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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
For the fiscal year ended December 31, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to __________
Commission file number 0-6906
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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
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the closing price at which the common
stock was sold on June 30, 2004 was approximately $14,107,383.
As of March 10, 2005 the company had outstanding 7,132,434 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Annual Reports, Forms 10-K, for the years ended December 31,
1994, 1997, 2001 and 2002 Part IV, Exhibits, incorporated in Part IV of this
Annual Report.
Annual Report for Registrant's Subsidiary Dialysis Corporation of America,
Form 10-K for the years ended December 31, 1996 and 1998 to 2003, Part IV,
Exhibits, incorporated in Part IV of this Annual Report.
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MEDICORE, INC.
Index to Annual Report on Form 10-K
Year Ended December 31, 2004
Page
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PART I
Item 1. Business.................................................................................... 1
Item 2. Properties.................................................................................. 34
Item 3. Legal Proceedings........................................................................... 36
Item 4. Submission of Matters to a Vote of Security Holders......................................... 36
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities....................................................... 37
Item 6. Selected Financial Data..................................................................... 39
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 54
Item 8. Financial Statements and Supplementary Data................................................. 54
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................................................... 54
Item 9A. Controls and Procedures..................................................................... 55
Item 9B. Other Information........................................................................... 55
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 56
Item 11. Executive Compensation...................................................................... 60
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................................................. 67
Item 13. Certain Relationships and Related Transactions.............................................. 70
Item 14. Principal Accountant Fees and Services...................................................... 72
PART IV
Item 15. Exhibits amd Financial Statement Schedules.................................................. 74
Signatures............................................................................................... 81
PART I
Cautionary Notice Regarding Forward-Looking Information
The statements contained in this Annual Report on Form 10-K and the
documents incorporated by reference in this Annual Report that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of
the Securities Exchange Act of the 1934 (the "Exchange Act"). In addition, from
time to time, we or our representatives have made or may make forward-looking
statements, orally or in writing, and in press releases. The Private Securities
Litigation Reform Act of 1995 contains certain safe harbors 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 56% owned public subsidiary, Dialysis Corporation of America, is
engaged, the proposed acquisition by Dialysis Corporation of America of our
company pursuant to a stock for stock merger transaction, 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. Forward-looking
statements are based on assumptions and are subject to known and unknown risks
and uncertainties. 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 our business and operations, and other factors
discussed periodically in our filings. Many of the foregoing factors are beyond
our control. Among the factors that could cause actual results to differ
materially are the factors detailed in the risks discussed in the "Risk Factors"
section beginning on page 23 of this Annual Report. If any such events occur or
circumstances arise that we have not assessed, they could have a material
adverse effect upon our revenues, earnings, financial condition and business, as
well as the trading price of our common stock, which could adversely affect your
investment in us. 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 we undertake no obligation to revise to reflect events after the date
made. All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf, are expressly qualified in their entirety by
the cautionary statements contained in this Annual Report. You should read this
Annual Report, the exhibits attached and the documents incorporated by reference
completely and with the understanding that our actual results may be materially
different from what we expect.
The forward-looking statements speak only as of the date of this Annual
Report, and except as required by law, we undertake no obligation to rewrite or
update such statements to reflect subsequent events.
Item 1. Business
General
Medicore, Inc., incorporated in Florida in 1961, has three business
segments: (i) the medical products division which distributes medical products;
(ii) the operation of kidney dialysis centers and other dialysis services
through our 56% owned public subsidiary, Dialysis Corporation of America; and
(iii) the investment in technology companies through our interest in Linux
Global Partners, Inc. (and in which Dialysis Corporation of America also has an
interest), a private speculative company that invests in developing Linux
software companies, including its affiliate Xandros, Inc., that has developed
and markets a Linux desktop operating system. We sold our 71% interest in our
public subsidiary, Techdyne, Inc., in June, 2001, subsequent to which we have
had no continuing operations as a contract manufacturer of electronic
components. The dialysis operations are the most significant part of our
operations, accounting for approximately 98% of our sales revenues. Our
investment in technology companies, currently limited to Linux Global Partners
and Xandros, has not generated any revenues other than interest income and a
gain of approximately $784,000 recorded in August 2003 from our sale of Ximian,
Inc. preferred stock that we had acquired on foreclosure of collateral securing
our loans to Linux Global Partners. We sold the Ximian stock in connection with
the acquisition of Ximian by a third party in August 2003. We also recorded a
gain of approximately $402,000 in August 2004 upon the release of half of the
escrowed funds due us from that sale, the balance of which is due to be released
to us in August 2005 pending fulfillment by the parties to the Ximian
acquisition of certain post sale conditions. Our medical products division
accounts for approximately 2% 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. You may further communicate with us at the following:
Florida New Jersey
Fax: (305) 825-0961 Fax: (201) 288-8208
Email: [email protected]
Recent Developments
We have agreed to terms with Dialysis Corporation of America for a
merger pursuant to which our company will be merged with and into Dialysis
Corporation of America in a stock for stock merger transaction. The prospective
merger was announced in a joint press release on March 15, 2005. The merger is
subject to our receipt of satisfactory tax and fairness opinions, the filing
with and declaration of effectiveness of a registration statement, including a
proxy statement/prospectus, with the SEC, and shareholder approval by our
shareholders and the shareholders of Dialysis Corporation of America. Assuming
the merger is completed, holders of our common stock on the effective date of
the merger, as currently structured, will have the right to receive .68 shares
of Dialysis Corporation of America common stock for each share of Medicore
common stock. It is anticipated that Dialysis Corporation of America will issue
an aggregate of approximately 5,289,000 shares in the merger, which will result
in approximately 9,000,000 of Dialysis Corporation of America shares of common
stock to be outstanding upon completion of the merger.
The bases for the merger are essentially to simplify the corporate
structure, enable the ownership of our control interest in Dialysis Corporation
of America to be in the hands of the public rather than Medicore, and provide
Dialysis Corporation of America with the Medicore assets, which include, among
other assets, minimum cash of approximately $4,000,000 to $5,000,000, the
medical supply operations, and income providing real estate in Hialeah, Florida,
with an estimated value of at least $3,000,000. Dialysis Corporation of
America's indebtedness to Medicore of approximately $2,435,000 at March 24,
2005, under a financing arrangement provided by us to Dialysis Corporation of
America of up to $5,000,000, will be eliminated. This credit facility is for
Dialysis Corporation of America's equipment financing, working capital and
general corporate purposes. These assets to be obtained in the merger will
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enhance Dialysis Corporation of America's liquidity and borrowing power and
provide Dialysis Corporation of America with the ability to continue its
business strategy of controlled growth, further build its dialysis business, and
expand the acquired medical supply operations.
Dialysis Corporation of America is preparing for filing with the SEC in
the near future a registration statement on Form S-4 containing a proxy
statement/prospectus, as well as an information statement for Dialysis
Corporation of America in connection with the merger transaction. Common
shareholders are urged to read that filing when it becomes available, since it
will contain important information about the merger, our company and Dialysis
Corporation of America, including, but not limited to, each company's
management, risk factors, stockholder rights, and voting procedures. When the
registration statement and the proxy statement/prospectus is available,
shareholders may obtain free copies and other documents filed with the SEC at
the SEC's website at www.sec.gov. In addition, shareholders and others may
obtain free copies of the documents filed with the SEC by contacting Lawrence E.
Jaffe, Esq., our corporate Secretary, at 201-288-8282. Medicore and our
directors and executive officers may be deemed to be participants in the
solicitation of proxies from our shareholders in connection with the merger
transaction. Dialysis Corporation of America is providing an information
statement with respect to its annual meeting at which shareholder approval for
the merger transaction will be sought, but Dialysis Corporation of America does
not solicit proxies since a quorum for the shareholder meeting exists by virtue
of our controlling interest in Dialysis Corporation of America.
Information regarding the special interests of our directors and
executive officers and the directors and executive officers of Dialysis
Corporation of America in the merger transaction will be disclosed in the proxy
statement/prospectus. Additional information regarding the directors and
executive officers of DCA is included in Dialysis Corporation of America's
Annual Report on Form 10-K for the year ended December 31, 2004, and as to our
directors and executive officers in this Annual Report, Part III, below. These
Annual Reports and related documents are available free of charge at the SEC's
website at www.sec.gov, and from Lawrence E. Jaffe, corporate Secretary to our
company and Dialysis Corporation of America, as described above.
Medical Products
We develop and distribute medical products, 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.
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Dialysis Operations
Dialysis Corporation of America currently operates 23 outpatient
dialysis centers in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South
Carolina and Virginia, including its management of an Ohio center in which it
has a 40% interest and an unaffiliated Georgia center, in each case pursuant to
management services agreements. Dialysis Corporation of America 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 that
Dialysis Corporation of America 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 in
appropriate and acceptable areas, and its ability to develop new 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
numbers of personnel and amounts of financial resources. Dialysis Corporation of
America opened five new dialysis centers during 2004; one in Virginia in January
2004, one in South Carolina in February 2004, one in Pennsylvania in March 2004,
one in Maryland in June 2004, and another in Virginia in December 2004. At the
end of August 2004, Dialysis Corporation of America acquired a dialysis company
which owns and operates two dialysis centers in Pennsylvania. Dialysis
Corporation of America is in the process of developing five additional dialysis
centers: one in Maryland, one in Ohio and three in South Carolina.
Dialysis Corporation of America's medical service revenues are derived
primarily from four sources: (i) outpatient hemodialysis services (46%, 47% and
48% of its medical services revenues for 2004, 2003 and 2002, respectively);
(ii) home peritoneal dialysis services (7%, 4% and 3% of its medical services
revenues for 2004, 2003 and 2002, respectively); (iii) inpatient hemodialysis
services for acute patient care provided through agreements with hospitals and
medical centers (5%, 7% and 10% of its medical services revenues for 2004, 2003
and 2002, 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 (a
deteriorating kidney loses its ability to regulate red blood cell count,
resulting in anemia) (42%, 42% and 39% of its medical services revenue for 2004,
2003 and 2002, respectively). Dialysis is an ongoing and necessary therapy to
sustain life for kidney dialysis patients, with end stage renal disease, or
ESRD. 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 Typically these
rates are at least equivalent to or higher than the government fixed rates on a
per treatment basis.
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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, ESRD, 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 dialysis treatment for the rest of their lives.
Based upon information published by the CMS, the number of ESRD
patients requiring dialysis treatments in the United States at December 31, 2002
was approximately 309,000, 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 4,443 dialysis
facilities, with the current annual cost for treating ESRD patients in the
United States at approximately $25 billion at December, 2002, of which Medicare
accounted for approximately $17 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 80%) 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 with other equipment which
also controls external blood flow and monitors the toxic and fluid removal
process. The dialyzer has two separate chambers divided by a semi-permeable
membrane, and simultaneously with the blood circulating through one chamber,
dialyzer fluid circulates 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.
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
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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.
While kidney transplantation, another treatment option for patients
with ESRD, is typically the most desirable form of therapeutic intervention, the
scarcity of suitable donors and possibility of donee rejection limits the
availability of this surgical procedure as a treatment option.
Dialysis Corporation of America's Business Strategy
Dialysis Corporation of America has 28 years' experience in developing
and operating dialysis treatment facilities. Its priority is to provide quality
patient care. Dialysis Corporation of America intends to continue to establish
alliances with physicians and hospitals and attempt to initiate dialysis service
arrangements with nursing homes and managed care organizations.
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 process of developing five
new dialysis centers and is in different stages of negotiations with physicians
for potential new facilities in a variety of states.
In June, 2001 we sold our controlling interest in Techdyne, Inc. for
$10,000,000 plus a three year earn-out of between $2,500,000 and $5,000,000. A
substantial portion of our after tax proceeds from that sale may be utilized for
expansion of Dialysis Corporation of America's dialysis operations.
Development and Acquisition of Facilities
One of the primary elements in developing or acquiring dialysis centers
is locating an area with an existing patient base under the current treatment of
a local nephrologist, since the proposed facility would primarily be serving
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 existing outpatient dialysis facilities within reasonable proximity to the
proposed center.
Dialysis Corporation of America's expansion is accomplished primarily
through the development of its 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 approximately 12 months or longer to generate income,
all of which are subject to variations based on location, size and competitive
elements. Some of Dialysis Corporation of America's 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 the size of Dialysis
Corporation of America's dialysis facilities, costs in a range of $750,000 to
$1,000,000 including equipment and initial working capital requirements,
depending on location, size and related services to be provided by the proposed
facility. Acquisition of existing facilities can be substantially more
expensive, and is usually based primarily upon its patient base and earnings,
and to a lesser extent, location and competition. Any significant expansion,
whether through acquisition or development of new facilities, is dependent upon
existing funds or financing from other sources. We have entered into a financing
arrangement with Dialysis Corporation of America which provides Dialysis
Corporation of America up to
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$5,000,000 for equipment financing and working capital. At March 25, 2005,
Dialysis Corporation of America had borrowed $2,435,000 under a demand
promissory note issued to us, at an annual interest rate of prime plus 1.25%.
Assuming completion of the proposed merger with Dialysis Corporation of America,
Dialysis Corporation of America would obtain, among other assets, approximately
$4,000,000 to $5,000,000 in cash which it may use for building its dialysis
operations. See "Recent Developments" above.
Inpatient Services
Management of Dialysis Corporation of America also seeks to increase
acute dialysis treatments through contracts with hospitals for inpatient
dialysis services. These contracts are sought with hospitals in areas serviced
by its 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.
There is no certainty as to when any additional centers or service
contracts will be implemented or, to the extent implemented, the number of
dialysis stations or patient treatments these centers or service contracts may
involve, or if they will ultimately be profitable. There is no assurance that
Dialysis Corporation of America will be able to continue to enter into favorable
relationships with physicians who would become medical directors of such
proposed dialysis facilities, or that Dialysis Corporation of America 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, initially adversely affect results of operations due to
their start-up costs and expenses and due to their having a smaller and slower
developing patient base. See this Item 1, "Business - Dialysis Corporation of
America's Business Strategy - Operations and Competition," and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Operations
Location, Capacity and Use of Facilities
Dialysis Corporation of America operates 23 outpatient dialysis
facilities in Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina
and Virginia, including an Ohio dialysis center in which it holds a 40% interest
and which it operates in conjunction with the majority owner, the medical
director of that center, and an unaffiliated center in Georgia which it manages.
These dialysis facilities have a total designed capacity of 331 licensed
stations.
Dialysis Corporation of America owns and operates its centers through
subsidiaries a majority of which are 100% owned, with the balance of the centers
owned by Dialysis Corporation of America as a majority owner in conjunction with
the medical directors of those centers who hold minority interests ranging from
20% to 49%. Dialysis Corporation of America has a minority 40% interest in a
center in Toledo, Ohio which it manages, and also manages an unaffiliated
dialysis center in Georgia. One of the Pennsylvania and one of the Georgia
dialysis facilities are located on properties owned by Dialysis Corporation of
America and leased to the subsidiaries operating those centers. Dialysis
Corporation of America's Cincinnati, Ohio dialysis center is leased from a
corporation owned by the medical director of that facility who, together with
his wife, holds a 40% interest in the subsidiary operating that center. See Item
2, "Properties."
The owner of the facility in Georgia that is managed by Dialysis
Corporation of America is involved in litigation and subject to its success in
that litigation and continuing to be the sole owner of
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that facility, Dialysis Corporation of America has given the owner a put option
to sell to a subsidiary of Dialysis Corporation of America all the assets of
that Georgia dialysis facility. The Dialysis Corporation of America subsidiary
holds a call option to purchase the assets of the Georgia facility. Each of the
put and call options are exercisable through September, 2005. The put option,
however, is not exercisable unless that Georgia dialysis facility has recorded
$100,000 in pre-tax income. Upon exercise of either the put or call option the
owner would receive a 20% interest in Dialysis Corporation of America's
subsidiary which will own and operate the Georgia facility, and the remainder of
the purchase price will be paid in cash, determined on a formula based upon a
multiple of EBITDA.
Additionally, Dialysis Corporation of America provides acute care
inpatient dialysis services to nine hospitals in areas serviced by its dialysis
facilities, and it is in the process of negotiating additional acute dialysis
services contracts in the areas surrounding its facilities as well as in tandem
with development of future proposed sites. Each of Dialysis Corporation of
America's dialysis facilities has the capacity to provide training, supplies and
on-call support services for home peritoneal patients. Dialysis Corporation of
America provided approximately 149,000 hemodialysis treatments in 2004, an
increase of approximately 31,000 treatments compared to fiscal 2003.
Management of Dialysis Corporation of America estimates that on average
its centers were operating at approximately 54% of capacity as of December 31,
2004, 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 significant additional capital
expenditures.
Operations of Dialysis Facilities
Dialysis Corporation of America's dialysis facilities are designed
specifically for outpatient hemodialysis and generally contain, in addition to
space for dialysis treatments, a nurses' station, a patient weigh-in area, a
supply room, water 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. Dialysis Corporation of America's facilities
also have a designated area for training patients in home dialysis. Each
facility also offers amenities for the patients, such as a color television with
headsets for each dialysis station, to ensure the patients are comfortable and
relaxed. Dialysis Corporation of America's facilities offer high-efficiency
conventional hemodialysis, which, it believes, provides the most viable
treatment for most patients, and management considers its dialysis equipment to
be both modern and efficient, providing state of the art treatment in a safe and
comfortable environment.
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. In addition, there are independent consultants who visit with the
dialysis patients at the facilities. These individuals supervise the patient's
needs and treatments. See "Employees" below. Dialysis Corporation of America
must, in furtherance of its business strategy, strive to attract and retain
skilled nurses and other staff, competition for whom is intense.
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Dialysis Corporation of America's 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
Dialysis Corporation of America.
Inpatient Dialysis Services
Dialysis Corporation of America presently provides inpatient dialysis
services to nine hospitals in Georgia, Ohio and Pennsylvania, under agreements
either with it or with one of its subsidiaries 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
Dialysis Corporation of America's dialysis facilities provide certain
ancillary services to ESRD patients, including the administration of certain
prescription drugs, such as erythropoietin, or 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. There is only one
manufacturer of EPO in the United States and there are currently no alternative
products that perform the functions of EPO available to dialysis treatment
providers. Although Dialysis Corporation of America has a good relationship with
the manufacturer and has not experienced any problems in receipt of its supply
of EPO, any loss or limitation of supply of this product could have a material
adverse effect on Dialysis Corporation of America's and our operating revenue
and income.
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. Dialysis Corporation of America, therefore, relies on its
ability to develop affiliations with area nephrologists.
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. Dialysis Corporation of
America retains, by written agreement, qualified physicians or groups of
qualified physicians to serve as medical directors for each of its facilities.
The medical directors are typically a source of patients treated at the
particular center served. Medical directors of eight of Dialysis Corporation of
America's centers have acquired a minority ownership interest in the subsidiary
operating the center they service, which minority interests range from 20% to
49%. Dialysis Corporation of America's Toledo, Ohio affiliate is owned 60% by
the medical director of that facility. Dialysis Corporation of America makes
every effort to comply with federal and state regulations concerning its
relationship with the physicians and the medical directors treating patients at
its facilities, and is not aware of any limitation on physician ownership in its
subsidiaries. See Item 1, "Business - Government Regulation - Dialysis
Corporation of America."
9
Agreements with medical directors typically range from a term of five
years to 10 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. These
agreements, however, do not prohibit physicians providing services at Dialysis
Corporation of America's facilities from providing direct patient care services
at other locations; and consistent with federal and state law, such agreements
do not require a physician to refer patients to Dialysis Corporation of America
dialysis centers. Usually, physician's professional fees for services are billed
directly to the patient or the government payment authorities on a direct basis
by the treating physician and paid directly to the physician or the professional
association.
Dialysis Corporation of America's ability to establish and operate a
dialysis facility in a particular area is substantially dependent upon 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, most likely
resulting in closure and, consequently, on the operations of Dialysis
Corporation of America. Compensation of medical directors is separately
negotiated for each facility and generally depends on competitive factors, the
size of the facility, and the fair market value of the services to be provided.
Quality Assurance
Dialysis Corporation of America implements a quality assurance program
to maintain and improve the quality of dialysis treatment and care it provides
to patients in every facility. Quality assurance activities involve the ongoing
examination of care provided, the identification of therapy deficiencies, the
need for any necessary improvements in the quality of care and the evaluation of
improved technology. Specifically, this program requires each center's staff,
including its medical director and/or nurse administrator to regularly review
quality assurance data and initiate programs for improvement, including 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. Dialysis Corporation of America's Vice President of Clinical
Services, a certified nephrology nurse, oversees this program in addition to
ensuring that Dialysis Corporation of America meets federal and state compliance
requirements for dialysis centers. See the section below in this Item 1
entitled, "Government Regulation - Dialysis Corporation of America."
Quality Clinical Results
Dialysis Corporation of America's goal is to provide consistent quality
clinical care to its patients from caring and qualified doctors, nurses, patient
care technicians, social workers and dieticians and has demonstrated an
unwavering commitment to quality renal care through its continuous quality
improvement initiatives. Dialysis Corporation of America strives to maintain a
leadership position as a quality provider in the dialysis industry and often
sets its goals higher than the national average standards.
Kt/V is a formula that measures the amount of dialysis delivered to a
patient, based on the removal of urea, an end product of protein metabolism.
Kt/V provides a means to determine an individual dialysis prescription and to
monitor the effectiveness or adequacy of the dialysis treatment as delivered to
the patient. It is critical to strive to achieve a Kt/V level of greater than
1.2 for as many patients as possible. The national average for 2003, the most
recent data available, indicated 92% of
10
dialysis patients had a Kt/V level greater than 1.2, while 95% of Dialysis
Corporation of America's patients had a Kt/V level greater than 1.2 for 2003 and
2004.
Anemia is a shortage of oxygen-carrying red blood cells. Because red
blood cells bring oxygen to all the cells in the body, anemia causes severe
fatigue, heart disorders, difficulty concentrating, reduced immune function, and
other problems. Anemia is common among renal patients, caused by insufficient
erythropoietin, iron deficiency, repeated blood losses, and other factors.
Anemia can be detected with a blood test for hemoglobin or hematocrit. It is
ideal to have as many patients as possible with hemoglobin levels above 11. The
national average for 2003 indicated 79% of dialysis patients had a hemoglobin
level greater than 11, while 80% of Dialysis Corporation of America's patients
had a hemoglobin level greater than 11 for 2003 and 2004.
One indicator of the overall health of Dialysis Corporation of
America's patients is the number of days that are spent in the hospital. The
crude hospitalization rate is the total number of hospital days during a given
year per total population. Hospitalization of patients can be related or
unrelated to chronic kidney disease. The national average for 2001, the most
recent data available, was 14.5 hospital days per patient per year, while
Dialysis Corporation of America's average was 11 hospital days per patient per
year, for 2003 and 2004.
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. The states in which Dialysis
Corporation of America operates 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. If no secondary payor covers the remaining 20%,
Medicare may reimburse part of the balance as part of Dialysis Corporation of
America's cost report filings. Medicare and Medicaid programs are subject to
regulatory changes, statutory limitations and government funding restrictions,
which may adversely affect Dialysis Corporation of America's dialysis services
payments and, consequently, its revenues. See "Medicare Reimbursement" below.
Inpatient dialysis services provided by Dialysis Corporation of America
are paid for by the hospital or medical center 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 Dialysis Corporation of America's dialysis facilities is certified to
participate in the Medicare program. The Medicare reimbursement system fixes the
reimbursement rates in advance and limits the allowable charge per treatment,
but provides Dialysis Corporation of America with predictable and recurring per
treatment revenues and allows it to retain any
11
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.
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 28% of
Dialysis Corporation of America's medical services revenues in 2004 was derived
from providing dialysis patients with EPO. CMS limits the EPO reimbursement
based upon patients' hematocrit levels. Other ancillary services, mostly other
drugs, account for approximately an additional 10% of Dialysis Corporation of
America's medical services revenues. Dialysis Corporation of America submits
claims monthly and is usually paid by Medicare within 14 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. Congress has approved a 1.6% composite rate increase for 2005.
Commencing this year, Medicare will reimburse dialysis providers for the ten
most utilized ESRD drugs at an amount equal to the cost of such drugs as
determined by the OIG. For other ESRD drugs, Medicare will reimburse dialysis
providers at an amount equal to the average sale price of the drug plus 6%, and
the composite rate will be increased by an amount estimated by HHS to be the
dialysis provider's average profit for these drugs. To make this change
budget-neutral, a drug add-on composite has been included. Accordingly, it has
been determined by CMS that the Medicare ESRD composite rate will increase by
approximately 8.7% or $11 per treatment, and that payments for separately
billable drugs will be reduced as described above. In addition, it is
anticipated that CMS will begin, as of April 1, 2005, to reimburse providers
using a case mix formula. CMS plans to adjust reimbursements based on predefined
patient parameters such as patient height, weight and age. Congress has mandated
a budget neutrality factor adjustment so that aggregate payments under the
system for 2005 equal payments that would have been made without the case mix
adjustments and the add-on composite for reimbursement of the drugs. Management
of Dialysis Corporation of America believes that there will be minimal impact on
its average Medicare revenue per treatment as a result of these changes in
Medicare reimbursement. This is the first increase in the Medicare ESRD
composite rate since 2001. 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 reimbursements 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. Dialysis Corporation of
America is a licensed ESRD Medicaid provider in Georgia, Maryland, New Jersey,
Ohio, Pennsylvania, South Carolina and Virginia.
12
Dialysis Corporation of America
Sources of Medical Services Revenues
Year Ended December 31,
------------------------------
2004 2003 2002
---- ---- ----
Medicare 48% 54% 49%
Medicaid and Comparable Programs 8% 8% 9%
Hospital inpatient dialysis services 6% 7% 10%
Commercial and private payors 38% 31% 32%
Management Services
Dialysis Corporation of America has a management services agreement
with each of its wholly- and majority-owned subsidiaries and with its 40% owned
affiliate DCA of Toledo, LLC, and with an unaffiliated Georgia dialysis center,
providing each of 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 facility.
Corporate Integrity Program
Medicore and Dialysis Corporation of America have each developed a
Corporate Integrity Program to assure that each entity continues to achieve the
goals of providing the highest level of care and service in a professional and
ethical manner consistent with applicable federal and state laws and
regulations. These programs are intended to (i) reinforce Dialysis Corporation
of America's as well as our management's, employees' and professional
affiliates' awareness of their responsibilities to comply with applicable laws
in the increased and complex regulatory environment relating to our operations,
(ii) benefit the overall care and services Dialysis Corporation of America
provides to its dialysis patients, and that we provide to our medical products
customers, and (iii) assure that our operations are in compliance with the law,
which in turn should also assist both Dialysis Corporation of America and us in
operating in a cost-effective manner, and accordingly, benefit our shareholders.
The board of directors of both Medicore and Dialysis Corporation of
America have established audit committees each consisting of three independent
members of the board who oversee audits, accounting, financial reporting, and
who have established procedures for receipt, retention and resolution of
complaints relating to those areas (none to date), among other responsibilities.
The audit committees operate under charters providing for their detailed
responsibilities.
Dialysis Corporation of America has developed a Compliance Program to
assure compliance with fraud and abuse laws, enhance communication of
information, and provide a mechanism to quickly identify and correct any
problems that may arise. This Compliance Program supplements and enhances its
existing policies, including those applicable to claims submission, cost report
preparation, internal audit and human resources.
Code of Ethics
As part of our Corporate Integrity Program, we have established a Code
of Ethics and Business Conduct covering management and all employees to assure
all persons affiliated with us and our
13
operations act in an ethical and lawful manner. The Code of Ethics and Business
Conduct covers relationships among and between affiliated persons, including
Dialysis Corporation of America patients and payors, and relates to information
processing, compliance, workplace conduct, environmental practices, training,
education, development, among other areas. Dialysis Corporation of America has
also developed its Code of Ethics and Business Conduct and, in its commitment to
delivering quality care to dialysis patients, has mandated rigorous standards of
ethics and integrity.
Our Code of Ethics and Business Conduct is designed to provide:
o ethical handling of actual or apparent conflicts of interest
between personal and professional relationships
o full, fair, accurate, timely, and understandable disclosure in
reports and documents we file with the SEC and in our other
public communications
o compliance with applicable governmental laws, rules and
regulations
o prompt internal reporting of violations of the Code to an
appropriate person identified in the Code
o accountability for adherence to the Code
The portion of our Code of Ethics and Business Conduct as it applies to
our principal executive officer, principal financial officer, principal
accounting officer, and persons performing similar functions, may be obtained
without charge upon request to our corporate Secretary and counsel, Lawrence E.
Jaffe, Esq., Jaffe & Falk, LLC, at 777 Terrace Avenue, Hasbrouck Heights, New
Jersey 07604.
The Corporate Integrity Programs are implemented and upgraded to
provide a highly professional work environment and lawful and efficient business
operations to better serve our patients and customers and our shareholders.
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, although Dialysis Corporation
of America has been involved in chronic and acute kidney dialysis services for
approximately 28 years, it has never been subject to any suit relating to the
providing of dialysis treatments. We currently have general and umbrella
liability insurance, in addition to property and workmen's compensation
coverage. Dialysis Corporation of America carries similar insurance coverage, as
well as professional and products liability insurance. 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 its 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 Dialysis Corporation of America's dialysis operations and
other physicians practicing at the facilities are required to maintain their own
professional malpractice insurance coverage.
Technology Companies
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 initial investment was in Linux Global Partners, Inc.,
a private company which, through its affiliate Xandros, Inc., has developed and
markets a Linux desktop operating system. In addition to Xandros, Linux Global
Partners has investments in a variety
14
of other Linux-related software companies, and is attempting to negotiate
strategic alliances with certain of those companies in order to employ their
systems in conjunction with Linux Global Partner's desktop system. Each of our
company and Dialysis Corporation of America holds an interest in Linux Global
Partners. During 2000, we loaned Linux Global Partners $2,200,000 at an annual
rate of interest of 10%, which funds we borrowed from our subsidiary, Dialysis
Corporation of America. In May and June, 2001, we fully repaid the principal
amount of this loan and accrued interest to Dialysis Corporation of America. In
2001, Linux Global Partners paid us $215,000 of which $200,000 was applied to
the principal amount of the indebtedness. Our loan to Linux Global Partners had
been extended on various occasions, and in 2002 we advanced another $250,000 to
Linux Global Partners under the same terms as the original loan. At December 31,
2002, the principal and accrued interest on the loans to Linux Global Partners
aggregated approximately $2,742,000. The indebtedness was collateralized by
Linux Global Partner's portfolio consisting of several companies that focus on
the software capabilities of the Linux operating system. Some of Linux Global
Partners' investments include Code Weavers, a software development service and
porting company, and Metro Link, which is involved in Linux graphics and the
embedded technology sector. All of these companies are private and are in the
developmental stages, several with limited revenues, and their success remains
speculative.
Under the terms of the loan arrangement with Linux Global Partners, we
were to receive $100,000 per month or 25% of the proceeds of Linux Global
Partners' private financings, whichever first occurred, and until such
repayment, Linux Global Partners had been issuing 50,000 shares of its common
stock to us every month. We declared the loan in default and sold, under the
requirements of the Uniform Commercial Code, certain of the collateral at public
auction on January 24, 2003. The auction sale consisted of 4,115,815 shares of
Ximian, Inc. series A convertible preferred stock, which Xandros committed to
purchase for $2,992,000. Xandros subsequently failed to meet the conditions of
purchase and as a result, in accordance with the negotiated terms of the
acquisition of the collateral, forfeited 775,000 shares of its common stock that
it had deposited with us as a down payment towards the purchase of the
collateral, and we retained the 4,115,815 preferred shares of Ximian. In
connection with a third-party's acquisition of Ximian in August, 2003, we sold
the Ximian preferred stock for approximately $3,541,000 in cash proceeds
resulting in a gain of approximately $784,000 recorded in August 2003. An
additional approximately $805,000 of proceeds due us from the sale of the Ximian
securities was placed in escrow in accordance with the terms of the acquisition
agreement, with one-half of such funds, approximately $402,000, released to us
in August 2004 on the first anniversary of the Ximian acquisition. We recorded a
gain of approximately $402,000 in August 2004 upon the release of the first half
of the escrowed funds. The remaining balance of escrowed funds is scheduled to
be released to us on the second anniversary of the Ximian acquisition in August
2005, pending fulfillment by the parties to the Ximian acquisition of certain
post-sale conditions. We expect to record an additional gain based on net
proceeds received at the time these remaining escrowed funds are disbursed to us
from escrow. See Item 1, "Business - Risk Factors - Investment in Technology
Companies," Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes 6 and 11, to "Notes to Consolidated
Condensed Financial Statements."
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. Corel, the world's
second largest desktop software company, holds a 5% interest in that subsidiary.
Xandros, building on Corel's $25 million investment in research and development
of the Linux desktop system, enhanced the system for commercial exploitation,
and in October, 2002, initiated the marketing of a Linux operating system and
suite of applications for desktop computing. The Linux operating system has
received high accolades from a variety
15
of technical software publications and was among five prize winners for desktop
software technology awarded by Norge, a pc magazine. Xandros has been obtaining
limited financing for its operations, and is in need of substantial capital to
continue its marketing and further development of the Linux desktop operating
system. Although Xandros is in discussions with a variety of investors, some of
whom have already provided funding to its parent, Linux Global Partners, and
itself, there is no assurance such capital will be available or, if so, on
favorable terms.
We recognize that Xandros is subject to all the risks of a startup
company, including its ability to continue operations, commercial acceptance of
the Linux desktop system, the availability of resources to further develop,
market and distribute the system, its ability to generate revenues and whether
such revenues will be sufficient to reflect income, and management's oversight
of the operations and growth of the company.
We continue to evaluate the technology sector for potential further
investments.
Government Regulation
Dialysis Corporation of America
Regulation of healthcare facilities, including dialysis facilities, is
extensive, with legislation continually proposed relating to safety, maintenance
of equipment and proper records, quality assurance programs, reimbursement
rates, confidentiality of medical records, licensing and other areas of
operations. Each dialysis center 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 the satisfaction of regulatory standards to its operations. Dialysis
Corporation of America's operations are also subject to the Occupational Safety
and Health Administration, known as OSHA, relating to workplace safety and
employee exposure to blood and other potentially infectious material.
Many states have eliminated the requirement to obtain a certificate of
need prior to the establishment or expansion of a dialysis center. There are no
certificate of need requirements in the states in which Dialysis Corporation of
America is presently operating.
Dialysis Corporation of America's record of compliance with federal,
state and local governmental laws and regulations remains excellent. Enforcement
of healthcare facility regulations, both privately and by the government, has
become more stringent, particularly in attempts to combat fraud and waste,
adding to compliance costs as well as potential sanctions. We are unable to
predict the scope and effect of any changes in government regulations on
Dialysis Corporation of America's operations, particularly any modifications in
the reimbursement rate for medical services or requirements to obtain
certification from CMS. Since its inception in 1976, Dialysis Corporation of
America has maintained all of its licenses, including its Medicare and Medicaid
and equivalent certifications. The loss of any licenses and certifications would
have a material adverse effect on Dialysis Corporation of America's operations,
revenues and earnings.
Dialysis Corporation of America regularly reviews legislative and
regulatory changes and developments and will restructure a business arrangement
if it determines such might place its operations in material noncompliance with
applicable laws or regulations. See "Fraud and Abuse" and "Stark II" below. To
date, none of Dialysis Corporation of America's business arrangements with
physicians,
16
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 future investigation
or prosecution by federal or state governmental authorities which could result
in civil and/or criminal sanctions.
Certification and Reimbursement
Dialysis Corporation of America's dialysis centers must meet certain
requirements, including, among others, those relating to patient care, patient
rights, medical records, the physical set-up of the center, and personnel, in
order to be certified by CMS, to be covered under the Medicare program and to
receive Medicare reimbursement. See above under "Operations - Medicare
Reimbursement." All of Dialysis Corporation of America's dialysis centers are
certified under the Medicare program and applicable state Medicaid programs.
Medicare coverage for ESRD services has been revised by CMS for 2005. See above
in this section under "Dialysis Operations - Medicare Reimbursement."
Fraud and Abuse
Certain aspects of Dialysis Corporation of America's dialysis business
are subject to federal and state laws governing financial relationships between
health care providers and referral sources and the accuracy of information
submitted in connection with reimbursement. These laws, collectively referred to
as "fraud and abuse" laws, include the Anti-Kickback Statute, Stark II, other
federal fraud laws, and similar state laws.
The fraud and abuse laws apply because Dialysis Corporation of
America's medical directors have financial relationships with the dialysis
facilities and also refer patients to those facilities for items and services
reimbursed by federal and state health care programs. Financial relationships
with patients who are federal program beneficiaries also implicate the fraud and
abuse laws. Other financial relationships which bear scrutiny under the fraud
and abuse laws include relationships with hospitals, nursing homes, and various
vendors.
Anti-Kickback Statutes
The federal Anti-Kickback Statute, derived from certain provisions of
the Social Securities Act of 1965, prohibits the knowing and willful
solicitation, receipt, offer, or payment of any remuneration, directly or
indirectly, in return for or to induce the referral of patients or the ordering
or purchasing of items or services payable under the Medicare, Medicaid, or
other federal health care program.
Sanctions for violations of the Anti-Kickback Statute include criminal
penalties, such as imprisonment and fines of up to $25,000 per violation, and
civil penalties, of up to $50,000 per violation, as well as exclusion from
Medicare, Medicaid, and other federal health care 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 "safe harbors" to the Anti-Kickback Statute. An arrangement
that meets all of the elements of the safe harbor is immunized from prosecution
under the Anti-Kickback Statute. The failure to satisfy all elements, however,
does not necessarily mean the arrangement violates the Anti-Kickback Statute.
17
Some states have enacted laws similar to the Anti-Kickback Statute.
These laws may apply regardless of payor source, may include criminal and civil
penalties, and may contain exceptions that differ from the safe harbors to the
Anti-Kickback Statute.
As required by Medicare regulations, each of Dialysis Corporation of
America's dialysis centers is supervised by a medical director, who is a
licensed nephrologist or otherwise qualified physician. The compensation of
these medical directors, who are independent contractors, is fixed by a medical
director agreement and reflects competitive factors in each respective location,
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 volume or value of any referrals to the
dialysis center. Eight of Dialysis Corporation of America's subsidiaries
operating outpatient dialysis centers are owned jointly between Dialysis
Corporation of America and physicians who hold a minority position, in most
cases, through a professional corporation or association. These physicians also
act as the medical directors for those facilities. Dialysis Corporation of
America's Toledo, Ohio affiliate is majority-owned by the medical director of
that facility. These physicians, except in one instance, also act as the medical
directors for those facilities. Dialysis Corporation of America attempts to
structure its arrangements with its physicians to comply with the Anti-Kickback
Statute. Many of these physicians' patients are treated at Dialysis Corporation
of America's facilities. Dialysis Corporation of America believes its
arrangements with its medical directors are in material compliance with
applicable law. Several states in which Dialysis Corporation of America operates
have laws prohibiting 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 a percentage ownership in the subsidiary entities owning and operating the
dialysis facilities, Dialysis Corporation of America would restructure its
relationship with these physicians, but it could still be subject to penalties.
Management believes that the Anti-Kickback Statute and other fraud and
abuse laws are primarily directed at abusive practices that increase the
utilization and cost of services covered by governmentally funded programs. The
dialysis services provided by Dialysis Corporation of America generally cannot,
by their very nature, be over-utilized since dialysis treatment is not elective,
and is only indicated when there is temporary or permanent kidney failure.
Medical necessity is capable of being supported by objective documentation,
drastically reducing the possibility of over-utilization. Additionally, there
are safe harbors for certain arrangements. Nevertheless, while relationships
created by medical director ownership of minority interests in Dialysis
Corporation of America's facilities satisfy many but not all of the criteria for
the safe harbor, there can be no assurance that these relationships will not
subject Dialysis Corporation of America to investigation or prosecution by
enforcement agencies. In an effort to further its compliance with the law,
Dialysis Corporation of America has adopted a Corporate Compliance Program that
addresses medical necessity and medical chart audits to confirm medical
necessity of referrals.
With respect to its inpatient dialysis services, Dialysis Corporation
of America provides hospitals with dialysis services, including qualified
nursing and technical personnel, supplies, equipment and technical services. In
certain instances, the medical directors who have a minority interest in a
particular Dialysis Corporation of America facility may refer patients to
hospitals with which Dialysis Corporation of America has an inpatient dialysis
services arrangement. We believe Dialysis Corporation of America's acute
inpatient hospital services are in compliance with the law. See "Stark II"
below.
Dialysis Corporation of America endeavors in good faith to comply with
all governmental regulations. However, there can be no assurance that Dialysis
Corporation of America will not be required to change its practices or
experience a material adverse effect as a result of any such potential
18
challenge. We cannot predict the outcome of the rule-making process, enforcement
procedures, or whether changes in the safe harbor rules will affect Dialysis
Corporation of America's position with respect to the Anti-Kickback Statute, but
we will continue to make every effort to ensure that Dialysis Corporation of
America will remain in compliance.
Stark II
The Physician Ownership and Referral Act, known as Stark II, bans
certain physician referrals, with 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. For purposes of Stark II, "designated health services"
include, among others, clinical laboratory services, durable medical equipment,
parenteral and enteral nutrients, home health services, and inpatient and
outpatient hospital services. Dialysis treatments are not included in the
statutory list of "designated health services."
This ban is subject to several exceptions including personal service
arrangements, employment relationships and group practices meeting specific
conditions. If Stark II is found to be applicable to a facility, that entity is
prohibited from claiming payment for such services under the Medicare or
Medicaid programs, is liable for the refund of 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 programs.
HHS' regulations to Stark II became effective in January, 2002, and CMS
adopted Phase II of its regulations under Stark II in March, 2004. These
regulations exclude from covered designated health services and referral
prohibitions, services included in the ESRD composite rate and 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 Dialysis Corporation of America's inpatient hospital services
agreements from Stark II. Equipment and supplies used in connection with home
dialysis are excluded from the Stark II definition of "durable medical
equipment." We believe, based upon the proposed rules and the industry practice,
that Congress did not intend to include dialysis services and the services and
items provided by Dialysis Corporation of America incident to dialysis services
within the Stark II prohibitions.
If the provisions of Stark II were found to apply to Dialysis
Corporation of America's arrangements however, we believe that Dialysis
Corporation of America would be in compliance. Dialysis Corporation of America
compensates its nephrologist-physicians, or practice groups with which such
nephrologist-physicians are affiliated, as medical directors of its dialysis
centers pursuant to medical director agreements, which we believe meet the
exception for personal service arrangements under Stark II. Non-affiliated
physicians who send their patients to or treat their patients at any of Dialysis
Corporation of America's facilities do not receive any compensation from
Dialysis Corporation of America.
Medical directors who hold a minority investment interest in certain of
the subsidiaries operating Dialysis Corporation of America's dialysis centers
may refer patients to hospitals with which Dialysis Corporation of America has
an acute inpatient dialysis service arrangement. Although the regulations of
Stark II may be interpreted to apply to these types of transactions, we believe
that Dialysis Corporation of America's contractual arrangements with hospitals
for acute care inpatient dialysis services are in compliance with Stark II.
19
If CMS or any other government entity otherwise interprets the Stark II
regulations, Dialysis Corporation of America may be required to restructure
certain existing compensation or investment agreements with its medical
directors, or, in the alternative, refuse to accept referrals for designated
health services from certain physicians. Stark II prohibits Medicare or Medicaid
reimbursement of items or services provided pursuant to a prohibited referral,
and imposes substantial civil monetary penalties on facilities which submit
claims for reimbursement. If such were to be the case, Dialysis Corporation of
America could be required to repay amounts reimbursed for drugs, equipment and
services that CMS determines to have been furnished in violation of Stark II, in
addition to substantial civil monetary penalties, which could adversely affect
both Dialysis Corporation of America's and our operations and future financial
results. We believe that if Stark II is interpreted by CMS or any other
governmental entity to apply to Dialysis Corporation of America's dialysis
arrangements, it is possible that Dialysis Corporation of America could be
permitted to bring its financial relationships with referring physicians into
material compliance with the provisions of Stark II on a prospective basis.
However, prospective compliance may not eliminate the amounts or penalties, if
any, that might be determined to be owed for past conduct, and there can be no
assurance that costs and expenses associated with such prospective compliance,
if permissible, would not have a material adverse effect on Dialysis Corporation
of America and consequently, on us.
Health Insurance Reform Act
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, which were expanded. HIPAA
established two programs that coordinate federal, state and local healthcare
fraud and abuse activities. Under these programs, these governmental entities
undertake a variety of monitoring activities, including medical utilization and
fraud review, cost report audits and secondary payor determinations. The
Incentive Program for Fraud and Abuse Information rewards Medicare recipients
10% of the overpayment up to $1,000 for reporting Medicare fraud and abuse.
HIPAA further created Health Care Fraud Crimes and extended their applicability
to private health plans.
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
single format. This regulation applies to Dialysis Corporation of America's
submissions and processing of healthcare claims and also applies to many of its
payors. We believe that Dialysis Corporation of America is in compliance with
the transactions standards rule.
HIPAA also includes provisions relating to the privacy of healthcare
information. HHS' privacy rules cover all individually identifiable healthcare
information known as "protected health information" and apply to healthcare
providers, health plans, and healthcare clearing houses, known as "covered
entities." The regulations are quite extensive and complex, but basically
require companies to: (i) obtain patient acknowledgement of receipt of a notice
of privacy practices; (ii) obtain patient authorization before certain uses and
disclosures of protected health information; (iii) respond to patient requests
for access to their healthcare information; and (iv) develop policies and
procedures with respect to uses and disclosures of protected health information.
During 2003 and 2004, Dialysis Corporation of America expended significant
resources to develop and implement policies and procedures to address privacy
issues, and we believe Dialysis Corporation of America is in compliance with the
HIPAA privacy rules.
20
The final HIPAA security regulations governing the security of health
information that is maintained or transmitted electronically were published in
February, 2003. Those regulations generally require implementation of safeguards
for ensuring the confidentiality of electronic health information. Most covered
entitles will have until April 21, 2005 to comply with the security standards
established by these HIPAA regulations. Dialysis Corporation of America believes
it is currently in compliance with the HIPAA security standards.
HIPAA significantly increased the civil and criminal penalties for
offenses related to healthcare fraud and abuse. HIPAA increased civil monetary
penalties from $2,000 plus twice the amount for each false claim to $10,000 plus
three times the amount for each false claim. HIPAA expressly prohibits four
practices, namely (1) submitting a claim that the person knows or has reason to
know is for medical items or services that are not medically necessary, (2)
transferring remuneration to Medicare and Medicaid beneficiaries that is likely
to influence such beneficiary to order or receive items or services, (3)
certifying the need for home health services knowing that all of the coverage
requirements have not been met, and (4) engaging in a pattern or practice of
upcoding claims in order to obtain greater reimbursement. However, HIPAA creates
a tougher burden of proof for the government by requiring that the government
establish that the person "knew or should have known" a false or fraudulent
claim was presented. The "knew or should have known" standard is defined to
require "deliberate ignorance or reckless disregard of the truth or falsity of
the information," thus merely negligent conduct or billing errors should not
violate the Civil False Claims Act.
As for criminal penalties, HIPAA adds healthcare fraud, theft,
embezzlement, obstruction of investigations and false statements to the general
federal criminal code with respect to federally funded health programs, thus
subjecting such acts to criminal penalties. Persons convicted of these crimes
face up to 10 years imprisonment and/or fines. Moreover, a court imposing a
sentence on a person convicted of federal healthcare offense may order the
person to forfeit all real or personal property that is derived from the
criminal offense. The Attorney General is also 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 Dialysis Corporation of America substantially
complies with currently applicable state and federal laws and regulations and to
date has not had any difficulty in maintaining its licenses and Medicare and
Medicaid authorizations, the healthcare service industry is and will continue to
be subject to substantial and continually changing regulation at the federal and
state levels, and the scope and effect of such and its impact on Dialysis
Corporation of America's operations cannot be predicted. No assurance can be
given that Dialysis Corporation of America's dialysis operations will not be
reviewed or challenged by regulatory authorities. Dialysis Corporation of
America continues to work with its healthcare counsel in reviewing its policies
and procedures and making every effort to comply with HIPAA and other applicable
federal and state laws and regulations.
Any loss by Dialysis Corporation of America of its approval as a
certified provider under the Medicare or Medicaid 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 accordingly, our business.
21
Environmental and Health Regulations
Dialysis Corporation of America's dialysis centers are subject to
various federal, state and local hazardous waste laws and non-hazardous medical
waste disposal laws. Most of Dialysis Corporation of America's waste is
non-hazardous. Dialysis Corporation of America also follows OSHA's Hazardous
Waste Communications Policy, which requires all employees to be knowledgeable of
the presence of and familiar with the use and disposal of hazardous chemicals in
the facility. Medical waste of each dialysis facility is handled by licensed
local medical waste sanitation agencies who are 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. Dialysis
Corporation of America adheres 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, such as the federal False Claims
Act, prohibiting anyone from presenting false claims or fraudulent information
to obtain payments from Medicare, Medicaid 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. The submission of Medicare cost reports and requests for
payment by dialysis centers are covered by these laws. The False Claims Act has
been used to prosecute for fraud, for coding errors, billing for services not
provided, and billing for services at a higher than allowable billing rate. We
believe Dialysis Corporation of America has the proper internal controls and
procedures for issuance of accounts and complete cost reports and payment
requests. Such reports and requests, however, 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.
Dialysis Corporation of America has developed a Compliance Program as
part of its Corporate Integrity Program, designed to assure compliance with
fraud and abuse laws and regulations. See above under the caption "Corporate
Integrity Program." Dialysis Corporation of America's establishment and
implementation of its compliance program, coupled with its existing policies and
internal controls, could have the effect of mitigating any civil or criminal
penalties for potential violations, of which it has had none since its inception
1976. We will continue to use our best efforts to ensure that Dialysis
Corporation of America fully complies with federal and state laws, regulations
and requirements as applicable to its operations and business.
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.
22
Although we hold three patents related to our lancets, 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 products industry is extremely competitive and our medical
supplies operations are not a significant competitive factor in this area.
The dialysis industry is also highly competitive. There are numerous
providers who have dialysis centers in the same areas as Dialysis Corporation of
America. Many are owned by larger corporations which operate dialysis centers
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, Inc.,
Gambro Healthcare, Inc., DaVita, Inc., and Renal Care Group, Inc. DaVita
recently entered into an agreement to acquire Gambro. These companies have
substantially greater financial resources, significantly more centers, patients
and services than Dialysis Corporation of America has, and by virtue of such may
have an advantage in competing for nephrologists and acquisitions of dialysis
facilities in areas and markets we target. Moreover, competition for
acquisitions has increased the cost of acquiring existing dialysis centers.
Fresenius and Gambro also manufacture and sell dialysis equipment and supplies,
which may provide them with an even greater competitive edge. Dialysis
Corporation of America also faces competition from hospitals and physicians that
operate their own dialysis facilities.
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
center for it to participate in the Medicare ESRD program, and are responsible
for the supervision of the medical 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. We cannot assure
you that Dialysis Corporation of America will compete effectively with any of
its competitors.
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 in the growth of this modality, renal transplantations could
become a more significant competitive aspect to the dialysis treatments provided
by Dialysis Corporation of America. Although kidney transplant is a preferred
treatment for ESRD, certain patients who have undergone such transplants have
subsequently lost the functionality of the transplanted kidney and have returned
to dialysis treatments.
Employees
Medicore and its subsidiaries employ 314 full time employees of which
nine are administrative, 301 are with the dialysis operations and 4 are engaged
in the medical products operations. In addition, Dialysis Corporation of America
employs approximately 23 part-time employees and retains 18 independent
23
contractors and subcontractors, consisting of the social workers and dietitians
at certain of its dialysis facilities in addition to medical directors who
supervise patient treatment at each facility. Dialysis Corporation of America
also uses approximately 78 "per diem" personnel to supplement staffing.
We believe that our relationship with our employees as well as Dialysis
Corporation of America's relationship with its employees is excellent and
neither we nor Dialysis Corporation of America has suffered any strikes or work
stoppages. None of Dialysis Corporation of America's or our employees are
represented by a labor union. Both we and Dialysis Corporation of America are an
equal opportunity employer.
Risk Factors
We have listed below certain of the risk factors relating to Medicore
and our securities. There may be other risks and uncertainties that we may face
of which we are currently unaware which could also adversely affect our
business, operations and financial condition. If any of such risks or
uncertainties arise, or the risks listed below occur, our operations, earnings
and financial condition could be materially harmed, which, in turn, would most
likely adversely affect the trading price of our common stock. Any such event
could negatively impact a shareholder's investment in Medicore.
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 have invested in development-stage privately-held Linux software companies,
all of which will, most likely, require significant additional financing in
order to continue operations for the development and marketing of their products
and/or services
In 2000, we initiated a new division for the purpose of investing in
technology companies, and our singular investment was the acquisition, in
January, 2000, of an 8% ownership interest in Linux Global Partners, a private,
development stage company involved in Linux software product development and
investment. Both our company and Dialysis Corporation of America hold an
interest in Linux Global Partners. As a result of our making a loan to Linux
Global Partners, the subsequent default on that loan by Linux Global Partners
and our sale of the collateral securing that loan at public auction, we acquired
approximately 775,000 shares of common stock of Xandros, Inc., an affiliate of
Linux Global Partners that has developed and markets a Linux-based desktop
operating system. Both Linux Global Partners and Xandros are recently organized
companies in a highly competitive, rapidly evolving market. Neither company has
current audited financial statements and both companies have a limited operating
history upon which to evaluate future prospects. Moreover, both companies have
incurred significant losses since inception and particularly with respect to the
initial marketing efforts relating to the desktop operating system. Commercial
demand for the operating system has been minimal, and sales of the system have
not generated revenues of a level sufficient to meet operating expenses. Neither
of the companies has the current resources necessary to pursue the development
and marketing of the desktop operating system required to generate commercial
interest and recognition. In the absence of a substantial increase in sales
revenues from the desktop operating system, both Xandros and Linux Global
Partners will require significant equity and/or debt financing in order to
continue business operations and to pursue further development and marketing
efforts. There can be no assurance that any of such financing will be available
or that if available, will be on commercially reasonable terms. To the extent
that such additional financing is not obtained, Xandros and Linux Global
Partners may be required to curtail certain operations or to ultimately cease
operations altogether.
24
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 operates and/or manages 23 centers in
the states of Georgia, Maryland, New Jersey, Ohio, Pennsylvania, South Carolina
and Virginia, with five dialysis centers in development. Some of Dialysis
Corporation of America's dialysis centers have generated losses since their
commencement of operations. This is due to operational costs and time needed to
reach maturity of dialysis treatments. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of 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 center
o government healthcare program participation requirements
o reimbursement for patient services
o patient referral prohibitions
o broad federal and state anti-kickback regulations
o false claims prohibitions for health care reimbursement and
other fraud and abuse regulations
o record keeping requirements
o health, safety and environmental compliance
o expanded protection of the privacy and security of personal
medical data
o establishing standards for the exchange of electronic health
information; electronic transactions and code sets; unique
identifiers for providers, employers, health plans and
individuals
Many of these laws and regulations are complex and open to further judicial and
legislative interpretations. If Dialysis Corporation of America is forced to
change its method of operations because of these regulations, our earnings,
financial condition and business could be adversely affected. The imposition of
additional licensing and other regulatory requirements may, among other things,
increase Dialysis Corporation of America's and consequently our, cost of doing
business. In addition, any violation of these governmental regulations could
involve substantial civil and criminal penalties and fines, revocation of
licensure, closure of one or more centers, and exclusion from participating in
Medicare and Medicaid programs. Any loss by Dialysis Corporation of America of
federal or state certifications or licenses would materially adversely impact
our business.
25
Dialysis Corporation of America's arrangements with its physician medical
directors do not meet the safe harbor provisions of federal and state laws, and
may be subject to greater governmental scrutiny
Neither Dialysis Corporation of America's arrangements with the medical
directors of its dialysis facilities, typically retained by Dialysis Corporation
of America as independent contractors under a fixed fee medical director
agreement, nor the minority ownership interests of referring physicians in
certain of Dialysis Corporation of America's 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
or 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 operations are subject to Medicare and
Medicaid audits with concurrent potential civil and criminal penalties for
failure to comply
Dialysis Corporation of America is subject to periodic audits by the
Medicare and Medicaid programs, which have various rights and remedies if they
assert that Dialysis Corporation of America has overcharged the programs or
failed to comply with program requirements. Rights and remedies available under
these programs include obtaining repayment from Dialysis Corporation of America
of any amounts alleged to be overpayments or in violation of program
requirements, or making deductions from future amounts due to Dialysis
Corporation of America. These programs may also impose fines, criminal penalties
or program exclusions.
In the ordinary course of Dialysis Corporation of America's business,
it receives notices of deficiencies for failure to comply with various
regulatory requirements. Dialysis Corporation of America reviews such notices
and takes appropriate corrective action. In most cases, Dialysis Corporation of
America and the reviewing agency will agree upon the measures that will bring
the center or services into compliance. In some cases or upon repeat violations,
none of which Dialysis Corporation of America has experienced, the reviewing
agency may take various adverse actions against a provider, including but not
limited to:
o the imposition of fines;
o suspension of payments for new admissions to the center; and
o in extreme circumstances, decertification from participation
in the Medicare or Medicaid programs and revocation of a
center's license.
Any such regulatory actions could adversely affect a center's ability
to continue to operate, to provide certain services, and/or its eligibility to
participate in Medicare or Medicaid programs or to receive payments from other
payors. Moreover, regulatory actions against one center may subject Dialysis
Corporation of America's other centers, which may be deemed under common control
or ownership, to similar adverse remedies.
26
There has been increased governmental focus and enforcement with respect to
anti-fraud initiatives as they relate to healthcare providers
State and federal governments are devoting increased attention and
resources to anti-fraud initiatives against healthcare providers. Legislation
has expanded the penalties for heath care fraud, including broader provisions
for the exclusion of providers from the Medicaid program. Dialysis Corporation
of America has established policies and procedures that we believe are
sufficient to ensure that its facilities will operate in substantial compliance
with these anti-fraud requirements. While we believe that Dialysis Corporation
of America's business practices are consistent with Medicare and Medicaid
criteria, those criteria are often vague and subject to change and
interpretation. Anti-fraud actions could have an adverse effect on Dialysis
Corporation of America's and our financial position and results of operations.
Dialysis Corporation of America's revenues and financial stability are dependent
on fixed reimbursement rates under Medicare and Medicaid
During 2002, 2003 and 2004, approximately 49%, 54% and 48% of Dialysis
Corporation of America's patient revenues was derived from Medicare
reimbursement and 9%, 8% and 8% of its patient revenues was derived from
Medicaid and equivalent programs. Decreases in Medicare and Medicaid and
equivalent rates and programs for dialysis treatments would adversely affect
Dialysis Corporation of America's and our revenues and profitability.
Federal and state governments seek to maintain, if not reduce costs,
and any such actions in the healthcare industry could adversely affect Dialysis
Corporation of America's revenues and earnings, including the following
o reductions in payments to Dialysis Corporation of America or
government programs in which Dialysis Corporation of America
participates
o increases in labor and supply costs, which Dialysis
Corporation of America does experience, without comparable
governmental reimbursement rate increases
o inclusion in the flat composite rate for dialysis treatments
those ancillary services which Dialysis Corporation of America
currently bills separately
This year, the reimbursement rate will change, primarily increasing the
composite rate by 8.7% and reducing the reimbursement rate for certain drugs,
including EPO. CMS is expanding the drug and ancillary services that are
included in the composite rate. Dialysis Corporation of America will be
reimbursed for other separately billable ESRD drugs at an average sale price
plus 6% The regulations provide for budget-neutrality, case mix and geographic
adjustments in the composite rate.
Management of Dialysis Corporation of America does not believe these
changes in reimbursement coupled with a 1.6% increase in the Medicare composite
rate will have a significant impact on its operations, expenses or earnings.
27
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 would adversely affect Dialysis
Corporation of America's and our business. Alternatively, any change in patient
coverage, such as Medicare eligibility as opposed to higher private insurance
coverage, would result in a reduction of revenue. We estimate approximately 42%,
38% and 44% of Dialysis Corporation of America's patient revenues for 2002, 2003
and 2004 was obtained from sources other than Medicare or Medicaid and
equivalent programs. Dialysis Corporation of America generally charges
non-governmental organizations for dialysis treatment at rates which exceed the
fixed Medicare and Medicaid and equivalent 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 composite rate, or
expanded coverage of dialysis treatments by managed care organizations, which
commonly have lower rates than Dialysis Corporation of America charges, could
adversely affect Dialysis Corporation of America's and our business, results of
operations, and financial condition.
Any decrease in the availability of or the reimbursement rate of EPO would
reduce Dialysis Corporation of America's and 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. In
2003, Amgen increased the price of EPO and we cannot assure you that there will
not be further price increases. There currently is no alternative drug available
to Dialysis Corporation of America for the treatment of anemia of its dialysis
patients. The available supply of EPO could be delayed or reduced, whether by
Amgen itself, as a result of unforeseen circumstances, or through excessive
demand. This would adversely impact Dialysis Corporation of America's and our
revenues and profitability, since approximately 26%, 28% and 28% of Dialysis
Corporation of America's medical revenues in 2002, 2003 and 2004 were based upon
the administration of EPO to its dialysis patients. Most of Dialysis Corporation
of America's EPO reimbursement is from government programs.
A new anemia treatment drug could affect Dialysis Corporation of America's use
of EPO, adversely impacting our profitability.
Amgen is the sole manufacturer of EPO, which is administered in
conjunction with dialysis treatments to address a patient's anemia. Amgen has
developed and obtained FDA approval for its new drug Aranesp(R), used to treat
anemia, and which is indicated to be effective for a longer period than EPO.
Based on its longer lasting capabilities, potential profit margins on Aranesp(R)
could be significantly lower than on EPO, and furthermore, Aranesp(R) could be
administered by a dialysis patient's physician, further eliminating potential
revenues from the treatment of anemia in our dialysis patients. The introduction
of Aranesp(R) as an anemia treatment for dialysis patients, therefore, could
adversely impact Dialysis Corporation of America's and our revenues and
profitability.
The implementation of the case-mix adjustment could adversely affect Dialysis
Corporation of America's revenues, profitability and cash flow.
CMS has adopted a case-mix adjustment for the ESRD composite rate,
under which the Medicare composite rate will be adjusted based on a patient's
age, body mass index and body surface area. These regulations are scheduled to
become effective in April, 2005. Management of Dialysis Corporation of
28
America believes implementing these case-mix adjustments will require
significant systems changes for the Medicare fiscal intermediaries that process
and pay Medicare claims. If the required systems changes are not made on a
timely basis, then the Medicare fiscal intermediaries may delay the payment of
claims or may not pay claims correctly, either of which could have an adverse
effect on Dialysis Corporation of America's as well as our cash flow and working
capital. Dialysis Corporation of America is presently unable to predict the
impact of this case-mix adjustment since it is dependant on the patient mix.
Dialysis Corporation of America's ability to grow is subject to its resources
and available locations
Other than four center acquisitions over the period 2002 through 2004,
expansion of Dialysis Corporation of America's operations has been through
construction of dialysis centers. This is due to the substantial costs involved
in an acquisition, usually valued on a per-patient basis. Dialysis Corporation
of America developed two dialysis centers and acquired one center in 2003 and
opened five new centers and acquired a company with two dialysis centers in
2004. Dialysis Corporation of America seeks areas with qualified and
cost-effective nursing and technical personnel and a sufficient population to
sustain a dialysis center. These opportunities are limited and Dialysis
Corporation of America competes with much larger dialysis companies for
appropriate locations. The time period from the beginning of construction
through commencement of operations of a dialysis center generally takes four to
six months and sometimes longer. Once the center is operable, it generates
revenues, but usually does not operate at full capacity, and may incur losses
for approximately 12 months or longer. Dialysis Corporation of America's growth
strategy based on construction also involves the risks associated with its
ability to identify suitable locations to develop additional centers. Those
centers that are developed may never achieve profitability, and additional
financing may not be available to finance future development.
Dialysis Corporation of America's inability to acquire or develop
dialysis centers in a cost-effective manner would adversely affect its ability
to expand its dialysis business and as a result, both Dialysis Corporation of
America's and our profitability.
Growth places significant demands on Dialysis Corporation of America's
financial and management skills. Dialysis Corporation of America's inability to
meet the challenges of expansion and to manage any such growth would have an
adverse effect on its 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 by seeking an
appropriate location for development of a dialysis center and by taking into
consideration the potential geographic patient base, the availability of a
physician nephrologist to be medical director of that dialysis center, and a
skilled work force. Construction, equipment and initial working capital costs
for a new dialysis center with 15 stations, typically the size of our dialysis
facilities range from $750,000 to $1,000,000. The cost of acquiring a center is
usually much greater. There is no assurance that Dialysis Corporation of America
will be successful in developing or acquiring dialysis centers, or otherwise
expanding its operations. Dialysis Corporation of America is negotiating with
nephrologists and others to establish new dialysis centers, but there is no
assurance that 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 by Dialysis Corporation of America.
29
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
Most dialysis facilities, including Dialysis Corporation of America's
dialysis facilities, are dependent upon referrals of ESRD patients for treatment
by physicians, primarily those 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 Dialysis Corporation of America, and
they are free to refer patients to any other conveniently located dialysis
facility. Dialysis Corporation of America may not be able to renew or otherwise
negotiate compensation under the medical director agreements with its medical
director physicians who could terminate the relationship, which, without a
suitable medical director replacement, could result in closure of the facility.
Accordingly, the loss of these key 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. Although
Dialysis Corporation of America's medical director agreements contain
non-competition restrictions upon the contracting physician or practice group,
we cannot assure you that the courts of the particular jurisdiction in which the
agreement is applicable would fully enforce such a provision, if at all, which
in turn could potentially increase competition with the dialysis centers and
negatively impact Dialysis Corporation of America's revenues and earnings.
Some of the medical directors or medical groups with whom they are
associated own minority interests in certain of the subsidiaries which operate
Dialysis Corporation of America's dialysis centers. 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 key
physicians, their medical groups, or their patients, who may seek dialysis
treatment elsewhere. The resulting loss of these patients together with the
potential requirement on such jointly owned facilities to repay Medicare
reimbursements and pay monetary penalties would have an adverse effect on
Dialysis Corporation of America's and our business and financial condition.
Industry changes could adversely affect Dialysis Corporation of America's
business
Healthcare organizations, public and private, continue to change the
manner in which they operate and pay for services. Dialysis 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 (i) further
increase government regulation of or other involvement in healthcare, (ii) lower
reimbursement rates, and (iii) 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.
30
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 highly competitive
environment in terms of operations, 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, resulting in several very large dialysis companies
competing for the acquisition of existing dialysis centers and the development
of relationships with referring physicians. Recently, DaVita, Inc. announced the
proposed $3 billion acquisition of Gambro Healthcare US, which if consummated
could result in one of, if not the largest provider of dialysis services in the
United States. Most of Dialysis Corporation of America's competitors have
significantly greater financial resources, more dialysis facilities and a
significantly larger patient base. In addition, technological advances by
Dialysis Corporation of America's competitors may provide more effective
dialysis treatments than the services provided by its centers.
Dialysis Corporation of America also experiences 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. Dialysis Corporation of America's
failure to compete effectively could significantly impair its continued growth
and profitability, and, consequently, our financial condition.
Dialysis Corporation of America could be subject to professional liability
claims that may adversely affect us
Operation of dialysis centers and, in particular, the provision of
dialysis treatments to ESRD patients, as is the case with most healthcare
treatment services, entails significant risks of liability. Accordingly,
Dialysis Corporation of America could be subject to various actions and claims
of professional liability alleging negligence in the performance of its
treatment and related services, as well as for the acts or omissions of its
employees. As Dialysis Corporation of America grows and the number of its
patients increases, so too does its exposure to potential malpractice,
professional negligence, and other related legal theories and causes of action.
These potential claims could seek substantial damages, possibly beyond Dialysis
Corporation of America's insurance coverage, and could subject it to the
incurrence of significant fees and costs related to defending such potential
claims. Such potential future claims for malpractice or professional liability,
including any judgments, settlements or costs associated with such claims and
actions, could have a material adverse effect on Dialysis Corporation of
America.
Dialysis Corporation of America's insurance costs and deductibles have been
substantially increasing over the last several years, and may not be sufficient
to cover claims and losses
Dialysis Corporation of America maintains a program of insurance
coverage against a broad range of risks in its business, including, and of
primary importance, professional liability insurance, subject to certain
deductibles. The premiums and deductibles under its insurance program have been
steadily and significantly increasing over the last several years as a result of
general business rate increases coupled with its continued growth and
development of dialysis centers. Dialysis Corporation of America is unable to
predict further increases in premiums and deductibles, but based on experience
anticipates further increases in this area, which could adversely impact
earnings. The liability exposure of operations in the healthcare services
industry has increased, resulting not only in increased premiums, but
31
in limited liability on behalf of the insurance carriers. Dialysis Corporation
of America's ability to obtain the necessary and sufficient insurance coverage
for its operations upon expiration of its insurance policies may be limited, and
sufficient insurance may not be available on favorable terms, if at all. Such
insurance may not be sufficient to cover any judgments, settlements or costs
relating to potential future claims, complaints or law suits. To the extent that
Dialysis Corporation of America's is unable to obtain sufficient insurance for
its operations, significant judgments, settlements and costs relating to future
potential actions, suits or claims, could have an adverse effect on Dialysis
Corporation of America.
Medicore, which owns 56% of the voting securities of Dialysis Corporation of
America, has some common officers and directors, which presents the potential
for conflicts of interest
We own 56% of the common stock 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.
Thomas K. Langbein is Chairman of the Board of both our company and Dialysis
Corporation of America, and also the President and Chief Executive Officer 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. Peter D. Fischbein, a director of our company since
1984, was elected a director of Dialysis Corporation of America in June 2004.
Lawrence E. Jaffe, Esq., a member of Jaffe & Falk, LLC, our corporate counsel,
is a director and our corporate Secretary, as well as the corporate Secretary of
Dialysis Corporation of America. The costs of executive salaries and other
shared corporate overhead for these companies are allocated on the basis of time
spent. The amount of expenses charged by Medicore to Dialysis Corporation of
America for 2004 amounted to approximately $200,000.
Additionally, there have been past and there are current transactions
between us and Dialysis Corporation of America and their directors, including
insurance coverage.
In March, 2004, we agreed to provide Dialysis Corporation of America
with up to $1,500,000 in financing under a demand promissory note with annual
interest at the prime rate plus 1.25%. The note was subsequently modified to
increase the maximum advances to $5,000,000 and its purpose expanded to include
working capital. At March 25, 2005, there was $2,435,000 outstanding under this
financing. See Note 8 to "Notes to Consolidated Financial Statements."
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.
The loss of certain executive personnel without retaining qualified replacements
could adversely affect management of our and Dialysis Corporation of America's
business, and our revenues and earnings could decline
We are dependent upon the services of Thomas K. Langbein, Chairman of
the Board and our Chief Executive Officer and President, who also holds the
position of Chairman of the Board with Dialysis Corporation of America. We are
also dependent on the services of Stephen W. Everett, President, Chief Executive
Officer and a director of Dialysis Corporation of America. Mr. Langbein has been
involved with Medicore since 1971, when his investment banking firm, Todd &
Company, Inc., took us public, and with Dialysis Corporation of America since it
became a public company in 1977
32
(originally our wholly-owned subsidiary organized in 1976). Mr. Everett joined
Dialysis Corporation of America in November, 1998 as Vice President, became
Executive Vice President in June, 1999, President on March 1, 2000, and Chief
Executive Officer in May, 2003. Mr. Everett has been involved in the healthcare
industry for 25 years. It would be very difficult to replace the services of
these individuals, whose services, both individually and combined, if lost would
adversely affect our operations and earnings, and most likely as a result, the
trading price of our common stock. There is no key-man life insurance on any of
our officers.
General
Shares eligible for future sale by restricted shareholders may adversely affect
our stock price
Our officers and directors own approximately 2,450,000 shares of our
common stock and options exercisable into an additional 212,331 shares of our
common stock. Most of the shares of these officers and directors, upon
satisfying the conditions of Rule 144 under the Securities Act, may be sold
without complying with the registration provisions of the Securities Act. The
conditions of Rule 144 include:
o holding the shares for one year from acquisition;
o 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;
o the filing of a Form 144with the SEC;
o Medicore continuing to timely file its reports under the
Exchange Act.
Our tradable common stock, known as the float, is approximately 4,536,000
shares, and the approximately 2,450,000 shares of common stock directly owned by
the officers and directors represents approximately 54% of the float.
Accordingly, the sale by such officers and directors may have an adverse affect
on the market price of our common stock, and may inhibit our ability to manage
subsequent equity or debt financing.
Over the last several months, our stock price has exhibited volatility, and any
investment in our common stock may, therefore, decline for reasons unrelated to
our performance
Our common stock trades on the Nasdaq SmallCap Market under the symbol
"MDKI." The market price of our common stock has exhibited significant
volatility in 2004 and early 2005. The first three quarters of 2004, the stock
traded in the $2.05 to $4.43 range on limited volume. The volume and market
substantially increased in the last quarter of 2004 approximately as follows:
Common Stock Volume (Weekly Average)
---------------- -----------------------
High Low
---- ---
October, 2004 $ 4.40 $ 2.85 17,317
November, 2004 $ 8.08 $ 3.26 199,251
December, 2004 $10.70 $ 6.50 359,415
The volume of trading of our common stock on December 31, 2004 was
approximately 3,039,100 shares. The range of market prices for our common stock
and trading volume for the first quarter of 2005
33
through the announcement on March 15, 2005 of our proposed merger with Dialysis
Corporation of America (see "Recent Developments" above) is as reported by
Nasdaq:
Common Stock Volume (Weekly Average)
---------------- -----------------------
High Low
---- ---
January, 2005 $13.05 $6.71 608,529
February, 2005 $ 9.88 $7.75 228,980
March 14, 2005 $11.00 $8.32 265,417
(two weeks)
For the period subsequent to the merger announcement our common stock
traded in the range of $13.78 to $9.65.
Other than the announcement on March 15, 2005 of the proposed merger
and the continued growth of Dialysis Corporation of America, there was no
information known to management that would cause the rise or significant
fluctuation in the price of our common stock, or the increased trading volume.
There has been interest in the renal care industry reflecting continued and
rapid consolidation as evidenced by the proposed acquisition involving two of
the major dialysis services providers, DaVita, Inc. and Gambro Healthcare U.S.,
for an estimated $3 billion, which may have generated interest of the
marketplace in our common stock as well as the common stock of Dialysis
Corporation of America.
Other factors that could continue to cause fluctuation in our common
stock include:
o changes in government regulation, whether legislative,
enforcement or reimbursement rates
o third party reports relating to the dialysis industry and
Dialysis Corporation of America (unsolicited by management)
o announcements by management of Dialysis Corporation of America
relating to the company's performance or other material events
o actions and announcements by competitors of Dialysis
Corporation of America
o the outlook for the healthcare industry generally
Investors should understand that in general, stock prices fluctuate for
reasons unrelated to operating results, which management surmises was the case
for our common stock over the last quarter of 2004. Any changes in the above
discussed factors, the Medicare and Medicaid reimbursement rates in particular,
or general economic, political, global and market conditions, could result in a
decline in the market price and volume of trading in our common stock.
Item 2. Properties
Medicore leases 2,800 square feet for its executive offices in Hialeah,
Florida pursuant to a lease expiring December 31, 2007. In addition, we lease a
5,000 square foot facility at a different location in Hialeah, Florida, for our
medical product operations pursuant to a five year lease expiring June 30, 2008,
with one five year renewal option. Our previously existing lease for 1,500
square feet also in Hialeah, Florida was not renewed, and expired on January 31,
2004. Medicore also leases 3,900 square feet of space for executive offices in
Hasbrouck Heights, New Jersey through March 31, 2006.
34
Dialysis Corporation of America owns three properties, one located in
Lemoyne, Pennsylvania, a second in Easton, Maryland, and a third in Valdosta,
Georgia. The Maryland property consists of approximately 7,500 square feet, most
of which is leased to a competitor under a 10-year lease through June 30, 2009
with two renewals of five years each. The lease is guaranteed by the tenant's
parent company. Dialysis Corporation of America uses approximately 600 square
feet at that property for an administrative office.
The Lemoyne property consists of approximately 15,000 square feet and
houses one of Dialysis Corporation of America's dialysis centers which accounts
for approximately 5,400 square feet under a five year lease through December 22,
2008, with one additional renewal period of five years. The center is approved
for 17 dialysis stations with space available for expansion. Dialysis
Corporation of America uses approximately 4,000 square feet of the Lemoyne
property for administrative offices.
The Easton, Maryland property has a mortgage securing a $700,000
development loan made by a third party to Dialysis Corporation of America's
Vineland, New Jersey subsidiary at an annual interest rate of 1% over the prime
rate, maturing in December 2007, which loan Dialysis Corporation of America
guarantees. This loan had a remaining principal balance of approximately
$610,000 at December 31, 2004. See Item 7, "Management's Discussions and
Analysis of Financial Condition and Results of Operations" and Note 3 to "Notes
to Consolidated Financial Statements."
Dialysis Corporation of America acquired property in Valdosta, Georgia
in 2000, which property is subject to a five year $788,000 mortgage obtained in
April, 2001 accruing interest at the prime rate plus 1/2% with a minimum rate of
6%, maturing in April, 2006. This mortgage had a remaining principal balance of
approximately $675,000 at December 31, 2004. Dialysis Corporation of America
constructed a dialysis center at this property comprising approximately 6,000
square feet which it has leased to one of its subsidiaries for $90,600 per year
under a 10-year lease, with two additional renewal periods of five years each.
With respect to its Cincinnati, Ohio facility, Dialysis Corporation of
America purchased the property and completed the construction of an
approximately 5,000 square foot dialysis facility at a cost of approximately
$740,000. In February, 2003, Dialysis Corporation of America sold the property
to a corporation owned by the medical director of that facility which, in turn,
leased the facility to Dialysis Corporation of America's Cincinnati subsidiary
for an initial term of 10 years from the commencement date of February 6, 2003,
with two additional five-year renewal periods. Annual rental fees remain the
same for the first four years of the lease, and thereafter increase based upon a
percentage increase in the CPI for the Cincinnati, Ohio area. Tenant
improvements at the Cincinnati facility aggregated $75,000 and were funded by a
loan from DCA to its Cincinnati subsidiary operating this dialysis center, for
which the Cincinnati subsidiary issued to Dialysis Corporation of America a
five-year promissory note. The loan must be paid prior to that subsidiary paying
any other indebtedness, and earlier if the subsidiary has cash flow or other
proceeds available for distribution to its members under its operating
agreement, subject to tax payment distributions which have a priority. Should
the Cincinnati subsidiary sell additional limited liability interests, the
proceeds will first be used to repay the loan.
In addition to its Lemoyne, Pennsylvania; Valdosta, Georgia; and
Cincinnati, Ohio facilities, Dialysis Corporation of America presently has 19
other dialysis centers, including the facility in Toledo, Ohio in which it has a
40% interest, that lease their respective facilities from unaffiliated third
parties. Most of the leases are for five to ten year initial terms, usually with
two additional renewal periods of five years each, for space ranging from
approximately 3,000 to 7,000 square feet. Dialysis Corporation of America
sublets a minimal amount of space at four of its dialysis centers to the
physicians who are its
35
medical directors at those centers, 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 -
Government Regulation - Fraud and Abuse."
In June, 2004, Dialysis Corporation of America moved its executive
offices from the approximately 2,300 square foot premises it had been leasing in
Hanover, Maryland to approximately 4,600 square feet of space in Linthicum,
Maryland pursuant to a five year lease.
Dialysis Corporation of America is constructing or renovating
facilities for three new centers in Maryland, Ohio and South Carolina under
recently signed leases for those premises, and has acquired, or is in contract
to acquire, two additional properties in South Carolina for development of new
facilities. Neither of the South Carolina properties being acquired are expected
to be subject to a mortgage. Dialysis Corporation of America continues to
actively pursue the additional development and acquisition of dialysis
facilities in other areas which would entail the acquisition or lease of
additional property.
Dialysis Corporation of America constructs most of its dialysis
centers, which have state-of-the-art equipment and facilities. Dialysis stations
are equipped with modern dialysis machines under a 1996 master lease/purchase
agreement. Dialysis Corporation of America now acquires its equipment with
advances from us under a demand promissory note for up to $5,000,000 with annual
interest on advances at 1.25% over the prime rate. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," Item
13, "Certain Relationships and Related Transactions," and Note 8 to "Notes to
Consolidated Financial Statements."
None of the dialysis facilities are operating at full capacity. See
"Business - Dialysis Operations - Location, Capacity and Use of Facilities"
above. The existing dialysis facilities could accommodate greater patient
volume, particularly if Dialysis Corporation of America were to increase hours
and/or days of operation without adding additional dialysis stations or any
additional capital expenditures. Dialysis Corporation of America also has the
ability and space at most of its facilities to expand to increase patient volume
subject to obtaining appropriate governmental approval.
We own two adjacent buildings and land near these buildings in Hialeah,
Florida which we lease to our former subsidiary, Simclar (formerly Techdyne),
under a ten year lease expiring August 31, 2010.
Item 3. Legal Proceedings
None.
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.
36
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Price Range
Our shares trade on the Nasdaq SmallCap Market under the symbol "MDKI."
The table below indicates the high and low bid prices for our common stock as
reported by Nasdaq for the four quarters for the years ended December 31, 2003
and 2004.
Bid Price
---------
High Low
---- ---
2003
1st Quarter................ $1.54 $1.15
2nd Quarter................ $1.71 $1.19
3rd Quarter................ $2.39 $1.16
4th Quarter................ $2.70 $1.82
Bid Price
---------
High Low
---- ---
2004
1st Quarter................ $4.05 $2.00
2nd Quarter................ $3.54 $2.65
3rd Quarter................ $3.25 $2.62
4th Quarter................ $10.61 $2.67
At March 24, 2005, the high and low sales prices of Medicore common
stock was $11.09and $10.41 per share.
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.
Stockholders
As of March 24, 2005, there were approximately 1,014 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 in excess of approximately 2,400 shareholders.
Dividend Policy
Medicore has not paid dividends in the last two years and does not
anticipate that it will pay dividends in the foreseeable future. Dividends are
paid at the discretion of the board of directors, and depend
37
on our earnings, capital requirements, financial condition, and other similar
relevant factors. The board of directors intends that any earnings be retained
for use in our business.
Equity Compensation Plan
The following table provides certain information with respect to
securities issuable in connection with our equity compensation plans outstanding
that were approved by shareholders and equity compensation plans outstanding
that were not approved by shareholders, in each case in effect as of December
31, 2004.
Number of securities
remaining available for
future issuance under
Number of securities to be Weighted-average equity
issued upon exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
warrants warrants and rights reflected
and rights in column (a))
---------------------------- ------------------------ ----------------------------
Plan Category (a) (b) (c)
- ----------------------------------- ---------------------------- ------------------------ ----------------------------
Equity compensation plans 259,661(1) $1.50 151,000
approved by security holders:
Equity compensation plans not
approved by security holders: 200,000(2) $2.50
- ---------------
(1) The options, all of which were granted under our 1989 Stock Option
Plan, are five years in duration, expiring in July, 2005 (except for
35,000 options which are exercisable for three years through September,
2006), of which 245,661 options have vested and 14,000 are non-vested.
The options contain anti-dilution provisions providing for adjustments
of the exercise price under certain circumstances and have termination
provisions.
(2) Represents non-qualified options issued as partial consideration in
connection with a third party non-exclusive consulting agreement, which
options are exercisable through May, 2005. We terminated the consulting
agreement in December 2004 and, pursuant to the terms of the option,
subsequent to December 31, 2004, the holder thereof exercised the
options via a "cashless" exercise at a price per share of $7.14,
resulting in an aggregate of 130,000 shares being issued to the holder.
Sale of Securities Not Registered Under the Securities Act
There were no sales of our securities, registered or unregistered,
under the Securities Act of 1933, as amended (the "Securities Act"), except
under option exercises which were exempt from the registration requirements of
Section 5 of the Securities Act under the private placement exemption of Section
4(2) and/or Regulation D of the Securities Act, based on the limited number of
optionees who are our officers, directors and key employees, as well as officers
and directors of our public subsidiary, Dialysis Corporation of America. See
Item 11, "Executive Compensation," Item 12, "Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters," and Note 6 to
"Notes to Consolidated Financial Statements." These sales and issuances of
shares of our common stock pursuant to option exercises were reported in our
quarterly reports on From 10-Q for the periods ended March 31, 2004, June 30,
2004 and September 30, 2004. We did not grant any options during fiscal 2004.
38
Stock Repurchases
In December, 2002, the board of directors authorized us to buy back up
to 1,000,000 shares of our common stock based upon the current market price. We
did not make any repurchases of our common stock in fiscal 2002. During the
first six months of fiscal 2003, we repurchased an aggregate of 48,500 shares
for approximately $70,000. We did not make any repurchases of our common stock
during 2004. See Note 13 to "Notes to Consolidated Financial Statements."
Item 6. Selected Financial Data
The following selected financial data for the five years ended December
31, 2004 is derived from the audited consolidated financial statements of the
company and its subsidiaries. The consolidated financial statements and related
notes for the three years ended December 31, 2004, together with the related
Reports of Independent Registered Public Accounting Firms, are included
elsewhere in this Annual Report on Form 10-K. The data should be read in
conjunction with the consolidated financial statements, related notes and other
financial information included herein, and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Consolidated Statements of Operations Data
(in thousands except per share amounts)
Years Ended December 31
---------------------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Revenues - continuing operations(1)(2) $ 41,768 $ 30,807 $ 26,243 $ 19,897 $ 9,882
Net income (loss) - continuing operations(2) 514 273 482 (339) (776)
Net income (loss)(3) 514 273 482 1,232 (406)
Income (loss) per common share:(2)
Basic $ .07 $ .04 $ .07 $ .20 $ .07
Diluted $ .06 $ .03 $ .06 $ .20 $ .07
Consolidated Balance Sheet Data
(in thousands)
December 31
---------------------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Working capital $12,604 $13,432 $14,306 $13,094 $17,372
Total assets 35,598 30,815 28,676 29,833 41,428
Long-term debt, net of current
portion 1,586 2,097 2,727 3,124 10,355
Stockholders' equity 17,528 16,993 16,482 16,035 13,534
- ----------
(1) Prior year amounts have been reclassified to conform to current year
presentations.
(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 2001 and 2000. See Note (2) above.
39
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 a narrative
explanation of our financial statements, and to provide our shareholders and
investors with the dynamics of our business as seen through our eyes as
management. Generally, MD&A is intended to cover expected effects of known or
reasonably expected uncertainties, expected effects of known trends on future
operations, and prospective effects of events that have had a material effect on
past operating results. Our discussion of MD&A should be read in conjunction
with our consolidated financial statements, including the notes, included
elsewhere in this Annual Report on Form 10-K. Please also review the Cautionary
Notice Regarding Forward-Looking Information on page one of this Annual Report.
Overview
Although we have a medical products division and investment in two
affiliated technology companies, our primary operations, revenues and income are
derived from our dialysis operations through our 56% owned public subsidiary,
Dialysis Corporation of America. That subsidiary provides dialysis services,
primarily kidney dialysis treatments through its 23 outpatient dialysis centers,
including the management of each of a center in which it holds a 40% minority
interest and one unaffiliated dialysis center. In addition, Dialysis Corporation
of America provides dialysis treatments to patients at nine hospitals and
medical centers through its acute inpatient dialysis services agreements with
these entities. Dialysis Corporation of America also provides homecare services,
including home peritoneal dialysis and method II services, the latter relating
to providing patients with supplies and equipment.
The following table shows the number of in-center, home peritoneal and
acute inpatient treatments performed by Dialysis Corporation of America through
the dialysis centers it operates, including the two centers it manages, one in
which it has a 40% ownership interest, and those hospitals and medical centers
with which it has inpatient acute service agreements for the periods presented:
Year Ended December 31,
----------------------------------------------
2004 2003 2002
------- ------- -------
In center 127,293 103,025 86,475
Home peritoneal 13,311 7,193 4,504
Acute 8,387 8,010 9,116
------- ------- -------
148,991(1) 118,228(1) 100,095(1)
======= ======= =======
- ---------------
(1) Treatments by the two managed centers included: in-center treatments of
13,196, 11,081 and 6,563 respectively, for 2004, 2003 and 2002; no home
peritoneal treatments; and acute treatments of 128, 156 and 87,
respectively, for 2004, 2003 and 2002.
Dialysis Corporation of America also provides ancillary services
associated with dialysis treatments, including the administration of EPO for the
treatment of anemia in its dialysis patients. EPO is currently available from
only one manufacturer, and no alternative drug has been available to Dialysis
Corporation of America for the treatment of anemia in its dialysis patients. If
the available supply of EPO were reduced either by the manufacturer or due to
excessive demand, Dialysis Corporation of America's and our revenues
40
and net income would be adversely affected. The manufacturer of EPO increased
its price in early 2003, and could implement further price increases which would
adversely affect Dialysis Corporation of America's and our net income. This
manufacturer has also developed another anemia drug that could possibly
substantially reduce Dialysis Corporation of America's and our revenues and
profit margins from the treatment of anemia in dialysis patients.
ESRD patients must either obtain a kidney transplant or obtain regular
dialysis treatments for the rest of their lives. Due to a lack of suitable
donors and the possibility of transplanted organ rejection, the most prevalent
form of treatment for ESRD patients is hemodialysis through a kidney dialysis
machine. Hemodialysis patients usually receive three treatments each week with
each treatment lasting between three and five hours on an outpatient basis.
Although not as common as hemodialysis in an outpatient facility, home
peritoneal dialysis is an available treatment option, representing the third
most common type of ESRD treatment after outpatient hemodialysis and kidney
transplantation.
Approximately 56% of medical service revenues from our dialysis
operations are derived from Medicare and Medicaid reimbursement with rates
established by CMS, and which rates are subject to legislative changes. Over the
last two years, Medicare reimbursement rates have not increased. Congress has
approved a 1.6% composite rate increase for 2005. Also for 2005, Medicare is
implementing changes in the way it reimburses dialysis providers, which includes
revision of pricing for separately billable drugs and biologics, with an add-on
component to make the change budget-neutral. Medicare also is to implement a
case mix payment system as an adjustment to the composite rate. See Item 1,
"Business - Dialysis Operations - Medicare Reimbursement." Dialysis is typically
reimbursed at higher rates from private payors, such as a patient's insurance
carrier, as well as higher payments received under negotiated contracts with
hospitals for acute inpatient dialysis services.
The following table shows the breakdown of medical services revenues by
type of payor for the periods presented:
Year Ended December 31,
------------------------------
2004 2003 2002
----- ----- ----
Medicare 48% 54% 49%
Medicaid and comparable programs 8% 8% 9%
Hospital inpatient dialysis services 6% 7% 10%
Commercial insurers and other private payors 38% 31% 32%
--- --- ---
100% 100% 100%
=== === ===
The medical service revenues from our dialysis operations are derived
primarily from four sources: outpatient hemodialysis services, home peritoneal
dialysis services, inpatient hemodialysis services and ancillary services. The
following table shows the breakdown of medical service revenues from our
dialysis
41
operations (in thousands) derived from primary revenue sources and the
percentage of total medical service revenue represented by each source for the
periods presented:
Year Ended December 31,
----------------------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
Outpatient hemodialysis services $18,599 46% $13,873 47% $12,118 48%
Home peritoneal dialysis services 2,691 7% 1,294 4% 823 3%
Inpatient hemodialysis services 2,261 5% 2,114 7% 2,545 10%
Ancillary services 16,899 42% 12,395 42% 9,676 39%
------- ------- ------- ------- ------- -------
$40,450 100% $29,676 100% $25,162 100%
======= ======= ======= ======= ======= =======
Essential to profitability of our dialysis operations is Medicare
reimbursement, which is at a fixed rate determined by CMS. The level of Dialysis
Corporation of America's, and therefore, our revenues and profitability may be
adversely affected by any potential legislation resulting in Medicare
reimbursement rate cuts. Increased operating costs with respect to dialysis
treatment as well as reductions in commercial third-party reimbursement rates
could also adversely affect Dialysis Corporation of America's, and therefore,
our margins and profitability.
The healthcare industry is subject to extensive regulation of federal
and state authorities. There are a variety of fraud and abuse measures to combat
waste, which include anti-kickback regulations and extensive prohibitions
relating to self-referrals, violations of which are punishable by criminal or
civil penalties, including exclusion from Medicare and other governmental
programs. Unanticipated changes in healthcare programs or laws would require
Dialysis Corporation of America to restructure its business practices which, in
turn, could materially adversely affect its operations and financial condition.
See Item 1, "Business - Regulation - Dialysis Corporation of America." Dialysis
Corporation of America has developed a Corporate Integrity Program to assure
that it provides the highest level of patient care and services in a
professional and ethical manner consistent with applicable federal and state
laws and regulations. See Item 1, "Business - Corporate Integrity Program."
Dialysis Corporation of America's future growth depends primarily on
the availability of suitable dialysis centers for development or acquisition in
appropriate and acceptable areas, and Dialysis Corporation of America's ability
to manage the development costs for these potential dialysis centers while
competing with larger companies, some of which are public companies or divisions
of public companies with greater numbers of personnel and amounts of financial
resources available for acquiring and/or developing dialysis facilities in areas
targeted by Dialysis Corporation of America. Additionally, there is intense
competition for retaining qualified nephrologists who would serve as medical
directors of and be responsible for the supervision of these dialysis centers.
There is no assurance as to when any new dialysis center or inpatient service
contract with hospitals will be implemented, or the number of stations, or
patient treatments such center or service contract may involve, or if such
center or service contract will ultimately be profitable. It has been our
experience that newly established dialysis centers, although contributing to
increased revenues, have adversely affected Dialysis Corporation of America's
results of operations in the short term due to start-up costs and expenses and a
smaller patient base.
42
Results of Operations
The following table shows our results of operations (in thousands) for the
periods presented:
2004 2003 2002
-------- -------- --------
Product sales $ 782 $ 810 $ 890
Medical service revenues 40,450 29,676 25,162
-------- -------- --------
Total sales 41,232 30,486 26,052
Other income 536 321 191
-------- -------- --------
Total 41,768 30,807 26,243
Cost of product sales 492 514 497
Cost of medical services 23,546 18,221 15,067
-------- -------- --------
Total cost of sales 24,038 18,735 15,564
Selling, general and administrative expenses 14,408 11,345 8,733
Provision for doubtful accounts 1,198 290 705
-------- -------- --------
Total cost and expenses 39,644 30,370 25,002
-------- -------- --------
Operating income 2,124 437 1,241
Other income, net 1,328 1,101 446
-------- -------- --------
Income before income taxes, minority interest and
equity in affiliate earnings 3,452 1,538 1,687
Income tax provision 1,589 636 647
-------- -------- --------
Income before minority interest and equity
in affiliate earnings 1,863 902 1,040
Minority interest in income of
consolidated subsidiaries (1,632) (673) (627)
Equity in affiliate earnings 283 44 69
-------- -------- --------
Net income $ 514 $ 273 $ 482
======== ======== ========
2004 Compared to 2003
Operating income increased approximately $1,687,000 for the year ended
December 31, 2004 compared to the preceding year. For this same period, income
before income taxes, minority interest and equity in affiliate earnings
increased approximately $1,914,000, and net income increased approximately
$241,000.
Consolidated operating revenues, increased by approximately $10,961,000
(36%) for the year ended December 31, 2004 compared to the preceding year. Sales
revenues increased by approximately $10,745,000 (35%) for the year ended
December 31, 2004 compared to the preceding year. Other operating income
increased by approximately $216,000 for the year ended December 31, 2004,
compared
43
to the preceding year. This includes a litigation settlement of $134,000 during
2004 and an increase in management fee income of $82,000 for the year ended
December 31, 2004 pursuant to a management services agreement between Dialysis
Corporation of America and its 40% owned Toledo, Ohio affiliate and a management
services agreement with an unaffiliated dialysis center. See Notes 1 and 18 to
"Notes to Consolidated Financial Statements."
In April, 2004, we received payment of approximately $930,000
representing the third installment of an earn-out payment from our sale of
Techdyne to Simclar International in 2001. This resulted in our having received
approximately $546,000 in excess of the minimum earn-out of $2,500,000 that we
had previously recorded. This excess amount has been recorded as a non-operating
gain in our consolidated statement of operations. On May 10, 2004, we filed an
action against Simclar International in Florida state court, alleging breach of
contract by Simclar International, seeking collection of an additional
approximately $155,000 which should have been included in the April, 2004
earn-out payment based on Techdyne's consolidated sales for 2003. Simclar
International has filed a counterclaim alleging that due to its certification of
erroneous sale amounts for 2001, 2002 and 2003 it had overpaid Medicore by
approximately $316,000. We believe the counterclaim is without merit. See Note
12 to "Notes to Consolidated Financial Statements."
Other non-operating income increased approximately $86,000 for the year
ended December 31, 2004 compared to the preceding year. Interest income from
unrelated parties increased $24,000 for the year ended December 31, 2004
compared to the preceding year. Rental income increased approximately $33,000,
miscellaneous other income decreased by approximately $11,000, and interest
expense decreased approximately $39,000, with the effect of reduced average
borrowings more than offsetting an increase in average interest rates for the
year ended December 31, 2004, in each case compared to the preceding year. The
prime rate was 5.25% at December 31, 2004 and 4.00% at December 31, 2003. See
Note 1 and 3 to "Notes to Consolidated Financial Statements."
In conjunction with a sale of third-party securities that we had
acquired through foreclosure proceedings on an outstanding debt obligation to
us, we recorded gains of approximately $402,000 during 2004 and $784,000 during
2003.
Medical product sales revenues decreased approximately $28,000 for the
year ended December 31, 2004 compared to the preceding year. Although our
medical products division has expanded its product line with several diabetic
disposable products, demand to date for these products continues to be less than
anticipated. Management is attempting to be more competitive in lancet sales
through overseas purchases and expansion of its customer base.
Medical services revenues, representing the sales revenues of our
dialysis division, Dialysis Corporation of America, increased approximately
$10,773,000 (36%) for the year ended December 31, 2004 compared to the preceding
year, with the increase largely attributable to a 27% increase in total dialysis
treatments performed by our dialysis division from 106,991 during 2003 to
135,667 during 2004. This increase reflects: (i) increased revenues from
Dialysis Corporation of America's Pennsylvania dialysis centers of approximately
$2,500,000, including revenues of $782,000 from its new Pottstown center; and
revenues of $750,000 for the two centers operated through its Keystone Kidney
Care, Inc. subsidiary, which was acquired by Dialysis Corporation of America
effective August 31, 2004; (ii) increased revenues of approximately $1,064,000
from its New Jersey centers; (iii) increased revenues of approximately
$1,548,000 from its Georgia centers; (iv) increased revenues of approximately
$1,109,000 from its Maryland centers, including revenues of $305,000 from its
new Rockville center; (v) increased
44
revenues of approximately $1,361,000 from its Ohio center; (vi) revenues of
approximately $1,089,000 for its two new Virginia centers; and (vii) revenues of
approximately $2,101,000 from its new South Carolina center. Some patients of
Dialysis Corporation of America carry commercial insurance which may require an
out of pocket co-pay by the patient, which is often uncollectible by Dialysis
Corporation of America. This co-pay is typically limited, and therefore may lead
to an under-recognition of revenue by Dialysis Corporation of America at the
time of service. Dialysis Corporation of America routinely recognizes these
revenues as it becomes aware that these limits have been met.
Cost of sales as a percentage of consolidated sales amounted to 58% for
the year ended 2004 compared to 61% for the preceding year.
Cost of goods sold for the medical products division as a percentage of
medical product sales was 63% for year ended December 31, 2004 and for the
preceding year. Changes in the cost of goods sold percentage for this division
result largely from a change in product mix.
Cost of medical services sales as a percentage of medical services
revenues decreased to 58% for the year ended December 31, 2004, compared to 61%
for the preceding year, including decreases in payroll costs and supply costs as
a percentage of medical services sales.
Approximately 28% of Dialysis Corporation of America's medical services
revenues for the year ended December 31, 2004 and for the preceding year were
derived from the administration of EPO to its patients. EPO is only available
from one manufacturer in the United States. Price increases for this product
without Dialysis Corporation of America's ability to increase its charges would
increase its costs and thereby adversely impact its earnings. We cannot predict
the timing or extent of any future price increases by the manufacturer, or
Dialysis Corporation of America's ability to offset any such increases.
Beginning this year, Medicare will reimburse dialysis providers for the ten most
utilized ESRD drugs at an amount equal to the cost of such drugs as determined
by the OIG, with complimentary increases in the composite rate. Dialysis
Corporation of America believes this will have little impact on its average
Medicare revenue per treatment. See Item 1, "Business - Dialysis Operations -
Medicare Reimbursement."
Selling, general and administrative expenses, increased approximately
$2,992,000 (27%) for the year ended December 2004, compared to the preceding
year. This increase reflects operations of Dialysis Corporation of America's new
dialysis centers in Pennsylvania, South Carolina, Virginia and Maryland, the
cost of additional support activities from expanded dialysis operations and
approximately $1,231,000 of compensation expense attributable to officer,
director, employee and legal counsel bonuses recorded in 2004 compared to
$760,000 of compensation expense attributable to such bonuses recorded in 2003.
As a percentage of sales revenues selling, general and administrative expenses
amounted to 34% for the year ended December 31, 2004 compared to 36% for the
preceding year. These expenses include expenses of new dialysis centers incurred
prior to Medicare approval for which there were no corresponding medical service
revenues.
Provision for doubtful accounts increased by approximately $908,000,
for the year ended December 31, 2004, compared to the preceding year. Medicare
bad debt recoveries of $213,000 were recorded during the year ended December 31,
2004, compared to approximately $326,000 for the preceding year. Without the
effect of the Medicare bad debt recoveries, provision for doubtful accounts
receivable would have amounted to 3% of sales for the year ended December 31,
2004 compared to 2% for the preceding year. The provision for doubtful accounts
reflects our collection experience with the impact of that experience included
in accounts receivable presently reserved, plus recovery of accounts previously
considered uncollectible from our Medicare cost report filings. The provision
for doubtful
45
accounts of our medical services operation, which is the primary component of
this provision, is determined under a variety of criteria, primarily aging of
the receivables and payor mix. Accounts receivable are estimated to be
uncollectible based upon various criteria including the age of the receivables,
historical collection trends and our understanding of the nature and
collectibility of the receivables, and are reserved for in the allowance for
doubtful accounts until they are written off.
Although Dialysis Corporation of America's operation of additional
dialysis centers has resulted in additional revenues, certain of these centers
are still in the developmental stage and, accordingly, their operating results
will adversely impact Dialysis Corporation of America's and our results of
operations until they achieve a patient count sufficient to sustain profitable
operations.
Dialysis Corporation of America experienced same-center growth in total
treatments of approximately 9% for the year ended December 31, 2004, compared to
the preceding year, and same-center revenues grew by approximately 20%. Dialysis
Corporation of America continues to search for ways to operate more efficiently
and reduce costs through process improvements. In addition, it is reviewing
technological improvements and intends to make capital investments to the extent
it is confident such investments will improve patient care and operating
performance.
Minority interest represents the proportionate equity interests of
minority owners of subsidiaries whose financial results are included in our
consolidated results. Equity in affiliate earnings represents Dialysis
Corporations of America's equity in the earnings incurred by its Ohio affiliate,
in which Dialysis Corporation of America has a 40% ownership interest. This
dialysis center commenced operations in February, 2001. See Notes 1 and 18 to
"Notes to Consolidated Financial Statements."
2003 Compared to 2002
Consolidated operating revenues, increased by approximately $4,564,000
(17%) in 2003 compared to the preceding year. Sales revenues increased by
approximately $4,435,000 (17%) compared to the preceding year. Other operating
income increased by approximately $129,000 for the year ended December 31, 2003
pursuant to a management services agreement between Dialysis Corporation of
America and its 40% owned Toledo, Ohio affiliate and management services
agreement with an unaffiliated dialysis center. See Note 1 to "Notes to
Consolidated Financial Statements."
Medical service revenues, representing the revenues of our dialysis
division, Dialysis Corporation of America, increased approximately $4,514,000
(18%) for 2003 compared to the preceding year, which increase was primarily
attributable to a 14% increase in total dialysis treatments performed by DCA
from 93,443 in 2002 to 106,991 in 2003. This increase reflects (i) increased
revenues of Dialysis Corporation of America's Pennsylvania dialysis centers of
approximately $1,998,000; (ii) increased revenues of approximately $674,000 for
its Georgia centers; (iii) revenues of approximately $1,255,000 for its new
Maryland center; and (iv) revenues of approximately $709,000 for its new Ohio
center; partially offset by decreased revenues of approximately $95,000 for its
New Jersey centers reflecting termination of two New Jersey acute care contracts
and a decrease of $27,000 in consulting and license income.
Medical product sales revenues decreased approximately $79,000 (9%) for
2003 compared to the preceding year which is attributable to decreased sales to
a major customer that has indicated it is changing suppliers and has commenced
phasing out purchases from us. Although management is attempting to be more
competitive in lancet sales through overseas purchases and expansion of its
customer base, we cannot assure you that we will be able to replace lost sales
or increase other sales. Although our medical products division has expanded its
product line with several diabetic disposable products, demand to date for these
products has been less than anticipated.
46
Other non-operating income decreased approximately $128,000 for the
year ended December 31, 2003 compared to the preceding year. Interest income
from unrelated parties decreased $228,000 for the year ended December 31, 2003
compared to the preceding year large due to our foreclosure and sale of
collateral in payment of loans due from Linux Global Partners. See Note 11 to
"Notes to Consolidated Financial Statements." Rental income increased
approximately $19,000, miscellaneous other income decreased by approximately
$40,000, and interest expense decreased approximately $41,000, reflecting
reduced average borrowings and lower interest rates on variable rate debt. The
prime rate was 4.00% at December 31, 2003 and 4.25% at December 31, 2002. See
Notes 1 and 3 to "Notes to Consolidated Financial Statements."
In conjunction with a sale of third-party securities that we acquired
through foreclosure proceedings on an outstanding debt obligation to us, we
recorded a gain of approximately $784,000 during 2003. See Note 11 to "Notes to
Consolidated Financial Statements."
Cost of sales as a percentage of consolidated sales amounted to 61% for
2003 compared to 60% for the preceding year.
Cost of goods sold for the medical products division as a percentage of
medical product sales was 63%, for 2003 compared to 56% for the preceding year.
Changes in cost of goods sold for this division resulted largely from a change
in product mix.
Cost of medical services sales as a percentage of medical services
revenues increased to 61% for the year ended December 31, 2003, compared to 60%
for the preceding year, which increase is primarily attributable to (i) costs
for treatments at new dialysis centers prior to Medicare approval of these
centers resulting in no corresponding medical service revenues for such
treatments, (ii) increases in the cost of EPO as a percentage of EPO sales
revenues, and (iii) increases in the cost of professional liability insurance.
The cost of professional liability insurance coverage for our medical services
division increased by $43,000 or 62% for the year ended December 31, 2003,
compared to the preceding year. While a portion of this increase is attributable
to Dialysis Corporation of America's new centers and overall increase in
treatments, a substantial portion of the cost increase relates to the general
market conditions for professional liability coverage including reduced
availability and higher costs for this coverage. Continued cost increases for
professional liability coverage at Dialysis Corporation of America could
adversely impact both Dialysis Corporation of America's and our earnings.
Approximately 28% of Dialysis Corporation of America's 2003 medical
services revenues were derived from the administration of EPO to its patients
compared to 26% for the preceding year. EPO is only available from one
manufacturer in the United States which raised its price for the product in
January, 2003. Continued price increases for this product without Dialysis
Corporation of America's ability to increase its charges would increase its
costs and thereby adversely impact its earnings. We cannot predict the timing or
extent of any future price increases by the manufacturer, or Dialysis
Corporation of America's ability to offset any such increases.
Selling, general and administrative expenses, increased $2,579,000 for
2003 compared to the preceding year. This increase reflects operations of
Dialysis Corporation of America's new dialysis centers in Maryland and Ohio, the
cost of additional support activities from expanded dialysis operations and an
aggregate of approximately $598,000 of stock option exercise bonuses to
officers, directors and employees and officer bonuses compared to approximately
$100,000 in the preceding year.
47
Provision for doubtful accounts decreased by approximately $416,000,
primarily through Medicare bad debt recoveries of approximately $341,000 during
2003. Without the effect of Medicare bad debt recoveries, the provision for
doubtful accounts receivable would have amounted to 2% of sales for the year
ended December 31, 2003 compared to 3% for the preceding year. This change
reflects our collection experience with the impact of that experience included
in accounts receivable presently resolved, plus recovery of amounts previously
considered uncollectible from our Medicare cost report filing. The provision for
doubtful accounts of our medical services operation, which is the primary
component of this provision, is determined under a variety of criteria,
primarily aging of the receivables and payor mix. Accounts receivable are
estimated to be uncollectible based upon various criteria including the age of
the receivable, historical collection trends and our understanding of the nature
and collectibility of the receivables, and are reserved for in the allowance for
doubtful accounts until they are written off.
Although operations of additional dialysis centers have resulted in
additional revenues, certain of these centers are still in the developmental
stage and, accordingly, their operating results will adversely impact Dialysis
Corporation of America's and our results of operations until they achieve a
patient count sufficient to sustain profitable operations.
Dialysis Corporation of America experienced same-center growth in total
treatments of approximately 7% in 2003, and same-center revenues grew
approximately 9% in fiscal 2003. Dialysis Corporation of America continues to
search for ways to operate more efficiently and reduce costs through process
improvements. In addition, it is reviewing technological improvements and
intends to make capital investment to the extent it is confident such
improvements will improve patient care and operating performance.
Equity in affiliate earnings represents equity in the earnings incurred
by Dialysis Corporations of America's Ohio affiliate, in which Dialysis
Corporation of America has a 40% ownership interest. This dialysis center
commenced operations in February, 2001.
Liquidity and Capital Resources
Working capital totaled approximately $12,604,000 at December 31, 2004,
which reflects a decrease of $828,000 (6%) during the year ended December 31,
2004. The change in working capital included a decrease in cash of $2,284,000
including net cash provided by operating activities of $1,959,000, net cash used
in investing activities of $3,322,000 (including additions to property, plant
and equipment of $3,182,000, payment of $670,000 by Dialysis Corporation of
America to a minority member in two of its subsidiary dialysis centers for the
remaining balance due to acquire an aggregate of 30% of such member's interest
in each of such subsidiaries, a net cash expenditure of $758,000 by Dialysis
Corporation of America for the acquisition of Keystone Kidney Care, an earn-out
payment of $930,000 received from the sale of a former subsidiary, receipt of
$402,000 from escrowed funds released on the August 2003 sale of Ximian shares,
$97,000 of distributions received from Dialysis Corporation of America's 40%
owned Ohio affiliate and $125,000 of loans to physician affiliates), and net
cash used in financing activities of $921,000 (including payments on long-term
debt of $715,000, $436,000 of distributions to the minority members of Dialysis
Corporation of America's subsidiaries, $53,000 from a share payment on prior
year stock grants, $172,000 of capital contributions from a subsidiary minority
member and $5,000 of receipts from the exercise of subsidiary stock options).
48
In January, 2003, we executed on certain of the collateral securing
Linux Global Partners' indebtedness to us, resulting in our acquiring 4,115,815
shares of series A convertible preferred stock of Ximian, Inc. These shares were
sold in August, 2003, in connection with a third party's acquisition of Ximian,
for which we received $3,541,000 with an additional $805,000 placed in escrow,
approximately half ($402,000) of which was released in August, 2004, and the
balance of which is to be released in August, 2005, subject to the parties to
the Ximian acquisition fulfilling certain conditions. See Note 11 to "Notes to
Consolidated Financial Statements."
In May, 2003, we entered into a one-year, non-exclusive consulting
agreement with an investment relations firm, which agreement expired by its
terms in May, 2004. The agreement provided for a $4,000 monthly fee and issuance
of an option for 200,000 shares of our common stock exercisable through May,
2005, at an exercise price of $2.50 per share. The parties to the agreement
agreed to continue the consulting arrangement on a month-to-month basis through
December 2004. The month-to-month arrangement was terminated effective December
2004, and in March 2005, in accordance with the terms of the option, the
investment relations firm exercised the option in full, via a "cashless"
exercise, for which it received an aggregate of 130,000 shares. See Notes 5 and
7 to "Notes to Consolidated Financial Statements."
In July, 2003, pursuant to a mediation proceeding following a partial
summary judgment, we obtained against Viragen, Inc., our former subsidiary,
Viragen agreed to abide by the terms of our royalty agreement and remitted
$30,000 to us in August, 2003 and an additional $30,000 plus $3,000 of interest
in August, 2004, with a remaining payment of $30,000 plus interest at 5% per
annum due in August, 2005. Viragen also agreed to commence remitting royalty
payments on a quarterly basis pursuant to the royalty agreement and has remitted
quarterly payments of $2,580 in October 2003, $2,905 in January 2004, $3,735 in
April 2004, $3,426 in July 2004, $1,521 in November 2004 and $2,543 in January
2005. See Note 2 to "Notes to Consolidated Financial Statements."
In April, 2004, we received a third earn-out payment of $930,248 on the
June, 2001 sale of our interest in Techdyne. Including the April, 2004 payment,
we have received approximately $3,046,000 of earn-out payments, which exceeded
the $2,500,000 minimum earn-out we originally recorded resulting in a
non-operating gain of approximately $546,000 which was recorded during the first
quarter of 2004. Earn-out payments were specified as 3% of Techdyne's
consolidated sales, which were $36,187,105 for 2003, and as a result, we believe
that the April, 2004 earn-out payment should have been $1,085,613. We have
demanded payment from and initiated legal action in Florida state court against
Simclar International, the purchaser of Techdyne, for the $155,365 balance due.
Simclar has filed a counterclaim in the amount of $316,464 alleging prior
overpayments resulting from Simclar's certification of erroneous sales amounts
for 2003, 2002 and 2001. We believe the counterclaim is without merit. See Note
12 to "Notes to Consolidated Financial Statements."
In December, 2002, we announced our intent to purchase up to 1,000,000
shares of our outstanding common stock based on then current market prices. We
repurchased and cancelled 48,500 shares of our outstanding common stock at a
cost of approximately $70,000 during the first half of 2003. We did not make any
repurchases during 2004. See Note 13 to "Notes to Consolidated Financial
Statements," and Part II, "Other Information," Item 2, "Changes in Securities,
Use of Proceeds and Issuer Purchases of Equity Securities."
Dialysis Corporation of America, has a mortgage on its real property in
Easton, Maryland securing a development loan made by a third party to one of
Dialysis Corporation of America's New Jersey dialysis centers. The outstanding
balance of the loan was $610,000 at December 31, 2004, and $636,000 at December
31, 2003. In April, 2001, Dialysis Corporation of America obtained a $788,000
five-year mortgage on its building in Valdosta, Georgia which had an outstanding
principal balance of $675,000 at
49
December 31, 2004, and $715,000 at December 31, 2003. Dialysis Corporation of
America has an equipment financing agreement with a third party for the purchase
of kidney dialysis machines for its facilities. Dialysis Corporation of America
had outstanding balances under this agreement of $814,000 at December 31, 2004,
and $1,321,000 at December 31, 2003. Dialysis Corporation of America has not
engaged in any additional equipment financing under this agreement during 2004.
See Note 3 to "Notes to Consolidated Financial Statements."
In March, 2004, we agreed to advance Dialysis Corporation of America up
to $1,500,000 for the purpose of equipment financing by Dialysis Corporation of
America, which loan arrangement was evidenced by a demand promissory note from
Dialysis Corporation of America. Subsequently, the loan arrangement was modified
to increase the maximum amount of advances that can be made to $5,000,000 and by
adding working capital and other corporate needs to the purposes of the
financing. Advances under this loan arrangement, were approximately $1,435,000
for 2004. See Note 8 to "Notes to Consolidated Financial Statements."
Dialysis Corporation of America opened centers in Pottstown,
Pennsylvania; Aiken South Carolina; Warsaw, Virginia, Ashland, Virginia; and
Rockville, Maryland during 2004, and acquired Keystone Kidney Care, which
operates two dialysis facilities in central Pennsylvania, effective as of the
close of business on August 31, 2004. Dialysis Corporation of America is in the
process of developing a new dialysis center in each of Maryland and Ohio and
three new centers in South Carolina. Payment of the balance due of $670,000 on
the purchase of minority interests in two of Dialysis Corporation of America's
dialysis centers was made during the second quarter of 2004. Payment of $761,000
was made September 1, 2004 on the acquisition of Keystone Kidney Care. See Note
9 to "Notes to Consolidated Financial Statements."
On March 15, 2005, together with Dialysis Corporation of America, we
issued a joint press release announcing the agreement to terms for a merger of
Medicore into Dialysis Corporation of America. The proposed merger is subject to
finalizing an Agreement and Plan of Merger, our receipt of satisfactory tax and
fairness opinions, the filing with and declaration of effectiveness of a
registration statement containing a proxy statement/prospectus by the SEC, and
the approval of our shareholders and the shareholders of Dialysis Corporation of
America. This transaction will enable the control interest in Dialysis
Corporation of America to be in the hands of the public stockholders and provide
Dialysis Corporation of America with additional capital resources to expand. See
Item 1, "Business - Recent Developments," and Note 9 to "Notes to Consolidated
Financial Statements."
Capital is needed by Dialysis Corporation of America primarily for the
development of outpatient dialysis centers. The construction of a 15 station
facility, typically the size of Dialysis Corporation of America's dialysis
facilities, costs in the range of $750,000 to $1,000,000, depending on location,
size and related services to be provided, which includes equipment and initial
working capital requirements. Acquisition of an existing dialysis facility is
more expensive than construction, although acquisition would provide Dialysis
Corporation of America with an immediate ongoing operation, which most likely
would be generating income. Although Dialysis Corporation of America's expansion
strategy focuses primarily on development and construction of new centers, it
has expanded through acquisitions of dialysis facilities and continues to review
potential further acquisitions. Development of a dialysis facility to initiate
operations takes four to six months and usually up to 12 months or longer to
generate income. Dialysis Corporation of America considers some of its centers
to be in the developmental stage, since they have not developed a patient base
sufficient to generate and sustain earnings.
50
Dialysis Corporation of America is seeking to expand its outpatient
dialysis treatment facilities and inpatient dialysis care and is presently in
different phases of negotiations with physicians for additional outpatient
centers. Such expansion requires capital. Dialysis Corporation of America has
been funding its expansion primarily through internally generated cash flow and
financing from us. See Note 9 to "Notes to Consolidated Financial Statements."
While we anticipate that financing will be available to Dialysis Corporation of
America either from a financial institution or us, including the proposed merger
into Dialysis Corporation of America, providing it with cash of approximately $4
to $5 million (see Item 1, "Business - Recent Developments"), no assurance can
be given that Dialysis Corporation of America will be successful in implementing
its growth strategy or that adequate financing, to the extent needed, will be
available to support such expansion.
The bulk of our cash balances are carried in interest-yielding vehicles
at various rates and mature at different intervals depending on our anticipated
cash requirements.
We anticipate that current levels of working capital and working
capital from operations will be adequate to successfully meet liquidity demands
for at least the next twelve months.
Aggregate Contractual Obligations
As of December 31, 2004, our contractual obligations (in thousands),
including payments due by period, are as follows:
Payments due by period
-------------------------------------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
------- ------- ------- ------- -------
Long-term debt $ 2,099 $ 513 $ 1,586 $ -- $ --
Operating leases 9,173 1,580 3,012 2,431 2,150
Purchase obligations:
Medical services 5,405 1,037 1,556 1,392 1,420
Construction contracts 28 28 -- -- --
------- ------- ------- ------- -------
Total purchase obligations 5,433 1,065 1,556 1,392 1,420
------- ------- ------- ------- -------
Total contractual obligations $16,705 $ 3,158 $ 6,154 $ 3,823 $ 3,570
======= ======= ======= ======= =======
New Accounting Pronouncements
In November, 2004, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards No. 151, "Inventory Costs",
an amendment of ARB No. 43, Chapter 4 ("FAS 151"). FAS 151 requires companies to
recognize as current-period charges abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage). FAS 151 is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The Company does not expect FAS 151 to have a significant effect on its
consolidated financial statements. See Note 1 to "Notes to Consolidated
Financial Statements."
In December, 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchanges of Non-monetary Assets", an amendment of APB
Opinion No. 29 ("FAS 153"). The amendments made by FAS 153 are intended to
assure that non-monetary exchanges of assets that are commercially substantive
are based on the fair value of the assets exchanged. FAS 153 is effective for
non-monetary assets exchanges occurring in fiscal periods beginning after June
15, 2004. The Company does no expect FAS 153 to have a significant effect on its
financial statements.
51
In December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised), "Share-Based Payment" (FAS 123(R)"). FAS 123(R)
requires companies to recognize the fair value of stock option grants as
compensation costs in their financial statements. Public entities, other than
small business issuers, will be required to apply FAS 123(R) in the first
interim or annual reporting period that begins after June 15, 2005. The Company
will be subjects to the provisions of FAS 123(R) effective July 1, 2005. In
addition to stock options granted after the effective date, companies will be
required to recognize a compensation cost with respect to any unvested stock
options outstanding as of the effective date equal to the grant date fair value
of those options (as previously disclosed in the notes to the financial
statements) with the cost of vested options later recognized over the vesting
period of the options. The Company is in the process of determining the impact
that FAS 123(R) will have on its consolidated financial statements.
Critical Accounting Policies and Estimates
The Securities and Exchange Commission has issued cautionary advice to
elicit more precise disclosure in this Item 7, MD&A, about accounting policies
management believes are most critical in portraying our financial results and in
requiring management's most difficult subjective or complex judgments.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make judgments and estimates. On an on-going basis, we evaluate
our estimates, the most significant of which include establishing allowances for
doubtful accounts, a valuation allowance for our deferred tax assets and
determining the recoverability of our long-lived assets. The basis for our
estimates are historical experience and various assumptions that are believed to
be reasonable under the circumstances, given the available information at the
time of the estimate, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
available from other sources. Actual results may differ from the amounts
estimated and recorded in our financial statements.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition: Revenues are recognized as services are rendered.
Dialysis Corporation of America receives payments through reimbursement from
Medicare and Medicaid for its outpatient dialysis treatments coupled with
patients' private payments, individually and through private third-party
insurers. A substantial portion of Dialysis Corporation of America's revenues
are derived from the Medicare End Stage Renal Disease program, which outpatient
reimbursement rates are fixed under a composite rate structure, which includes
the dialysis services and certain supplies, drugs and laboratory tests. Certain
of these ancillary services are reimbursable outside of the composite rate.
Medicaid reimbursement is similar and supplemental to the Medicare program.
Dialysis Corporation of America's acute inpatient dialysis operations are paid
under contractual arrangements, usually at higher contractually established
rates, as are certain of the private pay insurers for outpatient dialysis.
Dialysis Corporation of America has developed a sophisticated information and
computerized coding system, but due to the complexity of the payor mix and
regulations, it sometimes receives more or less than the amount expected at the
time the services are provided. Dialysis Corporation of America reconciles any
such differences quarterly. Product sales are recognized pursuant to stated
shipping terms.
52
Allowance for Doubtful Accounts: We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments and Dialysis Corporation of America's patients or their
insurance carriers to make required payments. Based on historical information,
we believe that our allowance is adequate. Changes in general economic, business
and market conditions could result in an impairment in the ability of our
customers and Dialysis Corporation of America's patients and their insurance
carriers to make their required payments, which would have an adverse effect on
cash flows and our results of operations. Therefore, the allowance for doubtful
accounts is reviewed monthly and changes to the allowance are updated based on
actual collection experience. We use a combination of percentage of sales and
specific account identification and the aging of accounts receivable to
establish an allowance for losses on accounts receivable.
Allowance for Inventory Obsolescence: We maintain an allowance for
inventory obsolescence for losses resulting from inventory items becoming
unsaleable due to loss of specific customers or changes in customers'
requirements. Based on historical and projected sales information, we believe
our allowance is adequate. However, changes in general economic, business and
market conditions could cause our customers' purchasing requirements to change.
These changes could affect our inventory saleability. Therefore, the allowance
for inventory obsolescence is reviewed regularly and changes to the allowance
are updated as new information is received.
Valuation Allowance for Deferred Tax Assets: The carrying value of
deferred tax assets assumes that we will be able to generate sufficient future
taxable income to realize the deferred tax assets based on estimates and
assumptions. If these estimates and assumptions change in the future, we may be
required to adjust our valuation allowance against deferred tax assets which
could result in additional income tax expense.
Long-Lived Assets: We state our property and equipment at acquisition
cost and compute depreciation for book purposes by the straight-line method over
estimated useful lives of the assets. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of the asset may not be recoverable. Recoverability
of assets to be held and used is measured by comparison of the carrying amount
of an asset to the future cash flows expected to be generated by the asset. If
the carrying amount of the asset exceeds its estimated future cash flows, an
impairment charge is recognized to the extent the carrying amount of the asset
exceeds the fair value of the asset. These computations are complex and
subjective.
Goodwill and Intangible Asset Impairment: In assessing the
recoverability of our goodwill and other intangibles we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. This impairment test requires the determination
of the fair value of the intangible asset. If the fair value of the intangible
assets is less than its carrying value, an impairment loss will be recognized in
an amount equal to the difference. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for these assets. We adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," (FAS 142) effective January 1,
2002 and are required to analyze goodwill and indefinite lived intangible assets
for impairment on at least an annual basis.
53
Impact of Inflation
Inflationary factors have not had a significant effect on our
operations. We attempt to pass on increased costs and expenses incurred in our
medical products division by increasing selling prices when and where possible.
In our dialysis division, revenue per dialysis treatment is subject to
reimbursement rates established and regulated by the federal government. These
rates do not automatically adjust for inflation. Any rate adjustments relate to
legislation and executive and Congressional budget demands, and have little to
do with the actual cost of doing business. Therefore, dialysis medical service
revenues cannot be voluntarily increased to keep pace with increases in supply
costs or nursing and other patient care costs. Increased operating costs without
a corresponding increase in reimbursement rates may adversely affect Dialysis
Corporation of America's and, accordingly, our future earnings.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks from changes in interest rates. We have
exposure to both rising and falling interest rates.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities and interest bearing accounts at financial institutions in
which we had approximately $7,186,000 invested as of December 31, 2004. A 15%
relative decrease in rates on our period-end investments would have resulted in
a negative impact of approximately $13,000 on our results of operations for
2004.
We have interest rate exposure on debt agreements with variable
interest rates of which we had approximately $ 1,285,000 of such debt
outstanding as of December 31, 2004. A 15% relative increase in interest rates
on our period-end variable rate debt would have resulted in a negative impact of
approximately $ 4,000 on our results of operations for 2004.
We do not utilize financial instruments for trading or speculative
purposes, and do not currently use interest rate derivatives.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section to this
report, specifically, Part IV, Item 15, "Exhibits, Financial Statement Schedules
and Reports on Form 8-K," subpart (a)1, "All Financial Statements - See Index to
Consolidated Financial Statements," and subpart (a)2, "Financial Statement
Schedules - See Index to Consolidated Financial Statements."
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
54
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this Annual Report on Form 10-K
for the year ended December 31, 2004, we carried out an evaluation, under the
supervision and with the participation of our management, including our
President and Chief Executive Officer, and the Principal Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the
"Exchange Act"), which disclosure controls and procedures are designed to
provide reasonable assurance that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods specified by the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our President and Chief Executive Officer, and our
Principal Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
(b) Changes in Internal Control.
There were no changes in our internal controls over financial reporting
that occurred during fiscal 2004 or subsequent to the evaluation as described in
subparagraph (a) above that materially affected or that are reasonably likely to
materially affect our control over financial reporting.
Item 9B. Other Information
We have reported all information required to be disclosed in our
current reports on Form 8-K during the fourth quarter of our 2004 fiscal year.
55
PART III
Item 10. Directors and Executive Officers of the Registrant
Below are the names, ages, positions held with Medicore, business
experience and related information for our directors and executive officers. Our
executive officers 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. There are no family relationships between any of our executive
officers and directors.
Current Position and Position
Name Age Areas of Responsibility Held Since
- ---- --- -------------------------------- ----------
Thomas K. Langbein 59 Chairman of the Board of 1980
Directors, President and Chief
Executive Officer
Daniel R. Ouzts 58 Vice President of Finance 1986
and Treasurer (Principal 1983
Financial Officer)
Charles B. Waddell(1) 75 Director 2001
Seymour Friend(2)(3) 84 Director 1975
Peter D. Fischbein(1)(2)(3) 65 Director 1984
Robert P. Magrann(1)(2) 60 Director 1977
Anthony C. D'Amore(3) 74 Director 1979
Lawrence E. Jaffe 65 Director 2000
Other Significant Employees
Stephen W. Everett 48 President and Chief Executive 2000 and
Officer, Director of Dialysis 2003
Corporation of America
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
(3) Member of the Nominating Committee of the Board of Directors.
56
Thomas K. Langbein has been affiliated with Medicore since 1980. He has
been Chairman of the Board of our 56%-owned public subsidiary, Dialysis
Corporation of America, since 1980, and served as its Chief Executive Officer
through May, 2003. He is also an officer and director of most of Dialysis
Corporation of America's subsidiaries. He is President, sole shareholder and
director of Todd & Company, Inc., a securities brokerage firm, currently not
active, registered with the SEC and a member of the NASD. Mr. Langbein in 2000
was appointed as a director of Linux Global Partners, Inc., a private company
that invests in developing Linux software companies in which Medicore invested
and also loaned money at various times between 2000 and 2002, which amounts have
been satisfied. Mr. Langbein resigned as a Linux Global Partner director in
November, 2002. Mr. Langbein devotes most of his time and efforts to the affairs
of Medicore and DCA, and maintains contact with Linux Global Partners and
Xandros, Inc. for the purpose of monitoring their development and overseeing
Medicore's remaining investment in those entities.
Daniel R. Ouzts is a certified public accountant. He joined Medicore in
1980 as Controller of its plasma division. In 1983 he became Controller of
Medicore and Dialysis Corporation of America, and in 1986 became Vice-President
of Finance and Treasurer of Medicore. In June, 1996, Mr. Ouzts was appointed
Vice President and Treasurer of Dialysis Corporation of America, where he served
in the capacity of principal financial officer through January 2002 and from
July 2003 through August 16, 2004, when he ceased serving as principal financial
officer. Mr. Ouzts continues to serve as Vice President and Treasurer of
Dialysis Corporation of America.. See Item 13, "Certain Relationships and
Related Transactions."
Charles B. Waddell was previously employed as Secretary and served as a
director of our former subsidiary, Techdyne (Europe) from 1988 to 1997,
responsible for preparing budgets and government financial and management
reports. Mr. Waddell is qualified in the United Kingdom as a certified and
corporate accountant, and as a member of the British Institute of Management.
Seymour Friend has been a director of Medicore since 1975. Mr. Friend
is a real estate investor and devotes a portion of his time to the affairs of
Medicore.
Peter D. Fischbein has been a director of Medicore since 1984. He also
serves as a director of Dialysis Corporation of America. He was a director of
Viragen, Inc., a former public subsidiary of Medicore, until his resignation in
2002. Mr. Fischbein is a practicing attorney.
Robert P. Magrann has been a director of our company since 1997. Mr.
Magrann was affiliated with Tetley USA, Inc., with whom he held the position of
Senior Vice President, Sales for its North American Food Group until July, 1999.
He then became Vice President of Worldwide Sales for Kenosia Corporation, which
creates software applications for manufacturers and retailers. In July, 2000, he
became President and CEO of a premiere start-up website consumer value company,
Couponbasket.com, which closed in November, 2000, and effected an arrangement
for the benefit of creditors. Mr. Magrann served as Senior Vice President of
Sales at DelMonte Foods, Inc., from April, 2001 through November, 2002, and has
served as Executive Vice President from December, 2002 through the present date.
Anthony C. D'Amore has been a director of Medicore since 1979. Mr.
D'Amore is an insurance broker and has been in the insurance business since the
early 1960's.
Lawrence E. Jaffe has been a director of Medicore since 2000 and is an
attorney and member of the law firm of Jaffe & Falk, LLC, which serves as
corporate counsel to Medicore and Dialysis Corporation of America. Mr. Jaffe is
corporate Secretary to each of our company and Dialysis Corporation of America,
and he receives a substantial portion of his professional fees from these
companies. See Item 13, "Certain Relationships and Related Transactions."
57
Stephen W. Everett has been involved in the healthcare industry for
over 25 years, primarily responsible for oversight, deal structuring, physician
recruitment and practice 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, President in March, 2000, and Chief
Executive Officer in May, 2003.
There are no family relationships among any of our officers or
directors.
Corporate Governance
Our board of directors oversees the business and affairs of Medicore
and monitors the performance of management. In accordance with corporate
governance principles, the board does not involve itself in day-to-day
operations. The board is kept apprised through discussions with the Chairman,
other directors, executives, the Audit, Nominating and Compensation Committees,
division heads, advisors, including counsel, outside auditors, investment
bankers and other consultants, by reading reports, contracts and other materials
sent to them and by participating in board and committee meetings.
Our board and management have a commitment to sound and effective
corporate governance practices. In 2002, our subsidiary, Dialysis Corporation of
America adopted a Compliance Program to prevent and detect violations commonly
known in the healthcare industry as "fraud and abuse" laws.
Medicore and Dialysis Corporation of America have each developed a
Corporate Integrity Program to assure that each entity continues to achieve the
goals of providing the highest level of care and service in a professional and
ethical manner consistent with applicable federal and state laws and
regulations. These programs are intended to reinforce Dialysis Corporation of
America's as well as our management's, employees' and professional affiliates'
awareness of their responsibilities to comply with applicable laws in the
increased and complex regulatory environment relating to our operations.
As part of our Corporate Integrity Program, we have developed a Code of
Ethics and Business Conduct covering management and all employees to assure all
persons affiliated with us and our operations act in an ethical and lawful
manner. The Code of Ethics and Business Conduct covers relationships among and
between affiliated persons, including Dialysis Corporation of America patients
and payors, and relates to information processing, compliance, workplace
conduct, environmental practices, training, education, development, among other
areas. Dialysis Corporation of America has also developed its Code of Ethics and
Business Conduct and, in its commitment to delivering quality care to dialysis
patients, has mandated rigorous standards of ethics and integrity. Our Code of
Ethics, as well as that of Dialysis Corporation of America, is reviewed and
updated as necessary. We will provide to any person, without charge, upon
request, a copy of our Code of Ethics upon submission of a request for the same
to our corporate Secretary, Lawrence E. Jaffe, Esq., at Jaffe & Falk, LLC, 777
Terrace Avenue, Hasbrouck Heights, New Jersey 07604, telephone number (201)
288-8282, or email, [email protected].
Board Committees
Our board of directors which is comprised of a majority of independent
directors, has an Audit Committee, and Nominating and Compensation Committees,
each of which consist solely of independent directors. Our board has two
employee members.
58
Audit Committee
In accordance with Nasdaq Stock Market Rule 4350(d), our Audit
Committee is comprised of at least three members, all of whom (i) are
independent as defined in Rule 4200(a)(15), (ii) meet the criteria of
independence set forth in Rule 10A-3(b)(1) under the Exchange Act, (iii) have
not participated in the preparation of our financial statements at any time
during the past three years, and (iv) are able to read and understand
fundamental financial statements, including our balance sheet, income statement
and cash flow statement. Charles B. Waddell, Chairman of our Audit Committee,
has past employment experience in finance and accounting, forming the background
which results in his financial sophistication and his designation as the
"financial expert" of the Audit Committee pursuant to Item 401(h) of Regulation
S-K promulgated under the Exchange Act. For Mr. Waddell's credentials, reference
is made to "Information About Directors and Executive Officers." The designation
of Mr. Waddell as the Audit Committee financial expert does not impose on him
any duty, obligation or liability that is greater than any duty, obligation or
liability imposed on any member of the Audit Committee and board of directors.
The other members of our Audit Committee are Peter D. Fischbein and Robert P.
Magrann. Mr. Fischbein is an independent member of the board of Dialysis
Corporation of America and its Audit, Nominating and Compensation Committees.
The Audit Committee, a very essential oversight committee, pursuant to
its charter provides assistance to the board in fulfilling its responsibilities
to our shareholders and the investment community relating to accounting,
reporting practices, the quality and integrity of our financial reports, and
surveillance of internal controls and accounting and auditing services. The
Audit Committee charter specifies:
o the scope of the Audit Committee's responsibilities
o how the Audit Committee carries out those responsibilities
o the structure, processes and membership requirements
The Audit Committee does not prepare financial statements or perform
audits, and its members are not auditors or certifiers of our financial
statements. A more complete description of the Audit Committee's
responsibilities is provided in its charter, a copy of which is attached as
Appendix A to our definitive proxy statement for our 2004 annual meeting of
shareholders which was filed with the SEC on Schedule 14A on April 29, 2004.
Shareholder Nominee Procedures
There have been no material changes to the procedures by which security
holders may recommend nominees to our board of directors as described in our
definitive proxy statement for our 2004 annual shareholders' meeting filed with
the SEC on Schedule 14A on April 29, 2004, under the caption "Information about
Directors and Executive Officers - Other Nominees."
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive
officers and 10% shareholders to file reports with the SEC, the Nasdaq Stock
Market and our company, indicating their beneficial ownership of common stock of
the company and any changes in their beneficial ownership. The rules of the SEC
require that we disclose failed or late filings of reports of company stock
ownership by our directors and
59
executive officers. To the best of our knowledge, and based solely on our review
of such forms filed with us, all beneficial ownership reports by these reporting
persons for the year 2004 were filed on a timely basis, except that Mr. Langbein
filed two late reports on Form 4, relating to gift transfers of common shares of
Medicore to family members in January and November 2004.
Item 11. Executive Compensation
The Summary Compensation Table below sets forth compensation paid by us
and our dialysis operations subsidiary for each of the last three fiscal years
ended December 31, 2004 for services in all capacities to each of our respective
Chief Executive Officer and each of Medicore's executive officers whose total
annual salary, bonus or other compensation exceeded $100,000.
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
---------------------------------------------------- ---------------------
(a) (b) (c) (d) (e) (g)
Other
Annual Securities
Name and Compen- Underlying
Principal Position Year Salary($) Bonus($) sation($) Options/SARs(#)
- ------------------ ---- --------- ---------- ---------- ---------------------
Medicore DCA
Medicore, Inc.
- ----------------------
Thomas K. Langbein(1) 2004 347,838 434,000(2) 33,626(3) 50,000(4)
2003 333,232 279,400(5) 30,166(3)
2002 293,000 50,000(6) 30,700(3)
Daniel R. Ouzts 2004 95,735 57,600(7) 1,794(8)
2003 96,220 29,410(9) 1,794(8)
2002 84,200 10,000(10) 430(8)
Dialysis Corporation
of America(11)
- ----------------------
Stephen W. Everett(12) 2004 179,692 250,000(13) 7,783(14) 50,000(4)
2003 168,923 117,078(15) 2,338(14)
2002 129,808 85,714(16) 4,179(14)
- ----------
(1) Mr. Langbein is the President and Chief Executive Officer of Medicore
and served as the Chief Executive Officer of Dialysis Corporation of
America until May, 2003, at which time Mr. Everett was appointed Chief
Executive Officer. Mr. Langbein continues to serve as the Chairman of
the Board of Dialysis Corporation of America.
(2) Includes (i) a $69,000 cash bonus paid February, 2004, (ii) a $150,000
bonus accrued in 2004 and paid February 2005 and (iii) a $215,000 stock
option exercise bonus.
(3) Includes automobile allowance and related expenses, life and disability
insurance premiums.
60
(4) Vests in equal annual increments of 12,500 shares every June 7 from
2005 through 2008.
(5) Includes (i) a cash bonus of $100,000 accrued in fiscal 2003 and paid
in 2004, and (ii) a bonus relating to the exercise of stock options for
officers, directors and employees which included the payment of the
exercise price of $1.38 for 100,000 shares exercised under Mr.
Langbein's options (valued at $138,000) and a related cash distribution
to Mr. Langbein of $41,400.
(6) Bonus accrued in 2002 and paid in January, 2003; does not include
$46,429 accrued in 2002 by Dialysis Corporation of America and paid in
March, 2003 for a partial exercise of Mr. Langbein's Dialysis options.
(7) Includes (i) a $10,350 cash bonus paid February, 2004, (ii) a $15,000
bonus accrued in 2004 and paid February, 2005, and (iii) a $32,250
stock option exercise bonus.
(8) Life insurance premium.
(9) Includes (i) a cash bonus of $2,500 accrued in fiscal 2003 and paid in
2004, and (ii) a bonus relating to the exercise of stock options for
officers, directors and employees which included the payment of the
exercise price of $1.38 for 15,000 shares exercised under Mr. Ouzts'
options (valued at $20,700) and a related cash distribution to Mr.
Ouzts of $6,210.
(10) Bonus accrued in 2002 and paid in January, 2003.
(11) Dialysis Corporation of America effected a 2-for-1 stock split of its
common shares on January 28, 2004. All share amounts and per share
exercise prices with respect to Dialysis Corporation of America common
stock set forth in this table have been adjusted to give effect to such
stock split.
(12) Chief Executive Officer (since May, 2003), President and director of
Dialysis Corporation of America. All compensation to Mr. Everett set
forth in this table, including option grants under Long Term
Compensation Award were paid or granted solely by Dialysis Corporation
of America.
(13) Accrued in 2004 and paid in 2005 by Dialysis Corporation of America.
(14) Includes automobile related expenses of $5,329 and $1,957,
respectively, for 2004 and 2005, and life insurance premiums of $2,454,
$2,338 and $2,000, respectively, in 2004, 2003 and 2002, all of which
were paid by Dialysis Corporation of America.
(15) Includes (i) a cash bonus of $50,000 accrued in fiscal 2003 and paid in
2004, and (ii) a bonus accrued in fiscal 2003 and paid in February 2004
relating to the exercise of director stock options which included the
payment of the $.625 exercise price for 69,242 shares exercised under
Mr. Everett's options (valued at $43,276) and a related cash
distribution to Mr. Everett of $23,802, all of which was paid by
Dialysis Corporation of America.
(16) Includes (i) $35,714 accrued in 2002 and paid in March, 2003 for the
partial exercise of options; and (ii) a bonus of $50,000 accrued in
2002 and paid in January, 2003; all paid by Dialysis Corporation of
America.
61
Option Grants in Fiscal Year Ended December 31, 2004
Medicore did not grant options to any of the named executives set forth
in the Summary Compensation Table above during fiscal 2004.
Our dialysis subsidiary granted options to certain of our named
executives as well as to its President and Chief Executive Officer during fiscal
2004 as follows:
Individual Grants
- -------------------------------------------------------------------------------------
Potential
Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options/SARs Exercise Price Appreciation
Underlying Granted to or Base For Option Term
Options/SARs Employees in Price Expiration -----------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
(a) (b) (c) (d) (e) (f) (g)
- --------- --------- -------- --------- ---------- -------- ----------
Thomas K. Langbein 50,000(1) 21.7 $4.02 6/6/09 55,533 122,713
Stephen W. Everett 50,000(1) 21.7 $4.02 6/6/09 55,533 122,713
- ---------------
(1) Vest in equal annual increments of 12,500 shares each June 7, from 2005
to 2008.
Aggregated Option/SAR Exercises In Last Fiscal Year
and FY-End Option/SAR Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs at
at FY-End (#) Fiscal Year End($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable($)
- ---- ---------------- -------------- ------------- ----------------
Thomas K. Langbein
Medicore Options 100,000 77,000 100,000 (exer.) 787,000
Dialysis Options 90,012 231,780 50,000 (unexer.)(1) 1,020,500
355,702 1,236,064 -0- -0-
Daniel R. Ouzts
Medicore Options 15,000 11,550 15,000 (exer.) 118,050
Dialysis Options 44,500 224,948 -0- -0-
Stephen W. Everett(2)
Medicore Options 8,334 6,417 8,333 (exer.) 65,581
Dialysis Options 69,242 178,298 273,616 (exer.)(3) 6,513,429
50,000 (unexer.)(1) 1,020,500
- ----------
(1) Vests in four equal annual installments of 12,500 shares each June 7
from 2005 through 2008.
62
(2) Mr. Everett has been the Chief Executive Officer of DCA since May,
2003. He is also the President and a director of DCA.
(3) Includes options for 66,000 shares exercisable at $.625 per share
through January 1, 2006, which options vested on January 1, 2005. An
aggregate of 150,000 of these options were exercised subsequent to
December 31, 2004.
Compensation of Directors
There are no standard arrangements for compensating directors for
services as directors or for participating on any committee. We reimburse
directors for travel and related out-of-pocket expenses incurred in attending
shareholder, board and committee meetings, which expenses have been minimal. In
lieu of any cash compensation or per meeting fees to directors for acting as
such, we have provided directors, among others, with options to purchase common
stock of the company at exercise prices no less than the fair market value as of
the date of grant. In January, 2004, bonuses were granted to the board members,
including $266,801 bonused for exercise of a portion of their options, amounting
to 193,335 shares at an exercise price of $1.38, and a cash award aggregating
$133,400. See Item 12, "Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters."
In February, 2005, the company provided director fees of $15,000 to
each director, except to Thomas K. Langbein, who received a $150,000 bonus from
the company for his services as Chairman of the Board, Chief Executive Officer
and President. See the Summary Compensation Table above.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
Mr. Langbein has an employment agreement with Medicore that will run
through February 28, 2009 at an annual salary, presently of $353,500, with
yearly increases in increments of not less than $12,000. The agreement provides
for Mr. Langbein to serve as the Chairman, Chief Executive Officer and
President.
The employment agreement also provides for
o monthly automobile allowance
o benefit plans and other fringe benefits available to Medicore
employees and executives
o reimbursement for business expenses
o payment of universal and term life insurance owned by Mr.
Langbein
o indemnification for acting as an officer and/or director of
Medicore and subsidiaries
o non-competition for one year from termination within 10 miles
of our then existing dialysis and medical products facilities
o full compensation for the first 180 days of disability, with
Medicore then having the option to continue Mr. Langbein's
employment with full compensation less disability payments
63
The employment agreement also contains different termination provisions
as follows:
o upon death, termination due to disability, or Mr. Langbein's
termination for cause or voluntarily by Mr. Langbein without
good reason (defined below), Medicore will pay to Mr. Langbein
a lump sum payment equal to three years of Mr. Langbein's
salary, including expenses and benefits, determined as of the
date of termination (for purposes of this discussion, the
"lump sum payment")
o Mr. Langbein has the option, subject to shareholder approval,
to take 400,000 shares of Medicore common stock instead of the
lump sum payment; which shares would carry a two year right to
demand registration of the shares, and a three year right to
include the shares in any registration statement filed by
Medicore during that time, such registration in either case
being at Medicore's cost
o for good reason by Mr. Langbein or upon the wrongful
termination of Mr. Langbein by Medicore, Medicore shall
continue to pay Mr. Langbein's salary, benefits and expenses,
and provide Mr. Langbein with the lump sum payment, with the
option to Mr. Langbein to acquire the Medicore shares in lieu
of the lump sum payment
o at expiration, if either of Medicore or Mr. Langbein does not
renew or enter into new employment with the other party,
Medicore shall pay Mr. Langbein a severance allowance which is
the lump sum payment or Mr. Langbein's option to take Medicore
shares
o upon Mr. Langbein's termination, other than for cause or Mr.
Langbein's termination of his employment without good reason,
there shall be full vesting of any warrants, options or
similar rights held by Mr. Langbein; Mr. Langbein has the
choice to keep those options, otherwise Medicore is required
to repurchase them at a certain repurchase formula.
o in the agreement, "cause" is defined as the willful failure to
perform duties under the employment agreement, and illegal or
gross misconduct which damages the business or reputation of
our company; and "good reason" is defined as assigning Mr.
Langbein duties inconsistent with his position or any action
that results in reducing Mr. Langbein's authority, duty or
responsibilities; reduction of salary, expenses or benefits;
or other substantial breach of the agreement
The employment agreement also provides for "change in control"
provisions, including (a) the announcement of and/or acquisition by, any person
not affiliated with Mr. Langbein, of 25% or more of Medicore's outstanding
common stock, (b) a sale by Medicore of substantially all of its assets, or a
merger or acquisition of Medicore, or (c) certain changes in the board other
than through shareholder elections of members nominated by the existing board.
Upon such a "change in control," Medicore or a successor entity shall pay Mr.
Langbein the lump sum payment with the option for shares in lieu thereof, and
the employment agreement shall remain in full force and effect and Mr. Langbein
shall receive the compensation due under the agreement.
Stephen W. Everett, President and director of Dialysis Corporation of
America, has a five-year employment contract with Dialysis Corporation of
America through December 31, 2005. Effective for fiscal 2005, Mr. Everett's
annual compensation was increased from $180,000 to $250,000. Mr. Everett's
employment agreement also provides:
64
o employee and fringe benefits to the extent available by
Dialysis Corporation of America to other similarly situated
executive employees
o reimbursement for reasonable out-of-pocket expenses incurred
in connection with his duties
o vacations normally taken by senior management
o termination
- death; three months' severance pay
- for cause; salary and expenses to date of
termination ("cause" includes conviction for
fraud or criminal conduct, habitual
drunkenness or drug addition, embezzlement,
regulatory agency sanctions against Mr.
Everett or the company due to his wrongful
acts, material breach of the agreement,
dishonesty, or resignation, except if due to
breach by Dialysis Corporation of America)
- by Dialysis Corporation of America after 13
weeks of disability; three months' severance
pay
- by Mr. Everett upon breach by Dialysis
Corporation of America; severance pay equal
to the greater of six months of his then
compensation or his remaining compensation
under the agreement
o confidentiality restrictions two years from termination
o non-competition for one year from termination within the
United States; provided, non-competition eliminated if
Dialysis Corporation of America terminates Mr. Everett without
cause or due to Dialysis Corporation of America's material
breach of the agreement
o Mr. Everett to assign any patents, property rights, discovery
or idea to Dialysis Corporation of America
Certain executive and accounting personnel and administrative
facilities of Medicore and Dialysis Corporation of America, were common for
fiscal 2004. The costs of executive and accounting salaries and other shared
corporate overhead are charged based on the time spent. Mr. Langbein, as an
officer and director of Medicore and Chairman of the Board of Dialysis
Corporation of America, and Mr. Daniel Ouzts, as an officer of Medicore and
Dialysis Corporation of America, divide their time and efforts among each
company. See Item 13, "Certain Relationships and Related Transactions." These
executive and accounting salaries and other shared corporate overhead will be
eliminated upon the successful completion of the merger of Medicore with
Dialysis Corporation of America. See Item 1, "Business - Recent Developments."
Options, Warrants or Rights
1989 Medicore Stock Option Plan
o expires May 18, 2009
o option grants are available to employees, officers, directors,
consultants, advisors and similar persons
o options are non-qualified, having a five year term, and an
exercise price equal to or greater than fair market value on
date of grant
65
o options that have vested may be exercised with cash or
Medicore common stock or both; if exercised with stock,
optionee receives additional option for amount of shares used
for exercise at an exercise price equal to the then current
market price and exercisable for the term of the remainder of
original option
o termination of optionee's affiliation with the company
- death, disability or retirement after age 65;
exercisable for up to two years from such event but
not beyond expiration date of option
- any other termination; right to exercise terminates
immediately
o forced redemption at formulated prices upon change in control
of Medicore which includes (i) sale of substantially all
assets of Medicore or its merger or consolidation, (ii)
majority of board changes other than by election of
shareholders pursuant to board solicitation or vacancies
filled by board caused by death or resignation, or (iii) any
person acquires or makes a tender offer for at least 25% of
Medicore's common stock; optionee may waive redemption
o options are non-transferable
o 1989 Medicore Plan history as of March 25, 2005:
- 1,000,000 shares reserved for issuance
- 865,000 granted at exercise prices ranging from $1.38
to $2.38 per share
- 3,000 exercised at $2.38 per share in March 2000
- 344,000 exercised at $1.38 per share in September
2003
- 234,671 exercised at $1.38 per share in January 2004
- 7,000 exercised at $2.25 per share in July 2004
- 7,000 exercised at $2.25 per share in February 2005
- 231,995 outstanding and vested, 14,000 outstanding
and unvested (held by a total of 14 persons including
eight officers and directors of Medicore), and
151,000 available for future grant under the plan
2000 Medicore Stock Option Plan
o adopted February 17, 2000
o authorized the issuance of up to 500,000 options (incentive
and non-qualified)
o 2000 Medicore Plan history:
- 475,000 granted on February 17, 2000
* 150,000 non-qualified options
* 325,000 incentive options
- exercisable at $3.25 per share
- all options expired unexercised on February 16, 2003
o plan expired February 16, 2005
1999 Dialysis Corporation of America Stock Option Plan
o expires April 20, 2009
o terms substantially similar to Medicore's 2000 Stock Option
Plan (see above)
o 1999 Plan history to March 25, 2005 (adjusted for the 2-for-1
stock split effected by Dialysis Corporation of America on
January 28, 2004)
authorized: 3,000,000
issued: 2,241,000
66
vested: 232,116
non-vested: 282,500
exercised: 1,742,730
cancelled: 193,654
available: 742,654
exercise prices: range from $.625 to $3.085
exercise periods: range from 1/1/06 to 8/15/09
In September 2003 and in January 2004 Medicore awarded bonuses to its
officers, directors and employees in the form of (a) the payment of the exercise
price on certain of their outstanding and vested options granted under the 1989
Plan, and (b) a cash distribution equal to approximately one-third of the value
of the option exercise. In accordance with the option exercise portion of the
bonus, our directors, including our Chief Executive Officer and President, as
well as our Vice President of Finance, exercised options for an aggregate of
406,666 shares. See Item 11, "Executive Compensation" above.
In September, 2003, we also granted non-qualified stock options for
21,000 shares of our common stock to each of Messrs. Charles B. Waddell and
Robert P. Magrann, each of whom is an independent member of our board of
directors. The options vest annually in three equal increments commencing
September 25, 2003, and have an exercise price of $2.25 per share.
All options awarded have an exercise price equal to not less than 100%
of the closing market price of our common stock on the date of grant.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth as of March 25, 2005 the names and
beneficial ownership of the equity securities of Medicore and its subsidiary,
Dialysis Corporation of America, for (i) our directors and each of our named
executive officers set forth in the Summary Compensation Table above in the
section entitled "Executive Compensation," individually itemized, (ii) our
directors and executive officers as a group, and (iii) shareholders known to us
to beneficially own more than 5% of our voting securities. All share and
per-share data, including option information in the following table, has been
adjusted to reflect a two-for-one stock split effected by Dialysis Corporation
of America on January 28, 2004.
67
Medicore, Inc. Dialysis Corporation of America
----------------------------------- ----------------------------------
Common Common
Name(#) Stock %(1) Stock(2) %(3)
- ------- ------------ --------- ------------- ----------
Medicore, Inc. -- -- 4,821,244 55.7
Thomas K. Langbein 1,356,014(4) 18.8 445,714(5) 5.2
Susan Kaufman 451,035(6) 6.3 39,600(7) *
Seymour Friend 427,705(8) 6.0 36,600 *
Anthony C. D'Amore 253,295(8) 3.5 34,600 *
Lawrence E. Jaffe 220,075(9) 3.1 276,800 3.2
Peter D. Fischbein 178,669(10) 2.5 39,600(11) *
Daniel R. Ouzts 136,050(12) 1.9 44,500 *
Robert P. Magrann 63,000(13) * 34,600 *
Charles B. Waddell 27,154(14) * -- --
Stephen W. Everett(15) 25,000(16) * 400,000(17) 4.6
All directors and 2,661,962(18) 36.2 912,414(19) 10.5
executive officers
as a group (8 persons)
- ---------------
# All addresses are c/o Medicore, Inc., 777 Terrace Avenue, Hasbrouck
Heights, New Jersey 07604.
* less than 1%.
(1) Based on 7,132,434 shares outstanding exclusive of (i) 231,995 shares
underlying outstanding options under our 1989 Stock Option Plan (14,000
non-vested options not included); (ii) 400,000 shares of common stock
available for issuance under certain conditions of Thomas K. Langbein's
employment agreement; and (iii) 98,000 shares of common stock reserved
for issuance under a key employee stock plan.
(2) Medicore owns 4,821,244 shares (56%) of the common stock of Dialysis
Corporation of America. Officers and directors of Medicore, including
those officers and directors who may be officers and/or directors and
shareholders of each of Medicore and Dialysis Corporation of America,
disclaim any indirect beneficial ownership of Dialysis Corporation of
America common stock through Medicore's 56% ownership of Dialysis
Corporation of America. Thomas K. Langbein, by virtue of his positions
with our company and Dialysis Corporation of America and his stock
ownership of our company, may be deemed to have indirect beneficial
ownership of such Dialysis
68
shares through shared voting and investment power with respect to our
company's ownership of Dialysis Corporation of America. Mr. Langbein
disclaims such entire indirect beneficial ownership, but for his
proportionate indirect interest, approximately 848,539 Dialysis shares
or approximately 8.9%.
(3) Based on 8,661,815 Dialysis Corporation of America shares outstanding
but exclusive of common stock issuable under (i) 232,116 options
currently exercisable at prices ranging from $.625 to $4.02 per share;
and (ii) 282,500 non-vested options outstanding, which options will
vest over the period ranging from June 4, 2005 through August 16, 2008
at exercise prices ranging from $.75 to $4.02 per share.
(4) Includes an option for 100,000 shares of our common stock exercisable
at $1.38 per share until July 26, 2005. Does not include up to 400,000
shares of our common stock reserved under Mr. Langbein's employment
agreement and which is issuable under certain circumstances such as a
change in control of Medicore, termination of his employment, and his
retirement.
(5) Does not include a five year incentive option for 50,000 Dialysis
shares exercisable at $4.02 per share which vests in equal annual
increments of 12,500 shares on each June 7 from 2005 through 2008.
(6) Ms. Kaufman is the wife of Peter D. Fischbein, a director of Medicore
and Dialysis Corporation of America. Ms. Kaufman's beneficial ownership
of Medicore securities includes all of her husband's interest in
Medicore other than 7,350 shares held in trust for their independent
daughter, for which Mr. Fischbein is sole trustee and to which Ms.
Kaufman has no interest or control. Ms. Kaufman's beneficial ownership
also includes (i) 196,382 of our shares held directly in her name, of
which Mr. Fischbein has no control and no beneficial interest; and (ii)
100,000 shares held in trust for their minor son. Ms. Kaufman, as
trustee for the trust, has sole voting and dispositive power over such
shares, and she is economically independent and maintains separate
checking and investment accounts for the trust. Mr. Fischbein has no
control over nor any interest in the shares held by the trust.
(7) Represents Dialysis securities beneficially owned by Mr. Fischbein over
which Ms. Kaufman has shared beneficial ownership. See footnote (11)
below.
(8) Includes an option for 16,666 shares of our common stock exercisable at
$1.38 per share until July 26, 2005.
(9) Includes an option for 33,333 shares of our common stock exercisable at
$1.38 per share until July 26, 2005.
(10) Includes (i) an option for 16,666 shares of our common stock
exercisable at $1.38 per share until July 26, 2005; and (ii) 7,350
shares held in trust for Mr. Fischbein's majority age and independent
daughter, for which Mr. Fischbein serves as sole trustee. Does not
include (i) 196,382 shares beneficially owned by Ms. Kaufman, Mr.
Fischbein's wife (see Footnote 6 above), who is economically
independent of Mr. Fischbein and who maintains separate banking and
brokerage accounts; and (ii) 100,000 shares held in trust for their
minor son by Ms. Kaufman as trustee, over which trust Mr. Fischbein has
no control nor any interest.
69
(11) Includes a non-qualified option for 5,000 Dialysis shares exercisable
at $4.02 per share through June 6, 2009.
(12) Includes an option for 15,000 shares of our common stock exercisable at
$1.38 per share until July 26, 2005.
(13) Includes the vested portion of an option for 14,000 shares of our
common stock exercisable at $2.25 per share until September 24, 2006.
Does not include the unvested portion of that option for 7,000 shares
which is scheduled to vest on September 25, 2005.
(14) Does not include the unvested portion of an option for 7,000 shares
exercisable at $2.25 per share until September 25, 2006, which is
scheduled to vest on September 25, 2005.
(15) President and Chief Executive Officer of Dialysis Corporation of
America. Mr. Everett is not an executive officer or director of
Medicore. Mr. Everett is included as a named executive in the Summary
Compensation table above in Section 11 entitled "Executive
Compensation" on account of the relationship between Medicore and
Dialysis Corporation of America, and consequently his beneficial
ownership of Medicore is included herein. His ownership, however, is
not included in the officers and directors of Medicore as a group.
(16) Includes an option for 8,333 shares of our common stock exercisable at
$1.38 per share until July 26,2 005.
(17) Includes an incentive option for 123,616 shares exercisable at $.625
per share until January 1, 2006. Does not include an incentive option
for 50,000 shares exercisable at $4.02 per share until June 6, 2009,
which option vests in equal annual increments of 12,500 Dialysis shares
on each June 7 from 2005 through 2008.
(18) Includes an aggregate of 212,331 shares of our common stock underlying
currently exercisable options as set forth in the above footnotes. Does
not include an aggregate of 14,000 shares of common stock underlying
non-vested options that are currently outstanding as set forth in the
above footnotes.
(19) Includes an aggregate of 5,000 Dialysis shares underlying currently
exercisable options. Does not include (i) an aggregate of 50,000
Dialysis shares underlying non-vested options currently outstanding,
and (ii) Dialysis shares owned by Medicore.
Item 13. Certain Relationships and Related Transactions
We own approximately 56% of the outstanding common shares of Dialysis
Corporation of America, our public subsidiary which is engaged in operating
outpatient dialysis centers providing dialysis and ancillary services to
patients suffering from chronic kidney failure, providing acute inpatient
dialysis treatments in hospitals, and providing homecare services.
Certain of our officers and directors are officers and/or directors of
Dialysis Corporation of America, including Thomas K. Langbein, who holds the
position of Chairman of the Board of Directors of our company and Dialysis
Corporation of America, and also serves as an officer and/or director of the
Dialysis Corporation of America subsidiaries. Daniel R. Ouzts is our Vice
President of Finance and
70
Treasurer and our principal financial officer and is Vice President of Finance
and Treasurer of Dialysis Corporation of America. Peter D. Fischbein is a
director of each of our company and Dialysis Corporation of America. See item
10, "Directors and Executive Officers of the Registrant." Lawrence E. Jaffe is a
director, Secretary and corporate counsel to Medicore, and is Secretary and
corporate counsel to Dialysis Corporation of America. Mr. Jaffe, together with
his son, Joshua M. Jaffe, devote a substantial portion of their professional
services to us and Dialysis Corporation of America from which companies their
law firm, Jaffe & Falk, LLC, receives approximately 60% of their professional
fees, which for fiscal 2004 aggregated approximately $413,000, of which $177,000
was from Medicore. Mr. Langbein beneficially owns approximately 18.8% of
Medicore, including an option for 100,000 shares, and approximately 5.2% of
Dialysis Corporation of America. Mr. Ouzts has an approximate 2% beneficial
interest in our company and less than 1% interest in Dialysis Corporation of
America. Mr. Fischbein holds an approximate 2.5% beneficial interest in our
company, including an option for 16,666 shares, and less than 1% interest in
Dialysis Corporation of America. Mr. Lawrence Jaffe holds an approximate 3.1%
beneficial interest in our company and 3.2% interest in Dialysis Corporation of
America. See Item 12, "Security Ownership of Certain Beneficial Owners and
Management."
We and Dialysis Corporation of America obtain and pay for group health
insurance coverage and personal life insurance policies for several executive
and key employees through George Langbein, brother of Thomas K. Langbein and
until March, 2001, an employee of our medical products division. This insurance
includes $100,000 of life insurance covering certain employees including Mr.
Ouzts. We also pay for $1,600,000 of life insurance owned by Thomas K. Langbein.
See Item 11, "Executive Compensation." Premiums on all life and group health
insurance for our employees for fiscal 2004 totaled approximately $157,000. We
are of the opinion that the cost and coverage of the insurance are as favorable
as can be obtained from unaffiliated parties.
Certain of our executive and accounting personnel and administrative
facilities and of Dialysis Corporation of America, are common. The costs of
executive and accounting salaries and other shared corporate overhead for our
companies are charged on the basis of time spent. Since the shared expenses are
allocated on a cost basis, there is no intercompany profit involved. The amount
of expenses for which we charged Dialysis Corporation of America was
approximately $200,000 for the year ended December 31, 2004. Utilization of
personnel and administrative facilities in this manner enables us to share the
cost of qualified individuals with our subsidiary rather than duplicating the
costs for the various entities. It is our opinion these services are on terms as
favorable as we could receive from unaffiliated parties.
Dialysis Corporation of America effected a 2-for-1 stock split of its
common stock on January 28, 2004. In April, 2000, certain officers and directors
of Medicore, Messrs. Anthony C. D'Amore, Peter D. Fischbein, Seymour Friend and
Robert Magrann, and Lawrence E. Jaffe, Secretary and corporate counsel to
Dialysis Corporation of America, exercised Dialysis Corporation of America
options granted under DCA's 1999 Stock Option Plan for 680,000 shares. The
exercise was effected with cash for the par value, and the balance, an aggregate
of $421,600 based on the number of underlying shares on the date of exercise, in
the form of three-year non-recourse promissory notes due April 20, 2003 at a
rate of interest of 6.2% per annum, which notes were extended to April 20, 2004.
In February, 2004, each of the foregoing persons repaid the principal and
accrued interest of their respective notes in full through the delivery of a
sufficient amount of shares of Dialysis Corporation of America which, when
multiplied by their fair market value on the date of repayment, equaled the
aggregate outstanding indebtedness under the note. All of these notes have since
been cancelled.
71
On March 17, 2004, we provided Dialysis Corporation of America with up
to $1,500,000 of financing for equipment purchases, for which Dialysis
Corporation of America issued to us a promissory note for the principal amount
of financing received. The financing carries an annual interest rate of 1.25%
over the prime rate. The financing was increased in June, 2004, to $5,000,000
and its purposes extended for working capital and other corporate purposes of
Dialysis Corporation of America. At March 25, 2005, the outstanding balance on
this financing was approximately $2,435,000 at an interest rate of 7.0%, with
accrued interest payable on the note of approximately $30,000.
The relationships and related transactions discussed in this Item 13
will be eliminated assuming and upon completion of the merger of our company
with and into Dialysis Corporation of America. See Item 1, "Business - Recent
Developments."
In May, 2001, Dialysis Corporation of America loaned its President
$95,000 at an annual interest of prime plus 1% (floating) payable on demand but
no later than May 11, 2006. Accrued interest aggregated approximately $13,000 at
December 31, 2004. The demand loan is collateralized by all of the President's
options and underlying common stock of Dialysis Corporation of America, as well
as any proceeds from the sale of such common stock.
Item 14. Principal Accountant Fees and Services
Audit Fees
Moore Stephens, P.C. performed the audit of our annual financial
statements as of and for the years ended December 31, 2003 and 2004, and
reviewed the financial statements included in our quarterly reports on Form 10-Q
for 2004. The fees of Moore Stephens, P.C. for professional services rendered
for the audit of our financial statements for fiscal 2003 were $15,000 and for
fiscal 2004 are anticipated to be $15,000.
Moore Stephens' fees for professional services for review of the
financial statements in our quarterly reports on Form 10-Q for fiscal 2004 were
$6,000. The review of the financial statements included in our Forms 10-Q for
2003 was performed by our former accountants, Wiss & Company, LLP, for an
aggregate fee of $1,500.
Audit Related Fees
Neither of Moore Stephens, P.C. nor Wiss & Company, LLP performed any
assurance and related services for Medicore, or any other services reasonably
related to the performance of the audit or review of our financial statements
during fiscal 2004 and 2003 that were not otherwise audit services as described
above.
Tax Fees
Moore Stephens, P.C. handled the calculation and preparation of
materials related to estimated taxes and the preparation of tax returns for 2003
and 2004. The tax fees for 2003 were $5,000, and the fees for such services for
2004 to be billed in 2005 are $5,000.
72
All Other Fees
In addition to the professional services and fees billed as described
above under "Audit Fees" and "Tax Fees," in 2004, Moore Stephens, P.C. performed
research on accounting and tax matters for a fee of $2,200. Wiss & Company did
not provide any other services or billed other fees to our company or any of our
subsidiaries.
Our Audit Committee has established its pre-approval policies and
procedures, pursuant to which it approved the foregoing audit and permissible
non-audit services provided by Moore Stephens, P.C. and Wiss & Company, LLP,
respectively, in 2004 and 2003. The Audit Committee's pre-approval policy
provides that all audit and permitted non-audit services be reviewed in advance
by the Audit Committee for a determination of approval of the performance by our
independent auditors of such services. Requests or applications for specific
services to be provided by the independent auditor are required to be submitted
in writing to our Audit Committee and our Vice President of Finance, who is also
our principal financial officer, and must include a detailed description of the
services to be rendered. Our Vice President of Finance shall provide the Audit
Committee with a written report as to the scope and applicability of the
proposed services and further communications may be made between and among the
independent auditors, the Vice President of Finance and the Audit Committee, as
necessary for further clarification and evaluation. The Audit Committee will
make the determination that any requested audit and/or non-audit services, upon
the above mentioned review process, are necessary and within the scope of the
company's operations and reporting responsibilities, will not, in its opinion
and evaluation, impair the auditor's independence, nor be considered a
prohibited non-audit service consistent with the SEC's rules relating to these
issues. The Audit Committee will provide a report of its approval or disapproval
of the requested audit and non-audit services to management and the board for
implementation. The Audit Committee will monitor the performance of all services
provided by the independent auditors and determine whether such services are in
compliance with its approval policies. The Audit Committee will report to
management on a periodic basis on the results of its monitoring, and recommend
appropriate action, including termination of the independent accountants for
breaches of the approved policies or the deficiency in providing services to the
company.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(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 (b) below.
(b) Exhibits+
3.1 Restated Articles of Incorporation, as amended (incorporated
by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 ("1997 Form 10-K"), Part IV,
Item 14(c)(3)(i)).
3.2 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 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)).
4.5 Form of Stock Option Certificate under the Dialysis
Corporation of America 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 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)).
74
10.2 Amendment to lease between the Company and Heights Plaza
Associates, dated February 12, 2001 (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 ("2001 Form 10-K"), Part IV, Item
14(c)10.3).
10.3 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)).
10.4 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)).
10.5 Lease Renewal Letter by the Company to Gesualdo Vitale(2)
dated August 5, 2002 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, Part II, Item 6(10)(i)).
10.6 Lease Agreement between the Company and Techdyne, Inc.(3)
dated August 29, 2000 (incorporated by reference to the
Company's Current Report on Form 8-K dated December 19, 2000,
Item 7(c)(10)(i)).
10.7 Amendment No. 1 to the Lease Agreement between the Company and
Techdyne, Inc.(3) dated November 29, 2001 (incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002 ("2002 Form 10-K"), Part IV, Item
15(c)10.8).
10.8 Lease Agreement between DCA of Wellsboro, Inc. (formerly
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)).
10.9 Lease between Dialysis Corporation of America(1) and DCA of
Lemoyne, Inc.(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)).
10.10 Medical Director Agreement(5) between DCA of Vineland, LLC(6)
and Vineland Dialysis Professionals dated April 30, 1999
(incorporated by reference to the DCA 1999 Form 10-K, Part IV,
Item 14(c)(10)(xxvi)).
10.11 Agreement for In-Hospital Dialysis Services(7) between DCA of
Wellsboro, Inc. (formerly 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)).
10.12 Lease between DCA of Carlisle, Inc. (formerly Dialysis
Services of PA., Inc. - Carlisle) (8) 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)).
75
10.13 Lease between DCA of Manahawkin, Inc. (formerly Dialysis
Services of NJ, Inc. - Manahawkin)(8) 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)).
10.14 Renewal of Lease between DCA of Manahawkin, Inc.(8) and
William P. Thomas dated February 20, 2004 (incorporated by
reference Dialysis Corporation of America's Annual Report on
Form 10-K for the year ended December 31, 2003 ("DCA 2003 Form
10-K"), Part IV, Item 15(c)10.8).
10.15 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)).
10.16 Schedule of Leased Equipment 0597 commencing June 1, 1997 to
Master Lease BC-105(9) (incorporated by reference to Dialysis
Corporation of America's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 ("DCA's June, 1997 10-Q"), Part
II, Item 6(a), Part II, Exhibit 10(i)).
10.17 Lease between DCA of Chambersburg, Inc. (formerly Dialysis
Services of PA., Inc. - Chambersburg)(8) 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)).
10.18 Lease between DCA of Vineland, LLC(6) 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)).
10.19 Management Services Agreement(10) between Dialysis Corporation
of America(1) and DCA of Vineland, LLC(6) dated April 30, 1999
(incorporated by reference to the DCA 1999 Form 10-K, Part IV,
Item 14(c)(10)(xxviii)).
10.20 Amendment No. 1 to Management Services Agreement between
Dialysis Corporation of America(1) and DCA of Vineland, LLC(6)
dated October 27, 1999 (incorporated by reference to the DCA
1999 Form 10-K, Part IV, Item 14(c)(10)(xxix)).
10.21 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)).
10.22 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)).
10.23 Lease between Dialysis Corporation of America(1) 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)).
76
10.24 Lease between DCA of Fitzgerald, LLC(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)).
10.25 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)).
10.26 Employment Agreement between Stephen W. Everett and Dialysis
Corporation of America(1) dated December 29, 2000
(incorporated by reference to the DCA 2000 Form 10-K, Part IV,
Item 14(c)(10)(vii)).
10.27 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)).
10.28 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)).
10.29 Modification Agreement to Dialysis Corporation of America's(1)
Promissory Note to Heritage Community Bank, dated December 16,
2002 (incorporated by reference to Dialysis Corporation of
America's Annual Report on Form 10-K for the year ended
December 31, 2002 ("DCA 2002 Form 10-K"), Part IV, Item 15(c)
10.24).
10.30 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)).
10.31 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) 10.37).
10.32 Lease between DCA of Central 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) 10.38).
10.33 Promissory Note Modification Agreement between DCA of
Vineland, LLC(6) and St. Michaels Bank dated December 27, 2002
(incorporated by reference to DCA 2002 Form 10-K, Part IV,
Item 15(c) 10.30).
10.34 Lease between Dialysis Corporation of America(1) and Dr.
Gerald Light dated February 15, 2002 (incorporated by
reference to Dialysis Corporation of America's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002, Part
II, Item 6(a)(99)(i)).
77
10.35 Lease between DCA of Royston, LLC(4) and Ty Cobb Healthcare
System, Inc. dated March 15, 2002 (incorporated by reference
to Dialysis Corporation of America's Current Report on Form
8-K dated April 22, 2002, Item 7(c)(10)(i)).
10.36 Lease Agreement between DCA of Chevy Chase, LLC(8) and
BRE/Metrocenter LLC and Guaranty of Dialysis Corporation of
America(1) dated August 8, 2002 (incorporated by reference to
Dialysis Corporation of America's Current Report on Form 8-K
dated September 25, 2002, Item 7(c)(10)(i)).
10.37 Dialysis Corporation of America's(1) Section 125 Plan
effective September 1, 2002 (incorporated by reference to
Dialysis Corporation of America's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002, Part II, Item
6(99)).
10.38 Lease Agreement between Pupizion, Inc. and DCA of Cincinnati,
LLC(11) dated December 11, 2002 (incorporated by reference to
DCA 2002 Form 10-K, Part IV, Item 15(c) 10.35).
10.39 Promissory Note from DCA of Cincinnati, LLC(11) to Dialysis
Corporation of America(1) dated February 3, 2003 (incorporated
by reference to DCA 2002 Form 10-K, Part IV, Item 15(c)
10.36).
10.40 Lease Agreement between DCA of Warsaw, LLC(4) and Warsaw
Village, L.P. dated July 23, 2003 (incorporated by reference
to Dialysis Corporation of America's Current Report on Form
8-K dated August 5, 2003, Item 7(c)(10)(i)).
10.41 Lease Agreement between DCA of Pottstown, LLC(8) and Fisher
Scheler, LLC dated August 19, 2003 (incorporated by reference
to Dialysis Corporation of America's Current Report on Form
8-K dated August 27, 2003, Item 7(c)(iv)(i)).
10.42 Renewal of Lease between the Company and DCA of Lemoyne,
Inc(4) dated December 30, 2003 (incorporated by reference to
DCA 2003 Form 10-K, Part IV, Item 15(c)10.3).
10.43 Business Lease between the Company and Suzanne M. Anderson
dated July 1, 2003 (incorporated by reference to the Company's
Current Report on Form 8-K dated July 22, 2003, Item
7(c)(10)(i)).
10.44 Demand Promissory Note from Dialysis Corporation of America(1)
to the Company dated March 1, 2004 (incorporated by reference
to DCA 2003 Form 10-K, Part IV, Item 15(c)10.46).
10.45 Employment Agreement between Thomas K. Langbein and the
Company dated April 27, 2004 (incorporated by reference to the
Company's Current Report on Form 8-K dated April 28, 2004,
Item 7(c)(i)).
10.46 Amendment No. 1 to the Employment Agreement between Thomas K.
Langbein and the Company dated October 21, 2004 (incorporated
by reference to the Company's Current Report on Form 8-K dated
November 19, 2004, item 9.01(c)(i)).
78
10.47 Agreement of Lease by and between Copt Concourse, LLC and the
Company dated March 31, 2004 (incorporated by reference to
Dialysis Corporation of America's Current Report on Form 8-K
dated March 31, 2004, Item 7(c)(10)(i)).
16 Letter re: Change in Certifying Accountant
16.1 Letter of Wiss & Company, LLP addressed to the Securities and
Exchange Commission dated November 10, 2003 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the third quarter ended September 30, 2003, Part II, Item
6(a)(16)).
21 Subsidiaries of the Company.
31 Rule 13a-14(a)/15d-14(a) Certifications.
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
32 Section 1350 Certifications
32.1 Certification of the Chief Executive Officer and the Principal
Financial Officer pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350.##
- ---------
+ Documents incorporated by reference not included in the Exhibit Volume.
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
## In accordance with Release No. 34-47551, this exhibit is furnished to
the SEC as an accompanying document and is not deemed to be "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 or
otherwise subject to the liabilities of that Section, and it shall not
be deemed incorporated by reference into any filing under the
Securities Act of 1933.
(1) 56% owned subsidiary.
(2) Viragen, Inc., a former subsidiary sold in 1993, sold the property to
Gesualdo and Rosanna Vitale in 2000; the Vitales are the new landlords.
(3) Former 71% owned subsidiary sold in June, 2001. (4) 100% owned
subsidiary of Dialysis Corporation of America.
(5) Each dialysis subsidiary has a Medical Director Agreement which is
substantially similar to the exhibit filed but for the term, 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.
(6) 51% owned subsidiary of Dialysis Corporation of America.
79
(7) Dialysis Corporation of America's acute inpatient services agreements
referred to as Agreement for In-Hospital Dialysis Services are
substantially similar to the exhibit filed, but for the hospital
involved, the term and the service compensation rates. Agreements for
In-Hospital Dialysis Services include the following areas: Valdosta and
Fitzgerald, Georgia; Bedford, Carlisle, Chambersburg, Harrisburg,
Mechanicsburg and Wellsboro, Pennsylvania; Toledo, Ohio.
(8) 80% owned subsidiary of Dialysis Corporation of America.
(9) Certain dialysis equipment was leased from time to time by Dialysis
Corporation of America and for each lease 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.
(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. Dialysis Corporation
of America also has a Management Services Agreement with DCA of Toledo,
LLC, in which it holds a 40% interest.
(11) 60% owned subsidiary of Dialysis Corporation of America.
80
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 31, 2005
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 31, 2005
Thomas K. Langbein
/s/ DANIEL R. OUZTS Vice-President of Finance and
- --------------------------- Treasurer (Principal Financial Officer) March 31, 2005
Daniel R. Ouzts
/s/ SEYMOUR FRIEND Director March 31, 2005
- ---------------------------
Seymour Friend
/s/ PETER D. FISCHBEIN Director March 31, 2005
- ---------------------------
Peter D. Fischbein
/s/ ANTHONY C. D'AMORE Director March 31, 2005
- ---------------------------
Anthony C. D'Amore
/s/ ROBERT P. MAGRANN Director March 31, 2005
- ---------------------------
Robert P. Magrann
/s/ CHARLES B. WADDELL Director March 31, 2005
- ---------------------------
Charles B. Waddell
/s/ LAWRENCE E. JAFFE Director March 31, 2005
- ---------------------------
Lawrence E. Jaffe
81
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 15(a) (1) and (2), and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 2004
MEDICORE, INC.
HIALEAH, FLORIDA
FORM 10-K--ITEM 15(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 of the Annual Report on Form 10-K:
Page
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-4
Consolidated Statements of Operations--Years ended December 31, 2004,
2003, and 2002 F-5
Consolidated Statements of Stockholders' Equity--
Years ended December 31, 2004, 2003 and 2002 F-6
Consolidated Statements of Cash Flows--
Years ended December 31, 2004, 2003, and 2002 F-7
Notes to Consolidated Financial Statements--December 31, 2004 F-8
The following financial statement schedule of Medicore, Inc. and
subsidiaries is included in Item 15(d):
Schedule II-Valuation and qualifying accounts F-34
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 REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Medicore, Inc.
We have audited the accompanying consolidated balance sheet of Medicore, Inc.
and subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 2004. Our audit also included the
financial statement schedule listed in the Index at Item 15(a). These
consolidated financial statements and schedule are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31 2004, 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/ MOORE STEPHENS, P.C.
-------------------------
MOORE STEPHENS, P.C.
Cranford, New Jersey
February 18, 2005, except for Note 19,
for which the date is March 15, 2005
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Board of Directors
Medicore, Inc.
We have audited the consolidated balance sheet (not presented herein) at
December 31, 2002 and the accompanying consolidated statements of income,
stockholders' equity and cash flows of Medicore, Inc. and subsidiaries for the
year ended December 31, 2002. Our audit also included the information related to
the year ended December 31, 2002 on the financial statement schedule listed in
the Index at Item 15(a). These financial statements and schedule are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medicore, Inc. and
subsidiaries for the year ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule for the year ended December 31, 2002, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ WISS & COMPANY, LLP
-----------------------
WISS & COMPANY, LLP
March 12, 2003
Livingston, New Jersey
F-3
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2004 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,032,576 $10,316,170
Accounts receivable, less allowance of
$1,643,000 at December 31, 2004 and $796,000 at December 31, 2003 8,627,091 4,963,628
Receivable from sale of former subsidiary -- 384,253
Inventories, less allowance for obsolescence
of $61,000 at December 31, 2004 and $90,000 at December 31, 2003 1,566,892 1,320,255
Related parties' loan and interest receivable 111,696 204,469
Prepaid expenses and other current assets 1,350,608 1,807,663
Deferred income tax asset 841,000 477,000
----------- -----------
Total current assets 20,529,863 19,473,438
Property and equipment
Land and improvements 1,027,108 1,027,108
Building and building improvements 3,252,191 3,232,904
Equipment and furniture 8,318,684 6,226,312
Leasehold improvements 4,692,980 3,566,083
----------- -----------
17,290,963 14,052,407
Less accumulated depreciation and amortization 7,177,770 5,670,595
----------- -----------
10,113,193 8,381,812
----------- -----------
Other assets 1,306,389 668,763
Goodwill 3,649,014 2,291,333
----------- -----------
Total other assets 4,955,403 2,960,096
----------- -----------
$35,598,459 $30,815,346
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,660,710 $ 1,209,128
Accrued expenses and other current liabilities 5,752,137 4,228,391
Current portion of long-term debt 513,000 575,000
Income taxes payable -- 28,949
----------- -----------
Total current liabilities 7,925,847 6,041,468
Long-term debt, less current portion 1,585,935 2,097,355
Acquisition liabilities 380,297 --
Deferred income tax liability 1,135,000 742,000
----------- -----------
Total liabilities 11,027,079 8,880,823
Minority interest in subsidiaries 7,042,885 4,941,655
Commitments and Contingencies
Stockholders' equity:
Common stock, $.01 par value; authorized 12,000,000 shares; 6,990,630
shares issued and outstanding at December 31, 2004;
6,753,943 shares issued and outstanding at December 31, 2003 69,906 67,539
Additional paid-in capital 13,027,511 13,007,988
Retained earnings 4,431,078 3,917,341
----------- -----------
Total stockholders' equity 17,528,495 16,992,868
----------- -----------
$35,598,459 $30,815,346
=========== ===========
See notes to consolidated financial statements.
F-4
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
2004 2003 2002
------------ ------------ ------------
Operating revenues
Sales:
Product sales $ 782,014 $ 810,482 $ 889,904
Medical service revenues 40,449,562 29,676,388 25,162,380
------------ ------------ ------------
Total sales 41,231,576 30,486,870 26,052,284
Other income 536,434 320,580 191,213
------------ ------------ ------------
41,768,010 30,807,450 26,243,497
Cost and expenses:
Cost of sales:
Cost of product sales 492,461 514,354 496,984
Cost of medical services 23,545,586 18,220,891 15,066,551
------------ ------------ ------------
Total cost of sales 24,038,047 18,735,245 15,563,535
Legal fees related party 413,000 342,000 310,000
Selling, general and administrative expenses 13,994,659 11,002,995 8,423,588
Provision for doubtful accounts 1,197,905 289,582 705,158
------------ ------------ ------------
39,643,611 30,369,822 25,002,281
------------ ------------ ------------
Operating income 2,124,399 437,628 1,241,216
------------ ------------ ------------
Other income (expense):
Interest income related parties 7,057 30,111 30,714
------------ ------------ ------------
Gain on sale of former subsidiary 545,995 -- --
------------ ------------ ------------
Gain on sale of securities 402,493 784,005 --
Other income, net 372,277 286,690 414,943
------------ ------------ ------------
1,327,822 1,100,806 445,657
------------ ------------ ------------
Income before income taxes, minority interest and
equity in affiliate earnings 3,452,221 1,538,434 1,686,873
Income tax provision 1,589,292 636,289 646,880
------------ ------------ ------------
Income before minority interest and
equity in affiliate earnings 1,862,929 902,145 1,039,993
Minority interest in income of consolidated subsidiaries (1,632,138) (673,145) (627,408)
Equity in affiliate earnings 282,946 44,354 69,533
------------ ------------ ------------
Net income $ 513,737 $ 273,354 $ 482,118
============ ============ ============
Earnings per share:
Basic $ .07 $ .04 $ .07
============ ============ ============
Diluted $ .06 $ .03 $ .06
============ ============ ============
See notes to consolidated financial statements.
F-5
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Additional
Stock Paid-In Comprehensive Retained
Capital Income Earnings Total
------ ----------- ------------- ---------- -----------
Balance December 31, 2001 $66,002 $12,806,898 $3,161,869 $16,034,769
Net income $482,118 482,118 482,118
========
Stock option expense 3,750 3,750
Repurchase and cancellation of 27,500 common shares (275) (38,290) (38,565)
------ ----------- ---------- -----------
Balance December 31, 2002 65,727 12,772,358 3,643,987 16,482,072
Net income $273,354 273,354 273,354
========
Consultant stock options 56,000 56,000
Exercise of subsidiary stock options (60,188) (60,188)
Repurchase and cancellation of 48,500 common shares (485) (66,125) (66,610)
Repurchase of stock by subsidiary (8,703) (8,703)
Exercise of stock options for 229,668 common shares 2,297 314,646 316,943
------ ----------- ---------- -----------
Balance December 31, 2003 67,539 13,007,988 3,917,341 16,992,868
Net income $513,737 513,737 513,737
========
Exercise of subsidiary stock options
including $67,939 company portion of $119,611
subsidiary tax effect (Notes 4 and 5)
(354,453) (354,453)
Exercise of stock option for 236,687 shares (Note 5) 2,367 321,476 323,843
Payment prior year stock grant 52,500 52,500
------ ----------- ---------- -----------
Balance December 31, 2004 $69,906 $13,027,511 $4,431,078 $17,528,495
======= =========== ========== ===========
See notes to consolidated financial statements.
F-6
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Operating activities:
Net income $ 513,737 $ 273,354 $ 482,118
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 1,539,103 1,227,363 1,117,462
Amortization 6,243 2,314 6,190
Bad debt expense 1,197,905 289,582 705,157
Inventory obsolescence provision (credit) (28,742) (15,071) (53,000)
Stock and option related compensation 347,178 349,612 3,750
Minority interest 1,632,138 673,145 627,408
Gain on sale of former subsidiary (545,995) -- --
Equity in affiliate earnings (282,946) (44,354) (69,533)
Deferred income tax provision (benefit) 29,000 (12,000) 127,000
Gain on sale of securities (402,493) (784,005) --
Increase (decrease) relating to operating activities from:
Accounts receivable (4,645,543) (1,681,363) (222,286)
Inventories (157,309) (158,574) (117,014)
Interest receivable related parties (7,058) (30,111) (30,714)
Prepaid expenses and other current assets 449,036 76,888 (1,536,046)
Accounts payable 322,977 (200,216) (220,047)
Accrued expenses and other current liabilities 1,901,338 829,568 706,018
Income taxes payable 90,662 28,949 (2,322,736)
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,959,231 825,081 (796,273)
Investing activities:
Purchase of minority interests in subsidiaries (670,000) (670,000) (300,000)
Notes receivable -- -- (250,000)
Acquisition of dialysis centers (757,616) (75,000) (550,000)
Additions to property and equipment, net of minor disposals (3,182,253) (1,661,343) (943,647)
Earn-out payment on sale of former subsidiary 930,248 1,010,747 1,105,000
Other assets (16,683) (5,178) 22,354
Proceeds from sale of securities 402,493 3,541,081 --
Distributions from affiliate 96,633 77,000 22,800
Loans to physician affiliates (125,000) (150,000) --
------------ ------------ ------------
Net cash (used in) provided by investing (3,322,178) 2,067,307 (893,493)
activities
Financing activities:
Line of credit net payments -- (79,157) (106,373)
Payments on long-term borrowings (715,037) (589,956) (444,335)
Proceeds from exercise of stock options 5,400 34,875 --
Share payment prior year stock grant 52,500
Subsidiary repurchase of stock -- (42,000) --
Repurchase of stock -- (66,610) (38,565)
Capital contributions by subsidiaries' minority members 172,000 204,382 10,570
Distribution to subsidiaries' minority members (435,510) (118,655) (10,000)
------------ ------------ ------------
Net cash used in financing activities (920,647) (657,121) (588,703)
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (2,283,594) 2,235,267 (2,278,469)
Cash and cash equivalents at beginning of year 10,316,170 8,080,903 10,359,372
------------ ------------ ------------
Cash and cash equivalents at end of year $ 8,032,576 $ 10,316,170 $ 8,080,903
============ ============ ============
See notes to consolidated financial statements.
F-7
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: The company has three reported business segments. The medical
services segment, operated by Medicore's 57% owned subsidiary, Dialysis
Corporation of America and subsidiaries ("Dialysis Corporation of America"),
owns 21 kidney dialysis outpatient treatment centers located in Georgia,
Maryland, New Jersey, Ohio, Pennsylvania, South Carolina and Virginia, manages
two other dialysis facilities, one a 40% owned Ohio affiliate and the other
unaffiliated Georgia center, and has five dialysis centers under development;
has agreements to provide inpatient dialysis treatments to various hospitals;
and provides supplies and equipment for dialysis home patients. The medical
products segment is engaged in the distribution of medical products. A third
segment, investment in technology companies, was initiated in January, 2000 with
an investment in and financing to Linux software companies.
Consolidation: The consolidated financial statements include the
accounts of Medicore, Inc. and Dialysis Corporation of America. All material
intercompany accounts and transactions have been eliminated in consolidation.
Dialysis Corporation of America has a 40% interest in an Ohio dialysis center it
manages, which is accounted for by the equity method and not consolidated for
financial reporting purposes.
Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
The company's principal estimates are for estimated uncollectible
accounts receivable as provided for in our allowance for doubtful accounts,
estimated losses from obsolete or unsaleable inventory as provided for in our
allowance for inventory obsolescence, estimated useful lives of depreciable
assets, estimates for patient revenues from non-contracted payors, and the
valuation allowance for deferred tax assets based on the estimated realizability
of deferred tax assets. Our estimates are based on historical experience and
assumptions believed to be reasonable given the available evidence at the time
of the estimates. Actual results could differ from those estimates.
Government Regulation: A substantial portion of the revenues of the
company's medical services segment are attributable to payments received under
Medicare, which is supplemented by Medicaid or comparable benefits in the states
in which the company operates. Reimbursement rates under these programs are
subject to regulatory changes and governmental funding restrictions. Laws and
regulations governing the Medicare and Medicaid programs are complex and subject
to interpretation. The company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare and Medicaid programs.
F-8
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Vendor Concentration: The company's medical services segment purchases
erythropoietin (EPO) from one supplier which comprised 36% in 2004, 37% in 2003
and 34% in 2002 of medical service cost of sales. There is only one supplier of
EPO in the United States without alternative products available to dialysis
treatment providers. Revenues from the administration of EPO which amounted to
approximately $11,381,000 in 2004, $8,308,000 in 2003 and $6,447,000 in 2002,
comprised 28% in 2004, 28% in 2003 and 26% in 2002 of medical service revenue.
Sale of Stock By Subsidiaries: The company follows an accounting policy
of recognizing income on sales of stock by its public subsidiaries, which
includes exercise of warrants issued in subsidiary stock offerings.
Inventories: Inventories are valued at the lower of cost (first-in,
first-out and/or weighted average cost method) or market value and consists of
inventory of the company's medical products division and the company's Medical
Services Division.
Property and Equipment: Property and equipment is stated at cost.
Depreciation is computed for book purposes 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.
Depreciation expense was $1,539,103 in 2004, $1,227,363 in 2003 and $1,117,462
in 2002. 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
for Long-lived 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. Financial Accounting Standards Board Statement No. 144 "Accounting for
the Impairment or Disposal of Long-lived Assets" (FAS 144) clarifies when a
long-lived asset held for sale should be classified as such. It also clarifies
previous guidance under FAS 121. 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.
The company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (FAS 142) effective January 1, 2002.
Under FAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if impairment
indicators are present) for impairment. Pursuant to the provisions of FAS 142,
the goodwill resulting from the company's acquisition of minority interests in
August 2001 and June 2003 and the acquisition of Georgia dialysis centers in
April 2002 and April 2003 and acquisition of a Pennsylvania dialysis business at
the close of business on August 31, 2004, are not being amortized for book
purposes and are subject to the annual impairment testing provisions of FAS 142,
which testing indicated no impairment for goodwill. See Note 9.
F-9
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Deferred Expenses: Deferred expenses, except for deferred loan costs,
are amortized on the straight-line method, over their estimated benefit period
ranging to 60 months. Deferred loan costs are amortized over the lives of the
respective loans. Deferred expenses of approximately $80,000 at December 31,
2004 and $4,000 at December 31, 2003 are recorded as other assets. Amortization
expense was $6,243 in 2004, $2,314 in 2003 and $6,190 in 2002.
Income Taxes: Deferred income taxes at the end of each period are
determined by applying enacted tax rates applicable to future periods in which
the taxes are expected to be paid or recovered to differences between the
financial accounting and tax basis of assets and liabilities.
Dialysis Corporation of America files separate income tax returns with
its income tax liability reflected on a separate return basis.
Other Income
Operating:
Other operating income is comprised as follows:
Year Ended December 31,
------------------------------------------
2004 2003 2002
-------- -------- --------
Management fee income $402,251 $320,580 $191,213
Litigation settlement 134,183 -- --
-------- -------- --------
$536,434 $320,580 $191,213
======== ======== ========
Non-Operating:
Other income, net, is comprised as follows:
Year Ended December 31,
---------------------------------------------
2004 2003 2002
--------- --------- ---------
Rental income $ 346,236 $ 313,183 $ 294,227
Interest income 119,144 94,738 322,989
Interest (expense) (162,791) (201,651) (242,442)
Other 69,688 80,420 40,169
--------- --------- ---------
Other income, net $ 372,277 $ 286,690 $ 414,943
========= ========= =========
F-10
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Accrued Expenses: Accrued expenses and other current liabilities is
comprised as follows:
December 31, December 31,
2004 2003
---------- ----------
Accrued compensation $1,531,743 $1,230,685
Due to insurance companies 2,926,711 1,759,397
Acquisition liabilities current portion (See Note 11) 380,298 670,000
Other 913,385 568,309
---------- ----------
$5,752,137 $4,228,391
========== ==========
Stock-Based Compensation: The company follows the intrinsic method of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its employee
stock options because, as discussed below, Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123) requires
use of option valuation models that were not developed for use in valuing
employee stock options. FAS 123 permits a company to elect to follow the
intrinsic method of APB 25 rather than the alternative fair value accounting
provided under FAS 123 but requires pro forma net income and earnings per share
disclosures as well as various other disclosures not required under APB 25 for
companies following APB 25. The company has adopted the disclosure provisions
required under Financial Accounting Standards Board Statement No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" (FAS 148).
Under APB 25, because the exercise price of the company's stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense was recognized. See "New Pronouncements."
Pro forma information regarding net income and earnings per share is
required by FAS 123 and FAS 148, and has been determined as if the company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value of options granted in 2003 was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of 1.76% for option grants
during 2003 and 1.83% for the January 2000 options modified in January 2002; no
dividend yield; volatility factor of the expected market price of the company's
common stock of .78 for option grants during 2003 and .67 for the January 2000
options modified in January 2002; and an expected life of 2.17 years for option
grants during 2003 and 1 year for the January 2000 options modified in January
2002. There were no Medicore options granted in 2004.
The fair value of Dialysis Corporation of America's options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for option grants during 2004, 2003,
2002 and 2001, respectively: risk-free interest rate of 3.83%, 1.44%, 3.73% and
5.40%; no dividend yield; volatility factor of the expected market price of the
company's common stock of 1.31, 1.07, 1.15, and 1.14, and a weighted-average
expected life of 5 years, 4.7 years, 5 years, and 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective input assumptions including the expected stock price
volatility.
F-11
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Because the company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable measure of
the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. The company's
pro forma information, which includes the pro forma effects related to the
company's interest in Dialysis Corporation of America pro forma adjustments,
follows:
2004 2003 2002
--------- --------- ---------
Net income, as reported $ 513,737 $ 273,354 $ 482,118
Stock-based employee compensation expense
under fair value method, net of related
tax effects (113,728) (43,257) (28,830)
--------- --------- ---------
Pro forma net income-basic computation 400,009 230,097 453,288
Subsidiary dilutive securities adjustments (77,659) (66,691) (79,305)
--------- --------- ---------
Pro forma net income-diluted computation $ 322,350 $ 163,406 $ 373,983
========= ========= =========
Earnings per share:
Basic, as reported $ .07 $ .04 $ .07
========= ========= =========
Basic, pro forma $ .06 $ .03 $ .07
========= ========= =========
Diluted, as reported $ .06 $ .03 $ .06
========= ========= =========
Diluted, pro forma $ .04 $ .02 $ .06
========= ========= =========
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,
-----------------------------------------------
2004 2003 2002
----------- ----------- -----------
Net income, numerator-basic computation $ 513,737 $ 273,354 $ 482,118
Adjustment due to subsidiaries' dilutive securities (77,659) (66,691) (79,305)
----------- ----------- -----------
Net income as adjusted, numerator-diluted computation $ 436,078 $ 206,663 $ 402,813
=========== =========== ===========
Weighted average shares- denominator basic computation 6,988,915 6,580,932 6,596,837
Effect of dilutive stock options 198,985 93,347 79,144
----------- ----------- -----------
Weighted average shares, as adjusted-denominator diluted
computation 7,187,900 6,674,279 6,675,981
=========== =========== ===========
Earnings per share:
Basic $ .07 $ .04 $ .07
=========== =========== ===========
Diluted $ .06 $ .03 $ .06
=========== =========== ===========
The company had various potentially dilutive stock options during the
periods presented. See Note 5.
F-12
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Cash and Cash Equivalents: The company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The carrying amounts, reported in the balance sheet for cash and
cash equivalents approximate their fair values. The credit risk associated with
cash and cash equivalents are considered low due to the high quality of the
financial institutions in which these assets are invested.
Credit Risk: The company's primary concentration of credit risk is with
accounts receivable which consist primarily of amounts owed by governmental
agencies, insurance companies and private patients to our medical services
division, and amounts owed by commercial customers to our medical products
division. Receivables of our medical services division from Medicare and
Medicaid comprised 52% of that division's receivables at December 31, 2004 and
59% at December 31, 2003.
Customer Payment Terms: The majority of the company's sales are made at
payment terms of net amount due in 30-45 days, depending on the customer.
Estimated Fair Value of Financial Instruments: The carrying value of
cash, accounts receivable and debt in the accompanying financial statements
approximate their fair value because of the short-term maturity of these
instruments, and in the case of debt because such instruments bear variable
interest rates which approximate market.
Business Segments: The company follows the provisions of Financial
Accounting Standards Board Statement No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (FAS 131) which contains standards for
reporting information about operating segments in annual financial statements
with operating segments representing components of an enterprise evaluated by
the enterprise's chief operating decision maker for purposes of making decisions
regarding resource allocation and performance evaluation. The adoption of FAS
131 has not changed the company's reported business segments, but has resulted
in changes in the company's segment reporting disclosures.
Comprehensive Income: The company follows Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income" (FAS 130)
which contains rules for the reporting of comprehensive income and its
components. Comprehensive income consists of net income.
Revenue Recognition: Net medical service revenues are recognized as
services are rendered at the net realizable amount from Medicare, Medicaid,
commercial insurers, other third-party payors, and directly from patients. The
medical services division occasionally provides dialysis treatments on a charity
basis to patients who cannot afford to pay; however, the amount is not
significant and the medical services division does not record revenue related to
these charitable treatments. Product sales are recorded pursuant to stated
shipping terms.
F-13
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
New Pronouncements
On November 24, 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 151, "Inventory Costs" an
amendment of ARB No. 43, Chapter 4 ("FAS 151). FAS 151 requires companies to
recognize as current period charges abnormal amounts of idle facility expense,
freight, handling costs and wasted materials (spoilage). FAS 151 also requires
manufacturers to allocate fixed production overheads to inventory based on
normal capacity of their production facilities. FAS 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
company does not expect FAS 151 to have a significant effect on its consolidated
financial statements.
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, "Exchange of Nonmonetary Assets', an amendment of APB Opinion
No. 29 ("FAS 153"). The amendments made by FAS 153 are based on the principle
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. The amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with an
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previous to FAS 153 some nonmonetary exchanges, although commercially
substantive were recorded on a carryover basis rather than being based on the
fair value of the assets exchanged. FAS 153 is effective for nonmonetary assets
exchanges occurring in fiscal periods beginning after June 15, 2005. The company
does not expect FAS 153 to have a significant effect on its financial
statements.
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised), "Share-Based Payment" ("FAS 123(R)). Provisions of
FAS 123(R) requires companies to recognize the fair value of stock option grants
as a compensation costs in their financial statements. Public entities, other
than small business issuers, will be required to apply FAS 123(R) in the first
interim or annual reporting period that beginning after June 15, 2005. The
company will be subject to the provisions of FAS 123(R) effective July 1, 2005.
In addition to stock options granted after the effective date, companies will be
required to recognize a compensation cost with respect to any unvested stock
options outstanding as of the effective date equal to the grant date fair value
of those options (as previously disclosed in the notes to the financial
statements) with the cost related to the unvested options to be recognized over
the vesting period of the options. The company is in the process of determining
the impact that FAS 123(R) will have on its consolidated financial statements.
Advertising Costs: The company expenses advertising costs as they are
incurred. Advertising costs amounted to $115,000, $76,000 and $60,000 during the
years ended December 31, 2004, 2003 and 2002, respectively.
Reclassification: Certain prior year amounts have been reclassified to
conform with the current year's presentation.
F-14
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 2--TRANSACTIONS WITH VIRAGEN, INC.
The company has a royalty agreement with a former subsidiary, Viragen,
Inc., pursuant to which it is to receive a royalty on Viragen's gross sales of
interferon and related products. The agreement provides for aggregate royalty
payments of $2.4 million to be paid based on the following percentages of
Viragen sales: 5% of the first $7 million, 4% of the next $10 million, and 3% of
the next $55 million. The effective date of the agreement was November 15, 1994,
with royalty payments due quarterly, commencing March 31, 1995. A payment of
approximately $108,000, earned under a previous royalty agreement, is due as the
final payment under the existing royalty agreement. In August 2002, the company
initiated a legal action against Viragen for breach of the royalty agreement and
for an accounting of sales pursuant to the royalty agreement.
In July, 2003, we reached an agreement with Viragen pursuant to
mediation proceedings following our obtaining a partial summary judgment against
Viragen in March, 2003, for amounts owed to us under a royalty agreement with
Viragen. Viragen agreed to remit $30,000 on each of August 1, 2003, August 1,
2004 and August 1, 2005, with annual interest accruing at 5% on the August 2004
and 2005 payments. Viragen remitted the $30,000 payment due August 1, 2003.
Viragen also agreed to commence remitting the quarterly royalty payments due
under the royalty agreement and has remitted quarterly payments of $2,580 in
October 2003, $2,905 in January 2004, $3,735 in April 2004, $3,426 in July 2004,
$1,521 in November 2004 and $2,543 in January 2005.
NOTE 3--LONG-TERM DEBT
The company's medical products division had a $350,000 line of credit
with a local Florida bank, with interest at prime plus 1% payable monthly. This
line of credit matured January 22, 2003 and was secured by the accounts
receivable and inventory of the company's medical products division. The line of
credit and accrued interest were paid off in January 2003 prior to maturity. The
company did not renew this line of credit.
Dialysis Corporation of America through its subsidiary, DCA of
Vineland, LLC, pursuant to a December 3, 1999 loan agreement obtained a $700,000
development loan with interest at 8.75% through December 2, 2001, 1 1/2% over
the prime rate thereafter through December 15, 2002 and 1% over prime
thereafter, with an interest rate of 5% at December 31, 2003 and 5.25% at
December 31, 2002, which is secured by a mortgage on Dialysis Corporation of
America's real property in Easton, Maryland. Outstanding borrowings were subject
to monthly payments of interest only through December 2, 2001 with monthly
payments thereafter of $2,917 principal plus interest through December 2, 2002
and monthly payments thereafter of $2,217 plus interest with any remaining
balance due December 2, 2007. This loan had an outstanding principal balance of
$610,000 at December 31, 2004 and $636,000 at December 31, 2003.
In April 2001, Dialysis Corporation of America obtained a $788,000
five-year mortgage through April 2006 secured by its land and building in
Valdosta, Georgia with interest at 8.29% until March 2002, 7.59% thereafter
until December 16, 2002 and prime plus 1/2% with a minimum of 6.0% effective
December 16, 2002, with an interest rate of 6% at December 31, 2003 and December
31, 2002. Payments are $6,800 including principal and interest commencing May
2001 with a final payment consisting of a balloon payment and any unpaid
interest due April 2006. The remaining principal balance under this mortgage
amounted to approximately $675,000 at December 31, 2004 and $715,000 at December
31, 2003.
F-15
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 3--LONG TERM DEBT--Continued
The Dialysis Corporation of America equipment financing agreement is
for financing for kidney dialysis machines for Dialysis Corporation of America's
facilities in Pennsylvania and Maryland, New Jersey and Georgia. Financing,
which is secured by the financed equipment, totaled approximately $399,000 in
2002 with no additional financing during 2003 or 2004. Monthly payments under
the agreement, which totaled approximately $46,000 as of December 31, 2004, are
pursuant to various schedules extending through August 2007 with interest at
rates ranging from 4.13% to 10.48%. Financing under the equipment financing
agreement is a noncash financing activity which is a supplemental disclosure
required by FAS 95, "Statement of Cash Flows." See Note 14. The remaining
principal balance under this financing amounted to approximately $814,000 at
December 31, 2004 and $1,321,000 at December 31, 2003.
Long-term debt is as follows:
December 31,
--------------------------
2004 2003
---------- ----------
Development loan secured by land and building with a net book
value of $319,000 at December 31, 2004. Payments of principal
and interest as described above $ 609,580 636,182
Mortgage note secured by land and building with a net book value
of $868,000 at December 31, 2004. Payments of principal and
interest as described above 675,018 714,979
Equipment financing agreement secured by Dialysis Corporation of America
equipment with a net book value of $977,000 at December 31,
2004. Payments of principal and interest as described above 814,337 1,321,194
---------- ----------
2,098,935 2,672,355
Less current portion 513,000 575,000
---------- ----------
$1,585,935 $2,097,355
The prime rate was 5.25% as of December 31, 2004 and 4.00% as of
December 31, 2003. For interest payments, see Note 14.
Scheduled maturities of long-term debt outstanding at December 31, 2004
are approximately:
2005 $ 513,000
2006 956,000
2007 630,000
2008 --
2009 --
Thereafter --
----------
$2,099,000
The company's two mortgage agreements contain certain restrictive
covenants that, among other things, restrict the payment of dividends above 25%
of the net worth of Dialysis Corporation of America, require lenders' approval
for a merger, sale of substantially all the assets, or other business
combination of the company, and require maintenance of certain financial ratios.
The company was in compliance with the debt covenants at December 31, 2004 and
December 31, 2003.
F-16
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 4--INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the company's deferred tax liabilities and assets are as follows:
December 31,
-----------------------------
2004 2003
----------- -----------
Deferred tax liabilities:
Tax over book depreciation $ 856,000 $ 285,000
Gain on sale of DCA stock 683,000 691,000
----------- -----------
Total deferred tax liability 1,539,000 976,000
Deferred tax assets:
Obsolescence and other accounts receivable reserves 628,000 345,000
Inventory capitalization 27,000 28,000
Book over tax depreciation -- 8,000
Installment gain on securities sale 56,000 --
Startup costs 126,000 47,000
Net operating loss carryforwards 708,000 286,000
Accrued expenses and other 130,000 123,000
----------- -----------
Sub-total 1,675,000 837,000
Valuation allowance (430,000) (126,000)
----------- -----------
Net deferred tax asset 1,245,000 711,000
----------- -----------
Net deferred tax liability $ 294,000 $ 265,000
=========== ===========
Due to the uncertainty as to the realizability of deferred tax assets,
a valuation allowance of $430,000 and $126,000, which relates to net operating
loss carryforwards, was recorded as of December 31, 2004 and 2003, respectively,
reflecting an increase of $304,000 for 2004. The company has approximately
$1,200,000 of net operating loss carryforwards expiring in 2024.
Deferred taxes in the accompanying balance sheets consist of the
following components:
December 31,
------------------------------
2004 2003
----------- -----------
Current deferred tax asset $ 841,000 $ 477,000
Long-term deferred tax asset 404,000 234,000
Long-term deferred tax liability 1,539,000 (976,000)
----------- -----------
Net long-term deferred tax liability (1,135,000) (742,000)
----------- -----------
Net deferred tax liability $ (294,000) $ (265,000)
=========== ===========
F-17
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 4--INCOME TAXES--Continued
The deferred tax liability includes $683,000 at December 31, 2004 and
$691,000 at 2003, resulting from income tax expense recorded on gains recognized
for financial reporting purposes, but not for income tax purposes. The result is
a difference between book and tax basis of the company's investment in Dialysis
Corporation of America. This temporary difference would reverse upon the
occurrence of certain events relating to the divestiture of Dialysis Corporation
of America. This deferred tax liability has been classified as non-current. See
Note 1.
Significant components of the provision (benefit) for income taxes are
as follows:
Year Ended December 31,
------------------------------------------------
2004 2003 2002
----------- ----------- -----------
Current:
Federal $ 1,221,498 $ 383,984 $ 395,667
State 330,809 264,305 124,213
City 7,985 -- --
----------- ----------- -----------
1,560,292 648,289 519,880
----------- ----------- -----------
Deferred:
Federal 135,364 3,000 328,000
State (106,364) (15,000) (201,000)
----------- ----------- -----------
29,000 (12,000) 127,000
----------- ----------- -----------
$ 1,589,292 $ 636,289 $ 646,880
=========== =========== ===========
The reconciliation of income tax attributable to income (loss) before
income taxes, minority interests and equity in affiliate earnings (loss)
computed at the U.S. federal statutory rate (34%) to income tax expense is as
follows:
Year Ended December 31,
-----------------------------------------------
2004 2003 2002
----------- ----------- -----------
Tax at statutory rate $ 1,173,755 $ 523,069 $ 573,537
Adjustments resulting from:
State income taxes-net of federal income tax effect 212,515 189,116 110,691
Non deductible items 45,232 25,154 14,287
Prior year tax return to provision adjustment (76,426) -- (5,456)
Change in valuation allowance 338,090 -- (102,000)
Other (103,874) (101,050) 55,821
----------- ----------- -----------
$ 1,589,292 $ 636,289 $ 646,880
=========== =========== ===========
The exercise of 70,348 Dialysis Corporation of America non-qualified
stock options during 2004 resulted in a tax deduction for Dialysis Corporation
of America of approximately $304,000 corresponding to the difference in the
market value of the shares obtained on exercise and the exercise price of the
options. The deduction resulted in a decrease in income taxes payable of
approximately $120,000 and a corresponding increase in Dialysis Corporation of
America's equity which in turn resulted in an increase of approximately $68,000
in the company's additional paid in capital related to its 57% interest in
Dialysis Corporation of America and a $52,000 increase in minority interest in
the company's consolidated balance sheet related to the 43% minority interest in
Dialysis Corporation of America.. This represents a non-cash financing activity,
which is a supplemental disclosure required by Accounting Standards Board
Statement No. 95, "Statement of Cash Flows." See Note 14.
For income tax payments, see Note 14.
F-18
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION
On May 6, 1996, the company adopted a Key Employee Stock Plan reserving
100,000 shares of our common stock for issuance from time to time to officers,
directors, key employees, advisors and consultants as bonus or compensation for
performances and or services rendered to the company or otherwise providing
substantial benefit for the company. As of December 31, 2004, 2,000 shares have
been issued under this Plan.
In July, 2000, the company granted, under its 1989 Stock Option Plan,
five-year non-qualified stock options for 820,000 shares to officers, directors
and employees of Medicore and its subsidiaries. The options have an exercise
price of $1.38, the market price on the date of grant. Options for 16,000 shares
were cancelled during 2003 due to employee terminations and resignations. In
June, 2001, 115,000 options were exercised. In September, 2003, the company's
board of directors authorized the granting of bonuses to its officers, directors
and employees, which bonuses were partially comprised of the exercise of
one-third of the options then held by these individuals as of September 11, 2003
resulting in the exercise of 229,668 options. In January, 2004, the company's
board of directors authorized the granting of bonuses to the company's officers,
directors and employees, which bonuses were partially comprised of the exercise
of a portion of the options then held by these individuals resulting in the
exercise of 234,671 options. At December 31, 2004, a total of 224,661 options
were outstanding under the 1989 Stock Option Plan.
As part consideration for a May, 2003 consulting agreement, the company
granted options to purchase 200,000 shares of common stock exercisable for two
years at $2.50 per share. The fair value of these options was $56,000 pursuant
to a Black-Scholes computation. The $56,000 expense was being deferred and
amortized over the one year life of the consulting agreement which expired on
May 30, 2004. Approximately $23,000 of such expense was recorded during the year
ended December 31, 2004 and $33,000 during the year ended December 31, 2003. The
option was exercised on February 28, 2005 through a cashless exercise with the
consultant receiving a net of 130,000 shares from the option exercise. The
consulting agreement was continued on a month-to-month basis through December
2004. See Note 8.
On September 25, 2003, the company granted options for 21,000 common
shares to each of two directors for their service on several of its board
committees, including its audit committee. The options were granted under the
company's 1989 Stock Option Plan and are exercisable at $2.25 per share through
September 24, 2006. The options vest in equal annual increments of 7,000 shares
each September 25, 2003, 2004 and 2005. On July 14, 2004, one of the directors
acquired an aggregate of 2,016 shares by effecting a "cashless" exercise of the
vested portion of his option with respect to 7,000 shares. The director agreed
to forego the balance of 4,984 shares underlying the option in lieu of making
cash payment for the exercise price. See Note 14.
The company issued 875,000 shares of stock as compensation to officers
and directors in June 2001. In connection with a revaluation of this issuance of
shares, officers and directors who received these shares paid the company
$52,500 during 2004.
F-19
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--Continued
On January 28, 2004, Dialysis Corporation of America effected a
two-for-one stock split of its outstanding common stock. All option amounts and
exercise prices with respect to Dialysis Corporation of America have been
adjusted to reflect the stock split. Split-adjusted option exercise prices
resulting in a fraction of a cent have been rounded up to the nearest cent for
purposes of these notes to the financial statements of the company.
In June, 1998, Dialysis Corporation of America's board of directors
granted an option under its now expired 1995 Stock Option Plan to a board member
for 10,000 shares exercisable at $1.13 per share through June 9, 2003. This
option was exercised in June, 2003.
In April, 1999, Dialysis Corporation of America adopted a stock option
plan pursuant to which its board of directors granted 1,600,000 options
exercisable at $.63 per share to certain of its officers, directors, employees
and consultants with 680,000 options exercisable through April 20, 2000 and
920,000 options exercisable through April 20, 2004, of which 120,000 options
have been cancelled to date as a result of terminations. In April, 2000, the
680,000 one-year options were exercised for which Dialysis Corporation of
America received cash payment of the par value amount of $3,400 and the balance
in three-year promissory notes with interest at 6.2%. The notes were repaid with
91,800 shares of Dialysis Corporation of America stock with a fair market value
of approximately $521,000 on February 9, 2004. Interest income on the notes
amounted to approximately $3,000 for the six months ended June 30, 2004, all of
which was earned during the first quarter. In March, 2003, 155,714 of the
remaining 800,000 options outstanding were exercised for $97,322 with the
exercise price satisfied by director bonuses accrued in 2002. In January, 2004,
130,278 of these options were exercised for $81,424 with the exercise price
satisfied by director bonuses accrued in 2003. In February, 2004, 158,306 of
these options were exercised for $98,941 with the exercise price satisfied by
payment of 18,152 shares of Dialysis Corporation of America's stock for
cancellation. In March, 2004, 355,702 of these options were exercised for
$222,314 with the exercise price satisfied by the optionee's payment of 54,223
shares of Dialysis Corporation of America for cancellation. The exercises and
share payments to the company represents a noncash investing activity, which is
a supplemental disclosure required by Financial Accounting Standards Board
Statement No. 95, "Statements of Cash Flows." See Note 14.
In January, 2001, Dialysis Corporation of America's board of directors
granted to its CEO and President a five-year option for 330,000 shares
exercisable at $.63 per share with 66,000 options vesting January, 2001, and
66,000 options vesting annually on January 1 through 2005. In January, 2004,
56,384 of these options were exercised for $35,240, with the exercise price
satisfied by a Dialysis Corporation of America director bonuses accrued in 2003.
In September, 2001, Dialysis Corporation of America's board of
directors granted five-year options for an aggregate of 150,000 shares
exercisable at $.75 per share through September 5, 2006, to certain officers,
directors and key employees. 30,000 of the options vested immediately and the
F-20
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--Continued
remaining 120,000 options vest in equal increments of 30,000 options each
September 5, commencing September 5, 2002. In March, 2003, 3,570 of these
options were exercised for $2,678 with the exercise price satisfied by Dialysis
Corporation of America director bonuses accrued in 2002. In January, 2004, 4,576
of these options were exercised for $3,432 with the exercise price satisfied by
Dialysis Corporation of America director bonuses accrued in 2003. These
exercises represent a noncash investing activity, which is a supplemental
disclosure required by Financial Accounting Standards Board Statement No. 95,
"Statement of Cash Flows." See Note 15. In January, 2004, 7,200 of these options
were exercised with Dialysis Corporation of America receiving a $5,400 cash
payment for the exercise price. Of the 30,000 immediately exercisable options,
15,346 have been exercised and 14,654 cancelled due to the resignation of a
Dialysis Corporation of America director in June 2004. Of the remaining 120,000
options, 90,000 had vested as of December 31, 2004.
In March, 2002, Dialysis Corporation of America's board of director's
granted a five-year option to an officer for 60,000 shares exercisable at $1.58
per share through February 28, 2007. The option was to vest in equal annual
increments of 15,000 shares each February 28 from 2003 through 2006. 15,000
options that vested in February, 2003, were exercised in October, 2003, and the
remaining 45,000 options expired unvested due to the July 31, 2003 resignation
of the officer.
In May, 2002, Dialysis Corporation of America's board of directors
granted five-year options for an aggregate of 21,000 shares to certain of its
employees of which 11,000 were outstanding and vested at December 31, 2004.
These options are exercisable at $2.05 per share through May 28, 2007. Options
for 10,000 shares have been cancelled as a result of the termination of several
employee option holders.
In June, 2003, Dialysis Corporation of America's board of directors
granted to an officer a five-year stock option for 50,000 shares exercisable at
$1.80 per share through June 3, 2008. The option vests annually in increments of
12,500 shares each June 4 from 2004 through 2007.
In August, 2003, Dialysis Corporation of America's board of directors
granted a three-year option to a director who is also a member of several of its
committees, for 10,000 shares exercisable at $2.25 per share through August 18,
2006. The option vests in two annual increments of 5,000 shares on August 19,
2004 and 2005.
In January, 2004, Dialysis Corporation of America's board of directors
granted a five-year option for 20,000 shares exercisable at $3.09 per share
through January 12, 2009. The option vests in annual increments of 5,000 shares
on each January 13 from 2005 through 2008.
In June 2004, Dialysis Corporation of America's board of directors
granted 160,000 options to officers and directors exercisable at $4.02 per share
through June 6, 2009. 15,000 options vested immediately and the remaining
145,000 options vest annually in equal 25% increments commencing June 7, 2005.
In August 2004, Dialysis Corporation of America's board of directors
granted 50,000 incentive stock options to an officer exercisable at $4.02 per
share through August 12, 2009. The options vest 25% annually commencing August
16, 2005.
F-21
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--Continued
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:
2004 2003 2002
-------------------------- --------------------------- -----------------------------
Weighted- Weighted-
Average Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
---------- -------------- ----------- -------------- ---------- -----------------
Outstanding-beginning of year 701,332 1,205,000 1,365,000
Granted -- -- 242,000 $ 2.46 25,000 $ 3.00
Exercised (241,671) $ 1.41 (229,668) $ 1.38 -- --
Expired -- -- (516,000) $ 3.18 (185,000) 2.88
-------- --------- ---------
Outstanding-end of year 459,661 701,332 1,205,000
======== ========= =========
Outstanding - end of year:
January 2000 and February 2000 options -- -- -- -- 500,000 $ 3.24
July 2000 options 224,661 $ 1.38 459,332 $ 1.38 705,000 $ 1.38
May 2003 options 200,000 $ 2.50 200,000 $ 2.50 -- --
September 2003 options 35,000 $ 2.25 42,000 $ 2.25 -- --
-------- --------- ---------
459,661 701,332 1,205,000
======== ========= =========
Outstanding and exercisable at end of year:
January 2000 and February 2000 options -- -- -- -- 500,000 $ 3.24
July 2000 options 224,661 $ 1.38 459,332 $ 1.38 705,000 $ 1.38
May 2003 options 200,000 $ 2.50 200,000 $ 2.50 -- --
September 2003 options 21,000 $ 2.25 14,000 $ 2.25 -- --
-------- --------- ---------
445,661 673,332 1,205,000
======== ========= =========
Weighted-average fair value of
options granted, including
modified options, during the year $0.46 $0.15
========= =========
The remaining contractual life at December 31, 2004 is .6 years for the
July 2000 options, .4 years for the May 2003 options and 1.7 years for the
September 2003 options.
The company has 957,661shares reserved for future issuance at December
31, 2004, including: 224,661 shares for the 1989 plan; 200,000 shares for the
May 2003 options; 35,000 shares for the September 2003 options; 98,000 shares
for key employee stock plan; and 400,000 shares for an employment agreement.
A summary of Dialysis Corporation of America's stock option activity,
and related information for the years ended December 31, follows:
F-22
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--Continued
2004 2003 2002
-------------------------- --------------------------- -----------------------------
Weighted- Weighted-
Average Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
---------- -------------- ----------- -------------- ---------- -----------------
Outstanding-beginning of year 1,191,716 1,367,000 1,410,000
Granted 230,000 $ 3.94 60,000 $ 1.88 81,000 $ 2.05
Cancellations (14,654) $ 0.75 (51,000) $ 1.63 (124,000) $ 0.67
Exercised (712,446) $ 0.63 (184,284) $ 0.73 -- --
Expired -- -- -- -- -- --
--------- --------- ---------
Outstanding-end of year 694,616 1,191,716 1,367,000
========= ========= =========
Outstanding-end of year:
August 2004 options 50,000 $ 4.02
June 2004 options 160,000 $ 4.02
January 2004 options 20,000 $ 3.09
August 2003 options 10,000 $ 2.25 10,000 $ 2.25
June 2003 options 50,000 $ 1.80 50,000 $ 1.80
May 2002 options 11,000 $ 2.05 11,000 $ 2.05 17,000 $ 2.05
March 2002 options -- -- -- -- 60,000 $ 1.58
September 2001 options 120,000 $ 0.75 146,430 $ 0.75 150,000 $ 0.75
January 2001 options 273,616 $ 0.63 330,000 $ 0.63 330,000 $ 0.63
April 1999 options -- -- 644,286 $ 0.63 800,000 $ 0.63
June 1998 options -- -- -- -- 10,000 $ 1.13
--------- --------- ---------
694,616 1,191,716 1,367,000
========= ========= =========
Outstanding and exercisable-
end of year:
June 2004 options 15,000 $ 4.02 -- -- -- --
August 2003 5,000 $ 2.25 -- -- -- --
June 2003 12,500 $ 1.80 -- -- -- --
May 2003 11,000 $ 2.05 -- -- -- --
September 2001 options 90,000 $ 0.75 90,000 $ 0.75 60,000 $ 0.75
January 2001 options 207,616 $ 0.63 198,000 $ 0.63 132,000 $ 0.63
April 1999 options -- -- 644,286 $ 0.63 800,000 $ 0.63
June 1998 options -- -- -- -- 10,000 $ 1.13
--------- --------- ---------
341,116 932,286 1,002,000
========= ========= =========
Weighted-average fair value of
options granted during the year $3.88 $1.41 $1.28
========= ========= =========
The remaining contractual life at December 31, 2004 is 4 years for the
January 2004 options, 4.4 years for the June 2004 options, 4.5 years for the
August 2004 options, 3.4 years for the June 2003 options, 1.7 years for the
August 2003 options, 2.4 years for the May 2002 options, 1.7 years for the
September 2001 options and 1 year for the January 2001 options.
All options of the company and Dialysis Corporation of America were
issued at fair market value on the date of grant.
F-23
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 6--BUSINESS SEGMENT DATA
The following summarizes information about the company's three reported
business segments, which are managed separately. The medical products division
has been shown separately even though not required by FAS 131. Corporate
activities include general corporate revenues and expenses. Corporate assets
include unallocated cash and other current assets, deferred income taxes and
corporate fixed assets and other non-current assets not allocated to any of the
segments. Intersegment sales, of which there were none for the periods
presented, are generally intended to approximate market price. 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 12.
BUSINESS SEGMENT OPERATING REVENUES
2004 2003 2002
------------ ------------ ------------
Medical Products $ 782,014 $ 810,482 $ 889,904
Medical Services 40,985,996 29,996,968 25,353,593
------------ ------------ ------------
$ 41,768,010 $ 30,807,450 $ 26,243,497
============ ============ ============
BUSINESS SEGMENT PROFIT (LOSS)
Medical Products $ (164,880) $ (130,090) $ (728)
Medical Services 4,188,934 2,207,132 2,099,156
New Technology -- 799,005 210,412
Corporate (1,520,321) (1,337,613) (621,967)
Gain on sale of former subsidiary 545,995 -- --
Gain on sale of securities 402,493 --
------------ ------------ ------------
------------
$ 3,452,221 $ 1,538,434 $ 1,686,873
============ ============ ============
BUSINESS SEGMENT ASSETS
Medical Products $ 389,383 $ 384,816 $ 392,992
Medical Services 26,489,714 19,604,374 17,153,984
New Technology -- -- 2,742,076
Corporate 10,630,329 11,060,251 8,386,678
Elimination of corporate advance receivable
from medical services (449,320) (234,095) --
Elimination of corporate note receivable
from medical services (1,435,008) -- --
Elimination of corporate interest receivable
from medical services (26,639)
------------ ------------
------------ ------------
$ 35,598,459 $ 30,815,346 $ 28,675,730
============ ============ ============
OTHER BUSINESS SEGMENT INFORMATION
Interest income:
Medical Services $ 39,595 $ 53,886 $ 47,846
New Technology -- 15,000 210,411
Corporate 142,602 57,596 98,403
Elimination of medical services intercompany
interest charge to corporate -- -- (2,957)
Elimination of medical services intercompany
interest charge to new technology -- --
Elimination of corporate intercompany
interest charge to medical services (55,996) (1,633) --
------------ ------------ ------------
$ 126,201 $ 124,849 $ 353,703
============ ============ ============
F-24
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 6--BUSINESS SEGMENT DATA--Continued
2004 2003 2002
----------- ----------- -----------
Interest expense:
Medical Products $ -- $ 335 $ 10,904
Medical Services 218,787 202,949 220,441
Corporate -- -- 14,054
Elimination of medical services intercompany
interest charge to corporate -- -- (2,957)
Elimination of corporate intercompany
interest charge to medical services (55,996) (1,633) --
----------- ----------- -----------
$ 162,791 $ 201,651 $ 242,442
=========== =========== ===========
Depreciation and amortization:
Medical Products $ -- $ -- $ 563
Medical Services 1,498,987 1,186,234 1,065,887
Corporate 46,358 43,443 57,202
----------- ----------- -----------
$ 1,545,345 $ 1,229,677 $ 1,123,652
=========== =========== ===========
Other significant non-cash items:
New Technology:
Gain on sale of securities $ 402,493 $ 784,005 $ --
Medical Services:
Stock option related compensation expense -- 120,000 100,000
Corporate:
Stock option related compensation expense 347,178 349,612 --
Gain on sale of former subsidiary 549,995 -- --
Capital Expenditures:
Medical Products $ -- $ -- $ (1,121)
Medical Services 3,132,000 1,656,000 1,325,882
Corporate 50,000 4,000 17,413
----------- ----------- -----------
$ 3,182,000 $ 1,660,000 $ 1,342,174
=========== =========== ===========
MAJOR CUSTOMERS
Medical services revenues represent revenues of the company's dialysis
division. A significant portion of medical service revenue pertains to services
provided to individuals receiving Medicare and Medicaid benefits 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. Approximately 56%, 62% and 58% of medical service revenues
for the years ended December 31, 2004, 2003 and 2002, respectively, were derived
from Medicare and Medicaid reimbursement.
NOTE 7--COMMITMENTS
Commitments
The company and its subsidiaries have leases on facilities housing its
dialysis operations, medical products operations and administrative offices and
equipment leases, which expire at various dates.
F-25
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 7--COMMITMENTS --Continued
Total rent expense was approximately $1,355,000, $953,000 and $688,000 in fiscal
2004, 2003 and 2002, respectively The aggregate lease commitments at December
31, 2004 for the Company's non-cancelable operating leases with a term of one
year or more are approximately:
2005 $1,580,000
2006 1,552,000
2007 1,460,000
2008 1,401,000
2009 1,030,000
Thereafter 2,150,000
----------
$9,173,000
Effective January 1, 1997, Dialysis Corporation of America established
a 401(k) savings plan (salary deferral plan) with an eligibility requirement of
one year of service and 21 year old age requirement. The company and Techdyne
adopted the 401(k) profit sharing plan of Lytton, a Techdyne subsidiary, as
participating employers effective July 1, 1998. Subsequent to the sale of its
interest in Techdyne in June 2001, the company remained as a participating
employer in this multi-employer plan until January 2003 when the company and
Dialysis Corporation of America established a new 401(k) plan containing
employer match provisions on a portion of employee contributions. The expense
for employer match amounted to $29,000 for 2004, $17,000 for 2003, and $10,000
for 2002.
The company has a five-year employment agreement with Thomas K.
Langbein, its CEO, President and Chairman of the Board, through February 25,
2009, which provides for annual increases in base salary in $12,000 increments
and which was $353,500 as of March 1, 2004. The employment agreement also
provided for a monthly automobile allowance, participation in benefit plans and
fringe benefits available to the company's employees and executives,
reimbursement for business expenses and the payment of life insurance policies
owned by Mr. Langbein. The agreement also provides for the non-competition by
Mr. Langbein for a period of two years from termination of the relationship
within a geographic area of the company's primary operations. Under the
agreement, Mr. Langbein is entitled to certain severance payments in the event
of termination as a result of death, extended disability, wrongful termination
or change of control or for good reason by Mr. Langbein.
Dialysis Corporation of America has a five-year employment contract
with Stephen W. Everett, its CEO, President and director, through December 31,
2005, currently at an annual salary of $250,000. The employment agreement also
provides for certain fringe benefits, reimbursement of reasonable out-of-pocket
expenses, and a one-year non-compete within the United States.
We entered into a one-year consulting agreement with an investment
relations firm in May, 2003, with a monthly fee of $4,000. The agreement also
provided for the issuance of an option to purchase 200,000 shares of our common
stock. The option was exercised through a cashless exercise on February 28, 2005
with the consultant selling the company 70,000 shares to pay the $500,000
exercise price and receiving 130,000 shares of the company's common stock. The
agreement was continued on a month-to-month basis through December 2004. In
June, 2003, two of the partners of the investment relations firm together with
Thomas K. Langbein, our Chief Executive Officer and President, became three of
the five directors of Xandros, Inc., a majority owned subsidiary of Linux Global
Partners, Inc., which is a privately held Linux software company to which we
made loans and in which we hold an approximate 14% interest. Mr. Langbein
resigned his positions with Xandros on August 12, 2003. See Notes 5 and 11.
F-26
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 8--RELATED PARTY TRANSACTIONS
During 2004, 2003 and 2002, the company and Dialysis Corporation of
America paid premiums of approximately $736,000, $612,000 and $448,000,
respectively, for insurance through a director and stockholder, and the relative
of a director and stockholder.
During 2004, 2003 and 2002, legal fees of approximately $413,000,
$342,000 and $310,000, respectively, were incurred by the company and Dialysis
Corporation of America for an attorney who is general counsel and secretary of
the company (of which he is also a director), and serves as general counsel and
secretary to Dialysis Corporation of America. In addition, the attorney was
granted $60,000 in bonuses during fiscal 2003.
In May 2001, Dialysis Corporation of America loaned its president
$95,000 to be repaid with accrued interest at prime minus 1% (floating prime) on
or before maturity on May 11, 2006. This demand loan is collateralized by all
Dialysis Corporation of America's President's stock options in Dialysis
Corporation of America, 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, $4,000 and $5,000 during the years ended December 31,
2004, 2003 and 2002, respectively.
The 20% minority interest in DCA of Vineland, LLC, a subsidiary of
Dialysis Corporation of America, was held by a company owned by the medical
director of that facility, who became a director of Dialysis Corporation of
America in 2001. This physician was provided with the right to acquire up to 49%
of DCA of Vineland. In April, 2000, another company owned by this physician
acquired an interest in DCA of Vineland, resulting in Dialysis Corporation of
America holding a 51.3% ownership interest in DCA of Vineland and this
physician's companies holding a combined 48.7% ownership interest in DCA of
Vineland. See Note 10.
In July, 2000, one of the companies owned by this physician, acquired a
20% interest in DCA of Manahawkin, Inc. (formerly known as Dialysis Services of
NJ, Inc. - Manahawkin). Under agreements with DCA of Vineland and DCA of
Manahawkin, this physician serves as medical director for each of those dialysis
facilities.
Effective March 17, 2004, the company agreed to provide Dialysis
Corporation of America with up to $1,500,000 of financing which was evidenced by
a demand promissory note issued by Dialysis Corporation of America to the
company with annual interest of 1.25% over the prime rate. The financing was
provided for equipment purchases to be made by Dialysis Corporation of America.
The financing was subsequently modified by increasing the maximum amount of
advances that can be made to $5,000,000, and by adding to the purposes of the
financing working capital and other corporate needs. As of December 31, 2004,
this note had an outstanding balance of approximately $1,435,000 and an interest
rate of 6.5%. Interest on the note amounted to approximately $51,000 for the
year ended December 31, 2004. Accrued interest receivable from Dialysis
Corporation of America on the note amounted to approximately $27,000 as of
December 31, 2004. The outstanding principal balance of $1,435,000 on the
promissory note and $27,000 of accrued interest have been eliminated in
consolidation.
F-27
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 8--RELATED PARTY TRANSACTIONS--Continued
In certain situations, minority members in Dialysis Corporation of
America subsidiaries may fund a portion of required capital contributions by
issuance of an interest bearing note payable to Dialysis Corporation of America
which minority members may repay directly or through their portion of capital
distributions of the subsidiary. The minority members funded approximately
$324,000 in capital contributions during 2004 and $223,000 during the preceding
year under notes with Dialysis Corporation of America accruing interest at prime
plus 2%, with an aggregate of approximately $74,000 of subsidiary distributions
applied against the notes and accrued interest during 2004 and $54,000 during
the preceding year. These transactions represent non-cash investing activities,
which is a supplemental disclosure required by Financial Accounting Standards
Board Statement No. 95, "Statement of Cash Flows." See Note 14.
NOTE 9--ACQUISITIONS
In August, 2001, Dialysis Corporation of America acquired the 30%
minority interest in one of its Georgia dialysis centers for $600,000. This
transaction resulted in $523,000 of goodwill representing the excess of the
purchase price over the fair value of the net assets acquired. The goodwill is
being amortized for tax purposes over a 15-year period. Dialysis Corporation of
America's decision to make this investment was based largely on its expectation
of continued profitability of this center. The party from whom Dialysis
Corporation of America acquired the minority interest is the medical director of
another of Dialysis Corporation of America's subsidiaries. See Note 1.
In April, 2002, Dialysis Corporation of America acquired a Georgia
dialysis center. This transaction resulted in $400,000 of goodwill representing
the excess of the purchase price over the fair value of the net assets acquired.
The goodwill is being amortized for tax purposes over a 15-year period. Dialysis
Corporation of America's decision to make this investment was based on its
expectation of future profitability resulting from its review of this dialysis
center's operations prior to making the acquisition. See Note 1.
Effective April 8, 2003, Dialysis Corporation of America acquired the
assets of a Georgia dialysis center, and effective June 1, 2003, acquired the
30% minority interests in each of two of its existing Georgia dialysis centers
for a total consideration of $1,415,000, of which $745,000 was paid and the
remaining balance of $670,000 was paid during the 2nd quarter of 2004. The
results of operations of the acquired center have been included in the
consolidated financial statements since its acquisition. Minority interest in
the results of operations of the centers for which Dialysis Corporation of
America acquired the outstanding minority interest was included in the
consolidated financial statements until Dialysis Corporation of America acquired
the minority interests. These acquisitions resulted in $1,368,000 of goodwill,
representing the excess of the purchase price over the fair value of the net
assets acquired. The goodwill is being amortized for tax purposes over a 15-year
period. Dialysis Corporation of America's decision to make these acquisitions
was based on its expectation of profitability resulting from its management's
evaluation of the operations of these dialysis centers. The party from whom the
30% minority interests were purchased was the medical director of one of the
facilities at which the 30% interest was acquired and is the medical director of
two other of Dialysis Corporation of America's Georgia dialysis facilities. See
Note 1.
F-28
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 9--ACQUISITIONS--Continued
Effective as of the close of business on August 31, 2004 Dialysis
Corporation of America acquired a Pennsylvania dialysis company for an estimated
net purchase price of $1,521,000. Of that amount, $761,000 is currently in
escrow, with the balance of $760,000 to be paid in equal installments, each on
the first and second anniversary of the effective date of the purchase
agreement. This transaction resulted in $1,358,000 of goodwill representing the
excess of the net purchase price over the estimated $164,000 fair value of the
net assets acquired, including an $83,000 valuation of an eight year
non-competition agreement that is being amortized over the life of the
agreement. The goodwill is not amortizable for tax purposes since the
transaction was a stock acquisition. The initial allocation of purchase cost at
fair value was based upon available information and will be finalized as any
contingent purchase amounts are resolved and estimated fair values of assets are
finalized. Dialysis Corporation of America began recording the results of
operations for the acquired company as of the effective date of the acquisition.
Dialysis Corporation of America's decision to make this investment was based on
its expectation of future profitability resulting from its review of the
acquired company's operations prior to making the acquisition. See Note 1.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition for the August 2004
Pennsylvania acquisition:
Accounts receivable, net $ 215,825
Inventory and other current assets 79,383
Property, plant and equipment, net 88,231
Intangible assets 82,500
Goodwill 1,357,681
----------
Total assets acquired 1,823,620
Total liabilities assumed 302,429
----------
Net assets acquired $1,521,191
==========
NOTE 10--LOAN TRANSACTIONS
Dialysis Corporation of America has provided and may continue to
provide funds in excess of capital contributions to meet working capital
requirements of its dialysis facility subsidiaries, usually until they become
self-sufficient. The operating agreements for the Dialysis Corporation of
America subsidiaries provide for cash flow and other proceeds to first pay any
such financing, exclusive of any tax payment distributions.
NOTE 11--INVESTMENT
During the period January, 2000 through December, 2002, the company
made various loans aggregating approximately $2,450,000 with a 10% annual
interest rate, to Linux Global Partners, a company investing in Linux software
companies, one of which initiated the marketing of a Linux desktop operating
system. In conjunction with the original loan the company acquired an ownership
interest in
F-29
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 11--INVESTMENT--Continued
Linux Global Partners. In consideration for the company's extending the due date
on the loans on several occasions it received additional shares of Linux Global
Partners' common stock. Both the company and Dialysis Corporation of America
presently own an interest in Linux Global Partners
Interest on the notes evidencing the company's loans to Linux Global
Partners amounted to approximately $15,000 during 2003 (through January 24,
2003).
The unpaid loans and accrued interest were satisfied through the
company's foreclosure in January, 2003, of 4,115,815 shares of Ximian, Inc.'s
series A convertible preferred stock which were part of the collateral securing
Linux Global Partners' indebtedness to the company. On January 24, 2003,
Xandros, Inc., a 95% owned subsidiary of Linux Global Partners, purchased the
Ximian preferred shares at the public foreclosure sale and deposited 775,000
shares of its common stock (approximately 1.5% of Xandros) as a good faith
deposit with the full amount due in cash. Upon Xandros' failure to make the
payment, the company, as the next highest bidder, obtained the Ximian preferred
stock and, in accordance with the terms of the public auction retained the
Xandros shares in satisfaction of the indebtedness due from Linux Global
Partners. Thereafter, in connection with a third-party's acquisition of Ximian
in August, 2003, the company sold the Ximian preferred stock for approximately
$3,541,000 in cash proceeds resulting in a gain of approximately $784,000. An
additional approximately $805,000 was placed in escrow, with approximately
$402,000 of the escrowed funds released to the company in August 2004 and the
remaining balance to be released in August 2005, pending fulfillment by the
parties to the Ximian acquisition of certain conditions. The company recorded a
gain of $402,000 in August 2004 and will record an additional gain based on
future proceeds received.
NOTE 12--SALE OF INTEREST IN FORMER SUBSIDIARY
On April 6, 2001, the company entered into an agreement with Simclar
International to sell its 71.3% ownership interest in Techdyne, Inc. (now
Simclar, Inc.) to Simclar International for $10,000,000. The agreement provided
for an earn-out consisting of 3% of consolidated Techdyne sales for the three
fiscal years commencing January 1, 2001. Limitations on the earn-out ranged from
a $5,000,000 maximum to a $2,500,000 minimum earn-out. The earn-out was payable
in cash each year for the earn-out period just ended. In April, 2002, the
company received the first earn-out payment of $1,105,000. In April, 2003, the
company received the second earn-out payment of $1,011,000. In April, 2004, the
company received a third earn-out payment of $930,248. The total earn-out
payments received of approximately $3,046,000 exceeded the $2,500,000 minimum
earn-out previously recorded by approximately $546,000, which has been reflected
as a non-operating gain in the consolidated statement of operations. Based on
Techdyne (Simclar, Inc.) consolidated sales of $36,187,105 for 2003 on which the
earn-out payment is supposed to be computed based on the Agreement for Sales and
Purchase of Shares, the earn-out payment received in April, 2004, should have
been $1,085,613. The company has demanded payment of the $155,365 balance due
from Simclar International, and on April 10, 2004, the company filed an action
in the 11th Judicial Circuit in Miami-Dade County, Florida to collect the
balance of the earn-out payment due. Simclar has filed a counterclaim against
the company, alleging that it erroneously overpaid the company $316,464 as a
result of Simclar certifying erroneous sales amounts for the years 2001, 2002
and 2003. The company believes the counterclaim is without merit.
F-30
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 13--STOCK REPURCHASES
In December, 2002, the company's board of directors authorized the
purchase of up to approximately 1,000,000 shares of the company's outstanding
common stock based on current market prices. The company repurchased and
cancelled 48,500 shares for approximately $70,000 in 2003. No repurchases were
made during 2004.
NOTE 14--SUPPLEMENTAL CASH FLOW INFORMATION
The following amounts (rounded to the nearest thousand) represent
non-cash financing and investing activities and other cash flow information:
2004 2003 2002
---------- ---------- ----------
Interest paid (see Note 3) $ 204,000 $ 190,000 $ 246,000
Income taxes paid (see Note 4) 1,350,000 777,000 3,120,000
Equipment financing (see Note 3) -- -- 399,000
Option exercise bonus (see Note 5) 120,000 100,000 --
Share payment (7,000 options exercised; 4,984
shares paid) for stock option exercise (see Note 5) 15,750 -- --
Share payment to subsidiary for subsidiary
stock option exercises (see Note 5) 321,000 -- --
Share payment to subsidiary for notes and
accrued interest (see Note 5) 521,000 -- --
Subsidiary minority member capital contribution
financing (see Note 8) 324,000 223,000 --
Subsidiary minority member distributions
applied against financing (see Note 8) 74,000 54,000 --
Increase in additional paid-in capital from exercise
of subsidiary non-qualified stock options (see
Notes 4 and 5) 68,000 -- --
NOTE 15--SUBSIDIARY STOCK SPLIT
The board of directors of Dialysis Corporation of America declared a
two-for-one stock split with respect to Dialysis Corporation of America's
3,968,772 shares of outstanding common stock. The record date of the split was
January 28, 2004; the distribution date was February 9, 2004; and the date
Nasdaq reported the adjusted price of the common stock was February 10, 2004.
The two-for-one stock split increased the outstanding shares of Dialysis
Corporation of America's common stock at that time to 7,937,344 shares. The
split also required adjustment in the outstanding stock options of Dialysis
Corporation of America by doubling the number of shares obtainable upon
exercise, and halving the exercise price of the options. See Note 5.
F-31
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 16--QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following summarizes certain quarterly operating data (in thousands
except per share data):
Year Ended December 31, 2004
--------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec.31 Total
-------- -------- -------- -------- --------
Net sales $ 8,634 $ 9,696 $ 11,047 $ 11,855 $ 41,232
Gross profit 3,354 3,826 4,872 5,142 17,197
Net income (loss) -- (34) 649 (101) 514
Earnings (loss) per
share:
Basic $ -- $ -- $ .09 $ (.02) $ .07
Diluted $ -- $ (.01) $ .09 $ (.02) $ .06
Year Ended December 31, 2003
--------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec.31 Total
-------- -------- -------- -------- --------
Net sales $ 6,948 $ 7,649 $ 7,725 $ 8,165 $ 30,487
Gross profit 2,614 2,989 2,903 3,245 11,751
Net income (loss) (44) (64) 230 151 273
Earnings (loss) per
share:
Basic $ (.01) $ (.01) $ .04 $ .02 $ .04
Diluted $ (.01) $ (.01) $ .03 $ .02 $ .03
Year Ended December 31, 2002
--------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec.31 Total
-------- -------- -------- -------- --------
Net sales $ 5,729 $ 6,536 $ 6,914 $ 6873 $ 26,052
Gross profit 2,188 2,679 2,819 2,803 10,489
Net income 18 133 177 154 482
Earnings per share:
Basic $ -- $ .02 $ .03 $ .02 $ .07
Diluted $ -- $ .02 $ .02 $ .02 $ .06
Since the computation of earnings per share is made independently for
each quarter using the treasury stock method, the total of four quarters
earnings do not necessarily equal earnings per share for the year.
NOTE 17--FOURTH QUARTER DATA (Unaudited)
The company recorded an income tax benefit adjustment to the valuation
allowance relating to its deferred tax asset of approximately $102,000 during
the fourth quarter of 2002.
F-32
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
NOTE 18--AFFILIATE FINANCIAL INFORMATION
The following amounts represent certain operating data of Dialysis
Corporation of America's 40% owned Ohio affiliate that is accounted for on the
equity method and not consolidated for financial reporting purposes (see Note
1):
2004 2003 2002
---------- ---------- ----------
Revenues $2,275,000 $1,547,000 $1,600,000
========== ========== ==========
Gross profit $1,244,000 $ 600,000 $ 665,000
========== ========== ==========
Net income $ 707,000 $ 111,000 $ 174,000
========== ========== ==========
The following amounts are from the balance sheet of Dialysis
Corporation of America's 40% owned Ohio affiliate:
December 31,
---------------------------
2004 2003
---------- ----------
Current assets $ 945,321 $ 451,104
Non-current assets 160,504 206,540
---------- ----------
Total assets $1,105,825 $ 657,644
========== ==========
Current liabilities $ 244,570 $ 211,221
Non-current liabilities -- 50,953
Capital 861,255 395,470
---------- ----------
Total liabilities and capital $1,105,825 $ 657,644
========== ==========
NOTE 19--SUBSEQUENT EVENTS
On March 15, 2005, the company and Dialysis Corporation of America
jointly announced that they have agreed to terms whereby the company, which owns
approximately 56% of Dialysis Corporation of America (57% at December 31, 2004),
will be acquired by Dialysis Corporation of America for a total consideration of
approximately 5,289,000 shares of Dialysis Corporation of America common stock.
Upon completion of the merger, each shareholder of the Company is anticipated to
receive .68 shares of Dialysis Corporation of America common stock for each
share of the Company's common stock, and the Company's ownership of Dialysis
Corporation of America will be retired, resulting in approximately 9,000,000
shares of Dialysis Corporation of America to remain outstanding. Completion of
the transaction is subject to shareholder approval of each company.
The merger is intended to simplify the corporate structure and enable
the ownership of the control interest in Dialysis Corporation of America to be
held by public shareholders. The merger will provide Dialysis Corporation of
America with additional capital resources to continue to build its dialysis
business.
F-33
Schedule II - Valuation and Qualifying Accounts
Medicore, Inc. and Subsidiaries
December 31, 2004
- -------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C
- -------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Additions (Deductions) Charged to
Beginning Charged (Credited) to Other Accounts
Classification of Period Cost and Expenses Describe
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2004:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible accounts $ 796,000 $ 1,198,000
Reserve for inventory obsolescence 90,000 (29,000)
Valuation allowance for deferred tax asset 126,000 304,000
----------- -----------
$ 1,012,000 $ 1,473,000
=========== ===========
YEAR ENDED DECEMBER 31, 2003:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible accounts $ 842,000 $ 290,000
Reserve for inventory obsolescence 122,000 (15,000)
Valuation allowance for deferred tax asset 115,000 11,000
----------- -----------
$ 1,079,000 $ 286,000
=========== ===========
YEAR ENDED DECEMBER 31, 2002:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 753,000 $ 705,000
Reserve for inventory obsolescence 175,000 (53,000)
Valuation allowance for deferred tax asset 217,000 (102,000)
----------- -----------
$ 1,145,000 $ 550,000
=========== ===========
Valuation allowance for deferred tax asset 820,000 (603,000)
----------- -----------
$ 2,070,000 $ 512,000
=========== ===========
- ----------------------------------------------------------------------------------------
COL. A COL. D COL. E
- ----------------------------------------------------------------------------------------
Other Changes Balance
Add (Deduct) at End of
Classification Describe Period
- ----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2004:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible accounts $ (351,000)(1) $ 1,643,000
Reserve for inventory obsolescence 61,000
Valuation allowance for deferred tax asset -- 430,000
----------- -----------
$ (351,000) $ 2,134,000
=========== ===========
YEAR ENDED DECEMBER 31, 2003:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible accounts $ (336,000)(1) $ 796,000
Reserve for inventory obsolescence (17,000)(2) 90,000
Valuation allowance for deferred tax asset -- 126,000
----------- -----------
$ (353,000) $ 1,012,000
=========== ===========
YEAR ENDED DECEMBER 31, 2002:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ (616,000)(1) $ 842,000
Reserve for inventory obsolescence -- 122,000
Valuation allowance for deferred tax asset -- 115,000
----------- -----------
$ (616,000) $ 1,079,000
=========== ===========
Valuation allowance for deferred tax asset -- 217,000
----------- -----------
$(1,437,000) $ 1,145,000
=========== ===========
(1) Net (write-offs) recoveries against receivables allowance.
(2) Net write-offs against inventory reserves.
F-34
Exhibits
to
MEDICORE, INC
Annual Report on Form 10-K For the Fiscal Year Ended December 31, 2004
21 Subsidiaries of the Company
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer and Principal Financial Officer
pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350.