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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 June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to __________________
Commission file number 0-6906
MEDICORE, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-0941551
- --------------------------------------------- -------------------
(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 - 6,990,630 shares as of August 10, 2004.
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
- ------ ---------------------
The Consolidated Financial Statements (Unaudited) for the three months
and six months ended June 30, 2004 and June 30, 2003 include the accounts of
the Registrant and its subsidiaries.
Item 1. Financial Statements
- ------ --------------------
1) Consolidated Statements of Operations for the three months and six
months ended June 30, 2004 and June 30, 2003.
2) Consolidated Balance Sheets as of June 30, 2004 and December 31,
2003.
3) Consolidated Statements of Cash Flows for the six months ended June
30, 2004 and June 30, 2003.
4) Notes to Consolidated Financial Statements as of June 30, 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------ ----------------------------------------------------------
Item 4. Controls and Procedures
- ------ -----------------------
PART II -- OTHER INFORMATION
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Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
- ------ ---------------------------------------------------------------------
Securities
----------
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
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PART I -- FINANCIAL INFORMATION
---------------------------------
Item 1. Financial Statements
- ------ --------------------
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
Revenues:
Sales:
Product sales $ 198,828 $ 225,024 $ 423,146 $ 434,781
Medical service revenues 9,496,608 7,423,946 17,906,132 14,161,897
Total sales 9,695,436 7,648,970 18,329,278 14,596,678
Other income 92,610 79,175 309,655 152,235
----------- ----------- ----------- -----------
9,788,046 7,728,145 18,638,933 14,748,913
----------- ----------- ----------- -----------
Cost and expenses:
Cost of sales:
Cost of product sales 131,623 143,015 249,250 274,106
Cost of medical services 5,738,179 4,516,757 10,900,401 8,719,370
----------- ----------- ----------- -----------
Total cost of sales 5,869,802 4,659,772 11,149,651 8,993,476
Legal fees related party 90,000 80,000 169,000 159,000
Selling, general and administrative
expenses 3,196,226 2,659,020 6,794,501 5,083,792
Provision for doubtful accounts 200,042 159,165 348,337 255,063
----------- ----------- ----------- -----------
9,356,070 7,557,957 18,461,489 14,491,331
----------- ----------- ----------- -----------
Operating income 431,976 170,188 177,444 257,582
Other income:
Interest income related parties 960 7,419 4,785 14,992
Gain on sale of former subsidiary
(Note 13) --- --- 545,995 ---
Other income, net 78,325 60,570 153,623 132,210
----------- ----------- ----------- -----------
79,285 67,989 704,403 147,202
----------- ----------- ----------- -----------
Income before income taxes, minority
interest and equity in affiliate
earnings 511,261 238,177 881,847 404,784
Income tax provision 277,665 163,086 493,773 274,351
----------- ----------- ----------- -----------
Income before minority interest and
equity in affiliate earnings 233,596 75,091 388,074 130,433
Minority interest in income of
consolidated subsidiaries (298,568) (145,227) (472,491) (259,746)
Equity in affiliate earnings 31,362 6,214 50,395 21,633
----------- ----------- ----------- -----------
Net loss $ (33,610) $ (63,922) $ (34,022) $ (107,680)
=========== =========== =========== ===========
Loss per share:
Basic $.-- $(.01) $.-- $(.02)
===== ===== ===== =====
Diluted $(.01) $(.01) $(.01) $(.02)
===== ===== ===== =====
See notes to consolidated financial statements.
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003(A)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,663,084 $10,316,170
Accounts receivable, less allowance of $865,000 at June 30,
2004 and $796,000 at December 31, 2003 6,376,143 4,963,628
Receivable from sale of former subsidiary (Note 13) --- 384,253
Inventories, less allowance for obsolescence of $75,000 at
June 30, 2004 and $90,000 at December 31, 2003 1,515,929 1,320,255
Related parties' loan and interest receivable 109,424 204,469
Prepaid expenses and other current assets 1,764,941 1,807,663
Deferred income taxes 488,000 477,000
----------- -----------
Total current assets 18,917,521 19,473,438
Property and equipment
Land and improvements 1,027,108 1,027,108
Building and building improvements 3,233,959 3,232,904
Equipment and furniture 7,615,941 6,226,312
Leasehold improvements 4,132,907 3,566,083
----------- -----------
16,009,915 14,052,407
Less accumulated depreciation and amortization 6,395,620 5,670,595
----------- -----------
9,614,295 8,381,812
----------- -----------
Other assets 702,735 668,763
Goodwill 2,291,333 2,291,333
----------- -----------
Total other assets 2,994,068 2,960,096
----------- -----------
$31,525,884 $30,815,346
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,204,371 $ 1,209,128
Accrued expenses and other current liabilities 4,494,513 4,228,391
Current portion of long-term debt 572,000 575,000
Income taxes payable 144,732 28,949
----------- -----------
Total current liabilities 6,415,616 6,041,468
Long-term debt 1,823,880 2,097,355
Deferred income taxes 683,000 742,000
----------- -----------
Total liabilities 8,922,496 8,880,823
Minority interest in subsidiaries 5,743,091 4,941,655
Commitments
Stockholders' equity:
Common stock, $.01 par value; authorized 12,000,000 shares;
6,988,614 shares issued and outstanding at June 30, 2004;
6,753,943 shares issued and outstanding at December 31, 2003 69,886 67,539
Capital in excess of par value 12,907,092 13,007,988
Retained earnings 3,883,319 3,917,341
----------- -----------
Total stockholders' equity 16,860,297 16,992,868
----------- -----------
$31,525,884 $30,815,346
=========== ===========
(A) Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2003 filed with the Securities and Exchange Commission
in March, 2004.
See notes to consolidated financial statements.
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
-------------------------
2004 2003
---- ----
Operating activities:
Net loss $ (34,022) $ (107,680)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 734,242 597,555
Amortization 1,157 1,157
Bad debt expense 348,337 255,063
Deferred income tax benefit (70,000) ---
Inventory obsolescence credit (15,445) (23,394)
Stock option expense 351,845 4,667
Minority interest 472,491 259,746
Equity in affiliate earnings (50,395) (21,633)
Gain on sale of former subsidiary (545,995) ---
Increase (decrease) relating to operating activities from:
Accounts receivable (1,760,852) (1,580,887)
Inventories (180,229) (236,872)
Interest receivable related parties (4,786) (14,992)
Prepaid expenses and other current assets 14,720 164,299
Accounts payable (4,757) (237,029)
Accrued expenses and other current liabilities 1,056,218 378,339
Income taxes payable 115,783 ---
----------- -----------
Net cash provided by (used in) operating activities 428,312 (561,661)
Investing activities:
Loans to physician affiliates --- (150,000)
Earn-out payment from sale of subsidiary 930,248 1,010,747
Purchase of minority interest in subsidiaries (670,000) (670,000)
Acquisition of dialysis center --- (75,000)
Additions to property and equipment, net of minor disposals (1,966,725) (659,269)
Distribution from affiliate 20,400 77,000
Other assets (8,404) 5,181
----------- -----------
Net cash used in investing activities (1,694,481) (461,341)
Financing activities:
Line of credit net payments --- (79,157)
Payments on long-term borrowings (276,474) (289,665)
Proceeds from exercise of subsidiary stock options 5,400 11,250
Repurchase of stock --- (66,611)
Capital contributions by subsidiaries' minority members --- 141,588
Distribution to subsidiaries' minority members (115,843) (118,655)
----------- -----------
Net cash used in financing activities (386,917) (401,250)
----------- -----------
Decrease in cash and cash equivalents (1,653,086) (1,424,252)
Cash and cash equivalents at beginning of periods 10,316,170 8,080,903
----------- -----------
Cash and cash equivalents at end of periods $ 8,663,084 $ 6,656,651
=========== ===========
See notes to consolidated financial statements.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: The company has three reported business segments. The
medical services segment, operated by Medicore's 57% owned subsidiary,
Dialysis Corporation of America and subsidiaries ("Dialysis Corporation of
America"), operates 20 kidney dialysis outpatient treatment centers located
in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and
Virginia, including the management of each of a 40% owned Ohio affiliate and
an unaffiliated Georgia center, and has one dialysis center under
development; has agreements to provide inpatient dialysis treatments to
various hospitals; and provides supplies and equipment for dialysis home
patients. The medical products segment is engaged in the distribution of
medical products. A third segment, investment in technology companies, was
initiated in January, 2000, with investments in Linux software companies.
See "Consolidation."
Consolidation: The consolidated financial statements include the
accounts of Medicore, Inc. and Dialysis Corporation of America. Intercompany
accounts and transactions have been eliminated in consolidation. Dialysis
Corporation of America has a 40% interest in an Ohio dialysis center it
manages, which is accounted for by the equity method and not consolidated for
financial reporting purposes.
Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
The company's principal estimates are for estimated uncollectible
accounts receivable as provided for in its allowance for doubtful accounts,
estimated losses from obsolete or unsaleable inventory as provided for in its
allowance for inventory obsolescence, estimated useful lives of depreciable
assets, estimates for patient revenues from non-contracted payors, and the
valuation allowance for deferred tax assets based on the estimated
realizability of deferred tax assets. The company's estimates are based on
historical experience and assumptions believed to be reasonable given the
available evidence at the time of the estimates. Actual results could differ
from those estimates.
Government Regulation: A substantial portion of the revenues of the
company's medical services segment are attributable to payments received
under Medicare, which is supplemented by Medicaid or comparable benefits in
the states in which the company operates. Reimbursement rates under these
programs are subject to regulatory changes and governmental funding
restrictions. Laws and regulations governing the Medicare and Medicaid
programs are complex and subject to interpretation. The company believes
that it is in compliance with all applicable laws and regulations and is not
aware of any pending or threatened investigations involving allegations of
potential wrongdoing. While no such regulatory inquiries have been made,
compliance with such laws and regulations can be subject to future government
review and interpretation as well as significant regulatory action including
fines, penalties, and exclusion from the Medicare and Medicaid programs.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Vendor Concentration: The company's medical services segment purchases
erythropoietin (EPO) from one supplier which comprised 35% and 36% of medical
service cost of sales for the three months and six months ended June 30, 2004
and 36% and 37% for the same periods of the preceding year. There is only
one supplier of EPO in the United States, which supplier has recently
received FDA approval for an alternative product available for dialysis
patients. There are no other suppliers of any similar drug available to
dialysis treatment providers. Revenues from the administration of EPO
comprised 27% and 28% of medical services revenue for the three months and
six months ended June 30, 2004 and for the same periods of the preceding
year.
Inventories: Inventories are valued at the lower of cost (first-in,
first-out and/or weighted average cost method) or market value, and consist
of inventory of the company's medical products division and the company's
medical services division.
Goodwill: Goodwill represents cost in excess of net assets acquired.
The company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (FAS 142) effective January 1, 2002.
Under FAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators are present) for impairment. Pursuant to the provisions of FAS
142, the goodwill resulting from Dialysis Corporation of America's
acquisition of minority interests in August, 2001, and June, 2003, and the
goodwill resulting from Dialysis Corporation of America's acquisition of
Georgia dialysis centers in April, 2002, and April, 2003, are not being
amortized for book purposes and are subject to the annual impairment testing
provisions of FAS 142, which testing indicated no impairment for goodwill.
See Note 10.
Income Taxes: Deferred income taxes are determined by applying enacted
tax rates applicable to future periods in which the taxes are expected to be
paid or recovered to differences between the financial accounting and tax
basis of assets and liabilities.
Dialysis Corporation of America files separate income tax returns with
its income tax liability reflected on a separate return basis.
Other Income:
Operating:
Other operating income is comprised as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
Management fee income $ 92,610 $ 79,175 $ 175,472 $ 152,235
Litigation settlement --- --- 134,183 ---
---------- ---------- ---------- ----------
$ 92,610 $ 79,175 $ 309,655 $ 152,235
========== ========== ========== ==========
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Non-operating:
Other income, net, is comprised as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
Rental income $ 85,658 $ 83,247 $ 170,946 $ 157,248
Interest income 19,470 19,086 38,315 49,124
Interest (expense) (40,755) (51,012) (83,352) (105,033)
Other 13,952 9,249 27,714 30,871
---------- ---------- ---------- ----------
Other income, net $ 78,325 $ 60,570 $ 153,623 $ 132,210
========== ========== ========== ==========
Accrued Expenses: Accrued expenses and other current liabilities is
comprised as follows:
June 30, December 31,
2004 2003
----------- -----------
Accrued compensation $ 1,037,012 $ 1,230,685
Due to insurance companies 2,486,521 1,759,397
Payable subsidiary minority interest acquisition (See Note 10) --- 670,000
Insurance premiums payable 410,062 137,987
Other 560,918 430,322
----------- -----------
$ 4,494,513 $ 4,228,391
=========== ===========
Stock-Based Compensation: The company follows the intrinsic value
method of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related Interpretations in accounting for
its employee stock options because, as discussed below, Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation"
(FAS 123) requires use of option valuation models that were not developed for
use in valuing employee stock options. FAS 123 permits a company to elect to
follow the intrinsic method of APB 25 rather than the alternative fair value
accounting provided under FAS 123, but requires pro forma net income and
earnings per share disclosures as well as various other disclosures not
required under APB 25 for companies following APB 25. The company has
adopted the disclosure provisions required under Financial Accounting
Standards Board Statement No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" (FAS 148). Under APB 25, because the exercise
price of the company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense was
recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123 and FAS 148, and has been determined as if the company
had accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the option grants in 2003: risk-free
interest rate of 1.76%; no dividend yield; volatility factor of the expected
market price of the company's common stock of .78, and an expected life of
2.17 years.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
The fair value of Dialysis Corporation of America's options was
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for option grants during
2004, 2003, 2002 and 2001, respectively: risk-free interest rate of 3.91%,
1.44%, 3.73% and 5.40%; no dividend yield; volatility factor of the expected
market price of the company's common stock of .66, 1.07, 1.15, and 1.14, and
a weighted-average expected life of 5 years, 4.7 years, 5 years, and 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective input assumptions including the
expected stock price volatility. Because the company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable measure of the fair
value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. The
company's pro forma information, which includes the pro forma effects related
to the company's interest in Dialysis Corporation of America pro forma
adjustments, follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
Net loss, as reported $ (33,610) $ (63,922) $ (34,022) $ (107,680)
Stock-based employee compensation
expense under fair value method,
net of related tax effects (24,439) (9,433) (31,058) (18,866)
----------- ----------- ----------- -----------
Pro forma net loss-basic computation (58,049) (73,355) (65,080) (126,546)
Subsidiary dilutive securities
adjustments (9,928) (11,711) (25,171) (20,560)
----------- ----------- ----------- -----------
Pro forma net loss-diluted computation $(67,977) $(85,066) $(90,251) $(147,106)
=========== =========== =========== ===========
Loss per share:
Basic, as reported $.--- $(.01) $.--- $(.02)
===== ===== ===== =====
Basic, pro forma $(.01) $(.01) $(.01) $(.02)
===== ===== ===== =====
Diluted, as reported $(.01) $(.01) $(.01) $(.02)
===== ===== ===== =====
Diluted, pro forma $(.01) $(.01) $(.01) $(.02)
===== ===== ===== =====
Earnings (Loss) Per Share: Diluted earnings (loss) 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.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
Net loss, numerator-basic computation $ (33,610) $ (63,922) $ (34,022) $ (107,680)
Adjustment due to subsidiaries' dilutive
securities (9,928) (11,711) (25,171) (20,560)
----------- ----------- ----------- -----------
Net loss as adjusted, numerator-diluted
computation $ (43,538) $ (75,633) $ (59,193) $ (128,240)
=========== =========== =========== ===========
Weighted average shares 6,988,614 6,551,775 6,987,325 6,558,548
=========== =========== =========== ===========
Loss per share:
Basic $.--- $(.01) $.--- $(.02)
===== ===== ===== =====
Diluted $(.01) $(.01) $(.01) $(.02)
===== ===== ===== =====
The company has various stock options outstanding which have not been
included in the diluted loss per share computation since they would be anti-
dilutive due to the loss. See Note 6.
Cash and Cash Equivalents: The company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The carrying amounts, reported in the balance sheet for cash
and cash equivalents approximate their fair values. The credit risk
associated with cash and cash equivalents are considered low due to the high
quality of the financial institutions in which these assets are invested.
Credit Risk: The company's primary concentration of credit risk is with
accounts receivable which consist primarily of amounts owed by governmental
agencies, insurance companies and private patients to the company's medical
services division, and amounts owed by commercial customers to its medical
products division. Receivables of the medical services division from
Medicare and Medicaid comprised 60% of that division's receivables at June
30, 2004 and 59% at December 31, 2003.
Customer Payment Terms: The majority of the company's sales are made at
payment terms of net amount due in 30-45 days, depending on the customer.
Estimated Fair Value of Financial Instruments: The carrying value of
cash, accounts receivable and debt in the accompanying financial statements
approximate their fair value because of the short-term maturity of these
instruments, and in the case of debt because such instruments bear variable
interest rates which approximate market.
Business Segments: The company follows the provisions of Financial
Accounting Standards Board Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" (FAS 131) which contains standards for
reporting information about operating segments in annual financial statements
with operating segments representing components of an enterprise evaluated by
the enterprise's chief operating decision maker for purposes of making
decisions regarding resource allocation and performance evaluation. The
adoption of FAS 131 has not changed the company's reported business segments,
but has resulted in changes in the company's segment reporting disclosures.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Revenue Recognition: Net medical services revenues are recognized as
services are rendered at the net realizable amount from Medicare, Medicaid,
commercial insurers, other third-party payors, and directly from patients.
The medical services division occasionally provides dialysis treatments on a
charity basis to patients who cannot afford to pay, however, the amount is
not significant. Product sales are recorded pursuant to stated shipping
terms.
Advertising Costs: The company expenses advertising costs as they are
incurred. Advertising costs amounted to $22,000 and $55,000 for the three
months and six months ended June 30, 2004 and $9,000 and $54,000 for the same
periods of the preceding year.
Reclassification: Certain prior year amounts have been reclassified to
conform with the current year's presentation.
NOTE 2--TRANSACTIONS WITH VIRAGEN, INC.
The company has a royalty agreement with a former subsidiary, Viragen,
Inc., pursuant to which it is to receive a royalty on Viragen's gross sales
of interferon and related products. The agreement provides for aggregate
royalty payments of $2.4 million to be paid based on the following
percentages of Viragen sales: 5% of the first $7 million, 4% of the next $10
million, and 3% of the next $55 million. The effective date of the agreement
was November 15, 1994, with royalty payments due quarterly, commencing March
31, 1995. A payment of approximately $108,000, earned under the original
royalty agreement, is due as the final payment under the existing royalty
agreement. In August, 2002, the company initiated a legal action against
Viragen for breach of the royalty agreement and for an accounting of sales
pursuant to the royalty agreement.
In July, 2003, the company reached an agreement with Viragen pursuant to
mediation proceedings following its obtaining a partial summary judgment
against Viragen in March, 2003, for amounts owed to it under the royalty
agreement with Viragen. Viragen agreed to remit $30,000 on each of August 1,
2003, August 1, 2004, and August 1, 2005, with annual interest accruing at 5%
and to be paid with the August, 2004 and 2005 payments. Viragen remitted the
$30,000 payment due August 1, 2003 and the $30,000 payment plus $3,000
interest due August 1, 2004. Viragen also agreed to commence remitting the
quarterly royalty payments due under the royalty agreement and has remitted
quarterly payments of $2,580 in October, 2003, $2,905 in January, 2004,
$3,735 in April, 2004, and $3,426 in July 2004.
NOTE 3--INTERIM ADJUSTMENTS
The financial summaries for the three months and six months ended June
30, 2004, and June 30, 2003, are unaudited and include, in the opinion of
management of the company, all adjustments (consisting of normal recurring
accruals) necessary to present fairly the earnings for such periods.
Operating results for the three months and six months ended June 30, 2004,
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 2004.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 3--INTERIM ADJUSTMENTS--CONTINUED
While the company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes included in the company's latest annual report on Form
10-K for the year ended December 31, 2003.
NOTE 4--LONG-TERM DEBT
The company's medical products division had a $350,000 line of credit
with a local Florida bank, with interest at prime plus 1% payable monthly.
This line of credit matured January 22, 2003, and was secured by the accounts
receivable and inventory of the company's medical products division. The
line of credit and accrued interest were paid off in January, 2003, prior to
maturity. The company did not renew this line of credit.
Dialysis Corporation of America through its subsidiary, DCA of Vineland,
LLC, pursuant to a December 3, 1999 loan agreement obtained a $700,000
development loan with interest at 8.75% through December 2, 2001, 11/2% over
the prime rate thereafter through December 15, 2002, and 1% over prime
thereafter. The interest rate on the loan was 5% at each of June 30, 2004
and December 31, 2003. The loan is secured by a mortgage on Dialysis
Corporation of America's real property in Easton, Maryland. Outstanding
borrowings were subject to monthly payments of interest only through December
2, 2001, with monthly payments thereafter of $2,917 principal plus interest
through December 2, 2002, and monthly payments thereafter of $2,217 principal
plus interest with any remaining balance due December 2, 2007. This loan had
an outstanding principal balance of $623,000 at June 30, 2004, and $636,000
at December 31, 2003.
In April, 2001, Dialysis Corporation of America obtained a $788,000
five-year mortgage through April, 2006, secured by its land and building in
Valdosta, Georgia with interest at 8.29% until March, 2002, 7.59% thereafter
until December 16, 2002, and prime plus 1/2% with a minimum of 6.0% effective
December 16, 2002. The interest rate on the loan was 6% at each of June 30,
2004 and December 31, 2003. Payments are $6,800 including principal and
interest commencing May, 2001, with a final payment consisting of a balloon
payment and any unpaid interest due April, 2006. The remaining principal
balance under this mortgage amounted to approximately $695,000 at June 30,
2004, and $715,000 at December 31, 2003.
The Dialysis Corporation of America equipment financing agreement is for
financing for kidney dialysis machines for Dialysis Corporation of America's
facilities. Financing is secured by the financed equipment. Monthly
payments under the agreement, as of December 31, 2003, are pursuant to
various schedules extending through August, 2007, with interest at rates
ranging from 4.13% to 10.48%. Financing under the equipment financing
agreement is a noncash financing activity which is a supplemental disclosure
required by FAS 95, "Statement of Cash Flows." There was no financing under
the agreement during the first half of 2004 or the first half of 2003. The
remaining principal balance under this financing amounted to approximately
$1,078,000 at June 30, 2004, and $1,321,000 at December 31, 2003.
The prime rate was 4.00% as of June 30, 2004 and as of December 31,
2003. For interest payments, see Note 15.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 4--LONG-TERM DEBT--CONTINUED
Dialysis Corporation of America's two mortgage agreements contain
certain restrictive covenants that, among other things, restrict the payment
of dividends above 25% of the net worth of Dialysis Corporation of America,
require lenders' approval for a merger, sale of substantially all the assets,
or other business combination of Dialysis Corporation of America, and require
maintenance of certain financial ratios. Dialysis Corporation of America was
in compliance with the debt covenants at June 30, 2004, and December 31,
2003.
NOTE 5--INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
For income tax payments, see Note 15.
NOTE 6--STOCK OPTIONS AND STOCK COMPENSATION
On May 6, 1996, we adopted a Key Employee Stock Plan reserving 100,000
shares of our common stock for issuance from time to time to officers,
directors, key employees, advisors and consultants as bonus or compensation
for performances and or services rendered to the company or otherwise
providing substantial benefit for the company. As of June 30, 2004, 2,000
shares have been issued under this Plan.
In July, 2000, the company granted, under our 1989 Stock Option Plan,
five-year non-qualified stock options for 820,000 shares to officers,
directors and employees of Medicore and its subsidiaries. The options have
an exercise price of $1.38, the market price on the date of grant. Options
for 16,000 shares were cancelled during 2003 due to employee terminations and
resignations. In June, 2001, 115,000 options were exercised. In September,
2003, the company's board of directors authorized the granting of bonuses to
our officers, directors and employees, which bonuses were partially comprised
of the exercise of one-third of the options then held by these individuals as
of September 11, 2003 resulting in the exercise of 229,668 options. In
January, 2004, the company's board of directors authorized the granting of
bonuses to the company's officers, directors and employees, which bonuses
were partially comprised of the exercise of a portion of the options then
held by these individuals resulting in the exercise of 234,671 options. At
June 30, 2004, a total of 224,661 options were outstanding under the 1989
Stock Option Plan.
As part consideration for a May, 2003 consulting agreement, the company
granted options to purchase 200,000 shares of common stock exercisable for
two years at $2.50 per share. The fair value of these options was $56,000
pursuant to a Black-Scholes computation. The $56,000 expense was being
deferred and amortized over the one year life of the consulting agreement
which expired on May 30, 2004. Approximately $14,000 and $28,000 of such
expense was recorded during the three months and six months ended June 30,
2004 and $5,000 for the same periods of the preceding year. The parties to
the consulting agreement have agreed to continue the arrangement on a month
to month basis. See Note 8.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 6--STOCK OPTIONS AND STOCK COMPENSATION--Continued
On September 25, 2003, the company granted options for 21,000 common
shares to each of two directors for their service on several of its board
committees, including its audit committee. The options were granted under
the company's 1989 Stock Option Plan and are exercisable at $2.25 per share
through September 24, 2006. The options vest in equal annual increments of
7,000 shares each September 25, 2003, 2004 and 2005. On July 14, 2004, one
of the directors acquired an aggregate of 2,016 shares by effecting a
"cashless" exercise of the vested portion of his option with respect to 7,000
shares. The director agreed to forego the balance of 4,984 shares underlying
the option in lieu of payment of cash for the exercise price.
On January 28, 2004, Dialysis Corporation of America effected a two-for-
one stock split of its outstanding common stock. All option amounts and
exercise prices with respect to Dialysis Corporation of America have been
adjusted to reflect the stock split. Split-adjusted option exercise prices
resulting in a fraction of a cent have been rounded up to the nearest cent
for purposes of these notes to the financial statements of the company.
In June, 1998, Dialysis Corporation of America's board of directors
granted an option under its now expired 1995 Stock Option Plan to a board
member for 10,000 shares exercisable at $1.13 per share through June 9, 2003.
This option was exercised in June, 2003.
In April, 1999, Dialysis Corporation of America adopted a stock option
plan pursuant to which its board of directors granted 1,600,000 options
exercisable at $.63 per share to certain of its officers, directors,
employees and consultants with 680,000 options exercisable through April 20,
2000 and 920,000 options exercisable through April 20, 2004, of which 120,000
options have been cancelled to date as a result of terminations. In April,
2000, the 680,000 one-year options were exercised for which Dialysis
Corporation of America received cash payment of the par value amount of
$3,400 and the balance in three-year promissory notes with interest at 6.2%.
The notes were repaid with 91,800 shares of Dialysis Corporation of America
stock with a fair market value of approximately $521,000 on February 9, 2004.
Interest income on the notes amounted to approximately $3,000 for the six
months ended June 30, 2004, all of which was earned during the first quarter.
In March, 2003, 155,714 of the remaining 800,000 options outstanding were
exercised for $97,322 with the exercise price satisfied by director bonuses
accrued in 2002. In January, 2004, 130,278 of these options were exercised
for $81,424 with the exercise price satisfied by director bonuses accrued in
2003. In February, 2004, 158,306 of these options were exercised for $98,941
with the exercise price satisfied by payment of 18,152 shares of Dialysis
Corporation of America's stock for cancellation. In March, 2004, 355,702 of
these options were exercised for $222,314 with the exercise price satisfied
by the optionee's payment of 54,223 shares of Dialysis Corporation of America
for cancellation. The exercises and share payments to the company represents
a noncash investing activity, which is a supplemental disclosure required by
Financial Accounting Standards Board Statement No. 95, "Statements of Cash
Flows." See Note 15.
In January, 2001, Dialysis Corporation of America's board of directors
granted to its CEO and President a five-year option for 330,000 shares
exercisable at $.63 per share with 66,000 options vesting January, 2001, and
66,000 options vesting in equal annual increments on January 1 for each of
the next four years. In January, 2004, 56,384 of these options were
exercised for $35,240, with the exercise price satisfied by a Dialysis
Corporation of America director bonuses accrued in 2003.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 6--STOCK OPTIONS AND STOCK COMPENSATION--Continued
In September, 2001, Dialysis Corporation of America's board of directors
granted five-year options for an aggregate of 150,000 shares exercisable at
$.75 per share through September 5, 2006, to certain officers, directors and
key employees. 30,000 of the options vested immediately and the remaining
120,000 options vest in equal increments of 30,000 options each September 5,
commencing September 5, 2002. In March, 2003, 3,570 of these options were
exercised for $2,678 with the exercise price satisfied by Dialysis
Corporation of America director bonuses accrued in 2002. In January, 2004,
4,576 of these options were exercised for $3,432 with the exercise price
satisfied by Dialysis Corporation of America director bonuses accrued in
2003. These exercises represent a noncash investing activity, which is a
supplemental disclosure required by Financial Accounting Standards Board
Statement No. 95, "Statement of Cash Flows." See Note 15. In January, 2004,
7,200 of these options were exercised with Dialysis Corporation of America
receiving a $5,400 cash payment for the exercise price leaving 134,654 of
these options outstanding as of March 31, 2004. As of June 30, 2004, an
aggregate of 90,000 of these options had vested of which 15,346 have been
exercised.
In March, 2002, Dialysis Corporation of America's board of director's
granted a five-year option to an officer for 60,000 shares exercisable at
$1.58 per share through February 28, 2007. The option was to vest in equal
annual increments of 15,000 shares each February 28 from 2003 through 2006.
15,000 options that vested in February, 2003, were exercised in October,
2003, and the remaining 45,000 options expired unvested due to the July 31,
2003 resignation of the officer.
In May, 2002, Dialysis Corporation of America's board of directors
granted five-year options for an aggregate of 21,000 shares to its employees
of which 11,000 remain outstanding at December 31, 2003. Most of these
options with respect to each individual employee are for 1,000 shares of
common stock, with one option for 3,000 shares of common stock. These
options are exercisable at $2.05 per share through May 28, 2007, with all
options having vested on May 29, 2004. Options for 10,000 shares have been
cancelled as a result of the termination of those employees holding the
options.
In June, 2003, Dialysis Corporation of America's board of directors
granted to an officer a five-year stock option for 50,000 shares exercisable
at $1.80 per share through June 3, 2008. The option vests annually in
increments of 12,500 shares each June 4 from 2004 through 2007.
In August, 2003, Dialysis Corporation of America's board of directors
granted a three-year option to a director who is also a member of several of
its committees, for 10,000 shares exercisable at $2.25 per share through
August 18, 2006. The option vests in two annual increments of 5,000 shares
on August 19, 2004 and 2005.
In January, 2004, Dialysis Corporation of America's board of directors
granted a five-year option for 20,000 shares exercisable at $3.09 per share
through January 12, 2009. The option vests in annual increments of 5,000
shares on each January 13 from 2005 through 2008.
In June 2004, Dialysis Corporation of America's board of directors
granted 145,000 options to officers and directors exercisable at $4.02 per
share through June 6, 2009. 15,000 options vested immediately and the
remaining 130,000 options vest annually in equal 25% increments commencing
June 7, 2005.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 7--BUSINESS SEGMENT DATA
The following summarizes information about the company's three reported
business segments, which are managed separately. The medical products
division has been shown separately even though not required by FAS 131.
Corporate activities include general corporate revenues and expenses.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
OPERATING REVENUES
Medical products $ 198,828 $ 225,024 $ 423,146 $ 434,781
Medical services 9,589,218 7,503,121 18,215,787 14,314,132
----------- ----------- ----------- -----------
$ 9,788,046 $ 7,728,145 $18,638,933 14,748,913
=========== =========== =========== ===========
PROFIT (LOSS)
Medical products $ (43,069) $ (29,967) $ (48,587) $ (55,213)
Medical services 764,535 473,552 1,305,354 851,826
New technology --- --- --- 15,000
Corporate (210,205) (205,408) (920,915) (406,829)
Gain on sale of former subsidiary --- --- 545,995 ---
----------- ----------- ----------- -----------
$ 511,261 $ 238,177 $ 881,847 $ 404,784
=========== =========== =========== ===========
NOTE 8--COMMITMENTS
In January, 2003, the company and Dialysis Corporation of America
established a new 401(k) plan containing employer match provisions on a
portion of employee contributions. The Company's expense for employer
matching contributions amounted to approximately $8,000 and $18,000 for the
three months and six months ended June 30, 2004 and $7,000 for the same
period of the preceding year.
The company entered into a one-year consulting agreement with an
investment relations firm in May, 2003, with a monthly fee of $4,000. The
agreement also provided for the issuance of a two year option to purchase
200,000 shares of the company's common stock exercisable at $2.50 per share.
At management's discretion, the company may cancel the agreement at any time.
In June, 2003, two of the partners of the investment relations firm together
with Thomas K. Langbein, the company's Chairman, CEO and President, became
three of the five directors of Xandros, Inc., a majority owned subsidiary of
Linux Global Partners, Inc., which is a privately held Linux software company
to which the company made loans and in which the company holds an approximate
14% interest. Mr. Langbein resigned his positions with Xandros on August 12,
2003. See Notes 6 and 12.
NOTE 9--RELATED PARTY TRANSACTIONS
In May, 2001, Dialysis Corporation of America loaned its President and
CEO $95,000 to be repaid with accrued interest at prime minus 1% (floating
prime) on or before maturity on May 11, 2006. This demand loan is
collateralized by all of such individual's Dialysis Corporation of America
stock and stock options in Dialysis Corporation of America, and proceeds from
the sale of such stock. Interest income on the loan amounted to
approximately $1,000 and $2,000 for three months and six months ended June
30, 2004 and for each of the same periods of the preceding year. Accrued
interest on the loan was approximately $14,000 as of June 30, 2004 and
$13,000 as of December 31, 2003.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 9--RELATED PARTY TRANSACTIONS--CONTINUED
The 20% minority interest in DCA of Vineland, LLC, a subsidiary of
Dialysis Corporation of America, was held by a company owned by the medical
director of that facility, who became a director of Dialysis Corporation of
America in 2001. In April, 2000, another company owned by this physician
acquired an interest in DCA of Vineland, resulting in Dialysis Corporation of
America holding a 51% ownership interest in DCA of Vineland and this
physician's companies holding a combined 49% ownership interest in DCA of
Vineland. Effective as of the company's annual meeting of shareholders in
June, 2004, the physician ceased being a member of the company's board of
directors.
In July, 2000, one of the companies owned by this physician, acquired a
20% interest in DCA of Manahawkin, Inc. (formerly known as Dialysis Services
of NJ, Inc. - Manahawkin). Under agreements with DCA of Vineland and DCA of
Manahawkin, this physician serves as medical director for each of those
dialysis facilities.
Effective March 17, 2004, the company agreed to provide Dialysis
Corporation of America with up to $1,500,000 of financing which was evidenced
by a demand promissory note issued by Dialysis Corporation of America to the
company with annual interest of 1.25% over the prime rate. The financing was
provided for equipment purchases to be made by Dialysis Corporation of
America. The financing was subsequently modified by increasing the maximum
amount of advances that can be made to $2,000,000, and by adding to the
purposes of the financing, working capital and other corporate needs.
Dialysis Corporation of America borrowed approximately $885,000 under this
note during the first half of 2004 which had an interest rate of 5.25% as of
June 30, 2004. Interest expense on the note amounted to approximately $2,000
and $7,000 for the three months and six months ended June 30, 2004. Accrued
interest payable on the note amounted to approximately $9,000 as of June 30,
2004.
Minority members in subsidiaries in certain situations may fund their
portion of required capital contributions by issuance of an interest bearing
note payable to Dialysis Corporation of America which the minority member may
repay through its portion of capital distributions of the subsidiary. The
20% member in DCA of Chevy Chase, LLC funded approximately $42,000 in capital
contributions during the first half of 2004, and $190,000 of such
contributions during the same period of the preceding year, under a note with
Dialysis Corporation of America accruing interest at prime plus 2%, with
interest totaling approximately $ 3,000 and $6,000 for the three months and
six months ended June 30, 2004 and $3,000 and $4,000 for the same periods of
the preceding year, with approximately $46,000 of distributions to the member
applied against the note and accrued interest during the first half of 2004.
No such distributions were made during the same period of the preceding year.
These transactions represent noncash investing activities, which is a
supplemental disclosure required by Financial Accounting Standards Board
Statement No. 95, "Statement of Cash Flows." See Note 15.
The company and Dialysis Corporation of America incurred legal fees of
approximately $90,000 and $169,000 for the three months and six months ended
June 30, 2004 and $80,000 and $159,000 for the same periods of the preceding
year, for an attorney who is general counsel and secretary of the company (of
which he is also a director), and serves as general counsel and secretary to
Dialysis Corporation of America.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 10--ACQUISITIONS
In August, 2001, Dialysis Corporation of America acquired the 30%
minority interest in one of its Georgia dialysis centers for $600,000. This
transaction resulted in $523,000 of goodwill representing the excess of the
purchase price over the fair value of the net assets acquired. The goodwill
is being amortized for tax purposes over a 15-year period. Dialysis
Corporation of America's decision to make this investment was based largely
on its expectation of continued profitability of this center. The party from
whom Dialysis Corporation of America acquired the minority interest is the
medical director of another of Dialysis Corporation of America's subsidiaries.
See Note 1.
In April, 2002, Dialysis Corporation of America acquired a Georgia
dialysis center. This transaction resulted in $400,000 of goodwill
representing the excess of the purchase price over the fair value of the net
assets acquired. The goodwill is being amortized for tax purposes over a 15-
year period. Dialysis Corporation of America's decision to make this
investment was based on its expectation of future profitability resulting
from its review of this dialysis center's operations prior to making the
acquisition. See Note 1.
Effective April 8, 2003, Dialysis Corporation of America acquired the
assets of a Georgia dialysis center, and effective June 1, 2003, acquired the
30% minority interests in each of two of its existing Georgia dialysis
centers for a total consideration of $1,415,000, of which $745,000 was paid
and the remaining balance of $670,000 was paid during the 2nd quarter of
2004. The results of operations of the acquired center have been included in
the consolidated financial statements since its acquisition. Minority
interest in the results of operations of the centers for which we acquired
the outstanding minority interest was included in the consolidated financial
statements until we acquired the minority interests. These acquisitions
resulted in $1,368,000 of goodwill, representing the excess of the purchase
price over the fair value of the net assets acquired. The goodwill is being
amortized for tax purposes over a 15-year period. Dialysis Corporation of
America's decision to make these acquisitions was based on its expectation of
profitability resulting from its management's evaluation of the operations of
these dialysis centers. The party from whom the 30% minority interests were
purchased was the medical director of one of the facilities at which the 30%
interest was acquired and is the medical director of two other of Dialysis
Corporation of America's Georgia dialysis facilities. See Note 1.
NOTE 11--LOAN TRANSACTIONS
Dialysis Corporation of America customarily funds the establishment and
operations of its dialysis facility subsidiaries, usually until they become
self-sufficient, including those subsidiaries in which medical directors hold
interests ranging from 20% to 49%. Except in limited circumstances, such
funding is generally made without formalized loan documents, as the operating
agreements for Dialysis Corporation of America's subsidiaries provide for
cash flow and other proceeds to first pay any such financing provided by
Dialysis Corporation of America, exclusive of any tax payment distributions.
One such loan exists with DCA of Vineland, LLC. In April, 2000, a company
owned by the Vineland medical director, acquired an interest in DCA of
Vineland for $203,000, which was applied to reduce Dialysis Corporation of
America's loan. The principal outstanding indebtedness of this loan was
approximately $189,000 at June 30, 2004 and $425,000 at December 31, 2003,
respectively. See Note 9.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 12--INVESTMENT
During the period January, 2000 through December, 2002, the company made
various loans aggregating approximately $2,450,000 with a 10% annual interest
rate, to Linux Global Partners, a company investing in Linux software
companies, one of which initiated the marketing of a Linux desktop operating
system. In conjunction with the original loan the company acquired an
ownership interest in Linux Global Partners. In consideration for the
company's extending the due date on the loans on several occasions it
received additional shares of Linux Global Partners' common stock and
presently owns approximately 14% of Linux Global Partners. Dialysis
Corporation of America also has an ownership interest in Linux Global
Partners of approximately 2%.
Interest on the notes evidencing the company's loans to Linux Global
Partners amounted to approximately $15,000 during 2003 (through January 24,
2003).
The unpaid loans and accrued interest were satisfied through the
company's foreclosure in January, 2003, of 4,115,815 shares of Ximian, Inc.'s
series A convertible preferred stock which were part of the collateral
securing Linux Global Partners' indebtedness to the company. On January 24,
2003, Xandros, Inc., a 95% owned subsidiary of Linux Global Partners,
purchased the Ximian preferred shares at the public foreclosure sale and
deposited 775,000 shares of its common stock (approximately 1.5% of Xandros)
as a good faith deposit with the full amount due in cash. Upon Xandros'
failure to make the payment, the company, as the next highest bidder,
obtained the Ximian preferred stock and, in accordance with the terms of the
public auction retained the Xandros shares in satisfaction of the
indebtedness due from Linux Global Partners. Thereafter, in connection with
a third-party's acquisition of Ximian in August, 2003, the company sold the
Ximian preferred stock for approximately $3,541,000 in cash proceeds
resulting in a gain of approximately $784,000. An additional approximately
$805,000 was placed in escrow, with approximately $402,000 of the escrowed
funds released to the company in August 2004 and the remaining balance to be
released in August 2005, pending fulfillment by the parties to the Ximian
acquisition of certain conditions. The company will record additional gains
based on net proceeds received.
NOTE 13--SALE OF INTEREST IN FORMER SUBSIDIARY
On April 6, 2001, the company entered into an agreement with Simclar
International to sell its 71.3% ownership interest in Techdyne, Inc. (now
Simclar, Inc.) to Simclar International for $10,000,000. The agreement
provided for an earn-out consisting of 3% of consolidated Techdyne sales for
the three fiscal years commencing January 1, 2001. Limitations on the earn-
out ranged from a $5,000,000 maximum to a $2,500,000 minimum earn-out. The
earn-out was payable in cash each year for the earn-out period just ended.
In April, 2002, the company received the first earn-out payment of
$1,105,000. In April, 2003, the company received the second earn-out payment
of $1,011,000. In April, 2004, the company received a third earn-out payment
of $930,248. The total earn-out payments received of approximately
$3,046,000 exceeded the $2,500,000 minimum earn-out previously recorded by
approximately $546,000, which has been reflected as a non-operating gain in
the consolidated statement of operations. Based on Techdyne (Simclar, Inc.)
consolidated sales of $36,187,105 for
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
NOTE 13--SALE OF INTEREST IN FORMER SUBSIDIARY--CONTINUED
2003 on which the earn-out payment is supposed to be computed based on the
Agreement for Sales and Purchase of Shares, the earn-out payment received in
April, 2004, should have been $1,085,613. The company has demanded payment
of the $155,365 balance due from Simclar International, and on April 10,
2004, the company filed an action in the 11th Judicial Circuit in Miami-Dade
County, Florida to collect the balance of the earn-out payment due. Simclar
has filed a counter claim against the company, alleging that it erroneously
overpaid the company $316,464 as a result of Simclar certifying erroneous
sales amounts for the years 2001, 2002 and 2003. The Company believes the
counterclaim is without merit.
NOTE 14--STOCK REPURCHASES
In December, 2002, the company's board of directors authorized the
purchase of up to approximately 1,000,000 shares of the company's outstanding
common stock based on current market prices. The company repurchased and
cancelled 48,500 shares for approximately $70,000 in the first quarter of
2003. No repurchases were made during the first half of 2004.
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION
The following represents non-cash financing and investing activities and
other cash flow information.
June 30, December 31,
2004 2003
----------- -----------
Interest paid (see Note 4) $ 80,000 $ 86,000
Income taxes paid (see Note 5) 453,000 336,000
Option exercise bonus (see Note 6) 120,000 100,000
Subsidiary minority member capital contributions funded by
notes (see Note 9) 42,000 190,000
Subsidiary minority member distributions applied against notes
and accrued interest (see Note 9) 46,000 ---
Share payment to subsidiary for subsidiary stock option exercises
(see Note 6) 321,000 ---
Share payment to subsidiary for notes and accrued interest
(see Note 6) 521,000 ---
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations, commonly known as MD&A, is our attempt to provide a narrative
explanation of our financial statements, and to provide our shareholders and
investors with the dynamics of our business as seen through our eyes as
management. Generally, MD&A is intended to cover expected effects of known
or reasonably expected uncertainties, expected effects of known trends on
future operations, and prospective effects of events that have had a material
effect on past operating results. Our discussion of MD&A should be read in
conjunction with our unaudited consolidated financial statements, including
the notes, included elsewhere in this Quarterly Report on Form 10-Q.
Overview
Although we have a medical products division and investment in two
affiliated technology companies, our primary operations, revenues and income
are derived from our dialysis operations through our 57% public subsidiary,
Dialysis Corporation of America. That subsidiary provides dialysis services,
primarily kidney dialysis treatments through its 20 outpatient dialysis
centers, including the management of each of a center in which it holds a 40%
minority interest and one unaffiliated dialysis center. Dialysis Corporation
of America retains board certified or board eligible nephrologists to serve
as medical directors of its outpatient dialysis centers. The medical
directors have a range of responsibilities, primarily administration and
monitoring of patient care. In addition, Dialysis Corporation of America
provides dialysis treatments to patients at six hospitals and medical centers
through its acute inpatient dialysis services agreements with these entities.
Dialysis Corporation of America also provides homecare services, including
home peritoneal dialysis and method II services, the latter relating to
providing patients with supplies and equipment.
The following table shows the number of in-center, home peritoneal
and acute inpatient treatments performed by Dialysis Corporation of America
through the dialysis centers it operates, including the two centers it
manages, one in which it has a 40% ownership interest, and those hospitals
and medical centers with which it has inpatient acute service agreements for
the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
In center 30,034 25,846 57,783 48,831
Home peritoneal 3,493 1,829 5,327 3,491
Acute 1,982 1,891 4,161 3,963
------ ------ ------ ------
35,509 29,566 67,271 56,285
_______________
(1) Treatments by the two managed centers included: in-center treatments of
3,205 and 6,088, for the three months and six months ended June 30, 2004
and 2,820 and 5,246 for the same periods of the preceding year; no home
peritoneal treatments; and acute treatments of 35 and 47, respectively,
for the three months and six months ended June 30, 2004 and 34 and 87
for the same periods of the preceding year.
Dialysis Corporation of America also provides ancillary services
associated with dialysis treatments, including the administration of EPO for
the treatment of anemia in its dialysis patients. EPO is currently available
from only one manufacturer, and no alternative drug has been available to
Dialysis Corporation of America for the treatment of anemia in its dialysis
patients. If the available supply of EPO were reduced either by the
manufacturer or due to excessive demand, Dialysis Corporation of America's
and our revenues
and net income would be adversely affected. The manufacturer of EPO
increased its price in early 2003, and could implement further price
increases which would adversely affect Dialysis Corporation of America's and
our net income. This manufacturer has also developed another anemia drug
that could possibly substantially reduce Dialysis Corporation of America's
and our revenues and profit margins from the treatment of anemia in dialysis
patients.
ESRD patients must either obtain a kidney transplant or obtain regular
dialysis treatments for the rest of their lives. Due to a lack of suitable
donors and the possibility of transplanted organ rejection, the most
prevalent form of treatment for ESRD patients is hemodialysis through a
kidney dialysis machine. Hemodialysis patients usually receive three
treatments each week with each treatment lasting between three and five hours
on an outpatient basis. Although not as common as hemodialysis in an
outpatient facility, home peritoneal dialysis is an available treatment
option, representing the third most common type of ESRD treatment after
outpatient hemodialysis and kidney transplantation.
Approximately 56% and 57% of medical service revenues from our dialysis
operations were derived from Medicare and Medicaid reimbursement for the
three months and six months ended June 30, 2004 compared to 61% and 60% for
the same periods of the preceding year with rates established by the Center
for Medicare and Medicaid Services of the Department of Health and Human
Services, and which rates are subject to legislative changes. Over the last
two years, Medicare reimbursement rates have not increased. Dialysis is
typically reimbursed at higher rates from private payors, such as a patient's
insurance carrier, as well as higher payments received under negotiated
contracts with hospitals for acute inpatient dialysis services.
The following table shows the breakdown of medical services revenues by
type of payor for the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
Medicare 48% 53% 49% 51%
Medicaid and comparable programs 8 8 8 9
Hospital inpatient dialysis services 5 7 6 8
Commercial insurers and other private
payors 39 32 37 32
--- --- --- ---
100% 100% 100% 100%
=== === === ===
The medical services revenues from our dialysis operations are derived
primarily from four sources: outpatient hemodialysis services, home
peritoneal dialysis services, inpatient hemodialysis services and ancillary
services. The following table shows the breakdown of medical service
revenues from our dialysis operations (in thousands) derived from primary
revenue sources and the percentage of total medical service revenue
represented by each source for the periods presented:
Three Months Ended Six Months Ended
June 30, June30,
------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Outpatient hemodialysis services $ 4,932 52% $ 3,651 49% $ 9,019 50% $ 6,960 49%
Home peritoneal dialysis services 606 6 309 4 1,016 6 598 4
Inpatient hemodialysis services 521 6 489 7 1,110 6 1,021 7
Ancillary services 3,438 36 2,975 40 6,761 38 5,583 40
------- --- ------- --- ------- --- ------- ---
$ 9,497 100% $ 7,424 100% $17,906 100% $14,162 100%
======= === ======= === ======= === ======= ===
Essential to profitability of our dialysis operations is Medicare
reimbursement, which is at a fixed rate determined by CMS. Although we are
not aware of any proposals in this regard, the level of Dialysis Corporation
of America's, and therefore, our revenues and profitability may be adversely
affected by any potential legislation resulting in Medicare reimbursement
rate cuts. Increased operating costs with respect to dialysis treatment as
well as reductions in commercial third-party reimbursement rates could also
adversely affect Dialysis Corporation of America's, and therefore, our
margins and profitability.
The healthcare industry is subject to extensive regulation of federal
and state authorities. There are a variety of fraud and abuse measures to
combat waste, which include anti-kickback regulations and extensive
prohibitions relating to self-referrals, violations of which are punishable
by criminal or civil penalties, including exclusion from Medicare and other
governmental programs. Unanticipated changes in healthcare programs or laws
would require Dialysis Corporation of America to restructure its business
practices which, in turn, could materially adversely affect its operations
and financial condition. Dialysis Corporation of America has developed a
Corporate Integrity Program to assure that it provides the highest level of
patient care and services in a professional and ethical manner consistent
with applicable federal and state laws and regulations.
Dialysis Corporation of America's future growth depends primarily on the
availability of suitable dialysis centers for development or acquisition in
appropriate and acceptable areas, and Dialysis Corporation of America's
ability to manage the development costs for these potential dialysis centers
while competing with larger companies, some of which are public companies or
divisions of public companies with greater numbers of personnel and amounts
of financial resources available for acquiring and/or developing dialysis
facilities in areas targeted by Dialysis Corporation of America.
Additionally, there is intense competition for retaining qualified
nephrologists who would serve as medical directors of and be responsible for
the supervision of these dialysis centers. There is no assurance as to when
any new dialysis center or inpatient service contract with hospitals will be
implemented, or the number of stations, or patient treatments such center or
service contract may involve, or if such center or service contract will
ultimately be profitable. It has been our experience that newly established
dialysis centers, although contributing to increased revenues, have adversely
affected Dialysis Corporation of America's results of operations in the short
term due to start-up costs and expenses and a smaller patient base.
Results of Operations
The following table shows our results of operations (in thousands) for
the periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
Revenues:
Sales:
Product Sales $ 199 $ 225 $ 423 $ 435
Medical service revenues 9,497 7,424 17,906 14,162
------- ------- ------- -------
Total sales 9,696 7,649 18,329 14,597
Other income 92 79 310 152
------- ------- ------- -------
9,788 7,728 18,639 14,749
------- ------- ------- -------
Cost and expenses:
Cost of sales:
Cost of product sales 132 143 249 274
Cost of medical services 5,738 4,517 10,900 8,719
------- ------- ------- -------
Total cost of sales 5,870 4,660 11,149 8,993
Selling, general and administrative
expenses 3,286 2,739 6,964 5,243
Provision for doubtful accounts 200 159 348 255
------- ------- ------- -------
9,356 7,558 18,461 14,491
======= ======= ======= =======
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2004 2003 2004 2003
Operating income 432 170 178 258
Other income, net 79 68 704 147
---- ---- ---- ----
Income before income taxes, minority
interest and equity in affiliate
earnings 511 238 882 405
Income tax provision 277 163 494 274
---- ---- ---- ----
Income before minority interest and
equity in affiliate earnings 234 75 388 131
Minority interest in income of
consolidated subsidiaries (299) (145) (472) (260)
Equity in affiliate earnings 31 6 50 21
---- ---- ---- ----
Net loss (34) (64) (34) (108)
==== ==== ==== ====
Consolidated operating revenues, increased by approximately $2,060,000
(27%) and $3,890,000 (26%) for the three months and six months ended June 30,
2004 compared to the same periods of the preceding year. Sales revenues
increased by approximately $2,046,000 (27%) and $3,733,000 (26%) for the
three months and six months ended June 30, 2004 compared to the same periods
of the preceding year. Other operating income increased by approximately
$13,000 and $157,000 for the three months and six months ended June 30, 2004,
compared to the same periods of the preceding year. This includes a
litigation settlement of $134,000 during the first quarter of 2004 and an
increase in management fee income of $13,000 and $23,000 for the three months
and six months ended June 30, 2004 pursuant to a management services
agreement between Dialysis Corporation of America and its 40% owned Toledo,
Ohio affiliate and a management services agreement with an unaffiliated
dialysis center. See Note 1 to "Notes to Consolidated Financial Statements."
In April, 2004, we received payment of approximately $930,000
representing the third installment of an earn-out payment from our sale of
Techdyne in 2001. This resulted in our having received approximately
$546,000 in excess of the minimum earn-out of $2,500,000 that we had
previously recorded. This excess amount has been recorded as a non-operating
gain in our consolidated statement of operations. On April 10, 2004, we
filed a breach of contract legal action in Florida state court to collect an
additional approximately $155,000 which should have been included in the
April, 2004 earn-out payment based on Techdyne's consolidated sales for 2003.
Simclar has filed a counter claim alleging that due to its certification of
erroneous sale amounts for 2001, 2002 and 2003 it had overpaid the company by
approximately $316,000. The Company believes the counterclaim is without
merit. See Note 13 to "Notes to Consolidated Financial Statements."
Other non-operating income (expense) increased approximately $18,000 and
$21,000 for the three months and six months ended June 30, 2004 compared to
the same periods of the preceding year. Interest income from unrelated
parties was largely unchanged for the three months ended June 30, 2004
compared to the same period of the preceding year but decreased by
approximately $11,000 for the six months ended June 30, 2004 compared to the
same period of the preceding year largely due to our foreclosure and sale of
collateral in payment of loans due from Linux Global Partners in the first
half of 2003. See Note 12 to "Notes to Consolidated Financial Statements."
Rental income increased approximately $2,000 and $14,000, miscellaneous other
income increased by approximately $5,000 for
the three months ended June 30, 2004 compared to the same period of the
preceding year and decreased by approximately $3,000 for the six months ended
June 30, 2004 compared to the same period of the preceding year, and interest
expense decreased approximately $10,000 and $22,000, reflecting lower
interest rates on variable rate debt and reduced average borrowings. The
prime rate was 4.00% at June 30, 2004 and December 31, 2003. See Note 1 to
"Notes to Consolidated Financial Statements."
Medical product sales revenues decreased approximately $26,000 (12%) and
$12,000 (3%) for the three months and six months ended June 30, 2004 compared
to the same periods of the preceding year. Although our medical products
division has expanded its product line with several diabetic disposable
products, demand to date for these products continues to be less than
anticipated. Management is attempting to be more competitive in lancet sales
through overseas purchases and expansion of its customer base.
Medical service revenues, representing the sales revenues of our
dialysis division, Dialysis Corporation of America, increased approximately
$2,073,000 (28%) and $3,744,000 (26%) for the three months and six months
ended June 30, 2004 compared to the same periods of the preceding year, with
the increase largely attributable to a 21% increase in total dialysis
treatments performed by our dialysis division from 26,712 during the second
quarter of 2003 to 32,269 during the second quarter of 2004 and a 20%
increase in total dialysis treatments performed from 50,952 during the first
half of 2003 to 61,136 during the first half of 2004. This increase
reflects: (i) increased revenues from Dialysis Corporation of America's
Pennsylvania dialysis centers of approximately $558,000 and $959,000,
including $248,000 of revenues during the second quarter of 2004 from its new
Pottstown center; (ii) increased revenues of approximately $182,000
and$213,000 from its New Jersey centers; (iii) increased revenues of
approximately $180,000 and $472,000 from its Georgia centers; (iv) increased
revenues of approximately $149,000 and $554,000 from its Maryland centers,
including $11,000 of revenues during the second quarter of 2004 from its new
Rockville center; (v) increased revenues of approximately $340,000 and
$676,000 from its Ohio center; (vi) revenues of approximately $247,000 and
$381,000 from its new Virginia center; and (vii) revenues of approximately
$417,000 and $489,000 from its new South Carolina center.
Cost of sales as a percentage of consolidated sales amounted to 61% for
each of the three months and six months ended June 30, 2004 compared to 61%
and 62% for the same periods of the preceding year.
Cost of goods sold for the medical products division as a percentage of
medical product sales was 66% and 59%, for the three months and six months
ended June 30, 2004 compared to 64% and 63% for the same periods of the
preceding year. Changes in cost of goods sold for this division resulted
largely from a change in product mix.
Cost of medical services sales as a percentage of medical services
revenues decreased to 60% and 61% for the three months and six months ended
June 30, 2004, compared to 61% and 62% for the same periods of the preceding
year, largely due to a decrease in payroll costs as a percentage of medical
service sales.
Approximately 27% and 28% of Dialysis Corporation of America's medical
services revenues for the three months and six months ended June 30, 2004 and
for the same periods of the preceding year were derived from the
administration of EPO to its patients. EPO is only available from one
manufacturer in the United States. Price increases for this product without
Dialysis Corporation of America's ability to increase its charges would
increase its costs and thereby adversely impact its earnings. We cannot
predict the timing or extent of any future price increases by the
manufacturer, or Dialysis Corporation of America's ability to offset any such
increases.
Selling, general and administrative expenses, increased approximately
$537,000 and $1,711,000 for the three months and six months ended June 30,
2004, compared to the same periods of the preceding year. This increase
reflects operations of Dialysis Corporation of America's new dialysis centers
in Pennsylvania, South Carolina, Virginia and Maryland, the cost of
additional support activities from expanded dialysis operations and
approximately $486,000 of officer, director and employee bonuses recorded in
the first quarter of 2004. Without the effect of the first quarter 2004
bonuses, selling, general and administrative expenses increased approximately
$1,225,000 for the six months ended June 30, 2004 compared to the same period
of the preceding year. As a percentage of sales revenues selling, general
and administrative expenses amounted to 33% and 35% for the three months and
six months ended June 30, 2004 compared to 37% and 35% for the same periods
of the preceding year. These expenses include expenses of new dialysis
centers incurred prior to Medicare approval for which there were no
corresponding medical service revenues. Without the effect of the first
quarter 2004 bonuses, selling, general and administrative expenses would have
amounted to 35% of sales revenues for the six months ended June 30, 2004.
Provision for doubtful accounts increased by approximately $41,000 and
$93,000, for the three months and six months ended June 30, 2004, compared to
the same periods of the preceding year. The provision amounted to 2% of
sales for the three months and six months ended June 30, 2004 and for each of
the same periods of the preceding year. Medicare bad debt recoveries of
$30,000 were recorded during the first half of 2003, all during the first
quarter, with no such recoveries recorded during the first half of 2004. The
provision for doubtful accounts reflects our collection experience with the
impact of that experience included in accounts receivable presently reserved,
plus recovery of accounts previously considered uncollectible from our
Medicare cost report filing. The provision for doubtful accounts of our
medical services operation, which is the primary component of this provision,
is determined under a variety of criteria, primarily aging of the receivables
and payor mix. Accounts receivable are estimated to be uncollectible based
upon various criteria including the age of the receivables, historical
collection trends and our understanding of the nature and collectibility of
the receivables, and are reserved for in the allowance for doubtful accounts
until they are written off.
Although operations of additional dialysis centers have resulted in
additional revenues, certain of these centers are still in the developmental
stage and, accordingly, their operating results will adversely impact
Dialysis Corporation of America's and our results of operations until they
achieve a patient count sufficient to sustain profitable operations.
Dialysis Corporation of America experienced same-center growth in total
treatments of approximately 11% for the six months ended June 30, 2004
compared to the same periods of the preceding year, and same-center revenues
grew approximately 20%. Dialysis Corporation of America continues to search
for ways to operate more efficiently and reduce costs through process
improvements. In addition, it is reviewing technological improvements and
intends to make capital investments to the extent it is confident such
investments will improve patient care and operating performance.
Equity in affiliate earnings represents Dialysis Corporations of
America's equity in the earnings incurred by its Ohio affiliate, in which
Dialysis Corporation of America has a 40% ownership interest. This dialysis
center commenced operations in February, 2001.
Liquidity and Capital Resources
Working capital totaled approximately $12,502,000 at June 30, 2004,
which reflects a decrease of $930,000 (7%) during the six months ended June
30, 2004. The change in working capital included a decrease in cash of
$1,653,000 including net cash provided by operating activities of $428,000,
net cash used in investing activities of $1,694,000 (including additions to
property, plant and equipment of
$1,967,000, acquisition payments of $670,000 to a minority member in two of
our subsidiary dialysis centers for the remaining balance due to acquire an
aggregate of 30% of such member's interest in each of such subsidiaries, an
earn-out payment of $930,000 from the sale of a former subsidiary and $20,000
of distributions received from Dialysis Corporation of America's 40% owned
Ohio affiliate), and net cash used in financing activities of $387,000
(including payments on long-term debt of $276,000, $116,000 of distributions
to the minority members of Dialysis Corporation of America's subsidiaries and
$5,000 of receipts from the exercise of subsidiary stock options).
In January, 2003, we executed on certain of the collateral securing
Linux Global Partners' indebtedness to us, resulting in our acquiring
4,115,815 shares of series A convertible preferred stock of Ximian, Inc.
These shares were sold in August, 2003, in connection with a third party's
acquisition of Ximian, for which we received $3,541,000 with an additional
$805,000 placed in escrow, approximately half of which was released in
August, 2004, and the balance of which is to be released in August, 2005,
subject to the parties to the Ximian acquisition fulfilling certain
conditions. See Note 12 to "Notes to Consolidated Financial Statements."
In May, 2003, we entered into a one-year, non-exclusive consulting
agreement with an investment relations firm, which agreement expired by its
terms in May, 2004. The agreement provided for a $4,000 monthly fee and
issuance of an option for 200,000 shares of our common stock exercisable
through May, 2005, at an exercise price of $2.50 per share. The parties to
the agreement have agreed to continue the consulting arrangement on a month-
to-month basis. See Notes 6 and 8 to "Notes to Consolidated Financial
Statements."
In July, 2003, pursuant to a mediation proceeding following a partial
summary judgment, we obtained against Viragen, Inc., our former subsidiary,
Viragen agreed to abide by the terms of our royalty agreement and remitted
$30,000 to us in August, 2003 and an additional $30,000 plus $3,000 of
interest in August, 2004, with a remaining payment of $30,000 plus interest
at 5% per annum due in August, 2005. Viragen also agreed to commence
remitting royalty payments on a quarterly basis pursuant to the royalty
agreement and has remitted quarterly payments of $2,580 in October 2003,
$2,905 in January 2004, $3,735 in April 2004 and $3,426 in July 2004. See
Note 2 to "Notes to Consolidated Financial Statements."
In April, 2004, we received a third earn-out payment of $930,248 on the
June, 2001 sale of our interest in Techdyne. Including the April, 2004
payment, we have received approximately $3,046,000 of earn-out payments,
which exceeded the $2,500,000 minimum earn-out we originally recorded
resulting in a non-operating gain of approximately $546,000 which was
recorded during the first quarter of 2004. Earn-out payments were specified
as 3% of Techdyne's consolidated sales, which were $36,187,105 for 2003, and
as a result, we believe that the April, 2004 earn-out payment should have
been $1,085,613. We have demanded payment from and initiated legal action in
Florida against Simclar International, the purchaser of Techdyne, for the
$155,365 balance due. Simclar has filed a counterclaim in the amount of
$316,464 alleging prior overpayments resulting from Simclar's certification
of erroneous sales amounts for 2003, 2002 and 2001. We believe the
counterclaim is without merit. See Note 13 to "Notes to Consolidated
Financial Statements."
In December, 2002, we announced our intent to purchase up to 1,000,000
shares of our outstanding common stock based on then current market prices.
We repurchased and cancelled 48,500 shares of our outstanding common stock at
a cost of approximately $70,000 during the first half of 2003. We have not
made any repurchases during 2004. See Note 14 to "Notes to Consolidated
Financial Statements," and Part II, "Other Information," Item 2, "Changes in
Securities, Use of Proceeds and Issuer Purchases of Equity Securities."
Dialysis Corporation of America, has a mortgage on its real property in
Easton, Maryland securing a development loan made by a third party to one of
Dialysis Corporation of America's New Jersey dialysis centers. The
outstanding balance of the loan was $623,000 at June 30, 2004, and $636,000
at December 31, 2003. In April, 2001, Dialysis Corporation of America
obtained a $788,000 five-year mortgage on its building in Valdosta, Georgia
which had an outstanding principal balance of $695,000 at June 30, 2004, and
$715,000 at December 31, 2003. Dialysis Corporation of America has an
equipment financing agreement with a third party for the purchase of kidney
dialysis machines for its facilities. Dialysis Corporation of America had
outstanding balances under this agreement of $1,078,000 at June 30, 2004, and
$1,321,000 at December 31, 2003. See Note 4 to "Notes to Consolidated
Financial Statements."
In March, 2004, we agreed to advance Dialysis Corporation of America up
to $1,500,000 for the purpose of equipment financing by Dialysis Corporation
of America, which loan arrangement is evidenced by a demand promissory note
from Dialysis Corporation of America. Subsequently, the loan arrangement was
modified to increase the maximum amount of advances that can be made to
$2,000,000 and by adding working capital and other corporate needs to the
purposes of the financing. Advances for equipment purchases under this loan
arrangement, amounted to approximately $885,000 for the first half of 2004.
Dialysis Corporation of America opened centers in Pottstown,
Pennsylvania; Aiken South Carolina; Warsaw, Virginia and Rockville, Maryland
during the first half of 2004 and is in the process of developing a new
dialysis center in Virginia. Payment of the balance due of $670,000 on the
purchase of minority interests in two of Dialysis Corporation of America's
dialysis centers was made during the second quarter of 2004. See Note 10 to
"Notes to Consolidated Financial Statements."
Capital is needed by Dialysis Corporation of America primarily for the
development of outpatient dialysis centers. The construction of a 15 station
facility, typically the size of Dialysis Corporation of America's dialysis
facilities, costs in the range of $600,000 to $750,000 depending on location,
size and related services to be provided, which includes equipment and
initial working capital requirements. Acquisition of an existing dialysis
facility is more expensive than construction, although acquisition would
provide Dialysis Corporation of America with an immediate ongoing operation,
which most likely would be generating income. Although Dialysis Corporation
of America's expansion strategy focuses primarily on development and
construction of new centers, it has expanded through acquisitions of dialysis
facilities and continues to review potential further acquisitions.
Development of a dialysis facility to initiate operations takes four to six
months and usually up to 12 months or longer to generate income. Dialysis
Corporation of America considers some of its centers to be in the
developmental stage, since they have not developed a patient base sufficient
to generate and sustain earnings.
Dialysis Corporation of America is seeking to expand its outpatient
dialysis treatment facilities and inpatient dialysis care and is presently in
different phases of negotiations with physicians for additional outpatient
centers. Such expansion requires capital. Dialysis Corporation of America
has been funding its expansion primarily through internally generated cash
flow. While we anticipate that financing will be available to Dialysis
Corporation of America either from a financial institution or us, no
assurance can be given that Dialysis Corporation of America will be
successful in implementing its growth strategy or that adequate financing, to
the extent needed, will be available to support such expansion.
The bulk of our cash balances are carried in interest-yielding vehicles
at various rates and mature at different intervals depending on our
anticipated cash requirements.
We anticipate that current levels of working capital and working capital
from operations will be adequate to successfully meet liquidity demands for
at least the next twelve months.
Critical Accounting Policies and Estimates
The Securities and Exchange Commission has issued cautionary advice to
elicit more precise disclosure in this Item 2, MD&A, about accounting
policies management believes are most critical in portraying our financial
results and in requiring management's most difficult subjective or complex
judgments.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make judgments and estimates. On an on-going basis, we
evaluate our estimates, the most significant of which include establishing
allowances for doubtful accounts, a valuation allowance for our deferred tax
assets and determining the recoverability of our long-lived assets. The
basis for our estimates are historical experience and various assumptions
that are believed to be reasonable under the circumstances, given the
available information at the time of the estimate, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily available from other sources. Actual
results may differ from the amounts estimated and recorded in our financial
statements.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition: Revenues are recognized as services are rendered.
Dialysis Corporation of America receives payments through reimbursement from
Medicare and Medicaid for its outpatient dialysis treatments coupled with
patients' private payments, individually and through private third-party
insurers. A substantial portion of Dialysis Corporation of America's
revenues are derived from the Medicare End Stage Renal Disease 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 or less than the amount expected at the time the
services are provided. Dialysis Corporation of America reconciles any such
differences quarterly. Product sales are recognized pursuant to stated
shipping terms.
Allowance for Doubtful Accounts: We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers
to make required payments and Dialysis Corporation of America's patients or
their insurance carriers to make required payments. Based on historical
information, we believe that our allowance is adequate. Changes in general
economic, business and market conditions could result in an impairment in the
ability of our customers and Dialysis Corporation of America's patients and
their insurance carriers to make their required payments, which would have an
adverse effect on cash flows and our results of operations. Therefore, the
allowance for doubtful accounts is reviewed monthly and changes to the
allowance are updated based on actual collection experience. We use a
combination of percentage of sales and specific account identification and
the aging of accounts receivable to establish an allowance for losses on
accounts receivable.
Allowance for Inventory Obsolescence: We maintain an allowance for
inventory obsolescence for losses resulting from inventory items becoming
unsaleable due to loss of specific customers or
changes in customers' requirements. Based on historical and projected sales
information, we believe our allowance is adequate. However, changes in
general economic, business and market conditions could cause our customers'
purchasing requirements to change. These changes could affect our inventory
saleability. Therefore, the allowance for inventory obsolescence is reviewed
regularly and changes to the allowance are updated as new information is
received.
Valuation Allowance for Deferred Tax Assets: The carrying value of
deferred tax assets assumes that we will be able to generate sufficient
future taxable income to realize the deferred tax assets based on estimates
and assumptions. If these estimates and assumptions change in the future, we
may be required to adjust our valuation allowance against deferred tax assets
which could result in additional income tax expense.
Long-Lived Assets: We state our property and equipment at acquisition
cost and compute depreciation for book purposes by the straight-line method
over estimated useful lives of the assets. In accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," long-
lived assets are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of the asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to the future cash flows
expected to be generated by the asset. If the carrying amount of the asset
exceeds its estimated future cash flows, an impairment charge is recognized
to the extent the carrying amount of the asset exceeds the fair value of the
asset. These computations are complex and subjective.
Goodwill and Intangible Asset Impairment: In assessing the
recoverability of our goodwill and other intangibles we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. This impairment test requires the
determination of the fair value of the intangible asset. If the fair value
of the intangible assets is less than its carrying value, an impairment loss
will be recognized in an amount equal to the difference. If these estimates
or their related assumptions change in the future, we may be required to
record impairment charges for these assets. We adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets," (FAS 142) effective January 1, 2002 and are required to analyze
goodwill and indefinite lived intangible assets for impairment on at least an
annual basis.
Impact of Inflation
Inflationary factors have not had a significant effect on our
operations. We attempt to pass on increased costs and expenses incurred in
our medical products division by increasing selling prices when and where
possible. In our dialysis division, revenue per dialysis treatment is subject
to reimbursement rates established and regulated by the federal government.
These rates do not automatically adjust for inflation. Any rate adjustments
relate to legislation and executive and Congressional budget demands, and
have little to do with the actual cost of doing business. Therefore, dialysis
medical service revenues cannot be voluntarily increased to keep pace with
increases in supply costs or nursing and other patient care costs. Increased
operating costs without a corresponding increase in reimbursement rates may
adversely affect Dialysis Corporation of America's and, accordingly, our
future earnings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks from changes in interest rates. We have
exposure to both rising and falling interest rates.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities and interest bearing accounts at financial institutions
in which we had approximately $8,654,000 invested as of June 30, 2004. A 15%
relative decrease in rates on our period-end investments would have resulted
in a negative impact of approximately $3,000 on our results of operations for
the six months ended June 30, 2004.
We have an interest rate exposure on debt agreements with variable
interest rates of which we had approximately $1,318,000 of such debt
outstanding as of June 30, 2004. A 15% relative increase in interest rates
on our period-end variable rate debt would have resulted in a negative impact
of approximately $ 1,000 on our results of operations for the first six
months of 2004.
We do not utilize financial instruments for trading or speculative
purposes, and do not currently use interest rate derivatives.
Item 4. Controls and Procedures
As of the end of the period of this quarterly report on Form 10-Q for
the second quarter ended June 30, 2004, management carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and President, and the Vice President of Finance, who is
also our Principal Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-15
of the Securities Exchange Act of 1934 (the "Exchange Act"). The disclosure
controls and procedures are designed to ensure that information required to
be disclosed by our company in the reports that we file under the Exchange
Act, as is this quarterly report on Form 10-Q, is recorded, processed,
summarized and reported within required time periods specified by the SEC's
rules and forms. Based upon that evaluation, our Chief Executive Officer and
President and our Vice President of Finance and Principal Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to us, including our
consolidated subsidiaries, required to be included in our periodic SEC
filings.
There were no significant changes in internal controls over financial
reporting during our most recent fiscal quarter, or in other factors that
have materially affected or are reasonably likely to materially affect,
internal controls over financial reporting, including any corrective actions
with regard to significant deficiencies and material weaknesses, of which
there were none.
PART II -- OTHER INFORMATION
------------------------------
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
- ------ --------------------------------------------------------------
Equity Securities
-----------------
(c) No equity securities were sold by the company during the second quarter
Ended June 30, 2004
(e) The company has a common stock repurchase program which it announced in
December, 2002, for the repurchase of up to approximately 1,000,000 shares at
the then current market price of approximately $1.20 per share. The
repurchase program was reiterated in September, 2003, and continues, but
repurchases are unlikely at the current market prices. The closing price of
the company's common stock on June 30, 2004 was $3.11. There were no
repurchases by or on behalf of the company of any of its equity securities
during the second quarter of 2004. Approximately 952,000 shares of common
stock may yet be purchased under this repurchase program.
Item 4. Submissions of Matters to a Vote of Security Holders
- ------ ----------------------------------------------------
The company held its annual meeting of shareholders on June 3, 2004 at
its executive offices in Hasbrouck Heights, New Jersey relating to the
election of three class 3 directors and ratification of the appointment of
the company's independent auditors, Moore Stephens, P.C. Proxies were
solicited from the shareholders of record as of April 16, 2004. Of the
6,988,614 shares outstanding as of the record date, approximately 95% of
those shares were present in person or represented by proxy at the meeting.
Each of the nominee directors were elected in accordance with the following
votes: (a) Thomas K. Langbein received 6,622,872 votes for election, 4,079
votes were withheld and there were 30,910 abstentions; (b) Seymour Friend
received 6,572,324 votes for election, 54,627 votes were withheld and there
were 30,910 abstentions; (c) Charles Waddell received 6,622,546 votes for
election, 4,405 votes were withheld and three were 30,910 abstentions. There
were no broker non-votes with respect to the election of the director
nominees. The other directors of the company that were not standing for
election at this meeting of shareholders are as follows: class 1 directors -
Peter D. Fischbein and Lawrence E. Jaffe, whose terms run through the 2005
annual meeting of shareholders, and class 2 directors - Anthony C. D'Amore
and Robert P. Magrann, whose terms run through the 2006 annual meeting of
shareholders. The stockholders also ratified the appointment of the
company's auditors, Moore Stephens, P.C., for fiscal 2004 by the affirmative
vote of 6,640,272 shares, with 12,618 votes cast against, 4,516 abstentions,
and no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certifications of the Principal Executive Officer pursuant
to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certifications of Principal Financial Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.
32 Section 1350 Certifications
32.1 Certifications of the Principal Executive Officer and the
Principal Financial Officer pursuant to Rule 13a-14(b) of
the Securities Exchange Act of 1934 and U.S.C. Section
1350.
(b) Reports on Form 8-K
There were no current reports on Form 8-K filed by the company
during the quarter ended June 30, 2004.
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 of Finance and
Treasurer (Principal Financial
Officer)
Dated: August 13, 2004
EXHIBIT INDEX
Exhibit No.
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certifications of the Principal Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
32 Section 1350 Certifications
32.1 Certifications of the Principal Executive Officer and the
Principal Financial Officer pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934 and U.S.C. Section 1350.
Exhibit 31.1
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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and procedures
as of the end of the period covered by this report based on such evaluation;
and
(c) Disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of the internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.
/s/ Thomas K. Langbein
Date: August 13, 2004 ----------------------------------------
THOMAS K. LANGBEIN, Chief Executive Officer
Exhibit 31.2
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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and procedures
as of the end of the period covered by this report based on such evaluation;
and
(c) Disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of the internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls.
/s/ Daniel R. Ouzts
Date: August 13, 2004 -----------------------------------
DANIEL R. OUZTS, Vice President of Finance
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of Medicore, Inc. (the
"Company") on Form 10-Q for the second quarter ended June 30, 2004 as filed
with the Securities and Exchange Commission on the date therein specified
(the "Report"), the undersigned, Thomas K. Langbein, Chief Executive Officer
of the Company, and Daniel R. Ouzts, Vice President of Finance and the
Principal Financial Officer of the Company, each certify pursuant to 18
U.S.C. Section 1350 that, to the best of our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Thomas K. Langbein
-----------------------------------
THOMAS K. LANGBEIN, Chief Executive Officer
/s/ Daniel R. Ouzts
-----------------------------------
DANIEL R. OUZTS, Vice President of Finance
(Principal Financial Officer)
Dated: August 13, 2004