to an exit plan, which
had been the method of recognition under Emerging Issues Task Force Issue No.
94-3, which FAS 146 supercedes. FAS 146, which will be effective for exit or
disposal activities initiated after December 31, 2002, is not expected to have
a material impact on the company's results of operation, financial position or
cash flows.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 2--Interim Adjustments
The financial summaries for the three months and nine months ended
September 30, 2002 and September 30, 2001 are unaudited and include, in the
opinion of management of the company, all adjustments (consisting of normal
recurring accruals) necessary to present fairly the earnings for such periods.
Operating results for the three months and nine months ended September 30,
2002 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 2002.
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
for the year ended December 31, 2001.
NOTE 3--Long-Term Debt
The company's medical products division has a $350,000 line of credit
with a local Florida bank, with interest at prime plus 1% payable monthly.
This line of credit matures January 22, 2003 and is secured by the accounts
receivable and inventory of the company's medical products division. The
line had an outstanding balance of approximately $102,000 at September 30,
2002 and $186,000 at December 31, 2001.
In December 1988, DCA obtained a $480,000 fifteen year mortgage through
November 2003 on its building in Lemoyne, Pennsylvania with interest at 1%
over the prime rate. The remaining principal balance under this mortgage
amounted to approximately $37,000 and $61,000 at September 30, 2002 and
December 31, 2001, respectively. Also in December 1988, DCA obtained a
$600,000 mortgage on its building in Easton, Maryland on the same terms as
the Lemoyne property. The remaining principal balance under this mortgage
amounted to approximately $47,000 and $77,000 at September 30, 2002 and
December 31, 2001, respectively.
DCA through its subsidiary, DCA of Vineland, LLC, pursuant to a December
3, 1999 loan agreement obtained a $700,000 development and equipment line of
credit with interest at 8.75% through December 2, 2001 and 1.5% over the
prime rate thereafter which is secured by the acquired assets of DCA of
Vineland and a second mortgage on DCA's real property in Easton, Maryland on
which an affiliated bank holds the first mortgage. Outstanding borrowings
were subject to monthly payments of interest only through December 2, 2001
with monthly payments thereafter of $2,917 principal plus interest with any
remaining balance due September 2, 2003. This loan, which is classified as
current at September 30, 2002 due to its September, 2003 maturity, had an
outstanding balance of approximately $671,000 and $700,000 at September 30,
2002 and December 31, 2001, respectively.
In April 2001, DCA obtained a $788,000 five-year mortgage through April
2006 on its building in Valdosta, Georgia with interest initially at 8.29%
which was revised to 7.59% in March 2002. Payments are $6,800 including
principal and interest commencing May 2001 with a final payment consisting
of a balloon payment and any unpaid interest due April 2006. This mortgage
is guaranteed by the company. The remaining principal balance under this
mortgage amounted to approximately $760,000 and $776,000 at September 30,
2002 and December 31, 2001, respectively.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 3--Long-Term Debt--(Continued)
The company's debt included that of Techdyne and its subsidiaries Lytton
and Techdyne (Europe) until the company sold its interest in Techdyne in June
2001. See Consolidation under Note 1 above and Note 9.
DCA has an equipment purchase agreement for kidney dialysis machines at
its facilities with interest at rates ranging from 4.14% to 10.48% pursuant
to various schedules extending through August 2006. There was additional
financing of $68,000 during the first nine months of 2002 and $536,000
additional financing for the same period of the preceding year. Financing
under this agreement represents a noncash financing activity, which is a
supplemental disclosure, required by FAS 95 "Statement of Cash Flows." The
remaining principal balance under this agreement amounted to approximately
$1,597,000 and $1,678,000 at September 30, 2002 and December 31, 2001,
respectively.
The prime rate was 4.75% as of September 30, 2002 and December 31, 2001.
Interest payments on debt amounted to approximately $112,000 and $196,000
for the three months and nine months ended September 30, 2002 and $78,000 and
$541,000 for the same periods of the preceding year.
NOTE 4--Income Taxes
DCA files separate federal and state income tax returns with its income
tax liability reflected on a separate return basis.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For financial reporting
purposes, a valuation allowance has been recognized to offset a portion of the
deferred tax assets.
Income tax payments were approximately $149,000 and $2,788,000 for the
three months and nine months ended September 30, 2002 and $21,000 and $238,000
for the same periods of the preceding year.
NOTE 5--Stock Options
On June 11, 1997, the board of directors granted a five-year non-qualified
stock option under the company's 1989 Stock Option Plan for 35,000 shares
immediately exercisable with an exercise price of $3.75 to a new board member,
which exercise price was reduced to $2.38 per share on September 10, 1997, the
market price on that date. That option expired June 10, 2002. On July 27,
2000, the board granted 820,000 five-year non-qualified stock options under
the 1989 Plan to 17 officers, directors and employees of the company and its
subsidiaries. The options are exercisable at $1.38, the market price on the
date of grant, through July 26, 2005. In June 2001, two of those options for
115,000 shares were exercised with cash payment of the par value and the
balance due on exercise with a promissory note then forgiven resulting in an
expense of approximately $158,000. There are 704,000 options outstanding under
the 1989 Plan at September 30, 2002.
On February 17, 2000, the company granted 150,000 non-qualified and
325,000 incentive stock options under its 2000 Stock Option Plan. The
options are exercisable for three years at $3.25 to February 16, 2003 and
remain outstanding at September 30, 2002.
In January, 2000, the company issued options to purchase 150,000
shares of its common stock exercisable as a finder's fee in conjunction
with the company's investment in Linux Global Partners exercisable at
$3.00 per share through January 31, 2002. One of these options for 25,000
shares has been extended through January 31, 2003. See Note 8.
In June, 1998, DCA's board of directors granted an option under the now
expired 1995 Stock Option Plan to its then new board member for 5,000 shares
exercisable at $2.25 per share through June 9, 2003.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 5--Stock Options--(Continued)
In April, 1999, DCA adopted a stock option plan pursuant to which its
board of directors granted 800,000 options exercisable at $1.25 per share to
certain of its officers, directors, employees and consultants with 340,000
options exercisable through April 20, 2000 and 460,000 options exercisable
through April 20, 2004, of which 60,000 options to date have been cancelled.
In April 2000, the 340,000 one-year options were exercised for which DCA
received cash payment of the par value and the balance in three-year
promissory notes with interest at 6.2%. On January 2, 2001, DCA's board of
directors granted to DCA's president an option for 165,000 shares exercisable
at $1.25 per share with 66,000 options vested as of January 2002 and 33,000
options vesting January 1 for each of the next three years.
In September, 2001, DCA's board of directors granted 75,000 five-year
options exercisable at $1.50 per share through September 5, 2006 to certain
officers, directors and key employees. 15,000 of the options vested
immediately with the remaining 60,000 options to vest 15,000 options each
September 5 commencing September 5, 2002.
In March 2002, DCA's board of director's granted a five-year option for
30,000 shares exercisable at $3.15 per share through February 28, 2007 to an
officer. The option vests 7,500 shares each February 28 from 2003 through
2006.
In May, 2002, DCA's board of directors granted five-year options for
shares of DCA common stock to employees, most options for 500 shares with
two options for 1,500 shares, exercisable at $4.10 per share through May 28,
2007. All options vest on May 29, 2004.
NOTE 6--Commitments and Contingencies
In May 2002, DCA purchased land on which it is constructing a facility
for a new dialysis center in Cincinnati, Ohio. Upon completion, DCA has
agreed to sell the property to a corporation owned by one of the minority
members of DCA of Cincinnati, DCA's subsidiary which will operate that
dialysis facility, and who will be the medical director of that dialysis
facility. The cost of the land and construction costs are included in
Prepaid Expenses and Other Current Assets.
Effective January 1, 1997, DCA established a 401(k) savings plan (salary
deferral plan) with an eligibility requirement of one year of service and 21
year old age requirement. DCA has made no contributions under this plan as
of September 30, 2002.
Lytton, Incorporated, a subsidiary of Techdyne, sponsors a 401(k) Profit
Sharing Plan adopted by the company and Techdyne as participating employers
effective July 1, 1998. The discretionary profit sharing and matching expense
of the company amounted to approximately $2,000 and $7,000 for the three
months and nine months ended September 30, 2002 and for the same periods of
the preceding year. Techdyne and Lytton are reflected in discontinued
operations for 2001. Subsequent to the sale of its interest in Techdyne in
June 2001, the company remains as a participating employer in this multi-
employer plan. See Notes 1 and 9.
NOTE 7--Business Segment Data
The following summarizes information about the company's three business
segments, dialysis treatment centers (medical services), medical products and
new technology. The medical products and new technology divisions have been
shown separately even though not required by FAS 131. Corporate activities
include general corporate revenues and expenses. Intersegment sales, of
which there were none for the periods presented, are generally intended to
approximate market price. The company sold its interest in Techdyne in June
2001 for which the operating results have been reclassified as discontinued
operations and accordingly are not included in the business segment data below.
See Notes 1 and 9.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 7--Business Segment Data--(Continued)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2002 2001 2002 2001
---- ---- ---- ----
BUSINESS SEGMENT REVENUES
Medical products $ 215,550 $ 239,740 $ 683,182 $ 652,435
Medical services 6,800,925 5,148,585 18,824,294 13,508,005
New technology 51,529 79,255 153,752 185,775
Corporate 54,631 123,901 170,268 214,529
Elimination of corporate rental charges
to medical products --- --- --- (1,830)
Elimination of medical services interest
charge to new technology --- --- --- (109,108)
Elimination of medical services
interest charge to corporate (595) (3,200) (2,796) (11,773)
----------- ----------- ----------- -----------
$ 7,122,040 $ 5,588,281 $19,828,700 $14,438,033
BUSINESS SEGMENT PROFIT (LOSS)
Medical products $ 1,878 $ (56,930) $ (32,112) $ (390,107)
Medical services 653,420 286,534 1,444,346 664,967
New technology 51,529 76,667 153,752 76,667
Corporate (127,731) (85,332) (447,048) (1,397,775)
----------- ----------- ----------- -----------
$ 579,096 $ 220,939 $ 1,118,938 $(1,046,248)
=========== =========== =========== ===========
NOTE 8--Investment
During 2000, the company loaned an aggregate of $2,200,000 with a 10%
annual interest rate to Linux Global Partners, Inc. ("LGP"), a private
company investing in Linux software companies and attempting, through its
subsidiary, to initiate the development and marketing of a Linux desktop
software system. The loan is collateralized with LGP's investments in other
Linux software companies, in which securities the company has a secured
interest. During that period, the company also acquired an 8% ownership
interest in LGP. The company's initial investment of $120 in LGP is accounted
for at cost. A substantial portion of the loans were originally scheduled to
mature January 26, 2001. The company borrowed the funds for its financing of
LGP from DCA under the same terms and at the same interest rate as its loan to
LGP. The company agreed to extend the maturity of its notes receivable from
LGP on several occasions, first to June 30, 2001 for additional consideration
consisting of 400,000 additional shares of LGP stock representing a 2% interest
in LGP and the right to convert all or part of the loans into convertible
series A preferred shares of LGP. The company transferred 100,000 of its LGP
shares to DCA in consideration for DCA's extension of the loan to us. This
increased DCA's ownership in LGP to 400,000 shares, including 300,000 LGP
shares previously securing a note receivable written off by DCA with a cost
basis of approximately $140,000, which is included in deferred expenses and
other assets. Additionally, LGP agreed to repay all monies owed to us prior
to any other use of LGP private placement proceeds if we chose not to convert
the loans. On May 14, 2001, LGP repaid the $200,000 August, 2000 loan plus
$15,500 accrued interest. The company made payment of $215,500 to DCA. In
June, 2001, LGP paid $100,000 toward the accrued interest on the remaining
$2,000,000 outstanding notes. At the end of June, 2001, the company repaid
DCA the remaining outstanding loan of $2,000,000 and accrued interest of
$279,000. On August 2, 2001, the company entered into a loan extension
agreement with LGP extending the maturity date of the loans pending completion
of an LGP proposed private placement, in consideration for 50,000 LGP shares
of common stock per month until the loan is fully satisfied, and repayment of
the loan based upon the earlier of $100,000 per month or 25% of the proceeds
from LGP's proposed private placement. We have received the shares but no
repayments. In September 2002, the company agreed to loan LGP up to an
additional $250,000 on the same terms as the company's existing loans to LGP,
with the company to receive 75,000 LGP shares in consideration for making the
maximum additional loan. As of September 30, 2002, the company had advanced
an additional $110,000 to LGP resulting in an outstanding loan balance of
$2,110,000. Interest on the notes amounted to approximately $52,000 and
$154,000 for the three months and nine months ended September 30,2002 and
$79,000 and $185,000 for the same periods of the preceding year. Interest
receivable on the notes from LGP amounted to approximately $435,000 at
September 30, 2002 and $282,000 at December 31, 2001 and is included in prepaid
expenses and other current assets. The company currently owns approximately
11% of LGP, and DCA owns approximately 2% of LGP.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 9--Sale of Techdyne Interest
On April 6, 2001, the company entered into an agreement with Simclar
to sell its 71.3% ownership interest in Techdyne to Simclar for $10,000,000,
with an earn-out consisting of 3% of consolidated Techdyne sales, net of
returns, allowances and bad debts for the three fiscal years commencing
January 1, 2001 with a $2,500,000 minimum and $5,000,000 maximum earn-out.
In April 2002, the company received the first earn-out payment of
approximately $1,100,000, with $1,100,000 of the remaining minimum earn-out
reflected as a current receivable and the balance as a non-current receivable.
The sale was subject to approval by the company's shareholders' which was
obtained at the company's annual shareholders' meeting on June 27, 2001, with
the sale to Simclar closing that same day. See Note 1.
The pro forma consolidated condensed financial information presented
below reflects the sale of the company's interest in Techdyne as if it had
occurred as of January 1, 2001. For purposes of pro forma statement of
operations information, no assumption has been made that expenses have been
eliminated which were included in corporate expense allocations by the company
to Techdyne and which were included in the actual results of operations of
Techdyne. No assumption has been included in the pro forma information as to
investment income to be realized from investment of the proceeds of the sale.
The summary pro forma information is not necessarily representative of what
the company's results of operations would have been if the sale had actually
occurred as of January 1, 2001 and may not be indicative of the company's
operating results for any future periods.
SUMMARY PRO FORMA INFORMATION
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2001
---- ----
Total revenues $ 5,588,000 $14,438,000
=========== ===========
Net loss $ (14,000) $(1,723,000)
=========== ===========
Loss per share:
Basic $.-- $(.28)
==== =====
Diluted $.-- $(.28)
==== ======
The company recorded a pre-tax gain on the sale of its interest in
Techdyne of approximately $4,200,000, including the $2,500,000 minimum
earn-out after estimated costs of $200,000, with estimated income taxes of
approximately $1,600,000.
The Consolidated Condensed Statements of Income reflect as discontinued
operations the results of operations of Techdyne, net of applicable taxes.
Certain reclassifications have been made to prior period amounts in accordance
with this presentation.
The company provided certain financial and administrative services to
Techdyne under a service agreement. Subsequent to the company's sale of its
71.3% ownership interest in Techdyne to Simclar on June 27, 2001, the company
continued to provide services under the agreement through July 15, 2001, the
effective date of cancellation of the agreement.
Simclar refinanced Techdyne's long-term debt and Techdyne repaid its
remaining loan payable to the company including accrued interest in October
2001. See Note 1.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE 10--Acquisitions
In August 2001, DCA acquired the 30% minority interest in DCA of So. Ga.,
LLC, giving it a 100% ownership interest, for $600,000 with $300,000 paid in
August, 2001 and $300,000 paid in August, 2002. This transaction resulted in
$523,000 of goodwill representing the excess of the $600,000 purchase price
over the $77,000 fair value of the minority interest acquired. The goodwill
will be amortized for tax purposes over a 15-year period. DCA's decision to
make this investment was based largely on the profitability of DCA of So. Ga.
The party from whom DCA acquired the minority interest has an agreement to
act as medical director of another of DCA's subsidiaries. See Note 1.
In April 2002, DCA acquired a dialysis center in Royston, Georgia for
$550,000. This transaction resulted in $400,000 goodwill representing the
excess of the $550,000 purchase price over the $150,000 fair value of the
assets acquired. The goodwill will be amortized for tax purposes over a
15-year period. DCA's decision to make this investment was based on its
expectation of future profitability resulting from its review of the dialysis
center's operations prior to making the acquisition. See Note 1.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations, commonly known as MD&A, is our attempt to provide the investor
with a narrative explanation of our financial statements, and to provide our
shareholders and investors with the dynamics of our business as seen through
our eyes as management. Generally, MD&A is intended to cover expected effects
of known or reasonably expected uncertainties, expected effects of known trends
on future operations, and prospective effects of events that have had a
material effect on past operating results. In conjunction with our discussion
of MD&A, shareholders should read the company's consolidated condensed
financial statements, including the notes, contained in this Quarterly Report
on Form 10-Q.
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q that are
not historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of the 1934. The Private Securities Litigation Reform Act of 1995
contains certain safe harbors regarding forward-looking statements. Certain
of the forward-looking statements include management's expectations,
intentions and beliefs with respect to the growth of our company, the nature
of the medical products and new technology divisions in which we are engaged,
the future and development of the dialysis industry in which our 62% owned
public subsidiary, DCA, is engaged, anticipated revenues, our business
strategies and plans for future operations, our need for sources of funding
for expansion opportunities and construction, expenditures, costs and income
and similar expenses concerning matters that are not considered historical
facts. Forward-looking statements also include our statements regarding
liquidity, anticipated cash needs and availability, and anticipated expense
levels in MD & A. Words such as "anticipate," "estimate," "expects,"
"projects," "intends," "plans," and "believes," and words and terms of
similar substance used in connection with any discussions of future operations
or financial performance, identify forward-looking statements. Such forward-
looking statements, like all statements about expected future events, are
subject to substantial risks and uncertainties that could cause actual
results to materially differ from those expressed in the statements,
including general economic, market and business conditions, opportunities
pursued by the company, competition, changes in federal and state laws or
regulations affecting our operations, and other factors discussed
periodically in our filings. Many of the foregoing factors are beyond our
control. Among the factors that could cause actual results to differ
materially are the factors detailed in the risks discussed in the "Risk
Factors" section included in our Annual Report on Form 10-K (Item 1,
"Business") as filed with the SEC, and provided to our shareholders.
Accordingly, readers are cautioned not to place too much reliance on such
forward-looking statements, which speak only as to the date made, and which
the company undertakes no obligation to revise to reflect events after the
date made.
Essential to the profitability of our dialysis operations is Medicare
reimbursement, which is at a fixed rate established by the Center for
Medicare and Medicaid Services ("CMS"). The level of DCA's, and therefore,
our revenues and profitability may be adversely affected by any potential
legislation resulting in Medicare reimbursement rate cuts. Operating costs
tend to increase over the years with the commencement of treatment at new
centers. There also may be reductions in commercial third-party reimbursement
rates. Over the last two years, Medicare rates have slightly increased, but
are not related to the increasing costs of operations. DCA is typically
reimbursed at higher rates from private payors, as well as higher payments
under negotiated contracts with hospitals for acute inpatient dialysis
services.
The healthcare industry is subject to extensive regulations of federal
and state authorities. There are a variety of fraud and abuse measures
promulgated by the government to combat waste, which include anti-kickback
regulations, extensive prohibitions relating to self-referrals, violations
of which are punishable by criminal or civil penalties, including exclusion
from Medicare and other governmental programs. There can be no assurance
that there will not be unanticipated changes in healthcare programs or laws
or that DCA will not be required to restructure its practice and will not
experience material adverse effects as a result of any such challenges or
changes.
DCA's future growth depends primarily on the availability of suitable
dialysis centers for development or acquisition in appropriate and acceptable
areas, and DCA's ability to develop these new potential dialysis centers at
costs within its budget while competing with larger companies, some of which
are public companies or divisions of public companies with greater personnel
and financial resources that have a significant advantage in acquiring and/or
developing facilities in areas targeted by DCA. Additionally, there is intense
competition for retaining qualified nephrologists who are responsible for the
supervision of the dialysis centers. There is no certainty as to when any new
centers or inpatient service contracts with hospitals will be implemented, or
the number of stations, or patient treatments such may involve, or if such
will ultimately be profitable. It has been our experience that newly
established dialysis centers, although contributing to increased revenues,
have adversely affected our results of operations due to start-up costs and
expenses with a smaller patient base until they mature.
Our venture into new technology is uncertain and competitive. We
initiated this segment in early 2000 with our investment and financing of LGP,
a private company involved with investments in Linux operating systems and
software companies and in the development of a Linux desktop software system.
LGP remains in its initial and development stage. Linux software systems
require development and financing and are subject to uncertainties as to
market acceptance, reliability, and other risks associated with new
technologies.
Results of Operations
Consolidated revenues, after reclassification of discontinued operations
due to our sale of Techdyne on June 27, 2001, increased by approximately
$1,534,000 (27%) and $5,391,000 (37%) for the three months and nine months
ended September 30, 2002 compared to the same periods of the preceding year.
Sales revenues increased by approximately $1,639,000 (31%) and $5,397,000
(39%) compared to the preceding year. See Notes 1 and 9 to "Notes to
Consolidated Condensed Financial Statements."
Other income which is comprised of interest income, rental income,
management fee income and miscellaneous other income decreased approximately
$106,000 and $6,000 for the three months and nine months ended September 30,
2002 compared to the preceding year. Interest income decreased approximately
$85,000 and $45,000 largely as a result of reduced interest rates and a
partial loan repayment by LGP in May 2001 with the decrease for the nine
months ended September 30, 2002 tempered by investment of the proceeds from
the sale of Techdyne. Management fee income, which includes a management
services agreement between DCA and its 40% owned Toledo, Ohio affiliate which
commenced operations in February 2001, and a management services agreement
with an unaffiliated Georgia dialysis center effective September 2002,
decreased by $10,000 for the three months ended September 30, 2002 and
increased by $46,000 for the nine months ended September 30, 2002 compared
to the same periods of the preceding year. Miscellaneous other income
decreased by $4,000 for the three months ended September 30, 2002 and
increased by $10,000 for the nine months ended September 30, 2002 compared
to the same periods of the preceding year. Rental income decreased by
$6,000 and $16,000 as a result of a lease renegotiation with Techdyne which
will provide greater overall rent income to the company over the remaining
lease term. See Notes 1 and 9 to "Notes to Consolidated Condensed Financial
Statements."
Medical product sales revenues decreased approximately $24,000 (10%) for
the three months ended September 30, 2002 and increased approximately $25,000
(4%) for the nine months ended September 30, 2002 compared to the same
periods of the preceding year. Management is attempting to be more
competitive in lancet sales through overseas purchases and is attempting to
expand its customer base. The medical products division has expanded its
product line with several diabetic disposable products; however, demand to
date for these products has been less than anticipated. No assurance can be
given that efforts to increase sales will be successful.
Medical service revenues, representing the revenues of our DCA dialysis
division, increased approximately $1,664,000 (33%) and $5,372,000 (41%) for
the three months and nine months ended September 30, 2002 compared to the
same periods of the preceding year. This increase includes increased revenues
of our Pennsylvania dialysis centers of approximately $471,000 and $1,275,000;
including revenues of approximately $282,000 and $604,000 for our new
Pennsylvania facility which commenced operations in January 2002; decreased
revenues of approximately $138,000 and increased revenues of approximately
$221,000 for our New Jersey centers, and increased revenues of approximately
$1,331,000 and $3,849,000 for our Georgia centers, including two which became
operational in the third quarter of 2001 and one which was acquired in April
2002. Revenues for the nine months ended September 30, 2002 also included
$27,000 of consulting fees. Although the operations of additional centers
have resulted in additional revenues, some are still in the developmental
stage and, accordingly, their operating results will adversely affect DCA's
and our results of operations until they achieve a sufficient patient count
to sustain profitable operations.
Cost of goods sold as a percentage of consolidated sales, after
reclassification of discontinued operations due to our sale of Techdyne,
amounted to 59% and 60% for the three months and nine months ended September
30, 2002 compared to 63% and 66% for the same periods of the preceding year.
See Notes 1 and 9 to "Notes to Consolidated Condensed Financial Statements."
Cost of goods sold for the medical products division as a percentage of
sales amounted to 53% and 59% for the three months and nine months ended
September 30, 2002 compared to 60% and 105% for the same periods of the
preceding year. Cost of goods sold for the nine months ended September 30,
2001 included a provision of $160,000 for obsolete and unusable inventory in
the second quarter of 2001 without which cost of goods sold would have
amounted to 80% for the nine months ended September 30, 2001. Changes in
cost of goods sold for this division resulted from a change in product mix and
a shift to overseas purchase of lancets.
Cost of medical services sales as a percentage of sales decreased to 59%
and 60% for the three months and nine months ended September 30, 2002,
compared to 63% and 64% for the same periods of the preceding year as a
result of decreases in both supply costs and payroll costs as a percentage of
sales.
Selling, general and administrative expenses, after reclassification of
discontinued operations due to our sale of Techdyne, increased $375,000 and
$585,000 for the three months and nine months ended September 30, 2002
compared to the same periods of the preceding year. Selling, general and
administrative expenses for the nine months ended September 30, 2001 included
$875,000 of stock compensation, $158,000 from forgiveness of stock options
notes and $160,000 officer bonus compensation, recorded in the second quarter
of 2001. Without these unusual items in the preceding year, selling, general
and administrative expenses would have increased $1,779,000 for the nine
months ended September 30, 2002 compared to the same period of the preceding
year. This increase reflects operations of DCA's new dialysis centers in
Georgia and Pennsylvania, and the cost of additional support personnel for
DCA. As a percent of consolidated sales revenue, without the unusual prior
year items, selling, general and administrative expenses remained relatively
stable amounting to 32% and 33% for the three months and nine months ended
September 30, 2002 compared to 34% for the same periods of the preceding year.
See Notes 1 and 9 to "Notes to Consolidated Condensed Financial Statements."
Provision for doubtful accounts receivable increased approximately $4,000
and $236,000 for the three months and nine months ended September 30, 2002
compared to the same periods of the preceding year. The provision for doubtful
accounts amounted to 3% of sales for the three months and nine months ended
September 30, 2002 and for the same periods of the preceding year. This
increase reflects different collectibility levels associated with DCA's
operations in different geographic areas.
Interest expense, after reclassification of discontinued operations due
to our sale of Techdyne, increased by approximately $13,000 and $24,000 and
for the three months and nine months ended September 30, 2002 compared to the
same periods of the preceding year. The increase is largely a result of
additional DCA equipment financing agreements, and DCA's April, 2001 Georgia
mortgage with the effect of the increased borrowings offset somewhat by lower
interest rates. See Notes 1, 3 and 9 to "Notes to Consolidated Condensed
Financial Statements."
The prime rate was 4.75% at September 30, 2002 and December 31, 2001.
Equity in affiliate earnings (loss) represents equity in the results
of operations of DCA's Ohio affiliate, in which DCA has a 40% ownership
interest. This dialysis center, which commenced operations in February,
2001, was profitable for the first nine months of 2002 but operated at a
loss for the same period of the preceding year.
Liquidity and Capital Resources
Working capital totaled $13,321,000 at September 30, 2002, which reflects
an increase of $227,000 (2%) during the nine months ended September 30, 2002.
The change in working capital included a decrease in cash of $2,325,000,
including net cash used in operating activities of $1,605,000 (which
includes income tax payments of approximately $2,788,000 during the first
nine months of 2002), net cash used in investing activities of $368,000
(including additions to property, plant and equipment of $531,000,
acquisition of a Georgia dialysis center for $550,000, a $300,000 payment due
on a prior year minority interest acquisition and the first earn-out payment
on the sale of Techdyne of $1,105,000; see Notes 9 and 10 to "Notes to
Consolidated Condensed Financial Statements"), and net cash used in financing
activities of $352,000 (including payments on long-term debt of $258,000 and
net line of credit payments of $83,000).
During 2000, we acquired an 8% interest in LGP, which interest is now
approximately 11% in addition to which DCA holds approximately a 2% interest,
and loaned LGP $2,200,000 at an annual interest rate of 10%. We borrowed the
funds for the loans from DCA, with the loans having the same terms as our
loans to LGP.
In May, 2001, LGP made a payment of $215,500 to us for the August, 2000
$200,000 loan plus $15,500 accrued interest. We paid a like amount to DCA.
In June, 2001, LGP paid $100,000 toward the accrued interest due on the
remaining outstanding notes. In June, 2001, we repaid DCA the remaining
$2,000,000 in loans it made to us with approximately $279,000 of accrued
interest. On August 2, 2001, we entered into a loan extension agreement with
LGP extending the maturity date of the loans in consideration for additional
LGP shares of common stock, and repayment of the loan based upon the earlier
of $100,000 per month or 25% of the proceeds from an LGP proposed private
placement. We have received the shares but not any repayments. In September
2002, we agreed to loan up to an additional $250,000 to LGP in consideration
for additional LGP shares. The outstanding loan balance was $2,110,000 as of
September 30, 2002, including $110,000 of September 2002 advances. Interest
on the notes amounted to $52,000 and $154,000 for the three months and nine
months ended September 30, 2002 compared to $79,000 and $185,000 for the same
periods of the preceding year. See Note 8 to "Notes to Consolidated Condensed
Financial Statements."
DCA has mortgages with a Maryland bank on two buildings, one in Lemoyne,
Pennsylvania and the other in Easton, Maryland, with a combined balance of
$84,000 at September 30, 2002 and $138,000 at December 31, 2001. DCA through
its subsidiary, DCA of Vineland, LLC, has a $700,000 development and equipment
loan secured by the acquired assets of DCA of Vineland and a second mortgage
on DCA's real property in Easton, Maryland. This loan had an outstanding
balance of $671,000 at September 30, 2002 and $700,000 at December 31, 2001.
In April 2001, DCA obtained a $788,000 five-year mortgage on its building in
Valdosta, Georgia which had an outstanding principal balance of $760,000 at
September 30, 2002 and $776,000 at December 31, 2001. DCA has an equipment
financing agreement for kidney dialysis machines for its facilities which had
an outstanding balance of $1,579,000 at September 30, 2002 and $1,678,000 at
December 31, 2001. See Note 3 to "Notes to Consolidated Condensed Financial
Statements."
DCA needs capital primarily for the development of outpatient dialysis
centers. The construction of a 15 station facility, typically the size of
DCA'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 normally more expensive than construction,
although acquisition provides an immediate ongoing operation. DCA plans to
expand its operations primarily through development of new centers.
Development of a dialysis facility to initiate operations typically takes
four to six months and usually 12 months or longer to generate income. DCA
opened its eleventh center in Mechanicsburg, Pennsylvania in January 2002,
and completed the acquisition of a dialysis unit in Georgia in April 2002
for $550,000. DCA is developing two new facilities, one in Ohio and one in
Maryland, and is in the planning stage for a new center in Indiana. In May
2002, we purchased land for $172,000 for construction of a facility to house
our new Ohio dialysis operation. We have agreed to construct the facility,
and upon completion we will sell the completed facility to a corporation
owned by one of the minority members and who will be the medical director of
the proposed facility, and will lease the facility from that corporation.
DCA acquired the remaining 30% minority interest in its DCA of So. Ga., LLC
subsidiary in August, 2001 for $600,000 with $300,000 paid at closing in
August, 2001 and $300,000 paid in August, 2002, giving DCA a 100% ownership
interest in that subsidiary. See Notes 1 and 10 to "Notes to Consolidated
Condensed Financial Statements."
DCA is in different phases of negotiations for additional outpatient
centers. No assurance can be given that DCA will be successful in
implementing its growth strategy or that financing will be available to
support such expansion. A substantial portion of the proceeds from the sale
of Techdyne are anticipated to be used for expansion of our dialysis
operations.
DCA is in the process of developing information technology for
compliance with confidentiality of patient records and information under the
Health Insurance Portability and Accountability Act. At present, capital
expenditures for this information technology program are not expected to be
significant. However, if DCA continues to grow at its current pace, the
development of the information technology infrastructure may require more
substantial capital outlays.
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.
Discontinued Operations
The company sold its 71.3% interest in Techdyne in June 2001.
Accordingly, the results of operations of Techdyne, net of applicable taxes,
have been reflected as discontinued operations in our Consolidated Condensed
Statements of Income with prior period amounts reclassified to conform to
this presentation. See Notes 1 and 9 to "Notes to Consolidated Condensed
Financial Statements."
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146). FAS 146, which will
be effective for exit or disposal activities initiated after December 31,
2002, is not expected to have a material impact on the company's results of
operation, financial position or cash flows. See Note 1 to "Notes to
Consolidated Condensed Financial Statements."
Critical Accounting Policies
The company has significant accounting policies relating to estimates
and revenue recognition as more fully described in Note 1 to "Notes to
Consolidated Condensed Financial Statements."
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 DCA's and, accordingly, our future earnings.
Item 3. Quantitative and Qualitative Disclosure 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 $6,660,000 invested as of September 30, 2002. A
1/4% decrease in rates on our investments as of September 30, 2002 would have
resulted in a negative impact of approximately $7,000 on our results of
operations for the first nine months of 2002.
We also have interest rate exposure on debt agreements with variable
interest rates of which we had approximately $863,000 of such debt outstanding
as of September 30, 2002. A 1% increase in interest rates on our variable
rate debt as of September 30, 2002 would have resulted in a negative impact
of approximately $1,000 on our results of operations for the first nine months
of 2002.
We do not utilize financial instruments for trading or speculative
purposes and do not currently use interest rate derivatives.
Item 4. Controls and Procedures
- ------ -----------------------
Within 90 days prior to the date of this quarterly report on Form 10-Q
for the third quarter ended September 30, 2002, the company carries out an
evaluation, under the supervision and with the participation of the company's
management, including the company's Chief Executive Officer and President,
its principal executive officer, and the company's Vice President of Finance,
Controller and Treasurer, our principal financial officer, of the
effectiveness of the design and operation of the company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange
Act of 1934. Based upon that evaluation, the principal executive officer
and principal financial officer concluded that the company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the company, including its consolidated
subsidiaries, required to be included in the company's periodic SEC
filings. There were no significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
PART II -- OTHER INFORMATION
------------------------------
Item 1. Legal Proceedings
- ------ -----------------
In August, 2002, the company initiated an action against its former
subsidiary, Viragen, Inc., in the Circuit Court of the Seventeenth Judicial
Circuit in and for Broward County, Florida for breach of a royalty agreement
it has with Viragen, and for an accounting of sales by Viragen and its
affiliates and sub-licensees of licensed products, including interferon, and
all products or any substance or group of substances which involve or include
interferon, whether produced naturally or through genetic engineering. The
company is also seeking damages, costs of the legal action, interest, and
other relief as the court deems just and proper. Viragen filed an answer and
some initial discovery has been accomplished. The company is filing for
summary judgment, which means it believes there are no genuine issues of
fact, and therefore, it is entitled to a judgment for breach of contract
and damages as a matter of law.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
Part I Exhibits
None
Part II Exhibits
(10) Material Contracts
(i) Lease Renewal dated August 5, 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
September 30, 2002.
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.
/s/ DANIEL R. OUZTS
By -----------------------------------
DANIEL R. OUZTS, Vice President/
Finance, Principal Financial Officer
Controller and Treasurer
Dated: November 8, 2002
CERTIFICATIONS
I, Thomas K. Langbein, Chief Executive Officer and President, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Medicore, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data, and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ Thomas K. Langbein
Date: November 8, 2002 ----------------------------------------
THOMAS K. LANGBEIN, Chief Executive
Officer and President
CERTIFICATIONS
I, Daniel R. Ouzts, Vice President/Finance, Principal Financial Officer,
Controller and Treasurer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Medicore, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data, and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ Daniel R. Ouzts
Date: November 8, 2002 ----------------------------------------
DANIEL R. OUZTS, Vice President/Finance,
Principal Financial Officer and Treasurer
Medicore, Inc.
2337 W. 76th Street
Hialeah, Florida 33016
(305) 558-4000
November 8, 2002
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Re: Medicore, Inc. - Form 10-Q (File No. 0-6906)
Gentlemen:
Enclosed for filing pursuant to the EDGAR system is the above company's
Quarterly Report on Form 10-Q for the third quarter ended September 30, 2002.
In accordance with Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned Chief Executive Officer and President, and Vice President/Finance,
Principal Financial Officer, Controller and Treasurer of Medicore, Inc.
certify, to such officers' knowledge, that the quarterly report of the
company for the third quarter ended September 30, 2002 ("Quarterly Report")
fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934, and the information contained in the Quarterly Report
fairly presents, in all material respects, the financial condition and
results of operations of the company.
Yours very truly,
/s/ Thomas K. Langbein
Thomas K. Langbein
Chief Executive Officer and President
/s/ Daniel R. Ouzts
Daniel R. Ouzts
Vice President/Finance, Principal
Financial Officer, Controller and
Treasurer
cc: The Nasdaq Stock Market, Inc.