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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________ to __________
Commission file number 0-6906
MEDICORE, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 59-0941551
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2337 WEST 76TH STREET, HIALEAH, FLORIDA 33016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (305) 558-4000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
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Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant based upon the closing price of the common stock on March 20,
2000 was approximately $14,550,000.
As of March 20, 2000 the Company had outstanding 5,710,540 shares of
common stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Proxy Statement
in connection with the Registrant's Annual Meeting of Shareholders anticipated
to be held on May 24, 2000.
Registrant's Annual Reports, Forms 10-K, for the years ended December
31, 1994, 1995, 1997 and 1998, Part IV, Exhibits.
Annual Reports for Registrant's Subsidiary, Techdyne, Inc., Forms 10-K
for the years ended December 31, 1991, 1995 and 1997, Part IV, Exhibits.
Registration Statement of Registrant's Subsidiary, Techdyne, Inc., Form
SB-2, effective September 13, 1995, Registration No. 33-94998-A, Part II, Item
27, Exhibits.
Registration Statement of Registrant's Subsidiary, Techdyne, Inc., Form
S-3, Effective December 11, 1996, Registration No. 333-15371, Part II, Item 16,
Exhibits.
Annual Report for Registrant's Subsidiary Dialysis Corporation of
America, Form 10-K for the years ended December 31, 1996, 1997 and 1998, Part
IV, Exhibits.
Registration Statement of Registrant's Subsidiary, Dialysis Corporation
of America, Form SB-2, effective April 17, 1996, Registration No. 333-80877A,
Part II, Item 27, Exhibits.
MEDICORE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1999
PAGE
PART I
Item 1. Business......................................... 1
Item 2. Properties....................................... 20
Item 3. Legal Proceedings................................ 21
Item 4. Submission of Matters to a Vote of
Security Holders................................. 22
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters.................. 22
Item 6. Selected Financial Data.......................... 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.... 23
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk ..................................... 34
Item 8. Financial Statements and Supplementary Data...... 35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........... 35
PART III
Item 10. Directors and Executive Officers of the
Registrant................................... 36
Item 11. Executive Compensation........................... 36
Item 12. Security Ownership of Certain
Beneficial Owners and Management................. 36
Item 13. Certain Relationships and Related Transactions.... 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ............................. 38
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
the 1934. The Private Securities Litigation Reform Act of 1995 contains certain
safe harbors regarding forward-looking statements. Certain of the
forward-looking statements include management's expectations, intuitions and
beliefs with respect to the growth of our Company, the nature of the electronics
industry in which our 71% owned public subsidiary, Techdyne, Inc., is involved
as a manufacturer, the nature of and future development of the dialysis industry
in which our 65% owned public subsidiary, Dialysis Corporation of America
("DCA"), is engaged, our business strategies and plans for future operations,
our needs for capital expenditures, capital resources, liquidity and operating
results, and similar matters that are not historical facts. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such forward-looking statements are subject to substantial risks
and uncertainties that could cause actual results to materially differ from
those expressed in the statements, including general economic and business
conditions, opportunities pursued or abandoned, 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 included in our Registration Statement, Form S-3, as
filed with the Securities and Exchange Commission (effective May 15, 1997) and
the Registration Statements of our subsidiaries, Techdyne's Registration
Statements as filed with the Commission, Form SB-2 (effective September 13,
1995) and Form S-3 (effective December 11, 1996), and DCA's Registration
Statements, Form SB-2, as filed with the Commission (effective on April 17,
1996), and Form S-3 (effective July 1, 1999). Accordingly, readers are cautioned
not to place too much reliance on such forward-looking statements which speak
only as of the date made and which the Company undertakes no obligation to
revise to reflect events after the date made.
ITEM 1. BUSINESS
GENERAL
Medicore, Inc., incorporated in Florida in 1961, has four business
segments: (i) the medical product division which distributes medical supplies;
(ii) the international contract manufacturing of electronic and
electro-mechanical products, primarily for the data processing,
telecommunications, instrumentation and food preparation equipment industries,
accomplished through our 71% owned public subsidiary, Techdyne (Techdyne's
wholly-owned subsidiaries include Lytton Incorporated, Techdyne (Europe)
Limited, and Techdyne (Livingston) Limited; (iii) the operation of kidney
dialysis centers through our 65% owned public subsidiary, Dialysis Corporation
of America; and (iv) a recent addition, the investment in technology
companies through our acquisition of an 8% interest in Linux Global Partners, a
private holding company which invests in developing Linux software companies, to
which company we loaned $2,000,000. See Note 6 and Note 15 to "Notes to
Consolidated Financial Statements."
Medicore and our subsidiaries are collectively hereinafter referred to
as "Medicore" or the "Company."
Our executive offices are located at 2337 West 76th Street, Hialeah,
Florida 33016 and at 777 Terrace Avenue, Hasbrouck Heights, New Jersey 07604.
Our telephone number in Florida is (305) 558-4000 and in New Jersey is (201)
288-8220.
MEDICAL PRODUCTS
We develop and distribute medical supplies, primarily disposables, both
domestically and internationally, to hospitals, blood banks, laboratories and
retail pharmacies. Products distributed include exam gloves, prepackaged swabs
and bandages and glass tubing products for laboratories. We additionally
distribute a line of blood lancets used to draw blood for testing. Developed by
the Company and previously manufactured by our public subsidiary, Techdyne,
which lancet manufacturing was taken over by us in 1999, the lancets are
distributed under the names Medi-Lance(TM) and Lady Lite(TM) or under a private
label if requested by the customer. Marketing of medical products is conducted
by independent manufacturer representatives and our employees.
ELECTRONIC MANUFACTURING INDUSTRY
Techdyne is an international contract manufacturer of electronic and
electro-mechanical products, primarily manufactured to customer specifications
and designed for original equipment manufacturers ("OEMs") and distributors in
the data processing, telecommunications, instrumentation and food preparation
equipment industries. Included among its customers are several Fortune 500
companies. Approximately 92% of sales are domestic and 8% are effected by
Techdyne's subsidiary, Techdyne (Europe) in the European markets and to a
limited extent in the Middle East.
Custom-designed products that the Company produces through Techdyne
primarily include complex printed circuit boards ("PCBs"), conventional and
molded cables and wire harnesses, and electro-mechanical assemblies. Techdyne
also provides OEMs with value-added, turnkey contract manufacturing services and
total systems assembly and integration, and delivers manufacturing and test
engineering services and materials management, with flexible and
service-oriented manufacturing and assembly services for its customers'
high-tech and rapidly changing products.
We believe that many OEMs view contract manufacturers as an integral
part of their manufacturing strategy. Outsourcing their manufacturing of
electronic assemblies enables OEMs to focus on product development, reduce
working capital requirements, improve inventory management and marketability.
OEMs are looking more to contract manufacturers, like Techdyne, to provide a
broader scope of value-added services, including manufacturing, engineering and
test services. OEMs rely on contract manufacturers for partial component
assemblies and complete turnkey manufacturing of entire finished products.
Another factor which leads OEMs to utilize contract manufacturers is reduced
time-to-market using the contract manufacturer's expertise and advanced and
automated manufacturing processes.
TECHDYNE'S BUSINESS STRATEGY
In response to the greater reliance of OEMs on contract manufacturers,
our objective is to become a stronger competitive force and provider of
electronic contract manufacturing services for OEM customers, particularly in
view of constantly changing and improving technology and therefore, shorter
product life cycles. Techdyne continues to seek to develop strong, long-term
alliances with major-growth OEMs of complex, market leading products. This
requires providing high quality, cost-effective manufacturing services marked by
a high degree of customer responsiveness and flexibility. We intend to maintain
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our high quality of service through expansion of Techdyne's vertically
integrated manufacturing capabilities, final system assemblies and testing.
We also believe we develop closer and more economically beneficial
relationships with our customers through our geographically diverse
manufacturing and assembly operations, presently located in Florida, Texas,
Massachusetts, Ohio and Scotland. Techdyne's diverse locations help reduce costs
and ensure timely delivery to customers. Techdyne's acquisition of Lytton in
1997 provided us with a new geographic and end user market and continues to
complement Techdyne's operations and further our business strategy by expanding
our customer base, broadening our product line, entering new geographic areas,
and enhancing our manufacturing capabilities.
More emphasis is placed on value-added turnkey business for the
manufacture of complete finished assemblies. This is accomplished with extended
technology, continuous improvement of our processes, and our early involvement
in the design process using our computer-aided design ("CAD") system.
Techdyne is improving its material acquisition process in an attempt to
better its purchasing power by identifying materials used across customer lines
through installation of a software program and updating our enterprise resource
planning ("ERP") system. See "Supplies and Material Management" and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." We believe these efforts will provide us with better leverage in
material pricing, and permit us to be more competitive when bidding for
manufacturing work and turnkey business by tracking actual costs against
customer quotes, enabling us to control costs and more accurately manage our
operating margins.
PRODUCTS AND SERVICES
Approximately 850 products, including complete turnkey finished
products, sub-assemblies, molded and non-molded cable assemblies, wire
harnesses, PCBs, injection molded and electronic assembly products, are
manufactured by Techdyne for over 100 OEM customers.
PRINTED CIRCUIT BOARDS
PCB assemblies are electronic assemblies consisting of a basic printed
circuit laminate with electronic components including diodes, resistors,
capacitors and transistors, inserted and wave soldered. PCBs may be used either
internally within the customer's products or in peripheral devices. The variety
of PCBs produced by Techdyne include pin-through-hole ("PTH") assemblies, low
and medium volume surface mount technology ("SMT") assemblies, and mixed
technology PCBs, which include multilayer PCBs.
PTH assembly involves inserting electronic components with pins or
leads through pre-drilled holes in a PCB and soldering the pins to the
electrical circuit.
In SMT production, electronic components are attached and soldered
directly onto the surface of a circuit board rather than inserted through holes.
SMT components are smaller, can be spaced more closely together and, unlike PTH
components, can be placed on both sides of a PCB. This allows for product
miniaturization, while enhancing the electronic properties of the circuit. SMT
manufacturing requires substantial capital investment in expensive, automated
production equipment which requires high usage. Techdyne has computerized
testing for substantially all of its PCBs to verify that components have been
installed properly and meet certain functional standards, that the electrical
circuits have been properly completed, and that the PCB assembly will perform
its intended functions.
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In 1997, we acquired Lytton, whose Ohio operations, with six automated
lines, are more focused on PCB manufacturing, primarily for the food preparation
equipment industry. We also established a 5,500 square foot manufacturing
facility in Massachusetts in 1997. These expansions resulted in PCB
manufacturing to have yielded approximately 55% and 48% of Techdyne sales
revenues in 1999 and 1998, respectively.
CABLE AND HARNESS ASSEMBLIES
A cable is an assembly of electrical conductors insulated from each
other and twisted around a central core and jacketed. Cables may be molded or
non-molded.
Techdyne offers a wide range of custom manufactured cable and harness
assemblies for molded and mechanical applications. These assemblies include
multiconductor, ribbon, co-axial cable assemblies, and discrete wire harness
assemblies. Techdyne uses advanced automated and semi-automated manufacturing
processes, in-line inspection and computer testing.
Techdyne maintains a large assortment of standard tooling for
D-Subminiature ("D-Subs"), DIN connectors and phono connectors. D-Subs are
connectors which are over-molded with the imprint of the customer's name and
part number. DIN connectors are circular connectors with from two to four pairs
of wires used for computer keyboards. Today's computers are multi-media,
providing audio as well as video, such as the CD-ROM.
Flat ribbon cable or ribbon cable assemblies are cables with wires
(conductors) on the same plane with connectors at each end. Flat ribbon cables
are used in computer assemblies and instrumentation.
Discrete cable assemblies are wires with contacts and connectors.
Harnesses are prefabricated wiring with insulation and terminals ready to be
attached to connectors. The cable sales of Techdyne comprised approximately 35%
and 42% of its total sales revenue for 1999 and 1998, respectively.
CONTRACT MANUFACTURING
Contract manufacturing involves the manufacture of complete finished
assemblies with all sheet metal, power supplies, fans, PCBs as well as complete
sub-assemblies for integration into an OEM's finished products, such as speaker
and lock-key assemblies and diode assemblies that consist of wire, connectors
and diodes that are over-molded, packaged and bar coded for distribution. These
products can be totally designed and manufactured by Techdyne through its CAD
system, engineering and supply procurement. Techdyne develops manufacturing
processes and tooling and test sequences for new products of its customers. It
also provides design and engineering services in the early stages of product
development thereby assuring mechanical and electrical considerations are
integrated with a total system. Alternatively, the customer may provide
specifications and Techdyne will assist in the design and engineering or
manufacture to the customer's specifications. Contract manufacturing products
include rack assemblies for data processing and video editing and custom disk
drive enclosures for OEMs.
REWORKING AND REFURBISHING
Customers provide Techdyne with materials and sub-assemblies acquired
from other sources which the customer has determined requires modified design or
engineering changes. Techdyne redesigns, reworks, refurbishes and repairs these
materials and sub-assemblies.
Contract manufacturing, medical product sales, reworking and
refurbishing together amounted to approximately 10% of sales of Techdyne for
each of 1999 and 1998. Management believes that PCB sales and contract
4
manufacturing will provide Techdyne with substantial increases in revenues in
the next few years.
MANUFACTURING
Components and products are custom designed and developed to fit
specific customer requirements and specifications. Techdyne attempts to develop
a "partnership" relationship with many of its customers by providing a
responsive, flexible, total manufacturing service. Such service includes
computer integrated manufacturing and engineering services, quick-turnaround
manufacturing and prototype development, materials procurement, quality
assurance, inventory management, development of special manufacturing processes
and acquisition of special equipment for that particular customer and its needs,
tooling and test sequences for new products from product designs received from
its customers or developed by Techdyne from customer requirements. The Company's
industrial, electrical and mechanical engineers work in close liaison with its
customers' engineering departments from inception through design, prototypes,
production and packaging. Upon completion of engineering, a prototype or
preproduction samples are produced. Materials procurement includes planning,
purchasing and warehousing electronic components and materials used in the
assemblies and finished products.
Techdyne's PCB assembly operations are geared toward advanced SMT.
Lytton provides us with increased PCB production through state-of-the-art
manufacturing equipment and processes and a highly trained and experienced
engineering and manufacturing workforce. The manufacturing of PCBs involves
several steps including the attachment of various electronic components, such as
integrated circuits, capacitors, microprocessors and resistors.
Techdyne offers a wide range of custom manufactured cables and
harnesses for molded and mechanical applications. The Company uses advanced
manufacturing processes, in-line inspection and testing to focus on process
efficiencies and quality. The cable and harness assembly process is accomplished
with automated and semi-automated preparation and insertion equipment and manual
assembly techniques. Techdyne maintains a large assortment of standard tooling
and modern state-of-the-art equipment at all of its facilities for crimping,
stripping, terminating, soldering, sonic welding and sonic cleaning which
permits it to produce conventional and complex molded cables.
In addition to assembly operations in the last few years, Techdyne has
become more involved in contract manufacturing of moderate to high volume
turnkey assemblies and sub-assemblies, including injection molded and electronic
assembly products.
The European manufacturing facility, located in Livingston, Scotland,
focuses mainly on the electronics industry producing primarily wire harnesses,
electro-mechanical assemblies, and molded cables, incorporating multifaceted
design and production capabilities. Significant reductions in sales of Techdyne
(Europe) have resulted in net losses for this subsidiary amounting to $577,000
for 1999 and $442,000 for 1998, and we are evaluating the future prospects for
that facility. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SUPPLIES AND MATERIALS MANAGEMENT
Materials used in Techdyne's operations consist of metals, electronic
components such as cable, wire, resistors, capacitors, diodes, PCBs and plastic
resins. These materials are readily available from a large number of suppliers
and manufacturers, and Techdyne has not experienced any significant disruptions
from shortages of materials or delivery delays of its suppliers and believes
that its present sources and the availability of its required materials are
adequate. Techdyne utilizes a computerized system of material requirements
planning, purchasing, sales and marketing functions, which has been updated
5
through the installation of the Visual Manufacturing software in all of its
facilities. This new software not only has improved Techdyne's material
acquisition process but has satisfied Techdyne's Year 2000 challenges. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Techdyne procures components from a select group of vendors which meet
its standards for timely delivery, high quality and cost effectiveness, and
orders supplies generally when it has a purchase order or commitment from its
customer for the completed assembly. Techdyne's inventory management allows its
customers to increase or decrease volume requirements within established
frameworks and results in reduced obsolescence problems, which in turn improves
overall efficiency. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
QUALITY AND PROCESS CONTROL
Quality control is essential to Techdyne's operations since low-cost
and high quality production are primary competitive standards and are vital to
the services of the Company. See "Competition" below. The Florida and Texas
facilities received from Underwriter's Laboratories an independent quality
assurance organization, the ISO 9002 quality assurance designation, which is the
international standard of quality with respect to all systems of operations,
including, among others, purchasing, engineering, manufacturing, sales,
inventory control and quality. Techdyne (Europe) received its BS 5750 quality
assurance designation from British Standards Institute. Lytton received its ISO
9002 quality designation from Eagle Registrations, Inc. These quality assurance
designations are only provided to those manufacturers which exhibit stringent
quality and process control assurances after extensive evaluation and auditing
by these independent quality assurance organizations.
Product components, assemblies and sub-assemblies manufactured by
Techdyne are thoroughly inspected visually and electronically to assure all
components are made to strict specifications and are functional and safe.
Strict process controls are also standard operating procedure. Process
controls deal with the controls relating to the entire manufacturing process.
During the course of initial qualification and production cycles, new and
existing customers inspect Techdyne and its operations. Over the years
Techdyne's product and manufacturing quality has received excellent ratings. We
believe we are one of the manufacturers of choice for the major Fortune 500
companies, certain of which are our customers, based upon our excellent record
of quality production.
Total quality, timely delivery and customer satisfaction is our
philosophy. High levels of quality in every area of our operations are
essential. Quality standards are established for each operation, performance
tracked against those standards, and identifying work flow and implementing
necessary changes to deliver higher quality levels. We maintain regular contact
with our customers to assure adequate information exchange and other activities
necessary to assure customer satisfaction and to support our high level of
quality and on-time delivery. Any adverse change in our excellent quality and
process controls could adversely effect our relationships with customers, and
ultimately our revenues and profitability.
CUSTOMERS
Techdyne serves a wide range of businesses from emerging growth
companies to multinational OEMs involved in a variety of markets including
computer networking systems, computer workstations, telecommunications, mass
data storage systems, instrumentation and food preparation equipment industries.
Techdyne's revenue was distributed over the following industry segments:
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Year Ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
Data processing 22% 29% 40%
Telecommunications 22% 20% 7%
Instrumentation 23% 17% 16%
Food preparation equipment (1) 17% 18% 19%
(1) Accomplished through Lytton, a Techdyne subsidiary acquired in July,
1997.
The Company seeks to serve a sufficiently large number of customers to
avoid dependence on any one customer or industry. Nevertheless, historically a
substantial percentage of Techdyne's sales have been to multiple locations of a
small number of customers. Significant reductions or delays in sales to any of
those major customers would have a material adverse effect on our results of
operations. In the past, certain customers have terminated their manufacturing
relationship with Techdyne, or otherwise significantly reduced their product
orders. There can be no assurance that any major customer may not terminate or
otherwise significantly reduce or delay manufacturing orders, any of which such
terminations or changes in manufacturing orders could have a material adverse
effect on our results of operations.
Techdyne and consequently the Company are dependent upon the continued
growth, viability and financial stability of Techdyne's customers, which are in
turn substantially dependent on the growth of the personal computer, computer
peripherals, the communications, instrumentation, data processing and food
preparation equipment industries. Most of these industries have been
characterized by rapid technological change, short product life cycles, pricing
and margin pressures. In addition, many of Techdyne's customers in these
industries are affected by general economic conditions. The factors affecting
these industries in general, and/or the Company's customers in particular, could
have a material adverse effect on our results of operations.
Techdyne also generates significant accounts receivable in connection
with providing manufacturing services to its customers. If one or more of its
customers were to become insolvent or otherwise were unable to pay for our
manufacturing services, our operating results and financial condition would be
adversely affected.
In 1999, 28% of Techdyne's sales were made to numerous locations of two
major customers. The table below sets forth the respective portion of sales for
the applicable period attributable to customers and related suppliers who
accounted for more than 10% of sales in any respective period.
Percentage of Sales
1999 1998 1997
---- ---- ----
PMI Food Equipment Group(1) 15% 18% *
International Business Machines * * 19%
EMC * * 10%
Motorola, Inc 13% 10% *
- ------------------------------
* less than 10% for that year
(1) PMI is a customer of Lytton acquired in 1997.
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Techdyne sells to approximately an additional 100 other companies,
which comprise the remaining 72% of sales. Lytton focuses primarily in PCB
production, and had approximately 32% of its sales for fiscal 1999 to PMI.
MARKETING AND SALES
Techdyne continues to pursue expansion and diversification of its
customer base and it is targeting emerging OEMs in high growth industry
segments. The Company's principal sources of new business are the expansion in
the volume and scope of services provided to existing customers, referrals from
customers and suppliers, direct sales through our sales managers and executive
staff, and through our independent sales representatives. Sales managers,
directed and supported by the executive staff, identify and attempt to develop
relationships with potential customers who exemplify financial stability, a need
for electronic and electro-mechanical component assembly and manufacturing,
anticipated unit volume, and a history of establishing long-term relationships.
Domestic sales are generated by four regional sales managers covering
the Northeast, Southeast, West and Southwest regions of the United States. There
are also 12 in-house sales/marketing personnel, including Barry Pardon, the
President of Techdyne. The regional sales managers have three independent
manufacturer representative agencies who employ approximately 10 sales
representatives. Sales are also generated through catalogues, brochures and
trade shows.
Techdyne (Europe) has three in-house sales personnel who market its
products, primarily ribbon, harness and cable assemblies, electro-mechanical
products, and molded cable assemblies, as well as its reworked and refurbished
products (see "Business - Electronic Manufacturing Industry - Reworking and
Refurbishing" above) to customers in Scotland, England, Ireland, Germany and the
Middle East.
Substantially all of Techdyne's sales and reorders are effected through
competitive bidding. Most sales are accomplished through purchase orders with
specific quantity, price and delivery terms. Some distribution is accomplished
under open purchase orders with components released against customer requests.
BACKLOG
On December 31, 1999, Techdyne's backlog of orders amounted to
approximately $14,643,000, of which approximately $8,179,000 (approximately 56%)
was represented by the orders from its Lytton operations and approximately
$959,000 (approximately 7%) was represented by orders for Techdyne (Europe)
operations. Last year the backlog was approximately $11,817,000 of which
approximately $8,354,000 was derived from Lytton operations and approximately
$673,000 was represented by orders of Techdyne (Europe) operations. We believe,
based on past experience and relationships with our customers and knowledge of
our manufacturing capabilities, that most of Techdyne's backlog orders are firm
and should be filled within six months. The purchase orders that Techdyne has do
not provide for cancellation, but Techdyne occasionally allows cancellations and
frequently rescheduling of deliveries. Over the last several years cancellations
have been minimal and management does not believe that any significant amount of
the backlog orders will be canceled. The variations in the size and delivery
schedules of purchase orders received by Techdyne may result in substantial
fluctuations in backlog from period to period. Since orders and commitments may
be rescheduled or cancelled, and customers' lead times may vary, backlog does
not necessarily reflect the timing or amount of future sales.
8
DIALYSIS OPERATIONS
The Company, through DCA and its subsidiaries, currently operates six
modern outpatient dialysis treatment centers, four in Pennsylvania and two in
New Jersey, with a current capacity of 86 dialysis stations. DCA also provides
inpatient dialysis services to three hospitals in areas serviced by three of
DCA's outpatient dialysis subsidiaries. The outpatient dialysis centers in
Pennsylvania are located in Carlisle, Lemoyne, Wellsboro and Chambersburg. The
New Jersey facilities are situated in Manahawkin and Vineland, New Jersey. Other
new dialysis facilities are anticipated to be initiated in Georgia and Ohio.
ESRD TREATMENT OPTIONS
Kidneys generally act as a filter removing harmful substances and
excess water from the blood, enabling the body to maintain proper and healthy
balances of chemicals and water. Chronic kidney failure, or End-Stage Renal
Disease ("ESRD"), which results from chemical imbalance and buildup of toxic
chemicals, is a state of kidney disease characterized by advanced irreversible
renal impairment. ESRD is a likely consequence of complications resulting from
diabetes, hypertension, advanced age, and specific hereditary, cystic and
urological diseases. Without regular treatment or kidney transplantation ESRD is
fatal.
Treatment options for ESRD patients include (1) hemodialysis, performed
either at (i) an outpatient facility, or (ii) inpatient hospital facility, or
(iii) the patient's home; (2) peritoneal dialysis, either continuous ambulatory
peritoneal dialysis ("CAPD") or continuous cycling peritoneal dialysis ("CCPD"),
usually performed at the patient's home; and/or (3) kidney transplant. According
to HCFA, approximately 86% of ESRD patients receive treatments at non-hospital
owned outpatient dialysis facilities, with the remaining patients treated at
home through hemodialysis or peritoneal dialysis. Patients treated at home are
monitored by a designated outpatient facility.
The most prevalent form of treatment for ESRD patients is hemodialysis,
which involves the use of an artificial kidney, known as a dialyzer, to perform
the function of removing toxins and excess fluids from the bloodstream. This is
accomplished with a dialysis machine, a complex blood filtering device which
takes the place of certain functions of the kidney and which machine also
controls external blood flow and monitors the toxic and fluid removal process.
The dialyzer has two separate chambers divided by a semi-permeable membrane. The
toxins and excess fluid pass through a semi-permeable membrane into one chamber
and the dialysis fluid is circulated through the other chamber. On the average,
patients usually receive three treatments per week with each treatment taking
three to five hours. Dialysis treatments are performed by teams of licensed
nurses and trained technicians pursuant to the staff physician's instruction and
supervision.
A second treatment for ESRD patients is peritoneal dialysis, which is
usually performed at home. All forms of peritoneal dialysis use the patient's
peritoneal (abdominal) cavity to eliminate fluid and toxins from the patient.
CAPD utilizes dialysis solution installed manually into the patient's peritoneal
cavity through a surgically-placed catheter remaining in the abdominal cavity
for a three to five hour period and is then drained. The cycle is then repeated.
CCPD is performed in a manner similar to CAPD, but utilizes a mechanical device
to cycle dialysis solution while the patient is sleeping.
The third modality for patients with ESRD is kidney transplantation.
While this is the most desirable form of therapeutic intervention, the scarcity
of suitable donors and possibility of donor rejection limits the availability of
this surgical procedure as a treatment option.
9
DCA'S BUSINESS STRATEGY
DCA has 23 years experience in developing and operating dialysis
treatment facilities. First in DCA's objectives is top quality patient care. We
intend to continue to establish alliances with physicians and hospitals and to
initiate dialysis service arrangements with nursing homes and managed care
organizations, and to continue to emphasize our high quality patient care and
our smaller size, which allows us to focus on each patient's individual needs
while remaining sensitive to the physicians' professional concerns.
We continue to actively seek and negotiate with physicians and others
to establish new outpatient dialysis facilities. DCA has entered into agreements
and purchased land for construction of a new facility in Georgia. We are
preparing agreements for a new facility in Ohio, and we are currently in
different phases of negotiations with 10 physicians for potential new facilities
in seven of the eastern states.
DCA endeavors to increase same center growth by adding quality staff
and management and attracting new patients to its existing facilities by
rendering high caliber patient care in convenient, safe and serene conditions.
We believe that we have existing adequate space and stations within our dialysis
facilities to accommodate greater patient volume and maximize its treatment
potential. In achieving such increase, we could lower our fixed costs, and
operate at a greater efficiency level.
One of the primary elements in acquiring or developing facilities is
locating an area with an existing patient base under the current treatment of a
local nephrologist. Other considerations in evaluating a proposed acquisition or
development of a dialysis facility are the availability and cost of qualified
and skilled personnel, particularly nursing and technical staff, the size and
condition of the facility and its equipment, the atmosphere for the patients,
the area's demographics and population growth estimates, state regulation of
dialysis and healthcare services, and the existence of competitive factors such
as hospital or proprietary non-hospital owned and existing outpatient dialysis
facilities within reasonable proximity to the proposed center.
Expansion of our dialysis operations is being approached presently
through the development of its own dialysis facilities. Acquisition of existing
outpatient dialysis centers, which the Company has not done in the past, is a
faster but much more costly means of growth.
To construct and develop a new facility ready for operations may take
an average of four to six months, and approximately 12 months or longer to
generate income, all of which are subject to location, size and competitive
elements. Three of our centers, Carlisle, Pennsylvania and Manahawkin and
Vineland in New Jersey, are in the developmental stages since they have not
reached the point where the patient base is sufficient to generate and sustain
earnings, and the Carlisle and Manahawkin subsidiaries have been operating in
excess of 12 months. To construct a 15 station facility may cost in a range of
$600,000 to $750,000 depending on location, size and related services to be
provided by the proposed facility. Acquisition of existing facilities is
substantially more expensive based upon the number of patients, location,
competition, nature of facility and negotiation. Any significant expansion,
whether through acquisition or development of new facilities, is dependent upon
existing funds or financing from other sources. To date, no acquisitions have
been made and should such acquisition opportunities arise, there is no assurance
that we would have available or be able to raise the necessary financing to
pursue or complete such an acquisition.
OPERATIONS OF DIALYSIS FACILITIES
DCA's dialysis facilities are designed specifically for outpatient
hemodialysis and generally contain, in addition to space for dialysis
treatments, a nurses' station, a patient weigh-in area, a supply room, water
10
treatment space used to purify the water used in hemodialysis treatments, a
dialyzer reprocessing room (where, with both the patient's and physician's
consent, the patient's dialyzer is sterilized for reuse), staff work area,
offices and a staff lounge. DCA's facilities also have a designated area for
training patients in home dialysis. Each facility also offers amenities for the
patients, such as a color television with headsets for each dialysis station, to
ensure the patients are comfortable and relaxed.
In accordance with participation requirements under the Medicare ESRD
program, each facility retains a medical director qualified and experienced in
the practice of nephrology and the administration of a renal dialysis facility.
See "Physician Relationships" below. Each facility is overseen by a nurse
administrator who supervises the daily operations and the staff, which consists
of registered nurses, licensed practical nurses, patient care technicians, a
part-time social worker and a part-time registered dietitian, who all supervise
each aspect of patient treatments. The Company must continue to attract and
retain skilled nurses and other staff, competition for whom is intense.
DCA's facilities offer high-efficiency and conventional hemodialysis,
which, in our experience, provides the most viable treatment for most patients.
We consider our dialysis equipment to be both modern and efficient, providing
state of the art treatment in a safe and comfortable environment. In 1999, DCA
leased an additional 32 machines which are more advanced and include better
safety features and updated technology. The addition of the improved equipment
enhances DCA's ability to provide more efficient treatment.
DCA's facilities also offer home peritoneal dialysis, primarily CAPD
and CCPD. Training programs for CAPD or CCPD generally encompass two to three
weeks at each facility, and such training is conducted by the facility's home
training nurse. After the patient completes training, they are able to perform
treatment at home with equipment and supplies provided by DCA.
DCA also provides homecare, sometimes referred to as Method II patient
treatment, which involves providing equipment and supplies, training, patient
monitoring, and follow-up assistance to patients who are able to perform
dialysis treatments at home.
The table below indicates when each subsidiary commenced operations and
The approximate number of patient treatments for the periods indicated.
Dialysis Treatments
------------------
Year Ended
December 31,
Commencement ------------------
Subsidiary and Location of Operations 1999 1998
- ----------------------- ------------- ---- ----
Dialysis Services of PA., Inc. - Lemoyne June, 1995 7,600 7,500
Dialysis Services of PA., Inc. - Wellsboro September, 1995 3,000 3,600
Dialysis Services of PA., Inc. - Carlisle September, 1997 3,000 3,500
Dialysis Services of NJ, Inc. - Manahawkin July, 1998 1,300 250 (1/2 yr.)
Dialysis Services of PA., Inc. - Chambersburg January, 1999 2,900 --
DCA of Vineland, LLC February, 2000 -- --
We estimate that on average DCA's centers were operating at
approximately 56% of capacity as of December 31, 1999, based on the assumption
that a dialysis center is able to provide up to three treatments a day per
station, six days a week. We believe that DCA may increase the number of
dialysis treatments at its centers without making additional capital
expenditures.
11
INPATIENT SERVICES
DCA provides acute care inpatient dialysis services to three hospitals
in areas serviced by three of its six dialysis facilities. Each agreement is for
a one-year term with automatic one-year renewal terms, subject to termination by
notice of either party. Inpatient services are typically necessary for patients
with acute kidney failure resulting from trauma or similar causes, patients in
the early stages of ESRD, and ESRD patients who require hospitalization for
other reasons.
ANCILLARY SERVICES
Our dialysis facilities provide certain ancillary services to ESRD
patients, including the administration of erythropoietin ("EPO") upon a
physician's prescription. EPO is a bio-engineered protein which stimulates the
production of red blood cells and is used in connection with dialysis to treat
anemia, a medical complication frequently experienced by ESRD patients. EPO
decreases the necessity for blood transfusions in ESRD patients. Other ancillary
services that DCA provides to patients in addition to EPO are electrocardiograms
and blood transfusions, all of which are separately reimbursed by Medicare. See
"Medicare and Medicaid Reimbursement" below.
PHYSICIAN RELATIONSHIPS
An integral element to the success of a facility is its association
with area nephrologists. A dialysis patient generally seeks treatment at a
facility near the patient's home and where such patient's nephrologist has
established practice privileges. DCA relies on its ability to attract and
satisfy the needs of referring nephrologists to gain new patients and to provide
quality dialysis care through these referring physicians.
The conditions of a facility's participation in the Medicare ESRD
program mandate that treatment at a dialysis facility be under the general
supervision of a medical director who is a physician. DCA retains by written
agreement qualified physicians or groups of qualified physicians to serve as
medical directors for each of its facilities. Generally, the medical directors
are board eligible or board certified in internal medicine by a professional
board specializing in nephrology and have had at least 12 months of experience
or training in the care of dialysis patients at ESRD facilities. DCA's medical
directors are typically a significant source of referrals to the particular
center served. Our dialysis centers are operated through subsidiaries, either
corporations or limited liability companies. The medical directors of four of
our six centers have acquired a 20% ownership interest in the centers they
service. We make every effort to comply with federal and state regulations
concerning our relationship with the physicians and our medical directors
treating patients at our facilities (see "Regulation - DCA" below) and we know
of no limitations on physician ownership in our subsidiaries.
Agreements with medical directors are usually for a term of five years
or more with renewal provisions. Each agreement specifies the duties,
responsibilities and compensation of the medical director. Under each agreement,
the medical director or professional association maintains his, her or its own
medical malpractice insurance. The agreements also provide for non-competition
in a limited geographic area surrounding that particular dialysis center during
the term of the agreement and upon termination for a limited period. The
agreements do not prohibit physicians from providing direct patient care
services at other locations, and in accord with the law, the agreements do not
require patient referrals to our dialysis centers.
Our ability to establish a dialysis facility in a particular area is
significantly geared to the availability of a qualified physician or
nephrologist with an existing patient base to serve as our medical director. The
12
loss of a medical director who could not be readily replaced would have a
material adverse effect on the operations of that facility and the Company.
QUALITY ASSURANCE
DCA implements a quality assurance program to maintain and improve the
quality of dialysis treatment and care it provides to its patients in every
facility. Quality assurance activities involve the ongoing examination of care
provided, the identification of deficiencies in that care and any necessary
improvements of the quality of care. This program requires each center's staff,
including its medical director and/or nurse administrator, to regularly review
quality assurance data, including dialysis treatment services, equipment,
technical and environmental improvements, and staff-patient and personal
relationships. This in addition to regulatory compliance with HCFA and OSHA.
DCA's manager of compliance, who is a registered nurse, oversees this program in
addition to ensuring that DCA meets federal and state compliance requirements
for dialysis centers. See "Regulation - DCA" below.
PATIENT REVENUES
DCA's net revenues are derived primarily from four sources: (i)
outpatient hemodialysis services (50% of medical services revenues for 1999 and
52% for 1998); (ii) home peritoneal dialysis services, including Method II
services (9% of medical services revenues for 1999 and 11% for 1998); (iii)
inpatient hemodialysis services for acute patient care provided through
agreements with hospitals and other healthcare entities (10% of medical services
revenues for 1999 and 11% for 1998); and (iv) ancillary services associated with
dialysis treatments, primarily certain tests and the administration of EPO (31%
of medical services revenues for 1999 and 26% for 1998). For each of the two
years ended December 31, 1998 and 1999, approximately 74% of DCA's revenues were
derived from Medicare reimbursement.
According to statistics published by HCFA, 92% of all ESRD patients who
receive dialysis treatment are funded under the Medicare ESRD Program
established by the federal government under the Social Security Act, and
administered in accordance with prescribed rates set by HCFA of the Department
of Health and Human Services. Under the ESRD Program, payments for dialysis
services are determined pursuant to Part B of the Medicare Act which presently
pays approximately 80% of the allowable charges for each dialysis treatment
furnished to patients. The maximum payments vary based on location of the
center. See "Medicare Reimbursement" below. The remaining 20% may be paid by
Medicaid if the patient is eligible, or if not, from private insurance funds or
the patient's personal funds. Pennsylvania and New Jersey, presently the states
in which the Company operates, provide Medicaid or comparable benefits to
qualified recipients to supplement their Medicare coverage.
Medicare and Medicaid programs are subject to regulatory changes,
statutory limitations and governmental funding restrictions, which may adversely
affect DCA's and the Company's revenues and dialysis services payments. See
"Medicare and Medicaid Reimbursement" below.
The inpatient dialysis services are paid for by the hospital pursuant
to contractual pre-determined fees. Inpatient treatments accounted for
approximately 10% and 11% of DCA's revenues for the years ended December 31,
1999 and 1998, respectively.
MEDICARE AND MEDICAID REIMBURSEMENT
DCA is reimbursed primarily from third party payors including Medicaid,
commercial insurance companies, and substantially by Medicare under a
prospective reimbursement system for chronic dialysis services, including
dialysis treatments, supplies used for such treatments, certain laboratory tests
and medications. Under this system, the reimbursement rates are fixed in advance
13
and have been adjusted from time to time by Congress. This form of reimbursement
limits the allowable charge per treatment, but provides DCA with predictable and
recurring per treatment revenues and allows it to retain any profit earned. HCFA
eliminated routine Medicare coverage for such tests as nerve conduction studies,
electrocardiograms, chest x-rays and bone density measurements, and will only
pay for such tests when there is documentation of medical necessity. The
Medicare composite rate is subject to regional differences in wage earnings.
DCA receives reimbursement for outpatient dialysis services provided to
Medicare-eligible patients at rates that are currently between $122 and $124 per
treatment, depending upon regional wage variations. The Medicare reimbursement
rate is subject to change by legislation and recommendations by the Medicare
Payment Advisory Commission ("MedPAC"), a commission mandated by the Balanced
Budget Act of 1997 and continuing the work of the Prospective Payment Assessment
Commission ("PROPAC"). An average ESRD reimbursement rate is $126 per treatment
for outpatient dialysis services. The current maximum composite reimbursement
rate is $134 per treatment. In 1998, MedPAC recommended a 2.7% increase in the
amount paid to dialysis facilities for performance of services. The Balanced
Budget Refinement Act of 1999 would increase the composite rate for payment by
1.2% for dialysis services in the year 2000 and an additional 1.2% for such
services in 2001. Congress is not required to implement such recommendation and
could otherwise increase or decrease the Medicare reimbursement rate.
Other ancillary services and items are eligible for separate
reimbursement under Medicare and are not part of the composite rate, including
certain drugs such as EPO. The proposal to reduce the reimbursement rate of EPO
from $10 per 1000 units to $9 per 1000 units could adversely impact DCA's income
from EPO if the proposal is enacted by Congress. There is no assurance, though,
that Congress will legislate the EPO reduction into law.
Medicaid programs are state administered programs partially funded by
the federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state defined levels and who are
otherwise uninsured. The programs also serve as supplemental insurance programs
for the Medicare co-insurance portion and provide certain coverages (e.g., oral
medications) that are not covered by Medicare. DCA is a licensed ESRD Medicaid
provider in New Jersey and Pennsylvania.
The Company is unable to predict what, if any, future changes may occur
in the rate of reimbursement. Any reduction in the Medicare composite
reimbursement rate or Medicaid reimbursement could have a material adverse
effect on DCA and the Company's business, revenues and net earnings.
NEW LINUX DIVISION
In January, 2000, we established a new division with the purpose of
investing in and incubating new technology companies, primarily involved with
Internet technology. Our first investment was in Linux Global Partners, a
private holding company which invests in Linux-related software companies. We
acquired a 6% ownership interest in Linux Global Partners for $90 and loaned
that company $1,500,000 for one year to January 26, 2001 at an interest rate of
10% per annum. Our agreement with Linux Global Partners allowed us to acquire an
additional 2% ownership for $30 and provide it with an additional $500,000 loan
which we completed on March 24, 2000. We borrowed these funds from Dialysis
Corporation of America, our 65% owned public subsidiary under a one-year
promissory note with interest at 10% per annum. Thomas K. Langbein, our Chairman
of the Board, Chief Executive Officer and President, and holding such executive
positions with our subsidiaries, was appointed as a director of Linux Global
Partners.
14
Linux Global Partners has invested and intends to continue to invest in
Linux-related software companies. Linux is a free operating system written by a
Finnish programmer in 1991, with its source code openly published, developed and
improved over the years by a worldwide community of programmers. Linux has
become an increasingly popular operating system posing a potential challenge to
the current major operating systems, such as Microsoft's Windows NT and Sun
Microsystems' Solaris, two of the leading operating systems used on server
computers, the data-serving machines that are the engines of corporate networks
and the Internet. IBM has recently embarked on a program to make all its
hardware and software work with Linux.
Linux Global Partners has a portfolio currently consisting of several
companies that focus on the software capabilities of the Linux operating system.
Linux Global Partners has identified five primary Linux software areas: (i)
applications; (ii) utilities; (iii) embedded systems; (iv) developer's tools;
and (v) games. It holds ownership interests ranging from 30% to 80% or has
options for investment opportunities in entities in each of these areas. Some of
its investments include Helix Code, involved in creating an applications suite,
and maintains the GNOME graphical interface that ships with Red Hat, a Linux
distribution; Code Weavers, a software development service and porting company;
Gnu-Money, which has formulated open source personal financial applications;
Heimdall Linux, a company in the process of formulating an operating system with
C2 government certification; and Linux Utilities, a utilities software
application company. One of its investment options is in Linux Magazine, a Linux
hard-copy publication specifically geared to the Linux community, currently
formulating a Linux portal that will be web-based and allow access to the
magazine, Linux kernel downloads, Linux news and sales, and Linux merchandising.
All of these companies are in the developmental stages, several with limited
revenues, and their success remains extremely speculative.
We believe Linux is a tremendous competitive force as the operating
system of the future for the Internet, and is becoming rapidly and increasingly
popular. It is free, and is being developed and improved worldwide. We are
optimistic about our investment in this new Linux technology, and hopefully it
will supplement our operating business and provide a better return to our
shareholders than we have experienced in the past. We will continue to evaluate
new technologies to determine whether future investment is warranted. This is a
newly developing area, and there is no assurance this new division will be
successful, or that Linux Global Partners will be able to repay our $2,000,000
financing. Our security for the loan is the ownership interest, shared on a pro
rata basis with other lenders to Linux Global Partners, in the companies in
which Linux Global Partners invested, which are speculative, developing
companies with great risk, and there exists the possibility that such collateral
may be minimal, if not valueless.
For details as to relationships between and among our subsidiary,
Dialysis Corporation of America, with MainStreet IPO.com, with which company it
proposes to merge in conjunction with its proposed sale of all of its dialysis
operations to us, MainStreet's joint venture with Linux Global Partners and
MainStreet's agreement with Todd & Company, Inc., a securities broker-dealer
registered with the Securities and Exchange Commission and NASD member, owned by
Thomas K. Langbein, the Chairman and CEO, reference is made to "Certain
Relationships and Related Transactions" of our Proxy Statement relating to the
Annual Meeting of Shareholders anticipated to be held on May 24, 2000, which is
incorporated herein by reference.
REGULATION
TECHDYNE
Techdyne's operations are subject to certain federal, state and local
regulatory requirements relating to environmental waste management and health
and safety matters. These regulations provide for civil and criminal fines,
15
injunctions and other sanctions and, in certain instances, allow third parties
to sue to enforce compliance. Management believes that Techdyne complies with
applicable regulations pertaining to health and safety in the workplace,
including those promulgated by OSHA, and the use, storage, discharge and
disposal of chemicals used in its manufacturing processes. Techdyne periodically
generates and temporarily handles limited amounts of materials that are
considered hazardous waste. The current costs of compliance are not material to
Techdyne or the Company. Nevertheless, no assurances can be given that
additional or modified requirements will not be imposed in the future, and if so
imposed, will not involve substantial additional expenditures.
DCA
Dialysis treatment centers must comply with various state and federal
health laws which are generally applicable to healthcare facilities. The
dialysis center must meet extensive governmental regulations relating to safety,
reimbursement rates, licensing, and other areas of operations. Each of the
dialysis facilities must be certified by HCFA, and we must comply with certain
rules and regulations established by HCFA regarding charges, procedures and
policies. Each dialysis center is also subject to periodic inspections by
federal and state agencies to determine if their operations meet the appropriate
regulatory standards. These requirements have been satisfied by each of our
dialysis facilities.
DCA's record of compliance with federal, state and local governmental
laws and regulations remains excellent. DCA regularly reviews legislative
changes and developments and will restructure a business arrangement if we
determine such might place us in material noncompliance with such law or
regulation. To date, none of DCA's business arrangements with physicians,
patients or others have been the subject of investigation by any governmental
authority. No assurance can be given, however, that DCA's business arrangements
will not be the subject of a future investigation or prosecution by a federal or
state governmental authority which could result in civil and/or criminal
sanctions.
The Social Security Act prohibits, as do many state laws, the payment
of patient referral fees for treatments that are otherwise paid for by Medicare,
Medicaid or similar state programs under the Medicare and Medicaid Patient and
Program Protection Act of 1987, or the "Anti-kickback Statute." The
Anti-kickback Statute and similar state laws impose criminal and civil sanctions
on persons who knowingly and willfully solicit, offer, receive or pay any
remuneration, directly or indirectly, in return for, or to include, the referral
of a patient for treatment, among other things. The federal government in 1991
and 1992 published regulations that established exceptions, "safe harbors," to
the Anti-kickback Statute for certain business arrangements that would not be
deemed to violate the illegal remuneration provisions of the federal statute.
All conditions of the safe harbor must be satisfied to meet the exception, but
failure to satisfy all elements does not mean the business arrangement violates
the illegal remuneration provision of the statute.
Each Year OIG publishes a Fraud and Abuse Civil Plan. For the year
2000, OIG has indicated it plans to concentrate, among other things, on ESRD
reimbursement issues, including oversight of dialysis facilities, separately
billable maintenance dialysis services, and medical appropriateness of tests and
other dialysis-related services. We have reviewed the OIG 2000 Work Plan, and
believe we are in compliance with applicable regulations to be addressed by OIG.
Nevertheless, we will continue to review risk areas inherent to dialysis
treatment and service, and to develop and implement a compliance program. This
program focuses on employee education concerning applicable billing rules,
regulations and insurance carrier interpretations, as well as auditing medical
records to ensure the medical necessity of services provided and billed.
16
As required by Medicare regulations, each of our dialysis centers is
supervised by a medical director who is a licensed nephrologist or otherwise
qualified physician. Four of our outpatient dialysis subsidiaries are owned
jointly between DCA and the physicians who hold a minority position, currently a
20% interest, and who also act as the medical directors of those facilities. DCA
attempts to structure its arrangements with its physicians to comply with the
Anti-Kickback Statute. However, many of these physicians refer patients to DCA's
facilities, therefore the federal Anti-kickback Statute might apply to referrals
by such physicians to our facilities. We believe that the illegal remuneration
provisions described above are primarily directed at abusive practices that
increase the utilization and cost of services covered by governmentally funded
programs. The dialysis services provided by DCA generally cannot, by their very
nature, be over-utilized, since dialysis treatment is not elective and cannot be
prescribed unless there is temporary or permanent kidney failure. Medical
necessity is capable of objective documentation, drastically reducing the
possibility of overutilization. However, these relationships do not satisfy all
of the criteria for the safe harbor, and there can be no assurance that the
relationships with DCA's medical directors will not subject DCA and the Company
to investigation or prosecution by enforcement agencies. There can be no
assurance that DCA will not be required to change its practices or experience a
material adverse effect as a result of any such potential challenge. We cannot
predict the outcome of the rule-making process or whether changes in the safe
harbor rules will affect our position with respect to the Anti-kickback Statute,
but we do believe we will remain in compliance.
The Physician Ownership and Referral Act ("Stark II") was adopted and
incorporated into the Omnibus Budget Reconciliation Act of 1993 and became
effective January 1, 1995. Stark II bans physician referrals, with certain
exceptions, for certain "designated health services" as defined in the statute
to entities in which a physician or an immediate family member has a "financial
relationship" which includes an ownership or investment interest in, or a
compensation arrangement between the physician and the entity. This ban is
subject to several exceptions, including personal service arrangements,
employment relationships and group practices meeting specific conditions. If
Stark II is found to be applicable to the facility, the entity is prohibited
from claiming reimbursement, and may receive civil penalties, may be excluded
from the Medicare or Medicaid programs. For purposes of Stark II, "designated
health services" includes, among others, clinical laboratory services, home
health services, and inpatient and outpatient hospital services. Dialysis
treatments are not included in the statutory list of "designated health
services."
Last year, HCFA released proposed rules that interpret the provisions
of Stark II ("Proposed Rules"). In the Proposed Rules, HCFA clarified the
definitions of designated health services, delineating what supplies and
services are intended to be included and excepted from each category. In
particular, dialysis equipment, supplies and services were specifically excepted
from the definitions of durable medical equipment, and inpatient and outpatient
health services. HCFA further indicated that the purpose behind the Stark II
prohibition on physician referral is to prevent Medicare program and patient
abuse, and that dialysis is a necessary medical treatment for those with
temporary or permanent kidney failure that is not susceptible to that type of
abuse. HCFA additionally excluded EPO (see "Business - Operations - Ancillary
Services" above) from the definition of outpatient prescription drugs under the
same reasoning. Management believes, based upon the Proposed Rules and the
industry practice, that Congress did not intend to include dialysis services and
the services and items provided by DCA incident to dialysis services within the
Stark II prohibitions. There can be no assurance, though, that final Stark II
regulations will adopt such a position.
If the provisions of Stark II were found to apply to DCA's arrangements
with its medical directors, however, we believe that we would be in compliance.
DCA compensates its nephrologist-physicians as medical directors of its dialysis
centers pursuant to Medical Director Agreements, which we believe meet the
exemption for personal service arrangements under Stark II. Also, acute care
inpatient hospital arrangements for dialysis services are excluded under the
Proposed Rules from the prohibition on physician referrals based upon the fact
17
that the services provided under these arrangements are rendered under emergency
circumstances and are necessary treatments. We believe that DCA's contractual
arrangements with hospitals for acute care inpatient dialysis services are in
compliance with this exception.
If HCFA or any other government entity takes a contrary position in the
Stark II final regulations or otherwise, DCA may be required to restructure
certain existing compensation agreements with its medical directors, or, in the
alternative, to refuse to accept referrals for designated health services from
certain physicians. There can be no assurance that such prospective compliance,
if permissible, would not have a material adverse effect on the Company.
The Health Insurance Portability and Accountability Act of 1996
("HIPAA"), provided a package of health insurance reforms which include a
variety of provisions important to healthcare providers, such as significant
changes to the Medicare and Medicaid fraud and abuse laws. Under these programs,
these governmental entities undertake a variety of monitoring activities,
including medical utilization and fraud review, cost report audits and secondary
payor determinations. Reports of fraud and abuse actions against providers will
be shared as well as encouraged by rewarding whistleblowers with money collected
from civil fines. HIPAA established two programs that coordinate federal, state
and local healthcare fraud and abuse activities, the "Fraud and Abuse Control
Program," conducted jointly by the Attorney General and HHS, and the "Medicare
Integrity Program" which enables HHS, the Department of Justice and the FBI to
monitor and review Medicare fraud. HIPAA has a program to assist providers in
understanding the requirements of the fraud and abuse laws. HIPAA also
specifically increased the civil and criminal penalties for offenses related to
healthcare fraud and abuse.
Our dialysis centers are subject to hazardous waste laws and
non-hazardous medical waste regulation. Most of our waste is non-hazardous. HCFA
requires that all dialysis facilities have a contract with a licensed medical
waste handler for any hazardous waste. Medical waste at each of DCA's facilities
is handled by licensed local medical waste sanitation agencies, who are
primarily responsible for compliance.
There are a variety of regulations promulgated under OSHA relating to
employees exposed to blood and other potentially infectious materials requiring
employers, including dialysis centers, to provide protection. We adhere to
OSHA's protective guidelines, including regularly testing employees and patients
for exposure to hepatitis B and providing employees subject to such exposure
with hepatitis B vaccinations on an as-needed basis, protective equipment, a
written exposure control plan and training in infection control and waste
disposal.
Although we believe that DCA substantially complies with currently
applicable state and federal laws and regulations and to date has not had any
difficulty in maintaining its licenses or its Medicare and Medicaid
authorizations, the healthcare service industry is and will continue to be
subject to substantial and continually changing regulation at the federal and
state levels, and the scope and effect of such and its impact on our operations
cannot be predicted. No assurance can be given that DCA's activities will not be
reviewed or challenged by regulatory authorities.
PATENTS AND TRADE NAMES
The Company sells certain of its medical supplies and products under
the trade name Medicore(TM). Certain of its lancets are marketed under the trade
names Medi-Lance(TM) and Lady Lite(TM).
18
The Company is the assignee of three patents relating to its lancets.
The issuance of a patent does not assure protection against the development of
similar, if not superior processes, know-how and products. We do not rely on
patents or trademarks in our electro-manufacturing operations and manufacturing
of medical products. Rather, we place importance upon design, engineering,
manufacturing cost containment, quality and marketing skills to establish or
maintain market position.
COMPETITION
The medical supply operations are extremely competitive and we are not
a significant competitive factor in this area.
In the electronics manufacturing industry, we experience substantial
competition from many areas including divisions of large electronic and
high-technology firms, as well as from numerous smaller but more specialized
companies. Competitive price advantages may also be available to competitors
with less expensive off-shore operations, especially in the Far East. Techdyne
also competes with in-house manufacturing operations of current and potential
customers. Although Techdyne has been expanding, certain of its competitors have
broader geographic coverage to serve their customers and attract additional
business, and are more established in the industry with substantially greater
financial, manufacturing and marketability resources than we have. We believe
the primary competitive factors to be price, quality of production,
manufacturing capability, prompt customer service, timely delivery, engineering
expertise, and technical assistance to customers. We believe we compete
favorably in these areas. During downtimes in the electronics industry, OEMs
become more price sensitive and those manufacturers who have greater direct
buying power with component suppliers or who have lower cost structures are more
competitive. In the PCB area major competitors include Diversified Systems,
Inc., Vickers Electronics Systems, ACT Manufacturing, Inc. and others. Major
competitors in the cable and harness assembly market include Volex Interconnect
Systems, Inc., Foxconn, ACT Manufacturing, Inc., Escod Industries and others.
The operation of kidney dialysis centers is extremely competitive and
DCA competes with numerous providers, many of which are facilities owned by
physicians or major corporations, some of which are public. The Company's
operations are small in comparison to these public companies. Many of these
competitors, including Fresenius AG, Renal Care Group, Inc., Total Renal Care
Holdings, Inc., and Everest Healthcare Service Corp., have substantially greater
financial resources and many more centers and patients than DCA, which provides
these larger facilities with a significant advantage in competing for
acquisitions of dialysis facilities and the ability to attract and retain
qualified nephrologists, who are normally a substantial source of patients for
the dialysis center. Hospitals and other outpatient dialysis centers also
compete with our dialysis operations. We also have experienced competition from
admitting physicians of our centers who have opened their own dialysis
facilities. Competitive factors that are most significant in dialysis treatment
are the quality of care and service, convenience of location, availability of a
local nephrologist, and pleasantness of environment. We are not a significant
competitive force in kidney dialysis services primarily based upon DCA's
ownership of a limited number of centers and the size of each of its facilities.
Based upon advances in surgical techniques, immune suppression and
computerized tissue typing, cross-matching of donor cells and donor organ
availability, renal transplantation instead of dialysis is becoming a
competitive factor. It is presently the second most commonly used modality in
ESRD therapy.
EMPLOYEES
The Company and its subsidiaries employ approximately 550 full time
employees of which 10 are administrative, 65 are with the dialysis operations,
5 are engaged in the medical supply operations, and 470 are with Techdyne's
19
electronic manufacturing operations (domestic and Europe). In addition, Techdyne
utilizes approximately 32 temporary workers, retained through local agencies, on
a regular basis, and DCA employs 35 part-time and 8 independent part-time
contract employees.
ITEM 2. PROPERTIES
The Company leases 2,800 square feet for its executive offices in
Hialeah, Florida, and at a different location in Hialeah, Florida, leases 5,000
square feet for its medical supply operations, each lease through December 31,
2002. It also leases 3,900 square feet of space for other executive offices in
Hasbrouck Heights, New Jersey through March 31, 2001.
DCA owns two properties, one located in Lemoyne, Pennsylvania, and the
second in Easton, Maryland. The Maryland property consists of approximately
7,400 square feet, most of which is leased to a competitor, through March 31,
2003. The Lemoyne property of approximately 15,000 square feet houses DCA's
dialysis center of approximately 5,400 square feet, approved for 13 dialysis
stations with space available for expansion, and 2,500 square feet for its
executive offices. DCA's subsidiary leases this facility from DCA under a five
year lease that commenced December 23, 1998, with two renewal periods of five
years. The Easton, Maryland and Lemoyne, Pennsylvania properties are subject to
mortgages from a Maryland banking institution extending through November, 2003.
The Easton property is subject to a second mortgage from a bank affiliated with
the first mortgagee. As of December 31, 1999, the remaining principal amount of
the mortgage on the Lemoyne property was approximately $127,000 and the first
mortgage on the Easton property was approximately $158,000. Each mortgage bears
interest at 1% over the prime rate and is secured by the real property and DCA's
personal property at each location. The bank has a lien on rents due DCA and
security deposits from the leases. The bank has to approve all leases,
subleases, alterations, improvements and sales relating to the properties. The
Easton, Maryland property has a second mortgage to secure a three-year loan to
our Vineland, New Jersey subsidiary, for up to $700,000 at an annual interest
rate of 8.75%, which loan DCA guarantees, and is further secured by that
subsidiary's personal property, exclusive of its dialysis equipment. See Item 7,
"Management's Discussions and Analysis of Financial Condition and Results of
Operations" and Note 2 to "Notes to Consolidated Financial Statements." See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DCA also leases space at its Lemoyne, Pennsylvania property to an
unrelated party for its own business activities unrelated to dialysis services
or to the Company. The lease is for approximately 1,500 square feet through
December 31, 2002.
In addition to our Lemoyne, Pennsylvania facility, we presently have
five other dialysis facilities. Each is leased from unaffiliated parties under
five year leases, all with two renewals of five years each, for space ranging
from 3,500 square feet to 7,000 square feet. We sublet 1,800 square feet at our
Chambersburg, Pennsylvania facility to the physicians who are medical directors
at that facility for their medical offices in Chambersburg. The sublease is on a
commercially reasonable basis and is structured to comply with the safe harbor
provisions of the "Anti-kickback Statute." See Item 1, "Business - Regulation -
DCA."
DCA recently acquired property in South Georgia for $207,000 and
anticipates commencement of construction of a new facility at that location in
the second quarter of 2000.
We construct all of our dialysis facilities, and each is relatively new
with state-of-the-art equipment and facilities. The dialysis stations are
equipped with modern dialysis equipment under a November, 1996 master
lease/purchase agreement with a $1.00 purchase option at the end of the term.
20
Payments under the various schedules extend through May, 2005. See Note 2 to
"Notes to Consolidated Financial Statements."
None of the dialysis facilities are operating at full capacity. The
existing dialysis facilities could accommodate greater patient volume,
particularly if we increase hours and/or days of operation without adding
additional dialysis stations or any additional capital expenditures. We also
have the ability and space at each of our facilities to expand to increase
patient volume subject to obtaining appropriate governmental approval.
DCA maintains executive offices at 27 Miller Street, Suite 2, Lemoyne,
Pennsylvania 17043 as well as with us at 2337 West 76th Street, Hialeah,
Florida.
Techdyne's domestic operations are headquartered in Hialeah, Florida
which consists of 16,000 square feet of space for its executive offices and
12,000 square feet for its manufacturing facilities and warehousing, leased from
us under leases expiring March 31, 2001. These facilities are located in two
adjacent buildings acquired by us from Techdyne in 1990 which also included the
purchase of a parcel of land adjacent to these buildings used for parking. See
"Certain Relationships and Related Transactions" of our Proxy Statement relating
to the Annual Meeting of Shareholders anticipated to be held on May 24, 2000
incorporated herein by reference. We also own a small parcel of land near
Techdyne's offices in Hialeah, Florida which is used as a parking lot, and a
small, undeveloped parcel adjacent to Techdyne's warehouse available for future
expansion.
Techdyne leased manufacturing, warehousing and office facilities in (i)
Houston, Texas for 15,000 square feet, leased until April, 2002; this facility
has been closed and we sublet it to an unrelated party for the remainder of the
term for substantially similar rent; (ii) Austin, Texas for 18,225 square feet
under a lease to May, 2002; (iii) Milford, Massachusetts for 5,500 square feet
through March, 2002; (iv) Taylor, Texas for 2,000 square feet (warehouse)
through August 15, 2000; and (v) Dayton, Ohio for 77,800 square feet
(manufacturing, office and warehouse) under a lease to July 31, 2002 with two
renewals of five years each. The landlord of the Ohio premises is a limited
liability company owned by the former president of Lytton. See "Certain
Relationships and Related Transactions" of our Proxy Statement relating to the
Annual Meeting of Shareholders anticipated to be held on May 24, 2000,
incorporated herein by reference. Techdyne has a right of first refusal and an
option to purchase these premises. We guaranteed this lease. Most other leases
have a five-year renewal. We also have two month-to-month leases, for warehouse
space (1,000 square feet in Milford, Massachusetts) and for a sales office
(approximately 700 square feet in Houston, Texas).
Techdyne (Europe) owns an approximately 31,000 square foot facility in
Livingston, Scotland subject to a 15-year mortgage due July, 2009 which has a
U.S. dollar equivalency of approximately $489,000 at December 31, 1999. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Techdyne maintains state-of-the-art manufacturing, quality control,
testing and packaging equipment at all of its facilities in Florida, Ohio,
Massachusetts, Texas and Europe, and believes that its equipment and facilities
are adequate for its current operations.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in or subject to any claims or litigation of a
material nature or that any adverse outcome would have a material adverse effect
on our financial condition. See Note 7 to "Notes to Consolidated Financial
Statements."
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of our fiscal year to
a vote of security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The table below reflects for the periods indicated the high and low
closing sales prices for our common stock as reported by the Nasdaq. Our shares
traded on the Nasdaq National Market until September 8, 1999, when transferred
to the Nasdaq SmallCap Market since the market value of the public float was not
equal to or greater than $5,000,000 for a 90-day period at that time as required
by the Nasdaq Marketplace Rule 4450(a)(2), Maintenance Standard 1.
Sale Price
---------------------
High Low
---- ---
1998
----
1st Quarter............. $2.38 $1.94
2nd Quarter............. 2.88 1.84
3rd Quarter............. 2.13 1.25
4th Quarter............. 1.56 0.94
High Low
---- ---
1999
----
1st Quarter............. $1.88 $1.34
2nd Quarter............. 1.28 .94
3rd Quarter............. 1.34 1.00
4th Quarter............. 2.50 1.00
The high and low sales price of Medicore common stock at March 20, 2000
were $3.56 and $3.00, respectively.
As of March 20, 2000, there were 1,199 shareholders of record. We have
been advised by ADP, which organization holds securities for brokers and
depositories, that our common stock is beneficially held by approximately 1,660
shareholders.
We have not paid any cash dividends in the last two years. Dividends
are paid at the discretion of the board of directors, and no such payments are
expected to be made in the immediate future. Any earnings will be retained for
use in our business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the consolidated financial statements, related notes and other financial
information included herein.
22
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands except per share amounts)
Years Ended December 31
-------------------------------------------------
1999 1998 1997(1) 1996(2) 1995
---- ---- ---- ---- ----
Revenues $ 55,644 $ 50,149 $ 44,119 $ 34,719 $ 36,660
Net (loss) income (613) 98 2,241 2,417 2,251
(Loss) income per common share:
Basic $ (.11) $ .02 $ .39 $ .44 $ .41
Diluted $ (.11) $ .01 $ .36 $ .39 $ .37
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
December 31
-------------------------------------------------
1999 1998 1997(1) 1996(2) 1995
---- ---- ---- ---- ----
Working capital $ 15,840 $ 15,421 $ 18,857 $ 13,844 $ 7,034
Total assets 38,610 36,310 40,862 27,085 21,247
Long-term debt 8,363 5,127 5,240 1,677 964
Stockholders' equity 14,282 15,368 16,077 13,021 9,754
- ------------------------
(1) REFLECTS (I) FIVE MONTHS OPERATIONS OF LYTTON, AND ITS ASSETS,
LIABILITIES AND STOCKHOLDERS' EQUITY, WHICH COMPANY WAS ACQUIRED BY
TECHDYNE ON JULY 31, 1997; AND (II) THE SALE OF THE FLORIDA DIALYSIS
OPERATIONS ON OCTOBER 31, 1997 FOR $5,065,000 CONSISTING OF $4,585,000
OF CASH WITH THE BALANCE CONSISTING OF 13,873 SHARES OF COMMON STOCK OF
THE PURCHASER. SEE ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND NOTE 12 TO "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS."
(2) IN 1996, THE COMPANY RECORDED ESTIMATED COSTS OF $305,000 FOR SHUTDOWN
OF ITS DURABLE MEDICAL EQUIPMENT OPERATIONS.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Techdyne's electronic and electro-mechanical manufacturing operations
continue to depend upon a relatively small number of customers for a significant
percentage of its net revenue. Significant reductions in sales to any of
Techdyne's large customers would have a material adverse effect on Techdyne's
and the Company's results of operations. The level and timing of orders placed
by a customer vary due to the customer's attempts to balance its inventory,
design modifications, changes in a customer's manufacturing strategy,
acquisitions of or consolidations among customers, and variation in demand for a
customer's products due to, among other things, product life cycles, competitive
conditions and general economic conditions. Any terminations of manufacturing
relationships or changes, reductions or delays in orders, as has occurred in the
past, could have an adverse effect on the Company's results of operations and
financial condition. The Company's and Techdyne's results also depend to a
substantial extent on the success of Techdyne's OEM customers in marketing their
products. Techdyne continues the diversification of its customer base to reduce
its reliance on its few major customers. See "Techdyne's Business Strategy" and
"Customers" under Item 1, "Business - Electronic Manufacturing Industry."
23
The industry segments served by Techdyne and the electronics industry
generally are subject to rapid technological change and product obsolescence.
Discontinuance or modification of products containing components manufactured by
Techdyne could adversely affect the Company's and Techdyne's results of
operations. The electronics industry is also subject to economic cycles and has
in the past experienced, and is likely in the future to experience, recessionary
periods, which could have a material adverse effect on the Company's and
Techdyne's business, financial condition and results of operations. To continue
to grow and be a successful competitor, we must be able to maintain and enhance
our technological capabilities, develop and market manufacturing services which
meet changing customer needs and successfully anticipate or respond to
technological changes in manufacturing processes on a cost-effective and timely
basis.
Techdyne must continuously develop improved manufacturing procedures to
accommodate customer needs for increasingly complex products. To continue to
grow and be a successful competitor, the Company must be able to maintain and
enhance its technological capabilities, develop and market manufacturing
services which meet changing customer needs and successfully anticipate or
respond to technological changes in manufacturing processes on a cost-effective
and timely basis. There can be no assurance that the Company's process
development efforts will be successful or that the emergence of new
technologies, industry standards or customer requirements will not render the
Company's technology, equipment or processes obsolete or uncompetitive. Further,
to the extent that the Company determines that new assembly and testing
technologies and equipment are required to remain competitive, the acquisition
and implementation of such technologies and equipment are likely to require
significant capital investment.
Techdyne uses enterprise resource planning through its Visual
Manufacturing system (see Item 1, "Business - Electronic Manufacturing Industry
- - Supplies and Materials Management" and "Year 2000 Readiness" below) in its
efforts to continuously develop accurate forecasts of customer volume
requirements. Techdyne is dependent on the timely availability of many
components. Component shortages could result in manufacturing and shipping
delays or increased component prices which could have a material adverse effect
on Techdyne's and the Company's results of operations. It is paramount that
Techdyne efficiently manages inventory, follows proper timing of expenditures
and allocates physical and personnel resources in anticipation of future sales,
the evaluation of economic conditions in the electronics industry, and the mix
of products for manufacture. See "Manufacturing" and "Supplies and Materials
Management" under Item 1, "Business - Electronic Manufacturing Industry."
Techdyne continues to seek to expand its geographic and customer base
through establishment of new manufacturing facilities and operations in areas to
better serve existing customers and to attract new OEMs, as well as direct
acquisition of contract manufacturing businesses complimentary to Techdyne's
operations. For such expansion opportunities, Techdyne competes with much larger
electronic manufacturing entities. Further, in order to effectuate any such
transactions, it may result in potentially dilutive issuance of equity
securities, the incurrence of debt and amortization expenses related to goodwill
and other intangible assets, as well as other costs and expenses, all of which
could materially adversely affect the Company's and Techdyne's financial
results. Any expansion may also involve numerous business risks, including
difficulties in successfully integrating acquired operations, technologies and
products or formalizing anticipated synergies, which would require the diversion
of management's attention from other business concerns. In the event that any
such transaction does occur, there can be no assurance that there would be a
beneficial effect on Techdyne and the Company's business and financial results.
Techdyne's, and in turn, the Company's results of operations are also
affected by other factors, including price competition, the level and timing of
customer orders, fluctuations in material costs, the overhead efficiencies
achieved in managing the costs of its operations, experience in manufacturing a
particular product, the timing of expenditures in anticipation of increased
orders, and selling, general and administrative expenses. Accordingly, gross
margins and operating income margins have generally improved during periods of
24
high volume and high capacity utilization. Techdyne generally has idle capacity
and reduced operating margins during periods of lower-volume production.
With respect to our dialysis operations, essential to profitability is
Medicare reimbursement, which is at a fixed rate determined by HCFA. The level
of DCA's, and therefore, our revenues and profitability may be adversely
affected by any potential legislation resulting in rate cuts. Operating costs in
treatment tend to increase over the years with the commencement of treatment at
new centers. There also may be reductions in commercial third-party
reimbursement rates.
The healthcare and in particular, the dialysis industry, is subject to
extensive regulations of federal and state authorities. There are a variety of
fraud and abuse measures promulgated by the government to combat government
waste, which include anti-kickback regulations, extensive prohibitions relating
to self-referrals, violations of which are punishable by criminal or civil
penalties, including exclusion from Medicare and other governmental programs.
Although DCA and the Company have never been challenged under these regulations
and believe that DCA complies in all material respects with such laws and
regulations, there can be no assurance that there will not be unanticipated
changes in healthcare programs or laws or that DCA will not be required to
restructure its practice and will not experience material adverse effects as a
result of any such challenges or changes.
DCA's future growth depends primarily on the availability of suitable
dialysis centers for development or acquisition in appropriate and acceptable
areas, and DCA's ability to develop these new potential dialysis centers at
costs within its budget while competing with larger companies, some of which are
public companies or divisions of public companies with greater personnel and
financial resources who have a significant advantage in acquiring and/or
developing facilities in areas targeted by the Company. Additionally, there is
intense competition for retaining qualified nephrologists, who are the primary
source of patients and are responsible for the supervision of the dialysis
centers. There is no certainty as to when any new centers or inpatient service
contracts with hospitals will be implemented, or the number of stations, or
patient treatments such may involve, or if such will ultimately be profitable.
It has been our experience that newly established dialysis centers, although
contributing to increased revenues, have adversely affected our results of
operations due to start-up costs and expenses with a smaller developing patient
base.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Consolidated revenues increased by approximately $5,496,000 (11%) in
1999 compared to the preceding year. Sales revenues increased by approximately
$5,533,000 (11%) compared to the preceding year. 1999 revenues included a gain
on the sale of marketable securities of $263,000 compared to $13,000 during the
preceding year. Other income decreased approximately $287,000 compared to the
preceding year, which includes a decrease in interest earned as a result of a
decrease in invested funds.
Techdyne sales increased approximately $3,654,000 (8%) for the year
December 31, 1999. There was an overall increase in domestic sales of $4,482,000
(11%), and a decrease in European sales of $828,000 (18%) compared to the
preceding year. The decline in European-based sales was attributable to a
decrease of approximately $982,000 (82%) in sales to Compaq (Europe) by Techdyne
(Europe) which was partially offset by sales to other customers.
Significant reductions in sales of Techdyne (Europe) have resulted in
net losses for this subsidiary amounting to $577,000 for the year ended December
31, 1999 and $442,000 for the preceding year. Techdyne (Europe) has continued
its efforts at new business development; however, continuing losses have
resulted in management's ongoing evaluation of the future prospects for this
facility.
25
Approximately 41% of Techdyne's consolidated sales and 36% of the
Company's consolidated sales for 1999 were made to four customers. Customers
generating in excess of 10% of Techdyne's consolidated sales with their
respective portions of Techdyne's and the Company's consolidated sales include
Motorola, which accounted for 13% and 12%, and PMI Food Group, which accounted
for 15% and 13%, respectively. Approximately $7,195,000 (32%) of Lytton's sales
for 1999 were to PMI Food Group, its major customer. The loss of, or
substantially reduced sales to any of Techdyne's major customers would have a
material adverse effect on Techdyne's and the Company's operations if such sales
are not replaced.
Medical product sales revenues decreased by approximately $216,000
(19%) for 1999 compared to the previous year due to decreased sales of the
principal product of this division. This was due to continuing reductions in
government purchases and foreign competition. Management is attempting to be
more competitive in lancet sales through overseas production and expansion of
its customer base. The Medical Products Division is also expanding its product
line with several diabetic disposable products. No assurance can be given that
these efforts will be successful.
Medical service revenues, represented by the revenues of our dialysis
division, DCA, increased approximately $1,946,000 (55%) for the year ended
December 31, 1999 compared to the preceding year. This increase reflects
increased revenues of our Pennsylvania dialysis centers of approximately
$1,460,000 including increased revenues of approximately $882,000 attributable
to the Company's dialysis center located in Chambersburg, Pennsylvania, which
commenced operations in January, 1999, and increased revenues of approximately
$486,000 for the Company's Manahawkin, New Jersey center, which received
regulatory approval in December, 1998. Although the operations of additional
centers have resulted in additional revenues, some are still in the
developmental stage and, accordingly, their operating results will adversely
affect DCA's and the Company's results of operations until they achieve a
sufficient patient count to cover fixed operating costs.
Cost of goods sold as a percentage of consolidated sales remained
relatively stable amounting to 86% for the year ended December 31, 1999 and
for the preceding year.
Cost of goods sold for Techdyne as a percentage of sales amounted to
relatively stable amounting to 88% for the year ended December 31, 1999 and
for the preceding year.
Cost of goods sold by the medical products division increased to 76%
for 1999 compared to 69% for the preceding year, as a result of a change in
product mix due to decreased sales of the principal product of the division.
Cost of medical services sales increased to 72% in 1999 compared to
71% in 1998 reflecting an increase in supply costs as a percentage of sales and
a decrease in healthcare salaries as a percentage of sales.
Selling, general and administrative expenses increased $1,205,000 for
1999 compared to the preceding year. This increase reflects operations of
DCA's new dialysis centers, $153,000 in compensation expense from issuance
by DCA of stock options, and approximately $93,000 associated with DCA's
decision not to go through with plans to construct a facility in New Jersey.
Also included are the cost of additional support personnel for both DCA and
Techdyne, and increased marketing costs associated with Techdyne's efforts
to expand sales.
Interest expense increased by approximately $82,000 for 1999 compared
to the preceding year, primarily due to increased borrowings of Lytton,
including funding of the remaining $1,100,000 payment in July, 1999, on the
26
Lytton purchase price guarantee, which was offset somewhat by decreased average
borrowings on other outstanding debt
We recorded an adjustment to the valuation allowance relating to our
deferred tax assets of approximately $28,000 during the fourth quarter of 1999
and $300,000 during the fourth quarter of 1998.
A substantial portion of our outstanding borrowings are tied to the
prime interest rate. The prime rate was 8.50% at December 31, 1999 and 7.75% at
December 31, 1998.
1998 COMPARED TO 1997
Consolidated revenues increased by approximately $6,029,000 (14%) in
1998 compared to the previous year. Sales revenues increased by approximately
$10,494,000 (27%) compared to the preceding year. 1997 revenues included both a
gain of $4,431,000 on the sale of certain assets of DCA's subsidiaries and a
gain of $90,000 on subsidiary warrant exercises. See Note 12 to "Notes to
Consolidated Financial Statements."
Techdyne sales increased approximately $11,758,000 (35%) for the year
December 31, 1998 compared to the preceding year. The increase was attributable
principally to the inclusion of sales of Lytton for which sales of $20,062,000
were included during the current year compared to $7,170,000 for the preceding
year commencing with our acquisition of Lytton on July 31, 1997. There was an
overall increase in domestic sales of $13,771,000 (52%), including Lytton, and a
decrease in European sales of $2,125,000 (31%) compared to the preceding year.
The decline in European-based sales was mainly attributable to a decrease of
approximately $1,656,000 (58%) in sales to Compaq (Europe) by Techdyne (Europe)
which was partially offset by sales to new customers and increased sales to
existing customers.
Approximately 50% of Techdyne's consolidated sales and 45% of the
Company's consolidated sales for 1998 were made to five customers. Customers
generating in excess of 10% of Techdyne's consolidated sales with their
respective portions of Techdyne's and the Company's consolidated sales include
Motorola, which accounted for 10% and 9%, and PMI Food Group, which accounted
for 18% and 17%, respectively. Approximately $8,183,000 (41%) of Lytton's sales
for 1998 were to PMI Food Group, its major customer. The loss of, or
substantially reduced sales to any of Techdyne's major customers would have a
material adverse effect on Techdyne's and the Company's operations if such sales
are not replaced.
Revenues of Techdyne (Europe) continue to be highly dependent on sales
to Compaq, which accounted for approximately 26% of sales for the current year
compared to 42% in the preceding year. The bidding for Compaq orders has become
more competitive which has continued to result in substantial reductions in
Compaq sales and lower profit margins on remaining Compaq sales. Techdyne
(Europe) is pursuing new business development and has offset some of the lost
Compaq business with sales to other customers. However there can be no assurance
as to the success of such efforts.
Medical product sales revenues decreased by approximately $373,000
(22%) for 1998 compared to the previous year due to decreased sales of the
principal product of this division. This was due to substantially reduced
government purchases and foreign competition. Management is attempting to be
more competitive in lancet sales through overseas production and expansion of
its customer base. The Medical Products Division is also expanding its product
line with several diabetic disposable products. No assurance can be given that
said efforts will be successful.
27
Medical service revenues, represented by the revenues of our dialysis
division, DCA, decreased approximately $823,000 (19%) for the year ended
December 31, 1998 compared to the preceding year. This decrease reflects a
decrease of approximately $1,663,000 compared to the preceding year attributable
to the sale of our Florida dialysis operations on October 31, 1997, which was
offset to some degree by increased revenues of the Pennsylvania dialysis centers
of approximately $782,000 including increased revenues of approximately $510,000
at the dialysis center located in Carlisle, Pennsylvania, which commenced
operations in July 1997, and $58,000 from a new dialysis center located in
Manahawkin, New Jersey, which received regulatory approval in December, 1998.
Although the operations of these centers have resulted in additional revenues,
they are in the developmental stage and, accordingly, their operating results
will adversely affect DCA's and the Company's results of operations until they
achieve a sufficient patient count to cover fixed operating costs.
Cost of goods sold as a percentage of consolidated sales increased to
86% for the year ended December 31, 1998 compared to 83% for the preceding year.
Cost of goods sold for Techdyne as a percentage of sales remained
relatively stable amounting to 88% for the year ended December 31, 1998 compared
to 87% for the preceding year.
Cost of goods sold by the medical products division increased to 69%
for 1998 compared to 65% for the preceding year, as a result of a change in
product mix due to decreased sales of the principal product of the division.
Cost of medical services sales increased to 71% in 1998 compared to 62%
in 1997 reflecting increases in healthcare salaries and supply costs as a
percentage of sales, including the operations of the dialysis centers in
Carlisle, PA and Manahawkin, NJ which are still in their developmental stage.
The preceding year included higher hospital treatment revenues, which have a
substantially lower cost of sales, with our Florida hospital operations having
been sold on October 31, 1997.
Selling, general and administrative expenses increased $508,000 for
1998 compared to the preceding year. This increase reflected inclusion of the
selling, general and administrative expenses of Lytton for all of 1998 versus
five months in 1997, as well as inclusion of the new dialysis center in
Carlisle, Pennsylvania for all of 1998, expenses in connection with the startup
of a new dialysis center in Manahawkin, New Jersey, a new center in
Chambersburg, Pennsylvania, which commenced operations in January, 1999, and
another center presently under construction in New Jersey, which was offset by
the decline in expenses resulting from DCA's sale of its Florida dialysis
operations on October 31, 1997. Included in 1997 was stock compensation expense
that occurred during the fourth quarter of 1997 in the amount of $322,000 in
conjunction with forgiveness of notes from option exercises of DCA common stock.
Interest expense increased by approximately $199,000 for 1998 compared
to the preceding year. This increase included additional interest of $122,000
associated with the financing the Lytton acquisition and increases in Lytton's
financing and debt agreements of approximately $81,000 which was partially
offset from DCA's reduced average outstanding borrowings.
We recorded an adjustment to the valuation allowance relating to our
deferred tax assets of approximately $300,000 during the fourth quarter of 1998
and $700,000 during the fourth quarter of 1997 which offset taxes of
approximately $1,700,000 of DCA which resulted from the sale of its Florida
dialysis operations.
A substantial portion of our outstanding borrowings are tied to the
prime interest rate. The prime rate was 7.75% at December 31, 1998 and 8.25% at
December 31, 1997.
28
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $15,840,000 at December 31, 1999, which
reflected an increase of $420,000 (3%) during 1999. Included in the changes in
components of working capital was a decrease of $3,144,000 in cash and cash
equivalents; increases in accounts receivable of $2,698,000, inventories of
$1,704,000, and accounts payable of $1,962,000 resulting from overall increased
sales levels; with the increase in working capital also reflecting reflects
the amendment of Lytton's line of credit in February, 2000, resulting in a
reclassification of its line of credit balance to long-term debt. The decrease
in cash reflected net cash used in operating activities of $1,395,000, net
cash used in investing activities of $3,477,000 (including additions to
property, plant and equipment of $2,407,000, and payments of $1,390,000
regarding the Lytton acquisition), and net cash provided by financing activities
of $1,751,000 (including Lytton net line of credit borrowings of $1,868,000,
increased borrowings under Lytton's term loan of $783,000, other short-term bank
borrowings of $405,000 and repayment of $375,000 toward such borrowings, and
payments on long-term debt of $922,000).
Techdyne had a five-year $1,500,000 ("notional amount under interest
rate swap agreement") commercial term loan with monthly principal payments of
$25,000 plus interest at 8.60%, which had an outstanding balance of $900,000 at
December 31, 1999 and $1,200,000 at December 31, 1998; and a $1,600,000
commercial revolving line of credit with interest at prime which was fully drawn
down as of December 31, 1999 and 1998. The commercial term loan had a maturity
of December 15, 2002 and the commercial line of credit, no longer a demand line,
had a maturity of May 1, 2000. See Note 3 to "Notes to Consolidated Financial
Statements."
Techdyne had obtained in 1996 two other term loans from its Florida
bank. One was a $712,500 term loan, which had a remaining principal balance of
$606,000 at December 31, 1999 and $636,000 at December 31, 1998, secured by two
buildings and land owned by the Company. The second term loan for $200,000,
which had a remaining principal balance of $47,000 at December 31, 1999 and
$87,000 at December 31, 1998, was secured by the Techdyne's tangible personal
property, goods and equipment. The Company guaranteed these loans and
subordinated the intercompany indebtedness due it from Techdyne, provided that
Techdyne could make payments to the Company on this subordinated debt from
additional equity injected into Techdyne and from earnings. See Note 3 to "Notes
to Consolidated Financial Statements."
Techdyne had outstanding borrowings of $145,000 from a local bank with
interest payable monthly with the note, which was renewed during 1997, maturing
April 2000. In July, 1994, Techdyne (Europe) purchased the facility housing its
operations for approximately $730,000, obtaining a 15-year mortgage which had a
U.S. dollar equivalency of approximately $489,000 at December 31, 1999 and
$545,000 at December 31, 1998, based on exchange rates in effect at each of
these dates. See Note 3 to "Notes to Consolidated Financial Statements."
On July 31, 1997, the Techdyne acquired Lytton, which is engaged in the
manufacture and assembly of PCBs and other electronic products for commercial
customers. This acquisition required $2,500,000 cash, funded by the modified
bank line of credit, as well as 300,000 shares of the Techdyne's common stock
which had a fair value of approximately $1,031,000 based on the closing price of
the Techdyne's common stock on the date of acquisition. Techdyne guaranteed
$2,400,000 minimum proceeds from the sale of these securities based on Lytton
having achieved certain earnings objectives. The Stock Purchase Agreement also
provided for incentive consideration to be paid in cash based on specific sales
29
levels of Lytton for each of three successive specified years, resulting in
additional consideration of approximately $290,000 and $154,000 for the first
two years of sales levels paid in April 1999 and April 1998, respectively. The
Lytton acquisition has expanded the Company's customer base, broadened its
product line, enhanced its manufacturing capabilities and provided a new
geographic area to better serve Techdyne's existing customer base with
opportunities to attract new customers. See Note 11 to "Notes to Consolidated
Financial Statements." The Guaranty in the Stock Purchase Agreement was modified
by Techdyne and the seller. In July, 1999, Techdyne issued a payment of
$1,100,000 and forgave an advance of $1,278,000 to satisfy the remaining
obligation with the $2,400,000 guarantee.
In February, 2000, Techdyne entered into two credit facilities with The
Provident Bank in Ohio for an aggregate borrowing of $5,500,000. This new
financing replaced the line of credit and the three commercial loans with
NationsBank of Florida which had a principal balance of $3,115,500 at February
9, 2000, the repayment date, and a smaller borrowing from another Florida bank
in the amount of approximately $145,000. We are not guaranteeing Techdyne's
financing with the Provident Bank, but one of the negative covenants precludes
loans to or the payment of loans from affiliates (including the Company), other
than the pre-existing balance on the advances from the Company to Techdyne.
The new financing includes a three-year revolving line of credit,
renewable annually at the discretion of the bank, which credit line carries an
interest rate of prime minus .25%, or at a fixed rate equal to the relevant
quoted LIBOR rate plus 2.5%, at the election of Techdyne. Also part of the
financing is a five-year term loan of $1,000,000 at the same interest rate as
the revolving line of credit. The financing is guaranteed by Lytton, which
subsidiary has provided the bank with a Security Agreement securing its guaranty
of Techdyne's financing. The Security Agreement includes all of Lytton's
property, including accounts receivable, equipment, inventory, general
intangibles, and the proceeds of such collateral. Lytton has also provided the
bank with a Conditional Assignment of Lease, assigning all of its right, title
and interest as tenant under the lease to the bank as further security for its
guaranty. The Conditional Assignment of Lease takes effect only if Lytton
defaults in any of its obligations under the lease or any of its obligations
under its guaranty. That lease is with Stanley Avenue Properties, Ltd., a
limited liability company whose membership includes Lytton and Patricia
Crossley, the wife of Lytton Crossley, former President of Lytton and a director
of Techdyne, who is also Assistant to the President of Lytton under an
employment agreement requiring 40 hours per month at an annual salary of
$30,000.
The financing, evidenced by an Asset Based Loan and Security Agreement,
provides for all the assets of Techdyne to collateralize the financing, as well
as affirmative and negative covenants. Certain of the affirmative covenants
require maintenance of a consolidated tangible net worth at all times greater
than $7,500,000, a ratio of consolidated liabilities to consolidated tangible
net worth of not more than 2.6 to 1.0, a debt coverage ratio of at least 1.5 to
1.0. Some of the negative covenants, among others, include prohibiting sale of
any of its assets or properties except inventory in the ordinary course of
business, declaring or paying any dividends or making any other payments on our
capital stock, consolidating or merging with any other corporation or acquiring
or purchasing any equity interest in any other entity, or assuming any
obligations of any other entity the value of which exceeds $100,000, except for
notes and receivables acquired in the ordinary course of business, incur,
assume, guaranty or remain liable with respect to any indebtedness, except for
certain existing indebtedness disclosed in our financial statements, or
undertake any capital expenditures in excess of $1,000,000 in any one fiscal
year. The credit line also provides for restrictions on transactions with
related persons, precludes changes in ownership in Techdyne, or changes in
Techdyne's management or any material change in any of Techdyne's business
objectives, purposes and operations which might adversely affect repayment of
the financing.
Lytton also entered into amendments to its financing agreements with
the Provident Bank. Lytton had an Asset Based Loan and Security Agreement
dated April 14, 1995, amended over the last several years, evidenced
30
by a $3,000,000 Revolving Credit Promissory Note, together with a Term Loan
Promissory Note in the amount of $1,400,000, and an Equipment Acquisition
Promissory Note in the amount of $500,000 (collectively the "Notes"). The line
of credit was amended to a three-year term coinciding with the term of
Techdyne's line of credit. The Provident Bank also agreed to reduce the interest
rates charged under the Notes, and Lytton and the Provident Bank entered into
modifications and amendments of the aggregate $4,900,000 loan agreements and
Notes, restated at the same interest rates, at the election of Lytton, as has
been provided to Techdyne in its credit facilities. Techdyne is guaranteeing
Lytton's financing, which guaranty is unconditional and is secured by a Security
Agreement between Techdyne and the Provident Bank which provides the bank with a
continuing first priority security interest on all of Techdyne's property. See
Note 3 to "Notes to Consolidated Financial Statements."
Techdyne is seeking to further expand its operations possibly through
acquisitions of companies in similar businesses, as with the Lytton acquisition.
There can be no assurance that Techdyne would be able to finance such
acquisitions from its own capital or be able to obtain sufficient external
financing.
DCA has mortgages on its two buildings, one in Lemoyne, Pennsylvania
and the other in Easton, Maryland, with a combined balance of $282,000 at
December 31, 1999 and $360,000 at December 31, 1998. In 1999, DCA was in default
of certain covenants relating to these mortgages. The covenants principally
related to debt service ratio requirements for which the lender has waived
compliance through December 31, 1999.
The debt service ratio requirement is tested on an annual basis and
thus, is effectively waived through December 31, 2000 as compliance with the
covenant will not be determined until final results for 2000 are available in
early 2001.
The bank has liens on the real and personal property of DCA, including
a lien on all rents due and security deposits from the rental of these
properties. An unaffiliated Maryland dialysis center continues to lease space
from DCA in its building. The Pennsylvania center relocated during 1995 and DCA
constructed its own dialysis facility at the property that commenced treatments
in June 1995. See Note 3 to "Notes to Consolidated Financial Statements."
DCA has an equipment financing agreement for kidney dialysis machines
for its facilities. There was additional financing of $387,000 during 1999
pursuant to this agreement. DCA had outstanding balances under this agreement of
$731,000 at December 31, 1999 and $449,000 at December 31, 1998.
DCA opened its fifth center in Chambersburg, Pennsylvania in January,
1999, and a sixth center in Vineland, New Jersey in February, 2000. The
professional corporations providing medical director services to both the New
Jersey centers and the centers in Carlisle, Pennsylvania and Chambersburg,
Pennsylvania have a 20% interest in those DCA subsidiaries.
DCA is seeking to expand its outpatient dialysis treatment facilities
and inpatient dialysis care. Such expansion, whether through acquisitions of
existing centers or the development of its own dialysis centers requires
capital, which was the basis for DCA's security offering in 1996 and sale of its
Florida dialysis operations in 1997. DCA has entered into agreements with
medical directors and intends to establish additional facilities in Georgia and
Ohio. DCA is in different phases of negotiations with approximately 10
physicians for additional outpatient centers in eight eastern seaboard states.
No assurance can be given that the Company will be successful in implementing
its growth strategy or that our available funds will be adequate to finance such
expansion. See Item 1, "Business - Business Strategy" and Note 11 to "Notes to
Consolidated Financial Statements."
On September 30, 1999, we converted the balance of approximately
$2,532,000 under the convertible promissory note receivable from Techdyne into
approximately 1,447,000 shares of Techdyne common stock, increasing our
ownership interest in Techdyne to 72.5%.
31
The bulk of the Company's cash balances are carried in
interest-yielding vehicles at various rates and mature at different intervals
depending on the anticipated cash requirements of the Company.
The Company anticipates 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.
YEAR 2000 READINESS
The Year 2000 computer information processing challenge associated with
the recent millennium change concerns the ability of computerized information
systems to properly recognize date sensitive information, to ensure continued
proper operations and reporting of financial condition. We were fully aware of
the Year 2000 issues, made our assessments, evaluated our computerized systems
and equipment, and communicated with our major vendors, and made our operations
Year 2000 compliant.
In 1997, we commenced upgrading our operations software program in
conjunction with Techdyne by acquiring a new Visual Manufacturing software
package. The Visual Manufacturing software system is primarily for Techdyne,
although for several computers and certain software we acquired. This new system
greatly enhanced Techdyne's enterprise resources planning, essential to bids for
new business, production scheduling, inventory and information technology, and
overall operations. This new system is providing Techdyne with leverage in
material pricing, production and timely-delivery, thereby enabling it to be more
competitive in bidding for manufacturing business. This Visual Manufacturing
system also enables Techdyne to better track actual costs against its quotes,
thereby allowing it to more effectively control costs and manage operating
margins. The cost of this new software program for us was is approximately
$58,000 and for Techdyne's domestic and European operations was approximately
$586,000, for an aggregate cost of approximately $644,000. The Visual
Manufacturing system was pre-tested and guaranteed by the manufacturer to be
Year 2000 compliant. We have an ongoing consulting, training and servicing
arrangement with the system's manufacturer for approximately $25,000 per annum.
The Visual Manufacturing system also provides the bookkeeping, accounting and
financial recording and information functions for us and our subsidiaries.
With respect to non-information technology systems which typically
include embedded technology such as microcontrollers, the major equipment used
in our manufacturing operations as well as in our dialysis operations are not
date sensitive, and did not pose any threat of a system breakdown. Techdyne's
quality control "Cirrus testers" and personal computer hardware and software
systems were tested and determined to be Year 2000 compliant.
We communicated with our key vendors, customers and other third parties
with whom our operations are essential to inquire of their assessment of their
Year 2000 issues and actions taken to insure they would be Year 2000 compliant.
We received written assurances they were Year 2000 compliant. We assumed a worse
case scenario that some of our critical suppliers would have a problem, and
limit, delay or be unable to deliver supplies. We identified other sources of
supplies and, if necessary, would have sought customer approval to purchase
from those alternative sources. We would have requested the alternate suppliers
to carry more inventory earmarked for us, if this had been necessary, which it
was not.
One of the most significant risks for DCA with respect to the Year
2000 change related to its electronic billing of Medicare, from which it
receives a substantial portion of its revenues. HCFA, through whom the Medicare
program and payments are effected, indicated it was doing everything to become
Year 2000 compliant to assure the Medicare program would continue to operate
smoothly. In 1998, DCA installed a new electronic billing software program that
was developed according to Medicare's compliance guidelines, which guidelines
require not only system but also Year 2000 compatibility. The software designer
32
has tested the software for Year 2000 compliance and DCA initiated its first
billing with the new software in January, 1999, without any problems. The costs
of the software modifications were minimal, approximately $1,000, and we do not
anticipate that any costs involved in any future Year 2000 compliance would be
material or would have a material adverse effect on our business.
In mid-year 1999, DCA installed a new Year 2000 compliant accounting
package, providing it with its own independent system of bookkeeping, accounting
and financial records and reducing its reliance on our system and staff. This
new system's cost, for equipment, software and training, was approximately
$40,000.
Another area that could have significantly impacted DCA's operations in
providing dialysis treatment to patients related to third-party providers,
specifically, the utility companies providing water, a necessary resource for
dialysis treatments, and electricity. These providers and services are beyond
our control, and we do not have a separate generator for electricity nor other
sources for water. None of these utilities have failed to provide services.
However, we had in place plans to reduce the impact of any such utility
shortages or outages which included notification to our utilities companies of
our dialysis center locations, schedules and emergency services required and a
24-hour contact as well as notification to each of our landlords to assure
access to the facility for our staff and key service providers.
We have not experienced any material unanticipated negative
consequences from the Year 2000 issues. We believe our assessment and
implementation of our Year 2000 issues were satisfactorily completed, as
evidenced by our continued and uninterrupted operations. However, we have only
just entered the new millenium, and there may yet arise Year 2000 problems that
we are not aware of These unknowns do not allow us the ability to predict with
any significant accuracy or to quantify these Year 2000 issues' impact upon us,
since they would involve uncertainty of costs we might incur as a result of
these unknown Year 2000 failures that might yet occur despite the successful
implementation of our program.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Statement No. 133, "Accounting For
Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 is effective
for fiscal quarters of fiscal years beginning after June 15, 2000. FAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires, among other things, that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that those instruments be measured at fair value. We are in the
process of determining the impact that the adoption of FAS 133 will have on our
consolidated financial statements.
PROPOSED MERGER AND ACQUISITION
On October 20, 1999, DCA entered into an Agreement and Plan of Merger
pursuant to which MainStreet IPO.com Inc. would merge with DCA and own
approximately 80% of DCA, the surviving company, a simultaneous sale of DCA's
assets to the Company in consideration for approximately 90% of our ownership in
DCA, our assumption of DCA's long-term debt and other liabilities, and our
waiver of most proceeds from the potential exercise of outstanding DCA warrants
and DCA underwriters' options. See Note 14 to "Notes to Consolidated Financial
Statements" and "Certain Relationships and Related Transactions" of our Proxy
Statement relating to our Annual Meeting of Shareholders anticipated to be held
on may 24, 2000 incorporated herein by reference.
33
INVESTMENT
On January 27, 2000, we acquired a 6% interest in Linux Global Partners
for $90, in connection with which we loaned Linux Global Partners $1,500,000 at
a 10% annual interest rate, to be repaid with accrued interest by January 26,
2001. We had an option which we exercised on March 24, 2000 to acquire an
additional 2% interest in Linux Global Partners for $30 in conjunction with
which we loaned an additional $500,000 to Linux Global Partners. We borrowed the
funds for the loans from DCA at a 10% annual interest rate. See Item 1,
"Business - New Linux Division," Note 15 to "Notes to Consolidated Financial
Statements" and "Certain Relationships and Related Transactions" of our Proxy
Statement relating to our Annual Meeting of Shareholders anticipated to be held
on may 24, 2000 incorporated herein by reference.
INFLATION
Inflationary factors have not had a significant effect on our
operations. We attempt to pass on increased costs and expenses incurred in the
electronic and electro-mechanical and medical products divisions by increasing
selling prices when and where possible, and by developing different and
improved products for our customers that can be sold at targeted profit
margins. In our medical services segment, revenue per dialysis treatment is
subject to reimbursement rates established and regulated by the federal
government. These rates do not automatically adjust for inflation. Any rate
adjustments relate to legislation and executive and Congressional budget
demands, and have little to do with the actual cost of doing business.
Therefore, dialysis services revenues cannot be voluntarily increased to keep
pace with increases in supply costs or nursing and other patient care costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risks from changes in interest rates and
foreign currency exchange 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 $3,800,000 invested as
of December 31, 1999.
Interest rate risk on debt is managed by negotiation of appropriate
rates on new financing obligations based on current market rates and by use of
interest rate swap and other agreements which cap interest rates on some of our
debt obligations. Agreements which cap interest rates totaled approximately
$900,000 as of December 31, 1999 and contain provisions which can either result
in a gain or a loss to us for early settlement of the related debt depending on
whether rates have increased or decreased since the agreements were negotiated.
At December 31, 1999, early settlement of these debt obligations would have a
negative impact on our results of operations of approximately $4,000.
We have exposure to both rising and falling interest rates.
We have an interest rate exposure on debt agreements with variable
interest rates of which we had approximately $5,600,000 of such debt outstanding
as of December 31, 1999. A 1% increase in interest rates on its year-end
variable rate debt would result in a negative impact of approximately $35,000 on
our results of operations.
A 1/2% decrease in rates on our year-end investments would result in a
negative impact of approximately $8,000 on our results of operations.
34
Our exposure to market risk from foreign currency exchange rates
relates to Techdyne's European subsidiary whose results of operations when
translated into U.S. Dollars are impacted by changes in foreign exchange rates.
A 10% strengthening of the U.S. Dollar against the local Scottish currency, the
pound, would have negatively impacted 1999 earnings by approximately $42,000. We
have not incurred any significant realized losses on foreign exchange
transactions and does not utilize foreign exchange contracts to hedge foreign
currency fluctuations. If realized losses on foreign transactions were to become
significant, we would evaluate appropriate strategies, including the possible
use of foreign exchange contracts to reduce such losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective August 6, 1999, the board of directors, upon the
recommendation of the audit committee, terminated Ernst & Young LLP as our
independent accountants, and engaged new independent accountants, Wiss &
Company, LLP, for our annual audit for our 1999 fiscal year.
This matter was previously reported on our Current Report on Form 8-K
dated August 27, 1999. For more details you are referred to the caption
"Proposals, 3. Ratification of Wiss & Young, LLP as Independent Auditors" of our
Proxy Statement, relating to the Annual Meeting of Shareholders anticipated to
be held on May 24, 2000, which is incorporated herein by reference.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are appointed each year by the
board of directors at its first meeting following the Annual Meeting of
Shareholders to serve during the ensuing year. The following information
indicates the position with the Company and age of the executive officers at
March 20, 2000.
Current Position and Position
Name Age Areas of Responsibility Held Since
- ---- --- ----------------------- ----------
Thomas K. Langbein 54 Chairman of the Board of 1980
Directors, Chief Executive
Officer and President
Seymour Friend 79 Vice President and 1981
Director 1975
Daniel R. Ouzts 53 Vice President (Finance) 1986
and Controller 1983
For more detailed information about our executive officers and
directors you are referred to the caption "Information About Directors and
Executive Officers" of our Proxy Statement relating to the Annual Meeting of
Shareholders anticipated to be held on May 24, 2000, which is incorporated
herein by reference.
There are no family relationships between any of the executive officers
and directors of the Company.
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation is included under the caption
"Executive Compensation" of our Proxy Statement relating to the Annual Meeting
of Shareholders anticipated to be held on May 24, 2000, incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on beneficial ownership of our voting securities by each
director and all officers and directors as a group, and for each of the named
executive officers disclosed in the Summary Compensation Table (see "Executive
Compensation" of our Proxy Statement), and by any person known to beneficially
own more than 5% of any class of our voting securities, is included under the
caption "Beneficial Ownership of the Company's Securities" of our Proxy
Statement relating to the Annual Meeting of Shareholders anticipated to be held
on May 24, 2000, incorporated herein by reference.
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions is
included under the caption "Certain Relationships and Related Transactions" of
our Proxy Statement relating to the Annual Meeting of Shareholders anticipated
to be held on May 24, 2000, incorporated herein by reference.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this report.
1. All financial statements - See Index to Consolidated Financial
Statements.
2. Financial statement schedules - See Index to Consolidated
Financial Statements.
3. Refer to subparagraph (c) below.
(b) Current Reports on Form 8-K filed during fourth quarter.
1. We filed a Current Report on Form 8-K dated October 12, 1999,
Item 5, "Other Events" re: conversion of Techdyne, Inc. note
into Techdyne common stock.
(c) Exhibits*
(3)(i) Restated Certificate of Incorporation, 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)).
(ii) By-laws, as amended (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 14(c)(3)(ii)).
(4) Instruments defining the rights of security holders,
including indentures.
(i) 1989 Stock Option Plan (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 4(i)).
(ii) Form of Stock Option Agreement issued pursuant to the
1989 Stock Option Plan (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 4(ii)).
(iii) Form of Additional Non-Qualified Stock Option Agreement
issuable under the Stock Option Agreement (incorporated by
reference to the Company's 1997 Form 10-K, Part IV, Item
4(iii)).
(iv) Form of 2000 Option granted to MainStreet IPO.com Inc. and
Affiliates.
(v) 2000 Stock Option Plan.
(vi) Form of Stock Option Certificate issued under the 2000
Stock Option Plan.
38
(10) Material contracts.
(i) Employment Agreement between the Company and Thomas K.
Langbein dated August, 1998 (incorporated by reference to
the Company's Annual Report on Form 10-K for year ended
December 31, 198 ("1998 Form 10-K"), Part IV, Item
14(c)(10)(i)).
(ii) Lease between the Company and Heights Plaza Associates,
dated April 30, 1981 (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 14(c)(10)(ii)).
(iii) Amendment to lease between the Company and Heights Plaza
Associates, dated March 31, 1996 (incorporated by reference
to the Company's 1997 Form 10-K, Part IV, Item
14(c)(10)(iii)).
(iv) Lease Agreement between the Company and Techdyne, Inc.(1)
dated July 17, 1990 (incorporated by reference to
Techdyne's Annual Report on Form 10-K for the year ended
December 31, 1991, Part IV, Item 14(a) 3 (10)(i)).
(v) Lease Renewal Letter from Techdyne, Inc.(1) dated
December 19, 1994 (incorporated by reference to Techdyne's
Registration Statement on Form SB-2, Registration No.
33-94998-A ("Techdyne's Form SB-2"), Part II, Item 27,
10(b)).
(vi) Lease Extension Letter between the Company and Techdyne,
Inc.(1) dated January 25, 2000 (incorporated by reference
to Techdyne's Annual Report on Form 10-K for 1999, Part IV,
Item 14(c)(10)(iii)).
(vii) Promissory Note of Techdyne, Inc. (1) to the Company dated
April 10, 1995 (incorporated by reference to Techdyne's
Form SB-2, Part II, Item 27, (a)(a)).
(viii) Lease between the Company and Viragen, Inc.(2) dated
December 8, 1992 (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 14(c)(10)(xi)).
(ix) Addendum to Lease between the Company and Viragen, Inc.(2)
dated January 15, 1993 (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 14(c)(10)(xii)).
(x) Lease Renewal Letter by the Company to Viragen, Inc.(2)
lease dated August 12, 1997 (incorporated by reference to
the Company's 1997 Form 10-K, Part IV, Item
14(c)(10)(xiii)).
(xi) Loan Agreement between Dialysis Corporation of America(3)
and Mercantile-Safe Deposit and Trust Company dated
November 30, 1988(4) (incorporated by reference to Dialysis
Corporation of America's Form 10-Q for the quarter ended
March 31, 1998 ("DCA's March, 1998 Form 10-Q"), Part II,
Item 6(a), Part II, Item 10(iii)).
(xii) First Amendment to Loan Agreement between Dialysis
Corporation of America(3) and Mercantile-Safe Deposit and
Trust Company dated December 1, 1997(4) (incorporated by
reference to Dialysis Corporation of America's Annual
Report on Form 10-K for the year ended December 31, 1997
("DCA's 1997 Form 10-K"), Part IV, Item 14(c)(xxviii)).
39
(xiii) Promissory Note to Mercantile-Safe Deposit and Trust
Company by Dialysis Corporation of America(3) dated
November 30, 1988(4) (incorporated by reference to DCA's
March, 1998 Form 10-Q, Part II, Item 6(a), Part II, Item
10(ii)).
(xiv) First Amendment and Modification to Promissory Note to
Mercantile-Safe Deposit and Trust Company by Dialysis
Corporation of America(3)(4) (incorporated by reference to
DCA's 1997 Form 10-K, Part IV, Item 14(c)(xxix)).
(xv) Lease Agreement between Dialysis Services of PA., Inc. -
Wellsboro(5) and James and Roger Stager dated January 15,
1995 (incorporated by reference to the Company's 1994 Form
10-K, Part IV, Item 14(a) 3 (10)(lxii)).
(xvi) Lease between Dialysis Corporation of America(3) and
Dialysis Services of PA., Inc. - Lemoyne(5) dated December
23, 1998 (incorporated by reference to Dialysis Corporation
of America's Annual Report on Form 10-K for the year ended
December 31, 1998 ("DCA's 1998 Form 10-K"), Part IV, Item
14(c)(ii)).
(xvii) Medical Director Agreement between Dialysis Services of
PA., Inc. - Wellsboro(5) and George Dy, M.D. dated
September 29, 1994 [*] (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994 as amended January, 1995
("September, 1994 Form 10-Q"), Part II, Item 6(a)(10)(i)).
(xviii) Agreement for In-Hospital Dialysis Services between
Dialysis Services of PA., Inc. - Wellsboro(5) and Soldiers
& Sailors Memorial Hospital dated September 28, 1994 [*]
(incorporated by reference to the Company's September, 1994
Form 10-Q, Part II, Item 6(a)(10)(ii)).
(xix) Medical Director Agreement between Dialysis Services of
PA., Inc. - Lemoyne(5) and Herbert I. Soller, M.D. dated
January 30, 1995 [*] (incorporated by reference to the
Company's 1994 Form 10-K, Part IV, Item 14(a) 3 (10)(lx)).
(xx) Agreement for In-Hospital Dialysis Services between
Dialysis Services of PA., Inc. - Lemoyne(5) and Pinnacle
Health Hospitals dated June 1, 1997 [*] (incorporated by
reference to Dialysis Corporation of America's Current
Report on Form 8-K dated June 19, 1997, Part II, Item
7(c)(10)(i)).
(xxi) Form of Exclusive Sales Representative Agreement between
Techdyne, Inc.(1) and sales representative ** (incorporated
by reference to the Company's 1994 Form 10-K, Part IV, Item
14(a) 3 (10)(lxiv)).
(xxii) Mortgage between Techdyne (Europe) Limited(6) and The Royal
Bank of Scotland dated August 8, 1994 (incorporated by
reference to the Company's June, 1994 Form 10-Q, Part II,
Item 6(a)(28)(vi)).
(xxiii) Employment Agreement between Techdyne, Inc.(1) and Barry
Pardon dated March 13, 1996 (incorporated by reference to
Techdyne, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1995, Part IV, Item 14(a)(10)(viii)).
[*] Confidential portions omitted have been filed separately with the Securities
and Exchange Commission.
40
(xxiv) Service Agreement between the Company and Techdyne Inc.(1),
dated October 25, 1996 (incorporated by reference to
Techdyne's Registration Statement on Form S-3, Registration
No. 333-15371, Part II, Item 16, Exhibit 10(a)).
(xxv) Service Agreement renewal letter from the Company to
Techdyne, Inc.(1), dated September 30, 1998 (incorporated
by reference to the 1998 Form 10-K, Part IV, Item
14(c)(10)(iii)).
(xxvi) Lease Agreement between Techdyne, Inc.(1) and Route 495
Commerce Park Limited Partnership dated March 25, 1997
(incorporated by reference to Techdyne's Quarterly Report
on Form 10-Q for the quarter ended March 30, 1997, Item
6(a), Part II, Item 10(i)).
(xxvii) Lease Agreement between Techdyne, Inc.(1) and PruCrow
Industrial Properties, L.P. dated April 30, 1997
(incorporated by reference to Techdyne's Current Report on
Form 8-K dated June 4, 1997 ("Techdyne's June 4, 1997 Form
8-K"), Item 7(c)(10)(i)).
(xxviii) Lease Agreement between Techdyne, Inc.(1) and EGP Houston
Partners Ltd. dated April 29, 1997 (incorporated by
reference to Techdyne's June 4, 1997 Form 8-K, Item
7(c)(10)(ii)).
(xxix) Asset Based Loan and Security Agreement between Techdyne,
Inc.(1) and The Provident Bank dated February 9, 2000
(incorporated by reference to Techdyne, Inc.'s Current
Report on Form 8-K dated March 1, 2000 ("Techdyne's March,
2000 Form 8-K"), Item 7(c)(10)(i)).*
(xxx) Line of Credit Promissory Note for $4,500,000 from
Techdyne, Inc.(1) to The Provident Bank dated February 9,
2000 (incorporated by reference to Techdyne's March, 2000
Form 8-K, Item 7(c)(10)(ii)).*
(xxxi) Term Loan Promissory Note for $1,000,000 from Techdyne,
Inc.(1) to The Provident Bank dated February 9, 2000
(incorporated by reference to Techdyne's March, 2000 Form
8-K, Item 7(c)(10)(iii)).*
(xxxii) Guaranty of the Company for the Lytton Incorporated(6)
financing with The Provident Bank dated February 9, 2000
(incorporated by reference to Techdyne's March, 2000 Form
8-K, Item 7(c)(10)(iv)).*
(xxxiii) Security Agreement of Techdyne, Inc.(1) for its Guaranty of
the Lytton Incorporated(6) financing with The Provident
Bank dated February 9, 2000 (incorporated by reference to
Techdyne's March, 2000 Form 8-K, Item 7(c)(10)(v)).*
(xxxiv) Amendment to Asset Based Loan and Security Agreement
between Lytton Incorporated(6) and The Provident Bank dated
February 9, 2000 (incorporated by reference to Techdyne's
March, 2000 Form 8-K, Item 7(c)(10)(vi)).*
(xxxv) Amended and Restated Revolving Credit Promissory Note for
$3,000,000 from Lytton Incorporated(6) to The Provident
Bank dated February 9, 2000 (incorporated by reference to
Techdyne's March, 2000 Form 8-K, Item 7(c)(10)(vii)).*
41
(xxxvi) Amended and Restated Term Loan Promissory Note for
$1,400,000 from Lytton Incorporated(6) to The Provident
Bank dated February 9, 2000 (incorporated by reference to
Techdyne's March, 2000 Form 8-K, Item 7(c)(10)(viii)).*
(xxxvii) Amended and Restated Equipment Acquisition Loan Promissory
Note for $500,000 from Lytton Incorporated(6) to The
Provident Bank dated February 9, 2000 (incorporated by
reference to Techdyne's March, 2000 Form 8-K, Item
7(c)(10)(ix)).*
(xxxviii) Guaranty of Lytton Incorporated(6) for Techdyne, Inc.'s(1)
financing with The Provident Bank dated February 9, 2000
(incorporated by reference to Techdyne's March, 2000 Form
8-K, Item 7(c)(10)(x)).*
(xxxix) Security Agreement for Lytton Incorporated(6) with respect
to its Guaranty of Techdyne, Inc.(1)'s financing with The
Provident Bank dated February 9, 2000 (incorporated by
reference to Techdyne's March, 2000 Form 8-K, Item
7(c)(10)(xi)).*
(xl) Conditional Assignment of Lease by Lytton Incorporated(6)
to The Provident Bank dated February 9, 2000 (incorporated
by reference to Techdyne's March, 2000 Form 8-K, Item
7(c)(10)(xii)).*(4)
(xli) 1995 Stock Option Plan of Dialysis Corporation of
America(3) (November 10, 1995) (incorporated by reference
to DCA Form SB-2, Part II, Item 27, 10(5)).
(xlii) Form of Dialysis Corporation of America(3) Stock Option
Certificate under 1995 Stock Option Plan (November 10,
1995) (incorporated by reference to DCA Form SB-2, Part II,
Item 27, 10(4)).
(xliii) Lease between Dialysis Services of PA., Inc. - Carlisle(7)
and Lester P. Burkholder, Jr. and Kirby K. Burkholder dated
November 1, 1996 (incorporated by reference to Dialysis
Corporation of America's Annual Report on Form 10-K for the
year ended December 31, 1996 ("DCA's 1996 Form 10-K"), Part
IV, Item 14(a) 3 (10)(xxiii)).
(xliv) Lease between Dialysis Services of NJ., Inc. -
Manahawkin(7) and William P. Thomas dated January 30, 1997
(incorporated by reference to DCA's 1996 Form 10-K, Part
IV, Item 14(a) 3 (10)(xxiv)).
(xlv) Addendum to Lease Agreement between William P. Thomas and
Dialysis Services of NJ., Inc. - Manahawkin(7) dated June
4, 1997 (incorporated by reference to DCA's 1997 Form 10-K,
Part IV, Item 14(c)(10)(xviii)).
(xlvi) Medical Director Agreement between Dialysis Services of NJ,
Inc. - Manahawkin(7) and Atlantic Nephrology Group, Inc.
dated January 21, 1998(8)(9) [*] (incorporated by reference
to DCA's 1998 Form 10-K, Part IV, Item 14(c)(xxv)).
[*] Confidential portions omitted have been filed separately with the Securities
and Exchange Commission.
42
(xlvii) Agreement for In-Hospital Dialysis Services between
Dialysis Services of PA., Inc. - Carlisle(7) and Carlisle
Hospital dated August 15, 1997 [*] (incorporated by
reference to Dialysis Corporation of America's Current
Report on Form 8-K dated August 29, 1997, Item 7(c)(10(i)).
(xlviii) Equipment Master Lease Agreement BC-105 between Dialysis
Corporation of America(3) and B. Braun Medical, Inc. dated
November 22, 1996 (incorporated by reference to DCA's 1996
Form 10-K, Part IV, Item 14(a) 3 (10)(xxvii)).
(xlix) Schedule of Leased Equipment 0597 commencing June 1, 1997
to Master Lease BC-105 (incorporated by reference to
Dialysis Corporation of America's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 ("DCA's June, 1997
10-Q"), Part II, Item 6(a), Part II, Exhibit 10(i)).(10)
(l) Form of Techdyne, Inc.(1) 1997 Stock Option Plan
(incorporated by reference to Techdyne's Current Report on
Form 8-K dated June 24, 1997 ("Techdyne's June 24, 1997
Form 8-K"), Item 7(c)(4)(i)).
(li) Form of Techdyne, Inc.(1) 1997 Incentive Stock Option
(incorporated by reference to Techdyne's June 24, 1997 Form
8-K, Item 7(c)(4)(ii)).
(lii) Form of Techdyne, Inc.(1) 1997 Non-Qualified Stock Option
(incorporated by reference to Techdyne's June 24, 1997 Form
8-K, Item 7(c)(4)(iii)).
(liii) Form of Stock Option to The Investor Relations Group, Inc.
(incorporated by reference to Techdyne's Current Report on
Form 8-K dated May 28, 1998, Item 7(c)(10)(i)).
(liv) Lease between Dialysis Services of PA., Inc. -
Chambersburg(7) and BPS Development Group dated April 13,
1998 (incorporated by reference to DCA's March, 1998 Form
10-Q, Part II, Item 6(a), Part II, Item 10(i)).
(lv) Stock Purchase Agreement between Dialysis Corporation of
America(3) and Atlantic Nephrology Group, Inc.
(incorporated by reference to Dialysis Corporation of
America's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, Part II, Item 6(a), Part II, Item
10(i)).
(lvi) Lease between Dialysis Corporation of America(3) and
Wirehead Networking Solutions, Inc. dated December 1, 1998
(incorporated by reference to DCA's 1998 Form 10-K, part
IV, Item 14(c)(10)(xxvi)).
(lvii) 1999 Stock Option Plan of the Dialysis Corporation of
America(3) (May 21, 1999) (incorporated by reference to
Dialysis Corporation of America's Annual Report on Form
10-K for the year ended December 31, 1999 ("DCA 1999 Form
10-K"), Part IV, Item 14(c)(10)(xxiii)).
[*] Confidential portions omitted have been filed separately with the Securities
and Exchange Commission.
43
(lviii) Form of Stock Option Certificate under the 1999 Stock
Option Plan (May 21, 1999) (incorporated by reference to
the DCA 1999 Form 10-K, Part IV, Item 14(c)(10)(xxiv)).
(lix) Lease between DCA of Vineland, LLC(7) and Maintree Office
Center, L.L.C. dated May 10, 1999 (incorporated by
reference to the DCA 1999 Form 10-K, Part IV, Item
14(c)(10)(xxv)).
(lx) Medical Director Agreement between DCA of Vineland, LLC(7)
and Vineland Dialysis Professionals dated April 30, 1999
(incorporated by reference to the DCA 1999 Form 10-K, Part
IV, Item 14(c)(10)(xxvi)).
(lxi) Medical Director Agreement between Dialysis Services of
PA., Inc. - Carlisle(7) and Cumberland Valley Nephrology
Associates, P.C. dated April 30, 1999(11) (incorporated by
reference to the DCA 1999 Form 10-K, Part IV, Item
14(c)(10)(xxvii)).
(lxii) Management Services Agreement between Dialysis
Corporation of America(3) and DCA of Vineland, LLC(7) dated
April 30, 1999(12) (incorporated by reference to the DCA
1999 Form 10-K, Part IV, Item 14(c)(10)(xxviii)).
(lxiii) Amendment No. 1 to Management Services Agreement between
Dialysis Corporation of America(3) and DCA of Vineland,
LLC(7) dated October 27, 1999 (incorporated by reference to
the DCA 1999 Form 10-K, Part IV, Item 14(c)(10)(xxix)).
(lxiv) Indemnity Deed of Trust from Dialysis Corporation of
America(3) to Trustees for the benefit of St. Michaels Bank
dated December 3, 1999 (incorporated by reference to
Dialysis Corporation of America's Current Report on Form
8-K dated December 13, 1999 ("DCA's December Form 8-K"),
Item 7(c)(99)(i)).
(lxv) Guaranty Agreement from Dialysis Corporation of America(3)
to St. Michaels Bank dated December 3, 1999 (incorporated
by reference to DCA's December Form 8-K, Item
7(c)(99)(ii)).
(lxvi) Promissory Note from the Company to Dialysis Corporation of
America(3) dated January 27, 2000 (incorporated by
reference to DCA's Current Report on Form 8-K dated
February 10, 2000, Item 7(c)10.1)
(lxvii) Management Services Agreement between DCA of Vineland, LLC
(7) and DCA Medical Services, Inc. (5) dated January 1,
2000(13) (incorporated by reference to the DCA 1999 Form
10-K, Part IV, Item 14(c)(10)(xxxiii)).
(16)(i) Letter re change in certifying accountant dated August 13,
1999 (incorporated by reference to the Company's Current
Report on form 8-K dated August 13, 1999, Item 7(c)(16)).
(ii) Letter re change in certifying accountant dated August 27,
1999 (incorporated by reference to the Company's Current
Report on Form 8-K/A#1 dated August 27, 1999, Item
7(c)(16)).
(21) Subsidiaries of the Company.
(23) Consent of experts and counsel.
(i) Consent of Ernst & Young LLP, Independent Certified
Public Accountants.
(ii) Consent of Wiss & Company, LLP, Independent Certified
Public Accountants.
(27) Financial Data Schedule (for SEC use only).
44
- ----------------
(1) 71% owned subsidiary.
(2) Former public subsidiary of the Company; spun-off in 1986.
(3) 65% owned subsidiary.
(4) Dialysis Corporation of America has two loans with Mercantile Safe
Deposit and Trust Company and such loan documents and promissory notes
conform to the exhibit filed but for the amount of each loan.
(5) 100% owned subsidiary of Dialysis Corporation of America.
(6) 100% owned subsidiary of Techdyne, Inc.
(7) 80% owned subsidiary of Dialysis Corporation of America.
(8) Previously filed with the same Medical Director under the name
Oceanview Medical Group, P.A.
(9) There are two Medical Director Agreements with Atlantic Nephrology
Group, Inc. and such Medical Director Agreements conform to the exhibit
filed but for the compensation and facility.
(10) Dialysis equipment is leased from time to time and a new Schedule is
added to the Master Lease; other than the nature of the equipment and
length of the lease, the Schedules conform to the exhibit filed and the
terms of the Master Lease remain the same.
(11) There are two Medical Director Agreements with Cumberland Valley
Nephrology Associates, P.C. and such agreements conform to the exhibit
filed but for the facility, the other being located in Chambersburg,
Pennsylvania.
(12) There are several substantially similar Management Service Agreements
which conform to the exhibit filed but for the name of the particular
subsidiary which entered into the Agreement.
(13) Each subsidiary has the identical Management Services Agreement with
DCA Medical Services, Inc.
* Documents incorporated by reference not included in Exhibit Volume.
** There are three such Agreements, all the same but for the territory
assigned.
*** Options to directors are the same except as to amounts of underlying
shares purchasable.
45
Schedule II - Valuation and Qualifying Accounts
Medicore, Inc. and Subsidiaries
December 31, 1999
- ---------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C
- ---------------------------------------------------------------------------------------------------------
Additions
Balance at Additions (Deductions) Charged to
Beginning Charged (Credited) to Other Accounts
Classification of Period Cost and Expenses Describe
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 317,000 $ 103,000
Reserve for inventory obsolescence 559,000 405,000
Valuation allowance for deferred tax asset 528,000 (28,000)
----------- ----------- -----------
$ 1,404,000 $ 480,000 $ 0
=========== =========== ===========
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 231,000 $ 106,000
Reserve for inventory obsolescence 238,000 437,000
Valuation allowance for deferred tax asset 850,465 (322,465)
----------- ----------- -----------
$ 1,319,465 $ 220,535) $ 0
=========== =========== ===========
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 385,000 $ 42,000
Reserve for inventory obsolescence 169,000 153,000
Valuation allowance for deferred tax asset 1,587,723 (737,258)
----------- ----------- -----------
$ 2,141,723 $ (542,258) $ 0
=========== =========== ===========
- --------------------------------------------------------------------------------
COL. A COL. D COL. E
- --------------------------------------------------------------------------------
Other Changes Balance
Add (Deduct) at End of
Classification Describe Period
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 11,000)(1) $ 431,000
Reserve for inventory obsolescence (240,000)(3) 724,000
Valuation allowance for deferred tax asset -- 500,000
----------- -----------
$ (229,000) $ 1,655,000
=========== ===========
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ (20,000)(1) $ 317,000
Reserve for inventory obsolescence (116,000)(3) 559,000
Valuation allowance for deferred tax asset -- 528,000
----------- -----------
$ (136,000) $ 1,404,000
=========== ===========
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ (150,000)(1) $ 231,000
(46,000)(3)
Reserve for inventory obsolescence (84,000)(2) 238,000
Valuation allowance for deferred tax asset -- 850,465
----------- -----------
$ (280,000) $ 1,319,465
=========== ===========
(1) Net (write-offs) recoveries against receivables allowance.
(2) Net write-offs against inventory reserves.
(3) Sale of subsidiaries' assets.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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/ THOMAS K. LANGBEIN
-----------------------------
THOMAS K. LANGBEIN, Chairman
of the Board of Directors, Chief
Executive Officer and President
March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
/s/ THOMAS K. LANGBEIN Chairman of the Board of Directors,
- --------------------------- Chief Executive Officer and President March 28, 2000
Thomas K. Langbein
/s/ SEYMOUR FRIEND Vice President and Director March 28, 2000
- ---------------------------
Seymour Friend
/s/ DANIEL R. OUZTS Vice-President, Principal Financial
- --------------------------- Officer and Controller March 28, 2000
Daniel R. Ouzts
/s/ PETER D. FISCHBEIN Director March 28, 2000
- ---------------------------
Peter D. Fischbein
/s/ ANTHONY C. D'AMORE Director March 28, 2000
- ---------------------------
Anthony C. D'Amore
/s/ ROBERT P. MAGRANN Director March 28, 2000
- ---------------------------
Robert P. Magrann
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A) (1) AND (2), (C) AND (D)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1999
MEDICORE, INC.
HIALEAH, FLORIDA
FORM 10-K--ITEM 14(a)(1) AND (2)
MEDICORE, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Medicore, Inc. and
subsidiaries are included in Item 8:
PAGE
Consolidated Balance Sheets--December 31, 1999 and 1998................ F-4
Consolidated Statements of Income--Years ended December 31, 1999,
1998, and 1997...................................................... F-5
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1999, 1998 and 1997.................................... F-6
Consolidated Statements of Cash Flows--Years ended December 31,
1999, 1998, and 1997 ............................................... F-7
Notes to Consolidated Financial Statements--December 31, 1999.......... F-8
The following financial statement schedule of Medicore, Inc. and subsidiaries is
included in Item 14(d):
Schedule II-Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Medicore, Inc.
We have audited the accompanying consolidated balance sheet of Medicore, Inc.
and subsidiaries as of December 31, 1999, and the related consolidated statement
of operations, stockholders' equity, and cash flows for the year then ended. Our
audit also included the Financial Statement Schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Medicore, Inc. and subsidiaries at December 31, 1999, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ WISS & COMPANY LLP
-------------------------
Wiss and Company LLP
March 10, 2000
Livingston, New Jersey
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Medicore, Inc.
We have audited the accompanying consolidated balance sheet of Medicore,
Inc. and subsidiaries as of December 31, 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1998. Our audits also included
the information related to each of the two years in the period ended December
31, 1998 on the Financial Statement Schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Medicore, Inc. and subsidiaries at December 31, 1998, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule for the two years in the period ended December 31,
1998, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
March 22, 1999
Miami, Florida
F-3
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,151,150 $ 7,294,707
Marketable securities 9,520 210,007
Accounts receivable, less allowances of
$431,000 in 1999 and $317,000 in 1998 8,958,837 6,260,748
Inventories, less allowance for obsolescence
of $724,000 in 1999 and $559,000 in 1998 10,097,974 8,393,770
Prepaid expenses and other current assets 810,806 648,088
Deferred tax asset 614,308 561,822
------------ ------------
Total current assets 24,642,595 23,369,142
PROPERTY AND EQUIPMENT
Land and improvements 1,012,455 1,018,455
Building and building improvements 3,071,948 3,073,777
Equipment and furniture 11,455,449 10,279,217
Leasehold improvements 2,243,658 1,489,445
------------ ------------
17,783,510 15,860,894
Less accumulated depreciation and amortization 7,309,250 6,360,632
------------ ------------
10,474,260 9,500,262
DEFERRED EXPENSES AND OTHER ASSETS 111,392 183,771
COSTS IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED,
less accumulated amortization of $749,000 in 1999 and $585,000 in 1998 3,381,718 3,256,915
------------ ------------
$ 38,609,965 $ 36,310,090
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings $ 30,024 $ 962,407
Accounts payable 5,568,972 3,607,414
Accrued expenses and other current liabilities 2,210,345 2,023,030
Current portion of long-term debt 732,677 953,452
Income taxes payable 260,481 402,333
------------ ------------
Total current liabilities 8,802,499 7,948,636
LONG-TERM DEBT 8,363,497 5,126,530
DEFERRED INCOME TAXES 1,814,743 1,800,143
MINORITY INTEREST IN SUBSIDIARIES 5,346,779 6,067,089
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 12,000,000 shares;
5,707,740 shares issued shares outstanding in 1999;
5,856,940 shares issued and 5,715,540 shares outstanding in 1998 57,075 58,569
Capital in excess of par value 11,961,030 12,470,817
Retained earnings 2,335,881 2,948,938
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (74,505) (19,457)
Unrealized gain on marketable securities for sale 2,966 130,204
------------ ------------
Total accumulated other comprehensive income (loss) (71,539) 110,747
------------ ------------
Treasury stock at cost; 141,400 shares at December 31, 1998 -- (221,379)
------------ ------------
Total Stockholders' Equity 14,282,447 15,367,692
------------ ------------
$ 38,609,965 $ 36,310,090
============ ============
See notes to consolidated financial statements
F-4
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
REVENUES
Sales $ 54,914,349 $ 49,381,765 $ 38,888,233
Gain on sale of subsidiaries' assets -- -- 4,430,663
Gain on subsidiary securities offering and
warrants exercise -- -- 89,898
Realized gain on sale of marketable securities 263,144 12,780 49,493
Other income 466,925 753,984 661,195
------------ ------------ ------------
55,644,418 50,148,529 44,119,482
COST AND EXPENSES
Cost of goods sold 47,282,583 42,460,760 32,198,701
Selling, general and administrative expense 8,328,713 7,123,888 6,615,768
Interest expense 674,500 592,414 393,515
------------ ------------ ------------
56,285,796 50,177,062 39,207,984
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (641,378) (28,533) 4,911,498
Income tax provision (benefit) 57,186 (352,369) 953,000
------------ ------------ ------------
(LOSS) INCOME BEFORE MINORITY INTEREST (698,564) 323,836 3,958,498
Minority interest in (loss) income of consolidated subsidiaries (85,507) 225,415 1,717,527
------------ ------------ ------------
NET (LOSS) INCOME $ (613,057) $ 98,421 $ 2,240,971
============ ============ ============
Earnings (loss) per share:
Basic $ (.11) $ .02 $ .39
============ ============ ============
Diluted $ (.11) $ .01 $ .36
============ ============ ============
See notes to consolidated financial statements.
F-5
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital in
Common Excess of Comprehensive Retained
Stock Par Value Income (Loss) Earnings
------- ----------- ------------- ----------
Balance January 1, 1997 $54,569 $11,493,255 $ 609,546
Comprehensive income:
Net income $2,240,971 2,240,971
Foreign currency translation adjustments (23,757)
Unrealized loss on marketable securities:
Unrealized holding loss arising during period, net of tax (663,882)
Less reclassification adjustments, net of tax,
for gain included in net income (32,364)
----------
Comprehensive income $1,520,968
==========
Exercise of stock options for 400,000 shares
of common stock 4,000 713,000
Exercise of subsidiary stock options (66,534)
Conversion of portion of Techdyne note (48,217)
Repurchase of stock by subsidiary (28,155)
Subsidiary stock issuance for acquisition 977,528
Repurchase of 8,200 common shares
------- ----------- ----------
Balance at December 31, 1997 58,569 13,040,877 2,850,517
Comprehensive income:
Net income $ 98,421 98,421
Foreign currency translation adjustments 11,671
Unrealized loss on marketable securities:
Unrealized holding loss arising during period, net of tax (45,009)
----------
Comprehensive income $ 65,083
==========
Exercise of subsidiary stock options (150,756)
Repurchase of stock by subsidiary 78,696
Subsidiary advance toward acquisition price guarantee (785,792)
Subsidiary acquisition price adjustment 251,600
Subsidiary acquisition of minority interest 23,386
Consultant stock options 12,806
Repurchase of 133,200 common shares
------- ----------- ----------
Balance December 31, 1998 58,569 12,470,817 2,948,938
Comprehensive (loss) income:
Net loss $ (613,057) (613,057)
Foreign currency translation adjustments (55,048)
Unrealized loss on marketable securities:
Unrealized holding gain arising during period, net of tax 2,966
Less reclassification adjustments, net of tax,
for gain included in net (loss) income (130,204)
----------
Unrealized holding loss, net of reclassification (127,238)
----------
Comprehensive loss $(795,343)
==========
Consultant stock options 24,360
Exercise of subsidiary stock options (53,205)
Subsidiary stock option issuances 104,040
Conversion of Techdyne note 7,363
Sale of subsidiary minority interest 2,693
Settlement subsidiary acquisition price guarantee (366,987)
Repurchase of 8,000 common shares
Cancellation of treasury shares (1,494) (228,051)
------- ----------- ----------
Balance at December 31, 1999 $57,075 $11,961,030 $2,335,881
======= =========== ==========
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other Notes
Comprehensive Receivable Treasury
Income (Loss) Options Stock Total
------------- -------- --------- -----------
Balance January 1, 1997 $ 864,088 $ -0- $ -0- $13,021,458
Comprehensive income:
Net income
Foreign currency translation adjustments (23,757)
Unrealized loss on marketable securities:
Unrealized holding loss arising during period, net of tax (663,882)
Less reclassification adjustments, net of tax,
for gain included in net income (32,364)
Comprehensive income 1,520,968
Exercise of stock options for 400,000 shares
of common stock 717,000
Exercise of subsidiary stock options (66,534)
Conversion of portion of Techdyne note (48,217)
Repurchase of stock by subsidiary (28,155)
Subsidiary stock issuance for acquisition 977,528
Repurchase of 8,200 common shares (16,790) (16,790)
--------- -------- --------- -----------
Balance at December 31, 1997 144,085 -0- (16,790) 16,077,258
Comprehensive income:
Net income
Foreign currency translation adjustments 11,671
Unrealized loss on marketable securities:
Unrealized holding loss arising during period, net of tax (45,009)
Comprehensive income 65,083
Exercise of subsidiary stock options (150,756)
Repurchase of stock by subsidiary 78,696
Subsidiary advance toward acquisition price guarantee (785,792)
Subsidiary acquisition price adjustment 251,600
Subsidiary acquisition of minority interest 23,386
Consultant stock options 12,806
Repurchase of 133,200 common shares (204,589) (204,589)
--------- -------- --------- -----------
Balance December 31, 1998 110,747 -0- (221,379) 15,367,692
Comprehensive (loss) income:
Net loss
Foreign currency translation adjustments (55,048)
Unrealized loss on marketable securities:
Unrealized holding gain arising during period, net of tax
Less reclassification adjustments, net of tax,
for gain included in net (loss) income
Unrealized holding loss, net of reclassification (127,238)
Comprehensive loss (795,343)
Consultant stock options 24,360
Exercise of subsidiary stock options (53,205)
Subsidiary stock option issuances 104,040
Conversion of Techdyne note 7,363
Sale of subsidiary minority interest 2,693
Settlement subsidiary acquisition price guarantee (366,987)
Repurchase of 8,000 common shares (8,166) (8,166)
Cancellation of treasury shares 229,545 --
--------- --------- -----------
Balance at December 31, 1999 $ (71,539) $ -- $14,282,447
========= ========= ===========
See notes to consolidated financial statements.
F-6
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
OPERATING ACTIVITIES
Net (loss) income $ (613,057) $ 98,421 $ 2,240,971
Adjustments to reconcile net (loss) incomee
to net cash used in operating activities:
Gain of sale of subsidiaries' assets -- -- (4,430,663)
Depreciation 1,732,487 1,434,638 1,019,253
Amortization 181,594 161,542 106,126
Bad debt expense 103,113 106,364 42,276
Provision for inventory obsolescence 404,762 437,095 153,011
Stock option related compensation expense 153,000 -- 322,125
Gain on sale of securities (263,144) (12,780) (49,493)
Minority interest (85,507) 225,415 1,717,527
Deferred income taxes 40,100 (29,295) (493,000)
Consultant stock option expense 16,552 17,651 --
Gain on subsidiary stock offering and warrants exercise -- -- (89,899)
Increase (decrease) relating to operating activities from:
Accounts receivable (2,819,365) (59,740) (1,735,304)
Inventories (2,122,458) (138,866) (2,615,706)
Prepaid expenses and other current assets (142,453) 181,018 (237,547)
Accounts payable 1,966,247 (783,100) 374,871
Accrued expenses and other current liabilities 194,881 (307,010) (101,702)
Income taxes payable (141,852) (1,359,496) 753,219
------------ ------------ ------------
Net cash used in operating activities (1,395,100) (28,143) (3,023,935)
INVESTING ACTIVITIES
Redemption of minority interest in subsidiaries -- (385,375) --
Proceeds from sale of subsidiaries' assets -- -- 4,583,662
Subsidiary acquisition payments (1,389,530) (153,818) (2,166,010)
Advance on subsidiary acquisition price guarantee -- (1,277,711) --
Additions to property and equipment, net of minor disposals (2,406,650) (1,776,381) (2,135,213)
Proceeds from sale of securities 292,354 252,780 49,493
Deferred expenses and other assets 55,025 (56,414) 30,801
Purchase of marketable securities (33,947)
Sale of minority interest in subsidiaries 6,040 -- --
------------ ------------ ------------
Net cash (used in) provided by investing activities (3,476,708) (3,396,919) 362,733
FINANCING ACTIVITIES
Borrowings to finance subsidiary acquisition -- 600,000 2,500,000
Short-term line of credit borrowings 1,867,590 413,709 548,698
Other short-term bank borrowings 405,024 -- --
Payments on short-term bank borrowings (375,000) -- --
Proceeds from long-term borrowings 783,333 -- --
Payments on long-term borrowings (922,145) (1,081,928) (430,976)
Proceeds from exercise of stock options and warrants 500 1,150 695,953
Subsidiary repurchase of stock -- (108,690) (206,250)
Repurchase of stock (8,166) (204,589) (16,790)
Dividend payments to minority shareholders -- -- (3,966)
Deferred financing costs -- -- (2,657)
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,751,136 (380,348) 3,084,012
Effect of exchange rate fluctuations on cash (22,885) 699 (118,690)
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (3,143,557) (3,804,711) 304,120
Cash and cash equivalents at beginning of year 7,294,707 11,099,418 10,795,298
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,151,150 $ 7,294,707 $ 11,099,418
============ ============ ============
See notes to consolidated financial statements.
F-7
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: The Company has three operating business segments. The
electro-mechanical segment, Techdyne, is an international contract manufacturer
of electronic and electro-mechanical products primarily manufactured to customer
specifications in the data processing, telecommunication, instrumentation and
food preparation equipment industries. The medical services segment, DCA, owns
and operates five kidney dialysis centers located in Pennsylvania and New Jersey
and has agreements to provide inpatient dialysis treatments to various hospitals
and provides supplies and equipment for dialysis home patients. DCA opened a
sixth center, located in New Jersey, in February 2000. The medical products
segment is engaged in the manufacture and distribution of medical supplies. A
fourth segment, investment in technology companies, was initiated in January,
2000, both an investment in and financing to Linux software companies.
CONSOLIDATION: The Consolidated Financial Statements include the
accounts of Medicore, Inc., Medicore's 68.0% owned subsidiary, Dialysis
Corporation of America ("DCA") and Medicore's 72.5% owned subsidiary, Techdyne,
Inc. ("Techdyne") and its subsidiaries Lytton Incorporated ("Lytton"), Techdyne
(Europe) Limited ("Techdyne (Europe)"), and Techdyne (Livingston) Limited which
is a subsidiary of Techdyne (Europe), collectively known as the Company. All
material intercompany accounts and transactions have been eliminated in
consolidation.
ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles 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.
SALE OF STOCK BY SUBSIDIARIES: The Company follows an accounting
policy of recognizing income on sales of stock by its subsidiaries, which
includes exercise of warrants issued in subsidiary stock offerings.
MARKETABLE SECURITIES: The Company follows Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Under this Statement, the Company is required to classify
its marketable equity securities as either trading or available-for-sale. The
Company does not purchase equity securities for the purpose of short-term sales;
accordingly, its securities are classified as available-for-sale. Marketable
securities are recorded at fair value. Unrealized gains and losses relating to
available-for-sale securities are included separately as a component of
accumulated other comprehensive income (loss) included in shareholders' equity,
net of income tax effect, until realized. Realized gains and losses are computed
based on the cost of securities sold using the specific identification method.
Marketable securities are comprised of the following:
December 31, December 31,
1999 1998
-------- --------
Cost $ 4,737 ---
Unrealized holding gains 4,783 210,007
-------- --------
Fair value $ 9,520 $210,007
======== ========
Unrealized holding gains, which amounted to $4,783, less deferred
taxes of $1,817 at December 31, 1999 and $210,007, less deferred tax of $79,803,
at December 31, 1998, are included separately as a component of accumulated
other comprehensive income (loss) included in stockholders' equity. Proceeds
from sales of securities were approximately $292,000 and $253,000 with gains of
approximately $263,000 and $13,000 for the years ended December 31, 1999 and
1998, respectively.
F-8
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
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. The cost of
finished goods and work in process consists of direct materials, direct labor
and an appropriate portion of fixed and variable manufacturing overhead.
Inventories are comprised of the following:
December 31, December 31,
1999 1998
----------- -----------
Electronic and mechanical components, net:
Finished goods $ 1,018,131 $ 794,297
Work in process 2,463,191 1,845,954
Raw materials and supplies 6,010,987 5,234,249
----------- -----------
9,492,309 7,874,500
Medical supplies 605,665 519,270
----------- -----------
$10,097,974 $ 8,393,770
=========== ===========
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets, which range from 5 to 34 years for buildings and
improvements; 3 to 10 years for machinery, computer and office equipment, and
furniture; and 5 to 15 years for leasehold improvements based on the shorter of
the lease term or estimated useful life of the property. Replacements and
betterments that extend the lives of assets are capitalized. Maintenance and
repairs are expensed as incurred. Upon the sale or retirement of assets, the
related cost and accumulated depreciation are removed and any gain or loss is
recognized.
LONG-LIVED ASSET IMPAIRMENT: Pursuant to Financial Accounting
Standards Board Statement No. 121 "Accounting for the Impairment of Long-lived
Assets and Assets to be Disposed of," impairment of long-lived assets, including
intangibles related to such assets, is recognized whenever events or changes in
circumstances indicate that the carrying amount of the asset, or related groups
of assets, may not be fully recoverable from estimated future cash flows and the
fair value of the related assets is less than their carrying value. The Company,
based on current circumstances, does not believe any indicators of impairment
are present.
COSTS IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED: The costs in excess
of net tangible assets acquired are being amortized on a straight-line basis
over 25 years. If, in the opinion of management, an impairment in value occurs,
based on the undiscounted cash flow method, any writedowns will be charged to
expense.
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.
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 financial
accounting and tax basis of assets and liabilities.
The Company filed consolidated federal and state tax returns with
Techdyne until October 2, 1995, the date Techdyne's securities offering was
completed, after which Techdyne files separate income tax returns with its
income tax liability reflected on a separate return basis. DCA was likewise
included in the consolidated tax returns of the Company until the completion of
its public offering in April 1996, after which it files separate income tax
returns with its income tax liability reflected on a separate return basis.
F-9
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
STOCK BASED COMPENSATION: The Company follows Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25) and
related Interpretations in accounting for its employee stock options. Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation"(FAS 123) permits a company to elect to follow the accounting
provisions 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.
FOREIGN CURRENCY TRANSLATION: The financial statements of the
foreign subsidiary have been translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52. All balance sheet accounts
have been translated using the current exchange rates at the balance sheet date.
Income statement amounts have been translated using the average exchange rate
for the year. The translation adjustments resulting from the change in exchange
rates from year to year have been reported separately as a component of
accumulated other comprehensive income (loss) included in stockholders' equity.
Foreign currency transaction gains and losses, which are not material, are
included in results of operations. These gains and losses result from exchange
rate changes between the time transactions are recorded and settled and, for
unsettled transactions, exchange rate changes between the time transactions are
recorded and the balance sheet date.
OTHER INCOME: Other income is comprised as follows:
Year Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
Interest income $ 257,077 $ 417,339 $ 448,950
Other 209,848 336,645 212,245
--------- --------- ---------
$ 466,925 $ 753,984 $ 661,195
========= ========= =========
EARNINGS PER SHARE: Diluted earnings per share gives effect to
potential common shares that were dilutive and outstanding during the period,
such as stock options and warrants, using the treasury stock method and average
market price.
Following is a reconciliation of amounts used in the basic and
diluted computations:
Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Net (loss) income, numerator-basic computation $ (613,057) $ 98,421 $ 2,240,971
Adjustment due to subsidiaries' dilutive securities (7,624) (52,219) (102,697)
----------- ----------- -----------
Net income as adjusted, numerator-diluted computation $ (620,681) $ 46,202 $ 2,138,274
=========== =========== ===========
Weighted average shares, denominator-basic computation 5,710,696 5,804,506 5,733,104
Effect of dilutive stock securities:
Stock options -- -- 285,088
----------- ----------- -----------
Weighted average shares as adjusted, denominator-diluted computation 5,710,696 5,804,506 6,018,192
=========== =========== ===========
Earnings per share:
Basic $ (.11) $ .02 $ .39
=========== =========== ===========
Diluted $ (.11) $ .01 $ .36
=========== =========== ===========
F-10
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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.
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.
RECLASSIFICATIONS: Certain reclassifications have been made to the
1998 and 1997 financial statements to conform to the 1999 presentation.
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, foreign currency
translation adjustments and unrealized gains on marketable securities and is
presented in the Consolidated Statement of Shareholders' Equity.
NEW PRONOUNCEMENTS: In June, 1998, the Financial Accounting
Standards Board issued Financial Accounting Standards Board Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS
133 is effective for fiscal quarters of fiscal years beginning after June 15,
2000. FAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities and requires, among other things, that
all derivatives be recognized as either assets or liabilities in the statement
of financial position and that these instruments be measured at fair value. The
Company is in the process of determining the impact that the adoption of FAS 133
will have on its consolidated financial statements.
NOTE 2--TRANSACTIONS WITH VIRAGEN, INC.
During 1999 and 1997 the Company sold approximately 259,000 shares
and 10,000 shares of Viragen (formerly a majority owned subsidiary of the
Company) stock and recognized gains of approximately $228,000 and $49,000,
respectively.
F-11
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 2--TRANSACTIONS WITH VIRAGEN, INC.--CONTINUED
The Company has a royalty agreement with Viragen, pursuant to which
it is to receive a royalty on Viragen's net sales of interferon and related
products. The agreement provides for aggregate royalty payments of $2.4 million
to be paid based on the following percentages of Viragen sales: 5% of the first
$7 million, 4% of the next $10 million, and 3% of the next $55 million. The
effective date of the agreement was November 15, 1994, with royalty payments due
quarterly, commencing March 31, 1995. No royalty income was earned under the
agreement in 1999, 1998 or 1997. In addition, a payment of approximately
$108,000, earned under a previous royalty agreement, is due as the final payment
under the new agreement.
NOTE 3--LONG-TERM DEBT
On February 8, 1996, Techdyne refinanced its term loan by entering
into three loan agreements with a Florida bank. One credit facility was a
$2,000,000 line of credit due on demand secured by Techdyne's accounts
receivable, inventory, furniture, fixtures and intangible assets and bore
interest at the bank's prime rate plus 1.25%. In conjunction with Techdyne's
acquisition of Lytton on July 31, 1997, the line of credit was modified and
increased to $2,500,000 with the interest rate reduced to prime plus .75% and
various other modifications. The line was fully drawn down in connection with
the Lytton acquisition with $2,500,000 remaining outstanding, with interest due
at 9.25%, until the line was refinanced in December 1997.
The $2,500,000 line of credit agreement was refinanced and replaced
effective December 29, 1997 with a five year $1,500,000 commercial term loan and
$1,600,000 commercial revolving line of credit. The $1,600,000 line of credit
had an outstanding balance of $1,600,000 at December 31, 1999 and December 31,
1998. This line matures May 1, 2000 and has monthly payments of interest at
prime. Both credit facilities are collateralized by the corporate assets of
Techdyne. The commercial term loan with an outstanding balance of $900,000 at
December 31, 1999 and $1,200,000 at December 31, 1998 matures December 15, 2002
with monthly principal payments of $25,000 plus interest. In connection with the
term loan, the Company entered into an interest rate swap agreement with the
bank to manage Techdyne's exposure to interest rates by effectively converting a
variable note obligation with an interest rate of LIBOR plus 2.25% to a fixed
rate of 8.60%. Early termination of the swap agreement, either through
prepayment or default on the term loan, may result in a cost or a benefit to
Techdyne. The December 29, 1997 refinancing represents a noncash financing
activity which is a supplemental disclosure required by Financial Accounting
Standards Board Statement No 95 "Statement of Cash Flows" (FAS 95).
The bank extended two commercial term loans to Techdyne in February
1996, one for $712,500 for five years expiring on February 7, 2001 at an annual
rate of interest equal to 8.28% with a monthly payment of principal and interest
of $6,925 based on a 15-year amortization schedule with the unpaid principal and
accrued interest due on the expiration date. This term loan had an outstanding
balance of approximately $606,000 at December 31, 1999 and $636,000 at December
31, 1998 and is secured by a mortgage on properties in Hialeah, Florida owned by
the Company, two of which properties are leased to Techdyne and one parcel being
vacant land used as a parking lot. Under this term loan, Techdyne is obligated
to adhere to a variety of affirmative and negative covenants.
F-12
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 3--LONG-TERM DEBT--CONTINUED
The second commercial term loan was for the principal amount of
$200,000 for a period of five years bearing interest at a per annum rate of
1.25% over the bank's prime rate and requiring monthly principal payments with
accrued interest of $3,333 through expiration on February 7, 2001. This $200,000
term loan which had a balance of approximately $47,000 at December 31, 1999 and
$87,000 at December 31, 1998 is secured by all of Techdyne's tangible personal
property, goods and equipment, and all cash or noncash proceeds of such
collateral.
The Company unconditionally guaranteed the payment and performance
by Techdyne of the revolving loan and the three commercial term loans and
subordinated Techdyne's intercompany indebtedness to the Company to the bank's
interest. There are cross defaults between the revolving and term loans
exclusive of the $200,000 term loan.
Lytton had a $1,500,000 revolving bank line of credit requiring
monthly interest payments at prime plus 1/2% maturing June 30, 1999 which was
increased to $3,000,000 and extended to June 30, 2000. There was an outstanding
balance on this loan of approximately $2,830,000 at December 31, 1999 and
$962,000 at December 31, 1998. The interest rate on this loan was 9% at December
31, 1999 and 8.25% as of December 31, 1998. Lytton had a $1,000,000 installment
loan with the same bank maturing August 1, 2002 at an annual rate of 9% until
July 1999, with monthly payments of $16,667 plus interest, at which time, Lytton
was to have an option to convert the note to a variable rate. This loan was
subject to a prepayment penalty during the fixed rate period. Lytton replaced
this loan at June 30, 1999 with a $1,400,000 installment loan with interest at
prime plus 1/2% and monthly payments of $23,333 plus interest payable in 60
monthly installments commencing August 1, 1999 with the final installment due
June 30, 2004. The balance outstanding on this loan was approximately $1,283,000
as of December 31, 1999 and $733,000 as of December 31, 1998. Lytton also has a
$500,000 equipment loan agreement with the same bank payable through June 30,
2004 with interest at prime plus 1/2%. There was no outstanding balance on this
loan as of December 31, 1999 or December 31, 1998. All of these bank loans are
secured by the business assets of Lytton.
Long-term debt is as follows:
December 31,
-----------------------
1999 1998
---------- ----------
Term loan secured by real property with a carrying value of $946,000
at December 31, 1999. Monthly payments of principal and interest
as described above $ 605,584 $ 636,438
Term loan secured by tangible personal property, goods and
equipment with a carrying value of $5,726,000 at December 31,
1999. Monthly payments of principal and interest as
described above 46,764 86,763
Commercial term loan secured by corporate assets of Techdyne with
a carrying value of approximately $15,366,000 as of December 31,
1999. Monthly payments of principal and interest as described above 900,000 1,200,000
Three-year revolving line of credit agreement maturing May 1, 2000
Secured by corporate assets of Techdyne with a carrying value of
approximately $15,366,000 at December 31, 1999. Monthly
payment of interest as described above 1,600,000 1,600,000
F-13
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 3--LONG-TERM DEBT--CONTINUED
December 31,
-----------------------
1999 1998
---------- ----------
Mortgage note secured by land and building with a net book value of
$785,000 at December 31, 1999. Quarterly payments of
approximately $20,000 based on exchange rates at December 31,
1999 for 15 years commencing October, 1997 including interest
at 2% above bank base rate 489,308 544,528
Promissory note secured by three certificates of deposit. A single
principal payment is due on April 21, 2000 with interest payable
monthly at prime 145,000 145,000
Mortgage note secured by land and building with a net book value of
of $390,000 at December 31, 1999. Monthly principal payments of
$3,333 plus interest at 1% over the prime rate through November 2003 156,711 200,040
Mortgage note secured by land and building with a net book value of
$688,000 at December 31, 1999. Monthly principal payments of
$2,667 plus interest at 1% over the prime rate through November 2003 125,289 159,960
Equipment financing agreement secured by DCA equipment with a
net book value of $772,000 at December 31, 1999. Monthly payments
totaling $8,582 as of December 31, 1999, including principal and interest,
as described below, pursuant to various schedules extending through May
2005 with interest at rates ranging from 4.14% to 11.84% 731,423 448,566
Mortgage note secured by land with a net book value of $107,000 at December 31,
1999. Monthly principal payments of $1,083 plus interest at 1.5% over the prime
rate. The entire unpaid principal balance and accrued interest is due May 1, 2003 43,281 56,288
Line of credit agreement, originally one year with June 30, 2000
maturity refinanced in February 2000 described below. Secured by business
assets of Lytton with a carrying value of $12,533,000 at December 31, 1999
Monthly payments of interest as described above 2,829,997 --
Installment loan requiring monthly payments of $23,333 plus interest at
prime plus1/2% at December 31, 1999 and $16,667 plus interest at 9%
at December 31, 1998. Secured by business assets of Lytton with a
carrying value of approximately $12,533,000. Monthly payments of
principal and interest as described above 1,283,333 733,333
Equipment loan requiring monthly payments of $4,298 including interest at 5.5%
and maturing in April 2002. The loan is secured by equipment of Lytton with a
carrying value of approximately $392,000 at December 31, 1999 112,693 156,746
Equipment financing obligations requiring combined monthly payments of $19,467
as of December 31, 1998, including interest at rates ranging from 8.55% to
10.09% and secured by the related assets of Lytton -- 112,320
Other 26,791 --
---------- ----------
9,096,174 6,079,982
Less current portion 732,677 953,452
---------- ----------
$8,363,497 $5,126,530
========== ==========
The prime rate was 8.50% as of December 31, 1999 and 7.75% as of December 31, 1998.
F-14
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 3--LONG-TERM DEBT--CONTINUED
DCA through its subsidiary DCA of Vineland, LLC, obtained a $700,000
development and equipment line of credit with interest at 8.75% which is secured
by the acquired assets of DCA of Vineland and a second mortgage on DCA's real
property in Easton, Maryland on which an affiliated bank holds the first
mortgage. Outstanding borrowings are subject to monthly payments of interest and
principal with any remaining balance due September 1, 2003. There were no
outstanding borrowings under this line of credit as of December 31, 1999.
The DCA equipment financing agreement provides financing for kidney
dialysis machines for DCA's facilities in Pennsylvania and New Jersey.
Additional financing totaled approximately $190,000 in 1997 and $245,000 in 1998
and $387,000 in 1999. Payments under the agreement are pursuant to various
schedules extending through May 2005. Payments under some schedules begin one
year after commencement of the financing which would increase monthly payments
from $8,582 as of December 31, 1999 to $23,744 if all payments had commenced as
of that date. Financing under the equipment financing agreement is a noncash
financing activity which is a supplemental disclosure required by FAS 95.
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extended through July 1999. The
present value of annual future minimum payments required under these financing
obligations is included in the schedule of long-term debt above. Financing under
these agreements is a noncash financing activity which is a supplemental
disclosure required by FAS 95.
In July 1994, Techdyne(Europe) purchased the facility housing its
operations obtaining a 15 year mortgage which had a U.S. dollar equivalency of
approximately $489,000 at December 31, 1999 and $545,000 at December 31, 1998,
based on exchange rates in effect at each of these dates.
Techdyne refinanced its bank debt and amended Lytton's bank loan
agreements in February 2000. The new financing has been considered in the
presentation of debt maturities. Scheduled maturities of long-term debt
outstanding at December 31, 1999 are: 2000 - $732,677; 2001 - $852,837; 2002 -
$815,081; 2003- $5,874,947; 2004- $548,302; thereafter - $272,330. Interest
payments on all of the above debt amounted to $649,000, $583,000 and $355,000 in
1999, 1998 and 1997, respectively.
The Company's various debt agreements contain certain restrictive
covenants that, among other things, restrict the payment of dividends, restrict
rent commitments, restrict additional indebtedness, prohibit issuance or
redemption of capital stock and require maintenance of certain financial ratios.
NOTE 4--INCOME TAXES
The Company has net operating loss carryforwards of approximately
$1,333,000 at December 31, 1999 and $2,590,000 at December 31, 1998 that expire
in years 2003 through 2010. Of these net operating loss carryforwards, $980,000
and $2,400,000, respectively, are available to offset future Techdyne (US)
taxable income which became a 62.5% owned subsidiary pursuant to its public
offering completed on October 2, 1995 and which began filing separate federal
and state income tax returns with its income tax liability reflected on a
separate return basis subsequent to that date. Techdyne's new subsidiary,
Lytton, is included in Techdyne's consolidated federal tax return effective
August 1, 1997 with Techdyne's net operating loss carryforwards able to be
utilized to offset any income taxable for federal tax return purposes generated
by Lytton. Of the December 31, 1999 net operating loss carryforwards, $353,000
are available to offset future taxable income, excluding the results of Techdyne
and DCA.
F-15
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 4--INCOME TAXES--CONTINUED
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets are as follows:
December 31,
--------------------------
1999 1998
----------- -----------
Deferred tax liabilities:
Tax over book depreciation $ 253,525 $ 201,943
Gain on sale of Techdyne and DCA stock 2,067,000 2,067,000
Unrealized gain on marketable securities 1,817 79,052
Other 159,239 24,965
----------- -----------
Total deferred tax liability 2,481,581 2,372,960
Deferred tax assets:
Obsolescence and other reserves 502,666 463,051
Tax credits 303,000 48,000
Inventory capitalization 91,074 73,688
Accrued expenses and other 92,000 135,106
----------- -----------
Sub-total 988,740 719,845
Net operating loss carryforward 792,406 942,794
Valuation allowance (500,000) (528,000)
----------- -----------
Net deferred tax asset 1,281,146 1,134,639
----------- -----------
Net deferred tax liability $ 1,200,435 $ 1,238,321
=========== ===========
Due to the uncertainty as to the realizability of deferred tax assets, a
valuation allowance of $500,000 and $528,000 was recorded as of December 31,
1999 and December 31, 1998, respectively.
Deferred taxes in the accompanying balance sheets consist of the following
components:
December 31,
--------------------------
1999 1998
----------- -----------
Current deferred tax asset $ 685,740 $ 590,133
Current deferred tax liabilities (71,432) (28,311)
----------- -----------
Net current deferred tax asset 614,308 561,822
Long-term deferred tax asset 505,808 544,506
Long-term deferred tax liability (2,320,551) (2,344,649)
----------- -----------
Net long-term deferred tax liability (1,814,743) (1,800,143)
----------- -----------
Net deferred tax liability $(1,200,435) $(1,238,321)
=========== ===========
A deferred tax liability of $2,067,000 at December 31, 1999 and
December 31, 1998, resulted from income tax expense recorded on gains recognized
for financial reporting purposes, but not for income tax purposes, resulting in
a difference between book and tax basis of the Company's investment in Techdyne
and DCA. This temporary difference would reverse upon the occurrence of certain
events relating to the divestiture of Techdyne and DCA. This deferred tax
liability has been classified as noncurrent along with the remaining portion of
noncurrent deferred tax liabilities resulting from differences in book and tax
depreciation of Techdyne (Europe). A current deferred tax liability has been
recorded for the unrealized gain on marketable securities. See Note 2.
F-16
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 4--INCOME TAXES--CONTINUED
For financial reporting purposes, (loss) income before income taxes
includes the following components:
Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
United States (loss) income $ (64,744) $ 508,933 $ 5,201,054
Foreign (loss) income (576,634) (537,466) (289,556)
----------- ----------- -----------
$ (641,378) $ (28,533) $ 4,911,498
=========== =========== ===========
Significant components of the provision (benefit) for income taxes are as
follows:
Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Current:
Federal $ (82,739) $ (415,468) $ 1,306,000
Foreign -- -- (96,000)
State 99,825 92,394 236,000
----------- ----------- -----------
$ 17,086 $ (323,074) $ 1,446,000
Deferred:
Federal 40,100 66,602 (493,000)
Foreign -- (95,897) --
----------- ----------- -----------
40,100 (29,295) (493,000)
----------- ----------- -----------
$ 57,186 $ (352,369) $ 953,000
=========== =========== ===========
The reconciliation of income tax attributable to income before
income taxes and minority interests computed at the U.S. federal statutory rate
(34%) to income tax expense is as follows:
Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Tax at statutory rate $ (208,439) $ (9,526) $ 1,669,909
Adjustments resulting from:
State income taxes-net of federal income tax effect 65,311 105,215 180,770
Lower effective income taxes of other countries 196,056 86,841 13,096
Non deductible items 27,052 62,235 --
Prior year tax return to provision adjustment (3,641) (287,623) --
Change in valuation allowance (28,000) (322,465) (737,258)
Other 8,847 12,954 (173,517)
----------- ----------- -----------
$ 57,186 $ (352,369) $ 953,000
=========== =========== ===========
Undistributed earnings of the Company's foreign subsidiary amounted
to approximately $1,718,000 at December 31, 1999 and $2,294,000 at December 31,
1998. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable.
Determination of the amount of unrecognized deferred U.S. income tax liability
is not practicable because of the complexities associated with its hypothetical
calculation; however, foreign tax credits may be available to reduce some
portion of the U.S. liability. Withholding taxes of approximately $86,000 and
$115,000 would be payable upon remittance of all previously unremitted earnings
at December 31, 1999 and December 31, 1998, respectively.
Income tax payments were approximately $101,000 in 1999, $1,203,000
in 1998 and $811,000 in 1997.
F-17
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION
The Company has elected to follow 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 is
discussed below, Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock Based Compensation" (FAS123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. 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.
In September 1994, the Company granted options to a consulting firm
to purchase 400,000 shares of common stock exercisable at $1.25 per share
through September 30, 1997. Options for 200,000 shares were exercised in August
1997 and the remaining options for 200,000 shares were exercised in September
1997.
The Company has 1,000,000 shares of common stock reserved for future
issuance pursuant to its 1989 Stock Option Plan. On April 18, 1995, the Company
granted non-qualified stock options for 809,000 shares of its common stock, as a
service award to officers, directors, and certain employees of the Company and
certain of its subsidiaries under its 1989 Plan. The options were exercisable at
$3.00 per share, reduced to $2.38 per share on December 31, 1996, through April
17, 2000. On June 11, 1997, the Company's board of directors granted a five-year
non-qualified stock option under the 1989 Plan for 35,000 shares immediately
exercisable with an exercise price of $3.75 to a new board member, which
exercise price was reduced to $2.38 per share on September 10, 1997, the fair
market value on that date. Including the June 1997 grant, there are 841,000
options outstanding at December 31, 1999 under the 1989 plan.
On May 6, 1996, the Company adopted a Key Employee Stock Plan
reserving 100,000 shares of its common stock for issuance from time to time to
officers, directors, key employees, advisors and consultants as bonus or
compensation for performances and or services rendered to the Company or
otherwise providing substantial benefit for the Company. 2,000 shares under this
plan were issued to the managing director of Techdyne's European operations.
In May 1994, Techdyne adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in May 1994, the board of directors granted
227,500 options to certain of its officers, directors, and employees. These
options were exercisable for a period of five years at $1 per share. On June 30,
1998, 115,000 of these options were exercised, and on May 10, 1999, 50,000 of
the remaining options were exercised. The Company received cash payment of the
par value and the balance in three year promissory notes with interest at 5.16%
for the June 1998 exercises and 4.49% for the May 1999 exercises.
On February 27, 1995 Techdyne granted non-qualified stock options,
not part of the 1994 Plan, to directors of Techdyne and its subsidiary for
142,500 shares exercisable at $1.75 per share for five years. In April 1995,
Techdyne granted a non-qualified stock option for 10,000 shares, not part of the
1994 Plan, to its general counsel at the same price and terms as the directors'
options. Including the April 1995 grant, 150,000 of these options are
outstanding at December 31, 1999.
In June 1997, Techdyne's board of directors adopted a Stock Option
Plan for up to 500,000 options, and pursuant to the plan the Board granted
375,000 options exercisable for five years through June 22, 2002 at $3.25 per
share the closing price of the common stock on the date of grant with 345,000 of
these options outstanding at December 31, 1999. On June 30, 1999, Techdyne
granted 52,000 options exercisable for three years through June 29, 2002 at
$4.00 per share. On August 25, 1999, Techdyne granted 16,000 options exercisable
for three years through August 24, 2002 at $4.00 per share. On December 15,
1999, Techdyne granted 19,000 options exercisable for three years through
December 14, 2002 at $4.00 per share.
F-18
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
In November 1995, DCA adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in November 1995, DCA's board of directors
granted 210,000 options to certain of its officers, directors and employees and
consultants of which there are 4,500 outstanding as of December 31, 1999. These
options vested immediately and are exercisable for a period of five years
through November 9, 2000 at $1.50 per share. On June 10, 1998, DCA's board of
directors granted an option under the 1995 plan to a new board member for 5,000
shares exercisable at $2.25 per share though June 9, 2003. On December 31, 1997,
162,500 options were exercised by officers for which the Company received cash
payments of the par value and the Company forgave the remaining balance due and
recorded compensation expense of $322,000.
In April 1999, DCA adopted a stock option plan pursuant to which its
board of directors granted 800,000 options exercisable at $1.25 per share to
certain of its officers, directors, employees and consultants with 340,000
options exercisable through April 20, 2000 and 460,000 options exercisable
through April 20, 2004. DCA recorded expense of $153,000 on 340,000 of these
options pursuant to FAS 123 and APB 25.
In May, 1998, as part of the consideration pursuant to an agreement
for investor relations and corporate communications services agreement, the
Company granted options for 20,000 shares of its common stock exercisable for
three years through May 14, 2001 at $2.25 per share and Techdyne granted options
for 25,000 shares of its common stock exercisable for three years through May
14, 2001 at $4.25 per share. Options for 5,000 shares of the Company's common
stock and 6,250 shares of Techdyne's common stock vested during 1998 with no
additional options to vest due to cancellation of this agreement in August,
1998. Pursuant to FAS 123, the Company recorded approximately $18,000 expense
for options vesting under this agreement.
Techdyne entered into a consulting agreement on July 1, 1999 for
financial advisory services with the agreement to end on September 15, 2000. As
compensation, the consultant received non-qualified stock options to purchase
100,000 shares of Techdyne's common stock exercisable at $3.50 per share that
will expire on September 15, 2000. These options were valued at $40,000
resulting in $17,000 expense during 1999.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the option grants issued during 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.55% and 5.59%; no dividend yield;
volatility factor of the expected market price of the Company's common stock
of .72 and .97; and an expected life of 3 years and 2.5 years.
F-19
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
The Black-Scholes options 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 than 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
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. The Company's
pro forma information which includes the pro forma effect of its own options, as
well as the pro forma effects related to the Company's interest in Techdyne and
DCA pro forma adjustments follows:
1999 1998 1997
--------- ---------- -----------
Pro forma net (loss) income $(828,889) $ 87,212 $ 1,671,720
========= ========== ===========
Pro forma (loss) earnings per share
Basic $ (.15) $ .02 $ .29
========= ========== ===========
Diluted $ (.15) $ .01 $ .26
========= ========== ===========
A summary of the Company's stock option activity, and related
information for the years ended December 31, follows, with modified options
being reflected as grants and the original grants being modified reflected as
cancellations:
1999 1998 1997
------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
-------- -------------- -------- -------------- --------- --------------
Outstanding-beginning of year 846,000 841,000 1,207,000 $ 2.01
Granted -- 5,000 $ 2.25 35,000 2.47
Cancellations -- -- --
Exercised -- -- (400,000) 1.25
Forfeited -- -- --
Expired -- -- (1,000) 2.38
-------- -------- ---------
Outstanding-end of year 846,000 846,000 841,000
======== ======== =========
Exercisable at end of year:
1994, 1995 and 1997 options 841,000 $ 2.38 841,000 2.38 841,000 2.38
1998 options 5,000 2.25 5,000 2.25 --
-------- -------- ---------
846,000 846,000 841,000
======== ======== =========
Weighted-average fair value of
Options granted, including
Modified options, during the year $ .-- $ .98 $ 2.47
======== ======== ==========
The weighted average remaining contractual life at December 31, 1999
of the 1997 options and the 1995 options modified in 1996 is .4 years and 1.4
years for the 1998 options.
The Company has 1,503,000 shares reserved for future issuance at
December 31, 1999, including: 1,000,000 shares for 1989 plan; 98,000 shares for
key employee stock plan; 5,000 shares for consultant stock options; and 400,000
shares for an employment agreement.
F-20
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
The fair value of Techdyne options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for the options issued during 1999, 1998 and 1997,
respectively: risk-free interest rate of 5.20%, 5.55% and 5.59%; no dividend
yield; volatility factor of the expected market price of Techdyne common stock
of .67, .58 and .60; and an expected life of the options of 1.8 years, 3 years,
and 2.5 years.
A summary of Techdyne's stock option activity, and related
information for the years ended December 31, follows:
1999 1998 1997
------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
-------- -------------- -------- -------------- --------- --------------
Outstanding-beginning of year 590,350 699,100 326,500
Granted 187,000 $ 3.73 6,250 $ 4.25 375,000 $ 3.25
Exercised (50,000) 1.00 (115,000) 1.00 (300) 1.00
Expired (39,000) 2.77 -- (2,100) 1.00
------- -------- -------
Outstanding-end of year 688,250 590,350 699,100
======= ======== =======
Outstanding and exercisable
at end of year:
May 1994 options -- 56,600 1.00 171,600 1.00
February and April 1995 options 150,000 1.75 152,500 1.75 152,500 1.75
June 1997 options 345,000 3.25 375,000 3.25 375,000 3.25
May 1998 options 6,250 4.25 6,250 4.25 --
------- -------- -------
June, August and December 1999
options 87,000 4.00 -- --
July 1999 options 100,000 3.50 -- --
------- -------- -------
688,250 590,350 699,100
======= ======== =======
Weighted-average fair value of
options granted during the year $ .59 $ 2.04 $ 1.33
======= ======== =======
The remaining average contractual life at December 31, 1999 is .7
years for the July 1999 options, and 4.6 years for the June 1999, August 1999
and December 1999 options and 1.4 years, 2.5 years and .2 years for the options
issued in 1998, 1997 and 1995, respectively.
The fair value of DCA options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for options granted/modified during 1999 and 1998, respectively;
risk-free interest rate of 5.65% and 5.55%; no dividend yield; volatility factor
of DCA common stock of .95 and .93 and a weighted average expected life of 1.9
years and 2.0 years.
F-21
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
A summary of DCA's stock option activity, and related information
for the years ended December 31, follows:
1999 1998 1997
------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
-------- -------------- -------- -------------- --------- --------------
Outstanding-beginning of year 19,500 29,000 209,000
Granted 800,000 $ 1.25 10,000 $ 2.25 --
Cancellations -- (5,000) 4.75 --
Exercised -- 1.50 -- (162,500) $ 1.50
Expired (10,000) 3.50 (14,500) 1.50 (17,500) 2.43
------- ------- --------
Outstanding-end of year 809,500 19,500 29,000
======= ======= ========
Outstanding and exercisable
at end of year:
April 1999 options 800,000 1.25 --
November 1995 options 4,500 1.50 4,500 1.50 19,000 1.50
August 1996 and June 1998 options 5,000 2.25 10,000 2.25 10,000 4.75
August 1996 options -- 5,000 4.75 --
------- ------- --------
809,500 19,500 29,000
======= ======= ========
Weighted-average fair value of
options granted during the year $ .59 $ .79
======= =======
The remaining contractual life at December 31, 1999 is .3 years for 340,000
options issued in April 1999, 4.3 years for 460,000 options issued in April
1999, 3.4 years for the options issued in June 1998, and .9 years for the
options issued in November 1995.
F-22
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 6--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA
The following summarizes information about the Company's three
reported business segments. 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 included unallocated
cash, deferred income taxes, corporate fixed assets and goodwill not allocated
to any of the segments. Intersegment sales are generally intended to approximate
market price.
BUSINESS SEGMENT REVENUES
1999 1998 1997
------------ ------------ ------------
Electro-Mechanical
External $ 48,359,292 $ 44,755,164 $ 32,954,795
Intersegment Sales 23,468 171,567 213,985
Medical Products 1,119,179 1,335,128 1,708,488
Medical Services 5,865,571 4,003,935 9,220,798
Corporate 539,066 310,713 488,268
Elimination of corporate rental charges
to electro-mechanical manufacturing (93,907) (93,444) (93,640)
Elimination of corporate interest charge
to electro-mechanical (143,086) (156,197) (151,901)
Elimination of corporate interest charge
to medical services -- (5,878) (7,326)
Elimination of medical services
interest charge to corporate (1,697) (892) --
Elimination of electro-mechanical
manufacturing sales to medical products (23,468) (171,567) (213,985)
------------ ------------ ------------
$ 55,644,418 $ 50,148,529 $ 44,119,482
============ ============ ============
BUSINESS SEGMENT (LOSS) PROFIT
Electro-Mechanical $ 653,139 $ 924,924 $ 861,248
Medical Products (192,644) (87,818) 6,485
Medical Services (960,821) (441,010) 4,266,683
Corporate (141,052) (424,629) (222,918)
------------ ------------ ------------
$ (641,378) $ (28,533) $ 4,911,498
============ ============ ============
BUSINESS SEGMENT ASSETS
Electro-Mechanical $ 26,760,202 $ 23,767,144 $ 24,625,147
Medical Products 723,204 667,955 606,305
Medical Services 9,035,947 9,348,924 11,637,765
Corporate 2,202,517 2,699,982 4,018,482
Elimination of intersegment trade receivables (6,763) (53,050) (26,180)
Elimination of intersegment advance receivable (105,142) (120,865) --
------------ ------------ ------------
$ 38,609,965 $ 36,310,090 $ 40,861,519
============ ============ ============
OTHER BUSINESS SEGMENT INFORMATION
INTEREST INCOME:
Electro-Mechanical $ 34,167 $ 78,315 $ 136,054
Medical Services 195,344 296,943 227,790
Corporate 172,349 205,048 244,333
Elimination of corporate intercompany
interest charge to electro-mechanical (143,086) (156,197) (151,901)
Elimination of corporate intercompany
interest charge to medical services -- (5,878) (7,326)
Elimination of medical services intercompany
interest change to corporate (1,697) (892) --
------------ ------------ ------------
$ 257,077 $ 417,339 $ 448,950
============ ============ ============
F-23
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 6--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA--CONTINUED
1999 1998 1997
------------ ------------ ------------
Interest expense:
Electro-Mechanical $ 738,794 $ 662,856 $ 456,621
Medical Products 1,377 -- --
Medical Services 72,605 81,531 86,129
Corporate 6,507 10,994 9,992
Elimination of corporate intercompany
interest charge to electro-mechanical (143,086) (156,197) (151,901)
Elimination of corporate intercompany
interest charge to medical services -- (5,878) (7,326)
Elimination of medical services intercompany
interest charge to corporate (1,697) (892) --
------------ ------------ ------------
$ 674,500 $ 592,414 $ 393,515
============ ============ ============
DEPRECIATION AND AMORTIZATION:
Electro-Mechanical $ 1,331,021 $ 1,115,023 $ 669,239
Medical Products 36,702 35,617 40,657
Medical Services 452,203 334,387 289,877
Corporate 94,155 111,153 125,606
------------ ------------ ------------
$ 1,914,081 $ 1,596,180 $ 1,125,379
============ ============ ============
OTHER SIGNIFICANT NON-CASH ITEMS:
Electro mechanical:
Provision for inventory obsolescence $ 404,762 $ 437,095 $ 153,011
Medical services:
Stock option related compensation expense 153,000 -- 322,125
UNUSUAL ITEMS:
Medical services:
Gain on sale of subsidiaries' assets $ -- $ -- $ 4,430,663
CORPORATE:
Gain on subsidiary securities offering $ -- $ -- $ 89,898
Gain on sale of marketable securities 263,144 12,780 49,493
CAPITAL EXPENDITURES:
Electro-Mechanical $ 1,475,823 $ 832,410 $ 1,396,260
Medical Products 1,202,819 23,652 4,595
Medical Services 19,710 1,149,373 825,427
Corporate 20,681 24,438 74,296
------------ ------------ ------------
$ 2,719,033 $ 2,029,873 $ 2,300,578
============ ============ ============
GEOGRAPHIC AREA SALES
United States $ 51,096,063 $ 44,735,318 $ 32,116,905
Europe(1) 3,818,286 4,646,447 6,771,328
------------ ------------ ------------
$ 54,914,349 $ 49,381,765 $ 38,888,233
============ ============ ============
Techdyne (Europe) sales are primarily to customers in the United Kingdom.
GEOGRAPHIC AREA PROPERTY, PLANT AND EQUIPMENT (NET)
United States $ 9,189,406 $ 8,114,120 $ 7,421,547
Europe 1,284,854 1,386,142 1,483,480
------------ ------------ ------------
$ 10,474,260 $ 9,500,262 $ 8,905,027
============ ============ ============
MAJOR CUSTOMERS
A majority of the Company's electro-mechanical sales are to certain
major customers. The loss of, or substantially reduced sales to, any of these
customers would have an adverse effect on the Company's operations, if such
sales were not replaced.
F-24
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 6--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA--CONTINUED
Electro-mechanical sales to major customers comprising 10% or more
of the Company's sales are as follows:
Year Ended December 31,
----------------------------------------
Customers 1999 1998 1997
--------- ---------- ---------- ----------
PMI Food Equipment Group(3) $7,195,000 $8,183,000 $ --
Motorola(2)(3) 6,338,000 -- --
IBM(1)(2) -- -- 6,437,000
- ----------------------
(1) Less than 10% of sales for 1999
(2) Less than 10% of sales for 1998.
(3) Less than 10% of sales for 1997.
Sales to PMI Food Equipment Group by Lytton, which was acquired by
Techdyne on July 31, 1997, represented approximately 32% and 41% of Lytton's
sales, 15% and 18% of Techdyne's sales and 13% and 17% of the Company's sales
for the year ended December 31, 1999 and December 31, 1998, respectively.
Sales to Compaq Computer Corp., which at one time was a major
customer of Techdyne (Europe) amounted to $209,000 in 1999, $1,192,000 in 1998
and $2,847,000 in 1997 representing 5%, 26% and 42% of the sales of Techdyne
(Europe) for 1999, 1998 and 1997, respectively.
Medical services revenues, which represent revenues of the Company's
dialysis division, 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. Although the Company
is not aware of any future rate changes, significant changes in reimbursement
rates could have a material effect on the Company's operations.
Medical product sales are highly dependent on government contracts
which have become increasingly difficult to secure due to changes in government
procurement procedures. Significant reductions in government contract revenues
would have had a material adverse effect on the operations of the Medical
Products Division.
NOTE 7--COMMITMENTS
COMMITMENTS
The Company and its subsidiaries have leases on several facilities,
which expire at various dates. The aggregate lease commitments at December 31,
1999 are approximately: 2000 - $894,000; 2001 - $823,000; 2002 - $617,000; 2003
- - $407,000, 2004-$316,000. Total rent expense was approximately $1,045,000,
$916,000 and $748,000 in 1999, 1998 and 1997, respectively.
Lytton leases its operating facilities from an entity which is owned
by Lytton's former owner and former President. Rent payments under the operating
lease, which expires July 31, 2002, amounted to approximately $220,000 during
1999, with payments to be adjusted each year based on the change in the Consumer
Price Index, with the lease containing renewal options for a period of five to
ten years at the then fair market rental value.
F-25
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 7--COMMITMENTS--CONTINUED
Effective January 1, 1997, DCA established a 401(k) savings plan
(salary deferral plan) with an eligibility requirement of one year of service
and 21 year old age requirement. DCA has made no contributions under this plan
as of December 31, 1999.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially
all of its employees. The Company and Techdyne have adopted this plan as
participating employers effective July 1, 1998. The discretionary profit sharing
and matching expense including that of the Company, Techdyne and Lytton amounted
to approximately $92,000 for the year ended December 31, 1999 and $49,000 for
the year ended December 31, 1998.
NOTE 8--RELATED PARTY TRANSACTIONS
During 1999, 1998 and 1997, the Company paid premiums of
approximately $761,000, $589,000 and $529,000, respectively, for insurance
through a director and stockholder, and the relative of a director and
stockholder.
During 1999, 1998 and 1997, legal fees of approximately $263,000,
$277,000 and $191,000, respectively, were paid by the Company and its public
subsidiaries to an officer of the Company and DCA.
Lytton had a deferred compensation agreement with its former
President. The agreement called for monthly payments of $8,339 provided that
Lytton's cash flow was adequate to cover these payments with interest to be
calculated on any unpaid balance as of August 1, 1999. During the period ended
December 31, 1999 a total of $58,000 was paid under this agreement which fully
paid the agreement.
NOTE 9--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summarizes certain quarterly operating data:
Year Ended December 31, 1999 Year Ended December 31, 1998
------------------------------------------- -----------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands except per share data)
Net Sales $ 11,259 $ 12,175 $ 15,993 $ 15,487 $ 13,020 $ 12,754 $ 12,130 $ 11,478
Gross profit 1,438 1,752 2,680 1,762 2,089 1,866 1,780 1,186
Realized gain on sale of
marketable securities -- 228 -- 35 -- -- 13 --
Net (loss) income (287) (126) 214 (414) 212 169 76 (359)
(Loss) earnings per share:
Basic $ (.05) $ (.02) $ .04 $ (.07) $ .04 $ .03 $ .01 $ (.06)
Diluted $ (.05) $ (.02) $ .04 $ (.07) $ .03 $ .02 $ .01 $ (.06)
Since the computation of earnings per share is made independently
for each quarter using the treasury stock method, the total of four quarters
earnings do not necessarily equal earnings per share for the year.
The Company recorded an adjustment to the valuation allowance
relating to its deferred tax asset of approximately $28,000 during the fourth
quarter of 1999, $300,000 during the fourth quarter of 1998 and $700,000 during
the fourth quarter of 1997.
F-26
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 10--ACQUISITION
On July 31, 1997, Techdyne acquired Lytton, which manufactures and
assembles printed circuit boards and other electronic products, for $2,500,000
cash, paid at closing, and issuance of 300,000 shares of Techdyne's common
stock. Techdyne guaranteed that the seller would realize a minimum of $2,400,000
from the sale of these shares of common stock based on Lytton having achieved
certain earnings objectives. Those earnings objectives were achieved in 1998,
resulting in an increase of $400,000 to the valuation of $2,000,000 originally
recorded for these securities. The difference (of $968,750) between the fair
value of the common stock at the date of acquisition and the guaranteed value
was considered part of the cost of the acquisition and is reflected as
additional paid in capital on Techdyne. The acquisition was accounted for under
the purchase method of accounting and, accordingly, the results of operations of
Lytton have been included in the Company's consolidated condensed statement of
income since August 1, 1997. The net purchase price in excess of the fair value
of net assets acquired is being amortized over twenty five years. Additional
contingent consideration is due if Lytton reaches pre-defined sales levels.
Additional consideration of approximately $290,000 and $154,000 was paid in
April 1999 and April 1998, respectively, based on sales levels with the Stock
Purchase Agreement providing for a possible additional sales level incentive for
a specified one year period. As the contingencies are resolved, if additional
consideration is due, the then current fair value of the consideration will be
recorded as goodwill, which will be amortized over the remainder of the initial
25 year life of the goodwill.
The terms of the Guaranty in the Stock Purchase Agreement were
modified in June, 1998 by the Company and the seller ("Modified Guaranty"). The
modified terms provided that the seller would sell an amount of common stock
which would provide $1,300,000 gross proceeds, and the Company guaranteed that,
to the extent that the seller had less than 150,000 shares of the Company's
common stock remaining, the Company would issue additional shares to the seller.
In July 1998, the Company advanced the seller approximately $1,278,000
("Advance") toward the $1,300,000 from the sale of the Company's common stock in
addition to the seller having sold 5,000 shares of common stock in July, 1998.
The advance was presented in the Stockholders' Equity Section of the balance
sheet. Proceeds from the sale of the Company's common stock owned by the seller,
up to 195,000 shares, were to repay the Advance and to the extent proceeds from
the sale of these shares were insufficient to pay the advance, the balance of
the Advance would be forgiven. The Company also guaranteed the seller aggregate
proceeds of no less than $1,100,000 from the sale of the remaining common stock
if sold on or prior to July 31, 1999 ("Extended Guaranty"). In July 1999,
Techdyne forgave the Advance and issued payment of $1,100,000 to the seller,
which together with the proceeds realized by the seller from the sale of stock
in July 1998 satisfied the Company's remaining obligation under the $2,400,000
guarantee. The 295,000 shares held by the seller were returned to Techdyne and
have been cancelled.
The following summary pro forma financial information reflects the
Lytton acquisition as if it had occurred on January 1, 1997, accordingly,
revenues and expenses of Lytton and related income tax effects for the
period prior to the acquisition have been excluded. The pro forma
financial information does not purport to represent what the Company's
actual results of operations would have been had the acquisition occurred
as of January 1, 1997.
SUMMARY PRO FORMA INFORMATION
Year Ended December 31, 1997
----------------------------
Total revenues $54,818,000
===========
Net Income $ 2,501,000
============
Earnings per share:
Basic $.44
====
Diluted $.40
====
F-27
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 11--SALE OF SUBSIDIARIES' ASSETS
On October 31, 1997, DCA concluded a sale ("Sale") of substantially
all of the assets of two of its 80% owned subsidiaries, Dialysis Services of
Florida, Inc. - Ft. Walton Beach ("DSF") (dialysis operations) and Dialysis
Medical, Inc. ("DMI") (Florida Method 2 home patient operations), and an
in-patient hospital service agreement of its 100% owned subsidiary, DCA Medical
Services, Inc. pursuant to an Asset Purchase Agreement. Consideration for the
assets sold was $5,065,000 consisting of $4,585,000 in cash and $480,000 of the
purchaser's common stock. DCA recorded a gain on the sale of approximately
$2,747,000, representing a pre-tax gain of approximately $4,431,000, net of
estimated income taxes of approximately $1,684,000, of which approximately
$537,000 of the net after tax gain related to the 20% minority interest in two
of the subsidiaries whose assets were sold. The Company's portion of the net
gain of $2,210,000 amounted to approximately $1,527,000 with the balance of
approximately $683,000 applicable to minority interest. In February 1998,
NOTE 11--SALE OF SUBSIDIARIES' ASSETS--CONTINUED
DCA acquired, in a transaction accounted for as a purchase, the remaining 20%
minority interests in the two subsidiaries whose assets were sold. The purchase
price totaled $625,000, which included one-half of the common shares originally
received as part of the consideration of the Sale. All of the common shares were
sold in September 1998 for approximately $253,000 resulting in a gain of
approximately $13,000.
The following summary pro forma financial information, which
excludes the gain on the Sale and related income taxes, is not necessarily
representative of what the Company's results of operations would have been if
the Sale had actually occurred as of January 1, 1997.
SUMMARY PRO FORMA INFORMATION
Year Ended December 31, 1997
----------------------------
Total revenues $37,978,000
===========
Net Income $ 517,000
===========
Earnings per share:
Basic $.09
====
Diluted $.07
====
NOTE 12--REPURCHASE OF COMMON STOCK
In November 1997, the Company announced its intent to repurchase up
to $1,000,000 of its outstanding common stock. As of December 31, 1998, the
Company had repurchased approximately 141,000 shares of common stock at a cost
of approximately $221,000 which was reflected as treasury stock. During the
second quarter of 1999, an additional 8,000 shares were purchased for
approximately $8,000.
In September 1998, DCA announced its intent to repurchase up to
300,000 shares of its outstanding common stock. DCA repurchased a total of
205,000 shares for approximately $315,000, including 100,000 shares acquired in
June 1998.
All treasury shares of both the Company and DCA were cancelled
during 1999.
F-28
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 13--BANK LOAN REFINANCING
In February 2000, Techdyne refinanced its line of credit and term
loan through the same bank which handles Lytton's financing. One credit facility
is a $4,500,000 three year committed line of credit facility maturing February,
2003 with interest at prime minus 1/4% and an option to fix the rate for up to
180 days at Libor plus 2.5%. The bank also extended a $1,000,000 five year term
loan maturing February 8, 2005 with the same interest rate as for the line of
credit. If Techdyne achieves certain financial criteria for its year ended
December 31, 2000, it would receive a rate reduction under both the prime and
Libor alternatives. The loans are secured by the business assets of Techdyne and
are cross collateralized with the debt of Lytton.
In conjunction with the Techdyne refinancing, the bank amended the
terms of the Lytton line of credit, term loan and equipment loan agreements to
make Lytton's line of credit a three year committed facility and to amend the
interest rates on Lytton's line of credit, term loan and equipment loan
agreements to coincide with those of Techdyne's loan agreements.
The bank also extended an acquisition credit facility for Techdyne's
use in funding acquisitions of other companies with the facility to be split
between a line of credit and term loan and cross collateralized with Techdyne's
other loans.
NOTE 14--PROPOSED MERGER AND ACQUISITION
On October 20, 1999, DCA entered into an Agreement and Plan of
Merger with MainStreet IPO.com, Inc. ("MSI") and its wholly-owned subsidiary,
MainStreet Acquisition Inc. ("MainStreet"). The proposed merger is anticipated
to be effected by MainStreet merging into DCA with DCA surviving, changing its
name to MainStreet, and becoming a wholly-owned subsidiary of MSI. DCA share-
holders will receive, on a one-for-one basis, shares of common stock of MSI,
which company filed a registration statement in February 2000 with the SEC
covering the issuance of approximately 1,396,000 shares of its common stock,
plus approximately 3,419,000 shares for resale by certain affiliates of the
Company, MSI and certain private investors of MSI. DCA will issue a proxy
statement which is part of MSI's registration statement, seeking its minority
shareholders' approval of the merger and related transactions, at which time
the SEC declares the registration effective.
Immediately prior to the proposed merger, DCA will be selling all of
its assets to Dialysis Acquisition Corp., a wholly-owned subsidiary of the
Company, with this subsidiary also assuming all liabilities of DCA. The
proposed sale of assets and merger transactions are subject to a variety of
contingencies, most importantly shareholder approval. Should DCA's minority
shareholders approve the transactions, the Company will own 100% of the
dialysis operations, and DCA's shareholders will become shareholders of MSI.
MSI is a recently established company which has developed a central
website to provide business entities with the necessary tools to perform direct
public offering of their securities. Another company, CEO Letter, LLC, which
will become a wholly-owned subsidiary of MSI at the time of the merger, provides
chief executive officers of public companies the forum to discuss their
companies to the multitude of potential internet investors.
F-29
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1999
NOTE 15--INVESTMENT
On January 27, 2000, the Company acquired a 6% interest, with an
option to acquire an additional 2%, in Linux Global Partners, a holding company
investing in Linux software companies, and loaned Linux Global Partners
$1,500,000 with a 10% annual interest rate to be repaid with accrued interest by
January 26, 2001. In March 2000, the Company exercised the option to acquire the
additional 2% interest in Linux Global Partners in conjunction with which it
loaned Linux Global Partners an additional $500,000. The Company borrowed the
funds for the loans from DCA with an annual interest rate of 10%. The companies
in which Linux Global Partners invests intend to use The Linux Fund IPO.com,
Inc. ("Linux Fund IPO.com") website for any of their future public offerings.
The Linux Fund IPO.com is a 50% owned subsidiary of the Linux Global Partners,
with 50% owned by MainStreet.
The Company issued options to purchase 150,000 shares of its common
stock to MSI and two officers of MSI as a finder's fee in conjunction with the
Company's investment in Linux Global Partners.
F-30