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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 March 31, 2003
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
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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 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 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 - 6,524,275 shares as of May 2, 2003.
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Operations (Unaudited) for the
three months ended March 31, 2003 and March 31, 2002 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, 2003 and March 31, 2002.
2) Consolidated Condensed Balance Sheets as of March 31, 2003 and
December 31, 2002.
3) Consolidated Condensed Statements of Cash Flows for the three months
ended March 31, 2003 and March 31, 2002.
4) Notes to Consolidated Condensed Financial Statements as of March 31,
2003.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results 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 6. Exhibits and Reports on Form 8-K
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PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
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MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
------------------------
2003 2002
---- ----
Revenues:
Sales:
Product sales $ 209,757 $ 241,035
Medical service revenues 6,737,951 5,488,045
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Total sales 6,947,708 5,729,080
Other income 206,294 228,717
---------- ----------
7,154,002 5,957,797
Cost and expenses:
Cost of sales:
Cost of product sales 131,091 146,566
Cost of medical services 4,202,613 3,394,661
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Total cost of sales 4,333,704 3,541,227
Selling, general and administrative expenses 2,503,771 2,062,238
Provision for doubtful accounts 95,898 186,027
Interest expense 54,021 57,203
---------- ----------
6,987,394 5,846,695
Income before income taxes, minority interest
and equity in affiliate earnings 166,608 111,102
Income tax provision 111,265 71,736
---------- ----------
Income before minority interest and equity
in affiliate earnings 55,343 39,366
Minority interest in income of
consolidated subsidiaries 114,519 67,689
Equity in affiliate earnings 15,419 46,704
---------- ----------
Net (loss) income $ (43,757) $ 18,381
========== ==========
(Loss) earnings 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,
2003 2002(A)
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,127,948 $ 8,080,903
Accounts receivable, less allowance of
$723,000 at March 31, 2003 and $842,000
at December 31, 2002 4,023,947 3,571,847
Note receivable --- 2,250,000
Receivable from sale of Techdyne 1,011,000 1,100,000
Inventories, less allowance for obsolescence
of $110,000 at March 31, 2003 and $122,000
at December 31,2002 1,290,261 1,146,610
Prepaid expenses and other current assets 1,292,294 2,542,654
Deferred income taxes 467,000 467,000
----------- -----------
Total current assets 15,212,450 19,159,014
Property and equipment
Land and improvements 1,027,108 1,027,108
Building and building improvements 3,224,734 3,222,663
Equipment and furniture 5,732,495 5,414,252
Leasehold improvements 2,974,937 2,730,162
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12,959,274 12,394,185
Less accumulated depreciation and amortization 4,744,792 4,474,339
----------- -----------
8,214,482 7,919,846
Receivable from sale of Techdyne 384,000 295,000
Other assets 3,180,590 378,730
Goodwill 923,140 923,140
----------- -----------
Total other assets 4,487,730 1,596,870
----------- -----------
$27,914,662 $28,675,730
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 895,343 $ 1,409,344
Accrued expenses and other current liabilities 2,633,099 2,828,823
Current portion of long-term debt 557,000 614,362
----------- -----------
Total current liabilities 4,085,442 4,852,529
Long-term debt 2,556,990 2,727,105
Deferred income taxes 744,000 744,000
Minority interest in subsidiaries 4,217,939 3,870,024
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Total liabilities 11,604,371 12,193,658
Commitments
Stockholders' equity:
Common stock, $.01 par value; authorized
12,000,000 shares; 6,524,275 shares issued
and outstanding at March 31, 2003; 6,572,775
shares issued and outstanding at December 31,
2002 65,242 65,727
Capital in excess of par value 12,644,819 12,772,358
Retained earnings 3,600,230 3,643,987
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Total stockholders' equity 16,310,291 16,482,072
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$27,914,662 $28,675,730
=========== ===========
(A) Reference is made to the company 's Annual Report on Form 10-K for the
year ended December 31, 2002 filed with the Securities and Exchange
Commission in March, 2003.
See notes to consolidated condensed financial statements.
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
------------------------
2003 2002
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Operating activities:
Net (loss) income $ (43,757) $ 18,381
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 283,510 269,150
Amortization 578 1,162
Bad debt expense 95,898 186,027
Provision for inventory obsolescence (11,894) ---
Minority interest 114,519 67,689
Equity in affiliate earnings (15,419) (46,704)
Increase (decrease) relating to
operating activities from:
Accounts receivable (547,998) (261,032)
Inventories (131,757) (17,859)
Prepaid expenses and other
current assets 743,284 (127,926)
Accounts payable (514,001) (668,287)
Accrued expenses and other
current liabilities (95,724) 17,310
Income taxes payable --- (2,322,736)
---------- ----------
Net cash used in operating activities (122,761) (2,884,825)
Investing activities:
Additions to property and equipment, net of
minor disposals (578,146) (249,407)
Distribution from affiliate 77,000 ---
Sale of minority interest in subsidiary 4,000 ---
Other assets 7,639 22,218
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Net cash used in investing activities (489,507) (227,189)
Financing activities:
Line of credit net payments (79,157) ---
Payments on long-term borrowings (148,320) (69,712)
Repurchase of company stock (66,610) ---
Distribution to subsidiary minority member (46,600) ---
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Net cash used in financing activities (340,687) (69,712)
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Decrease in cash and cash equivalents (952,955) (3,181,726)
Cash and cash equivalents at beginning of period 8,080,903 10,359,372
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Cash and cash equivalents at end of period $7,127,948 $7,177,646
========== ==========
See notes to consolidated condensed financial statements.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies
Consolidation
The consolidated condensed financial statements include the accounts of
Medicore, Inc., and Medicore's 61% owned subsidiary, Dialysis Corporation of
America. Medicore and its subsidiaries are collectively referred to as the
"company" or "Medicore." All material 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.
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" (SAB 101). 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:
March 31, December 31,
2003 2002
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(Unaudited)
Accrued compensation $ 678,436 $ 909,763
Due to insurance companies 1,355,549 1,271,235
Other 599,114 647,825
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$2,633,099 $2,828,823
========== ==========
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 2003 and 32% for the same period of the preceding year.
There is only one supplier of EPO in the United States without alternative
products available to dialysis treatment providers. Revenues from the
administration of EPO comprised 28% of medical service revenue for the first
quarter of 2003 and 24% for the same period of the preceding year.
Advertising Cost
The company expenses advertising costs as they are incurred.
Advertising expenses amounted to $44,000 for the three months ended March 31,
2003 and $17,000 for the same period of the preceding year.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Other Income
Other income is comprised as follows:
Three Months Ended
March 31,
------------------------
2003 2002
---- ----
Interest income $ 37,611 $ 89,728
Rental income 74,001 72,570
Management fee income 73,060 51,160
Other 21,622 15,259
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$ 206,294 $ 228,717
========== ==========
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
March 31,
------------------------
2003 2002
---- ----
Net (loss) income, numerator-basic computation $ (43,757) $ 18,381
Adjustment due to subsidiaries' dilutive
securities (8,576) (10,126)
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Net (loss) income as adjusted,
numerator-diluted computation $ (52,333) $ 8,255
========== ==========
Weighted average shares 6,565,397 6,600,275
========= =========
(Loss) earnings per share:
Basic $(.01) $.--
===== ====
Diluted $(.01) $.--
===== ====
The company's potentially dilutive securities consist of stock options.
See Note 5.
Goodwill
Goodwill represents cost in excess of net assets acquired. Pursuant to
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (FAS 142), goodwill and intangible assets with indefinite
lives are no longer amortized but are reviewed annually (or more frequently
if impairment indicators are present) for impairment. Pursuant to the
provisions of FAS 142, the goodwill resulting from the company's acquisition
of a minority interest in August, 2001, and the goodwill resulting from the
company's acquisition of a Georgia dialysis center in April, 2002, are not
being amortized for book purposes and are subject to the annual impairment
testing provisions of FAS 142. See Note 10.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Stock-Based Compensation
The company follows the intrinsic method of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for its employee stock options because,
as discussed below, Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" (FAS 123) requires use of option
valuation models that were not developed for use in valuing employee stock
options. FAS 123 permits a company to elect to follow the intrinsic method
of APB 25 rather than the alternative fair value accounting 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 has been determined as if the company and Dialysis
Corporation of America had accounted for their employee stock options under
the fair value method of that Statement. No company stock options were
granted or vested during the first three months of 2003. See Note 5.
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 2002
and 2001, respectively and vesting during 2003: risk-free interest rate of
3.73% and 5.40%; no dividend yield; volatility factor of the expected market
price of the company's common stock of 1.15 and 1.14, and a weighted-average
expected life of 5 years and 4 years. No Dialysis Corporation of America
options were granted during the first three months of 2003. See Note 5.
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,
------------------------
2003 2002
---- ----
Net (loss) income, as reported $ (43,757) $ 18,381
Stock-based employee compensation expense
under fair value method, net of related
tax effects (9,510) (5,582)
Pro forma net (loss) income-basic computation (53,267) 12,799
Subsidiary dilutive securities (8,576) (10,126)
---------- ----------
Pro forma net (loss) income-diluted computation $ (61,843) $ 2,673
========== ==========
(Loss) earnings per share:
Basic, as reported $(.01) $.--
===== ====
Basic, pro forma $(.01) $.--
===== ====
Diluted, as reported $(.01) $.--
===== ====
Diluted, pro forma $(.01) $.--
===== ====
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
New Pronouncements
In June, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146), which addresses the
accounting and reporting for costs associated with exit or disposal
activities. FAS 146 requires that a liability for a cost associated in an
exit or disposal activity be recognized when the liability is incurred rather
than being recognized at the date of an entity's commitment to an exit plan,
which had been the method of recognition under Emerging Issues Task Force
Issue No. 94-3, which FAS 146 supercedes. FAS 146, which is 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.
In November, 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which elaborates on the
existing disclosure requirements for most guarantees and clarifies that at
the time a company issues a guarantee, it must recognize a liability for the
fair value of the obligations it assumes under the guarantee and must
disclose that information in its interim and annual financial statements.
The disclosure requirements of FIN 45 are effective for financial statements
for periods ending after December 15, 2002. The initial recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The company does not
expect FIN 45 to have a material impact on its financial position or results
of operations.
In December, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (FAS 148), which amends FAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition when voluntarily
changing to the fair value based method of accounting for stock-based employee
compensation. FAS 148 also amends FAS 123 disclosure requirements to require
prominent disclosures in annual and interim financial statements about the
method used to account for stock-based employee compensation and its effect
on results of operations. The company adopted the transition guidance and
annual disclosure provisions of FAS 148 commencing 2002 and has adopted the
interim disclosure provisions of FAS 148 commencing 2003. The company is
subject to the expanded disclosure requirements of FAS 148, but does not
expect FAS 148 to otherwise have a material impact on its consolidated
results of operations, financial position or cash flows.
In January, 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated support
from other parties. FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or is entitled to
receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements
apply to variable interest entities created before February 1, 2003, in the
first fiscal year or interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply to financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The company does not expect FIN 46 to have a material impact
on its financial position or results of operations.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 2--Interim Adjustments
The financial summaries for the three months ended March 31, 2003 and
March 31, 2002 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, 2003 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 2003.
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, 2002.
NOTE 3--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 was secured by the accounts receivable and inventory of
the company's medical products division and had an outstanding balance of
approximately $79,000 at December 31, 2002. The line of credit and accrued
interest were paid off in January 2003 prior to the scheduled January 22,
2003 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 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 plus interest with any remaining
balance due December 2, 2007. This loan had an outstanding balance of
$656,000 at March 31, 2003 and $662,000 at December 31, 2002.
In April 2001, Dialysis Corporation of America obtained a $788,000
five-year mortgage through April 2006 on its building in Valdosta, Georgia
with interest at 8.29% until March, 2002, 7.59% thereafter until December 16,
2002, and prime plus 1/2% with a minimum of 6.0% effective December 16, 2002.
Payments are $6,800 including principal and interest having commenced 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 $743,000 at March 31, 2003 and $753,000 at December
31, 2002.
The Dialysis Corporation of America equipment purchase agreement
provides financing for kidney dialysis machines for Dialysis Corporation of
America's dialysis facilities. Payments under the agreement pursuant to
various schedules extending through August, 2007, with interest at rates
ranging from 4.14% to 10.48%. Financing under the equipment purchase
agreement is a noncash financing activity which is a supplemental disclosure
required by FAS 95, "Statement of Cash Flows." The remaining principal
balance under this financing amounted to approximately $1,714,000 at March 31,
2003 and $1,844,000 at December 31, 2002.
The prime rate was 4.25% as of March 31, 2003 and December 31, 2002.
Interest payments on debt amounted to approximately $44,000 for the
three months ended March 31, 2003 and $60,000 for the same period of the
preceding year.
NOTE 4--Income Taxes
Dialysis Corporation of America files separate federal and state income
tax returns with its income tax liability reflected on a separate return basis.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 4--Income Taxes-(Continued)
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 $197,000 for the three months
ended March 31, 2003 and $2,458,000 for the same period of the preceding year.
NOTE 5--Stock Options
On July 27, 2000, the company granted 820,000 five-year non-qualified
stock options under its 1989 Stock Option Plan to 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. Options for 16,000 shares
were cancelled due to employee terminations and resignations, and in June,
2001, 115,000 options were exercised leaving 689,000 options outstanding at
March 31, 2003.
On May 6, 1996, the company adopted a Key Employee Stock Plan reserving
100,000 shares of its 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. 2,000 shares have been issued
under this Plan.
Options for 25,000 shares issued as a finder's fee in January, 2000,
were exercisable at $3.00 per share through January 31, 2002 and were
extended through January 31, 2003, in connection with which the company
recognized an expense of approximately $4,000 during 2002. These options
expired unexercised.
In June, 1998, Dialysis Corporation of America's board of directors
granted an option under its now expired 1995 Stock Option Plan to a new board
member for 5,000 shares exercisable at $2.25 per share through June 9, 2003,
which is the only outstanding option under that plan.
In April, 1999, Dialysis Corporation of America 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. In April, 2000,
the 340,000 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%. The board of
Dialysis Corporation of America extended the maturity date of the notes to
April 20, 2004. In March, 2003, 77,857 of these options were exercised with
the exercise price satisfied by director bonuses accrued in 2002 leaving
322,143 options outstanding as of March 31, 2003.
In January, 2001, Dialysis Corporation of America's board of directors
granted to Dialysis Corporation of America's President an option for 165,000
shares exercisable at $1.25 per share for five years from vesting with 33,000
options vesting each January 1 having commenced in 2001.
In September, 2001, Dialysis Corporation of America'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 were non-qualified and vested immediately and the remaining
60,000 options were incentive with 15,000 options vesting each September 5
having commenced September 5, 2002. In March, 2003, 1,785 of these options
were exercised with the exercise price satisfied by director bonuses accrued
in 2002 leaving 73,215 options outstanding as of March 31, 2003.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 5--Stock Options--(Continued)
In March, 2002, Dialysis Corporation of America's board of director's
granted a five-year incentive 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, Dialysis Corporation of America's board of directors
granted a total of 10,500 five-year incentive options to employees of which
8,000 remain outstanding at March 31, 2003. Most options are for 500 shares
of common stock of Dialysis Corporation of America, with two options for 1,500
shares of common stock. All options are exercisable at $4.10 per share
through May 28, 2007, with all options vesting on May 29, 2004. Options for
2,500 shares have been cancelled.
NOTE 6--Commitments and Contingencies
Effective 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.
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.
Three Months Ended
March 31,
------------------------
2003 2002
---- ----
BUSINESS SEGMENT REVENUES
Medical products $ 213,196 $ 243,967
Medical services 6,879,018 5,605,839
New technology 15,000 50,000
Corporate 46,888 59,099
Elimination of medical services interest charge
to medical services (100) ---
Elimination of medical services
interest charge to corporate --- (1,108)
---------- ----------
$7,154,002 $5,957,797
========== ==========
BUSINESS SEGMENT PROFIT (LOSS)
Medical products $ (25,246) $ (13,021)
Medical services 378,275 240,097
New technology 15,000 50,000
Corporate (201,421) (165,974)
---------- ----------
$ 166,608 $ 111,102
========== ==========
NOTE 8--Investment
Over the period, January, March and August, 2000, the company loaned an
aggregate of $2,200,000 with a 10% annual interest rate to Linux Global
Partners, a company investing in Linux software companies which recently
initiated the marketing of a Linux desktop software system. During that
period, the company also acquired an 8% ownership interest in Linux Global
Partners. The company's investment of $120 in Linux Global Partners is
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 8--Investment-(Continued)
accounted for at cost. A substantial portion of the loans were originally
scheduled to mature January 26, 2001. The company agreed to extend the
maturity of its notes receivable from Linux Global Partners on several
occasions, for which the company received additional Linux Global Partners'
common stock. On May 14, 2001, Linux Global Partners repaid the $200,000
August 2000 loan plus $15,000 accrued interest. In June, 2001, Linux Global
Partners paid $100,000 toward the accrued interest on the remaining $2,000,000
outstanding notes.
In September, 2002, the company agreed to loan Linux Global Partners up
to an additional $250,000 on the same terms as the company's existing loans
to Linux Global Partners, with the company receiving 75,000 additional Linux
Global Partners shares. The loans were made prior to the end of 2002, which
increased the aggregate outstanding principal balance of the loans to
$2,250,000. The company currently owns approximately 14% of Linux Global
Partners, and Dialysis Corporation of America owns approximately 2% of Linux
Global Partners with a cost basis of approximately $144,000, which is included
in other assets.
Interest on the notes amounted to approximately $15,000 during the first
quarter of 2003 (through January 24, 2003) and $50,000 for the first quarter
of 2002. Interest receivable on the notes from Linux Global Partners amounted
to approximately $492,000 at December 31, 2002, and was included in prepaid
expenses and other current assets.
The loan, accrued interest and costs of collection of the Linux Global
Partners' indebtedness were satisfied through the company's sale of certain
of the collateral. On January 24, 2003, the company sold 4,115,815 shares of
Ximian, Inc.'s series A convertible preferred stock, part of the collateral
for the Linux Global Partners indebtedness, at public auction, pursuant to
notice and the requirements of the Uniform Commercial Code.
Xandros, Inc., a 95% owned subsidiary of Linux Global Partners,
purchased the collateral 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 on March 7, 2003, extended to March 21, 2003. Xandros failed to
make the payment resulting in the company as the next highest bidder,
obtaining the 4,115,815 series A preferred stock of Ximian and keeping the
775,000 shares of common stock of Xandros in satisfaction of the indebtedness
due from Linux Global Partners for which the company has reflected a combined
cost basis of approximately $2,757,000 in other assets. Based upon certain
agreements entered into between Linux Global Partners and Ximian in January,
2000, after the company had provided Linux Global Partners with the initial
loans, Linux Global Partners, in January, 2003, gave the company a put to sell
all or any portion of the Ximian series A preferred stock to Linux Global
Partners for an aggregate of $3,100,000 or $.753 per share commencing January
25, 2004 and expiring March 24, 2004.
NOTE 9--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 48,500
shares for approximately $70,000 during the first quarter of 2003.
NOTE 10--Acquisitions
In August, 2001, Dialysis Corporation of America acquired the remaining
30% minority interest in DCA of So. Ga., LLC, giving Dialysis Corporation of
America a 100% ownership interest, for $600,000 of which $300,000 was paid in
August, 2001 and $300,000 was paid in August, 2002. This transaction resulted
in $523,000 goodwill representing the excess of the $600,000 purchase price
over the $77,000 fair value of the minority interest 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 the profitability of DCA of So. Ga. 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.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 10--Acquisitions-(Continued)
In April 2002, Dialysis Corporation of America acquired a dialysis center
in Royston, Georgia for $550,000. This transaction resulted in $400,000
goodwill representing the excess of the $550,000 purchase price over the
$150,000 fair value of the assets acquired. The goodwill is being amortized
for tax purposes over a 15-year period. 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.
NOTE 11--Related Party Transactions
The 20% minority interest in DCA of Vineland, LLC, a subsidiary of
Dialysis Corporation of America, was held by Vineland Dialysis Professionals,
LLC, a company owned by Dr. David Blecker, who became a director of Dialysis
Corporation of America in 2001. Dr. Blecker was provided with the right to
acquire up to 49% of DCA of Vineland, LLC. In April, 2000, another company
owned by Dr. Blecker, Vineland Dialysis Group, LLC, acquired a 35.9% interest
in DCA of Vineland, resulting in Dialysis Corporation of America holding a
51.3% interest in DCA of Vineland and Vineland Dialysis Professionals, LLC
holding a 12.8% interest. This provided Dr. Blecker's companies with a
combined 48.7% ownership of DCA of Vineland.
In July, 2000, Vineland Dialysis Professionals, one of Dr. Blecker's
companies, 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, Dr. Blecker serves as medical director for
each of those dialysis facilities.
NOTE 12--Loan Transactions
Dialysis Corporation of America customarily funds the establishment and
operations of its dialysis facilities, usually until they become self-
sufficient, without any formalized loan documents, except in limited
instances, including those subsidiaries in which Dialysis Corporation of
America's medical directors hold interests ranging from 20% to 49%. 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 loan is with DCA of Vineland, LLC. In April, 2000,
Vineland Dialysis Group, one of Dr. Blecker's companies, acquired a 35.9%
interest for $203,000, which was applied to reduce the loan, which loan at
March 31, 2003 reflected a principal indebtedness of approximately $553,000.
See Note 11.
NOTE 13--Subsequent Events
In April, 2003, Dialysis Corporation of America acquired a dialysis
center in Adel, Georgia for $75,000 and ceased operations at its Homerville,
Georgia facility.
In April, 2003, the company received its second earn-out payment of
approximately $1,011,000 under its April, 2001, agreement with Simclar
International pursuant to which the company sold its 71.3% interest in
Techdyne to Simclar in June, 2001, for $10,000,000 with three years of earn-
outs based on 3% of Techdyne's consolidated net sales with a $2,500,000
minimum and a $5,000,000 maximum earn-out. This amount has been reflected as
a current receivable, with the balance of the minimum $2,500,000 earn-out of
approximately $384,000 reflected as a non-current receivable.
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 61% owned public subsidiary,
Dialysis Corporation of America, 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 (Item 1,
"Business") included in our Annual Report on Form 10-K as filed with the SEC,
and provided to our shareholders. If any such events occur or circumstances
arise that we have not assessed, they could have a material adverse effect
upon our revenues, earnings, financial condition and business, as well as the
trading price of our common stock, which could adversely affect your
investment in the company. Accordingly, readers are cautioned not to place
too much reliance on such forward-looking statements, which speak only as to
the date made, and which the company undertakes no obligation to revise to
reflect events after the date made.
Essential to profitability of our dialysis operations is Medicare
reimbursement, which is at a fixed rate determined by CMS. 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. Operating costs in treatment
tend to increase over the years. There also may be reductions in commercial
third-party reimbursement rates.
The healthcare industry is subject to extensive regulations of federal
and state authorities. There are a variety of fraud and abuse measures 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 Dialysis Corporation of
America will not be required to restructure its practice and will not
experience material adverse effects as a result of any such challenges or
changes. Dialysis Corporation of America has developed a Corporate Integrity
Program to assure the dialysis operations provide 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 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 more personnel and financial
resources, in acquiring and/or developing facilities in areas targeted by the
company. 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 and a smaller patient base until
they develop.
Our venture into new technology is uncertain and competitive. We
initiated this segment in early 2000 with our investment and financing of
Linux Global Partners, a private company involved with investments in Linux
operating systems and software companies and in the development of a Linux
desktop software system. Linux Global Partners 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, increased by approximately $1,196,000 (20%) for
the three months ended March 31, 2003 compared to the same period of the
preceding year. Sales revenues increased by approximately $1,219,000 (21%)
compared to the same period of the preceding year.
Other income which is comprised of interest income, rental income,
management fee income and miscellaneous other income decreased approximately
$23,000 for the three months ended March 31, 2003 compared to the same period
of the preceding year. Interest income decreased approximately $52,000
largely due to our foreclosure and sale of collateral in payment of loans due
from Linux Global Partners (see Note 8 to "Notes to Consolidated Condensed
Financial Statements.") Management fee income, which includes income related
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 Georgia dialysis center effective September, 2002, increased
approximately $22,000. Rental income increased approximately $1,000.
Miscellaneous other income increased by approximately $6,000. See Note 1 to
"Notes to Consolidated Condensed Financial Statements."
Medical product sales revenues decreased approximately $31,000 (13%) for
the three months ended March 31, 2003 compared to the same period of the
preceding year. Management is continuing its efforts to be more competitive
in lancet sales through overseas purchases and expansion of its customer base.
The medical products division expanded its product line with several diabetic
disposable products; however, demand to date for these products continues to
be less than anticipated. No assurance can be given that efforts to increase
sales will be successful.
Medical service revenues, representing the revenues of our dialysis
division, Dialysis Corporation of America, increased approximately $1,250,000
(23%) for the three months ended March 31, 2003 compared to the same period
of the preceding year. This increase reflects increased revenues of our
Pennsylvania dialysis centers of approximately $738,000, decreased revenues
of approximately $103,000 for our New Jersey centers reflecting termination
of our two New Jersey acute care contracts; increased revenues of
approximately $569,000 for our Georgia centers, including $445,000 for the
Georgia center acquired in April, 2001; $47,000 revenues for our new Maryland
center, and $26,000 revenues for our new Ohio center. Revenues for the prior
year included $27,000 consulting fees.
Cost of goods sold as a percentage of consolidated sales amounted to 62%
for the three months ended March 31, 2003 and for the same period of the
preceding year.
Cost of goods sold for the medical products division as a percentage of
sales was 62%, for the three months ended March 31, 2003 compared to 61% for
the same period of the preceding year. Changes in cost of goods sold for this
division resulted from a change in product mix.
Cost of medical services sales as a percentage of sales amounted to 62%
for the three months ended March 31, 2003, and for the same period of the
preceding year with an increase in supply costs as a percentage of sales
being offset by a comparable decrease in payroll costs. Approximately 28% of
our medical services revenues for the three months ended March 31, 2003 and
24% for the same period of the preceding year were from the administration of
EPO to our patients. This drug is only available from one manufacturer in the
United States which raised its price for the product in January, 2003.
Continued price increases for this product without our ability to increase
our charges will increase our costs and thereby adversely impact our
earnings. We cannot predict the price increases, if any, or the extent of
such by the manufacturer, or our ability to offset any such increases.
Selling, general and administrative expenses, increased $442,000 for the
three months ended March 31, 2003 compared to the same period of the preceding
year. This increase reflects operations of Dialysis Corporation of America's
new dialysis centers in Maryland and Ohio and the Georgia dialysis center we
acquired in April, 2002, as well as the cost of additional support personnel
for Dialysis Corporation of America. As a percent of consolidated sales
revenue, selling, general and administrative expenses amounted to 36% for the
three months ended March 31, 2003 and for the same period of the preceding
year.
Provision for doubtful accounts decreased approximately $90,000, for the
three months ended March 31, 2003 compared to the same period of the preceding
year. The provision amounted to 1% of sales for the three months ended March
31, 2003 compared to 3% for the same period of the preceding year. This
change reflects our collection experience with the impact of that experience
included in accounts receivable presently reserved. The provision for
doubtful accounts of our medical services operation, which is the primary
component of our 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 with doubtful accounts reserved
for in the allowance for doubtful accounts until they are written off or
collected.
Although operations of additional dialysis centers have resulted in
additional revenues, some are still in the developmental stage and,
accordingly, their operating results will adversely affect results of
operations until they achieve a sufficient patient count to sustain profitable
operations.
Interest expense remained relatively stable with little change for the
three months ended March 31, 2003 compared to the same period of the
preceding year. The additional Dialysis Corporation of America equipment
financing agreements was offset by lower interest rates and reduced average
borrowings on other debt. See Note 3 to "Notes to Consolidated Condensed
Financial Statements."
The prime rate was 4.25% at March 31, 2003 and December 31, 2002.
Equity in affiliate earnings represents equity in the earnings incurred
by Dialysis Corporation of America's Ohio affiliate, in which Dialysis
Corporation of America has a 40% ownership interest.
Liquidity and Capital Resources
Working capital totaled $11,127,000 at March 31, 2003, which reflects a
decrease of $3,179,000 (22%) during the first quarter of 2003 with the
decrease largely attributable to reclassification of $2,757,000 of a note
receivable from Linux Global Partners and related accrued interest to other
assets. See Note 8 to "Notes to Consolidated Condensed Financial Statements."
The change in working capital also included a decrease in cash of $953,000
including net cash used in operating activities of $123,000, net cash used in
investing activities of $490,000 (including additions to property, plant and
equipment of $578,000 and a $77,000 distribution received from Dialysis
Corporation of America's 40% owned Ohio affiliate) and net cash used in
financing activities of $341,000 (including net line of credit payments of
$79,000, payments on long-term debt of $148,000, repurchase of stock of
approximately $67,000 and a $47,000 distribution to a subsidiary minority
member).
In January, 2003, we executed on certain of the collateral securing the
Linux Global Partners' indebtedness, resulting in our company obtaining
4,115,815 shares of series A convertible preferred stock of Ximian, Inc. in
satisfaction of the Linux Global Partners' indebtedness. See Note 8 to
"Notes to Consolidated Condensed Financial Statements."
In December, 2002, the company announced its intent to purchase up to
1,000,000 shares of its outstanding common stock based on then current market
prices. The company repurchased and cancelled 48,500 shares of its
outstanding common stock at a cost of approximately $67,000 during the first
quarter of 2003.
Dialysis Corporation of America has a loan secured by a mortgage on its
real property in Easton, Maryland with an outstanding balance of $656,000 at
March 31, 2003 and $662,000 at December 31, 2002. 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 $743,000 at
March 31, 2003 and $753,000 at December 31, 2002. Dialysis Corporation of
America has an equipment financing agreement for kidney dialysis machines for
its facilities with an outstanding balance of $1,714,000 at March 31, 2003
and $1,844,000 at December 31, 2002. See Note 3 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
our dialysis facilities, costs in the range of $600,000 to $750,000 depending
on location, size and related services to be provided, which includes
equipment and initial working capital requirements. Acquisition of an
existing dialysis facility is more expensive than construction, although
acquisition would provide us with an immediate ongoing operation, which most
likely would be generating income. We presently plan to expand our operations
primarily through construction of new centers, rather than acquisition.
Development of a dialysis facility to initiate operations takes four to six
months and usually up to 12 months or longer to generate income. We consider
some of our centers to be in the developmental stage, since they have not
developed a patient base sufficient to generate and sustain earnings.
We are seeking to expand our outpatient dialysis treatment facilities
and inpatient dialysis care. Dialysis Corporation of America opened its 13th
and 14th centers in Cincinnati, Ohio and Chevy Chase, Maryland in February,
2003. We are in the developmental stage for a new center in Virginia. We
acquired a dialysis center in Adel, Georgia in April, 2003, and ceased
operations at our Homerville, Georgia center, which had not been performing
up to expectations. See Note 13 to "Notes to Consolidated Condensed
Financial Statements." We are presently in different phases of negotiations
with physicians for additional outpatient centers. Such expansion requires
capital. Although we presently have the capital and financing capabilities
for the current rate of expansion, no assurance can be given that we will be
successful in implementing our growth strategy or that financing 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 12 months.
New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (FAS 146). FAS 146, which is
effective for exit or disposal activities initiated after December 31, 2002,
is not expected to have a material impact on the company's results of
operation, financial position or cash flows. See Note 1 to "Notes to
Consolidated Condensed Financial Statements."
In November, 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which is effective for
periods ending after December 15, 2002. The company does not expect FIN 45
to have a material impact on its financial position or results of operations.
See Note 1 to "Notes to Consolidated Condensed Financial Statements."
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" (FAS 148), which amends FAS 123, "Accounting for Stock-Based
Compensation," transition requirements when voluntarily changing to the fair
value based method of accounting for stock-based compensation and also amends
FAS 123 disclosure requirements. FAS 148 is not expected to have a material
impact on the company's results of operations, financial position or cash
flow. See Note 1 to "Notes to Consolidated Condensed Financial Statements."
In January, 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" (FIN 46), for which certain disclosure
requirements apply to financial statements issued after January 31, 2003.
FIN 46 contains consolidation requirements regarding variable interest
entities which are applicable depending on when the variable interest entity
was created. The company does not expect FIN 46 to have a material impact on
its financial position or results of operations. See Note 1 to "Notes to
Consolidated Condensed Financial Statements."
Critical Accounting Policies and Estimates
In December, 2001, the SEC issued a cautionary advice to elicit more
precise disclosure in this Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," about accounting policies
management believes are most critical in portraying the company's financial
results and in requiring management's most difficult subjective or complex
judgments.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make judgments and estimates. On an on-going basis, we
evaluate our estimates, the most significant of which include establishing
allowances for doubtful accounts, a valuation allowance for our deferred
tax assets and determining the recoverability of our long-lived assets. The
basis for our estimates are historical experience and various assumptions
that are believed to be reasonable under the circumstances, given the
available information at the time of the estimate, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily available from other sources. Actual
results may differ from the amounts estimated and recorded in our financial
statements.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition: Revenues are recognized 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 the payor mix and regulations, it sometimes receives more which
it reconciles 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 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 changes for these assets. We adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," (FAS 142) effective January 1, 2002 and are required to analyze
goodwill and indefinite lived intangible assets for impairment on at least
an annual basis.
Impact of Inflation
Inflationary factors have not had a significant effect on our operations.
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
services 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 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 $7,101,000 invested as of March 31, 2003. A 15%
relative decrease in rates on our period-end investments would result in a
negative annual impact of approximately $2,000 on our quarterly results of
operations.
We have an interest rate exposure on debt agreements with variable
interest rates of which we had approximately $1,400,000 of such debt
outstanding as of March 31, 2003. A 15% relative increase in interest rates
on our period-end variable rate debt would result in a negative annual impact
of approximately $1,000 on our quarterly results of operations.
Item 4. Controls and Procedures
- ------ -----------------------
Within 90 days prior to the date of this quarterly report on Form 10-Q
for the first quarter ended March 31, 2003, management carries out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and President, and the Vice President of Finance, 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 (the "Exchange Act"), which disclosure
controls and procedures are designed to ensure that
information required to be disclosed by the company in the reports that it
files 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 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 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
(99) Additional Exhibits
(i) Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(ii) Certification of Principal Financial Officer pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended March
31, 2003.
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 12, 2003
CERTIFICATIONS
I, Thomas K. Langbein, 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 officers 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 officers 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 registrants internal
controls; and
6. The registrant's other certifying officers 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: May 12, 2003 -----------------------------------
THOMAS K. LANGBEIN, Chief Executive
Officer
CERTIFICATIONS
I, Daniel R. Ouzts, 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 officers 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 officers 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 officers 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: May 12, 2003 -----------------------------------
DANIEL R. OUZTS, Principal Financial
Officer
EXHIBIT INDEX
Exhibit No.
- ----------
(99) Additional Exhibits
(i) Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(ii) Certification of Principal Financial Officer pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Exhibit 99(i)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECITON 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Medicore, Inc. (the "Company")
on Form 10-Q for the first quarter ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date therein specified (the
"Report"), I, Thomas K. Langbein, Chief Executive Officer of the Company,
certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Thomas K. Langbein
-----------------------------------
THOMAS K. LANGBEIN, Chief Executive
Officer
Dated: May 12, 2003
Exhibit 99(ii)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECITON 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Medicore, Inc. (the "Company")
on Form 10-Q for the first quarter ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date therein specified (the
"Report"), I, Daniel R. Ouzts, Principal Financial Officer of the Company,
certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Daniel R. Ouzts
-----------------------------------
DANIEL R. OUZTS, Principal Financial
Officer
Dated: May 12, 2003