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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, 2001
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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
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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
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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. [ ] [ ]
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 21,
2002 was approximately $6,551,000.
As of March 21, 2002 the company had outstanding 6,600,275 shares of
common stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporating information by reference from the Proxy Statement
in connection with the Registrant's Annual Meeting of Shareholders anticipated
to be on May 29, 2002.
Registrant's Annual Reports, Forms 10-K, for the years ended December 31,
1994, 1997, 1998 and 1999 Part IV, Exhibits.
Annual Report for Registrant's Subsidiary Dialysis Corporation of America,
Form 10-K for the years ended December 31, 1996 to 2001, Part IV, Exhibits,
incorporated in Part IV of this Annual Report.
MEDICORE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2001
Page
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PART I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 24
Item 3. Legal Proceedings................................................. 26
Item 4. Submission of Matters to a Vote
of Security Holders............................................... 26
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters................................... 27
Item 6. Selected Financial Data........................................... 27
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 35
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............................................ 37
Item 12. Security Ownership of Certain
Beneficial Owners and Management.................................. 37
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, intentions and beliefs with
respect to the growth of our company, the nature of and future development of
the dialysis industry in which our 62% owned public subsidiary, Dialysis
Corporation of America, is engaged, anticipated revenues, our need for sources
of funding for expansion, 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 considered historical facts.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Words such as "anticipate," "estimate," "expects,"
"projects," "intends," "plans" and "believes," and words and terms of similar
import used in connection with any discussions of future operating or financial
performance identify forward-looking statements. Such forward-looking
statements, like all statements about expected future events, are subject to
substantial risks and uncertainties that could cause actual results to
materially differ from those expressed in the statements, including general
economic, market and business conditions, opportunities pursued 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. 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 three business
segments: (i) the medical products division which distributes medical supplies;
(ii) the operation of kidney dialysis centers through our 62% owned public
subsidiary, Dialysis Corporation of America; and (iii) the investment in
technology companies through our approximately 13% interest in Linux Global
Partners (and in which Dialysis Corporation of America has an approximately 3%
interest), a private speculative company attempting to develop and market a
Linux desktop system and which invests in developing Linux software companies,
to which company we loaned $2,200,000. See "Linux Division" and "Risk Factors"
under this Item 1, "Business," Item 13, "Certain Relationships and Related
Transactions," and Note 6 and Note 12 to "Notes to Consolidated Financial
Statements." We sold our 71% owned public subsidiary, Techdyne, Inc., in June,
2001, subsequent to which we have no continuing operations as a contract
manufacturer of electronic components. The dialysis operations are the most
significant of our operations, accounting for approximately 91% of our sales
revenues. Our investment in technology companies, currently limited to Linux
Global Partners, has not generated any revenues other than interest income, and
our medical products division accounts for approximately 4% of our sales
revenues.
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. The lancets
are distributed under the names Producers of Quality Medical Disposables(TM),
Lady Lite(TM), our brand name Lite Touch, or under a private label if requested
by the customer. Medical devices are required by the FDA, as a condition of
marketing, to secure a 510(k) premarket notification clearance or a Premarket
Approval Application. A product will be cleared by the FDA under a 510(k) if it
is found to be substantially equivalent in terms of safety, effectiveness and
intended use to another legally marketed product. We received 510(k) clearance
for our blood lancet line and insulin syringes, and for the sterile products.
Our medical products are subject to continuing FDA oversight, including
labeling, "good manufacturing practices," as defined in FDA regulations, and
adverse event reporting, none of which adverse events have occurred to date.
Although we hold three patents related to our lancets (see "Patents and Trade
Names" below), and obtained required FDA approval relating to the production of
lancets, we are no longer manufacturing these products. As of April 1, 2001, we
commenced purchasing lancets from manufacturers in the Far East. Marketing of
medical products is conducted by independent manufacturer representatives and
our employees.
DIALYSIS OPERATIONS
Dialysis Corporation of America currently operates eleven outpatient
dialysis facilities in Pennsylvania, New Jersey, Georgia and Ohio. It also
provides acute dialysis services through contractual relationships with nine
hospitals and medical centers. In addition, it provides homecare services
through its wholly owned subsidiary, DCA Medical Services, Inc. Management
believes the company distinguishes itself on the basis of quality patient care,
and a patient-focused, courteous, highly trained professional staff.
General
Dialysis Corporation of America's growth depends primarily on the
availability of suitable dialysis centers for development or acquisition or
development in appropriate and acceptable areas, and management's ability to
develop new potential dialysis centers at costs within Dialysis Corporation of
America's budget while competing with larger companies, some of which are public
companies or divisions of public companies with much greater personnel and
financial resources who have a significant advantage in acquiring and/or
developing facilities in areas targeted by our subsidiary. Two new dialysis
facilities were opened in Georgia in 2001 and one dialysis center in the first
quarter of 2002 in Pennsylvania. A center in Ohio, in which we have a 40%
interest which we manage, opened in February, 2001. We are in the development
stages for two new centers, one in Ohio and one in Maryland. We are completing
the acquisition of a dialysis unit in Georgia, which should be operational in
the second quarter of 2002.
Dialysis Corporation of America's medical service revenues are derived
primarily from four sources: (i) outpatient hemodialysis services (47%, 51% and
50% of medical services revenues for 2001, 2000 and 1999, respectively); (ii)
home peritoneal dialysis services, including method II services (3%, 6%
2
and 9% of medical services revenues for 2001, 2000 and 1999, respectively);
(iii) inpatient hemodialysis services for acute patient care provided through
agreements with hospitals and medical centers (15%, 10% and 10% of medical
services revenues for 2001, 2000 and 1999, respectively); and (iv) ancillary
services associated with dialysis treatments, primarily the administration of
erythropoietin ("EPO"), a bio-engineered protein that stimulates the production
of red blood cells, since a deteriorating kidney loses its ability to regulate
red blood cell count, resulting in anemia (35%, 33% and 31% of medical services
revenue for 2001, 2000 and 1999, respectively). Dialysis is an ongoing and
necessary therapy to sustain life for kidney dialysis patients. ESRD patients
normally receive 156 dialysis treatments each year.
Essential to Dialysis Corporation of America's operations and income is
Medicare reimbursement which is a fixed rate determined by the Center for
Medicare and Medicaid Services ("CMS") of the Department of Health and Human
Services ("HHS"). The level of our revenues and profitability may be adversely
affected by future legislation that could result in rate cuts. Further, Dialysis
Corporation of America's operating costs tend to increase over the years in
excess of increases in the prescribed dialysis treatment rates. The inpatient
dialysis service agreements for treating acute kidney disease are not subject to
government fixed rates, but rather are negotiated with hospitals, and typically
the rates are higher on a per treatment basis.
Dialysis Industry
Kidneys 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, End Stage Renal Disease, results
from chemical imbalance and buildup of toxic chemicals, and is a state of kidney
disease characterized by advanced irreversible renal impairment. ESRD patients,
in order to survive, must either obtain a kidney transplant, which procedure is
limited due to lack of suitable kidney donors and the incidence of rejection of
transplanted organs, or obtain regular dialysis treatment for the rest of their
lives.
Based upon information published by the National Kidney Foundation, the
number of ESRD patients requiring dialysis treatments in the United States is
approximately 240,000, and continues to grow at a rate of approximately 7% a
year. This is thought to be attributable primarily to the aging of the
population and greater patient longevity as a result of improved dialysis
technology. The statistics further reflect approximately 3,600 dialysis
facilities of which 260 are hospital-based, and the current annual cost of
treating ESRD in the United States is approximately $18 billion.
ESRD Treatment Options
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 or continuous cycling peritoneal dialysis; and/or (3) kidney
transplant. A significant portion of ESRD patients receive treatments at
non-hospital owned outpatient dialysis facilities (according to CMS,
approximately 86%) with most of 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
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by a semi-permeable membrane, and at the same time the blood circulates through
one chamber, a dialyzer fluid is circulated through the other chamber. The
toxins and excess fluid pass through the membrane into the dialysis fluid. 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
instructions.
Home hemodialysis treatment requires the patient to be medically suitable
and have a qualified assistant. Additionally, home hemodialysis requires
training for both the patient and the patient's assistant, which usually
encompasses four to eight weeks. Dialysis Corporation of America does not
currently provide home hemodialysis (non-peritoneal) services. The use of
conventional home hemodialysis has declined and is minimal due to limitations on
the patient's suitability and lifestyle, the need for the presence of a partner
and a dialysis machine at home, and the higher expense involved over continuous
ambulatory peritoneal dialysis.
A second home treatment for ESRD patients is peritoneal dialysis. There are
several variations of peritoneal dialysis, the most common being continuous
ambulatory peritoneal dialysis and continuous cycling peritoneal dialysis. All
forms of peritoneal dialysis use the patient's peritoneal (abdominal) cavity to
eliminate fluid and toxins from the patient. Continuous ambulatory peritoneal
dialysis utilizes dialysis solution infused manually into the patient's
peritoneal cavity through a surgically-placed catheter. The solution is allowed
to remain in the abdominal cavity for a three to five hour period and is then
drained. The cycle is then repeated. Continuous cycling peritoneal dialysis is
performed in a manner similar to continuous ambulatory peritoneal dialysis, but
utilizes a mechanical device to cycle the dialysis solution while the patient is
sleeping. Peritoneal dialysis is the third most common form of ESRD therapy
following center hemodialysis and renal transplant.
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.
Dialysis Corporation of America's Business Strategy
Dialysis Corporation of America has 25 years' experience in developing and
operating dialysis treatment facilities. Its first priority is to provide
quality patient care. Dialysis Corporation of America intends to continue to
establish alliances with physicians and hospitals, attempts to initiate dialysis
service arrangements with nursing homes and managed care organizations, and to
continue to emphasize its high quality patient care. Its smaller size allows it
to focus on each patient's individual needs while remaining sensitive to the
physicians' professional concerns.
Dialysis Corporation of America continues to actively seek and negotiate
with physicians and others to establish new outpatient dialysis facilities.
Dialysis Corporation of America is in the development stages for two new
centers, one in Ohio, and one in Maryland, and is anticipating completion of an
acquisition of a dialysis unit in Georgia in the immediate future. In 2001 and
through the first quarter of 2002, it has obtained five new acute inpatient
dialysis services agreements with hospitals in Pennsylvania, Ohio, Georgia and
New Jersey.
We sold our controlling interest in Techdyne, Inc. in June, 2001 for
$10,000,000 plus a three year earn-out which will amount to between $2,500,000
and $5,000,000. A substantial portion of our after tax proceeds from that sale
are anticipated to be provided to Dialysis Corporation of America for expansion
of its dialysis operations.
4
Development and Acquisition of Facilities
One of the primary elements in developing or acquiring facilities is
locating an area with an existing patient base under the current treatment of a
local nephrologist, since the facility is primarily going to serve such
patients. Other considerations in evaluating development of a dialysis facility
or a proposed acquisition 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 is approached primarily through the development of Dialysis
Corporation of America's own dialysis facilities. Acquisition of existing
outpatient dialysis centers is a faster but more costly means of growth. To
construct and develop a new facility ready for operations takes an average of
six to eight months, and 12 months or longer to generate income, all of which
are subject to location, size and competitive elements. Some of our centers are
in the developmental stage, since they have not reached the point where the
patient base is sufficient to generate and sustain earnings. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Construction of a 15 station facility typically costs 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, and is usually based primarily upon the number of
patients, and to a lesser extent, location, competition, nature of facility and
negotiation. Dialysis Corporation of America has recently completed an agreement
to acquire a dialysis unit in Georgia with approximately 18 dialysis stations.
Assuming completion this acquisition, this center is expected to be operational
in the second quarter of 2002. Any significant expansion, whether through
acquisition or development of new facilities, is dependent upon existing funds
or financing from other sources.
Inpatient Services
Management is also seeking to increase acute dialysis care contracts with
hospitals for inpatient dialysis services. These contracts are sought with
hospitals in areas serviced by our facilities. The contract rates are
individually negotiated with each hospital and are not fixed by government
regulation as is the case with Medicare reimbursement fees for ESRD patient
treatment. In 2001, Dialysis Corporation of America entered into new acute
inpatient dialysis services agreements with hospitals in New Jersey and Georgia,
as did its 40% owned Ohio subsidiary.
There is no certainty as to when any additional centers or service
contracts will be implemented, or the number of dialysis stations or patient
treatments such may involve, or if such will ultimately be profitable. There is
no assurance that we will be able to continue to enter into favorable
relationships with physicians who would become medical directors of such
proposed dialysis facilities, or that our company will be able to acquire or
develop any new dialysis centers within a favorable geographic area. Newly
established dialysis centers, although contributing to increased revenues, also
adversely affect results of operations due to start-up costs and expenses and
due to their having a smaller and slower developing patient base. See "Dialysis
Corporation of America's Business Strategy," "Operations" and "Competition" of
Item 1, "Business," and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
5
Operations
Location, Capacity and Use of Facilities
Dialysis Corporation of America operates 11 outpatient dialysis facilities
in Pennsylvania, New Jersey and Georgia, with a total designed capacity of 173
licensed stations. It has a 40% interest in an Ohio dialysis center which it
operates in conjunction with the majority owner, which center has a total of 12
licensed dialysis centers.
Dialysis Corporation of America also provides acute care inpatient dialysis
services to nine hospitals in areas serviced by our dialysis facilities. Each
dialysis facility provides training, supplies and on-call support services for
home peritoneal patients. Dialysis Corporation of America provided approximately
61,000 hemodialysis treatments in 2001.
Management estimates that on average our centers were operating at
approximately 60% of capacity as of December 31, 2001, based on the assumption
that a dialysis center is able to provide up to three treatments a day per
station, six days a week. Management of Dialysis Corporation of America believes
it can increase the number of dialysis treatments at its centers without making
additional capital expenditures.
Operations of Dialysis Facilities
Our 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
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. Our 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.
Dialysis Corporation of America maintains a team of dialysis specialists to
provide for the individual needs of each patient. 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 to assist the patient and family to adjust to dialysis treatment and to
provide help in financial assistance and planning, and a part-time registered
dietitian. These individuals supervise the patient's needs and treatments. See
"Employees" below. Dialysis Corporation of America must continue to attract and
retain skilled nurses and other staff, competition for whom is intense.
Our facilities also offer home dialysis, primarily continuous ambulatory
peritoneal dialysis and continuous cycling peritoneal dialysis. Training
programs for continuous ambulatory peritoneal dialysis or continuous cycling
peritoneal dialysis generally encompass two to three weeks at the dialysis
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 the company.
Inpatient Dialysis Services
The company presently provides inpatient dialysis services to nine
hospitals in New Jersey, Pennsylvania, Georgia and Ohio, under agreements either
with the company or with one of our facilities
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in the area. The agreements are for a term ranging from one to five years, with
automatic 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 certain prescription drugs, such as
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.
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 where the patient's nephrologist has an established
practice.
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. We retain by written agreement
qualified physicians or groups of qualified physicians to serve as medical
directors for each of our facilities. The medical directors are typically a
source of patients treated at the particular center served. The medical
directors of four of our centers have acquired an ownership interest in the
center they service ranging from 20% to 49%. Our Ohio affiliate is owned 60% by
the physician. 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 Item 1, "Business - Regulation -
Dialysis Corporation of America."
Agreements with medical directors typically range from a term of five years
to ten years, 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. However,
the agreements do not prohibit physicians providing services at our facilities
from providing direct patient care services at other locations; and consistent
with the federal and state law, such agreements do not require a physician to
refer patients to our dialysis centers. Usually, physician's professional fees
for services are billed directly to government payment authorities on a direct
basis by the treating physician and paid directly to the physician or the
professional corporation.
Dialysis Corporation of America's ability to establish a dialysis facility
in a particular area is significantly geared to the availability of a qualified
physician or nephrologist to serve as the medical director. The loss of a
medical director who could not be readily replaced would have a material adverse
effect on the operations of that facility and Dialysis Corporation of America.
Compensation of medical directors is separately negotiated for each facility and
generally depends on competitive factors such as the local market, the
physician's qualifications and the size of the facility.
7
Quality Assurance
Dialysis Corporation of America implements a quality assurance program to
maintain and improve the quality of dialysis treatment and care we provide to
our 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 in the quality of care. Specifically, this
program requires each center's staff, including its medical director and/or
nurse administrator to regularly review quality assurance data, whether related
to dialysis treatment services, equipment, technical and environmental
improvements, and staff-patient and personnel relationships. These evaluations
are in addition to assuring regulatory compliance with CMS and the Occupational
Safety and Health Administration. Our Vice President of Clinical Services, who
is a certified nephrology nurse, oversees this program in addition to ensuring
that the company meets federal and state compliance requirements for dialysis
centers. See Item 1, "Business - Regulation - Dialysis Corporation of America."
Patient Revenues
A substantial amount of the fees for outpatient dialysis treatments are
funded under the ESRD Program established by the federal government under the
Social Security Act, and administered in accordance with rates set by CMS. A
majority of dialysis patients are covered under Medicare. The balance of the
outpatient charges are paid by private payors including the patient's medical
insurance, private funds or state Medicaid plans. Pennsylvania, New Jersey,
Georgia and Ohio, presently the states in which we operate, provide Medicaid or
comparable benefits to qualified recipients to supplement their Medicare
coverage.
Under the ESRD Program, payments for dialysis services are determined
pursuant to Part B of the Medicare Act which presently pays 80% of the allowable
charges for each dialysis treatment furnished to patients. The maximum payments
vary based on the geographic location of the center. The remaining 20% may be
paid by Medicaid if the patient is eligible, from private insurance funds or the
patient's personal funds. Medicare and Medicaid programs are subject to
regulatory changes, statutory limitations and government funding restrictions,
which may adversely affect our revenues and dialysis services payments. See
"Medicare Reimbursement" below.
The inpatient dialysis services are paid for by the hospital pursuant to
contractual pre-determined fees for the different dialysis treatments.
Medicare Reimbursement
Dialysis Corporation of America is reimbursed primarily by Medicare under a
prospective reimbursement system for chronic dialysis services, and by third
party payors including Medicaid and commercial insurance companies. Each of our
dialysis facilities is certified to participate in the Medicare program. Under
the Medicare system, the reimbursement rates are fixed in advance and limit the
allowable charge per treatment, but provides us with predictable and recurring
per treatment revenues and allows us to retain any profit earned. An established
composite rate set by CMS governs the Medicare reimbursement available for a
designated group of dialysis services, including dialysis treatments, supplies
used for such treatments, certain laboratory tests and medications.
Dialysis Corporation of America receives reimbursement for outpatient
dialysis services provided to Medicare-eligible patients at rates that are
currently between approximately $121 and $135 per treatment, depending upon
regional wage variations. The Medicare reimbursement rate is subject to change
by legislation. An average ESRD reimbursement rate is approximately $124 per
treatment for outpatient dialysis services.
8
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 allowable rate of which is currently $10 per 1000 units for
amounts in excess of three units per patient per year, and certain
physician-ordered tests provided to dialysis patients. Approximately 26% of
Dialysis Corporation of America's revenues in 2001 was derived from providing
dialysis patients with EPO. CMS limits the EPO reimbursement rate based upon
patients' hematocrit levels. Except for the administration of EPO, other
ancillary services are not significant sources of income. We routinely submit
claims monthly and are usually paid by Medicare within 30 days of the
submission.
There have been a variety of proposals to Congress for Medicare reform. We
are unable to predict what, if any, future changes may occur in the rate of
reimbursement. Any reduction in the Medicare composite reimbursement rate would
have a material adverse effect on Dialysis Corporation of America's and our
business, revenues and net earnings.
Medicaid Reimbursement
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. State regulations generally
follow Medicare reimbursement levels and coverages without any co-insurance
amounts. Certain states, however, require beneficiaries to pay a monthly share
of the cost based upon levels of income or assets. Pennsylvania and New Jersey
have Medical Assistance Programs comparable to Medicaid, with primary and
secondary insurance coverage to those who qualify. We are a licensed ESRD
Medicaid provider in New Jersey, Pennsylvania and Georgia.
Dialysis Corporation of America
Sources of Medical Services Revenue
-----------------------------------
Year Ended December 31,
-----------------------
2001 2000
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Medicare 48% 59%
Medicaid and Comparable Programs 11% 13%
Hospital inpatient dialysis services 15% 10%
Commercial and private payors 26% 18%
Management Services
Dialysis Corporation of America has a management services agreement with
each subsidiary and with DCA of Toledo, LLC, in which it holds a minority
position, providing them with administrative and management services, including
but not limited to providing capital equipment, preparing budgets, bookkeeping,
accounting, data processing, and other corporate based information services,
materials and human resource management, billing and collection, and accounts
receivable and payable processing. These services are provided for a percentage
of net revenues of each particular facility.
Potential Liability and Insurance
Participants in the health care industry are subject to lawsuits based upon
alleged negligence, many of which involve large claims and significant defense
costs. We are very proud of the fact that,
9
although Dialysis Corporation of America has been involved in chronic and acute
kidney dialysis services for approximately 25 years, that subsidiary has never
been subject to any suit relating to its dialysis operations. We currently have
general and umbrella liability insurance, as well as professional and products
liability coverage. Our insurance policies provide coverage on an "occurrence"
basis and are subject to annual renewal. A hypothetical successful claim against
Dialysis Corporation of America in excess of our insurance coverage could have a
material adverse effect upon Dialysis Corporation of America's and our business
and results of operations. The medical directors supervising our dialysis
operations and other physicians practicing at the facilities are required to
maintain their own professional malpractice insurance coverage.
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 only investment to date has been in Linux Global
Partners, a private company in the development stage of its Linux desktop system
and which invests in Linux-related software companies. We hold an approximately
13% interest in Linux Global Partners, and Dialysis Corporation of America holds
an approximately 3% interest. During 2000, we loaned Linux Global Partners
$2,200,000 at an annual rate of interest of 10%, which funds we borrowed from
Dialysis Corporation of America. In May and June, 2001, we fully repaid this
loan and accrued interest to Dialysis Corporation of America. Mr. Langbein, our
Chairman of the Board, Chief Executive Officer and President, also holding such
executive positions, other than President, with Dialysis Corporation of America,
has been a director of Linux Global Partners since January, 2000. See Item 13,
"Certain Relationships and Related Transactions."
Linux is a free operating system, 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. In August, 2001, Linux Global Partners purchased
Corel Corporation's Canadian Linux Business Division, which Linux Global
Partners is operating through its subsidiary, Xandros, Inc. Corel, the world's
second largest desktop software company, holds a 5% interest in that subsidiary.
Xandros, building on Corel's $25 million in research and development of the
Linux desktop system, has improved the system and has brought the Linux
operating system and suite of applications for desktop computing to the first
level of marketing by providing 1,000 Linux desktop systems to users for
evaluation. Linux Global Partners believes its product will be ready for
commercialization some time before the end of the third quarter of fiscal 2002.
Linux Global Partners has been obtaining limited financing for its operations,
and is in need of substantial capital to continue its development of the Linux
desktop operating system and to bring the product to market. Although Linux
Global Partners' management has been in discussions with a variety of very
interested investors, some of whom have already provided funding to Linux Global
Partners, there is no assurance such capital will be available or, if so, on
favorable terms. We also recognize Linux Global Partners is subject to all the
risks of a startup company, including the ability to continue operations to
enable it to bring the Linux desktop system to market, whether its product will
ever be brought to market, and, if so, whether it will be accepted, the extent
of sales, its ability to generate revenues, and whether such revenues will be
sufficient to reflect income, and the overall ability of management to operate
and grow that company.
Linux Global Partners also has a portfolio consisting of several companies
that focus on the software capabilities of the Linux operating system. It holds
ownership interests in those companies ranging from 6% to 90%. Some of its
investments include Ximian (formerly Helix Code), which is involved in creating
an
10
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; and Metro Link, involved in Linux graphics and the embedded
sector. All of these companies are in the developmental stages, several with
limited revenues, and their success remains speculative.
We are holding Linux Global Partners' portfolio of investment as collateral
for our loan to Linux Global Partners. Accrued interest on our loan was
approximately $282,000 at December 31, 2001. The loan has been extended on
various occasions, but we have been working with Linux Global Partners to enable
them to raise sufficient capital to continue operations and be in a position to
repay our loan. We were to receive $100,000 per month or 25% of the proceeds of
Linux Global Partners' private financings, whichever first occurs, and until
such repayment, Linux Global Partners has been and will continue to issue 50,000
shares of its common stock to us every month. See Item 1, "Business - Risk
Factors - Investment in Technology Companies," Item 7, "Management's Discussion
and Analysis of Financial Conditions and Results of Operations" and Note 14 to
"Notes to Consolidated Condensed Financial Statements."
Thomas K. Langbein, our Chairman, CEO and President, has participated in
certain financing negotiations, and has been advised by such potential investors
that Linux Global Partners' technology is superior to most others in the desktop
software segment. Accordingly, we have been encouraged that Linux Global
Partners has a good possibility of obtaining the capital it currently needs.
Assuming it is able to bring its Linux desktop system to market before the end
of the third quarter of this year, Linux Global Partners may become a
competitive force in Internet computer operating systems. We are hopeful that
our investment in Linux Global Partners will supplement our operations and that
Linux Global Partners will be in a position in the near future to repay its debt
to us. There is no assurance that Linux Global Partners will be successful or
will repay the debt, which would force us to foreclose on the collateral.
Although we continue to evaluate new technologies, the economy and
marketplace during 2001 and thus far in 2002 have not been friendly to many
industries, particularly the technology sector. To date, we have not found or
developed any other new technologies we believe were worthy of investment.
DISCONTINUED OPERATIONS
We formerly were engaged as a contract manufacturer of electronic and
electro-mechanical products, primarily for the data processing,
telecommunications, instrumentation and food preparations equipment industries,
accomplished through our 71% owned public subsidiary, Techdyne, Inc. We sold our
71% interest in Techdyne on June 27, 2001. Accordingly Techdyne is presented as
a discontinued operation.
REGULATION
Dialysis Corporation of America
Dialysis Corporation of America is subject to extensive regulation, with
legislation continually proposed relating to safety, reimbursement rates,
licensing and other areas of operations. Each of the dialysis facilities must be
certified by CMS, and Dialysis Corporation of America must comply with certain
rules and regulations established by CMS 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 Dialysis
Corporation of America's dialysis facilities, and our record of compliance with
federal, state and local governmental laws and regulations remains excellent. We
are unable to predict the scope and effect
11
of any changes in government regulations, particularly any modifications in the
reimbursement rate for medical services or requirements to obtain certification
from CMS. Enforcement has become more stringent adding to compliance costs as
well as potential sanctions. To date, none of Dialysis Corporation of America'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 Dialysis Corporation of America's business arrangements will not
be the subject of a future investigation or prosecution by a federal or state
governmental authority.
Although management believes that Dialysis Corporation of America
substantially complies with currently applicable state and federal laws and
regulations and has never had any difficulty in maintaining its licenses or its
Medicare and Medicaid and comparable 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 Dialysis Corporation of America's operations cannot be
predicted. Any loss by of Dialysis Corporation of America's various
certifications and approvals as a certified provider under the Medicare or
Medicaid and comparable programs, or its licenses under the laws of any state or
other governmental authority, a reduction of dialysis reimbursement or a
reduction or complete elimination of coverage for dialysis services would have a
material adverse effect on Dialysis Corporation of America's business, and, in
turn, ours.
Fraud and Abuse
Each year OIG publishes a general Work Plan. For the year 2002, OIG
indicated it planned to concentrate, among other things, on utilization service
patterns of beneficiaries and assess the medical necessity and accuracy of
coding of selected categories of services provided outside the composite rate,
Medicare payments for EPO, and method II billing, including the adequacy of CMS
oversight and the impact on nursing home residents. Dialysis Corporation of
America has reviewed the OIG 2002 Work Plan, and management believes it is and
will make every effort to continue to be in compliance with applicable
regulations to be addressed by OIG. Nevertheless, the continuous review of risk
areas inherent to dialysis treatment and service, and maintenance of compliance
programs is necessary. These programs focus 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.
The Social Security Act provides Medicare coverage to most persons
regardless of age or financial condition for dialysis treatments as well as
kidney transplants. The Social Security Act further 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. Included in the
civil penalties is exclusion of the provider from participation in the Medicare
and Medicaid programs. The language of the Anti-Kickback Statute has been
construed broadly by the courts. Over the years, the federal government has
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 and
immunize the arrangement from prosecution, but failure to satisfy all elements
does not mean the business arrangement violates the illegal remuneration
provision of the statute.
12
As required by Medicare regulations, a medical director who is a licensed
nephrologist or otherwise qualified physician supervises each of Dialysis
Corporation of America's dialysis centers. The compensation of medical directors
is fixed by a medical director agreement and reflects competitive factors in
each respective location, and the size of the center, and the physician's
professional qualifications. The medical director's fee is fixed in advance,
typically for periods of one to five years and does not take into account the
amount of referrals to the dialysis center. Four of Dialysis Corporation of
America's outpatient dialysis centers are owned jointly between the company and
a group of physicians, who hold a minority position. DCA's Ohio affiliate is
majority-owned by a physician. These physicians also act as the medical director
for those facilities. We attempt to structure arrangements with our physicians
to comply with the Anti-Kickback Statute. Many of these physicians' patients are
treated at our dialysis facilities. We believe that the value of the minority
interest represented by subsidiaries' stock issued to physicians has been
consistent with the fair market value of the cash consideration paid, assets
transferred to, or services performed by such physicians for the subsidiary, and
there is no intent to induce referrals to our facilities. See "Business -
Physician Relationships" above. Certain states in which we operate have similar
statutes to the federal anti-kickback laws limiting physicians from holding
financial interests in various types of medical facilities. If these statutes
are interpreted to apply to relationships Dialysis Corporation of America has
with its medical directors who hold joint ownership in our dialysis facilities,
we would restructure our relationship with these physicians but could be subject
to penalties. There are safe harbors for certain arrangements. However, these
relationships with medical director ownership of a minority interest in a
Dialysis Corporation of America facility satisfies many but not all of the
criteria for the safe harbor, and there can be no assurance that these
relationships will not be subject of investigation or prosecution by enforcement
agencies. In an effort to further the position of adhering to the law, Dialysis
Corporation of America has medical and corporate compliance plans and medical
chart audits to confirm medical necessity of referrals.
We endeavor in good faith to comply with all governmental regulations. We
have never been challenged under these statutes and management believes
arrangements with its medical directors are in material compliance with
applicable law. However, there can be no assurance that we will not be required
to change our practices or experience a material adverse effect as a result of
any such potential challenge. Management cannot predict the outcome of the
rule-making process or whether changes in the safe harbor rules will affect
Dialysis Corporation of America's position with respect to the Anti-Kickback
Statute, but believes that Dialysis Corporation of America will remain in
compliance.
Stark II
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. If Stark II is
applicable, the entity is prohibited from claiming reimbursement for such
services under the Medicare or Medicaid and comparable programs, is liable for
the amounts received pursuant to prohibited claims, is subject to civil
penalties of up to $15,000 per referral, and can be excluded from participation
in the Medicare and Medicaid and comparable programs.
HHS' regulations to Stark II recently became effective in January, 2002,
primarily excluding from Stark II, services included in the ESRD composite rate.
These regulations exclude from covered designated health services and referral
prohibitions, EPO and other drugs required as part of dialysis treatments under
certain conditions. Also excluded from "inpatient hospital services" are
dialysis services provided by a hospital not certified by CMS to provide
outpatient dialysis services, which would exclude
13
Dialysis Corporation of America inpatient hospital services agreements, since
the hospitals to which it provides these services are not providing outpatient
dialysis. Equipment and supplies used in connection with home dialysis are
excluded from the Stark II definition of "durable medical equipment." HHS is
revisiting its regulations and intends to issue additional regulations to the
Stark legislation. We are unable to predict the extent or nature of such revised
and/or new HHS regulations, which may negatively impact Dialysis Corporation of
America's operations or require it to restructure different aspects of its
business.
If the provisions of Stark II were found to apply to Dialysis Corporation
of America's arrangements however, management believes that it would be in
compliance. We compensate our nephrologist-physicians as medical directors of
our dialysis centers pursuant to medical director agreements, which we believe
are in compliance with Stark II. Non-affiliated physicians who send or treat
their patients at any of Dialysis Corporation of America's facilities do not
receive any compensation from the company. Medical directors of Dialysis
Corporation of America's facilities, which hold a minority investment interest,
may refer patients to hospitals with which Dialysis Corporation of America has
an acute inpatient dialysis service arrangement. Stark II may be interpreted to
apply to these types of interests. We believe that the contractual arrangements
we have with hospitals for acute care inpatient dialysis services are in
compliance with this exception. We believe that the language and legislative
history of Stark II and phase I of final Stark II regulations indicate that
Congress did not intend to include as designated health services dialysis
services and the services and items provided incident to dialysis services.
If CMS or any other government entity takes a contrary position in
interpreting the Stark II final regulations or otherwise, Dialysis Corporation
of America may be required to restructure certain existing compensation or
investment agreements with its medical directors, or, in the alternative, to
refuse to accept referrals for designated health services from certain
physicians. If such were to be the case, it could adversely affect Dialysis
Corporation of America's and our operations and future financial results.
Health Insurance Reform Act
Congress has taken action in recent legislative sessions to modify the
Medicare program for the purpose of reducing the amounts otherwise payable from
the program to healthcare providers. Future legislation or regulations may be
enacted that could significantly modify the ESRD program or substantially reduce
the amount paid to Dialysis Corporation of America for its services, or impose
further regulation or restrictions on healthcare providers. Any new legislation
or regulations may adversely affect Dialysis Corporation of America's and our
business and operations, as well as our competitors.
The Health Insurance Portability and Accountability Act of 1996, known as
HIPAA, provided for health insurance reforms which included a variety of
provisions important to healthcare providers, such as significant changes to the
Medicare and Medicaid fraud and abuse laws. HIPAA established two programs that
coordinate federal, state and local healthcare fraud and abuse activities, known
as the "Fraud and Abuse Control Program" and the "Medicare Integrity Program."
The Fraud and Abuse Control Program will be conducted jointly by HHS and the
Attorney General while the Medicare Integrity Program, which is funded by the
Medicare Hospital Insurance Trust Fund, will enable HHS, the Department of
Justice and the FBI to monitor and review specifically Medicare fraud.
As part of the administrative simplification provisions of HIPAA, final
regulations governing electronic transactions relating to healthcare information
were published by HHS. These regulations require a party transmitting or
receiving healthcare transactions electronically to send and receive data in
14
single format, rather than the different data formats currently used. This
regulation applies to Dialysis Corporation of America's submissions and
processing of healthcare claims. We are in the process of developing the single
format transmission, which is required to be in place in October, 2003.
HHS also published regulations relating to the exchange of healthcare
information to comply with HIPAA privacy standards. HSS' privacy rules cover all
individually identifiable health information covering healthcare providers and
others. The regulations, which require organizations to comply no later than
April 14, 2003, require covered entities to continually obligate business
associates and employers to follow the privacy rules. The regulations are quite
extensive and complex, but basically require companies to: (i) obtain patient
consent before using or disclosing protected healthcare information for
heathcare, payment or other uses; (ii) respond to patient requests for access to
their healthcare information; and (iii) develop policies and procedures with
respect to uses and disclosures of protected healthcare information. HHS
recently proposed changes to these privacy regulations to correct unintended
consequences that threatened patient's access to quality health care. These
proposals include, among others, removing consent requirements hindering access
to care, clarifying oral communication restrictions by allowing doctors to
discuss a patient's treatment with other doctors and professionals involved in
their care, parental access to children's records, and prohibiting use of
patients' records for marketing while allowing appropriate communications.
Dialysis Corporation of America has developed and continues to refine its
processing of patient healthcare information to comply with HHS' patient privacy
regulations, to insure proper patient healthcare information protection. It is
anticipated that these privacy regulations will be further amended and
developed, which could require our company to spend additional effort and money
toward compliance.
HIPAA increases significantly the civil and criminal penalties for offenses
related to healthcare fraud and abuse. The Attorney General is provided with a
greatly expanded subpoena power under HIPAA to investigate fraudulent criminal
activities, and federal prosecutors may utilize asset freezes, injunctive relief
and forfeiture of proceeds to limit fraud during such an investigation.
Although we believe we substantially comply with currently applicable state
and federal laws and regulations and to date have not had any difficulty in
maintaining our licenses and Medicare and Medicaid and comparable
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 our activities will not be
reviewed or challenged by regulatory authorities.
Any loss by Dialysis Corporation of America of its various federal
certifications, its approval as a certified provider under the Medicare or
Medicaid and comparable programs or its licenses under the laws of any state or
other governmental authority from which a substantial portion of its revenues
are derived or a change resulting from healthcare reform, a reduction of
dialysis reimbursement or a reduction or complete elimination of coverage for
dialysis services, would have a material adverse effect on Dialysis Corporation
of America's and on our business.
Environmental and Health Regulations
Our dialysis centers are subject to hazardous waste laws and non-hazardous
medical waste regulation. Most of our waste is non-hazardous. CMS requires that
all dialysis facilities have a contract with a licensed medical waste handler
for any hazardous waste. We also follow OSHA's Hazardous Waste Communications
Policy, which requires all employees to be knowledgeable of the presence of and
15
familiar with the use and disposal of hazardous chemicals in the facility.
Medical waste of each facility is handled by licensed local medical waste
sanitation agencies primarily responsible for compliance with such laws.
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.
Other Regulation
There are also federal and state laws prohibiting anyone from presenting
false claims or fraudulent information to obtain payments from Medicare,
Medicaid and comparable programs and other third-party payors. These laws
provide for both criminal and civil penalties, exclusion from Medicare and
Medicaid participation, repayment of previously collected amounts and other
financial penalties under the False Claims Act. The submission of Medicare cost
reports and requests for payment by dialysis centers are covered by these laws.
We believe we have the proper internal controls and procedures for issuance of
accounts and complete cost reports and payment requests. Such reports and
requests are subject to a challenge under these laws.
Certain states have anti-kickback legislation and laws dealing with
self-referral provisions similar to the federal Anti-Kickback Statute and Stark
II. We have no reason to believe that Dialysis Corporation of America is not in
compliance with such state laws.
PATENTS AND TRADE NAMES
We sell certain of our medical supplies and products under the trademark
Medicore(TM). Certain of our lancets are marketed under the trademarks Providers
of Quality Medical Disposables(TM) and Lady Lite(TM) and under the brand name
Lite Touch.
We do not rely on patents or trademarks in our medical products division.
Rather, we place importance upon design, engineering, 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.
The dialysis industry is very competitive. There are numerous providers who
have dialysis facilities in the same areas as the company. Many are owned by
major corporations which operate dialysis facilities regionally, nationally and
internationally. Our dialysis operations are small in comparison with those
corporations. Some of Dialysis Corporation of America's major competitors are
public companies, including Fresenius Medical Care, Gambro Healthcare, Inc.,
Renal Care Group, Inc., and Davita, Inc. Most of these companies have
substantially greater financial resources, many more centers, patients and
services than Dialysis Corporation of America has, and by virtue of such have a
16
significant advantage in competing for nephrologists and acquisitions of
dialysis facilities in areas and markets we target. Fresenius and Gambro also
manufacture and sell dialysis equipment and supplies, which may provide them
with an even greater competitive edge. Competition for acquisitions has
increased the cost of acquiring existing dialysis facilities. Dialysis
Corporation of America also faces competition from hospitals and physicians that
operate their own dialysis facilities. We are not very competitive based on our
ownership of limited number of centers and the size of each of our facilities.
However, upon completion of the sale of controlling stock of Techdyne, we plan
to focus on expansion of our dialysis facilities, and improvement of our
dialysis operation's competitive position.
Competitive factors most important in dialysis treatment are quality of
care and service, convenience of location and pleasantness of the environment.
Another significant competitive factor is the ability to attract and retain
qualified nephrologists. These physicians are a substantial source of patients
for the dialysis centers, are required as medical directors of the dialysis
facility for it to participate in the Medicare ESRD program, and are responsible
for the supervision and operations of the center. Dialysis Corporation of
America's medical directors usually are subject to non-compete restrictions
within a limited geographic area from the center they administer. Additionally,
there is always substantial competition for obtaining qualified, competent
nurses and technical staff at reasonable labor costs.
Based upon advances in surgical techniques, immune suppression and
computerized tissue typing, cross-matching of donor cells and donor organ
availability, renal transplantation in lieu of dialysis is becoming a
competitive factor. It is presently the second most commonly used modality in
ESRD therapy. With greater availability of kidney donations, currently the most
limiting factor, renal transplantations could become a more significant
competitive aspect to the dialysis treatments we provide. Although kidney
transplant is a preferred treatment for ESRD, certain patients who have
undergone such transplants have lost their transplant function and returned to
dialysis treatments.
EMPLOYEES
The company and its subsidiaries employ approximately 176 full time
employees of which 8 are administrative, 163 are with the dialysis operations
and 5 are engaged in the medical supply operations. In addition, Dialysis
Corporation of America employs approximately 27 part-time and 22 independent
contractors, including its medical directors and the social workers and
dietitians at Dialysis Corporation of America's Georgia dialysis facilities.
RISK FACTORS
Our dialysis operations are the most significant business segment, and,
therefore, most of the risk factors will relate to that business.
Investment in Technology Companies
WE ONLY HAVE ONE INVESTMENT IN A DEVELOPMENT STAGE PRIVATE LINUX SOFTWARE
COMPANY, LINUX GLOBAL PARTNERS, INC., WHICH HAS NOT YET MARKETED A PRODUCT, AND
NEEDS SIGNIFICANT FINANCING
In 2000, we initiated a new division which was to be investments in
technology companies. Although we have had several reviews of and negotiations
with development stage technology companies, to date we have made only one
investment, with Linux Global Partners, a private development stage company
17
involved in Linux software product development and investment. The following
risks relate to Linux Global Partners
o no audited financial statements
o anticipate incurring additional losses in implementing the production
and marketing of its Linux desktop system
o demand for its Linux desktop system may be minimal
o assuming the Linux desktop system is marketed, sufficient revenues may
not be generated to cover expenses or reflect income
o significant funding is required to continue its existence and
development of its product
- no assurance funding will be available, or if so, on favorable
terms
- presently has significant outstanding indebtedness, some of which
is due but not paid
- all of its investments in Linux software companies are collateral
security for its indebtedness to Medicore
o no operating history; inability to evaluate future prospects
o early stage company; rapidly evolving market; intense competition
o reliance on prominent Linux developers of the Linux kernal could
impair it from upgrading its product
OUR $2,000,000 LOAN TO LINUX GLOBAL PARTNERS IS PAST DUE WITH ACCRUED INTEREST
AT DECEMBER 31, 2001 OF APPROXIMATELY $282,000; LINUX GLOBAL PARTNER'S INABILITY
TO REPAY US
In 2000, we made our investment in Linux Global Partners, obtaining an 8%
interest and having loaned $2,200,000 to Linux Global Partners at an annual
interest rate of 10%. We borrowed those funds from Dialysis Corporation of
America, and fully repaid our subsidiary in June, 2001. In May, 2001, Linux
Global Partners paid us $215,500 of which $200,000 was principal. In August,
2001, we entered into an extension of our loan with Linux Global Partners based
upon repayment of $100,000 per month or 25% of any proceeds it received from its
financing attempts. We also received, and continue to receive, 50,000 shares of
Linux Global Partners' common stock per month until our loan is repaid. Our
equity interest in Linux Global Partners is currently 13%, and Dialysis
Corporation of America owns approximately 3% of that company.
The Linux Global Partners debt to us has been extended on various
occasions, and is past due. We hold their investments in Linux software
companies. We continue our efforts to work with Linux Global Partners, hopefully
until the persons and entities negotiating financing with them provide the
necessary funding for their continued development and operations, and repayment
of their indebtedness to us. With accrued interest, Linux Global Partners owed
us $2,282,000 at December 31, 2001.
There is no assurance Linux Global Partners will be able to obtain
sufficient financing, or if so, whether on favorable terms, and whether any such
financing will be sufficient to continue its limited operations and to repay its
debt to us. The collateral for its debt consists of securities of private
companies in which Linux Global Partners invested, and there is no assurance we
will be able to sell such collateral, or if so, in amounts sufficient to satisfy
the Linux Global Partner's indebtedness to us. See Item 7, "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
Note 14 to "Notes to Consolidated Financial Statements."
18
Dialysis Operations
UNTIL FISCAL 2001, DIALYSIS CORPORATION OF AMERICA HAD EXPERIENCED OPERATIONAL
LOSSES
Since 1989, when Dialysis Corporation of America sold four of its five
dialysis centers, that subsidiary had experienced operational losses. Not until
fiscal 2001 did Dialysis Corporation of America reflect net income. Dialysis
Corporation of America initiated an expansion program in 1995, opening two new
dialysis centers that year, and to date it has 11 centers in New Jersey,
Pennsylvania and Georgia, with a 40% interest in a dialysis facility in Ohio
which Dialysis Corporation of America manages. However, some of our dialysis
centers have generated losses since their commencement of operations. This is
due to operational costs and time needed to reach full capacity of dialysis
treatments. Even though we have two facilities in the development stage in
Maryland and Ohio and are in the process of completing the acquisition of
another in Georgia, this expansion should generate greater revenues, but until
these dialysis centers develop their patient base toward a fuller capacity,
these centers may not reflect profitable operations.
DIALYSIS OPERATIONS ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
Our dialysis operations are subject to extensive federal and state
government regulations which include:
o licensing requirements for each dialysis facility
o patient referral prohibitions
o false claims prohibitions for health care reimbursement
o record keeping requirements
o health, safety and environmental compliance
o restriction of disclosure of individually identifiable health
information
Many of these laws and regulations are complex and open to a variety of
interpretations. If Dialysis Corporation of America is forced to change its
method of operations because of these regulations, Dialysis Corporation of
America's and our earnings, financial condition and business might be adversely
affected. In addition, any violation of these governmental regulations could
involve substantial civil and criminal penalties and fines, and exclusion from
participating in Medicare and Medicaid and comparable programs. Any loss of
federal or state certifications or licenses would adversely impact Dialysis
Corporation of America and our business.
Neither Dialysis Corporation of America's arrangements with the medical
directors of its facilities nor the minority ownership interests of referring
physicians in certain of its dialysis facilities meet all of the requirements of
published safe harbors to the illegal remuneration provisions of the Social
Security Act and similar state laws. These laws impose civil and criminal
sanctions on persons who receive or make payments for referring a patient for
treatment that is paid for in whole or in part by Medicare, Medicaid and similar
state programs. Transactions that do not fall within the safe harbor may be
subject to greater scrutiny by enforcement agencies.
DIALYSIS CORPORATION OF AMERICA'S REVENUES AND FINANCIAL STABILITY ARE DEPENDENT
ON FIXED REIMBURSEMENT RATES UNDER MEDICARE AND MEDICAID
Approximately 48% of Dialysis Corporation of America's patient revenues for
2001 was derived from
19
Medicare reimbursement. Approximately 11% of its patient revenues for 2001 was
derived from Medicaid. Decreases in the Medicare and Medicaid rates and programs
for Dialysis Corporation of America's dialysis treatments would adversely affect
its revenues and profitability. Furthermore, operating costs tend to increase
over the years without any comparable increase in the prescribed dialysis
treatment rates.
DECREASES IN REIMBURSEMENT PAYMENTS FROM THIRD-PARTY, NON-GOVERNMENT PAYORS
COULD ADVERSELY AFFECT OUR EARNINGS
Any reduction in the rates paid by private insurers, hospitals and other
non-governmental third-party organizations could adversely affect Dialysis
Corporation of America's and our business. We estimate approximately 41% of
Dialysis Corporation of America's patient revenues for 2001 was obtained from
sources other than Medicare or Medicaid and comparable programs. Dialysis
Corporation of America generally charges non-governmental organizations for
dialysis treatment rates which exceed the fixed Medicare and Medicaid and
comparable rates. Any limitation on Dialysis Corporation of America's ability to
charge these higher rates, which may be affected by expanded coverage by
Medicare under the fixed corporate rate, or expanded coverage of dialysis
treatments by managed care organizations, which commonly have lower rates than
we charge, could adversely affect our business, results of operations, and
financial condition.
ANY DECREASE IN THE AVAILABILITY OF OR THE REIMBURSEMENT RATE OF EPO WOULD
REDUCE OUR REVENUES AND EARNINGS
EPO, the bio-engineered drug used for treating anemia in dialysis patients,
is currently available from a single manufacturer, Amgen, Inc. Two years ago,
Amgen increased the price of EPO, and there is no assurance there will not be
further price increases this year or in the near future. There currently is no
alternative drug available to us for dialysis patient treatment of anemia. The
available supply could also be reduced, whether by Amgen or through excessive
demand. This would adversely impact our revenues and profitability, since
approximately 26% of Dialysis Corporation of America's medical revenues in 2001
were based upon the administration of EPO to its dialysis patients. Most of
Dialysis Corporation of America's EPO reimbursement is from government programs.
We are unsure whether there will be an EPO reimbursement rate reduction, but if
such occurs, it would adversely affect Dialysis Corporation of America's and our
revenues and earnings.
DIALYSIS CORPORATION OF AMERICA'S ABILITY TO GROW IS SUBJECT TO ITS RESOURCES
AND AVAILABLE LOCATIONS
To date, expansion of Dialysis Corporation of America's operations has been
through construction of dialysis facilities rather than acquisition. This is due
to the substantial costs involved in an acquisition, usually valued on a
per-patient basis. Dialysis Corporation of America is attempting to complete its
first acquisition of a dialysis unit in Georgia. Dialysis Corporation of America
has limited resources. Therefore, it looks for areas with qualified and
cost-effective nursing and technical personnel, with a sufficient population to
sustain a dialysis facility. These opportunities are limited and we compete with
much larger dialysis companies for appropriate locations. Construction through
commencement of operations generally takes four to six months and sometimes
longer. Once the facility is operable, it generates revenues, but usually does
not operate at full capacity, thereby generating losses for up to approximately
a 12 month period or more. Our growth strategy based on development of dialysis
centers also involves the risks of Dialysis Corporation of America's ability to
identify suitable locations to develop additional facilities. Those we do
develop may never achieve profitability, and additional financing may not be
available to finance future development.
20
Our inability to acquire or develop facilities in a cost-effective manner
would adversely affect our ability to expand our dialysis business and our
profitability.
Growth places significant demands on Dialysis Corporation of America's
financial and management skills. Inability on its behalf to meet the challenges
of expansion and to manage any such growth would have an adverse effect on
Dialysis Corporation of America's management, and Dialysis Corporation of
America's and our results of operations and financial condition.
DIALYSIS CORPORATION OF AMERICA'S ATTEMPTS TO EXPAND THROUGH DEVELOPMENT OR
ACQUISITION OF DIALYSIS FACILITIES WHICH ARE NOT CURRENTLY IDENTIFIED ENTAILS
RISKS WHICH SHAREHOLDERS AND INVESTORS WILL NOT HAVE A BASIS TO EVALUATE
Dialysis Corporation of America expands generally through seeking an
appropriate location considering the patient base, availability of a physician
nephrologist to be Dialysis Corporation of America's medical director, and a
skilled work force. Construction and equipment costs for a new dialysis facility
typically range from $600,000 to $750,000. The cost of acquiring a center is
usually much greater. Dialysis Corporation of America cannot ensure that it will
be successful in developing or acquiring dialysis facilities, or otherwise
successfully expanding its operations. Dialysis Corporation of America is
negotiating with nephrologists and others to establish new dialysis centers, but
it cannot ensure these negotiations will result in the development of new
centers. Furthermore, there is no basis for shareholders and investors to
evaluate the specific merits or risks of any potential development or
acquisition of dialysis facilities.
DIALYSIS CORPORATION OF AMERICA DEPENDS ON PHYSICIAN REFERRALS, AND THE
LIMITATION OR CESSATION OF SUCH REFERRALS WOULD ADVERSELY IMPACT DIALYSIS
CORPORATION OF AMERICA'S AND OUR REVENUES AND EARNINGS
Our dialysis facilities and those centers we seek to develop are dependent
upon referrals of ESRD patients for treatment by physicians specializing in
nephrology. Generally, the nephrologist or medical professional association of
physicians supervising a particular dialysis center's operations, known as a
medical director of that facility, account for most of the patient base. There
is no requirement for these physicians to refer their patients to us, and they
are free to refer patients to any other conveniently located dialysis facility.
The loss of these key referring physicians at a particular center could have a
material adverse effect on the operations of the center and could adversely
affect Dialysis Corporation of America's and our revenues and earnings.
Some of the referring physicians own minority interests in certain of
Dialysis Corporation of America's dialysis facilities. If these interests are
deemed to violate applicable federal or state law, these physicians may be
forced to dispose of their ownership interests. We are unable to predict how
this would affect Dialysis Corporation of America's relationship with these
referring physicians, who may move their patients elsewhere, which would have an
adverse effect on Dialysis Corporation of America's and our business.
INDUSTRY CHANGES COULD ADVERSELY AFFECT DIALYSIS CORPORATION OF AMERICA'S
BUSINESS
The healthcare industry is in a period of change and uncertainty.
Healthcare organizations, public and private, continue to change the manner in
which they operate and pay for services. Dialysis
21
Corporation of America's business is designed to function within the current
healthcare financing and reimbursement system. In recent years, the healthcare
industry has been subject to increasing levels of government regulation of
reimbursement rates and capital expenditures, among other things. In addition,
proposals to reform the healthcare system have been considered by Congress, and
still remain a priority issue. Any new legislative initiatives, if enacted, may
further increase government regulation of or other involvement in healthcare,
lower reimbursement rates and otherwise change the operating environment for
healthcare companies. We cannot predict the likelihood of those events or what
impact they may have on Dialysis Corporation of America's or our earnings,
financial condition or business.
DIALYSIS CORPORATION OF AMERICA'S BUSINESS IS SUBJECT TO SUBSTANTIAL
COMPETITION, AND IT MUST COMPETE EFFECTIVELY, OTHERWISE ITS GROWTH COULD SLOW
Dialysis Corporation of America is operating in a very competitive
environment in terms of operations and development and acquisition of existing
dialysis centers. Competition comes from other dialysis centers, many of which
are owned by much larger companies, and from hospitals. The dialysis industry is
rapidly consolidating. There are some very large dialysis companies competing
for the acquisition of existing dialysis centers and the development of
relationships with referring physicians. Most of Dialysis Corporation of
America's competitors have much greater financial resources, more dialysis
facilities and a larger patient base.
Competition also comes from technological advances that provide more
effective dialysis treatments than the services provided by our centers.
We experience competition from physicians who open their own dialysis
facilities. Competition for existing centers has increased the costs of
acquiring such facilities. Competition is also intense for qualified nursing and
technical staff as well as for nephrologists with an adequate patient base.
Management can provide no assurance Dialysis Corporation of America can compete
effectively, and thereby continue its growth.
MEDICORE, WHICH OWNS 62% OF DIALYSIS CORPORATION OF AMERICA COMPANY, HAS SOME
COMMON OFFICERS AND DIRECTORS, WHICH PRESENTS THE POTENTIAL FOR CONFLICTS OF
INTEREST
We own 62% of Dialysis Corporation of America, and are able to elect all of
Dialysis Corporation of America's directors and otherwise control Dialysis
Corporation of America's management and operations. Such control is also
complemented by the fact that Thomas K. Langbein is Chairman of the Board and
Chief Executive Officer of both our company and Dialysis Corporation of America,
and also the President of our company, and Daniel R. Ouzts is Vice President and
Treasurer of both companies. Neither Mr. Langbein nor Mr. Ouzts devotes full
time to Dialysis Corporation of America. The costs of executive salaries and
other shared corporate overhead for these companies are charged first on the
basis of direct usage when identifiable, with the remainder allocated on the
basis of time spent. The amount of expenses charged by Medicore to Dialysis
Corporation of America for 2001 amounted to approximately $200,000.
Additionally, there have been past and there are current transactions
between our company and Dialysis Corporation of America and their directors,
including loans and insurance coverage. Dialysis Corporation of America advanced
funds to us for working capital requirements until we sold Techdyne, Inc.,
another of our public subsidiaries, in June, 2001. Dialysis Corporation of
America also loaned us $2,200,000 over the last two years for our financing and
investment in Linux Global Partners, Inc., a private company involved in
developing a Linux desktop product and investing in Linux software
22
companies, and which company is in its developmental stages. We repaid that loan
to Dialysis Corporation of America in June, 2001, with approximately $294,000 of
accrued interest.
Since Medicore holds a majority interest in Dialysis Corporation of
America, there exists the potential for conflicts between Medicore and Dialysis
Corporation of America, and the responsibilities of our management to our
shareholders could conflict with the responsibilities owed by management of
Dialysis Corporation of America to its shareholders.
General
THERE IS A POSSIBILITY OF CONTINUED VOLATILITY IN OUR SECURITY PRICE
Our common stock trades on the Nasdaq SmallCap Market. Over the years the
market price of the common stock has significantly fluctuated. During the last
two years, the common stock has been as high as $1.92 in the fourth quarter of
2001 and as low as $.63 in the fourth quarter of 2000 and the first quarter of
2001. On March 21, 2002, the closing price of the common stock was $1.50. The
market price of our common stock could fluctuate substantially based upon
announcements concerning our company, such as operating results, government
regulatory changes, technological innovations, or information concerning our
competitors. In addition, security prices fluctuate widely for reasons unrelated
to operations, usually general political, and worldwide and domestic economic
conditions, and the stock market's reaction. These fluctuations and events could
adversely affect the market price of our common stock.
POSSIBLE DELISTING AND RISKS OF LOW PRICED STOCKS
Our common stock trades on the Nasdaq SmallCap Market. There are certain
criteria for continued listing on the Nasdaq SmallCap Market, known as
maintenance requirements. Failure to satisfy any one of these maintenance
listing requirements could result in our securities being delisted from the
Nasdaq SmallCap Market. These criteria include two active market makers,
maintenance of $2,500,000 of stockholders' equity (or a market capitalization of
$35,000,000 or a net income of $500,000 for our most recently completed fiscal
year or in two of the last three most recently completed fiscal years), a
minimum bid price for our common stock of $1.00, and at least 500,000 publicly
held shares with a market value of at least $1,000,000, among others. Usually,
if a deficiency occurs for a period of 30 consecutive business days, the
particular company is notified by Nasdaq and has 90 days to achieve compliance.
Nasdaq has proposed adjustments to its SmallCap Market bid price grace period
from 90 days to 180 days. Following this grace period, issuers that demonstrate
compliance with the core initial listing standards of the SmallCap Market, which
is either net income of $750,000 (determined from the most recently completed
fiscal year or two of the most recently completed fiscal years), stockholders'
equity of $5,000,000, or market capitalization of $50,000,000, will be afforded
an additional 180-day grace period within which to regain compliance. If the
company is unable to demonstrate compliance, the security is subject to
delisting. The security might be able to trade on the OTC Bulletin Board, a less
transparent trading market which may not provide the same visibility for the
company or liquidity for its securities, as does the Nasdaq SmallCap Market. As
a consequence, an investor may find it more difficult to dispose of or obtain
prompt quotations as to the price of our securities, and may be exposed to a
risk of decline in the market price of the common stock.
In December, 2000 and again in April, 2001, we received notification from
the Nasdaq Listing Qualifications Department of the Nasdaq Stock Market that our
common stock failed to maintain a closing bid price greater than or equal to
$1.00 per share for 30 consecutive days, as required by
23
Marketplace Rule 4310(c)(4). In each instance, we maintained our Nasdaq SmallCap
Market listing. These situations dealing with the trading market are beyond our
control. There can be no assurance that some other listing maintenance criteria
will not become deficient, whether within or beyond our control, and without a
timely cure, could cause our common stock to be delisted from the Nasdaq
SmallCap Market.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT SHAREHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
Officers and directors of our company own approximately 2,118,000 shares of
common stock and 1,095,000 options exercisable into an additional 1,095,000
shares of common stock. Approximately 60% of the shares held by these officers
and directors are freely tradable under the conditions of Rule 144 of the
Securities Act. There is also a block of 115,000 restricted shares held by
former officers and directors of Techdyne. A registration statement covering the
sale of shares held by these officers, directors and Medicore, may be effected,
since these are controlling persons of the company, and all their shares,
including those issuable upon exercise of their options, would be eligible for
resale in the public market without restriction, if so registered. Also, the
officers' and directors' common stock now owned, as well as the shares
obtainable upon exercise of their options, and the 115,000 restricted block of
common stock, upon satisfying the conditions of Rule 144 under the Securities
Act, may be sold without complying with the registration provisions of the
Securities Act. These conditions include holding the shares for one year from
acquisition, volume limits of selling every three months an amount of shares
which does not exceed the greater of 1% of the outstanding common stock, or the
average weekly volume of trading as reported by Nasdaq during the four calendar
weeks prior to the sale, the filing of a Form 144, our company continuing to
timely file its reports under the Exchange Act, and the sales are sold directly
to a market maker or otherwise sold through a typical broker's transaction, with
normal commissions and no prearranged solicitations of the purchase order. Our
tradable common stock, known as the float, is approximately 4,367,000 shares,
and the approximately 2,118,000 shares of common stock directly owned by the
officers and directors represents approximately 49% of the float, and with the
options for 1,095,000 additional shares, would represent approximately 59% of
the float. Accordingly, the sale by such officers and directors, whether through
a registration statement or under Rule 144, may have an adverse affect on the
market price of our common stock, and may hamper our ability to manage
subsequent equity or debt financing. If these shareholders sell substantial
amounts of their common stock of our company, including shares issued upon the
exercise of their options into the public market, the market price of our common
stock could fall.
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 1,500 square feet of warehouse space in Hialeah, Florida for its
medical supply operations under a lease through January 31, 2003. Medicore also
leases 3,900 square feet of space for other executive offices in Hasbrouck
Heights, New Jersey through March 31, 2006.
Dialysis Corporation of America owns three properties, one located in
Lemoyne, Pennsylvania, the second in Easton, Maryland, and the third in
Valdosta, Georgia. The Maryland property consists of approximately 7,500 square
feet, most of which is leased to a competitor under 10 year lease through June
30, 2009 with two five-year renewal options. The lease is guaranteed by the
tenant's parent company.
24
The Easton, Maryland property is subject to two mortgages from affiliated
Maryland banking institutions. The Lemoyne, Pennsylvania property is also
subject to a mortgage from one of the Maryland banking institutions which holds
the first mortgage on the Easton, Maryland property. Each of these mortgages is
under the same terms and extends through November, 2003, bears interest at 1%
over the prime rate, and is secured by the real property and the company's
personal property at each respective location. The bank also has a lien on rents
due the company and security deposits from leases of the properties, and each
tenant is required to sign a tenant subordination agreement as part of its lease
with us. Written approval of the bank is required for all leases, assignments or
sublettings, alterations and improvements and sales of the properties. The
Easton, Maryland property has a second mortgage to secure a three-year $700,000
loan to our Vineland, New Jersey subsidiary, at an annual interest rate of 1
1/2% over the prime rate, which loan Dialysis Corporation of America guarantees,
and is further secured by that subsidiary's assets, exclusive of financed
dialysis equipment. See Item 7, "Management's Discussions and Analysis of
Financial Condition and Results of Operations" and Note 3 to "Notes to
Consolidated Financial Statements."
The Lemoyne property of approximately 15,000 square feet houses one of
Dialysis Corporation of America's dialysis center of approximately 5,400 square
feet, approved for 17 dialysis stations with space available for expansion. The
lease is for five years through December 22, 2003, with two renewals of five
years each. Dialysis Corporation of America uses approximately 2,500 square feet
for an administrative office.
Dialysis Corporation of America also leases space at its Lemoyne,
Pennsylvania property to unrelated parties for their own business activities
unrelated to dialysis services. One lease is for approximately 1,500 square feet
through December 31, 2002, a second lease is for approximately 530 square feet
through May 21, 2001 on a month-to-month basis, and another month-to-month lease
for an office.
Dialysis Corporation of America constructed a new dialysis center in
Valdosta Georgia on property it acquired in February, 2000 for $207,000. This
property is subject to a five-year $788,000 mortgage obtained April, 2001, with
interest at 8.29%, which matures April, 2006. This mortgage had a remaining
principal balance of approximately $776,000 at December 31, 2001. Dialysis
Corporation of America leases approximately 6,000 square feet to one of its
dialysis centers for $90,600 per year under a 10-year lease, with two renewals
of five years; and leases an additional 2,160 square feet to a professional
association for its medical offices, which acts as the medical director of that
Valdosta, Georgia dialysis facility, under a 10-year lease, with two renewals of
five years each.
In addition to the Lemoyne, Pennsylvania, and Valdosta, Georgia facilities,
Dialysis Corporation of America presently has nine other dialysis facilities.
Each is leased from unaffiliated parties most under five or ten year leases,
with two renewals of five years each, for space ranging from approximately 3,000
square feet to 7,000 square feet. One lease in Homerville, Georgia is for
approximately 1,700 square feet for two years to October 15, 2002. Dialysis
Corporation of America sublets a minimal amount of space at two of its dialysis
facilities to the physicians who are medical directors at those facilities for
their medical offices. The subleases are on a commercially reasonable basis and
are structured to comply with the safe harbor provisions of the "Anti-Kickback
Statute." See Item 1, "Business - Regulation - Dialysis Corporation of America -
Fraud and Abuse."
25
Dialysis Corporation of America leases approximately 2,300 square feet in
Hanover, Maryland for executive offices pursuant to a five year lease with one
five year renewal option.
Dialysis Corporation of America develops most of its dialysis facilities,
and each is relatively new with state-of-the-art equipment and facilities. The
dialysis stations are equipped with modern dialysis machines under a November,
1996 master lease/purchase agreement with a $1.00 purchase option at the end of
the term. Payments under the various schedules extend through May, 2005. See
Note 3 to "Notes to Consolidated Financial Statements."
None of our dialysis facilities are operating at full capacity. See Item 1,
"Business - Operations - Location, Capacity and Use of Facilities" above. The
existing dialysis facilities could accommodate greater patient volume,
particularly if hours and/or days of operation were increased without adding
additional dialysis stations or any additional capital expenditures. We also
have the ability and space at each of our dialysis facilities to expand to
increase patient volume subject to obtaining appropriate governmental approval.
We own two adjacent buildings and a parcel of land adjacent to these
buildings in Hialeah, Florida which we lease to our former subsidiary, Techdyne,
under a ten year lease expiring August 31, 2010. We also own two other parcels
of undeveloped land near Techdyne in Hialeah, Florida.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in or subject to any material pending legal actions.
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.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our shares trade on the Nasdaq SmallCap Market under the symbol "MDKI." The
table below reflects for the periods indicated the high and low bid prices for
our common stock as reported by Nasdaq.
Sale Price
----------
HIGH LOW
---- ---
2001
1st Quarter .................. $1.28 $.63
2nd Quarter .................. 1.54 .72
3rd Quarter .................. 1.38 .85
4th Quarter .................. 1.92 1.04
HIGH LOW
---- ---
2000
1st Quarter .................. $5.00 $1.59
2nd Quarter .................. 2.94 1.69
3rd Quarter .................. 2.25 .97
4th Quarter .................. 1.25 .63
The high and low sales price of Medicore common stock at March 21, 2002 was
$1.50.
Bid prices represent prices between bidders, and do not include retail
mark-ups, mark-downs, or any commission, and may not necessarily represent
actual transactions.
As of March 21, 2002, there were 1,116 shareholders of record, as reported
by our transfer agent. We have been advised by ADP, which organization holds
securities for brokers and depositories, that our common stock is beneficially
held by approximately 1,560 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 for the five years ended December 31,
2001 is derived from the audited consolidated financial statements of the
company. The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
27
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands except per share amounts)
YEARS ENDED DECEMBER 31
-------------------------------------------------------
2001 2000 1999 1998 1997(1)
---- ---- ---- ---- ----
Revenues--continuing operations(2) $20,691 $10,797 $7,507 $5,644 $44,119
Net (loss) income--continuing operations(2) (339) (776) (758) (373) 1,378
Net income (loss) 1,232 (406) (613) 98 2,241
Income (loss) per common share:
Basic $.20 $(.07) $(.11) $.02 $.39
Diluted $.20 $(.07) $(.11) $.01 $.36
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
DECEMBER 31
--------------------------------------------------------
2001 2000(2) 1999(3) 1998(3) 1997(3)
---- ---- ---- ---- ----
Working capital $13,094 $17,372 $15,840 $15,421 $18,857
Total assets 29,833 41,428 38,610 36,310 40,862
Long-term debt, net of current
portion 3,124 10,355 8,363 5,127 5,240
Stockholders' equity 16,035 13,534 14,282 15,368 16,077
- ---------------
(1) Reflects 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.
(2) Reflects reclassification as discontinued operations of amounts related to
Techdyne, of which subsidiary we sold our 71.3% interest in June, 2001.
(3) Includes Techdyne in 2000, 1999, 1998 and 1997. See Note (2) above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations, commonly known as MD&A, is our attempt to provide the investor with
a narrative explanation of our financial statements, and to provide our
shareholders and investors with the dynamics of our business as seen through our
eyes as management. Generally, MD&A is intended to cover expected effects of
known or reasonably expected uncertainties, expected effects of known trends on
future operations, and prospective effects of events that have had a material
effect on past operating results. In conjunction with our discussion of MD&A,
shareholders should read the company's consolidated financial statements,
including the notes, contained at the back part of this annual report on Form
10-K. Please also review the Cautionary Notice Regarding Forward-Looking
Information on page one of this annual report.
GENERAL
Although we have a medical products division and investment in one
technology company, our primary operations, revenues and income are derived from
our dialysis operations through our 62% public subsidiary, Dialysis Corporation
of America. That subsidiary provides dialysis services, primarily kidney
dialysis treatments through its 11 outpatient dialysis centers, plus an
additional center in which it holds a
28
minority interest. Through its acute inpatient dialysis services agreements with
hospitals, Dialysis Corporation of America provides dialysis treatments to the
hospital's dialysis patients. Dialysis Corporation of America also provides
homecare services, including home peritoneal dialysis and method II services.
Dialysis Corporation of America also provides ancillary services associated with
dialysis treatments, primarily the administration of EPO.
Essential to profitability of our dialysis operations is Medicare
reimbursement, which is at a fixed rate determined by CMS. The level of Dialysis
Corporation of America's, and therefore, our revenues and profitability may be
adversely affected by any potential legislation resulting in Medicare
reimbursement rate cuts. Operating costs in treatment tend to increase over the
years with the commencement of treatment at new centers. There also may be
reductions in commercial third-party reimbursement rates.
The healthcare industry is subject to extensive regulations of federal and
state authorities. There are a variety of fraud and abuse measures to combat
waste, which include anti-kickback regulations, extensive prohibitions relating
to self-referrals, violations of which are punishable by criminal or civil
penalties, including exclusion from Medicare and other governmental programs.
There can be no assurance that there will not be unanticipated changes in
healthcare programs or laws or that Dialysis Corporation of America will not be
required to restructure its practice and will not experience material adverse
effects as a result of any such challenges or changes. See Item 1, "Business -
Regulation - Dialysis Corporation of America."
Dialysis Corporation of America's future growth depends primarily on the
availability of suitable dialysis centers for development or acquisition in
appropriate and acceptable areas, and Dialysis Corporation of America's ability
to develop these new potential dialysis centers at costs within its budget while
competing with larger companies, some of which are public companies or divisions
of public companies with 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 responsible for the supervision of the
dialysis centers. There is no certainty as to when any new centers or inpatient
service contracts with hospitals will be implemented, or the number of stations,
or patient treatments such may involve, or if such will ultimately be
profitable. It has been our experience that newly established dialysis centers,
although contributing to increased revenues, have adversely affected our results
of operations due to start-up costs and expenses and a smaller patient base
until they develop.
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
Consolidated revenues, after reclassification of discontinued operations
due to our sale of our public subsidiary, Techdyne, on June 27, 2001, increased
by approximately $9,894,000 (92%) in 2001 compared to the preceding year. Sales
revenues increased by approximately $9,899,000 (100%) compared to the preceding
year. See Notes 1 and 13 to "Notes to Consolidated Financial Statements."
Other income which is comprised of interest income, rental income and
miscellaneous other income increased approximately $272,000 compared to the
preceding year. Interest income increased approximately $84,000 due to
investment of the proceeds from the sale of Techdyne. Management fee income
increased $131,000 with $115,000 of the increase related to a management
services agreement between Dialysis Corporation of America and its 40% owned
Toledo, Ohio affiliate and the remaining $15,000 increase resulting from
Techdyne extending its service agreement with our company until July
29
15, 2001. Rental income increased by $25,000 due to increased rent income from
Techdyne and increased rent income of our dialysis operations. Miscellaneous
other income increased by $32,000. We recorded a gain of approximately $251,000
related to Dialysis Corporation of America warrant exercises during 2000. See
Notes 1, 11 and 13 to "Notes to Consolidated Condensed Financial Statements."
Medical product sales revenues decreased approximately $252,000 (23%) for
2001 compared to the preceding year reflecting decreased sales of the principal
product of this division as a result of the general downturn in the economy,
reductions in government purchases and foreign competition, and decreased sales
of diabetic disposable products. Management is attempting to be more competitive
in lancet sales through overseas purchases and expansion of its customer base.
The medical products division has expanded its product line with several
diabetic disposable products; however, demand to date for these products has
been less than anticipated. No assurance can be given that efforts to increase
sales will be successful.
Medical service revenues, representing the revenues of our dialysis
division, Dialysis Corporation of America, increased approximately $10,150,000
(116%) for 2001 compared to the preceding year. This increase reflects increased
revenues of our Pennsylvania dialysis centers of approximately $1,894,000,
increased revenues of approximately $2,239,000 for our New Jersey centers, and
increased revenues of approximately $5,902,000 for our Georgia centers, where we
commenced operations at our first Valdosta center in the fourth quarter of 2000
and opened two new centers during 2001, and $115,000 consulting and license
income. 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 Dialysis Corporation of America's
and our 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 after
reclassification of discontinued operations due to our sale of Techdyne amounted
to 65% for 2001 compared to 69% for the preceding year. See Notes 1 and 13 to
"Notes to Consolidated Financial Statements."
Cost of goods sold for the medical products division as a percentage of
sales was 90%, including a provision of $160,000 for obsolete and unusable
inventory for 2001. Without this provision, cost of goods sold by the medical
products division for 2001 would have amounted to 72% compared to 86% for the
preceding year. Changes in cost of goods sold for this division resulted from a
change in product mix and a shift to overseas purchase of lancets.
Cost of medical services sales as a percentage of sales decreased to 64%
for the year ended December 31, 2001, compared to 67% for the preceding year as
a result of decreases in both supply costs and payroll costs as a percentage of
sales.
Selling, general and administrative expenses, after reclassification of
discontinued operations due to our sale of Techdyne, increased $3,280,000 for
2001 compared to the preceding year. Included in 2001 were $875,000 stock
compensation expenses for 875,000 shares issued to officers and directors,
$158,000 from forgiveness of amounts due from exercise of stock options, officer
bonus compensation of $190,000, and a goodwill write-off of $52,000 related to
the Medical Supply Division due to continuing operating losses of this division.
Included for 2000 was approximately $140,000 of stock option expense. Without
the increase in unusual items, selling, general and administrative expenses
would have increased $2,149,000 for 2001 compared to the preceding year. This
increase reflects operations of Dialysis Corporation of America's new dialysis
centers in Georgia and Pennsylvania, and the cost of additional support
personnel for Dialysis Corporation of America. As a percent of consolidated
sales revenue, without the unusual items, selling, general and administrative
expenses decreased to 33% for the year ended December 31, 2001 compared to 45%
30
for the year ended December 31, 2000 reflecting efficiencies associated with
Dialysis Corporation of America's expanded operations. See Notes 1 and 13 to
"Notes to Consolidated Financial Statements."
Provision for doubtful accounts increased approximately $466,000, including
$67,000 related to an uncollectible note, as a result of expanded operations of
Dialysis Corporation of America. The provision on doubtful accounts receivable,
excluding the note provision, amounted to 3% of sales for the year ended
December 31, 2001 compared to 2% for the year ended December 31, 2000. This
increase reflects different collectibility levels associated with Dialysis
Corporation of America's operations in new geographic areas, such as Dialysis
Corporation of America's Georgia operations.
Interest expense, after reclassification of discontinued operations due to
our sale of Techdyne, increased by approximately $130,000 for 2001 compared to
the preceding year, primarily as a result of additional Dialysis Corporation of
America equipment financing agreements, Dialysis Corporation of America's
Vineland loan and Dialysis Corporation of America's April, 2001 Georgia
mortgage. See Notes 1, 3 and 13 to "Notes to Consolidated Financial Statements."
The prime rate was 4.75% at December 31, 2001 and 9.50% at December 31,
2000.
Equity in affiliate loss represents equity in the loss incurred by Dialysis
Corporation of America's Ohio affiliate, in which Dialysis Corporation of
America has a 40% ownership interest. This dialysis center commenced operations
in February, 2001, and is still in the developmental stage.
2000 COMPARED TO 1999
Consolidated revenues after reclassification of discontinued operations due
to our sale of Techdyne on June 27, 2001 increased by approximately $3,289,000
(44%) in 2000 compared to the preceding year. Sales revenues increased by
approximately $3,264,000 (49%) compared to the preceding year.
Other income increased approximately $12,000 compared to the preceding
year, which includes interest of approximately $186,000 earned on the company's
loan to Linux Global Partners which more than offset a reduction in interest on
other invested funds. We recorded gains of approximately $276,000 related to
Dialysis Corporation of America warrant exercises during 2000. During the prior
year, we had a realized gain on the sale of marketable securities of $263,000.
See Notes 11 and 12 to "Notes to Consolidated Financial Statements."
Medical product sales revenues decreased by approximately $7,000 (1%)
compared to the preceding year. The medical products division has expanded its
product line with several diabetic disposable products in an effort to offset
decreased sales of the principal product of this division due to 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. No assurance can be given that these efforts will be
successful.
Medical service revenues, which represent the revenues of our dialysis
division, Dialysis Corporation of America, increased approximately $3,271,000
(59%) compared to the preceding year. This increase reflects increased revenues
of our Pennsylvania dialysis centers of approximately $1,174,000, increased
revenues of approximately $1,834,000 for our New Jersey centers, including
revenues of approximately $1,524,000 for our center in Vineland, New Jersey
which commenced operations in February 2000, and revenues of approximately
$263,000 for our new Georgia centers in
31
Valdosta and Homerville, Georgia. Although operations of new centers result in
additional revenues, while they are in the developmental stage their operating
results adversely affect Dialysis Corporation of America's and our results of
operations. As a result of having centers in the developmental stage which have
not achieved sufficient patient count to cover fixed operating costs, Dialysis
Corporation of America has continued to experience operational losses.
Cost of goods sold as a percentage of consolidated sales after
reclassification of discontinued operations amounted to 69% compared to 73% for
the preceding year.
Cost of goods sold by the medical products division increased to 85%
compared to 76% for the preceding year, as a result of a change in product mix
due to decreased sales of the principal product of the division and sales of new
products with lower profit margins.
Cost of medical services sales amounted to 67% for the year ended December
31, 2000 compared to 72% for the preceding year reflecting a decrease in both
supply costs and healthcare salaries as a percentage of sales.
Selling, general and administrative expenses after reclassification of
discontinued operations increased by approximately $799,000 compared to the
preceding year. This increase reflects operations of Dialysis Corporation of
America's new dialysis centers in Vineland, New Jersey, Valdosta, Georgia and
Homerville, Georgia, $69,000 expense from issuance by us of stock options as a
finders fee related to our investment in Linux Global Partners and approximately
$71,000 in conjunction with issuance of non-employee stock options. Also
included are the cost of additional support personnel for Dialysis Corporation
of America. As a percent of consolidated sales revenues, without the unusual
items, selling, general and administrative expenses decreased to 46% of sales
revenues for the year ended December 31, 2000 compared to 57% for the previous
year reflecting efficiencies associated with Dialysis Corporation of America's
expanded operations. Provision for doubtful accounts increased approximately
$94,000 as a result of Dialysis Corporation of America's expanded operations.
Interest expense after reclassification of discontinued operations
increased by approximately $19,000 compared to the preceding year, which
includes interest on additional dialysis equipment financing agreements,
interest on borrowings under our line of credit for our medical products
division to fund payments under letters of credit for foreign purchases.
A substantial portion of our outstanding borrowings are tied to the prime
interest rate. The prime rate was 9.5% at December 31, 2000 and 8.5% at December
31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $13,094,000 at December 31, 2001, which reflects a
decrease of $4,278,000 (25%) during 2001. The decrease in working capital
reflects our sale of Techdyne whose working capital, which totaled $12,443,000
at December 31, 2000, is not reflected in our Consolidated Balance Sheet at
December 31, 2001. The change in working capital included an increase in cash of
$8,894,000 including net cash provided by operating activities of $135,000, net
cash provided by investing activities of $8,264,000 (including net proceeds from
the sale of Techdyne of approximately $9,852,000, additions to property, plant
and equipment of $1,393,000, investments in Dialysis Corporation of America's
40% owned Ohio affiliate of $153,000, purchase of subsidiary minority interest
of $300,000 and repayments by Linux Global Partners of a $200,000 note) and net
cash provided by financing activities of $463,000 (including net line of credit
borrowings of $493,000, payments on long-term debt
32
of $584,000, repurchase of stock of approximately $126,000, repurchases by
Dialysis Corporation of America of its stock of approximately $98,0000 and
proceeds of Dialysis Corporation of America's new Georgia mortgage of
approximately $788,000). See Notes 1, 12 and 13 to "Notes to Consolidated
Financial Statements."
During 2000, we acquired an 8% interest in Linux Global Partners and loaned
Linux Global Partners $2,200,000 at an annual interest rate of 10%. We borrowed
the funds for the loans from Dialysis Corporation of America with an annual
interest rate of 10%, with the loans having the same terms as our loans to Linux
Global Partners. Interest on the notes amounted to $211,000 for 2001 compared to
$186,000 the preceding year. In May, 2001, Linux Global Partners made a payment
of $215,500 to us for the August, 2000 $200,000 principal balance and $15,500
accrued interest. We paid a like amount to Dialysis Corporation of America. In
June, 2000, Linux Global Partners paid $100,000 toward the accrued interest due
on the notes. In June, 2001, we repaid Dialysis Corporation of America the
remaining $2,000,000 in loans it made to us with approximately $279,000 of
accrued interest. On August 2, 2001, we entered into an Extension Agreement with
Linux Global Partners extending the maturity date of the loans in consideration
for additional Linux Global Partners shares of common stock, and repayment of
the loan based upon the earlier of $100,000 per month or 25% of the proceeds
from Linux Global Partners' proposed private placement. We have received the
shares but not any repayments. See Note 12 to "Notes to Consolidated Financial
Statements."
The Company repurchased and cancelled approximately 100,000 shares of its
outstanding common stock at a cost of approximately $125,000 in 2001. Dialysis
Corporation of America repurchased and cancelled approximately 93,000 shares of
its outstanding common stock at a cost of approximately $97,000 during 2001.
Dialysis Corporation of America has mortgages with a Maryland bank on its
two buildings, one in Lemoyne, Pennsylvania and the other in Easton, Maryland,
with a combined balance of $138,000 at December 31, 2001 and $210,000 at
December 31, 2000. Dialysis Corporation of America through its subsidiary DCA of
Vineland, LLC, has a $700,000 development and equipment loan secured by the
acquired assets of DCA of Vineland and a second mortgage on Dialysis Corporation
of America's real property in Easton, Maryland. This loan had an outstanding
balance of $700,000 at December 31, 2001 and December 31, 2000. In April 2001,
we obtained a $788,000 five-year mortgage on Dialysis Corporation of America's
building in Valdosta, Georgia which had an outstanding principal balance of
$776,000 at December 31, 2001. Dialysis Corporation of America has an equipment
financing agreement for kidney dialysis machines for its facilities. Dialysis
Corporation of America had outstanding balances under this agreement of
$1,678,000 at December 31, 2001 and $1,140,000 at December 31, 2000. See Note 3
to "Notes to Consolidated Financial Statements."
Long-term debt of Techdyne and its subsidiaries, Lytton and Techdyne
(Europe) was included in the company's long-term debt balances at December 31,
2000. As a result of our sale of our interest in Techdyne as of June 27, 2001,
Techdyne and its subsidiaries long-term debt is not reflected in the company's
long-term debt at June 30, 2001. See Notes 1, 3 and 13 to "Notes to Consolidated
Financial Statements."
The bulk of our cash balances are carried in interest-yielding vehicles at
various rates and mature at different intervals depending on our anticipated
cash requirements.
We anticipate that current levels of working capital and working capital
from operations will be adequate to successfully meet liquidity demands for at
least the next twelve months.
33
Dialysis Corporation of America opened its ninth dialysis center in
Fitzgerald, Georgia, its tenth center in Valdosta, Georgia (its second Valdosta
center), both in August, 2001, and its eleventh center in Mechanicsburg,
Pennsylvania in January, 2002. Dialysis Corporation of America is in the
planning stages for a new Ohio center and a new Maryland center, and is
anticipating completion of an acquisition of a dialysis unit in Georgia in the
immediate future. A center in Ohio which we manage and in which we hold a
minority interest (40%), opened in February, 2001. Dialysis Corporation of
America acquired the 30% minority interest in its DCA of So. Ga., LLC subsidiary
in August, 2001 for $600,000 with $300,000 paid in cash and $300,000 payable in
one year. See Notes 1 and 14 to "Notes to Consolidated Financial Statements."
Dialysis Corporation of America needs capital primarily for the development
of outpatient dialysis centers. The construction of a 15 station facility,
typically the size of Dialysis Corporation of America's dialysis facilities,
costs in the range of $600,000 to $750,000 depending on location, size and
related services to be provided, which includes equipment and initial working
capital requirements. Acquisition of an existing dialysis facility is more
expensive than construction, although acquisition provides an immediate ongoing
operation, which most likely would be generating income. Dialysis Corporation of
America plans to expand its operations primarily through development of new
centers. Development of a dialysis facility to initiate operations takes four to
six months and usually 12 months or longer to generate income. Dialysis
Corporation of America is in the planning stages for two new facilities, one in
Ohio and one in Maryland, and anticipates completing the acquisition of a
dialysis unit in Georgia in the immediate future. Dialysis Corporation of
America is also in different phases of negotiations for additional outpatient
centers. No assurance can be given that Dialysis Corporation of America will be
successful in implementing its growth strategy or that financing will be
available to support such expansion. A substantial portion of the proceeds from
the sale of Techdyne are anticipated to be used for expansion of our dialysis
operations.
DISCONTINUED OPERATIONS
The Company sold its 71.3% interest in Techdyne in June 2001. Accordingly,
the results of operations of Techdyne, net of applicable taxes, and the
company's gain on disposal of Techdyne, net of applicable taxes, have been
reflected as discontinued operations in our Consolidated Statements of
Operations with prior period amounts reclassified to conform to this
presentation. Costs of approximately $250,000 associated with Techdyne's
discontinuation of its European manufacturing operations are included in the
loss from discontinued operations. See Notes 1 and 13 to "Notes to Consolidated
Financial Statements."
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). Other than expanded disclosures, FAS 141 has had
no effect on the company's consolidated financial statements. Pursuant to FAS
142, the goodwill arising after June 30, 2001, will not be amortized and will be
subject to the impairment testing provisions of FAS 142 commencing in 2002. In
August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment on Disposal of Long-lived Assets" (FAS 144).
34
The adoption of FAS 144, which is required in 2002, is not expected to have a
significant effect on the company's consolidated operations, financial position
or cash flows. See Notes 1 and 14 to "Notes to Consolidated Financial
Statements."
INFLATION
Inflationary factors have not had a significant effect on our operations.
We attempt to pass on increased costs and expenses incurred in our medical
products division by increasing selling prices when and where possible. In our
dialysis division, revenue per dialysis treatment is subject to reimbursement
rates established and regulated by the federal government. These rates do not
automatically adjust for inflation. Any rate adjustments relate to legislation
and executive and Congressional budget demands, and have little to do with the
actual cost of doing business. Therefore, dialysis medical service revenues
cannot be voluntarily increased to keep pace with increases in supply costs or
nursing and other patient care costs. Increased operating costs without a
corresponding increase in reimbursement rates may adversely affect Dialysis
Corporation of America's and, accordingly, our future earnings. See "Regulation
- - Dialysis Corporation of America" and "Risk Factors" under Item 1, "Business."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risks from changes in interest rates. We have
exposure to both rising and falling interest rates.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities and interest bearing accounts at financial institutions in
which we had approximately $9,523,000 invested as of December 31, 2001.
We have an interest rate exposure on debt agreements with variable interest
rates of which we had approximately $1,040,000 of such debt outstanding as of
December 31, 2001. A 1% increase in interest rates its year-end variable rate
debt would result in a negative impact of approximately $6,000 on our results of
operations.
A1/2% decrease in rates on our year-end investments would result in a
negative impact of approximately $ 14,000 on our --- results of operations.
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
None.
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 23, 2002.
CURRENT POSITION AND POSITION
NAME AGE AREAS OF RESPONSIBILITY HELD SINCE
- ---- --- ----------------------- ----------
Thomas K. Langbein 56 Chairman of the Board of 1980
Directors, Chief Executive
Officer and President
Seymour Friend 81 Vice President and 1981
Director 1975
Daniel R. Ouzts 55 Vice President (Finance) 1986
Controller and Treasurer 1983
OTHER SIGNIFICANT EMPLOYEES
Stephen W. Everett 45 President and Director of Dialysis 2000
Corporation of America
DANIEL R. OUZTS - a certified public accountant, joined our company in 1980
as Controller of its plasma division. In 1983 he became Controller of our
company and Dialysis Corporation of America, and in 1986 became Vice-President
of Finance and Treasurer of our company. In June, 1996, Mr. Ouzts was appointed
Vice President and Treasurer of Dialysis Corporation of America. See Item 13,
"Certain Relationships and Related Transactions."
STEPHEN W. EVERETT has been involved in the healthcare industry for over 22
years. From 1993 to 1997, Mr. Everett was responsible for oversight, deal
structuring, physician recruitment and practice management for the renal care
division of Vivra, Inc., the second largest provider of dialysis services in the
United States. Mr. Everett held positions of similar responsibility in 1998 in
his affiliation with Physicians Practice Management, engaged in consulting and
management in the renal healthcare field. He joined Dialysis Corporation of
America in November, 1998 as Vice President, became Executive Vice President in
June, 1999, and President on March 1, 2000.
For more detailed information about or 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 29, 2002, which is incorporated herein by
reference.
36
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 29, 2002, 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 relating to the annual meeting of
shareholders anticipated to be held on May 29, 2002, incorporated herein by
reference), and by any person known to beneficially own more than 5% of any
class of our voting security, 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 29, 2002,
incorporated herein by reference.
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 29, 2002, 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.
None
(c) Exhibits*
3.1 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)).
3.2 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.
4.1 1989 Stock Option Plan (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 14 (c)(10)(i)).
4.2 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 14 (c)(10)(ii)).
4.3 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 14 (c)(10)(iii)).
4.4 Form of 2000 Option granted to MainStreet IPO.com Inc. and
Affiliates (incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 ("1999
Form 10-K"), Part IV, Item 14 (c)(10)(iv)).
4.5 2000 Stock Option Plan (incorporated by reference to the
Company's 1999 Form 10-K, Part IV, Item 14 (c)(10)(v)).
4.6 Form of Stock Option Certificate issued under the 2000 Stock
Option Plan (incorporated by reference to the Company's 1999 Form
10-K, Part IV, Item 14 (c)(10)(vi)).
38
4.7 1999 Stock Option Plan of the Dialysis Corporation of America(1)
(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)).
4.8 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)).
10 Material contracts.
10.1 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, 1998
("1998 Form 10-K"), Part IV, Item 14(c)(10)(i)).
10.2 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)).
10.3 Amendment to lease between the Company and Heights Plaza
Associates, dated February 12, 2001.
10.4 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)).
10.5 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)).
10.6 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)).
10.7 Loan Agreement between Dialysis Corporation of America(1) and
Mercantile-Safe Deposit and Trust Company dated November 30,
1988(3) (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)).
10.8 First Amendment to Loan Agreement between Dialysis Corporation of
America(1) and Mercantile-Safe Deposit and Trust Company dated
December 1, 1997(3) (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)).
10.9 Promissory Note to Mercantile-Safe Deposit and Trust Company by
Dialysis Corporation of America(1) dated November 30, 1988(3)
(incorporated by reference to DCA's March, 1998 Form 10-Q, Part
II, Item 6(a), Part II, Item 10(ii)).
10.10 First Amendment and Modification to Promissory Note to
Mercantile-Safe Deposit and Trust Company by Dialysis Corporation
of America(1)(3) (incorporated by reference to DCA's 1997 Form
10-K, Part IV, Item 14(c)(xxix)).
10.11 Lease Agreement between Dialysis Services of PA., Inc. -
Wellsboro(4) 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)).
39
10.12 Lease between Dialysis Corporation of America(1) and Dialysis
Services of PA., Inc. - Lemoyne(4) 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)).
10.13 Medical Director Agreement between Dialysis Services of PA., Inc.
- Wellsboro(4) 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)).
10.14 Agreement for In-Hospital Dialysis Services between Dialysis
Services of PA., Inc. - Wellsboro(4) 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)).
10.15 Medical Director Agreement between Dialysis Services of PA., Inc.
- Lemoyne(4) 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)).
10.16 Agreement for In-Hospital Dialysis Services between Dialysis
Services of PA., Inc. - Lemoyne(4) 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)).
10.17 Lease between Dialysis Services of PA., Inc. - Carlisle(5) 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)).
10.18 Lease between Dialysis Services of NJ., Inc. - Manahawkin(5) 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)).
10.19 Addendum to Lease Agreement between William P. Thomas and
Dialysis Services of NJ., Inc. - Manahawkin(5) dated June 4, 1997
(incorporated by reference to DCA's 1997 Form 10-K, Part IV, Item
14(c)(10)(xviii)).
10.20 Agreement for In-Hospital Dialysis Services between Dialysis
Services of PA., Inc. - Carlisle(5) 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)).
10.21 Equipment Master Lease Agreement BC-105 between Dialysis
Corporation of America(1) 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)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
40
10.22 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)).(6)
10.23 Lease between Dialysis Services of PA., Inc. - Chambersburg(5)
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)).
10.24 Lease between Dialysis Corporation of America(1) 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)).
10.25 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)).
10.26 Medical Director Agreement between DCA of Vineland, LLC(7) and
Vineland Dialysis Professionals dated April 30, 1999(8)
(incorporated by reference to the DCA 1999 Form 10-K, Part IV,
Item 14(c)(10)(xxvi)).
10.27 Medical Director Agreement between Dialysis Services of PA., Inc.
- Carlisle(5) and Cumberland Valley Nephrology Associates, P.C.
dated April 30, 1999(9) (incorporated by reference to the DCA
1999 Form 10-K, Part IV, Item 14(c)(10)(xxvii)).
10.28 Management Services Agreement between Dialysis Corporation of
America(1) and DCA of Vineland, LLC(7) dated April 30, 1999(10)
(incorporated by reference to the DCA 1999 Form 10-K, Part IV,
Item 14(c)(10)(xxviii)).
10.29 Amendment No. 1 to Management Services Agreement between Dialysis
Corporation of America(1) 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)).
10.30 Indemnity Deed of Trust from Dialysis Corporation of America(1)
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)).
10.31 Guaranty Agreement from Dialysis Corporation of America(1) to St.
Michaels Bank dated December 3, 1999 (incorporated by reference
to DCA's December Form 8-K, Item 7(c)(99)(ii)).
10.32 Lease between Dialysis Corporation of America and DCA of So. Ga.,
LLC(4) dated November 8, 2000 (incorporated by reference to
Dialysis Corporation of America's Current Report on Form 8-K
dated January 3, 2001 ("DCA January, 2001 8-K"), Item
7(c)(10)(i)).
10.33 Lease between DCA of Fitzgerald(4) and Hospital Authority of Ben
Hill County, dba Dorminy Medical Center, dated February 8, 2001
(incorporated by reference to Dialysis Corporation of America's
Current Report on Form 8-K dated March 5, 2001 ("DCA March, 2001
8-K"), Item 7(c)(10)(i)).
41
10.34 Lease between Dialysis Corporation of America(1) and Renal
Treatment Centers - Mid-Atlantic, Inc. dated July 1, 1999
(incorporated by reference to Dialysis Corporation of America's
Annual Report on Form 10-K for the year ended December 31, 2000
("DCA 2000 Form 10-K"), Part IV, Item 14 (c)(10)(xlii)).
10.35 Employment Agreement between Stephen W. Everett and Dialysis
Corporation of America(1) dated December 29, 2000 (incorporated
by reference to DCA 2000 Form 10-K, Part IV, Item
14(c)(10)(vii)).
10.36 Commercial Loan Agreement between Dialysis Corporation of
America(1) and Heritage Community Bank, dated April 3, 2001
(incorporated by reference to Dialysis Corporation of America's
Current Report on Form 8-K dated June 14, 2001 ("DCA June, 2001
Form 8-K"), Item 7(c)(i)).
10.37 Promissory Note by Dialysis Corporation of America(1) to Heritage
Community Bank, dated April 3, 2001 (incorporated by reference to
the DCA June, 2001 Form 8-K, Item 7(c)(ii)).
10.38 Guaranty of the Company to Heritage Community Bank, dated April
3, 2001 (incorporated by reference to the DCA June, 2001 Form
8-K, Item 7(c)(iii)).
10.39 Lease between Dialysis Corporation of America(1) and Commons
Office Research dated June 11, 2001 (incorporated by reference to
Dialysis Corporation of America's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 ("DCA June, 2001 Form 10-Q"),
Part II, Item 6(a)(10((i)).
10.40 Lease between DCA of Mechanicsburg, LLC(4) and Pinnacle Health
Hospitals dated July 24, 2001 (incorporated by reference to the
DCA June, 2001 Form 10-Q, Part II, Item 6(a)(10)(ii)).
10.41 Lease between Dialysis Corporation of America(1) and Clinch
Memorial Hospital dated September 29, 2000 (incorporated by
reference to Dialysis Corporation of America's Annual Report on
Form 10-K for the year ended December 31, 2001 ("DCA 2001 Form
10-K"), Part IV, Item 14(c) 10.38).
10.42 Lease between DCA of Valdosta, LLC(4) and W. Wayne Fann dated
March 20, 2001 (incorporated by reference to DCA 2001 Form 10-K,
Part IV, Item 14(c) 10.39).
10.43 Promissory Note Modification Agreement between DCA of Vineland,
LLC(7) and St. Michaels Bank dated November 28, 2001
(incorporated by reference to DCA 2001 Form 10-K, Part IV, Item
14(c) 10.43).
21 Subsidiaries of the Company.
23 Consent of experts and counsel.
(i) Consent of Wiss & Company, LLP, Independent Certified Public
Accountants.
27 Financial Data Schedule (for SEC use only).
42
- ---------------
(1) 62% owned subsidiary.
(2) Viragen, Inc. sold the property to Gesualdo and Rosanna Vitale in 2000; the
Vitales are the new landlords.
(3) 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.
(4) 100% owned subsidiary of Dialysis Corporation of America.
(5) 80% owned subsidiary of Dialysis Corporation of America.
(6) 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.
(7) 51% owned subsidiary of Dialysis Corporation of America.
(8) Each dialysis subsidiary has a Medical Director Agreement which is
substantially similar to the exhibit but for the area of non-competition
and compensation. Dialysis Corporation of America's affiliate, DCA of
Toledo, LLC (40% owned), has a substantially similar Medical Director
Agreement.
(9) 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.
(10) Each of Dialysis Corporation of America's dialysis subsidiaries has a
Management Service Agreement which is substantially similar to the exhibit
filed but for the name of the particular subsidiary which entered into the
Agreement and the compensation.
* Documents incorporated by reference not included in Exhibit Volume.
43
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 26, 2002
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 26, 2002
Thomas K. Langbein
/s/ SEYMOUR FRIEND Vice President and Director March 26, 2002
- ---------------------------
Seymour Friend
/s/ DANIEL R. OUZTS Vice-President (Finance), Principal
- --------------------------- Financial Officer, Controller and Treasurer March 26, 2002
Daniel R. Ouzts
/s/ PETER D. FISCHBEIN Director March 26, 2002
- ---------------------------
Peter D. Fischbein
/s/ ANTHONY C. D'AMORE Director March 26, 2002
- ---------------------------
Anthony C. D'Amore
/s/ ROBERT P. MAGRANN Director March 26, 2002
- ---------------------------
Robert P. Magrann
/s/ CHARLES B. WADDELL Director March 26, 2002
- ---------------------------
Charles B. Waddell
/s/ LAWRENCE E. JAFFE Director March 26, 2002
- ---------------------------
Lawrence E. Jaffe
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, 2001
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, 2001 and 2000........................................................ F-3
Consolidated Statements of Operations--Years ended December 31, 2001,
2000, and 1999.............................................................................................. F-4
Consolidated Statements of Stockholders' Equity--Years ended December 31, 2001,
2000 and 1999............................................................................................... F-5
Consolidated Statements of Cash Flows--Years ended December 31, 2001, 2000, and 1999........................... F-6
Notes to Consolidated Financial Statements--December 31, 2001.................................................. F-7
The following financial statement schedule of Medicore, Inc. and subsidiaries is
included in Item 14(d):
Schedule II-Valuation and qualifying accounts...............................................................F-28
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 sheets of Medicore, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. Our audits 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. 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
March 8, 2002
Livingston, New Jersey
F-2
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $10,359,372 $ 1,464,543
Accounts receivable, less allowances of
$753,000 in 2001 and $452,000 in 2000 4,054,718 9,612,264
Note receivable 2,000,000 2,200,000
Receivable from sale of Techdyne 1,100,000 ---
Inventories, less allowance for obsolescence
of $175,000 in 2001 and $798,000 in 2000 976,596 11,165,131
Prepaid expenses and other current assets 975,894 1,199,846
Deferred income taxes 372,000 673,463
----------- -----------
Total current assets 19,838,580 26,315,247
Property and equipment
Land and improvements 1,027,108 1,205,908
Building and building improvements 3,121,406 3,797,877
Equipment and furniture 4,728,377 11,729,212
Leasehold improvements 2,270,034 2,367,835
----------- -----------
11,146,925 19,100,832
Less accumulated depreciation and amortization 3,601,794 7,760,067
----------- -----------
7,545,131 11,340,765
Receivable from sale of Techdyne 1,400,000 ---
Deferred income taxes 166,000 ---
Deferred expenses and other assets 360,541 177,327
Goodwill, less accumulated amortization of $0 in 2001 and $932,000 in 2000 523,140 3,595,020
----------- -----------
$29,833,392 $41,428,359
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,629,391 $ 4,914,570
Accrued expenses and other current liabilities 2,422,805 2,697,523
Current portion of long-term debt 370,000 1,150,079
Income taxes payable 2,322,736 180,884
----------- -----------
Total current liabilities 6,744,932 8,943,056
Long-term debt 3,123,645 10,354,734
Deferred income taxes 688,000 2,251,388
Minority interest in subsidiaries 3,242,046 6,345,310
Commitments
Stockholders' equity:
Common stock, $.01 par value; authorized 12,000,000 shares; 6,600,275 shares
issued and outstanding in 2001;
5,710,540 shares issued and outstanding in 2000 66,002 57,105
Capital in excess of par value 12,806,898 11,705,837
Retained earnings 3,161,869 1,929,447
Accumulated other comprehensive loss:
Foreign currency translation adjustment --- (158,518)
----------- -----------
Total stockholders' equity 16,034,769 13,533,871
----------- -----------
$29,833,392 $41,428,359
=========== ===========
See notes to consolidated financial statements.
F-3
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues 2001 2000 1999
------------ ------------ ------------
Sales:
Product sales $ 861,077 $ 1,112,366 $ 1,119,180
Medical service revenues 18,919,752 8,769,470 5,498,541
------------ ------------ ------------
Total sales 19,780,829 9,881,836 6,617,721
Gain on subsidiary warrants exercise --- 276,178 ---
Realized gain on sale of marketable securities --- --- 263,144
Other income 910,264 638,646 626,591
------------ ------------ ------------
20,691,093 10,796,660 7,507,456
Cost and expenses:
Cost of sales:
Cost of product sales 775,969 949,939 837,109
Cost of medical services 12,021,907 5,833,081 3,964,258
------------ ------------ ------------
Total cost of sales 12,797,876 6,783,020 4,801,367
Selling, general and administrative expenses 7,869,714 4,588,776 3,789,419
Provision for doubtful accounts 661,158 195,244 101,399
Interest expense 228,312 97,923 78,792
------------ ------------ ------------
21,557,060 11,664,963 8,770,977
------------ ------------ ------------
Loss from continuing operations before income
taxes, minority interest and equity in affiliate loss (865,967) (868,303) (1,263,521)
Income tax (benefit) provision (928,125) 23,061 (292,462)
------------ ------------ ------------
Income (loss) from continuing operations before
minority interest and equity in affiliate loss 62,158 (891,364) (971,059)
Minority interest in income (loss) of consolidated subsidiaries 385,233 (136,534) (213,510)
Equity in affiliate loss (16,345) (20,896) ---
------------ ------------ ------------
Net loss from continuing operations (339,420) (775,726) (757,549)
Discontinued operations:
(Loss)income from operations of electro-mechanical
manufacturing operations, net of applicable income
taxes of $25,000 in 2001, $91,000
in 2000 and $350,000 in 1999 (962,814) 369,292 144,492
Gain on disposal of electro-mechanical manufacturing
operation, net of applicable income taxes of
$1,621,000 2,534,656 ---
------------ ------------ ------------
Net income (loss) $ 1,232,422 $ (406,434) $ (613,057)
============ ============ ============
Earnings (loss) per share:
Basic $.20 $(.07) $(.11)
==== ===== =====
Diluted $.20 $(.07) $(.11)
==== ===== =====
See notes to consolidated financial statements.
F-4
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL IN
COMMON EXCESS OF COMPREHENSIVE RETAINED
STOCK PAR VALUE INCOME (LOSS) EARNINGS
------------- ------------ ------------- ------------
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 December 31, 1999 57,075 11,961,030 2,335,881
Comprehensive loss
Net loss $ (406,434) (406,434)
Foreign currency translation adjustments (84,013)
Unrealized loss on marketable securities:
Unrealized holding loss arising during period, net of tax ---
Less reclassification adjustments, net of tax,
for shares written off (2,966)
------------
Comprehensive loss (493,413)
Finders fee stock option expense 69,000
Stock option expense 70,500
Adjustment for subsidiary minority capital contribution 123,817
Exercise of subsidiary stock options (602,055)
Repurchase of stock by subsidiary 76,435
Stock option exercises 30 7,110
------------ ------------ ------------
Balance December 31, 2000 57,105 11,705,837 1,929,447
Comprehensive income (loss):
Net income $ 1,232,422 1,232,422
Foreign currency translation adjustments (39,416)
Reclassification adjustment for foreign
for foreign currency translation adjustments
upon sale of subsidiary 197,934
------------
Comprehensive income $ 1,390,940
============
Forgiveness of subsidiary stock option notes 148,179
Stock compensation 8,750 866,250
Exercise of stock options 1,150 157,550
Repurchase of 100,000 common shares (1,003) (124,715)
Repurchase of stock by subsidiary --- 53,797
------------ ------------ ------------
Stock option exercises
Balance December 31, 2001 $ 66,002 $ 12,806,898 $ 3,161,869
============ ============ ============
(continued)
See notes to consolidated financial statements.
F-5
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
COMPREHENSIVE TREASURY
INCOME (LOSS) STOCK TOTAL
------------- ----- -----
Balance December 31, 1998 $ 110,747 $ (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 December 31, 1999 (71,539) 14,282,447
Comprehensive loss
Net loss
Foreign currency translation adjustments (84,013)
Unrealized loss on marketable securities:
Unrealized holding loss arising during period, net of tax
Less reclassification adjustments, net of tax,
for shares written off (2,966)
Comprehensive loss (493,413)
Finders fee stock option expense 69,000
Stock option expense 70,500
Adjustment for subsidiary minority capital contribution 123,817
Exercise of subsidiary stock options (602,055)
Repurchase of stock by subsidiary 76,435
Stock option exercises 7,140
------------ ------------
Balance December 31, 2000 (158,518) --- 13,533,871
Comprehensive income (loss):
Net income
Foreign currency translation adjustments (39,416)
Reclassification adjustment for foreign
for foreign currency translation adjustments
upon sale of subsidiary 197,934
Comprehensive income 1,390,940
Forgiveness of subsidiary stock option notes 148,179
Stock compensation 875,000
Exercise of stock options 158,700
Repurchase of 100,000 common shares (125,718)
Repurchase of stock by subsidiary --- 53,797
------------ ------------
Stock option exercises
Balance December 31, 2001 --- $ 16,034,769
============ ============ ============
See notes to consolidated financial statements.
F-5
MEDICORE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Operating activities:
Net income (loss) $ 1,232,422 $ (406,434) $ (613,057)
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation 1,534,158 1,943,524 1,732,487
Amortization 101,023 220,647 181,594
Bad debt expense 765,158 220,244 103,113
Provision for inventory obsolescence 349,805 421,888 404,762
Write-off of goodwill 52,471 --- ---
Stock and option related compensation write-off of goodwill 1,032,550 70,500 153,000
Subsidiary stock option note forgiveness 207,825 --- ---
Gain on sale of securities --- --- (263,144)
Minority interest 3,917 28,205 (85,507)
Gain on sale of Techdyne (2,534,656) --- ---
Equity in affiliate losses 16,345 20,896 ---
Loss on writeoff of marketable securities --- 42,317 ---
Deferred income taxes (391,939) 162,348 40,100
Consultant stock option expense --- 23,448 16,552
Finders' fee stock options expense --- 69,000 ---
Gain on subsidiary stock offering and warrants exercise --- (276,178) ---
Increase (decrease) relating to operating activities from:
Accounts receivable (2,025,484) (939,556) (2,819,365)
Inventories 624,128 (1,531,788) (2,122,458)
Prepaid expenses and other current assets (540,279) (178,725) (142,453)
Accounts payable (230,128) (636,582) 1,966,247
Accrued expenses and other current liabilities 618,898 523,597 194,881
Income taxes payable (680,972) 31,871 (141,852)
------------ ------------ ------------
Net cash provided by (used in) operating activities 135,242 (190,778) (1,395,100)
Investigating activities:
Redemption of minority interest in subsidiaries (300,000) --- ---
Notes receivable from Linux Global Partners 200,000 (2,200,000) ---
Subsidiary acquisition payments --- (395,806) (1,389,530)
Additions to property and equipment, net of minor disposals (1,392,884) (2,362,673) (2,406,650)
Net proceeds from sale of Techdyne 9,852,114 --- ---
Loan receivable from Techdyne 189,330 --- ---
Proceeds from sale of securities --- --- 292,354
Deferred expenses and other assets (20,073) (13,517) 55,025
Purchase of marketable securities --- (37,580) (33,947)
Sale of minority interest in subsidiaries 4,000 206,000 6,040
Loan to MainStreet --- (140,000) ---
Investment in affiliate (152,811) (28,589) ---
Loan to medical director practice (20,332) (83,521) ---
Loan to subsidiary officer (95,000) --- ---
------------ ------------ ------------
Net cash provided by (used in) investing activities 8,264,344 (5,055,686) (3,476,708)
Financing activities:
Line of credit borrowings 493,292 1,779,375 1,867,590
Other short-term bank borrowings --- --- 405,024
Payments on short-term bank borrowings --- (30,024) (375,000)
Proceeds from long-term borrowings 787,500 850,000 783,333
Payments on long-term borrowings (583,599) (741,999) (922,145)
Proceeds from exercise of stock options and warrants 1,150 777,440 500
Subsidiary repurchase of stock (97,978) (96,031) ---
Repurchase of stock (125,718) --- (8,166)
Deferred financing costs (11,882) (505) ---
------------ ------------ ------------
Net cash provided by financing activities 462,765 2,538,256 1,751,136
Effect of exchange rate fluctuations on cash 32,478 21,601 (22,885)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 8,894,829 (2,686,607) (3,143,557)
Cash and cash equivalents at beginning of year 1,464,543 4,151,150 7,294,707
------------ ------------ ------------
Cash and cash equivalents at end of year $ 10,359,372 $ 1,464,543 $ 4,151,150
============ ============ ============
See notes to consolidated financial statements.
F-6
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: The Company has three reported business segments. The medical
services segment, DCA, owns and operates eleven kidney dialysis centers located
in Pennsylvania, New Jersey and Georgia, and has agreements to provide inpatient
dialysis treatments to various hospitals and provides supplies and equipment for
dialysis home patients. The medical products segment is engaged in the
manufacture and distribution of medical supplies. A third segment, investment in
technology companies, was initiated in January, 2000 with an investment in and
financing to Linux software companies.
Consolidation: The Consolidated Financial Statements include the accounts
of Medicore, Inc., and Medicore's 62% owned subsidiary, Dialysis Corporation of
America ("DCA"). All material intercompany accounts and transactions have been
eliminated in consolidation. DCA has a 40% interest in an Ohio dialysis center
it manages, which is accounted for by the equity method and not consolidated for
financial reporting purposes.
On June 27, 2001, the Company sold its 71.3% interest in its
electro-mechanical manufacturing subsidiary, Techdyne, Inc. ("Techdyne") to
Simclar International Limited ("Simclar"). All material intercompany accounts
and transactions have been eliminated in consolidation. Techdyne's results of
operations are shown as discontinued operations in the Consolidated Condensed
Statement of Operations, requiring reclassification of amounts related to
Techdyne. See Note 13.
Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
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, securities it has owned were reclassified 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.
Proceeds from sales of securities were approximately $292,000 with a gain
of approximately $263,000 for the year ended December 31, 1999. Due to other
than temporary declines in their value, marketable securities were written off
during 2000. These securities, including approximately $5,000 of securities
purchased in 1999 and approximately $37,000 purchased during 2000, consisted of
several technology startup stocks.
F-7
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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. At December 31,
2001, inventories consists of inventory of the Company's medical products
division and the Companies Medical Services Division. At December 31, 2000,
inventories included those of Techdyne and its subsidiaries Lytton and Techdyne
(Europe) for which the cost of finished goods and work in process consisted of
direct materials, direct labor and an appropriate portion of fixed and variable
manufacturing overhead. The Company sold its interest in Techdyne in June 2001.
See Consolidation above and Note 13.
Inventories are comprised of the following:
DECEMBER 31, DECEMBER 31,
DISCONTINUED OPERATIONS: 2001 2000
------------- -----------
Electronic and mechanical components, net:
Finished goods $ --- $ 658,966
Work in process --- 2,586,900
Raw materials and supplies --- 6,937,268
----------- -----------
--- 10,183,134
CONTINUING OPERATIONS:
Medical supplies 976,596 981,997
----------- -----------
$ 976,596 $11,165,131
=========== ===========
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.
Goodwill: Goodwill represents cost in excess of net assets acquired.
Pursuant to Statement of Financial Accounting Standards No. 142, since the
Company's remaining goodwill was acquired after June 30, 2001 it will not be
amortized but will be subject to impairment testing commencing in 2002. See New
Pronouncements below and Note 14.
F-8
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Goodwill at December 31, 2000 consisted of goodwill related to the
Company's medical products division and Techdyne and was being amortized on a
straight-line basis over 25 years. The net remaining goodwill of approximately
$52,000 related to the Company's medical products division was written off in
September 2001 due to continuing operating losses of that division. The Company
sold its interest in Techdyne in June 2001, accordingly, the remaining Lytton
acquisition unamortized goodwill with a balance of approximately $3,072,000 at
December 31, 2000 is no longer included in the Company's consolidated balance
sheet. See Consolidation above and Note 13.
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 the
financial accounting and tax basis of assets and liabilities.
DCA was 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.
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 Techdyne's
foreign subsidiary Techdyne (Europe) were translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52. All balance
sheet accounts were translated using the current exchange rates at the balance
sheet date. Income statement amounts were 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 were not material, were
included in results of operations. These gains and losses resulted from exchange
rate changes between the time transactions are recorded and settled and, for
unsettled transactions, exchange rate changes between the time transactions were
recorded and the balance sheet date. The Company sold its interest in Techdyne
in June 2001; accordingly foreign currency translation adjustments are no longer
included in the Company's stockholder's equity. See Consolidation above and Note
13.
F-9
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Other Income: Other income is comprised as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Interest income $391,833 $284,670 $222,910
Interest income from discontinued operations 7,997 30,979 143,086
Rental income 240,724 160,432 142,561
Rental income from discontinued operations 73,170 128,630 79,707
Management fee income 130,715 --- ---
Other 65,825 33,935 38,327
-------- -------- --------
$910,264 $638,646 $626,591
======== ======== ========
At December 31, 2000 accrued expenses and other current liabilities
included those of Techdyne and its subsidiaries Lytton and Techdyne (Europe).
The Company sold its interest in Techdyne in June 2001. See Consolidation above
and Note 13.
Accrued expenses and other current liabilities is comprised as follows:
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Accrued compensation $ 813,664 $ 761,174
Due to insurance companies 671,935 294,659
Payable subsidiary minority interest acquisition (See Note 11) 300,000 ---
Other 637,206 1,641,690
---------- ----------
$2,422,805 $2,697,523
========== ==========
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.
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
----------- ----------- -----------
Net income (loss), numerator-basic computation $ 1,232,422 $ (406,434) $ (613,057)
Adjustment due to subsidiaries' dilutive securities (12,496) (1,476) (7,624)
----------- ----------- -----------
Net income (loss) as adjusted, numerator-diluted computation $ 1,219,926 $ (407,910) $ (620,681)
=========== =========== ===========
Weighted average shares 6,217,458 5,710,007 5,710,696
=========== =========== ===========
Earnings (loss) per share:
Basic $.20 $(.07) $(.11)
==== ===== =====
Diluted $.20 $(.07) $(.11)
==== ===== =====
The Company has various stock options outstanding which have not been
included on the earnings (loss) per share computation since they were
anti-dilutive.
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.
F-10
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Customer Payment Terms: The majority of the Company's sales are made at
payment terms of net amount due in 30-45 days, depending on the customer.
Estimated Fair Value of Financial Instruments: The carrying value of cash,
accounts receivable and debt in the accompanying financial statements
approximate their fair value because of the short-term maturity of these
instruments, and in the case of debt because such instruments bear variable
interest rates which approximate market.
Business Segments: The Company follows the provisions of Financial
Accounting Standards Board Statement No. 131, " Disclosures About Segments of an
Enterprise and Related Information" (FAS 131) which contains standards for
reporting information about operating segments in annual financial statements
with operating segments representing components of an enterprise evaluated by
the enterprise's chief operating decision maker for purposes of making decisions
regarding resource allocation and performance evaluation. The adoption of FAS
131 has not changed the Company's reported business segments, but has resulted
in changes in the Company's segment reporting disclosures.
Comprehensive Income: The Company follows Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" (FAS 130) which
contains rules for the reporting of comprehensive income and its components.
Comprehensive income (loss) consists of net income (loss), foreign currency
translation adjustments (related to Techdyne, sold June 2001; see Consolidation
above and Note 13) and unrealized gains on marketable securities and is
presented in the Consolidated Statement of Shareholders' Equity.
Revenue Recognition: The company follows the guidelines of SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB101). Medical service revenues are recorded as services are rendered.
New Pronouncements: In July 2001, The FASB issued Statements of Financial
Accounting Standards No. 141, "Business Combinations" (FAS 141) and No. 142,
"Goodwill and Other Intangible Assets" (FAS 142). FAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Other than expanded disclosure requirements, FAS 141 has had
not effect on the Company's consolidated financial statements. Under FAS 142,
goodwill and intangible assets with
F-11
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators are present) for impairment. Separable
intangible assets that do not have indefinite lives will continue to be
amortized over their useful lives (with no maximum life). The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2002, the provisions of FAS 142 will be effective for fiscal years
beginning after December 15, 2001. Pursuant to the provision so FAS 142, the
goodwill resulting from DCA's acquisition of minority interest in August 2001
will not be amortized and will be subject to impairment testing provisions of
FAS 142 commencing in 2002, prior to which it will be subject to the impairment
provisions of Accounting Principles Board Opinion No. 17 "Intangible Assets",
and FASB Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-lived Assets and Assets to be Disposed of." See Note 14.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment on Disposal of Long-lived Assets" (FAS
144). FAS 144 clarifies when a long-lived asset held for sale should be
classified as such. It also clarifies provision guidance under FAS 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be disposed of.." The Company will be required to adopt FAS 144 in 2002. The
adoption of FAS 144 is not expected to have a significant effect on the
Company's consolidated operations, financial position or cash flows.
Reclassification: The Statement of Operations has been reclassified to
reflect the operations of Techdyne as discontinued operations due to the
Company's sale of its interest in Techdyne in June 2001. See Consolidation above
and Note 13.
NOTE 2--TRANSACTIONS WITH VIRAGEN, INC.
During 1999, the Company sold approximately 259,000 shares of Viragen
(formerly a majority owned subsidiary of the Company) stock and recognized a
gain of approximately $228,000.
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
2001, 2000 or 1999. 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
The Company's medical products division has a $350,000 line of credit with
a local Florida bank, with interest at prime plus 1% payable monthly. This line
of credit originally matured April 22, 2001, was extended to July 22, 2001 and
subsequently extended to January 22, 2003 and is secured by the accounts
receivable and inventory of the Company's medical products division. The line
had an outstanding balance of approximately $186,000 at December 31, 2001 and
$217,000 at December 31, 2000.
F-12
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 3--LONG-TERM DEBT--CONTINUED
In December 1988, DCA obtained a $480,000 fifteen year mortgage through
November 2003 on its building in Lemoyne, Pennsylvania with interest at 1% over
the prime rate. The remaining principal balance under this mortgage amounted to
approximately $61,000 and $93,000 at December 31, 2001 and December 31, 2000,
respectively. Also in December 1988, DCA obtained a $600,000 mortgage on its
building in Easton, Maryland on the same terms as the Lemoyne property. The
remaining principal balance under this mortgage amounted to approximately
$77,000 and $117,000 at December 31, 2001 and December 31, 2000, respectively.
DCA through its subsidiary, DCA of Vineland, LLC, pursuant to a December 3,
1999 loan agreement obtained a $700,000 development and equipment line of credit
with interest at 8.75% through December 2, 2001 and 1 1/2% over the prime rate
thereafter 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 only through December 2, 2001 with monthly payments
thereafter of $2,917 principal plus interest with any remaining balance due
September 2, 2003. This loan had an outstanding balance of $700,000 at December
31, 2001 and December 31, 2000.
In April 2001, DCA obtained a $788,000 five-year mortgage through April
2006 on its building in Valdosta, Georgia with interest at 8.29%. Payments are
$6,800 including principal and interest commencing May 2001 with a final payment
consisting of a balloon payment and any unpaid interest due April 2006. This
mortgage is guaranteed by the Company. The remaining principal balance under
this mortgage amounted to approximately $776,000 at December 31, 2001.
The DCA equipment financing agreement provides financing for kidney
dialysis machines for DCA's facilities in Pennsylvania, New Jersey and Georgia.
Additional financing totaled approximately $387,000 in 1999, $525,000 in 2000
and $752,000 in 2001. Payments under the agreement are pursuant to various
schedules extending through August 2006. Payments under some schedules begin one
year after commencement of the financing which would increase monthly payments
from $28,426 as of December 31, 2001 to $50,825 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.
Long-term debt at December 31, 2000 included Techdyne and its subsidiaries,
Lytton and Techdyne (Europe). At December 31, 2000, Techdyne and Lytton had
various cross-collateralized loans with the same bank. They had a combined
amount of approximately $6,669,000 outstanding under three-year lines of credit
maturing February 2003, $833,000 outstanding under a five-year term loan
maturing February 2005, $1,028,000 outstanding under a five-year term loan
maturing June 2004 and $150,000 outstanding under an equipment loan agreement
maturing February 2003. In addition to these bank loans at December 31, 2000,
Lytton had an equipment loan with an outstanding balance of $66,000 and Techdyne
(Europe) had a 15-year mortgage originating in July 1994 with an outstanding
balance of $414,000. The Company sold its interest in Techdyne in June 2001. In
conjunction with its purchase of the Company's 71.3% interest in Techdyne,
Simclar refinanced all of Techdyne's long-term debt, and Techdyne repaid its
loan payable to the Company in October 2001. See Notes 1 and 13.
F-13
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 3--LONG-TERM DEBT--CONTINUED
Long-term debt is as follows:
DECEMBER 31
-------------------------------
2001 2000
---- ----
Mortgage note of Techdyne (Europe), a subsidiary of Techdyne (sold June 2001) $ --- $ 413,608
Mortgage note secured by land and building with a net book value of
of $355,000 at December 31, 2001. Monthly principal payments of
$3,333 plus interest at 1% over the prime rate through November 2003, 76,719 116,715
as described above
Mortgage note secured by land and building with a net book value of
$623,000 at December 31, 2001. Monthly principal payments of $2,667
plus interest at 1% over the prime rate through November 2003,
as described above 61,281 93,284
Equipment financing agreement secured by DCA equipment with a net book
value of $1,588,000 at December 31, 2001. Monthly payments totaling
$28,426 as of December 31, 2001, including principal and interest,
pursuant to various schedules extending through August 2006 with
interest
at rates ranging from 4.14% to 10.48%, as described above 1,678,067 1,140,260
Development and equipment loan secured by assets of DCA of Vineland and
land and building with a total net book value of $1,542,000 at
December 31, 2001. Payments of principal and
interest as described above 700,000 700,000
Mortgage note secured by land and building with a net book value of
$940,000 at December 31, 2001. Monthly payments of $6,800 including
principal and interest at 8.29% commencing May 2001,
with remaining balance due April 2006 755,842 ---
Line of credit maturing January 22, 2003 secured by accounts receivable
and inventory of medical supply division with a carrying value of
approximately $273,000 at December 31, 2001. Monthly payments
of interest as described above 185,530 216,930
Mortgage note secured by land with a net book value of $107,000 at
December 31, 2001. 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 16,205 30,285
Line of credit agreement of Techdyne (sold June 2001) --- 3,883,058
Installment loan of Techdyne (sold June 2001) --- 833,330
Line of credit agreement of Lytton subsidiary of Techdyne (sold June 2001) --- 2,786,442
Installment loan of Lytton a subsidiary of Techdyne (sold June 2001) --- 1,028,337
Equipment loan of Lytton, a subsidiary of Techdyne (sold June 2001) --- 150,000
Equipment loan of Lytton, a subsidiary of Techdyne (sold June 2001) --- 66,157
Other - Techdyne (sold June 2001) --- 46,407
----------- -----------
3,493,644 11,504,813
Less current portion 370,000 1,150,079
----------- -----------
$ 3,123,644 $10,354,734
=========== ===========
F-14
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 3--LONG-TERM DEBT--CONTINUED
The prime rate was 4.75% as of December 31, 2001 and 9.50% as of December
31, 2000.
Scheduled maturities of long-term debt outstanding at December 31, 2001
are: 2002 - $370,000; 2003 - $ 1,400,000; 2004 - $502,000; 2005- $356,000; 2006-
$866,000. Interest payments on all of the above debt amounted to $535,000,
$883,000 and $649,000 in 2001, 2000 and 1999, 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 had net operating loss carryforwards of approximately $950,000
at December 31, 2000 with expirations through the year through 2020, including
Techdyne (sold June 2001; see Notes 1 and 13) net operating loss carryforwards
of approximately $170,000 at December 31, 2000. DCA had federal net operating
loss carryforwards $170,000 at December 31, 2000 with expirations through 2020.
DCA files separate federal and state income tax returns with their respective
income tax liabilities reflected on a separate basis.
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,
------------------------------
2001 2000
------------ -----------
Deferred tax liabilities:
Tax over book depreciation $ --- $ 81,200
Gain on sale of Techdyne and DCA stock 688,000 2,067,000
------------ -----------
Total deferred tax liability 688,000 2,148,200
Deferred tax assets:
Obsolescence and other reserves 349,500 435,480
Inventory capitalization --- 111,328
Book over tax depreciation 201,500 ---
Net operating loss carryforwards 86,000 ---
Accrued expenses and other 118,000 118,195
------------ -----------
Sub-total 755,000 665,003
Valuation allowance (217,000) (820,000)
------------ -----------
Net deferred tax asset $ 538,000 $ 570,275
------------ -----------
Net deferred tax liability $ 150,000 $ 1,577,925
============ ===========
Due to the uncertainty as to the realizability of deferred tax assets, a
valuation allowance of $217,000 and $820,000 was recorded as of December 31,
2001 and 2000, respectively.
F-15
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 4--INCOME TAXES--CONTINUED
Deferred taxes in the accompanying balance sheets consist of the following
components:
DECEMBER 31,
------------------------------
2001 2000
------------ -----------
Current deferred tax asset $ 372,000 $ 73,178
Current deferred tax liabilities --- (252,600)
------------ -----------
Net current deferred tax asset (liability) 372,000 (179,422)
------------ -----------
Long-term deferred tax asset 166,000 671,097
Long-term deferred tax liability (688,000) (2,069,600)
------------ -----------
Net long-term deferred tax liability (522,000) (1,398,503)
------------ -----------
Net deferred tax liability $ (150,000) $(1,577,925)
============ ===========
A deferred tax liability of $698,000 and $2,067,000 at December 31, 2001
and 2000, respectively, 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 (sold June 2001) and DCA. This temporary difference would reverse
upon the occurrence of certain events relating to the divestiture of DCA or
Techdyne (as occurred June 2001). This deferred tax liability has been
classified as noncurrent. See Notes 1 and 13.
Significant components of the provision (benefit) for income taxes are as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
---- ---- ----
Current:
Federal $(472,239) $ (180,309) $(330,358)
State (151,286) 55,422 30,456
--------- ---------- ---------
(623,525) (124,887) (299,902)
--------- ---------- ---------
Deferred:
Federal (291,721) 123,365 7,440
State (12,879) 24,583 ---
--------- ---------- ---------
(304,600) 147,948 7,440
--------- ---------- ---------
$(928,125) $ 23,061 $(292,462)
========= ========= =========
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,
--------------------------------
2001 2000 1999
---- ---- ----
Tax at statutory rate $(300,002) $(312,866) $ (430,506)
Adjustments resulting from:
State income taxes-net of federal income tax effect (34,617) 36,578 21,290
Non deductible items 203,876 58,006 3,395
Prior year tax return to provision adjustment --- (268,433) (3,641)
Change in valuation allowance (603,000) 623,000 117,000
Other (194,382) (113,224) ---
--------- --------- ----------
$(928,125) $ 23,061 $ (292,462)
========= ========= ==========
F-16
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 4--INCOME TAXES--CONTINUED
Income tax (refunds) payments were approximately $253,000 in 2001,
$(72,000) in 2000 and $101,000 in 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.
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 809,000 options under its 1989 plan, of which 3,000 were exercised at
$2.38 in March 2000 for a total of $7,140 proceeds, with 3,000 cancelled and
803,000 options having expired at 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. These
options remain outstanding at December 31, 2001. On July 27, 2000, the board
granted 820,000 five-year non-qualified stock options under the 1989 Plan to 17
officers, directors and employees of the Company and its subsidiaries. The
options are exercisable at $1.38, the market price on the date of grant. In June
2001, 115,000 options were exercised with cash for the par value and the balance
due on the exercise price forgiven resulting in an expense of approximately
$158,000 leaving 705,000 options outstanding at December 31, 2001. In June 2001,
the Company issued 875,000 shares of stock as compensation to officers and
directors resulting in an expense of $875,000.
On February 17, 2000, the Company adopted a new 2000 Stock Option Plan for
up to 500,000 shares and granted 150,000 non-qualified and 325,000 incentive
stock options which Plan was approved by shareholders on May 24, 2000, prior to
which the options were restricted from exercise. The options are exercisable for
three years at $3.25 and remain outstanding at December 31, 2001. The Company
recorded an expense of approximately $71,000 on 75,000 of these options in May
2000.
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. In July, 1996, 2,000 shares under this Plan
were issued to the managing director of Techdyne's European operations. Techdyne
was sold June 2001. See Notes 1 and 13.
F-17
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 5--STOCK OPTIONS--CONTINUED
In June, 1998, DCA's board of directors granted an option under the now
expired 1995 Stock Option Plan to a new board member for 5,000 shares
exercisable at $2.25 per share through June 9, 2003.
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. In April 2000, the 340,000 one-year options were exercised for which
DCA received cash payment of the par value amount of $3,400 and the balance in
three-year promissory notes with interest at 6.2%. On January 2, 2001, DCA's
board of directors granted to DCA's president an option for 165,000 shares
exercisable at $1.25 per share for five years from vesting with 33,000 options
vesting January 2001 and 33,000 options vesting each January 1 for the next four
years.
In May, 1998, as part of the consideration pursuant to an agreement for
investor relations and corporate communications services, which agreement
terminated in August, 1998, 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
of which options for 5,000 shares vested and which options expired on May 14,
2001.
In June, 2001, Techdyne (sold June 2001) forgave approximately $234,000
related to promissory notes from stock options exercises with this amount
reflected in discontinued operations. Techdyne entered into a consulting
agreement on July 1, 1999 for financial advisory services, which ended 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 expired September 15, 2000. These options were valued at
$40,000 resulting in approximately $23,000 expense during 2000 and $17,000
expense during 1999 with these amounts reflected in discontinued operations. See
Notes 1 and 13.
In January, 2000, the Company issued options to purchase 150,000 shares of
its common stock to an entity and two of its then officers as a finder's fee in
conjunction with the Company's investment in Linux Global Partners and recorded
an expense of approximately $69,000 on these options. These options are
exercisable at $3.00 per share through January 30, 2002. See Note 12.
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: risk-free interest rates of 6.43% for the
January 2000 options, 6.75% for the February 2000 and July 2000 options and
5.59% for the 1997 options; no dividend yield; volatility factor of the expected
market price of the Company's common stock of .78 for the January 2000 and
February 2000 options, .81 for the July 2000 options, and .97 for the 1997
options; and an expected life of 3 years for the January 2000 options, 2.75
years for the February 2000 options, 2.5 years for the July 2000 options, and
2.5 years for the 1997 options.
F-18
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
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 DCA and
(Techdyne (sold June 2001; see Notes 1 and 13) pro forma adjustments follows:
2001 2000 1999
---- ---- ----
Pro forma net income (loss) $1,225,658 $(1,401,506) $(874,361)
========== =========== =========
Pro forma earnings (loss) per share
Basic $.20 $(.25) $(.15)
==== ===== =====-
Diluted $.20 $(.25) $(.15)
==== ===== =====
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:
2001 2000
---- ----
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- --------------
Outstanding-beginning of year $1,485,000 846,000
Granted --- $1.38 1,445,000 $2.16
Exercised (115,000) 4.25 (3,000) 2.38
Expired (5,000) (803,000) 2.38
----------- -----------
Outstanding-end of year 1,365,000 1,485,000
========= =========
Outstanding and exercisable at end of year:
1995 and 1997 options 35,000 2.38 35,000 $2.38
1998 options --- 5,000 2.25
January 2000 and February 2000 options 625,000 3.19 625,000 3.19
July 2000 options 705,000 1.38 820,000 1.38
---------- ----------
1,365,000 1,485,000
========= =========
Weighted-average fair value of
options granted, including
modified options, during the year $.-- $.77
==== ====
(continued)
1999
----
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding-beginning of year 846,000
Granted ---
Exercised ---
Expired ---
--------
Outstanding-end of year 846,000
=======
Outstanding and exercisable at end of year:
1995 and 1997 options 841,000 $2.38
1998 options 5,000 2.25
January 2000 and February 2000 options ---
July 2000 options ---
--------
846,000
=======
Weighted-average fair value of
options granted, including
modified options, during the year $ .--
=====
The weighted average remaining contractual life at December 31, 2001 of the
1997 options is .4 years, .9 years for the January 2000 and February 2000
options, and 3.4 years for the July 2000 options.
F-19
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
The Company has 1,905,000 shares reserved for future issuance at December
31, 2001, including: 882,000 shares for the 1989 plan; 500,000 shares for the
February 2000 plan, 98,000 shares for key employee stock plan; 25,000 for the
January 2000 options, and 400,000 shares for an employment agreement.
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 2001 and 1999; risk-free
interest rate of 5.75% and 5.65%; no dividend yield; volatility factor of the
expected market price of DCA common stock of 1.15 and .95 and a weighted average
expected life of 4 years and 1.9 years.
A summary of DCA's stock option activity, and related information for the
years ended December 31, follows:
2001 2000 1999
---- ---- ----
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding-beginning of year 465,000 809,500 19,500
Granted 165,000 $ 1.25 --- 800,000 $ 1.25
Cancellations --- --- ---
Exercised --- (340,000) $ 1.25 --- 1.50
Expired (4,500) 1.50 (10,000) 3.50
------- ----------- -----------
Outstanding-end of year 630,000 465,000 809,500
======= =========== ===========
Outstanding and exercisable
at end of year:
January 2001 options 33,000 1.25
April 1999 options 460,000 1.25 460,000 1.25 800,000 1.25
November 1995 options --- --- --- 4,500 1.50
June 1998 options 5,000 2.25 5,000 2.25 5,000 2.25
------- ----------- -----------
498,000 465,000 809,500
======= =========== ===========
Weighted-average fair value of
options granted during the year $ .43 $ .59
======= ===========
F-20
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
The remaining contractual life at December 31, 2001 is 2.3 years for
460,000 options issued in April 1999 and 1.4 years for the options issued in
June 1998. The remaining contractual life for the January 2001 options is 4
years for the 33,000 options which vested January 2001 and 6 years, 7 years, 8
years and 9 years for the 33,000 options vested January 2002, January 2003,
January 2004 and January 2005, respectively.
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, of which there were none for the periods
presented, are generally intended to approximate market price. The Company sold
its interest in Techdyne in June 2001 for which the operating results have been
reclassified as discontinued operations and accordingly are not included in the
business segment data below. Subsequent to the sale of Techdyne, the Company's
operations are primarily domestic, with all property, plant and equipment
located in the United States and minimal sales outside the Untied States. See
Notes 1 and 13.
BUSINESS SEGMENT REVENUES
2001 2000 1999
------------ ------------ ------------
Medical Products $ 864,035 $ 1,112,490 $ 1,119,179
Medical Services 19,441,170 9,247,101 5,865,571
New Technology 211,330 185,836 ---
Corporate 299,255 457,839 538,603
Elimination of corporate rental charges
to medical products (1,830) (7,320) (14,200)
Elimination of medical services interest
charge to new technology (109,108) (185,836) ---
Elimination of medical services
interest charge to corporate (13,759) (13,450) (1,697)
------------ ------------- -------------
$ 20,691,093 $ 10,796,660 $ 7,507,456
============ ============= =============
BUSINESS SEGMENT PROFIT (LOSS)
Medical Products $ (401,178) (284,380) (192,644)
Medical Services 966,388 (379,198) (960,821)
New Technology (1,533,399) (69,000) ---
Corporate 102,222 (135,725) (110,056)
------------ ------------- -------------
$ (865,967) $ (868,303) $ (1,263,521)
============ ============= =============
BUSINESS SEGMENT ASSETS
Continuing Operations:
Medical Products $ 335,588 $ 899,650 $ 723,204
Medical Services 15,683,433 11,177,382 9,035,947
New Technology 2,281,666 2,385,836 ---
Corporate 11,733,433 1,889,881 2,202,517
Elimination of medical services advance receivable
from corporate (200,728) (414,339) (105,142)
Elimination of medical services notes receivable
from new technology --- (2,200,000) ---
Elimination of medical services accrued interest
from new technology --- (185,836) ---
------------ ------------- -------------
$ 29,833,392 $ 13,552,574 $ 11,856,526
============ ============= =============
Discontinued Operations:
Electro-mechanical --- 27,875,785 26,760,202
Elimination of electro-mechanical trade receivable --- --- (6,763)
------------ ------------- -------------
from medical products $ 29,833,392 $ 41,428,359 $ 38,609,968
============ ============= =============
F-21
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 6--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA--CONTINUED
2001 2000 1999
----------- ----------- -----------
OTHER BUSINESS SEGMENT INFORMATION
INTEREST INCOME:
Medical Services $ 180,368 $ 289,350 $ 195,344
New Technology 211,330 185,836 ---
Corporate 130,999 39,747 172,349
Elimination of medical services intercompany
interest charge to corporate (13,759) (13,450) ---
Elimination of medical services intercompany
interest charge to new technology (109,108) (185,836) (1,697)
----------- ----------- -----------
$ 399,830 $ 315,649 $ 365,996
=========== =========== ===========
INTEREST EXPENSE:
Medical Products $ 15,933 $ 11,485 $ 1,377
Medical Services 210,805 82,456 72,605
New Technology 109,108 185,836
Corporate 15,333 17,432 6,507
Elimination of medical services
interest charge to new technology (109,108) (185,836)
Elimination of medical services intercompany
interest charge to corporate (13,759) (13,450) (1,697)
----------- ----------- -----------
$ 228,312 $ 97,923 $ 78,792
=========== =========== ===========
DEPRECIATION AND AMORTIZATION:
Continuing Operations:
Medical Products $ 22,068 $ 39,307 $ 36,702
Medical Services 808,659 596,305 452,203
Corporate 54,973 58,089 63,159
----------- ----------- -----------
$ 885,700 $ 693,701 $ 552,064
=========== =========== ===========
DISCONTINUED OPERATIONS:
Electro-mechanical 749,481 1,470,470 1,362,017
----------- ----------- -----------
$ 1,635,181 $ 2,164,171 $ 1,914,081
=========== =========== ===========
OTHER SIGNIFICANT NON-CASH ITEMS:
MEDICAL SERVICES:
Stock and stock option related compensation expens$ $ --- $ --- $ 153,000
NEW TECHNOLOGY:
Finders' fee stock option expense --- 69,000 ---
CORPORATE:
Gain on subsidiary warrant exercise --- $ 276,178 $ ---
Gain on sale of marketable securities --- --- 263,144
Stock option related compensation expense $ 1,032,550 70,500 ---
DISCONTINUED OPERATIONS:
Gain on disposal of electro-mechanical
manufacturing operations, net of tax $ 2,574,173 --- ---
CAPITAL EXPENDITURES:
Medical Products $ --- 1,897 19,710
Medical Services 1,984,980 1,912,049 1,202,819
Corporate --- 2,802 20,681
----------- ----------- -----------
$ 1,984,980 $ 1,916,748 $ 1,243,210
=========== =========== ===========
F-22
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 6--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA--CONTINUED
MAJOR CUSTOMERS
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, 2001
are approximately: 2002 - $609,000; 2003 - $541,000; 2004 - $423,000, 2005 -
$338,000; 2006 - $241,000; thereafter - $694,000. Total rent expense for
continuing operations was approximately $464,000, $357,000 and $297,000 in 2001,
2000 and 1999, respectively.
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, 2000.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially all of
its employees. The Company and Techdyne adopted this plan as participating
employers effective July 1, 1998. The discretionary profit sharing and matching
expense of the Company, $10,000 for 2001, $8,000 for 2000, and $6,000 for 1999.
Techdyne and Lytton are reflected in discontinued operations. Subsequent to the
sale of its interest in Techdyne in June 2001, the Company remains as a
participating employer in this multi-employer plan. See Notes 1 and 13.
NOTE 8--RELATED PARTY TRANSACTIONS
During 2001, 2000 and 1999, the Company and DCA paid premiums of
approximately $283,000, $242,000 and $294,000, respectively, for insurance
through a director and stockholder, and the relative of a director and
stockholder.
During 2001, 2000 and 1999, legal fees of approximately $271,000, $215,000
and $219,000, respectively, were paid by the Company and DCA to an attorney who
acts as general counsel and is secretary of the Company (of which he is also a
director), and served as general counsel and secretary to DCA.
F-23
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 8--RELATED PARTY TRANSACTIONS--CONTINUED
In May 2002, DCA loaned its president $95,000 to be repaid with accrued
interest at prime minus 1% (floating prime) on or before maturity on May 11,
2006. This demand loan is collateralized by all DCA President's stock options in
DCA, as well as common stock from exercise of the options and proceeds from sale
of such stock. Interest income on the loan amounted to approximately $4,000 for
2001. This loan and the related accrued interest of $4,000 have been included in
prepaid expenses and other current assets at December 31, 2001.
The company accrued $20,000 as compensation to be paid to Techdyne's
President for assistance with affairs related to the sale of Techdyne and
subsequent transition matters. See Notes 1 and 13.
NOTE 9--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The Company recorded an adjustment to the valuation allowance relating to
its deferred tax asset of approximately $320,000 during the fourth quarter of
2000 and $28,000 during the fourth quarter of 1999.
NOTE 10--ACQUISITION
On July 31, 1997, Techdyne (sold In June 2001; see Consolidation above and
Note 13), acquired Lytton, which manufactures and assembles printed circuit
boards and other electronic products, for $2,5000,000 cash and 300,000 shares of
Techdyne common stock with a guaranteed sales value of $2,400,000. Additional
contingent consideration was due if Lytton achieved pre-defined sales levels.
Additional consideration of approximately $396,000, $290,000 and $154,000 was
paid in April 2000, April 1999, and April 1998, respectively, based on sales
levels. As the contingencies were resolved, additional consideration due, was
recorded as goodwill. In July 1998, Techdyne advanced the seller approximately
$1,278,000 ("Advance") toward the guarantee for the sale of Techdyne's common
stock in addition to prior sales by the seller. In July 1999, Techdyne forgave
the Advance and issued payment of $1,100,000 to the seller, which together with
proceeds realized by the seller from the sale of Techdyne stock in 1998
satisfied Techdyne's remaining obligation under the $2,400,000 guarantee.
NOTE 11--SUBSIDIARY STOCK OFFERINGS
Pursuant to a 1996 public offering, DCA issued common stock and 2,300,000
redeemable common stock purchase warrants to purchase one DCA common share each
with an exercise price of $4.50, originally exercisable through April 16, 1999
and extended to June 30, 2000, at which time the remaining outstanding warrants
expired. The underwriters received options to purchase 100,000 shares of DCA
common stock and 200,000 common stock purchase warrants, with the options
exercisable at $4.50 per unit through their expiration, April 16, 2001 with the
underlying warrants being substantially identical to the public warrants except
that they are exercisable at $5.40 per share. The underwriters' options expired
unexercised.
During 2000, approximately 170,000 DCA warrants were exercised with net
proceeds to DCA of approximately $765,000. In accordance with its accounting
policy, the Company recognized a gain of approximately $276,000 and deferred
income taxes of approximately $105,000 related to the DCA warrant exercises.
F-24
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 12--INVESTMENT
Over the period, January, March and August, 2000, the Company loaned an
aggregate of $2,200,000 with a 10% annual interest rate to Linux Global Partners
("LGP"), a company investing in Linux software companies and recently attempting
to initiate the development and marketing of a Linux desktop software system.
During that period, the Company also acquired an 8% ownership interest in LGP.
The Company's investment of $120 in LGP is accounted for at cost. A substantial
portion of the loans were originally scheduled to mature January 26, 2001. The
Company borrowed the funds for its financing of LGP from DCA under the same
terms and at the same interest rate as its loan to LGP. Interest on the notes
amounted to approximately $211,000 for the year ended December 31, 2001 and
$186,000 for the year ended December 31, 2000. Interest receivable on the notes
from LGP amounted to approximately $282,000 at December 31, 2001 and $186,000 at
December 31, 2000 and is included in prepaid expenses and other current assets.
The Company has agreed to extend the maturity of its notes receivable from LGP
on several occasions, first to June 30, 2001 for additional consideration
consisting of 400,000 additional shares of LGP stock representing a 2% interest
in LGP and the right to convert all or part of the loans into Convertible
Preferred A shares of LGP with the same terms and conditions as a private
placement of its securities in process by LGP. The Company transferred 100,000
of these shares to DCA in consideration for that subsidiary's extension of the
loan to the Company. This increased DCA's ownership in LGP to 400,000 shares,
including 300,000 LGP shares previously securing a note receivable written off
by DCA with a cost basis of approximately $145,000, which is included in
deferred expenses and other assets. Additionally, LGP agreed to repay all monies
owed to the Company prior to any other use of its private placement proceeds if
the Company chose not to convert the loans. On May 14, 2001, LGP repaid the
$200,000 August 2000 loan plus $16,000 accrued interest. The Company made
payment of $216,000 to DCA. In June 2001, LGP paid $100,000 toward the accrued
interest on the remaining $2,000,000 outstanding notes. At the end of June,
2001, the Company repaid DCA the remaining outstanding loan of $2,000,000 and
accrued interest of $279,000. Further, on August 2, 2001, the Company entered
into an Extension Agreement with LGP extending the maturity date of the loans
pending completion of LGP's proposed private placement, in consideration for
50,000 LGP shares of common stock per month until the loan is fully satisfied,
and repayment of the loan based upon the earlier of $100,000 per month or 25% of
the proceeds from LGP's proposed private placement. We have received the shares
but no repayments.
F-25
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 13--SALE OF TECHDYNE INTEREST
On April 6, 2001, the Company entered into an agreement with Simclar to
sell its 71.3% ownership interest in Techdyne to Simclar for $10,000,000, with
an earn-out consisting of 3% of consolidated Techdyne sales, net of returns,
allowances and bad debts for the three fiscal years commencing January 1, 2001
with a $5,000,000 maximum and $2,500,000 minimum earn-out. The earn-out is
payable in cash by March 31 of each year for the earn-out period just ended. A
receivable of $1,100,000, representing an estimate of the first earn-out
payment, has been included in current assets with the remaining $1,400,000 of
the minimum $2,500,000 earn-out reflected as non-current. The sale was subject
to approval by the Company's shareholders' which was obtained at the Company's
annual shareholders' meeting on June 27, 2001, with the sale to Simclar closing
that same day. See Note 1.
The pro forma consolidated condensed financial information presented below
reflects the sale of the Company's interest in Techdyne as if it had occurred as
of January 1, 1999. For purposes of pro forma statement of operations
information, no assumption has been made that expenses have been eliminated
which were included in corporate expense allocations by the Company to Techdyne
and which were included in the actual results of operations of Techdyne. No
assumption has been included in the pro forma information as to investment
income to be realized from investment of the proceeds of the sale. The summary
pro forma information, which excludes the gain on the sale, 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, 1999 and may not be indicative
of the Company's operating results for any future periods.
SUMMARY PRO FORMA INFORMATION
(Unaudited)
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2001 2000 1999
---- ---- ----
Total revenues $ 20,683,000 $ 10,766,000 $ 7,364,000
============== ============== ==============
Net loss $ (1,522,000) $ (1,167,000) $ (1,309,000)
============== ============== ==============
Loss per share
Basic $ (.24) $ (.20) $ (.23)
============== ============== ==============
Diluted $ (.25) $ (.20) $ (.23)
============== ============== ==============
The Company recorded a pre-tax gain on the sale of its interest in Techdyne
of approximately $4,200,000, including the $2,500,000 minimum earn-out after
estimated costs of $200,000, with estimated income taxes of approximately
$1,600,000.
The Consolidated Condensed Statement of Operations reflects as discontinued
operations the results of operations of Techdyne, net of applicable taxes, and
the gain on disposal of Techdyne, net of applicable taxes. Certain
reclassifications have been made to prior period amounts in accordance with this
presentation.
F-26
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
NOTE 13--SALE OF TECHDYNE INTEREST--CONTINUED
The Company provided certain financial and administrative services to
Techdyne under a service agreement. Subsequent to the Company's sale of its
71.3% ownership interest in Techdyne to Simclar on June 27, 2001, the Company
continued to provide services under the agreement through July 15, 2001, the
effective date of cancellation of the agreement, for additional consideration of
$15,000.
Simclar refinanced Techdyne's long-term debt and Techdyne repaid its
remaining loan payable to the Company including accrued interest in October
2001. See Note 1.
NOTE 14--ACQUISITION OF MINORITY INTEREST
In August 2001, DCA acquired the 30% minority interest in DCA of So. Ga.,
LLC, for $600,000 with $300,000 paid in cash and $300,000 payable in August,
2002 with this liability included in accrued expenses and other current
liabilities. This transaction resulted in $523,000 goodwill representing the
excess of the $600,000 purchase price over the $77,000 fair value of the
minority interest acquired. The goodwill will be amortized for tax purposes over
a 15-year period. DCA's decision to make this investment was based largely on
the profitability of DCA of So. Ga. Subsequent to this acquisition, DCA of So.
Ga. will continue to be included in the Company's and DCA's consolidated
condensed statements of operations; however, minority interest in DCA of So.
Ga.'s results of operations will not be recorded subsequent to DCA's acquisition
of the minority interest. The party from which DCA acquired the minority
interest has an agreement to act as medical director of another of DCA's
subsidiaries. If this party should fail to satisfy the terms of the agreement,
the purchase price of the 30% minority interest in DCA of So. Ga. would be
reduced to $300,000. See Note 1.
F-27
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
MEDICORE, INC. AND SUBSIDIARIES
DECEMBER 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D
- ---------------------------------------------------------------------------------------------------------------------------
Balance at Additions (Deductions) Charged to Other Changes
Beginning Charged (Credited) to Other Accounts Add (Deduct)
Classification of Period Cost and Expenses Describe Describe
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 452,000 $ 765,000 $ (223,000)(1)
(241,000)(3)
Reserve for inventory obsolescence 798,000 350,000 (511,000)(2)
(462,000)(3)
Valuation allowance for deferred tax asset 820,000 (603,000) ---
---------- ------------------ -----------------
$2,070,000 $ 512,000 $ (1,437,000)
========== ================== =================
YEAR ENDED DECEMBER 31, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 431,000 $ 220,000 $ (199,000)(1)
Reserve for inventory obsolescence 724,000 422,000 (348,000)(2)
Valuation allowance for deferred tax asset 500,000 320,000 ---
---------- ------------------ --------- -----------------
$1,655,000 $ 962,000 $ 0 $ (547,000)
========== ================== ========= =================
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 317,000 $ 103,000 $ 11,000)(1)
Reserve for inventory obsolescence 559,000 405,000 (240,000)(2)
Valuation allowance for deferred tax asset 528,000 (28,000) ---
---------- ------------------ --------- -----------------
$1,404,000 $ 480,000 $ 0 $ (229,000)
========== ================== ========= =================
(1) Net (write-offs) recoveries against receivables allowance.
(2) Net write-offs against inventory reserves.
(3) Sale of Techdyne
(continued)
F-28
- ------------------------------------------------------------------
COL. A COL. E
- ------------------------------------------------------------------
Additions
Balance
at End of
Classification Period
- ------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 753,000
Reserve for inventory obsolescence 175,000
Valuation allowance for deferred tax asset 217,000
-----------------
$ 1,145,000
=================
YEAR ENDED DECEMBER 31, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 452,000
Reserve for inventory obsolescence 798,000
Valuation allowance for deferred tax asset 820,000
-----------------
$ 2,070,000
=================
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 431,000
Reserve for inventory obsolescence 724,000
Valuation allowance for deferred tax asset 500,000
-----------------
$ 1,655,000
=================
(1) Net (write-offs) recoveries against receivables allowance.
(2) Net write-offs against inventory reserves.
(3) Sale of Techdyne
F-28