FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
ECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 incorporation (I.R.S. Employer
or organization) Identification No.)
2337 West 76th Street, Hialeah, Florida 33016
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(Address of principal executive offices) (Zip Code)
(305) 558-4000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
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] or No [ ]
Common Stock Outstanding
Common Stock, $.01 par value -- 5,856,940 shares as of October 31, 1997.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Income (Unaudited) for the
three months and nine months ended September 30, 1997 and September 30,
1996 include the accounts of the Registrant and all its subsidiaries.
Item 1. Financial Statements
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1) Consolidated Condensed Statements of Income for the three months
and nine months ended September 30, 1997 and September 30, 1996.
2) Consolidated Condensed Balance Sheets as of September 30, 1997 and
December 31, 1996.
3) Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 1997 and September 30, 1996.
4) Notes to Consolidated Condensed Financial Statements as of Sep-
tember 30, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition
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and Results of Operation
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PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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<PAGE>
PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
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CONSOLIDATED CONDENSED STATEMENTS OF INCOME
MEDICORE, INC. AND SUBSIDIARIES
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
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1997 1996 1997 1996
---- ---- ---- ----
REVENUES
Sales $10,627,557 $6,633,610 $26,472,183 $22,387,167
Gain on subsidiary
securities offering
and warrants exercise 89,898 1,521,127
Realized gain on
sale of marketable
securities 307,834 49,493 1,793,680
Other income 166,361 373,986 457,103 636,849
Litigation settlement 139,645
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10,793,918 7,315,430 27,068,677 26,478,468
COST AND EXPENSES
Cost of goods sold 8,864,058 5,345,390 21,566,904 18,110,329
Selling, general and
administrative expenses 1,671,516 1,406,694 4,549,813 4,472,826
Interest expense 124,352 56,021 234,578 169,011
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10,659,926 6,808,105 26,351,295 22,752,166
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INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 133,992 507,325 717,382 3,726,302
Income tax (benefit)
provision 11,107 108,679 (28,760) 1,125,389
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INCOME BEFORE MINORITY
INTEREST 122,885 398,646 746,142 2,600,913
Minority interest in
earnings of consolidated
subsidiaries 92,101 65,540 333,305 261,228
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NET INCOME $ 30,784 $ 333,106 $ 412,837 $ 2,339,685
=========== ========== =========== ===========
Net income per share $.01 $.06 $.07 $.39
==== ==== ==== ====
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1997 1996(A)
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(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 7,741,440 $10,665,826
Marketable securities 606,687 1,405,579
Short-term investments 134,294 129,472
Accounts receivable, less allowances of
$354,000 at September 30, 1997 and
$385,000 at December 31, 1996 6,118,756 3,711,600
Inventories, less allowances for
obsolescence of $589,000 at September 30,
1997 and $169,000 at December 31, 1996 8,197,033 3,637,556
Prepaid expenses and other current assets 1,418,778 589,502
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Total current assets 24,216,988 20,139,535
Property and Equipment:
Land and improvements 1,013,655 1,024,455
Building and building improvements 3,110,330 2,986,126
Equipment and furniture 9,464,364 6,364,188
Leasehold improvements 851,435 392,607
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14,439,784 10,767,376
Less accumulated depreciation
and amortization 5,351,404 4,728,167
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9,088,380 6,039,209
Deferred expenses and other assets 297,076 204,361
Costs in excess of net tangible assets
acquired, less accumulated amortization
of $398,000 at September 30, 1997 and
$356,000 at December 31, 1996 1,921,192 701,747
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$35,523,636 $27,084,852
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Liabilities and Stockholders' Equity
Current Liabilities:
Short-term bank borrowings $ 2,873,889
Accounts payable 4,915,264 $ 2,726,817
Accrued expenses and other current
liabilities 2,295,703 1,412,623
Current portion of long-term debt 1,099,979 832,851
Income taxes payable 424,459 788,976
Deferred income taxes 230,541 534,120
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Total current liabilities 11,839,835 6,295,387
Long-term debt 2,976,357 1,677,367
Deferred income taxes 2,276,681 2,155,603
Minority interest in subsidiaries 4,701,668 3,935,037
Commitments and contingencies
Stockholders' Equity:
Common stock, $.01 par value authorized
12,000,000 shares; issued and outstanding
5,856,940 shares at September 30, 1997;
5,456,940 shares at December 31, 1996 58,569 54,569
Capital in excess of par value 12,329,283 11,493,255
Retained earnings 1,022,383 609,546
Foreign currency translation adjustment (57,286) (7,371)
Unrealized gain on marketable
securities for sale 376,146 871,459
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Total Stockholders' Equity 13,729,095 13,021,458
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$35,523,636 $27,084,852
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(A) Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 filed with the Securities and Exchange
Commission in March, 1997.
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
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1997 1996
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OPERATING ACTIVITIES
Net income $ 412,837 $ 2,339,685
Adjustments to reconcile net income to net
(used in) cash provided by operating
activities:
Depreciation 689,299 484,932
Amortization 61,786 58,736
Bad debt expense 34,464 127,290
Gain on Viragen note collection (227,703)
Provision for inventory obsolescence 91,423 32,367
Gain on sale of securities (49,493) (1,793,680)
Gain on subsidiary securities offering and
warrants exercise (89,899) (1,521,127)
Minority interest 333,305 261,228
Forgiveness of option notes and accrued
interest 344,871
Stock compensation 5,560
Deferred income taxes 37,096 578,000
Increase (decrease) relating to operating
activities from:
Accounts receivable (1,280,292) (34,036)
Inventories (2,039,637) 230,688
Prepaid expenses and other current assets (415,172) 19,817
Accounts payable 920,423 (1,018,724)
Accrued expenses and other current
liabilities (7,753) (609,447)
Income taxes payable (677,250) 59,823
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Net cash used in operating activities (1,978,863) (661,720)
INVESTING ACTIVITIES
Additions to property and equipment, net
of minor disposals (1,690,844)
Acquisition of subsidiary (2,166,011) (550,318)
Payments received on note receivable
from Viragen, Inc. 373,948
Proceeds from short-term investments 230,274 285,146
Short-term investments (235,096) (225,664)
Proceeds from sale of securities 49,493 1,793,680
Deferred expenses and other assets (105,611) 115,462
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Net cash (used in) provided by investing
activities (3,917,795) 1,792,254
FINANCING ACTIVITIES
Proceeds from subsidiary stock offering 3,445,158
Line of credit borrowing to finance acquisition 2,500,000
Other line of credit short-term borrowings 373,889
Proceeds from long-term borrowings 181,476
Subsidiary repurchase of stock (206,250)
Payments on long-term borrowings (253,581) (201,097)
Dividend payments to minority shareholder (3,966) (6,107)
Deferred financing costs (2,979) (14,452)
Proceeds from exercise of warrants and
stock options 694,328 53,000
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Net cash provided by (used in) financing
activities 3,101,441 3,457,978
Effect of exchange rate fluctuations on cash (129,169) 30,992
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(Decrease) increase in cash and cash
equivalents (2,924,386) 4,619,504
Cash and cash equivalents at beginning of year 10,665,826 4,836,512
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,741,440 $ 9,456,016
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See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies
Consolidation
The Consolidated Condensed Financial Statements include the accounts of
Medicore, Inc., Medicore's 69.1% owned subsidiary, Dialysis Corporation
of America ("DCA") and Medicore's 58.9% owned subsidiary, Techdyne, Inc.
("Techdyne") (including its wholly-owned subsidiaries Lytton Incorporated
("Lytton"), Techdyne (Scotland) Limited ("Techdyne (Scotland)"), and
Techdyne Livingston Limited (a subsidiary of Techdyne (Scotland))), collec-
tively known as the Company. All material intercompany accounts and
transactions have been eliminated in consolidation. See Note 9.
Major Customers
A majority of the Company's electro-mechanical sales which consists of
electronic and electro-mechanical products primarily manufactured to
customer specifications and designed for original equipment manufacturers
and distributors in the data processing, telecommunications, instrumenta-
tion and food preparation equipment industries, are to certain major
customers. Approximately 53% of the sales of Lytton, Techdyne's recently
acquired subsidiary (see Note 9) for each of its last three fiscal years
prior to being acquired by the Company were to PMI Food Equipment Group
("PMI"). Sales to PMI by Lytton for the two months ended September 30,
1997, since Techdyne acquired Lytton on July 31, 1997, accounted for
approximately 44% of Lytton's sales during this period. Customers gen-
erating at least 10% of the Company's sales for the nine months ended
September 30, 1997 included IBM (19%) and EMC (10%). The loss of or
substantially reduced sales to any of the Company's major customers
would have an adverse effect on its operations if such sales were not
replaced. See "Management's Discussion and Analysis of Financial Condi-
tion and Results of Operations - Results of Operations."
Sale of Stock By Subsidiaries
The Company follows an accounting policy of income statement recognition
for sales of stock by its subsidiaries, which includes exercise of warrants
issued in subsidiary stock offerings. See Note 8.
Inventories
Inventories are comprised of the following:
September 30, December 31,
1997 1996
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Electronic and mechanical
components, net:
Finished goods $ 748,979 $ 486,863
Work in process 1,514,244 478,481
Raw materials and supplies 5,559,620 2,083,990
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7,822,843 3,049,334
Medical supplies 374,190 588,222
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$8,197,033 $3,637,556
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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 ex-
pected to be paid or recovered to differences between financial accounting
and tax basis of assets and liabilities.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-(Continued)
September 30, 1997
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies --Continued
The Company filed consolidated federal and state tax returns with Techdyne
until October 2, 1995, the date Techdyne's securities offering was com-
pleted, after which Techdyne files separate income tax returns with its
income tax liability reflected on a separate return basis. DCA was like-
wise included in the consolidated tax returns of the Company until the
completion of its public offering in April 1996, after which it files
separate income tax returns with its income tax liability reflected on a
separate return basis. See Note 8.
Earnings per Share
Earnings per share have been computed on the basis of weighted average
shares outstanding plus common equivalent shares from dilutive stock
options using the treasury stock method and average market price for the
three months and nine months ended September 30, 1997 and using the modi-
fied treasury stock method and average market price for the three months
and nine months ended September 30, 1996.
New Pronouncements
In February 1997, the Financial Accounting Standards Board issued FAS 128,
"Earnings Per Share," which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently
used for computing earnings per share and to restate all prior periods.
The new requirements for calculating primary earnings per share will ex-
clude the dilutive effect of stock options. This change would not have
affected earnings per share under the basic computation required by FAS 128
for the three months ended September 30, 1997 or September 30, 1996 but
would have increased earnings per share for the nine months ended Sep-
tember 30, 1997 to $.08 per share and would have increased earnings per
share for the nine months ended September 30, 1996 to $.43. Earnings per
share under the diluted computation required under FAS 128, which will
include stock options using the treasury stock method and average market
price, would have yielded the same results as the present primary compu-
tation for the three months and nine months ended September 30, 1997 and
for the same periods of the preceding year.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 presentation.
NOTE 2--Interim Adjustments
The financial summaries for the three months and nine months ended Sep-
tember 30, 1997 and September 30, 1996 are unaudited and include, in the
opinion of management of the Company, all adjustments (consisting of normal
recurring accruals) necessary to present fairly the earnings for such
periods. Operating results for the three months and nine months ended
September 30, 1997 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 1997.
While the Company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these Consoli-
dated Condensed Financial Statements be read in conjunction with the
financial statements and notes included in the Company's latest annual
report for the year ended December 31, 1996.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-(Continued)
September 30, 1997
(Unaudited)
NOTE 3--Transactions With Viragen, Inc.
The Company owns approximately 259,000 shares of common stock of Viragen,
formerly a majority-owned subsidiary of the Company. The carrying value
of these securities was written off as of December 31, 1991. The Company
has recorded these securities at fair value with the unrealized gain
credited to a separate component of Stockholders' Equity, net of income
tax effect. Fair value was determined using quoted market prices by the
Nasdaq Stock Market commencing September 1996 and by the National Quotation
Bureau, Inc. prior to that time. The market price of Viragen common stock
has fluctuated significantly amounting to $2.34 per share at September 30,
1997 and $5.22 per share at December 31, 1996.
The Company sold 10,000 shares of Viragen stock and recognized a gain of
approximately $49,000 during the first quarter of 1997, and sold 310,000
shares and recognized a gain of $562,000 during the same period of the
preceding year. There were no such sales during the second or third
quarter of 1997 as compared with sales of 160,000 shares for $924,000 and
69,000 shares for $308,000 during the second and third quarters of 1996,
respectively.
The Company had a second mortgage and related note due from Viragen. The
note balance included amounts due from Viragen that were previously written
off by the Company. In March, 1996, Viragen prepaid $165,000 on this note.
The Company recognized a gain of approximately $29,000 in the first quarter
of 1996 as a result of collecting a portion of the previously reserved
amount and recognized a gain of approximately $198,000 in the third quarter
of 1996, as a result of Viragen repaying the balance which had been offset
by an allowance for amounts previously written off as uncollectable.
The Company has a royalty agreement with Viragen, pursuant to which it
receives a royalty on Viragen's net sales of interferon and related
products. The terms of the agreement include an aggregate 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 remaining
$55 million. Royalty payments are due quarterly. Under the agreement,
approximately $108,000 of royalties earned pursuant to a previous
agreement, will comprise the final payment.
NOTE 4--Long-Term Debt
On February 8, 1996, Techdyne refinanced its term loan by entering into
three loan agreements with a Florida bank. One credit facility was a
$2,000,000 line of credit, due on demand, secured by Techdyne's accounts
receivable, inventory, furniture, fixtures and intangible assets and bore
interest at the bank's prime rate plus 1.25%. In conjunction with
Techdyne's acquisition of Lytton on July 31, 1997, the line of credit
was modified and was increased to $2,500,000 with the interest rate
reduced to prime plus .75% and various other modifications. The interest
rate has remained at 9.25% since the line was drawn on July 31, 1997. The
line was fully drawn down in connection with the Lytton acquisition with
$2,500,000 remaining outstanding at September 30, 1997. See Note 9.
The bank also extended two commercial term loans to Techdyne, one for
$712,500 which had an outstanding balance of $672,000 and $691,000 at
September 30, 1997 and December 31, 1996 and is secured by a mortgage
on properties in Hialeah, Florida owned by the Company, two of which
properties are leased to Techdyne and one parcel being vacant land used
as a parking lot.
The second commercial term loan for $200,000 had an outstanding balance
of $137,000 and $167,000 at September 30, 1997 and December 31, 1996,
respectively, and is secured by all of Techdyne's tangible personal
property, goods and equipment, and all cash or noncash proceeds of such
collateral.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-(Continued)
September 30, 1997
(Unaudited)
NOTE 4--Long-Term Debt--Continued
The Company has unconditionally guaranteed the payment and performance
by Techdyne of the revolving loan and the two commercial term loans.
Techdyne has a promissory note payable to a local bank of $145,000 at
September 30, 1997 and December 31, 1996, with interest payable monthly
at prime with the note maturing April, 2000.
Lytton has a $1,500,000 revolving bank line of credit requiring monthly
interest payments at prime plus .5% which matures August 1, 1998. The
average amount outstanding on this loan since the Company acquired Lytton
on July 31, 1997 was $55,758 with the maximum outstanding of $373,889
remaining outstanding as of September 30, 1997. The weighted average
interest rate on this loan during this period was 9.13%. Lytton has a
$1,000,000 installment loan with the same bank maturing June, 2002 at an
annual rate of 9% for two years, with monthly payments of $16,667 plus
interest. After two years, Lytton will have an option of a variable or
fixed interest rate. The balance outstanding on this loan was $983,333
as of September 30, 1997. Lytton also negotiated a $500,000 equipment
loan agreement with the same bank payable over four years through July 1,
2001 with the same interest rate as the installment loan. There was no
outstanding balance on this loan as of September 30, 1997. All of these
bank loans are secured by the business assets of Lytton.
In October, 1994, Techdyne (Scotland) finalized the purchase of the
facility which houses its operations at a cost of approximately $730,000.
This mortgage had a remaining balance of $566,000 and $622,000 at Sep-
tember 30, 1997 and December 31, 1996, respectively. Techdyne (Scotland)
has a line of credit with a Scottish bank with a U.S. dollar equivalency
of approximately $324,000 and $342,000 at September 30, 1997 and December
31, 1996, respectively. No amounts were outstanding under this line of
credit as of September 30, 1997 or December 31, 1996.
The Company obtained a $130,000 mortgage on vacant land for possible
future expansion in April 1993. This mortgage has been extended from its
originally scheduled due date of April 1, 1998 to May 1, 2003 with payments
remaining at $1,083 per month plus interest at prime plus 1.50%. This
mortgage had a balance of approximately $73,000 at September 30, 1997
and $76,000 at December 31, 1996.
DCA has mortgages on its buildings in Lemoyne, Pennsylvania and Easton,
Maryland for which the remaining combined principal balance amounted to
approximately $450,000 and $504,000 at September 30, 1997 and December 31,
1996, respectively. Commencing November 30, 1993, the bank has the right
to demand repayment on the outstanding balance of the borrowings under
these mortgages which have accordingly been classified as current liabil-
ities.
DCA has an equipment purchase agreement for kidney dialysis machines for
its facilities in Pennsylvania and Florida. The initial principal balance
of $195,130, additional borrowings of $124,096 in 1996, $17,000 in March,
1997, $48,000 in June, 1997 and $108,000 in July, 1997, net of downpayments,
represents a noncash financing activity which is a supplemental disclosure
required by FAS 95. Monthly payments were originally $4,435 commencing
September, 1995, including principal and interest, through September, 2000,
with additional monthly payments on new financing as follows: $2,750 on
1996 financing commencing December, 1996, including principal and interest
through September, 2001 with interest at 12%; additional monthly payments
of $344 commencing March, 1997, including principal and interest, through
February, 2002, with interest at 8%; additional monthly payments of $975
commencing June, 1997, including principal and interest through May, 2002,
with interest at 8.7%; and additional monthly payments of $2,194 commencing
July, 1997, including principal and interest through June, 2002, with
interest at 8.7%. The remaining principal balance under this agreement
amounted to approximately $398,000 and $272,000 at September 30, 1997 and
December 31, 1996, respectively. In conjunction with DCA's sale of its
Florida dialysis operations on October 31, 1997,
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-(Continued)
September 30, 1997
(Unaudited)
NOTE 4--Long-Term Debt--Continued
the purchaser assumed a portion of the financing liabilities which amounted
to approximately $113,000 as of September 30, 1997, which is included in
the balance outstanding of $398,000 at that date. See Note 10.
The prime rate was 8.5% as of September 30, 1997 and 8.25% as of December
31, 1996.
Interest payments on long-term debt amounted to $115,000 and $223,000 for
the three months and nine months ended September 30, 1997 and $54,000 and
$170,000 for the same periods of the preceding year.
NOTE 5 -- Income Taxes
Techdyne files separate federal and state income tax returns with its
income tax liability reflected on a separate return basis. DCA likewise
files separate federal and state income tax returns subsequent to its 1996
public offering.
Techdyne has net operating loss carryforwards which amounted to approxi-
mately $5 million at December 31, 1996 and which expire in years 2003
through 2010. These net operating loss carryforwards are only available
to offset Techdyne (US) taxable income. Techdyne's new subsidiary Lytton,
will be included in Techdyne's consolidated federal tax return effective
August 1, 1997 with Techdyne's net operating loss carryforwards able to
be utilized to offset any income taxable for federal return purposes
generated by Lytton. See Note 9.
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. A de-
ferred tax liability of $2,087,000 at September 30, 1997 and $2,053,000
December 31, 1996 resulted from income tax expense recorded on gains
recognized for financial reporting purposes, but not for income tax
purposes resulting in a difference between book and tax basis of the
Company's investments in Techdyne and DCA. This temporary difference
would reverse upon the occurrence of certain events relating to the
divestiture of these subsidiaries. Management of the Company currently
has no plans to effect a transaction that will result in such a divesti-
ture. A deferred tax liability of approximately $231,000 has been
recorded for the unrealized gain on marketable securities. See Note 3.
The Company had a domestic income tax expense (benefit) of approximately
$48,000 and $72,000 for the three months and nine months ended September
30, 1997, including deferred taxes of approximately $34,000 on gains on
Techdyne warrant exercises during the nine months ended September 30, 1997,
all of which were prior to the third quarter; and $120,000 and $821,000
for the same periods of the preceding year, including deferred taxes of
$578,000 in the second quarter of 1996 on the DCA stock offering. See
Note 8.
Techdyne (Scotland) had an income tax (benefit) expense of approximately
$(36,000) and $(100,000) for the three months and nine months ended
September 30, 1997 and income tax (benefit) expense of approximately
$(12,000) and $304,000 for the same periods of the preceding year.
Income tax payments were $364,000 and $770,000 for the three months and
nine months ended September 30, 1997 and $487,000 and $497,000 for the
same periods of the preceding year.
NOTE 6 -- Stock Options And Stock Compensation
In September 1994, the Company granted options to a consulting firm to
purchase 400,000 shares of common stock exercisable at $1.25 per share
through September 30, 1997. Options for 200,000 shares were transferred
by the consulting firm to another party in September, 1996. The options
vested on the basis of 25% of the aggregate as of the end of each quarter
beginning with the quarter ended December 31, 1994. Options for
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-(Continued)
September 30, 1997
(Unaudited)
NOTE 6 -- Stock Options And Stock Compensation-Continued
200,000 shares were exercised in August, 1997 and the remaining options
for 200,000 shares were exercised in September 1997.
In September, 1994, options to purchase 480,000 shares of common stock at
$.69 per share were exercised. The Company received cash payment of the
par value and the balance in three year promissory notes. In September,
1996, the Company forgave the balances due under the notes including
accrued interest, In accordance with which it recorded approximately
$344,000 in compensation expense in the second quarter of 1996. The
Company has 1,000,000 shares of common stock reserved for future issuance
pursuant to its 1989 Stock Option Plan. On April 18, 1995, the Company
granted 809,000 options, of which there are currently 806,000 outstanding,
as a service award to officers, directors, consultants and certain em-
ployees of the Company and certain of its subsidiaries under its 1989
Stock Option Plan. The options were exercisable at $3.00 per share
reduced to $2.38 per share on December 30, 1996, through April 17, 2000.
On June 11, 1997, the Company's Board of directors granted a five-year
non-qualified stock option under the 1989 Stock Option Plan for 35,000
shares immediately exercisable with an exercise price of $3.75 to a new
Board member, which exercise price was reduced to $2.38 per share on
September 10, 1997, the fair market value on that date. Including the
June 1997, grant, there are 841,000 options outstanding under the 1989 plan.
On May 6, 1996, the Company adopted a Key Employee Stock Plan reserving
100,000 shares of its common stock for issuance from time to time to
officers, directors, key employees, advisors and consultants as bonus
or compensation for performances and or services rendered to the Company
or otherwise providing substantial benefit for the Company. 2,000 shares
under this plan were issued to the managing director of the Company's
European operations for which the Company recorded approximately $6,000
in compensation expense during the second quarter of 1996.
In May 1994, Techdyne adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in May 1994, Techdyne's Board of Direc-
tors granted 227,500 options, of which there are 171,600 outstanding as
of September 30, 1997, to certain of its officers, directors, employees
and consultants. These options are excercisable for a period of five
years at $1 per share.
On February 27, 1995 Techdyne granted stock options, not part of the 1994
Plan, to directors of Techdyne and its subsidiary for 142,500 shares
exercisable at $1.75 per share for five years. In April 1995, Techdyne
granted a stock option for 10,000 shares, not part of the 1994 Plan, to
its general counsel at the same price and terms as the directors' options.
On September 6, 1997, Techdyne's Board of Directors adopted a Stock
Option Plan with 500,000 shares of its common stock reserved under the
1997 Plan with the 1997 Plan approved by shareholders at Techdyne's
annual meeting of shareholders on June 11, 1997. On September 23, 1997,
Techdyne's Board granted options under the plan for an aggregate of
375,000 shares of Techdyne common stock exercisable for five years
through September 22, 2002 at $3.25 per share, the closing price of
the common stock on that date as reported by Nasdaq.
In November 1995, DCA adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in November 1995, DCA's Board of Direc-
tors granted 210,000 options, of which there are 187,000 outstanding
options as of September 30, 1997 to certain of its officers, directors,
employees and consultants. These options are exercisable for a period
of five years through November 9, 2000 at $1.50 per share. In August,
1995, DCA's Board granted 15,000 options to the medical directors at its
three kidney dialysis centers. These options are exercisable for a period
of 3 years through August 18, 1999 at $4.75 per share.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-(Continued)
September 30, 1997
(Unaudited)
NOTE 6 -- Stock Options And Stock Compensation-Continued
The Boards of Directors of each company granting stock options determined
that the fair value of the underlying common stock was not in excess of
the exercise price on the date of grant for stock options granted and,
therefore, no amounts have been charged to operations in connection with
any grants of options.
NOTE 7 -- Commitments And Contingencies
In the first quarter of 1996, a temporary worker provided by a temporary
personnel agency was injured while working at Techdyne. The worker was
insured through the temporary personnel agency. While the full extent of
the temporary worker's injuries and the ultimate costs associated with
those injuries are not presently known, the Company anticipates that its
insurance is adequate to cover any potential claims which might arise.
Effective January 1, 1997, DCA established a 401(k) savings plan (salary
deferral plan) with an eligibility requirement of one year of service and
21 year old age requirement.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially all
of its employees. The discretional profit sharing and matching expense
since Techdyne acquired Lytton on July 31, 1997 has been approximately
$7,000.
NOTE 8 -- Subsidiary Stock Offerings
In October 1995, Techdyne completed a public offering of common stock and
redeemable common stock purchase warrants. During the nine months ended
September 30, 1997, approximately 41,000 Techdyne warrants were exercised,
with all such exercises occurring prior to the third quarter, providing net
proceeds of approximately $194,000 after underwriter commissions on the
warrant exercises. In accordance with its accounting policy of income
statement recognition for sales of stock by subsidiaries, which includes
exercises of warrants issued in subsidiary stock offerings, the Company
recognized a gain of approximately $61,000 with applicable income taxes
of approximately $23,000, which resulted in a net gain of approximately
$38,000 during the first quarter of 1997 and a gain of $29,000 with appli-
cable income taxes of approximately $11,000, which resulted in a net gain
of approximately $18,000 during the second quarter of 1997, with no warrant
exercises or related gains in the third quarter of 1997. See Note 1.
DCA completed a public offering in April 1996 for which the Company re-
corded a gain of approximately $1,521,000 with applicable income taxes of
$578,000, which resulted in a net gain of approximately $943,000.
NOTE 9 -- Acquisition
On July 31, 1997, Techdyne acquired Lytton Incorporated, which is engaged
in the manufacture and assembly of printed circuit boards and other elec-
tronic products for commercial customers. Techdyne's modified bank line
of credit (see Note 4) provided $2,500,000 cash required at closing. In
addition, the purchase price included 300,000 shares of Techdyne common
stock which have been registered for the seller. Techdyne has guaranteed
that the seller will realize a minimum of $2,000,000 from the sale of
these shares of common stock which had a fair value of approximately
$1,031,000 based on the closing price of its common stock on the date of
the acquisition with the guaranteed sales proceeds amounting to $2,400,000
if certain earnings objectives are met by Lytton in a specified one year
period, with Lytton having achieved such objectives on a pro rata basis
for the six month period already expired with a final determination to
be made at the conclusion of the one year period. Techdyne has the option
of paying the seller any difference between the guaranteed sales proceeds
and the actual amount realized by the seller from the sale of Techdyne
common stock in cash and/or additional common stock of Techdyne. Based on
the closing price of the Company's common stock on September 30, 1997, the
shares issued in the Lytton acquisition had a fair value of approximately
$1,163,000. With the earnings objectives being met on a pro
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-(Continued)
September 30, 1997
(Unaudited)
NOTE 9 - Acquisition--Continued
rata basis by Lytton, this stock valuation contingency could result in
additional consideration of approximately $1,237,000 being due either in
cash or in approximately 320,000 shares of Techdyne's common stock. In
addition, the Stock Purchase Agreement provides for incentive considera-
tion based on specific sales levels of Lytton for each of three years as
specified in the Agreement with any such consideration payable in cash.
Any additional consideration payable either from the stock valuation
guarantee or as incentive consideration would result in additional good-
will which would be amortized over the remainder of the initial 25 year
life.
The acquisition was accounted for under the purchase method of accounting,
and accordingly the results of operation of Lytton have been included on
the accompanying consolidated condensed statement of income since August 1,
1997. The total purchase price preliminarily recorded amounted to
$3,621,000 including estimated acquisition costs of $90,000 resulting in
goodwill of approximately $1,261,000 which will be amortized over 25 years.
The net purchase price was allocated as follows:
Working capital, other than cash $ 1,398,588
Property, plant and equipment 1,959,751
Other assets 3,000
Goodwill 1,261,353
Other liabilities (1,335,432)
------------
$ 3,287,260
============
Net cash portion of purchase price,
including costs $ 2,256,010
Common stock issued 1,031,250
------------
$ 3,287,260
The following pro forma consolidated condensed financial information re-
flects the Lytton acquisition as if it had occurred on January 1, 1996,
for statement of income purposes. The pro forma financial information
does not purport to represent what the Company's actual results of opera-
tions would have been had the sale occurred as of January 1, 1996 and may
not be indicative of operating results for any future periods.
SUMMARY PRO FORMA INFORMATION
Nine Months Ended
September 30,
--------------------
1997 1996
---- ----
Total revenues $37,769,000 $33,831,000
Net income $ 646,000 $ 2,410,000
Earnings per share $.11 $.40
==== ====
NOTE 10 - SUBSEQUENT EVENTS
On October 31, 1997, DCA concluded a sale ("Sale") of substantially all
of the assets of two of its 80% owned subsidiaries, Dialysis Services of
Florida, Inc. - Ft. Walton Beach ("DSF") (dialysis operations) and Dialysis
Medical, Inc. ("DMI") (Florida Method 2 home patient operations), and an
in-patient hospital service agreement of its 100% owned subsidiary, DCA
Medical Services, Inc. pursuant to an Asset Purchase Agreement. Considera-
tion for the assets sold was $5,065,000 consisting of $4,585,000 in cash
and $480,000 of the purchaser's common stock which the purchaser has agreed
to register within one year.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-(Continued)
September 30, 1997
(Unaudited)
NOTE 10 - SUBSEQUENT EVENTS--Continued
Provided that the shares are sold within 30 days of their registration,
the purchaser has agreed to make up any difference by which the sales
proceeds are less then $480,000 in cash or additional registered shares
of the purchaser at its discretion.
The pro forma consolidated condensed financial information presented below
reflects the Sale if it had occurred on January 1, 1996 for purposes of
Statement of Operations information and as if it had occurred at the end
of the period for purposes of balance sheet information. For purposes of
pro forma statement of operations information, no assumption has been made
that expenses have been eliminated which were included in corporate expense
allocations by the Company and DCA, to the business operations sold and
which were included in the actual results of operations of these businesses.
Such expenses which amounted to approximately $105,000 and $187,000 for
the nine months ended September 30, 1997 and September 30, 1996, respec-
tively, have accordingly not been removed when computing the below pro
forma amounts.
No assumption has been included in the pro forma information as to invest-
ment income to be realized from investment of the proceeds of the Sale.
If the estimated after tax proceeds of approximately $2,985,000 based on
$4,585,000 cash proceeds at closing and estimated taxes of $1,600,000 were
assumed to have been invested in short-term Treasury Bills at the current
estimated yield of 5.15% for the entire periods presented pending decision
as to other investment of the funds, estimated interest income of $111,000
would have been earned for both the nine months ended September 30, 1997
and for the same period of the preceding year which has not been reflected
in the pro forma revenues or income information.
The summary pro forma information is not necessarily representative of
what the Company's results of operations would have been if the Sale had
actually occurred as of January 1, 1997 and may not be indicative of the
Company's financial position or operating results for any future periods.
SUMMARY PRO FORMA INFORMATION
Statement of Income Information
-------------------------------
Nine Months Ended
September 30,
--------------------------
1997 1996
---- ----
Total revenue $25,552,000 $24,923,000
=========== ===========
Net income $ 245,000 $ 2,112,000
=========== ===========
Income per common share $.04 $.35
==== ====
Balance Sheet Information
-------------------------
Total assets $39,793,000
===========
Total liabilities $24,517,000
===========
Total stockholders' equity $15,276,000
===========
DCA has preliminarily estimated that it will record a gain on the Sale of
approximately $2,700,000 as of October 31, 1997, representing an estimated
pre-tax gain of approximately $4,300,000, net of estimated income taxes of
approximately $1,600,000, of which approximately $528,000 of the net after
tax gain relates to the 20% minority interest in two of the subsidiaries
whose assets were sold. The Company's portion of the net gain of
$2,172,000 would amount to approximately $1,500,000 with the balance
of approximately $672,000 applicable to the DCA minority interest. This
gain is not reflected in the above pro forma information. The actual gain
will be subject to the actual amount of net assets sold as of October 31,
1997 and related costs of the transaction.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
- ---------------------
The statements contained in this Quarterly Report on Form 10-Q that are not
historical are forward looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including statements regarding the Company's expectations,
intentions, beliefs, or strategies regarding the future. Forward looking
statements include the Company's statements regarding liquidity, antici-
pated cash needs and availability, and anticipated expense levels in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" including the pursuit of new Techdyne business development
efforts to replace lost sales from major customers, and the development of
new products and facilities, anticipated development and acquisition of
dialysis centers, new facility completions and related anticipated costs.
All forward looking statements included in this document are based on
information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward looking statement. It is
important to note that the Company's actual results could differ materially
from those in such forward looking statements. Among the factors that
could cause actual results to differ materially are the factors detailed
in the risks discussed in the "Risk Factors" section included in the
Registration Statement of the Company on Form S-3 as filed with the
Securities and Exchange Commission ("Commission") effective May 15, 1997 and
the Registration Statements of the Company's subsidiaries, Techdyne's
Registration Statements on Forms S-3 (effective December 11, 1996 and
November 4, 1997) and DCA's Registration Statement, Form SB-2 (effective
on April 17, 1996).
Techdyne's electronic and electo-mechanical manufacturing and assembly
operations are subject to substantial competition from divisions of large
electronic and high-technology firms and numerous smaller, specialized
companies. Strong competition derives from price advantages of competitors
with less expensive off-shore operations. This imposes pressure on
Techdyne's bidding orders and profit margins.
The Company's future growth as an international contract manufacturer
of precision electronic and electro-mechanical products for OEMs in the
data processing, telecommunication, instrumentation industries and food
preparation equipment industries will be influenced by several factors
including technological developments, the ability of the Company to
efficiently meet the design and production requirements of its customers,
and the market acceptance of its customers' products. Further factors
impacting the success of the Company's electronic manufacturing operations
are increases in expenses associated with continued sales growth, the
ability of Techdyne to control costs, management's ability to evaluate
new orders to target satisfactory profit margins, the capacity of Techdyne
to develop and manage the introduction of new products, and competition as
well as pursue acquisitions in new geographical and product markets.
Quality control is also essential to Techdyne's operations, since cus-
tomers demand strict compliance with design and product specifications.
Any adverse change in Techdyne's excellent quality and process controls
could adversely affect its relationship with customers and ultimately its
revenues and profitability.
The dialysis industry is highly competitive and subject to extensive
regulation, including the limitation on fees for dialysis treatments and
services. Significant competitive factors include quality of care and
service, convenience of location and pleasant environment. Additionally,
there is intense competition for retaining qualified nephrologists who
normally are the sole source of patient referrals and are responsible for
the supervision of the dialysis centers. There is also substantial compe-
tition for obtaining qualified nurses and technical staff. Major companies,
some of which are public companies or divisions of public companies, have
many more centers, physicians and financial resources than does the
Company's subsidiary, DCA, and by virtue of such have a significant
advantage in competing for acquisitions of dialysis facilities in areas
targeted by the Company.
The Company's growth in dialysis operations depends primarily on the
availability of suitable dialysis centers for acquisition or development
in appropriate and acceptable areas, and the Company's ability to compete
with larger companies with greater personnel and financial resources to
develop these new potential dialysis centers at costs within the budget
of the Company. Its ability to retain qualified nephrologists, nursing and
technical staff at reasonable rates is also a significant factor. Manage-
ment continues in negotiations with nephrologists for the acquisition or
development of new dialysis facilities, as well as with hospitals and
other health care maintenance entities. In July, 1997 the Company opened
a new center in Carlisle, Pennsylvania. The Company is planning new centers
in New Jersey and Pennsylvania. Several agreements for acute in-patient
services are under review but there is no assurance that such agreements
would be completed. Even if the Company were to establish new centers in
the near future, or complete in-patient treatment arrangements, there is
no certainty as to when any new centers or service contracts would be
implemented, or the number of stations, or patient treatments such may
involve, or if such will ultimately be profitable.
<PAGE>
Results of Operations
Consolidated revenues increased approximately $3,478,000 (48%) and
$590,000 (2%) for the three months and nine months ended September 30,
1997 compared to the same periods of the preceding year. Sales revenues
increased $3,994,000 (60%) and $4,085,000 (18%) for the three months and
nine months ended September 30, 1997 compared to the same periods of the
preceding year. 1997 revenues included a gain of approximately $90,000
for the nine months ended September 30, 1997 from the exercise of common
stock purchase warrants from Techdyne's securities offering, with such
gains all prior to the third quarter. 1996 included a gain of approxi-
mately $1,521,000 from DCA's securities offering. See Note 8 to "Notes
to Consolidated Condensed Financial Statements." Gain on sale of
marketable securities represents a gain attributable to the sale of
Viragen (a former subsidiary) common stock for which the carrying
value had been written-off in previous periods (see Note 3 to "Notes to
Consolidated Condensed Financial Statements") with no gain for the three
months ended and a gain of $49,000 for the nine months ended September 30,
1997 and gains of $308,000 and $1,794,000 for the same periods of the
preceding year. Other income decreased approximately $208,000 and
$180,000 for the three months and nine months ended September 30, 1997
compared to the same periods of the preceding year primarily due to gains
of $198,000 and $227,000 for the three months and nine months ended
September 30, 1996 on the Viragen note recovery. See Note 3 to "Notes
to Consolidated Condensed Financial Statements." Prior year revenues
included $140,000 from a litigation settlement in the first quarter of
1996.
Techdyne sales increased $3,715,000 (71%) and $3,785,000 (21%) for the
three months and nine months ended September 30, 1997 compared to the
same periods of the preceding year. Domestic sales of Techdyne increased
$3,705,000 (100%) and $7,400,000 (76%) and European-based sales increased
$11,000 (1%) and decreased $3,615,000 (43%) compared to the same periods
of the preceding year. The increase in domestic sales included sales of
Lytton of $2,779,000 commencing August 1, 1997. The decrease in European-
based sales was largely attributable to decreases of $614,000 (54%) and
$5,086,000 (70%) in sales to Compaq Computer Corp. ("Compaq") by Techdyne
(Scotland) for the three months and nine months ended September 30, 1997
compared to the same periods of the preceding year.
Approximately 50% and 61% of Techdyne's consolidated sales and 42% and
50% of the Company's consolidated sales for the three months and nine
months ended September 30, 1997 were made to five customers. Customers
generating 10% or more of Techdyne's or the Company's consolidated sales
for either the three month or nine month periods with their respective
portions of Techdyne's and the Company's consolidated sales for the three
months and nine months ended September 30, 1997 included Compaq which
accounted for 6% and 10% and 5% and 8%, IBM for 16% and 23% and 13% and
19% and EMC and its related suppliers for 7% and 13% and 6% and 10% and
Lytton's major customer PMI for 14% and 6% and 12% and 5%. The loss of,
or substantially reduced sales to, any of these customers would have an
adverse effect on the Company's operations. Approximately $1,236,000
(44%) of Lytton's sales were to its major customer. The loss of or
substantially reduced sales to any of its major customers, as occurred
with Compaq in Europe commencing in the third quarter of 1996, would
have an adverse effect on the Company's operations.
Revenues of Techdyne's Scottish-based subsidiary, Techdyne (Scotland),
continue to be highly dependent on sales to Compaq, which accounted for
approximately 34% and 45% of the sales of Techdyne (Scotland) for the
three months and nine months ended September 30, 1997, and 74% and 86%
for the same periods of the preceding year. The bidding for Compaq
orders in Scotland has become more competitive, which resulted in sub-
stantially reduced Compaq sales commencing in the third quarter of 1996
and lower profit margins on remaining Compaq sales. Techdyne (Scotland)
is pursuing new business development efforts and has offset some of the
lost Compaq business with sales to other customers and is also pursuing
cost reductions efforts to remain competitive with respect to Compaq,
although there can be no assurance as to the success of such efforts.
Medical product sales revenues decreased $37,000 (9%) and $275,000 (17%)
for the three months and nine months ended September 30, 1997 compared to
the same periods of the preceding year, largely due to the Company's
shutdown, resulting from unprofitable operations, of All American Medical
& Surgical Supply Corp., the Company's home healthcare durable subsidiary
("All American"), which commenced operations in January 1996.
Medical services sales revenues, which represents revenues of DCA,
the Company's dialysis division, increased $311,000 (32%) and $521,000
(18%) for the three months and nine months ended September 30, 1997
compared to the same periods of the preceding year. This increase
included increased revenues of approximately $170,000 (45%) and $487,000
(52%) at the Company's dialysis center in Lemoyne, Pennsylvania which
commenced operations in September 1995. Also included were revenues of
$82,000 for the three months and nine months
<PAGE>
Results of Operations -- Continued
ended September 30, 1997 for the Company's new dialysis center in
Carlisle, Pennsylvania which commenced treatments in July, 1997.
Cost of goods sold as a percentage of consolidated sales increased
slightly for the three months ended September 30, 1997 to 83% compared
to 81% for the same period of the preceding year but remained relatively
stable for the nine months ended September 30, 1997 and for the same
periods of the preceding year amounting to 81% for both periods.
Cost of goods sold for Techdyne increased to 88% for the three months
ended September 30, 1997 compared to 85% for the same period of the
preceding year. Cost of goods sold for Techdyne's new subsidiary,
Lytton, included in results of operation since August 1, 1997 were 88%,
which together with Techdyne (Scotland)'s reduced margins contributed
to the overall increase in cost as a percentage of sales.
Cost of goods sold for the medical products division amounted to 66%
and 64% for the three months and nine months ended September 30, 1997
compared to 64% and 65% for the same periods of the preceding year
reflecting increases in the cost of the principal product of this
division and changes resulting from the shutdown of All American.
Cost of medical services sales decreased to 60% from 66% and to 61%
from 66% for the three months and nine months ended September 30, 1997,
largely as a result of a decrease in supply cost and healthcare salaries
as a percentage of sales.
Selling, general and administrative expenses increased $265,000 and
$77,000 for the three months and nine months ended September 30, 1997
compared to same period of the preceding year. While there were decreases
from the shutdown of All American which is no longer reflected in the
Company's results of operations, and also approximately $350,000 of stock
compensation in the second quarter of 1996, the overall increase in 1997
resulted from increased medical services operations, increases related to
Techdyne's Austin, Texas facility which has substantially increased its
operations and Techdyne's new Massachusetts facility, as well as Lytton's
selling, general and administrative expenses being included commencing
August 1, 1997.
Interest expense increased approximately $68,000 and $66,000 for the
three months and nine months ended September 30, 1997 compared to the
same periods of the previous year resulting largely from interest on the
bank line of credit used to finance the Lytton acquisition and also from
Lytton's interest expense being included since August 1, 1997.
The prime rate was 8.5% at September 30, 1997 and 8.25% at December 31,
1996, respectively.
Liquidity and Capital Resources
Working capital totaled $12,377,000 at September 30, 1997, a decrease
of $1,467,000 during the nine months ended September 30, 1997 reflecting
income tax payments and various changes in other components of working
capital resulting from increased sales levels. Included was a decrease
of $495,000 in the net of tax valuation of marketable securities pursuant
to Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Working capital of
Lytton of $1,523,000 is included, although this was more than offset by
the decrease in working capital resulting from the $2,500,000 bank loan
funding the Lytton acquisition.
Included in the changes in components of working capital was a decrease
of $2,924,000 in cash and cash equivalents, which included net cash used
in operating activities of $1,979,000, net cash used in investing
activities of $3,918,000 (including funds used in the acquisition of
Lytton of approximately $2,166,000 and additions to property, plant and
equipment of $1,691,000) and net cash provided by financing activities
of $3,101,000 (including net proceeds of approximately $694,000 from the
exercise of common stock purchase warrants and stock options, borrowings of
$2,500,000 under Techdyne's line of credit to fund the Lytton acquisition,
repayments on long-term debt of $254,000 and the repurchase by DCA of
100,000 shares of its stock for $206,000).
In February 1996, Techdyne refinanced its bank loan agreement. The
financing included a $2,000,000 line of credit, due on demand, secured
by Techdyne's accounts receivable, inventory, furniture, fixtures and
intangible assets. A $712,500 term loan, which had a balance of $672,000
and $691,000 at September 30, 1997 and December
<PAGE>
Liquidity and Capital Resources-Continued
31, 1996, respectively, is secured by two buildings and land owned by
the Company. The second term loan for $200,000, which had a balance of
$137,000 and $167,000 at September 30, 1997 and December 31, 1996,
respectively, is secured by Techdyne's tangible personal property, goods
and equipment. The Company has guaranteed these loans and has subor-
dinated $2,500,000 due from Techdyne, provided that Techdyne may make
payments to the Company on this subordinated debt from funds from
Techdyne's security offering and from earnings. Techdyne further agreed
that in the event that it should sell its interest in Techdyne (Scotland),
which is not anticipated, 50% of the selling price would be used to repay
the $712,500 term loan facility. Techdyne was in default of certain
financial reporting requirements regarding these loans as of December 31,
1996 for which the bank has granted waivers as of December 31, 1996 and
through December 31, 1997. In connection with Techdyne's acquisition of
Lytton in July 1997, the line of credit was increased to $2,500,000 with
various other modifications, including removal of conditions regarding use
of proceeds upon any sale of Techdyne (Scotland). In conjunction with this
acquisition, the increased line of $2,500,000 was fully drawn down in
July 1997, with this balance remaining outstanding as of September 30,
1997. See Notes 4 and 9 to "Notes to Consolidated Condensed Financial
Statements."
Techdyne has outstanding borrowings of $145,000 from a local bank with
interest payable monthly with the present note maturing April, 2000.
In April 1993, the Company purchased a vacant lot adjacent to Techdyne's
facility in Hialeah, Florida for possible future expansion. In connection
with this purchase, the Company obtained a $130,000 mortgage originally
scheduled to mature April, 1998 which has been extended to May, 2003. The
principal balance outstanding under this mortgage amounted to $73,000 and
$82,000 at September 30, 1997 and December 1996, respectively. See Note 4
to "Notes to Consolidated Condensed Financial Statements."
Techdyne (Scotland) has a line of credit with a Scottish bank, with a
U.S. dollar equivalency of approximately $324,000 and $342,000 at Sep-
tember 30, 1997 and December 31,1996, respectively. The line of credit
is secured by the assets of Techdyne (Scotland) and guaranteed by
Techdyne. This line of credit operates as an overdraft facility. No
amounts were outstanding under this line of credit as of September 30,
1997 or December 31, 1996. In October, 1994, Techdyne (Scotland) pur-
chased the facility housing its operations for approximately $730,000,
Obtaining a 15-year mortgage which had a U.S. dollar equivalency of
approximately $566,000 and $622,000 at September 30, 1997 and December
31, 1996, respectively. See Note 4 to "Notes to Consolidated Condensed
Financial Statements."
During 1988, the Company, through DCA, its dialysis subsidiary, obtained
mortgages totaling $1,080,000 on its two buildings, one in Lemoyne,
Pennsylvania and the other in Easton, Maryland. The mortgages had a
combined remaining balance of $450,000 and $504,000 at September 30, 1997
and December 31, 1996, respectively. DCA was in default of certain
covenants principally relating to net worth and debt service ratio
requirements under these loan agreements as of December 31, 1996. The
lender has waived compliance with these covenants as of December 31, 1996
and through December 31, 1997. See Note 4 to "Notes to Consolidated
Condensed Financial Statements."
DCA has an equipment purchase agreement for kidney dialysis machines for
its Florida and Pennsylvania dialysis facilities which had a remaining
principal balance of $398,000 and $272,000 at September 30, 1997 and
December 31, 1996, respectively, which included additional equipment
financing of approximately $17,000 in the first quarter of 1997 and
$48,000 in the second quarter of 1997 and $108,000 in the third quarter
of 1997. See Note 4 to "Notes to Consolidated Condensed Financial
Statements."
The Company has sold 10,000 shares of Viragen stock realizing a gain and
cash proceeds of approximately $49,000 during the first nine months of
1997 and sold 539,000 shares and recognized gains of $1,794,000 during
the same period of the preceding year. The carrying value of these
securities was previously written off. Under the provisions of FASB
Statement No. 115, the remaining shares at September 30, 1997 have been
recorded at an estimated fair value of $607,000 with the unrealized gain,
net of income tax effect, credited to a separate component of stockholder's
equity. See Note 3 to "Notes to Consolidated Condensed Financial State-
ments."
Techdyne has a convertible note payable to the Company, convertible
at $1.75 per share, which amounted to approximately $3,128,000 and
$2,998,000, including accrued interest, at September 30, 1997 and
December 31, 1996, respectively, with $350,000 of the note converted
into 200,000 shares of Techdyne common stock in September 1996.
<PAGE>
Liquidity and Capital Resources - Continued
For the nine months ended September 30, 1997, the Company recognized
gains of approximately $90,000, with applicable income taxes of $34,000,
which resulted in net gains of approximately $56,000 from exercise of
Techdyne common stock purchase warrants from Techdyne's public offering
with no such gains in the third quarter. See Note 8 to "Notes to Con-
solidated Condensed Financial Statements."
Techdyne has established a new manufacturing facility in Milford, Massa-
chusetts with the facility having an initial five year lease term through
March 31, 2002. This facility is intended to assist in meeting increased
customer demand in the Northeastern United States, as well as to increase
service levels to customers in the Northeast and to penetrate new markets.
Techdyne is increasing its manufacturing capacity with new leases for its
Houston and Austin, Texas facilities to meet increased customer demand in
the Southwestern United States. Most of the expenditures related to its
new facilities, including leasehold improvements, equipment and furniture
and fixtures, and the costs of expansion of existing facilities were
provided from the proceeds from Techdyne's 1995 security offering.
On October 31, 1997, DCA concluded a sale of substantially all of the
assets of its Florida dialysis operations for consideration of $5,065,000,
of which $4,585,000 was received in cash at closing and $480,000 in common
stock of the purchaser. The purchaser assumed approximately $113,000 of
the financing liabilities of the equipment purchase agreement. DCA has
preliminarily estimated an after tax gain of approximately $2,700,000 of
which approximately $528,000 relates to the 20% minority interest in two
of the subsidiaries whose assets were sold with the Company's portion of
the net gain estimated at approximately $1,500,000, net of DCA minority
interest of approximately $672,000. See Notes 4 and 9 to "Notes to
Consolidated Condensed Financial Statements."
DCA, although having sold its Florida dialysis operations in October,
1997, is seeking to expand its outpatient dialysis treatment facilities
and inpatient dialysis care. Such expansion, whether through acquisition
of existing centers, or the development of its own dialysis centers,
requires capital, which was the basis for DCA's 1996 securities offering
and sale of its Florida operations. No assurance can be given that DCA
will be successful in implementing its growth strategy or that the funds
from the securities offering and sale of the Florida operations will be
adequate to finance expansion or that sufficient outside financing would
be available to fund expansion.
DCA commenced operations at its newly established dialysis center in
Carlisle, Pennsylvania in July 1997 and is in the process of establishing
new dialysis centers in New Jersey and Pennsylvania.
The bulk of the Company's cash balances are carried in interest yielding
vehicles at various rates and mature at different intervals depending on
the anticipated cash requirements of the Company.
On July 31, 1997, Techdyne acquired Lytton, which is engaged in the
manufacture and assembly of printed circuit boards and other electronic
products for commercial customers. This acquisition required $2,500,000
cash at closing, funded by the modified bank line of credit, as well as
300,000 shares of Techdyne's common stock which had a fair value of
approximately $1,031,000 based on the closing price of Techdyne's
common stock on the date of acquisition for which Techdyne has guaranteed
$2,000,000 minimum proceeds ($2,400,000 if certain earnings objectives are
met over a 12 month period, which objectives have been met to date on a
pro rata basis for the period already expired) to the seller. The Stock
Purchase Agreement also provides for incentive consideration based on
specific sales levels of Lytton for each of three successive specified
years. Based on the closing price of the Techdyne's common stock on
September 30, 1997, the shares issued in the Lytton acquisition had a
fair value of $1,163,000 at September 30, 1997. The Lytton acquisition
has expanded the Techdyne's customer base, broadened its product line,
enhanced its manufacturing capabilities and provided a new geographic area
to better serve the continued existing customer base with opportunities to
attract new customers. See Notes 4 and 9 to "Notes to Consolidated
Condensed Financial Statements."
The Company anticipates that current levels of working capital and
working capital from operations, including those of Lytton, will be
adequate to successfully meet liquidity demands for at lease the next
12 months, including the financing obligations incurred in the acquisi-
tion of Lytton. See Notes 4 and 9 to "Notes to Consolidated Condensed
Financial Statements."
<PAGE>
Inflation
Inflationary factors have not had a significant effect on the Company's
operations. The Company attempts to pass on increased costs and expenses
by increasing selling prices when and where possible and by developing
different and improved products for its customers that can be sold at
targeted profit margins. However, in the Company's medical services
segment, revenue per dialysis treatment is subject to reimbursement
rates established and regulated by the federal government. These rates
do not automatically adjust for inflation. Any rate adjustments relate
to legislation and executive and Congressional budget demands, and have
little to do with the actual cost of doing business. Therefore, dialysis
services revenues cannot be voluntarily increased to keep pace with
increases in nursing and other patient care costs.
<PAGE>
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Part I Exhibits
(11) Statements re: computation of per share earnings
(27) Financial Data Schedule (for SEC use only)
Part II Exhibits
None
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, Item 2, "Acquisi-
tion or Disposition of Assets" dated August 14, 1997 relating to the
acquisition by Techdyne of Lytton Incorporated on July 31, 1997. The
Company filed a Current Report on Form 8-K/A#1, Item 7, "Financial
Statements and Exhibits" dated October 15, 1997, reflecting that no
financial statements of Lytton or pro forma financial information of
the Company are required.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MEDICORE, INC.
By /s/ DANIEL R. OUZTS
--------------------------------
DANIEL R. OUZTS, Vice President/
Finance, Controller and Principal
Accounting Officer
Dated November 14, 1997
<PAGE>
EXHIBIT INDEX
Exhibit
No.
- -------
Part I Exhibits
(11) Statement re: computation of per share earnings
(27) Financial Data Schedule (for SEC use only)
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
EXHIBIT 11 -- COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Primary
Weighted average
shares outstanding 5,548,244 5,456,940 5,487,709 5,456,020
Net effect of dilutive
stock options-based on
the modified treasury
stock method using
average market price 283,998 459,768 385,449 616,756
--------- --------- --------- ----------
5,832,242 5,916,708 5,873,158 6,072,776
========= ========= ========= ==========
Net income $ 30,784 $ 333,106 $ 412,837 $2,339,685
Net income per share $.01 $.06 $.07 $.39
==== ==== ==== ====
Fully Diluted
Weighted average
share outstanding 5,456,940
Net effect of dilutive
stock options-based on
the modified treasury
stock method using
ending market price 592,789
---------
6,049,729
=========
Net income $ 333,106
=========
Net income per share $.06
====
Note: Fully diluted earnings per share has not been presented for the
three months and nine months ended September 30, 1997 or for the nine
months ended September 30, 1996 as they are not dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <S>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,741,440
<SECURITIES> 606,687
<RECEIVABLES> 6,118,756<F1>
<ALLOWANCES> 0
<INVENTORY> 8,197,033<F2>
<CURRENT-ASSETS> 24,216,988
<PP&E> 14,439,784
<DEPRECIATION> 5,351,404
<TOTAL-ASSETS> 35,523,636
<CURRENT-LIABILITIES> 11,839,835
<BONDS> 2,976,357
0
0
<COMMON> 58,569
<OTHER-SE> 12,329,283
<TOTAL-LIABILITY-AND-EQUITY> 35,523,636
<SALES> 26,472,183
<TOTAL-REVENUES> 27,068,677
<CGS> 21,566,904
<TOTAL-COSTS> 21,566,904
<OTHER-EXPENSES> 4,549,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 234,578
<INCOME-PRETAX> 717,382
<INCOME-TAX> (28,760)
<INCOME-CONTINUING> 412,837
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 412,837
<EPS-PRIMARY> .07
<EPS-DILUTED> 0
<FN>
<F1> ACOUNTS RECEIVABLE ARE NET OF ALLOWANCE OF $354,000 AT SEPTEMBER 30,
1997.
<F2> INVENTORIES ARE NET OF RESERVE OF $589,000 AT SEPTEMBER 30, 1997.
</FN>
</TABLE>
