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FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
--------------
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.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-0941551
- -------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2337 West 76th Street, Hialeah, Florida 33016
- --------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(305) 558-4000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check b 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 b 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 - 7,132,434 shares as of April 30, 2005.
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
The Consolidated Financial Statements (Unaudited) for the three months
ended March 31, 2005 and March 31, 2004 include the accounts of the Registrant
and all its subsidiaries.
Item 1. Financial Statements
1) Consolidated Statements of Operations for the three months ended
March 31, 2005 and March 31, 2004 (Unaudited).
2) Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and
December 31, 2004.
3) Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and March 31, 2004 (Unaudited).
4) Notes to Consolidated Financial Statements as of March 31, 2005
(Unaudited).
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
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Item 6. Exhibits
i
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
Revenues: 2005 2004
------------ ------------
Sales:
Product sales $ 196,695 $ 224,318
Medical services revenues 10,484,101 8,409,524
------------ ------------
Total sales 10,680,796 8,633,842
Other income 128,395 217,045
------------ ------------
10,809,191 8,850,887
Cost and expenses:
Cost of sales:
Cost of product sales 106,293 117,627
Cost of medical services 6,542,601 5,162,222
------------ ------------
Total cost of sales 6,648,894 5,279,849
Legal fees related party 89,000 79,000
Selling, general and administrative expenses 3,601,711 3,598,275
Provision for doubtful accounts 247,994 148,295
------------ ------------
10,587,599 9,105,419
Operating income (loss) 221,592 (254,532)
Other income (expense):
Interest income related parties 1,292 3,825
Gain on sale of former subsidiary (Note 13) -- 545,995
Other income, net 106,367 75,298
------------ ------------
107,659 625,118
------------ ------------
Income before income taxes, minority interest and
equity in affiliate earnings 329,251 370,586
Income tax provision 308,803 216,108
------------ ------------
Income before minority interest and equity
in affiliate earnings 20,448 154,478
Minority interest in income of consolidated subsidiaries (206,137) (173,923)
Equity in affiliate earnings 120,109 19,033
------------ ------------
Net loss $ (65,580) $ (412)
============ ============
Loss per share:
Basic $ (.01) $.---
============ ============
Diluted $ (.01) $.---
============ ============
See notes to consolidated financial statements.
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2005 2004(A)
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,468,709 $ 8,032,576
Accounts receivable, less allowance of
$1,922,000 at March 31, 2005 and $1,643,000 at December 31, 2004 8,709,998 8,627,091
Inventories, less allowance for obsolescence
of $61,000 at March 31, 2005 and $61,000 at December 31, 2004 1,466,213 1,566,892
Related parties' loan and interest receivable 112,989 111,696
Prepaid expenses and other current assets 1,225,573 1,350,608
Deferred income tax asset 841,000 841,000
----------- -----------
Total current assets 18,824,482 20,529,863
----------- -----------
Property and equipment
Land and improvements 1,170,613 1,027,108
Building and building improvements 3,266,048 3,252,191
Equipment and furniture 8,398,114 8,318,684
Leasehold improvements 4,716,676 4,692,980
----------- -----------
17,551,451 17,290,963
Less accumulated depreciation and amortization 7,565,544 7,177,770
----------- -----------
9,985,907 10,113,193
----------- -----------
Other assets 1,269,426 1,306,389
Goodwill 3,649,014 3,649,014
----------- -----------
Total other assets 4,918,440 4,955,403
----------- -----------
$33,728,829 $35,598,459
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,075,225 $ 1,660,710
Accrued expenses and other current liabilities 4,330,264 5,752,137
Current portion of long-term debt 485,000 513,000
----------- -----------
Total current liabilities 5,890,489 7,925,847
Long-term debt, less current portion 1,477,144 1,585,935
Acquisition liability 380,297 380,297
Deferred income tax liability 1,135,000 1,135,000
----------- -----------
Total liabilities 8,882,930 11,027,079
Minority interest in subsidiaries 7,454,614 7,042,885
Commitments and Contingencies
Stockholders' equity:
Common stock, $.01 par value; authorized 12,000,000 shares;
7,132,434 shares issued and outstanding at March 31, 2005;
6,990,630 shares issued and outstanding at December 31, 2004 71,324 69,906
Additional paid-in capital 12,954,463 13,027,511
Retained earnings 4,365,498 4,431,078
----------- -----------
Total stockholders' equity 17,391,285 17,528,495
----------- -----------
$33,728,829 $35,598,459
=========== ===========
(A) Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2004 filed with the Securities and Exchange Commission
in March, 2005.
See notes to consolidated financial statements.
2
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
Operating activities: 2005 2004
------------ ------------
Net loss $ (65,580) $ (412)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 419,050 340,875
Amortization 3,525 579
Bad debt expense 247,994 148,295
Deferred income tax benefit -- (70,000)
Inventory obsolescence credit -- (15,459)
Stock option expense -- 337,844
Minority interest 206,137 173,923
Equity in affiliate earnings (120,109) (19,033)
Gain on sale of former subsidiary -- (545,995)
Increase (decrease) relating to operating activities from:
Accounts receivable (330,901) (410,196)
Inventories 100,679 (156,019)
Interest receivable related parties (1,293) (3,825)
Prepaid expenses and other current assets 125,035 (46,672)
Accounts payable (585,485) 488,792
Accrued expenses and other current liabilities (1,421,873) 208,246
Income taxes payable -- 191,528
------------ ------------
Net cash (used in) provided by operating activities (1,422,821) 622,471
------------ ------------
Investing activities:
Additions to property and equipment, net of minor disposals (291,764) (1,482,201)
Payments received on physician affiliate loans 3,042 --
Distribution from affiliate 160,878 20,400
Other assets (28,335) (4,078)
------------ ------------
Net cash used in investing activities (156,179) (1,465,879)
------------ ------------
Financing activities:
Payments on long-term borrowings (136,791) (111,218)
Proceeds from exercise of subsidiary stock options 141,924 5,400
Capital contributions by subsidiaries' minority members 10,000 --
Distribution to subsidiaries' minority members -- (62,333)
------------ ------------
Net cash provided by (used in) financing activities 15,133 (168,151)
------------ ------------
Decrease in cash and cash equivalents (1,563,867) (1,011,559)
Cash and cash equivalents at beginning of year 8,032,576 10,316,170
------------ ------------
Cash and cash equivalents at end of period $ 6,468,709 $ 9,304,611
============ ============
See notes to consolidated financial statements.
3
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: The company has three reported business segments. The medical
services segment, operated by Medicore's 56% owned subsidiary, Dialysis
Corporation of America and subsidiaries ("Dialysis Corporation of America"),
owns 21 operating kidney dialysis outpatient treatment centers located in
Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and Virginia,
manages two other dialysis facilities, one a 40% owned Ohio affiliate and the
other an unaffiliated Georgia center, and has five dialysis centers under
development; and has agreements to provide inpatient dialysis treatments to
various hospitals. The medical products segment is engaged in the distribution
of medical products. A third segment, investment in technology companies, was
initiated in January, 2000, and currently has investments in two affiliated
Linux software companies. See "Consolidation."
Consolidation: The consolidated financial statements include the
accounts of Medicore, Inc. and Dialysis Corporation of America. Intercompany
accounts and transactions have been eliminated in consolidation. Dialysis
Corporation of America has a 40% interest in an Ohio dialysis center it manages,
which is accounted for by the equity method and not consolidated for financial
reporting purposes.
Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
The company's principal estimates are for estimated uncollectible
accounts receivable as provided for in our allowance for doubtful accounts,
estimated losses from obsolete or unsaleable inventory as provided for in our
allowance for inventory obsolescence, estimated useful lives of depreciable
assets, estimates for patient revenues from non-contracted payors, and the
valuation allowance for deferred tax assets based on the estimated realizability
of deferred tax assets. The company's estimates are based on historical
experience and assumptions believed to be reasonable given the available
evidence at the time of the estimates. Actual results could differ from those
estimates.
Government Regulation: A substantial portion of the revenues of the
company's medical services segment are attributable to payments received under
Medicare, which is supplemented by Medicaid or comparable benefits in the states
in which the company operates. Reimbursement rates under these programs are
subject to regulatory changes and governmental funding restrictions. Laws and
regulations governing the Medicare and Medicaid programs are complex and subject
to interpretation. The company believes that it is in compliance with 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.
Vendor Concentration: The company's medical services segment purchases
erythropoietin (EPO) from one supplier which comprised 33% for the first quarter
of 2005 and 37% for the same period of the preceding year of medical service
cost of sales. There is only one supplier of EPO in the United States without
alternative products available to dialysis treatment providers. Revenues from
the administration of EPO which amounted to approximately $2,787,000 for the
first quarter of 2005 and $2,430,000 for the same period of the preceding year,
comprised 27% and 29% medical service revenue for these periods, respectively.
4
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Inventories: Inventories are valued at the lower of cost (first-in,
first-out and/or weighted average cost method) or market value and consists 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 the company's acquisitions 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.
Deferred Expenses: Deferred expenses, except for deferred loan costs,
are amortized on the straight-line method, over their estimated benefit period
ranging to 60 months. Deferred loan costs are amortized over the lives of the
respective loans. Deferred expenses of approximately $77,000 at March 31, 2005
and $80,000 at December 31, 2004 are recorded as other assets. Amortization
expense was $3,525 for the three months ended March 31, 2005 and $579 for the
same period of the preceding year.
Income Taxes: Deferred income taxes at the end of each period are
determined by applying enacted tax rates applicable to future periods in which
the taxes are expected to be paid or recovered to differences between the
financial accounting and tax basis of assets and liabilities.
Dialysis Corporation of America files separate income tax returns with
its income tax liability reflected on a separate return basis.
Other Income:
Operating:
Other operating income is comprised as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
--------- ---------
Management fee income $ 128,395 $ 82,862
Litigation settlement -- 134,183
--------- ---------
$ 128,395 $ 217,045
========= =========
Non-operating:
Other income, net, is comprised as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2005 2004
--------- ---------
Rental income $ 88,811 $ 85,288
Interest income 48,354 18,845
Interest expense (34,701) (42,597)
Other 3,903 13,762
--------- ---------
Other income, net $ 106,367 $ 75,298
========= =========
5
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Accrued Expenses: Accrued expenses and other current liabilities is
comprised as follows:
MARCH 31, DECEMBER 31,
2005 2004
---------- ----------
Accrued compensation $ 629,293 $1,531,743
Due to insurance companies 2,957,860 2,926,711
Acquisition liability - current portion (see Note 10) 380,298 380,298
Other 362,813 913,385
---------- ----------
$4,330,264 $5,752,137
========== ==========
Stock-Based Compensation: The company follows the intrinsic method of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its employee
stock options because, as discussed below, Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123) requires
use of option valuation models that were not developed for use in valuing
employee stock options. FAS 123 permits a company to elect to follow the
intrinsic method of APB 25 rather than the alternative fair value accounting
provided under FAS 123, but requires pro forma net income and earnings per share
disclosures as well as various other disclosures not required under APB 25 for
companies following APB 25. The company has adopted the disclosure provisions
required under Financial Accounting Standards Board Statement No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" (FAS 148).
Under APB 25, because the exercise price of the company's stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense was recognized.
See "New Pronouncements."
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 those
Statements. The fair value of options granted in 2003 was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 1.76% for option grants
during 2003 and 1.83% for the January 2000 options modified in January 2002; no
dividend yield; volatility factor of the expected market price of the company's
common stock of .78 for option grants during 2003 and .67 for the January 2000
options modified in January 2002; and an expected life of 2.17 years for option
grants during 2003 and 1 year for the January 2000 options modified in January
2002. There were no Medicore options granted in 2004.
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 3.83%, 1.44%, 3.73% and
5.40%; no dividend yield; volatility factor of the expected market price of the
company's common stock of 1.31, 1.07, 1.15, and 1.14, and a weighted-average
expected life of 5 years, 4.7 years, 5 years, and 4 years.
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.
6
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. The company's
pro forma information, which includes the pro forma effects related to the
company's interest in Dialysis Corporation of America pro forma adjustments,
follows:
THREE MONTHS ENDED
MARCH 31,
2005 2004
--------- ---------
Net loss, as reported $ (65,580) $ (412)
Stock-based employee compensation expense under
fair value method, net of related tax effects (31,105) (7,504)
--------- ---------
Pro forma net loss-basic computation (96,685) (7,916)
Subsidiary dilutive securities adjustments (11,897) (14,335)
--------- ---------
Pro forma net loss-diluted computation $(108,582) $ (22,251)
========= =========
Loss per share:
Basic, as reported $ (.01) $.---
========= =========
Basic, pro forma $ (.01) $.---
========= =========
Diluted, as reported $ (.01) $.---
========= =========
Diluted, pro forma $ (.02) $.---
========= =========
Earnings (Loss) Per Share: Diluted earnings per share gives effect to
potential common shares that were dilutive and outstanding during the period,
such as stock options, using the treasury stock method and average market price.
THREE MONTHS ENDED
MARCH 31,
-------------------------
2005 2004
----------- -----------
Net loss, numerator-basic computation $ (65,580) $ (412)
Adjustment due to subsidiaries' dilutive securities (11,897) (14,335)
----------- -----------
Net loss as adjusted, numerator-diluted computation $ (77,477) $ (14,747)
=========== ===========
Weighted average shares 7,041,901 6,986,035
=========== ===========
Loss per share:
Basic $ (.01) $.---
=========== ===========
Diluted $ (.01) $.---
=========== ===========
The company has various stock options outstanding which have not been
included in the diluted loss per share computation since they would be
anti-dilutive due to the loss. See Note 6.
Cash and Cash Equivalents: The company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The carrying amounts, reported in the balance sheet for cash and
cash equivalents approximate their fair values. The credit risk associated with
cash and cash equivalents are considered low due to the high quality of the
financial institutions in which these assets are invested.
7
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Credit Risk: The company's primary concentration of credit risk is with
accounts receivable which consist primarily of amounts owed by governmental
agencies, insurance companies and private patients to our medical services
division, and amounts owed by commercial customers to our medical products
division. Receivables of our medical services division from Medicare and
Medicaid comprised 49% of that division's receivables at March 31, 2005 and 52%
at December 31, 2004.
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.
Comprehensive Income: The company follows Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income" (FAS 130)
which contains rules for the reporting of comprehensive income and its
components. Comprehensive income consists of net income.
Revenue Recognition: Net medical service 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 and the medical services division does not record revenue related to
these charitable treatments. Product sales are recorded pursuant to stated
shipping terms.
New Pronouncements
On November 24, 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 151, "Inventory Costs" an
amendment of ARB No. 43, Chapter 4 ("FAS 151"). FAS 151 requires companies to
recognize as current period charges abnormal amounts of idle facility expense,
freight, handling costs and wasted materials (spoilage). FAS 151 also requires
manufacturers to allocate fixed production overheads to inventory based on
normal capacity of their production facilities. FAS 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
company does not expect FAS 151 to have a significant effect on its consolidated
financial statements.
8
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchange of Nonmonetary Assets," an amendment of APB Opinion
No. 29 ("FAS 153"). The amendments made by FAS 153 are based on the principle
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. The amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with an
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previous to FAS 153 some nonmonetary exchanges, although commercially
substantive were recorded on a carryover basis rather than being based on the
fair value of the assets exchanged. FAS 153 is effective for nonmonetary assets
exchanges occurring in fiscal periods beginning after June 15, 2005. The company
does not expect FAS 153 to have a significant effect on its financial
statements.
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised), "Share-Based Payment" ("FAS 123(R)). FAS 123(R)
requires companies to recognize the fair value of stock option grants as a
compensation costs in their financial statements. Public entities on a calendar
year need not comply with FAS 123(R) until the interim financial statements for
the first quarter of 2006 are filed with the SEC. In addition to stock options
granted after the effective date, companies will be required to recognize a
compensation cost with respect to any unvested stock options outstanding as of
the effective date equal to the grant date fair value of those options (as
previously disclosed in the notes to the financial statements) with the cost
related to the unvested options to be recognized over the vesting period of the
options. The company is in the process of determining the impact that FAS 123(R)
will have on its consolidated financial statements.
Advertising Costs: The company expenses advertising costs as they are
incurred. Advertising costs amounted to $15,000 for the quarter ended March 31,
2005 and $32,000 for the same period of the preceding year.
Reclassification: Certain prior year amounts have been reclassified to
conform with the current year's presentation.
NOTE 2--TRANSACTIONS WITH VIRAGEN, INC.
The company has a royalty agreement with a former subsidiary, Viragen,
Inc., pursuant to which it is to receive quarterly royalty payments 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. A payment of approximately $108,000,
earned under a previous royalty agreement, is due as the final payment.
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, we reached an agreement with Viragen
pursuant to mediation proceedings following our obtaining a partial summary
judgment against Viragen in March, 2003, for amounts owed to us under the
royalty agreement with Viragen. Viragen agreed to remit $30,000 on each of
August 1, 2003, August 1, 2004 and August 1, 2005, with annual interest accruing
at 5% on the August 2004 and 2005 payments. Viragen remitted the $30,000 payment
due August 1, 2003 and 2004. Viragen also agreed to commence remitting the
quarterly royalty payments due under the royalty agreement and has remitted
quarterly payments since October, 2003, aggregating approximately $21,000.
9
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 3--INTERIM ADJUSTMENTS
The financial summaries for the three months ended March 31, 2005, and
March 31, 2004, are unaudited and include, in the opinion of management of the
company, all adjustments (consisting of normal recurring accruals) necessary to
present fairly the earnings for such periods. Operating results for the three
months ended March 31, 2005, are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 2005.
While the company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these consolidated
condensed financial statements be read in conjunction with the financial
statements and notes included in the company's latest annual report on Form 10-K
for the year ended December 31, 2004.
NOTE 4--LONG-TERM DEBT
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 initially at 8.75% and currently at 1% over
prime, which 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 plus interest with any remaining balance
due December 2, 2007. This loan had an outstanding principal balance of $603,000
at March 31, 2005 and $610,000 at December 31, 2004.
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 initially at 8.29% and currently at prime plus
1/2% with a minimum of 6.0%. 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 $665,000 at March 31, 2005 and
$675,000 at December 31, 2004.
The Dialysis Corporation of America equipment financing agreement is
for financing for some of the kidney dialysis machines for Dialysis Corporation
of America's facilities. The financing is secured by the financed equipment.
There was no financing during 2003, 2004, or the first quarter of 2005. Monthly
payments under the agreement 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 non-cash financing activity which
is a supplemental disclosure required by FAS 95, "Statement of Cash Flows." The
remaining principal balance under this financing amounted to approximately
$695,000 at March 31, 2005 and $814,000 at December 31, 2004.
The prime rate was 5.75% as of March 31, 2005 and 5.25% as of December
31, 2004. For interest payments, see Note
14.
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 that subsidiary, and require maintenance of certain
financial ratios. Dialysis Corporation of America was in compliance with the
debt covenants at March 31, 2005 and December 31, 2004.
10
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
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 14.
NOTE 6--STOCK OPTIONS AND STOCK COMPENSATION
On May 6, 1996, the company adopted a Key Employee Stock Plan reserving
100,000 shares of our common stock for issuance from time to time to officers,
directors, key employees, advisors and consultants as bonus or compensation for
performances and or services rendered to the company or otherwise providing
substantial benefit for the company. As of March 31, 2005, 2,000 shares have
been issued under this Plan.
In July, 2000, the company granted, under its 1989 Stock Option Plan,
five-year non-qualified stock options for 820,000 shares to officers, directors
and employees of Medicore and its subsidiaries. At March 31, 2005, a total of
245,995 options were outstanding under the 1989 Stock Option Plan. The options
have an exercise price of $1.38, the market price on the date of grant. Options
for 16,000 shares were cancelled due to employee terminations and resignations.
In September, 2003, the company's board of directors authorized the granting of
bonuses to its 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. On
March 7, 2005, 6,666 of these options were exercised with the company receiving
$9,199 payment for the exercise, leaving 217,995 of those options outstanding as
of March 31, 2005.
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 by payment with 4,984
shares underlying his option. On February 4, 2005, one of the directors acquired
5,138 shares through a cashless exercise of the vested portion of his option
with respect to 7,000 shares by payment with 1,862 shares underlying his option.
As of March 31, 2005, 28,000 of these options were outstanding. See Note 14.
As part consideration for a May, 2003 consulting agreement, terminated
as of December 31, 2005 (see Note 8), the company granted options (not within
the 1989 Plan) to purchase 200,000 shares of common stock exercisable for two
years at $2.50 per share. The option was exercised on February 28, 2005, through
a cashless exercise with the consultant receiving a net of 130,000 shares from
the option exercise.
The company issued 875,000 shares of stock as compensation to officers
and directors in June, 2001. In connection with a revaluation of this issuance
of shares, officers and directors who received these shares paid the company
$52,500 during 2004.
11
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 6--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
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. 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 14.
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 annually on January 1 through 2005. 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.
In March, 2005, 150,000 of these options were exercised with Dialysis
Corporation of America receiving $93,750 for the exercise price, leaving 123,616
of these options outstanding.
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. Of the 30,000 immediately exercisable options,
15,346 have been exercised and 14,654 cancelled due to the resignation of a
Dialysis Corporation of America director in June, 2004. In February, 2005, a
portion of these options were exercised for 15,000 shares with Dialysis
Corporation of America receiving a cash payment of $11,100. Of the remaining
105,000 options, 75,000 had vested as of March 31, 2005.
12
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 6--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
In May, 2002, Dialysis Corporation of America's board of directors
granted five-year options for an aggregate of 21,000 shares to certain of its
employees of which 1,000 were outstanding and vested at March 31, 2005. These
options are exercisable at $2.05 per share through May 28, 2007, and were
registered with the SEC on a Form S-8 registration statement. Options for 10,000
shares have been cancelled as a result of the termination of several employee
option holders. During the first quarter of 2005, 6,000 of these options were
exercised with Dialysis Corporation of America receiving $12,240 in cash
payments for the exercise price.
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 February 2005, a portion of this
option was exercised for 5,000 shares with Dialysis Corporation of America
receiving a cash payment of $15,375, leaving 15,000 of these options
outstanding.
In June, 2004, Dialysis Corporation of America's board of directors
granted 160,000 options to officers and directors exercisable at $4.02 per share
through June 6, 2009. 15,000 options vested immediately and the remaining
145,000 options vest annually in equal 25% increments commencing June 7, 2005.
In August, 2004, Dialysis Corporation of America's board of directors
granted 50,000 incentive stock options to an officer exercisable at $4.02 per
share through August 12, 2009. The options vest 25% annually commencing August
16, 2005.
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. Corporate assets
include unallocated cash and other current assets, deferred income taxes and
corporate fixed assets and other non-current assets not allocated to any of the
segments. Intersegment sales, of which there were none for the periods
presented, are generally intended to approximate market price.
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2005 2004
------------ ------------
BUSINESS SEGMENT OPERATING REVENUES
Medical products $ 196,695 $ 224,318
Medical services 10,612,496 8,626,569
------------ ------------
$ 10,809,191 $ 8,850,887
BUSINESS SEGMENT PROFIT (LOSS)
Medical products $ (25,661) $ (5,518)
Medical services 576,351 540,819
Corporate (221,439) (710,710)
Gain on sale of former subsidiary -- 545,995
------------ ------------
$ 329,251 $ 370,586
============ ============
13
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 8--COMMITMENTS
In January, 2003, the company and Dialysis Corporation of America
established a new 401(k) plan with an eligibility requirement of one year of
service and 21 year old age requirement, and containing employer match
provisions on a portion of employee contributions. Employer matching expense
amounted to approximately $15,000 for the three months ended March 31, 2005 and
$10,000 for the same period of the preceding year.
We 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 an option to purchase 200,000 shares of our common
stock. The option was exercised through a cashless exercise on February 28, 2005
with the consultant selling the company 70,000 shares to pay the $500,000
exercise price and receiving 130,000 shares of the company's common stock. The
agreement was continued on a month-to-month basis through December, 2004. See
Note 6.
NOTE 9--RELATED PARTY TRANSACTIONS
In May 2001, Dialysis Corporation of America loaned its President
$95,000 to be repaid with accrued interest at prime minus 1% (floating prime) on
or before maturity on May 11, 2006. This demand loan is collateralized by all
the President's Dialysis Corporation of America stock options, as well as common
stock from exercise of the options and proceeds from sale of such stock.
Interest income on the loan amounted to approximately $1,000 for the three
months ended March 31, 2005 and for the same period of the preceding year.
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, and whose directorship ceased in June, 2003. This physician was
provided with the right to acquire up to 49% of DCA of Vineland. In April, 2000,
another company owned by this physician acquired an interest in DCA of Vineland,
resulting in Dialysis Corporation of America holding a 51% ownership interest in
DCA of Vineland and this physician's companies holding a combined 49% ownership
interest in DCA of Vineland.
In July, 2000, one of the companies owned by this physician, acquired a
20% interest in DCA of Manahawkin, Inc. 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. The financing was subsequently modified by
increasing the maximum amount of available advances to $5,000,000, and by adding
working capital and other corporate needs to the purposes of the financing. This
note had an outstanding balance of approximately $2,435,000 as of March 31, 2005
and $1,435,000 as of December 31, 2004, and an interest rate of 7.0% as of March
31, 2005 and 6.5% as of December 31, 2004. Interest on the note amounted to
approximately $33,000 for the three months ended March 31, 2005 and $2,000 for
the same period of the preceding year. Accrued interest receivable from Dialysis
Corporation of America on the note amounted to approximately $33,000 as of March
31, 2005 and $27,000 as of December 31, 2004. The outstanding principal balance
of $2,435,000 on the promissory note and $33,000 of accrued interest have been
eliminated in consolidation.
14
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 9--RELATED PARTY TRANSACTIONS-CONTINUED
In certain situations, minority members in Dialysis Corporation of
America subsidiaries may fund a portion of required capital contributions by
issuance of an interest bearing note payable to Dialysis Corporation of America
which minority members may repay directly or through their portion of capital
distributions of the subsidiary. The minority members funded approximately
$30,000 in capital contributions during the first quarter of 2004, with no such
funding during the first quarter of 2005, under notes with Dialysis Corporation
of America accruing interest at prime plus 2%, with an aggregate of
approximately $18,000 of subsidiary distributions applied against the notes and
accrued interest during the first quarter of 2005, and $16,000 during the same
period of the preceding year. Interest income on the notes totaled approximately
$10,000 for the three months ended March 31, 2005 and $4,000 for the same period
of the preceding year. These transactions represent non-cash investing
activities, which is a supplemental disclosure required by Financial Accounting
Standards Board Statement No. 95, "Statement of Cash Flows." See Note 14.
NOTE 10--ACQUISITIONS
Effective as of the close of business on August 31, 2004, Dialysis
Corporation of America acquired a Pennsylvania dialysis company for an estimated
net purchase price of $1,521,000. Of that amount, $761,000 is currently in
escrow, with the balance of $760,000 to be paid in equal installments, each on
the first and second anniversary of the effective date of the purchase
agreement. This transaction resulted in $1,358,000 of goodwill representing the
excess of the net purchase price over the estimated $164,000 fair value of the
net assets acquired, including an $83,000 valuation of an eight year
non-competition agreement that is being amortized over the life of the
agreement. The goodwill is not amortizable for tax purposes since the
transaction was a stock acquisition. The initial allocation of purchase cost at
fair value was based upon available information and will be finalized as any
contingent purchase amounts are resolved and estimated fair values of assets are
finalized. Dialysis Corporation of America began recording the results of
operations for the acquired company as of the effective date of the acquisition.
Dialysis Corporation of America's decision to make this investment was based on
its expectation of future profitability resulting from its review of the
acquired company's operations prior to making the acquisition. See Note 1.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition for the August, 2004
Pennsylvania acquisition:
Accounts receivable, net $ 215,825
Inventory and other current assets 79,383
Property, plant and equipment, net 88,231
Intangible assets 82,500
Goodwill 1,357,681
----------
Total assets acquired 1,823,620
Total liabilities assumed 302,429
-----------
Net assets acquired $1,521,191
==========
NOTE 11--LOAN TRANSACTIONS
Dialysis Corporation of America has provided and may continue to
provide funds in excess of capital contributions to meet working capital
requirements of its dialysis facility subsidiaries, usually until they become
self-sufficient. The operating agreements for the Dialysis Corporation of
America subsidiaries provide for cash flow and other proceeds to first pay any
such financing, exclusive of any tax payment distributions. See Notes 9 and 14.
NOTE 12--INVESTMENT
In 2000, the company made 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 and extensions
of the due date, the company acquired an ownership interest in Linux Global
Partners. Dialysis Corporation of America also owns shares of Linux Global
Partners.
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
15
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 12--INVESTMENT--CONTINUED
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 recorded a gain of $402,000 in August, 2004, and will
record an additional gain based on future proceeds received.
NOTE 13--SALE OF INTEREST IN FORMER SUBSIDIARY
In April, 2001, pursuant to an Agreement for Sale and Purchase of
Shares, the company sold 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 total earn-out
payments received were approximately $3,046,000 Based on Techdyne (Simclar,
Inc.) consolidated sales of $36,187,105 for 2003 on which the earn-out payment
is supposed to be computed, the third and final 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
counterclaim 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--SUPPLEMENTAL CASH FLOW INFORMATION
The following amounts (rounded to the nearest thousand) represent
non-cash financing and investing activities and other cash flow information:
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
-------- --------
Interest paid (see Note 4) $ 63,000 $ 41,000
Income taxes paid (see Note 5) 319,000 97,000
Option exercise bonus (see Note 6) -- 120,000
Subsidiary minority member capital
contributions funded by notes (see Notes 9 -- 30,000
and 11)
Subsidiary minority member distributions
applied against notes and accrued interest
(see Notes 9 and 11) 18,000 16,000
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
16
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 15--SUBSIDIARY STOCK SPLIT
The board of directors of Dialysis Corporation of America declared a
two-for-one stock split with respect to Dialysis Corporation of America's
3,968,772 shares of outstanding common stock. The record date of the split was
January 28, 2004; the distribution date was February 9, 2004; and the date
Nasdaq reported the adjusted price of the common stock was February 10, 2004.
The two-for-one stock split increased the outstanding shares of Dialysis
Corporation of America's common stock at that time to 7,937,344 shares. The
split also required adjustment in the outstanding stock options of Dialysis
Corporation of America by doubling the number of shares obtainable upon
exercise, and halving the exercise price of the options. See Note 6.
NOTE 16--AFFILIATE FINANCIAL INFORMATION
The following amounts represent certain operating data of Dialysis
Corporation of America's 40% owned Ohio affiliate that is accounted for on the
equity method and not consolidated for financial reporting purposes (see Note
1):
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- --------
Revenues $766,000 $406,000
Gross profit $476,000 $167,000
Net income $300,000 $ 48,000
The following amounts are from the balance sheet of Dialysis
Corporation of America's 40% owned Ohio affiliate:
MARCH 31, DECEMBER 31,
2005 2004
---------- ----------
Current assets $ 882,455 $ 945,321
Non-current assets 154,105 160,504
---------- ----------
Total assets $1,036,560 $1,105,825
========== ==========
Current liabilities $ 277,227 $ 244,570
Non-current liabilities -- --
Capital 759,333 861,255
---------- ----------
Total liabilities and capital $1,036,560 $1,105,825
========== ==========
NOTE 17--STOCKHOLDERS' EQUITY
The changes in stockholders' equity for the three months ended March
31, 2005 are summarized as follows:
COMMON ADDITIONAL RETAINED
STOCK PAID-IN CAPITAL EARNINGS TOTAL
------------ ------------ ------------ ------------
Balance at December 31, 2004 $ 69,906 $ 13,027,511 $ 4,431,078 $ 17,528,495
Stock option exercises 1,418 7,781 -- 9,199
Subsidiary stock option exercises -- (80,829) -- (80,829)
Net loss -- -- (65,580) (65,580)
------------ ------------ ------------ ------------
Balance March 31, 2005 $ 71,324 $ 12,954,463 $ 4,365,498 $ 17,391,285
============ ============ ============ ============
17
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 18--ACQUISITION BY SUBSIDARY
On March 15, 2005, the company and Dialysis Corporation of America
jointly announced that they have agreed to terms whereby the company, which owns
approximately 56% of Dialysis Corporation of America, will be acquired by
Dialysis Corporation of America for a total consideration of approximately
5,289,000 shares of Dialysis Corporation of America common stock. Upon
completion of the merger, each shareholder of the company is anticipated to
receive .68 shares of Dialysis Corporation of America common stock for each
share of the company's common stock, and the company's ownership of
approximately 4,821,000 shares of Dialysis Corporation of America common stock
will be retired, resulting in approximately 9,000,000 shares of Dialysis
Corporation of America to remain outstanding. Completion of the transaction is
subject to satisfactory tax and fairness opinions and shareholder approval of
each company.
The merger is intended to simplify the corporate structure and enable
the ownership of the control interest in Dialysis Corporation of America to be
held by public shareholders. The merger will provide Dialysis Corporation of
America with additional capital resources to continue to build its dialysis
business. Several litigations have recently been initiated against the company
and the directors of Dialysis Corporation of America relating to the proposed
merger. See Item 1, "Legal Proceedings" under Part II - "Other Information" of
this quarterly report.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this quarterly report on Form 10-Q for the
quarter ended March 31, 2005, that are not historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934 (the "Exchange Act"). In addition, from time to time, we or our
representatives have made or may make forward looking statements, orally or in
writing, and in press releases. The Private Securities Litigation Reform Act of
1995 contains certain safe harbors for forward-looking statements. Certain of
the forward-looking statements include management's expectations, intentions,
beliefs and strategies regarding the growth of our company and our future
operations, the proposed acquisition of our company by Dialysis Corporation of
America pursuant to a stock for stock merger transaction (see Note 18 to the
"Notes to Consolidated Financial Statements"), the character and development of
the dialysis industry in which Dialysis Corporation of America operates,
anticipated revenues, our need for and sources of funding for expansion
opportunities, expenditures, our business strategies and plans for future
operations, and similar expressions concerning matters that are not considered
historical facts. Forward-looking statements also include our statements
regarding liquidity, anticipated cash needs and availability, and anticipated
expense levels in this Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," commonly known as MD&A. Words
such as "anticipate," "estimate," "expects," "projects," "intends," "plans" and
"believes," and words and terms of similar substance used in connection with any
discussions of future operating or financial performance identify
forward-looking statements. Such forward-looking statements, like all statements
about expected future events, are based on assumptions and are subject to
substantial risks and uncertainties that could cause actual results to
materially differ from those expressed in the statements, including the general
economic, market and business conditions, opportunities pursued, competition,
changes in federal and state laws or regulations affecting the company and our
operations, and other factors discussed periodically in our filings. Many of the
foregoing factors are beyond our control. Among the factors that could cause
actual results to differ materially are the factors detailed in the risks
discussed in the "Risk Factors" section beginning on page 23 of our annual
report on Form 10-K for the year ended December 31, 2004. If any of such events
occur or circumstances arise that we have not assessed, they could have a
material adverse effect upon our revenues, earnings, financial condition and
business, as well as the trading price of our common stock, which could
adversely affect your investment in our company. Accordingly, readers are
cautioned not to place too much reliance on such forward-looking statements,
which speak only as of the date of this quarterly report, and except as required
by law, we undertake no obligation to revise such statements to reflect
subsequent events. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf, are expressly qualified in
their entirety by the cautionary statements contained in this quarterly report.
You should read this quarterly report, with any of the exhibits attached and the
documents incorporated by reference, completely and with the understanding that
the company's actual results may be materially different from what we expect.
MD&A is our attempt to provide a narrative explanation of our financial
statements, and to provide our shareholders and investors with the dynamics of
our business as seen through our eyes as management. Generally, MD&A is intended
to cover expected effects of known or reasonably expected uncertainties,
expected effects of known trends on future operations, and prospective effects
of events that have had a material effect on past operating results.
OVERVIEW
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 56% owned public subsidiary,
Dialysis Corporation of America. That subsidiary provides dialysis services,
primarily kidney dialysis
19
treatments through its 23 outpatient dialysis centers, including the management
of two dialysis centers, one in which it holds a 40% minority interest and one
unaffiliated. In addition, Dialysis Corporation of America provides dialysis
treatments to patients at nine 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.
The following table shows the number of in-center, home peritoneal and
acute inpatient treatments performed by Dialysis Corporation of America through
the dialysis centers it operates, including the two centers it manages, one in
which it has a 40% ownership interest, and those hospitals and medical centers
with which it has inpatient acute service agreements for the periods presented:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------ ------
In center 35,944 27,749
Home peritoneal 3,950 2,380
Acute 2,355 2,179
------ ------
42,249(1) 32,308(1)
====== ======
- -----------
(1) Treatments by the two managed centers included: in-center treatments of
3,603 and 2,883, respectively, for the three months ended March 31, 2005
and March 31, 2004; no home peritoneal treatments; and acute treatments of
65 and 12, respectively, for the three months ended March 31, 2005 and
March 31, 2004.
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 60% of medical service revenues from our dialysis
operations are derived from Medicare and Medicaid reimbursement for the three
months ended March 31, 2005 compared to 57% for the same period of the preceding
year with rates established by the Center for Medicare and Medicaid Services, or
CMS, and which rates are subject to legislative changes. Over the last two
years, Medicare reimbursement rates have not increased. Congress has approved a
1.6% composite rate increase for 2005. Also for 2005, Medicare has modified the
way it reimburses dialysis providers, which includes revision of pricing for
separately billable drugs and biologics, with an add-on component to make the
change budget-neutral. Effective April 1, 2005, CMS also implemented a case-mix
adjustment payment methodology which is designed to pay differential composite
service rates based on a variety of patient characteristics. If the case-mix
adjustment is not properly implemented it could adversely affect the Medicare
reimbursements rates. This change is also designed to be budget neutral.
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.
20
The following table shows the breakdown of medical services revenues by
type of payor for the periods presented:
THREE MONTHS
ENDED MARCH 31,
----------------
2005 2004
---- ----
Medicare 51% 49%
Medicaid and comparable programs 9 8
Hospital inpatient dialysis services 6 7
Commercial insurers and other private payors 34 36
---- ----
100% 100%
==== ====
The medical service revenues from our dialysis operations are derived
primarily from four sources: outpatient hemodialysis services, home peritoneal
dialysis services, inpatient hemodialysis services and ancillary services. The
following table shows the breakdown of medical service revenues from our
dialysis operations (in thousands) derived from primary revenue sources and the
percentage of total medical service revenue represented by each source for the
periods presented:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2005 2004
--------------- ---------------
Outpatient hemodialysis services $ 5,371 51% $ 3,806 45%
Home peritoneal dialysis services 779 8 423 5
Inpatient hemodialysis services 629 6 589 7
Ancillary services 3,705 35 3,592 43
------- ---- ------- ----
$10,484 100% $ 8,410 100%
======= ==== ======= ====
Essential to profitability of our dialysis operations is Medicare
reimbursement, which is at a fixed rate determined by CMS. The level of Dialysis
Corporation of America's, and therefore, our revenues and profitability may be
adversely affected by any potential legislation resulting in Medicare
reimbursement rate cuts. 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.
21
RESULTS OF OPERATIONS
The following table shows our results of operations (in thousands) for the
periods presented:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- --------
Product sales $ 197 $ 224
Medical service revenues 10,484 8,410
-------- --------
Total sales 10,681 8,634
Other income 128 217
-------- --------
Total revenues 10,809 8,851
Cost of product sales 107 118
Cost of medical services 6,542 5,162
-------- --------
Total cost of sales 6,649 5,280
Selling, general and administrative expenses 3,691 3,677
Provision for doubtful accounts 248 148
-------- --------
Total cost and expenses 10,588 9,105
-------- --------
Operating income (loss) 221 (254)
Other income (expense), net 108 625
-------- --------
Income before income taxes, minority interest
and equity in affiliate earnings 329 371
Income tax provision 309 216
-------- --------
Income before minority interest and equity
in affiliate earnings 20 155
Minority interest in income of
consolidated subsidiaries (206) (174)
Equity in affiliate earnings 120 19
-------- --------
Net loss $ (66) $ --
======== ========
Consolidated operating revenues, increased by approximately $1,958,000
(22%) for the three months ended March 31, 2005 compared to the same period of
the preceding year. Sales revenues increased by approximately $2,047,000 (24%)
for the three months ended March 31, 2005 compared to the same period of the
preceding year. Other operating income decreased by approximately $89,000 for
the three months ended March 31, 2005 compared to the same period of the
preceding year. There was a gain on a litigation settlement of $134,000 during
the first quarter of 2004. There was an increase in management fee income of
$45,000 for the quarter ended March 31, 2005 compared to the same period of the
preceding year 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 Notes 1 and 16 to
"Notes to Consolidated Financial Statements."
22
In April, 2004, we received payment of approximately $930,000
representing the third installment of an earn-out payment from our sale of
Techdyne to Simclar International in 2001. This resulted in our having received
approximately $546,000 in excess of the minimum earn-out of $2,500,000 as
provided in the sale agreement that we had previously recorded. This excess
amount has been recorded as a non-operating gain in our consolidated statement
of operations. On May 10, 2004, we filed an action against Simclar International
in Florida state court, alleging breach of contract by Simclar International,
seeking collection of 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 International has filed a counterclaim
alleging that due to its certification of erroneous sale amounts for 2001, 2002
and 2003 it had overpaid Medicore by approximately $316,000. We believe the
counterclaim is without merit. See Note 12 to "Notes to Consolidated Financial
Statements."
Other non-operating income increased approximately $31,000 for the
three months ended March 31, 2005 compared to the same period of the preceding
year. Interest income from unrelated parties increased $30,000 for the three
months ended March 31, 2005 compared to the same period of the preceding year.
Rental income increased approximately $3,000, miscellaneous other income
decreased by approximately $10,000, and interest expense decreased approximately
$8,000, with the effect of reduced average borrowings more than offsetting an
increase in average interest rates for the three months ended March 31, 2005, in
each case compared to the same period of the preceding year. The prime rate was
5.75% at March 31, 2005 and 5.25% at December 31, 2004. See Notes 1 and 4 to
"Notes to Consolidated Financial Statements."
Medical product sales revenues decreased approximately $28,000 for the
three months ended March 31, 2005 compared to the same period 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 services revenues, representing the sales revenues of our
dialysis division, Dialysis Corporation of America, increased approximately $
2,075,000 (25%) for the three months ended March 31, 2005 compared to the same
period of the preceding year, with the increase largely attributable to a 31%
increase in total dialysis treatments performed by our dialysis division from
29,413 during the first quarter of 2004 to 38,581 during the first quarter of
2005. This increase reflects: (i) increased revenues from Dialysis Corporation
of America's Pennsylvania dialysis centers of approximately $411,000, including
revenues of $592,000 for the two centers operated through its Keystone Kidney
Care, Inc. subsidiary, which was acquired by Dialysis Corporation of America
effective August 31, 2004; (ii) decreased revenues of approximately $16,000 from
its New Jersey centers; (iii) increased revenues of approximately $108,000 from
its Georgia centers; (iv) increased revenues of approximately $396,000 from its
Maryland centers, (v) increased revenues of approximately $69,000 from its Ohio
center; (vi) increased revenues of approximately $408,000 for its Virginia
centers; and (vii) increased revenues of approximately $699,000 from its South
Carolina center. Some patients of Dialysis Corporation of America carry
commercial insurance which may require an out of pocket co-pay by the patient,
which is often uncollectible by Dialysis Corporation of America. This co-pay is
typically limited, and therefore may lead to an under-recognition of revenue by
Dialysis Corporation of America at the time of service. Dialysis Corporation of
America routinely recognizes these revenues as it becomes aware that these
limits have been met.
Cost of sales as a percentage of consolidated sales amounted to 62% for
the three months ended March 31, 2005 compared to 61% for the same period of the
preceding year.
Cost of goods sold for the medical products division as a percentage of
medical product sales was 54% for three months ended March 31, 2005 and for 52%
for the same period of the preceding year. Changes in the cost of goods sold
percentage for this division result largely from a change in product mix.
23
Cost of medical services sales as a percentage of medical services
revenues increased to 62% for the three months ended March 31, 2005, compared to
61% for the same period of the preceding year, reflecting increases in payroll
costs and supply costs as a percentage of medical services sales.
Approximately 27% of Dialysis Corporation of America's medical services
revenues for the three months ended March 31, 2005 and 29% for the same period
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. Beginning this year, Medicare will reimburse dialysis
providers for the ten most utilized ESRD drugs at an amount equal to the cost of
such drugs as determined by the OIG, with complimentary increases in the
composite rate. Dialysis Corporation of America believes this will have little
impact on its average Medicare revenue per treatment.
Selling, general and administrative expenses increased approximately
$3,000 for the three months ended March 31, 2005 compared to the same period of
the preceding year. The first quarter of 2004 included approximately $486,000 of
stock option related bonuses. Without the effect of the stock option bonuses,
selling general and administrative expenses would have increased approximately
$489,000 for the three months ended March 31, 2005 compared to the same period
of the preceding year. This includes operations of Dialysis Corporation of
America's new dialysis centers in Pennsylvania, South Carolina, Virginia and
Maryland, and the cost of additional support activities from expanded dialysis
operations. As a percentage of sales revenues, selling, general and
administrative expenses amounted to 34% for the three months ended March 31,
2005 compared to 42% for the same period of the preceding year. Without the
effect of the 2004 stock option bonuses, selling, general and administrative
expenses would have amounted to 36% of sales revenues for the first quarter of
2004. These expenses include expenses of new dialysis centers incurred prior to
Medicare approval for which there were no corresponding medical service
revenues.
Provision for doubtful accounts increased by approximately $100,000,
for the three months ended March 31, 2005 compared to the same period of the
preceding year. Medicare bad debt recoveries of $177,000 were recorded during
the three months ended March 31, 2005, with no such recoveries recorded for the
same period of the preceding year. Without the effect of the Medicare bad debt
recoveries, provision for doubtful accounts receivable would have amounted to 4%
of sales for the three months ended March 31, 2005 compared to 2% for the same
period of the preceding year. The provision for doubtful accounts reflects our
collection experience with the impact of that experience included in accounts
receivable presently reserved, plus recovery of accounts previously considered
uncollectible from our Medicare cost report filings. The provision for doubtful
accounts 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 Dialysis Corporation of America's operation of additional
dialysis centers has 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.
Minority interest represents the proportionate equity interests of
minority owners of subsidiaries whose financial results are included in our
consolidated results. Equity in affiliate earnings represents Dialysis
Corporations of America's equity in the earnings incurred by its Ohio affiliate.
See Notes 1 and 16 to "Notes to Consolidated Financial Statements."
24
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled approximately $12,934,000 at March 31, 2005,
which reflects an increase of $330,000 (3%) during the three months ended March
31, 2005. The change in working capital included a decrease in cash of
$1,564,000 including net cash used in operating activities of $1,423,000, net
cash used in investing activities of $156,000 (including additions to property,
plant and equipment of $292,000, and $161,000 of distributions received from
Dialysis Corporation of America's 40% owned Ohio affiliate), and net cash
provided by financing activities of $15,000 (including payments on long-term
debt of $137,000, $10,000 of capital contributions from a subsidiary minority
member and $142,000 of receipts from the exercise of company and 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 ($402,000) 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
agreed to continue the consulting arrangement on a month-to-month basis through
December, 2004. In March, 2005, in accordance with the terms of the option, the
investment relations firm exercised the option in full, via a "cashless"
exercise, for which it received an aggregate of 130,000 shares. 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 since October 2003, aggregating approximately $21,000. 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 provided for in the sale agreement which 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 in the agreement 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 state court 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."
25
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 $603,000 at March 31, 2005, and $610,000 at December 31,
2004. 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 $665,000 at March 31, 2005, and $675,000 at December 31,
2004. Dialysis Corporation of America has an equipment financing agreement with
a third party for the purchase of kidney dialysis machines for some of its
facilities. Dialysis Corporation of America had outstanding balances under this
agreement of $695,000 at March 31, 2005, and $814,000 at December 31, 2004.
Dialysis Corporation of America has not engaged in any additional equipment
financing under this agreement during the first quarter of 2005 or the first
quarter of the preceding year. 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 was 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 $5,000,000 and by
adding working capital and other corporate needs to the purposes of the
financing. Advances under this loan arrangement, were approximately $1,000,000
during the first quarter of 2005 with $2,435,000 outstanding at March 31, 2005
and $1,435,000 at December 31, 2004. See Note 8 to "Notes to Consolidated
Financial Statements."
Dialysis Corporation of America opened centers in Pottstown,
Pennsylvania; Aiken South Carolina; Warsaw, Virginia, Ashland, Virginia; and
Rockville, Maryland during 2004, and acquired Keystone Kidney Care, which
operates two dialysis facilities in Pennsylvania, effective as of the close of
business on August 31, 2004. Dialysis Corporation of America is in the process
of developing a new dialysis center in each of Maryland and Ohio and three new
centers in South Carolina. See Note 10 to "Notes to Consolidated Financial
Statements."
On March 15, 2005, together with Dialysis Corporation of America, we
issued a joint press release announcing the agreement to terms for a merger of
our company into Dialysis Corporation of America. The proposed merger is subject
to finalizing an Agreement and Plan of Merger, our receipt of satisfactory tax
and fairness opinions, the filing with and declaration of effectiveness by the
SEC of a registration statement containing a proxy statement/prospectus, and the
approval of our shareholders and the shareholders of Dialysis Corporation of
America. This transaction will enable the control interest in Dialysis
Corporation of America to be in the hands of the public stockholders and provide
Dialysis Corporation of America with additional capital resources to expand. See
Note 18 to "Notes to Consolidated Financial Statements." Certain litigation has
been initiated against us based on the proposed merger. See Item 1, "Legal
Proceedings" under Part II - "Other Information" of this quarterly report.
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 $750,000 to $1,000,000, depending on location,
size and related services to be provided, which includes equipment and initial
working capital requirements. Acquisition of an existing dialysis facility is
more expensive than construction, although acquisition would provide 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 and
financing from us. See Note 9 to "Notes to Consolidated Financial
26
Statements." While we anticipate that financing will be available to Dialysis
Corporation of America either from a financial institution or us, including the
proposed merger into Dialysis Corporation of America no assurance can be given
that Dialysis Corporation of America will be successful in implementing its
growth strategy, that the proposed merger will be completed, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In November, 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs," an amendment of ARB No. 43, Chapter 4
("FAS 151"). FAS 151 requires companies to recognize as current-period charges
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage). FAS 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The company does not expect FAS 151
to have a significant effect on its consolidated financial statements. See Note
1 to "Notes to Consolidated Financial Statements."
In December, 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Non-monetary Assets," an amendment of APB
Opinion No. 29 ("FAS 153"). The amendments made by FAS 153 are intended to
assure that non-monetary exchanges of assets that are commercially substantive
are based on the fair value of the assets exchanged. FAS 153 is effective for
non-monetary assets exchanges occurring in fiscal periods beginning after June
15, 2004. The Company does no expect FAS 153 to have a significant effect on its
financial statements. See Note 1 to "Notes to Consolidated Financial
Statements."
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised), "Share-Based Payment" ("FAS 123(R)"). FAS 123(R)
requires companies to recognize the fair value of stock option grants as a
compensation costs in their financial statements. The company will be required
to comply with the provisions of FAS 123(R) effective with its interim financial
statements for the first fiscal quarter of 2006. The company is in the process
of determining the impact that FAS 123(R) will have on its consolidated
financial statements. See Note 1 to "Notes to Consolidated Financial
Statements."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The SEC has issued cautionary advice to elicit more precise disclosure
in this Item 7, MD&A, about accounting policies management believes are most
critical in portraying our financial results and in requiring management's most
difficult subjective or complex judgments.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make judgments and estimates. On an on-going basis, we evaluate
our estimates, the most significant of which include establishing allowances for
doubtful accounts, a valuation allowance for our deferred tax assets and
determining the recoverability of our long-lived assets. The basis for our
estimates are historical experience and various assumptions that are believed to
be reasonable under the circumstances, given the available information at the
time of the estimate, the results of which form the basis for
27
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
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estimated future cash flows, an impairment charge is recognized to the extent
the carrying amount of the asset exceeds the fair value of the asset. These
computations are complex and subjective.
Goodwill and Intangible Asset Impairment: In assessing the
recoverability of our goodwill and other intangibles we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. This impairment test requires the determination
of the fair value of the intangible asset. If the fair value of the intangible
asset is less than its carrying value, an impairment loss will be recognized in
an amount equal to the difference. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for these assets. We adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," (FAS 142) effective January 1,
2002< and are required to analyze goodwill and indefinite lived intangible
assets for impairment on at least an annual basis.
IMPACT OF INFLATION
Inflationary factors have not had a significant effect on our
operations. 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 $6,430,000 invested as of March 31, 2005. A 15%
relative decrease in rates on our period-end investments would have resulted in
a negative impact of approximately $4,000 on our results of operations for the
first quarter of 2005.
We have interest rate exposure on debt agreements with variable
interest rates of which we had approximately $1,268,000 of such debt outstanding
as of March 31, 2005. A 15% relative increase in interest rates on our
period-end variable rate debt would have resulted in a negative impact of
approximately $1,000 on our results of operations for the first quarter of 2005.
We do not utilize financial instruments for trading or speculative
purposes, and do not currently use interest rate derivatives.
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
As of the end of the period of this quarterly report on Form 10-Q for
the first quarter ended March 31, 2005, 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 Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15 of the
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Securities Exchange Act of 1934 (the "Exchange Act"). The disclosure controls
and procedures are designed to provide reasonable assurance that information
required to be disclosed by our company in the reports that we file under the
Exchange Act is recorded, processed, summarized and reported within required
time periods specified by the SEC's rules and forms, and that such information
is accumulated and communicated to our management. Based upon that evaluation,
our Chief Executive Officer and President and our Vice President of Finance and
Chief Financial Officer concluded that as of the end of the period, our
disclosure controls and procedures provided reasonable assurance that 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.
(b) Internal Control Over Financial Reporting
There were no significant changes in internal control over financial
reporting that occurred during our most recent fiscal quarter, or subsequent to
the evaluation as described in subparagraph (a) above, that materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
30
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
In April, 2005, three law suits were filed, two in the Circuit Court of
the Eleventh Judicial Circuit in and for Miami - Dade County of Florida as
putative class and derivative actions, and one in the Circuit Court for Anne
Arundel County, Maryland, as a putative derivative action, each by alleged
holders of Dialysis Corporation of America's shares, against the company and the
directors of Dialysis Corporation of America, alleging breaches of fiduciary
duty in connection with the proposed merger of the company with Dialysis
Corporation of America. See Note 18 to "Notes to Consolidated Financial
Statements." These actions were previously reported in the company's current
reports on Form 8-K. The parties have agreed to consolidate the two Florida
actions and have tentatively agreed to stay the Maryland action. The company and
Dialysis Corporation of America have filed motions to stay the Florida action
and enlarge the time to respond. The motion to stay is based upon the company's
and Dialysis Corporation of America's assertions that plaintiffs prematurely
filed their actions without making demand on Dialysis Corporation of America's
board of directors to take action or conduct an investigation, which failure of
demand on the board, which plaintiffs allege would be futile, is a violation of
Florida law. The company's and Dialysis Corporation of America's position is
that Florida law provides Dialysis Corporation of America's board of directors
with the authority to decide whether initiating derivative litigation is in the
best interest of Dialysis Corporation of America. The company believes the class
and derivative actions are without merit, and the matters will be defended
vigorously by the company and by Dialysis Corporation of America on behalf of
its board of directors.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
EQUITY SECURITIES SOLD BY THE COMPANY DURING THE FIRST QUARTER ENDED MARCH 31,
2005 AND NOT REGISTERED UNDER THE SECURITIES ACT
The only sale of equity securities by the company during the first
quarter ended March 31, 2005 that was not registered under the Securities Act
was through the issuance of shares of common stock pursuant to option exercises.
On February 4, 2005, director Charles Waddell exercised his option at
$2.25 per share for 7,000 shares of common stock for an aggregate of $15,750. As
consideration for the exercise price, Mr. Waddell delivered to the company 1,862
shares of common stock underlying the option, resulting in Mr. Waddell receiving
an aggregate of 5,138 shares.
On February 28, 2005, TARget, LLC, the former investment relations
consultant (see Notes 6 and 8 to "Notes to Consolidated Financial Statements"),
exercised its option at $2.50 per share for 200,000 shares of common stock for
an aggregate of $500,000. As consideration for the exercise price, TARget
delivered to the company 70,000 shares of common stock underlying the option,
resulting in TARget receiving an aggregate of 130,000 shares.
On March 7, 2005, Bart Pelstring, a former director of our subsidiary,
Dialysis Corporation of America, exercised his company option for 6,666 shares
of common stock, exercisable at $1.38 per share, for an aggregate price of
$9,199 paid in cash.
All of the issuances of common stock to the persons set forth above
upon their option exercises were not registered under the Securities Act and
were based on the Section 4(2) non-public offering exemption from the
registration requirements of the Securities Act. Each of the persons to whom
common stock was issued by the company is sophisticated and knowledgeable about
the affairs of the company, and has access to information
31
concerning the company, its operations, financial condition and management.
Restrictive legends indicating the non-transferability of the shares have been
placed on the common stock certificates, and stop-transfer instructions placed
against such shares with the company's transfer agent. The shares of common
stock issued to such persons upon exercise of their options are restricted
securities as defined in Rule 144(a)(3) under the Securities Act, and may not be
publicly sold, transferred or hypothecated without compliance with the
registration requirements of the Securities Act or an available exemption
therefrom.
PURCHASES OF EQUITY SECURITIES BY OR ON BEHALF OF THE COMPANY DURING THE FIRST
QUARTER ENDED MARCH 31, 2005
The following tabular format provides information relating to the
company's common stock repurchases pursuant to publicly announced plans or
programs, and those not made pursuant to publicly announced plans or programs.
(a) (b) (c) (d)
Maximum No. (or
Total No. of Shares Approximate Dollar
(or Units) Purchased Value) of Shares (or
as Part of Publicly Units) that May Yet
Total No. of Shares Average Price Paid Announced Plans Be Purchased Under
Period (or Units) Purchased Per Share (or Unit) or Programs the Plans or Programs
- ------ -------------------- ------------------- ----------- ---------------------
January 1, 2005 to
January 31, 2005 -0- -0- -0- 952,000(2)
February 1, 2005 to
February 28, 2005 71,862(1) (1) -0- 952,000(2)
March 1, 2005 to
March 31, 2004 -0-(1) -0- -0- 952,000(2)
Total 71,862
(1) All of such shares were acquired by the company in lieu of cash
consideration pursuant to the exercise of options by one officer of and one
former consultant to the company. The fair market value of the shares delivered
as consideration by such persons to the company equaled the aggregate exercise
price of their respective options. See above "Equity Securities Sold by the
Company During the First Quarter Ended March 31, 2004 and Not Registered Under
the Securities Act".
(2) The company has a common stock repurchase program, which was announced in
December, 2002, for the repurchase of up to 1,000,000 shares at the then current
market prices of approximately $1.20 per share. The repurchase program was
reiterated in September, 2003, and continues, but repurchases are unlikely at
the current market prices. The closing price of our common stock on May 12, 2005
was $11.00.
Item 6. Exhibits
Part I Exhibits
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certifications of the Chief Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certifications of Chief Financial Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.
32 Section 1350 Certifications
32.1 Certifications of the Chief Executive Officer and the
Chief Financial Officer pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934 and U.S.C. Section 1350.
32
Part II Exhibits
3 Articles of Incorporation and Bylaws
3.1 Restated Articles of Incorporation, as amended
(incorporated by reference to the company's Annual Report
on Form 10-K for the year ended December 31, 1997 ("1997
Form 10-K"), Part IV, Item 14(c)(3)(i)).
3.2 Bylaws, as amended (incorporated by reference to the
company's 1997 Form 10-K, Part IV, Item 14(c)(3)(ii)).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDICORE, INC.
By /s/ DANIEL R. OUZTS
-------------------------------
DANIEL R. OUZTS, Vice President
(Finance), Chief Financial
Officer and Treasurer
Dated: May 16, 2005
33
EXHIBIT INDEX
Exhibit No.
-----------
Part I Exhibits
31 Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certifications of the Chief Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certifications of Chief Financial Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.
32 Section 1350 Certifications
32.1 Certifications of the Chief Executive Officer and the
Chief Financial Officer pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934 and U.S.C. Section 1350.
Part II Exhibits
3 Articles of Incorporation and Bylaws
3.1 Restated Articles of Incorporation, as amended
(incorporated by reference to the company's Annual Report
on Form 10-K for the year ended December 31, 1997 ("1997
Form 10-K"), Part IV, Item 14(c)(3)(i)).
3.2 Bylaws, as amended (incorporated by reference to the
company's 1997 Form 10-K, Part IV, Item 14(c)(3)(ii)).
34