Description

I apologize in advance for the thin nature of this play. It seemed so tempting that even if you get a world of slippage, you will still do quite well. I did these numbers last night, and updated the prices for when I am posting now. I hope my numbers are right; I have never done a stub play like this before, so it is all pretty new to me.

Medicore (MDKI) owns 2,410,622 shares of Dialysis Corporation Of America (DCAI). There are 6,524,275 shares of MDKI outstanding. A bit of division till tell you that each MDKI share holds .3695 shares of DCAI. Therefore, you can sell 37 shares of DCAI for every 100 shares of MDKI that you buy and effectively create the stub that isolates Medicore’s business and assets. At the current quote of 7.5, those .3695 shares are valued at 2.77 a share. Incidentally, this is above the current quote of MDKI. As long as Medicore’s business has a positive value, this is a winner. Now let’s look at MDKI.

Medical equipment businesses are quite outside my circle of expertise. The medical products segment is essentially break even. I know that this can all change fast with new developments, but seeing how low revenues have been in the past, I think it is fair to give this business no value for now. Should that change, this is definitely a sweetener.

Here is a quick shot at the unconsolidated balance sheet showing the assets of MDKI not owned by the subsidiary (DCAI).



Assets

Cash + Equivalents 5.756
Accounts Receivable .062
Inventories .263
Other Current Assets .413
Deferred Income Taxes .075

Total Current Assets 6.596

Long Term Assets 1.136

Other Assets (2.762) is now (1):

14% of Linux Global Partners (2)
3.541 in cash + .805 in escrow = 4.346 (3)
Earn out Payment of .6 minimum (4)
.03 in settlements from Viragen and quarterly royalties (5)

Total Other Assets 4.976

Total Assets 12.681



Liabilities

Payables .016
Other Liabilities .813

Current Liabilities .829

Deferred Income Taxes .716

Total Liabilities 1.547

Book Value 11.134

Shares Outstanding 6.524

Book Value Per Share 1.7066



(1) Other assets include some very interesting bits that were understated at quarter end but have since been settled and given values.

(2) No idea what this is worth. Linux has been hot lately, and it could be monetized. I am giving it no value now, but it could be a nice upside sweetener.

(3) The company had received as collateral, shares of a privately held company. These have now been converted into cash which is not shown on the balance sheet as of the end of the quarter. Additional cash is also in escrow.

(4) The company has received 2 of 3 earn out payments from the sale of the Techdyne subsidiary. Payments represent 3% of revenues for the year. In ’01 they got 1.015m and in ’02 they got 1.011m. The minimum earn –out is .384 which is in current assets as a receivable. I assume that they will get closer to the million averages of the past two years and hence they should get another .6.

(5) The .03 is not reflected at quarter end in cash and cash equivalents. They will get .03 for the next 2 years as well. They will also receive quarterly royalties. There is no way to quantify this either, but it must be a large number if Viragen fought them so hard to withhold royalties. This is another upside sweetener.


Conclusion: For a net credit on the stub (talk about rare) you get a company with a book value of around 1.71 a share with a few very interesting sweeteners.

Risks:

Spreads can widen quite a bit more before converging. Don’t forget LTCM.

Never underestimate day-traders who are chasing momentum in a microcap!!!

These two are thin. I think that the potential profit is great enough that moderate slippage should not matter still.

DCAI could be a hard short. Friends of mine found some, but the effective float is about 1.5m shares.

MDKI is in an industry that I do not understand well.

The management consulting contract seems a bit expensive for my tastes.

MDKI may never be able to bring out its true value.

I own and have owned DCAI for a long time and have decided not to short any for a hedge; I think it is a great long. I own MDKI as well because it currently has a negative value excluding the DCAI should DCAI stay up here. I have not felt the need to hedge. (Just thought you should know where I stand).

I may incidentally know very little about doing a stub (this is my first). Good luck guys.

Catalyst

Convergence of the spread.
None really, except the spread is too wide now and it gives MDKI a negative value.