UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A#1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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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 (I.R.S. Employer
incorporation or organization) Identification No.)
2337 WEST 76TH STREET, HIALEAH, FLORIDA 33016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (305) 558-4000
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant based upon the closing price of the common stock on March
5, 1998 was approximately $9,563,000.
As of March 5, 1998 the Company had outstanding 5,847,740 shares of
common stock.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Proxy Statement
in connection with the Registrant's Annual Meeting of Shareholders to be
held on June 10, 1998.
Annual Reports, Forms 10-K, for the years ended December 31, 1994
and 1995, Part IV, Exhibits.
Annual Reports for Registrant's Subsidiary, Techdyne, Inc., Forms
10-K for the years ended December 31, 1995 and 1997, Part IV, Exhibits.
Registration Statement of Registrant's Subsidiary, Techdyne, Inc.,
Form SB-2, effective September 13, 1995, Registration No. 33-94998-A, Part
II, Item 27, Exhibits.
Registration Statement of Registrant's Subsidiary, Techdyne, Inc.,
Form S-3, Effective December 11, 1996, Registration No. 333-15371, Part II,
Item 16, Exhibits.
Annual Report for Registrant's Subsidiary Dialysis Corporation of
America, Form 10-K for the years ended December 31, 1996, and 1997, Part
IV, Exhibits.
Registration Statement of Registrant's Subsidiary, Dialysis Corpora-
tion of America, Form SB-2, effective April 17, 1996, Registration No.
333-80877A, Part II, Item 27, Exhibits.
<PAGE>
MEDICORE, INC.
Index to Annual Report on Form 10-K
Year Ended December 31, 1997
Page
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PART I
Item 1. Business................................................... 1
Item 2. Properties................................................. 17
Item 3. Legal Proceedings.......................................... 19
Item 4. Submission of Matters to a Vote
of Security Holders........................................ 19
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters............................ 19
Item 6. Selected Financial Data.................................... 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 21
Item 8. Financial Statements and Supplementary Data................ 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 31
PART III
Item 10. Directors and Executive Officers
of the Registrant.......................................... 31
Item 11. Executive Compensation..................................... 32
Item 12. Security Ownership of Certain
Beneficial Owners and Management........................... 32
Item 13. Certain Relationships and Related Transactions............. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................ 33
<PAGE>
PART I
Item 1. Business
Historical
Medicore, Inc. ("Medicore"), incorporated in Florida in 1961, manu-
factures and distributes medical products, and through its 63% owned
public subsidiary, Techdyne, Inc. ("Techdyne"), is an international
contract manufacturer of electronic and electro-mechanical products,
primarily for the data processing, telecommunications, instrumentation
and food preparation equipment industries. Techdyne's wholly-owned
subsidiaries include Lytton Incorporated ("Lytton") acquired in July,
1997, Techdyne (Scotland) Limited ("Techdyne (Scotland)") and Techdyne
Livingston Limited which is a subsidiary of Techdyne (Scotland). Medicore
also owns and operates three kidney dialysis centers through its 66% owned
public subsidiary Dialysis Corporation of America ("DCA").
Medicore and its subsidiaries are collectively hereinafter referred
to as the "Company."
The Company's executive offices are located at 2337 West 76th
Street, Hialeah, Florida 33016 and at 777 Terrace Avenue, Hasbrouck
Heights, New Jersey 07604. Its telephone number in Florida is (305)
558-4000 and in New Jersey is (201) 288-8220.
Financial Information Relating to Industry Segments
Year Ended December 31,
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1997 1996 1995
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Revenues
Electro-mechanical(1) $33,168,780 $24,434,180 $30,424,358
Medical products(2) 1,708,488 2,012,498 1,702,042
Medical services 9,220,435 4,136,970 2,469,372
Earned at corporate level 329,404 4,517,673 2,413,790
Elimination of intersegment
revenues:
Parent company real estate
rental charges to electro-
mechanical manufacturing (93,640) (103,450) (130,000)
Electro-mechanical
manufacturing sales to
medical services (213,985) (278,465) (219,482)
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Total Revenues $44,119,482 $34,719,406 $36,660,080
=========== =========== ===========
<PAGE> 1
Year Ended December 31,
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1997 1996 1995
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Operating Profit (Loss)(3)
Electro-mechanical(1) $ 1,317,869 $ 1,282,190 $ 2,218,269
Medical products(2) 6,485 (637,360) 34,789
Medical services 4,352,812 75,706 (322,156)
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Total Operating Profit 5,677,166 720,536 1,930,902
Earned at corporate level 329,404 4,517,673 2,413,790
General corporate expenses 701,557 977,691 505,169
Interest expense 393,515 217,615 246,393
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Income before income taxes,
and minority interest $ 4,911,498 $ 4,042,903 $ 3,593,130
========== ========== ==========
Identifiable Assets(4)
Electro-mechanical(1) $24,625,147 $13,224,196 $12,879,101
Medical products(2) 580,125 985,210 780,343
Medical services 11,637,765 7,552,289 3,971,867
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36,843,037 21,761,695 17,631,311
Corporate assets 4,018,482 5,323,157 3,615,843
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Total Assets $40,861,519 $27,084,852 $21,247,154
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Financial Information Relating to Foreign
and Domestic Operations and Export Sales
Year Ended December 31,
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1997 1996 1995
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Net Sales and Other Income
United States $37,279,414 $24,559,290 $24,349,700
Europe(5) 6,840,068 10,160,116 12,310,380
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$44,119,482 $34,719,406 $36,660,080
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Net Income (Loss)
United States(2) $ 2,434,607 $ 1,897,373 $ 1,254,849
Europe(5) (193,636) 519,896 996,422
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$ 2,240,971 $ 2,417,269 $ 2,251,271
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Identifiable Assets(4)
United States $35,869,051 $21,299,640 $14,645,274
Europe(5) 4,992,468 5,785,212 6,601,880
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$40,861,519 $27,084,852 $21,247,154
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(Notes on following page)
<PAGE> 2
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(1) Reflects the operations, revenues, assets and liabilities of Lytton
for the five months ended December 31, 1997. Lytton was acquired on
July 31, 1997 for $2,500,000 and 300,000 shares of the Company's common
stock, plus guarantees and incentive compensation. Lytton is engaged
in the manufacture of electronic and electro-mechanical products,
primarily printed circuit boards. See Item 1, "Business - Electro-
Mechanical Manufacturing" and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Includes estimated costs of $305,000 in 1996 for shutdown of durable
medical equipment operations.
(3) Operating profit is total revenue exclusive of revenues earned at the
corporate level, less operating expenses and includes any applicable
amortization of costs in excess of net tangible assets acquired.
Operating expenses exclude general corporate expenses, interest expense
and minority interest of subsidiaries.
(4) Identifiable assets by segment include assets directly identifiable
with the applicable operations. Company assets consist primarily of
cash, receivables, marketable securities, real property and deferred
expenses.
(5) Techdyne (Scotland) Limited sales are primarily to customers in the
United Kingdom. Sales are also made to Ireland, Germany and the Middle
East.
Medical Products
The Company distributes medical supplies, primarily disposables, both
domestically and internationally, to hospitals, blood banks, laboratories
and retail pharmacies. Products distributed include exam gloves, prepackaged
swabs and bandages and glass tubing products for laboratories. In addition,
the Company distributes a line of blood lancets used to draw blood for
testing. Developed by the Company and manufactured by Techdyne, the
lancets are distributed under the names Medi-Lance(tm) and Lady Lite(tm)
or as a private label item if requested by the customer.
The Company closed its durable medical equipment subsidiary, All
American Medical & Surgical Supply Corp. in the first quarter of 1997.
See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Marketing of medical products is conducted by independent manufacturer
representatives and employees of the Company.
Electro-Mechanical Manufacturing
Techdyne is an international contract manufacturer of electro-
mechanical and electronic products, primarily manufactured to customer
specifications and designed for original equipment manufacturers ("OEMs")
and distributors in the data processing, telecommunications, instrumentation
and food preparation equipment industries.
Custom-designed products primarily include conventional and molded
cables and wire harnesses, and complex printed circuit boards ("PCBs") and
electro-mechanical assemblies. Techdyne also
<PAGE> 3
manufactures complete finished assemblies as well as conducts contract
manufacturing for other companies. Techdyne also provides manufac-
turing and test engineering services and materials management for its
customers' high tech and rapidly changing products. Manufacturing is
accomplished, if applicable, in accordance with Underwriters Labora-
tories specifications and the Canadian Standards Association require-
ments. Techdyne has an ISO 9002 quality assurance designation for its
Hialeah, Florida and Houston and Austin, Texas facilities, which
similar quality assurance designation is held by its European
subsidiary Techdyne (Scotland). See "Quality Control" below.
Techdyne custom designs and assembles over 800 components and finished
products for over 100 OEM customers. The customer base consists of certain
of the Fortune 500 companies. Approximately 79% of sales are domestic,
and 21% effected by Techdyne (Scotland) are in the European markets. For
the year ended December 31, 1997, approximately 63% of Techdyne's sales
were made to numerous locations of six major customers, IBM (19%), EMC and
its related suppliers (10%),Compaq Computer Corporation ("Compaq") (9%),
Motorola (9%) and PMI Food Equipment Group ("PMI") (8%) (Lytton's primary
customer which accounted for 38% of Lytton's sales for the five months
ended December 31, 1997). Techdyne (Scotland) had a substantial portion
of its sales, approximately 42%, to Compaq. During 1997 and 1996 bidding
for Compaq orders became more competitive which resulted in substantially
reduced sales to that customer with lower profit margins on remaining sales.
A loss or substantially reduced sales of any major customer would have had
an adverse effect on Techdyne and the Company as was the case with the
Company in Europe. The Company is pursuing new customer orders. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Techdyne's Business Strategy
In response to industry trends for OEMs to rely more on contract
manufacturers in order to reduce capital investment in sophisticated
equipment, access manufacturing technology, improve inventory management
and purchasing power, and focus on product development and marketing,
particularly in view of constantly changing and improving technology and
therefore, shorter product life cycles, Techdyne's objective is to become
a stronger competitive force and provider of electronic contract manu-
facturing services for OEM customers. Techdyne will continue to seek to
develop strong, long-term alliances with major-growth OEMs of complex,
market leading products.
Management is seeking to concentrate on high value added products
and services for leading OEMs. Techdyne focuses on leading manufacturers
of advanced electronic products that generally require custom-designed,
more complex interconnect products and short lead-time manufacturing
services.
Techdyne is able to build on its integrated manufacturing capabilities,
provide its customers with a broad range of high value added manufacturing
services and final system assemblies and testing. In addition to PCBs,
Techdyne's cable assembly capabilities provide it with further opportuni-
ties to leverage its vertical integration. By manufacturing PCBs and
custom cable assemblies, Techdyne is able to provide greater value added
and be more competitive. In addition, vertical integration provides
Techdyne with greater control over quality, delivery and cost.
Techdyne has significantly expanded its manufacturing facilities. In
March, 1997, it executed a five year lease for 5,500 square feet of manu-
facturing and office space in Milford, Massachusetts. Cables, harnesses
and to a lesser extent PCBs are manufactured at this new facility. In
April, 1997, it entered into two leases for its manufacturing facilities
in Texas. One lease is for 18,225 square feet in Austin, Texas which
tripled its existing manufacturing space in that area, and the second
lease is for
<PAGE> 4
15,000 square feet of space in Houston, Texas, also expanding on its
manufacturing and warehousing facility at that location. These
facilities have greatly expanded Techdyne's manufacturing capabilities
and provide Techdyne with operations in key geographic markets for its
electronic industry customers.
Management has also successfully pursued business acquisition
opportunities. In July, 1997, Techdyne acquired Lytton, a private company
engaged in the manufacture, assembly and sale of complex PCBs and other
electronic products for over 40 major commercial customers. Lytton is
located in Dayton, Ohio, providing the Company with a new geographic and
end user market. The Lytton acquisition complemented Techdyne's operations
and continued the business strategy of the Company by expanding its customer
base, broadening its product line, entering a new geographic area, enhancing
its manufacturing capabilities, and enabling the Company to better serve
the combined existing customer base with enhanced product choices with
opportunities to further attract new customers.
To satisfy customer needs, the Company seeks to develop long-term
customer relationships by using its state-of-the-art technology to provide
timely and quick-turnaround manufacturing and comprehensive support for
materials purchases and inventory control. Through its EDI (electronic
data interchange), the customer is able to convey its inventory and
product needs on a weekly basis based on a rolling quantity forecast.
More emphasis is placed on value-added turnkey business for the manu-
facture of complete finished assemblies. This is accomplished with
extended technology, continuous improvement of its processes, and
Techdyne's early involvement in the design process using its computer-
aided design ("CAD") system.
Techdyne is improving its material acquisition process in an attempt
to better its purchasing power by identifying materials used across
customer lines. In 1998, the Company will begin to update its material
requirements planning ("MRP") system utilizing Visual Manufacturing
software. The Visual Manufacturing software is anticipated to solve
the "year 2000" issue for the Company. Management is also attempting to
consolidate vendors to achieve better purchasing power. The Company
believes these efforts will provide it with better leverage in material
pricing and permit Techdyne to be more competitive when bidding for manu-
facturing work and turnkey business. Management is also attempting to
better track actual costs against customer quotes which will better allow
it to control costs and more accurately manage its operating margins.
Products and Services
Cable and Harness Assemblies
A cable is an assembly of electrical conductors insulated from each
other and twisted around a central core and jacketed. Cables may be molded
or non-molded. Techdyne maintains a large assortment of standard tooling
for D-subminiature connectors, Din connectors (circular connectors with
from two to four pairs of wires used for computer keyboards), flat ribbon
cables, and discrete cable assemblies.
Techdyne offers a wide range of custom manufactured cable and harness
assemblies for molded and mechanical applications, including multiconductor,
ribbon, co-axial cable assemblies, and discrete wire harness assemblies.
The Company uses advanced manufacturing processes, in-line inspection and
computer testing. The cable and harness assemblies use automated and
semi-automated processes. Techdyne tests all of its cable and harness
assemblies with computerized automated test equipment.
<PAGE> 5
Flat ribbon cable or ribbon cable assemblies are cables with wires
(conductors) on the same plane with connectors at each end. Flat ribbon
cables are used in computer assemblies and instrumentation.
Discrete cable assemblies are wires with contacts and connectors.
Harnesses are prefabricated wiring with insulation and terminals ready to
be attached to connectors.
Printed Circuit Boards and Molded Assemblies
PCB assemblies are electronic assemblies consisting of a basic printed
circuit laminate with electronic components including diodes, resistors,
capacitors and transistors, inserted and wave soldered. PCBs may be used
either internally within the customer's products or in peripheral devices.
The variety of PCBs produced include pin-through-hole ("PTH") assemblies,
low and medium volume surface mount technology ("SMT") assemblies, and
mixed technology PCBs, which include multilayer PCBs.
PCB production increased from approximately 8% in 1996, to approxi-
mately 26% in 1997, primarily due to additional manufacturing facilities
including the acquisition of Lytton which, with its six automated lines,
is significantly involved in PCB production.
PTH assembly involves inserting electronic components with pins or
leads through pre-drilled holes in a PCB and soldering the pins to the
electrical circuit.
In SMT production, electronic components are attached and soldered
directly onto the surface of a circuit board rather than inserted through
holes. SMT components are smaller, can be spaced more closely together
and, unlike PTH components, can be placed on both sides of a PCB. This
allows for product miniaturization, while enhancing the electronic
properties of the circuit. SMT manufacturing requires substantial
capital investment in expensive, automated production equipment which
requires high usage. Techdyne has computerized testing for substantially
all of its PCBs to verify that components have been installed properly and
meet certain functional standards, that the electrical circuits have been
properly completed, and that the PCB assembly will perform its intended
functions.
Techdyne also produces multilayer PCBs, which consist of three or
more layers of a PCB laminated together and interconnected by plated-through
holes used to receive component leads and to interconnect the circuit
layers. Multilayer boards increase packaging density, improve power and
ground distribution, and permit the use of higher speed circuitry. The
development of electronic components with increased speed, higher per-
formance and smaller size has stimulated a demand for multilayer PCBs,
as they provide increased reliability, density and complexity.
Contract Manufacturing
Contract manufacturing involves the manufacture of complete finished
assemblies with all sheet metal, power supplies, fans, PCBs, as well as
complete sub-assemblies for integration into an OEM's finished products,
such as speaker and lock key assemblies and diode assemblies that consist
of wire, connectors and diodes that are over-molded, packaged and bar
coded for distribution. These products can be totally designed and manu-
factured by Techdyne through its computer-aided design system, engineering
and supply procurement. Techdyne develops manufacturing processes and
tooling and test sequences for new products for its customers. It also
provides design and engineering services in the early stages of product
development thereby assuring mechanical and electrical considerations are
integrated with a total system. Alternatively, the customer may provide
specifications and Techdyne will assist in the design and
<PAGE> 6
engineering, or just manufacture to a customer's specifications. Contract
manufacturing products also include rack assemblies for data processing
and video editing and custom disk drive enclosures for OEMs.
By contracting assembly production, OEMs are able to keep pace with
continuous and complex technological changes and improvements by making
rapid modifications in their products without costly retooling and without
any extensive capital investments for new or altered equipment.
Medical Products
Lancets are produced for the Company for its medical supplies distri-
bution. Lancets produced by Techdyne are vertical insert molded disposable
products distributed under the trade names Medi-Lance(tm), Lady Lite(tm)
and Medi-Let or under a private label if requested by the customer.
Reworking and Refurbishing
Customers provide Techdyne with materials and sub-assemblies
acquired from other sources which the customer has determined requires
modified design or engineering changes. Techdyne redesigns, reworks,
refurbishes and repairs these materials and sub-assemblies.
Manufacturing
Components and products are custom designed and developed to fit
specific customer requirements and specifications. Techdyne attempts to
develop a "partnership" relationship with many of its customers by
providing a responsive, flexible, total manufacturing service. Such
service includes computer integrated manufacturing and engineering
services, quick-turnaround manufacturing and prototype development,
materials procurement, inventory management, developing manufacturing
processes for that particular customer and its needs, tooling and test
sequences for new products from product designs received from its
customers or developed by Techdyne based upon customer requirements.
Techdyne's industrial, electrical and mechanical engineers work in close
liaison with its customers' engineering departments from inception through
design, prototypes, production and packaging.
Techdyne maintains a large assortment of standard tooling and modern
state-of-the-art equipment at all of its facilities. Techdyne operates
simultaneous production and assembly lines for its diverse mix of
electrical and electro-mechanical products.
In addition to assembly operations, Techdyne has become more
involved in contract manufacturing of moderate to high volume turnkey
assemblies and sub-assemblies, including injection molded and electronic
assembly products. Finished turnkey assemblies include the entire
finished product and the entire manufacturing process from design and
engineering to purchasing raw materials, manufacturing and assembly of
the component parts, testing, packaging and delivery of the product to
the customer. By contracting assembly production, OEMs are able to keep
pace with continuous and complex technological changes and improvements
by making rapid modifications to their products without costly retooling
and without any extensive capital investments for new or altered equipment.
The PCB assembly operations are geared toward advanced SMT. Lytton
provides Techdyne with increased PCB production through state-of-the-art
manufacturing equipment and processes and a highly trained and experienced
engineering and manufacturing workforce that compliments Techdyne's opera-
tions. The manufacturing of PCBs involves several steps including the
attachment of various electronic components, such as integrated circuits,
capacitors, microprocessors and resistors.
<PAGE> 7
The Company offers a wide range of custom manufactured cables and
harnesses for molded and mechanical applications using advanced manufac-
turing processes, in-line inspection and testing to focus on process
efficiencies and quality. The cable and harness assembly process is
accomplished with automated and semi-automated preparation and insertion
equipment and manual assembly techniques.
Techdyne (Scotland)'s manufacturing facility, located in Livingston,
Scotland, focuses mainly on the electronics industry producing primarily
wire harnesses, electro-mechanical assemblies, and molded cables, incor-
porating multifaceted design and production capabilities.
Techdyne also has "supplier partnerships" to meet customers' needs.
This involves Techdyne accomplishing the in-house manufacturing require-
ments of the customer. Through EDI the customer conveys its needs on a
weekly basis based on a rolling quarterly forecast.
Suppliers and Materials Management
Materials used in Techdyne's operations consist of metals, electronic
components such as cable, wire, resistors, capacitors, diodes, PCBs, and
plastic resins. These materials are readily available from a large number
of suppliers and manufacturers. Techdyne has not experienced any signifi-
cant disruptions from shortages in materials or delivery delays of its
suppliers and believes that its present sources and the availability of
its required materials are adequate. Techdyne has a computerized system
of material requirements planning, purchasing, sales and marketing
functions. Techdyne is updating and making its materials acquisition
processes more efficient by installing new Visual Manufacturing software
in 1998/1999.
Techdyne uses just-in-time inventory management technologies and
manages its material pipelines and vendor base to allow its customers to
increase or decrease volume requirements within established frameworks.
Operational improvements implemented several years ago have improved
the overall efficiency of manufacturing, particularly in the area of
inventory management, including purchasing, which is geared more closely
to current needs resulting in reduced obsolescence problems.
Quality and Process Control
Techdyne has an ISO 9002 quality assurance designation for its
Hialeah, Florida, Houston and Austin, Texas and Dayton, Ohio facilities,
which is the international standard of quality with respect to all quality
systems of operations, including, among others, purchasing, design,
engineering, processes, manufacturing, sales, inventory control and
quality. Techdyne (Scotland) also holds a similar quality assurance
designation.
Quality control is essential to Techdyne's operations since low-cost
and high quality production are primary competitive standards and are
vital to the services of Techdyne. See "Competition" below. Products,
components, assemblies and sub-assemblies manufactured by Techdyne are
thoroughly inspected visually and electronically to assure components are
to strict specifications and are functional and safe. Management believes
it is one of the manufacturers of choice for the major Fortune 500
companies, certain of which continue to be customers based upon Techdyne's
excellent record of quality production.
<PAGE> 8
Strict process controls are also standard operating procedure.
Process controls deal with the controls relating to the entire manufac-
turing process. Techdyne strives for a CPK of two, i.e., twice as
critical as customer tolerances.
During the course of initial qualification and production cycles,
new and existing customers inspect Techdyne and its operations. Techdyne's
product and manufacturing quality receive excellent ratings.
Customers
Techdyne serves a wide range of businesses from emerging growth
companies to multinational OEMs involved in a variety of markets including
computer networking systems, computer workstations, telecommunications,
mass data storage systems, instrumentation and food preparation equipment
industries. The Company seeks to serve a sufficiently large number of
customers to avoid dependence on any one customer or industry. Neverthe-
less, historically a substantial percentage of the Company's net sales
have been to multiple locations of a small number of customers, the loss
of any of which would adversely affect the Company. To that extent, the
Company is dependent upon the continued growth, viability and financial
stability of its customers, which are in turn substantially dependent on
the growth of the personal computer, computer peripherals, communications,
instrumentation, data processing and food preparation equipment industries.
These industries have been characterized by rapid technological change,
short product life cycles, pricing and margin pressures. In addition,
many of the Company's customers in these industries are affected by
general economic conditions. In addition, the Company generates signifi-
cant accounts receivable in connection with providing manufacturing
services to its customers. If one or more of the Company's major
customers were to become insolvent or otherwise were unable to pay for
the manufacturing services provided by the Company, the Company's operating
results and financial condition would be adversely affected. In 1997, 63%
of Techdyne's sales, including IBM (19%), EMC and related suppliers (10%),
Compaq (9%), Motorola (9%), Telxon (8%) and PMI Food Equipment Group (8%)
were made to numerous locations of six major customers. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Techdyne sells to approximately an additional 100 other companies,
which comprise the remaining 37% of its sales. Lytton, which was acquired
in July, 1997 and focuses primarily in PCBs, had approximately 53% of its
sales for the last three fiscal years to PMI Food Equipment Group.
Techdyne (Scotland) had a substantial portion of its 1997 sales, approxi-
mately 42%, to Compaq. During 1997 and 1996, bidding for Compaq orders
became more competitive due to Far Eastern competitors which resulted in
substantially reduced sales to that customer with lower profit margins on
remaining sales. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Marketing and Sales
Techdyne continues to pursue expansion and diversification of its
customer base and it is targeting emerging OEMs in high growth industry
segments. Principal sources of new business are the expansion in the
volume and scope of services provided to existing customers, referrals
from customers and suppliers, direct sales through its sales managers
and executive staff, and through its independent sales representatives.
Domestic sales are generated by six regional sales managers covering
different regions of the country. There are also 11 in-house
sales/marketing personnel, including the President of Techdyne. The
regional sales managers have six independent manufacturer representative
agencies. Sales are also generated through catalogues, brochures and
trade shows. The manufacturer sales representatives,
<PAGE> 9
primarily marketing electronic and similar high technology-products, are
retained under exclusive sales representative agreements for specific
territories and are paid on a commission basis.
Techdyne (Scotland) has four in-house sales personnel who market its
products and services to customers in Scotland, England, Ireland, Germany
and the Middle East.
Substantially all of Techdyne's sales and reorders are effected
through competitive bidding. Most sales are accomplished through purchase
orders with specific quantity, price and delivery terms. Some production,
such as its supplier partnerships are accomplished under open purchase
orders with components released against customer requests. See "Manufac-
turing and Supplies" above.
Backlog
At December 31, 1997, Techdyne's backlog of orders amounted to
approximately $14,029,000, of which approximately $2,054,000 (approxi-
mately 15%) was represented by the orders for Techdyne (Scotland) and
approximately $7,408,000 (approximately 53%) was represented by orders
for Lytton. Last year the backlog was approximately $7,300,000 of which
approximately $1,320,000 was represented by orders for Techdyne (Scotland).
Management believes, based on past experience and relationships with its
customers and knowledge of its manufacturing capabilities, that substan-
tially all of its backlog orders are firm and will be filled within six
months. The purchase orders within which Techdyne performs do not provide
for cancellation. Over the last several years cancellations have been
minimal. However, variations in the size and delivery schedules of
purchase orders received by Techdyne may result in substantial fluctua-
tions in backlog from period to period. Since orders and commitments may
be rescheduled or cancelled, and customers' lead times may vary, backlog
does not necessarily reflect the timing or amount of future sales.
Dialysis Operations
The Company, through DCA and its subsidiaries, currently operates
three outpatient dialysis treatment centers in Pennsylvania with a
capacity of 31 licensed stations. Through these centers and other DCA
subsidiaries, the Company provides inpatient dialysis services to several
hospitals where the dialysis facilities are located. The outpatient
dialysis centers are located in Carlisle, Lemoyne and Wellsboro, Pennsyl-
vania. Home patient dialysis services are also provided by DCA, which
includes dialysis training for patients at home, primarily peritoneal
dialysis, either continuous ambulatory peritoneal dialysis ("CAPD") or
continuous cycling peritoneal dialysis ("CCPD"), as well as Method 2
homepatient treatment which involves providing equipment and supplies,
training, patient monitoring and follow-up assistance to patients who
are able and prefer to be treated at home.
In October, 1997, DCA sold its Florida dialysis operations which
included the assets of Dialysis Services of Florida, Inc. - Fort Walton
Beach ("DSF"), the assets of Dialysis Medical, Inc. ("DMI") which related
solely to the Florida Method 2 patient treatments, and an acute inpatient
dialysis services agreement with a Florida hospital operated by DCA Medical
Services, Inc. ("DCAMS"). DSF and DMI are now inactive, 20% of which
subsidiaries was owned by a former medical director whose shares have
been redeemed. DCAMS is wholly owned and continues to operate the home-
care operations in Pennsylvania.
DCA has commenced construction of a Manahawkin, New Jersey dialysis
facility licensed for 12 stations, and will soon commence construction of
another dialysis facility in Toms River, New Jersey and one in Chambers-
burg, Pennsylvania. Other new dialysis facilities are anticipated,
presently through construction and development of new dialysis centers
as opposed to acquisition.
<PAGE> 10
DCA's Business Strategy
DCA, having 21 years experience in successfully developing and
operating dialysis treatment facilities, is intent upon using its
expertise to expand its dialysis operations, including provision of
ancillary services to patients. First in the Company's objectives is
top quality patient care. Management intends to continue to establish
alliances with hospitals and to initiate dialysis service arrangements
with nursing homes and managed care organizations, and to continue to
emphasize its high quality patient care and its smaller size which allows
it to focus on each patient's individual needs while remaining sensitive
to the physicians' professional concerns.
DCA is actively negotiating with physicians to establish new out-
patient dialysis facilities. Other than the current development of the
two facilities in New Jersey, there are no other firm agreements for the
acquisition or construction of additional dialysis facilities, no firm
contracts for acute inpatient dialysis services, and no assurance can be
given that any such acquisition or development will be completed.
DCA believes that it has existing adequate space within its facilities
to accommodate greater patient volume and will work to achieve such
increase, to lower its fixed costs, and operate at a greater efficiency
level.
One of the primary elements in acquiring or developing facilities is
locating an area with an existing substantial patient base under the
guidance of a local nephrologist, since the facility is primarily going
to serve such patients. Other considerations in evaluating a proposed
acquisition or development of a dialysis facility are the availability
and cost of qualified and skilled personnel, particularly nursing and
technical staff, the size and condition of the facility and its equipment,
the atmosphere for the patients, the area's demographics and population
growth estimates, whether a certificate of need is required, and the
existence of competitive factors such as hospital or proprietary non-
hospital owned and existing outpatient dialysis facilities within
reasonable proximity of the proposed center.
An acquisition, which usually costs more than construction and
development of a new facility, can be accomplished quickly. To construct
and develop a new facility ready for operations may take an average of
four to six months and 12 months or longer to generate income, all of
which are subject to location, size and competitive elements. To construct
a 10 station facility may cost in a range of $600,000 to $750,000 depending
on location, size and related services to be provided.
Acquisition of existing facilities may range from $40,000 to $70,000
per patient. Therefore, a facility for 30 patients could cost from
$1,200,000 to $2,100,000 subject to location, competition, nature of
facility and negotiation. To date, no acquisitions have been made and
should such acquisition opportunities arise, there is no assurance that
DCA would have available or be able to raise the necessary financing.
Management is also seeking to increase acute dialysis care contracts
with hospitals for inpatient dialysis services. These contracts are sought
with hospitals in areas serviced by its facilities, and are negotiated and
are not fixed by government regulation as is the case with Medicare
reimbursement fees for ESRD patient treatment. Hospitals are willing to
enter into such inpatient care arrangements for cost efficiencies and to
eliminate the administrative burdens of providing dialysis services to
their patients.
<PAGE> 11
ESRD Treatment Options
Individuals with end stage renal disease ("ESRD"), which results
from chemical imbalance and buildup of toxic chemicals, is a state of
kidney disease characterized by advanced, irreversible renal impairment,
which requires dialysis treatments or kidney transplantation to sustain
life.
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 CAPD
or CCPD, usually performed at the patient's home; and/or (3) kidney
transplant. 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 blood-stream. This is accomplished with the dialysis machine,
a complex blood filtering device which takes the place of certain functions
of the kidney and which machine also controls external blood flow and
monitors the toxic and fluid removal process. 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 instruc-
tions. Home hemodialysis treatment requires the patient to be medically
suitable and have a qualified assistant.
Operations of Dialysis Facilities
DCA's dialysis facilities are designed specifically for outpatient
hemodialysis and generally contain, in addition to space for dialysis
treatments, a nurses' station, a patient weigh-in area, a supply room,
water treatment space used to purify the water used in hemodialysis
treatments, a dialyzer reprocessing room, staff work area, offices and a
staff lounge and kitchen. DCA's facilities also have a designated area
for training patients in home dialysis. Each facility offers amenities
for the patients, such as a color television with headsets for each
dialysis station, and other amenities to ensure the patients are com-
fortable and relaxed.
In accordance with participation requirements under the Medicare ESRD
program, each facility retains a Medical Director qualified and experienced
in the practice of nephrology and the administration of a renal dialysis
facility. See "Physician Relationships" below. Each facility also has a
nurse administrator who supervises the daily operations and the staff,
which consists of registered nurses, licensed practical nurses, patient
care technicians, a part-time social worker and a part-time registered
dietitian, who all supervise each aspect of the patients' treatments.
See "Employees" below.
Inpatient Dialysis Services
DCA presently provides inpatient dialysis services to three hospitals
in Pennsylvania. These services are under contracts with the hospitals
wherein the dialysis facility provides the equipment, supplies and
personnel to perform the dialysis treatments as required by the hospital.
These hospital agreements specify per treatment fees individually
negotiated with the hospital. 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 facilities provide certain ancillary services to ESRD
patients, including the administration of erythropoietin ("EPO") upon a
physician's prescription. EPO is a bio-engineered protein which stimulates
the production of red blood cells and is used in connection with all forms
of
<PAGE> 12
dialysis to treat anemia, a medical complication frequently experienced
by ESRD patients. EPO decreases the necessity for blood transfusions in
ESRD patients. Other ancillary services may include bone densitometry
studies to test the degree of bone deterioration; electrocardiograms;
nerve conduction studies to test the degree of deterioration of nerves;
doppler flow testing to test the effectiveness of the patient's vascular
access for dialysis; and blood transfusions. See "Medicare Reimbursement"
below.
Physician Relationships
An integral element to the success of a facility is its association
with area nephrologists. A dialysis patient generally seeks treatment
at a facility near the patient's home and where such patient's nephrologist
has established practice privileges. Consequently, DCA relies on its
ability to attract and satisfy the needs of referring nephrologists to
gain new patients and to provide quality dialysis care through these
referring physicians.
The conditions of a facility's participation in the Medicare ESRD
program mandate that treatment at a dialysis facility be under the
general supervision of a medical director who is a physician. DCA
retains by written agreement qualified physicians or groups of qualified
physicians to serve as medical directors for each of its facilities.
Generally, the medical directors are board eligible or board certified
in internal medicine by a professional board specializing in nephrology
and have had at least 12 months of experience or training in the care of
dialysis patients at ESRD facilities. DCA's medical directors are
typically a significant source of referrals to the particular center
served.
Patient Revenues
Substantially all 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
the Health Care Financing Administration ("HCFA") of the Department of
Health and Human Services ("HHS"). The balance of the outpatient charges
are paid by private payors including the patient's medical insurance,
private funds or state Medicaid plans. Pennsylvania, presently the state
in which the Company operates, provides Medicaid or comparable benefits to
qualified recipients to supplement their Medicare coverage. Medicaid
payments to DCA have not been significant.
Under the ESRD Program, payments for dialysis services are determined
pursuant to Part B of the Medicare Act which presently pays approximately
80% of the allowable charges for each dialysis treatment furnished to
patients. The maximum payments vary based on location of the center.
See "Medicare Reimbursement" below. The remaining 20% may be paid by
Medicaid if the patient is eligible, from private insurance funds or the
patient's personal funds. Medicare and Medicaid programs are subject to
regulatory changes, statutory limitations and governmental funding re-
strictions, which may adversely affect DCA's and the Company's revenues
and dialysis services payments. See "Medicare Reimbursement" below.
The inpatient dialysis services are paid for by the hospital pursuant
to contractual pre-determined fees. Inpatient treatments accounted for
approximately 12% and 16% of DCA's revenues for the years ended December
31, 1996 and 1997, respectively.
<PAGE> 13
Medicare Reimbursement
DCA is reimbursed primarily from third party payors including
Medicaid, commercial insurance companies, and substantially by Medicare
under a prospective reimbursement system for chronic dialysis services.
Under this system, the reimbursement rates are fixed in advance and have
been adjusted from time to time by Congress. This form of reimbursement
limits the allowable charge per treatment. An established composite rate
set by HCFA 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. HCFA
eliminated routine Medicare coverage for nerve conduction studies,
electrocardiograms, chest x-rays and bone mineral density measurements,
and will only pay for such tests when there is documentation of medical
necessity. The Medicare composite rate is subject to regional differences.
Certain other services and items are eligible for separate reim-
bursement under Medicare and are not part of the composite rate, including
certain drugs (including EPO, the allowable rate currently $10 per 1000
units), blood (for amounts in excess of three units per patient per year),
and certain physician-ordered tests provided to dialysis patients. These
ancillary services are not significant segments of income to the Company.
The Company receives reimbursement for outpatient dialysis services
provided to Medicare-eligible patients at rates that are currently between
$117 and $123 per treatment, depending upon regional wage variations. The
Medicare composite rate for outpatient dialysis services currently averages
$126 per treatment for freestanding facilities. The Medicare reimbursement
rate is subject to change by legislation.
Since 1989, the dialysis operations consisted of one center in Fort
Walton Beach, Florida until 1995 when DCA established two additional
outpatient dialysis facilities, one in Lemoyne, Pennsylvania which
commenced operations in June, 1995 and the other in Wellsboro, Pennsyl-
vania which commenced operations in October, 1995. In July, 1997 a new
dialysis facility in Carlisle, Pennsylvania became operational, and in
October, 1997 DCA sold its Florida dialysis operations. The treatment
statistics for the five years ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Outpatients at year end 96 129 108 60 72
Outpatient treatments 15,300(1)(2) 18,364(1)(2) 10,903(1)(2) 9,500 9,800
Acute inpatient treatments 1,800 1,387 843 419 748
</TABLE>
- ----------
(1) Includes outpatient and homecare treatments of DSF and DMI, substan-
tially all of the assets of which companies were sold on October 31,
1997, as well as the acute care inpatient treatments of the Florida
operations conducted by DCAMS. See "Dialysis Operations" above and Item
7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) Includes 4,400, 4,548 and 3,060 home patient treatment equivalents for
1997, 1996 and 1995, respectively, which patients are billed for
dialysis treatment supplies rather than per treatment and is converted
into a per treatment basis pursuant to a formula developed by Medicare.
<PAGE> 14
Since DCA sold four of its dialysis centers in 1989, it has incurred
operational losses. Although DCA has reflected income over the years, this
was due to interest income, including interest on funds received through
advances to the Company. In December, 1995 a new DCA subsidiary, Renal
Services of Pa., Inc. was established to implement DCA's growth strategy
to obtain new inpatient dialysis services at hospitals and to assist in
establishing or acquiring outpatient dialysis centers. A new dialysis
center in Carlisle, PA was developed and became operational in the third
quarter of 1997 and construction has begun for a new dialysis facility in
Manahawkin, New Jersey, with plans to initiate another new outpatient
facility in Toms River, New Jersey and Chambersburg, Pennsylvania. In
October, 1997 DCA sold its Florida operations for $5,065,000 of which
$4,585,000 was in cash and the balance in the purchaser's common stock.
DCA plans to use these proceeds for further expansion.
Regulation
Techdyne
Techdyne's operations are subject to certain federal, state and
local regulatory requirements relating to environmental waste management
and health and safety matters. Management believes that Techdyne complies
with applicable regulations pertaining to health and safety in the workplace
and the use, storage, discharge and disposal of chemicals used in its manu-
facturing processes. Techdyne periodically generates and temporarily
handles limited amounts of materials that are considered hazardous waste
under applicable law. The current costs of compliance are not material.
Nevertheless, no assurances can be given that additional or modified
requirements will not be imposed in the future, and if so imposed, will
not involve substantial additional expenditures. These regulations
provide for civil and criminal fines, injunctions and other sanctions
and, in certain instances, allow third parties to sue to enforce compliance.
DCA
The dialysis operations must adhere to stringent regulations of
federal and state authorities. Each dialysis center is subject to provider
inspections by state agencies. DCA must comply with rules and regulations
established by HCFA regarding charges, procedures and policies. Each of
the dialysis facilities must be certified by HCFA. DCA's operations are
subject to the terms of the Social Security Act and similar state laws
which prohibit the payment of patient referral fees for treatments that
are otherwise paid in whole or in part by Medicare, Medicaid or a similar
state program, generally known as the "Anti-kickback Statute." As required
by Medicare regulation, each of DCA's dialysis centers is supervised by a
medical director, a licensed nephrologist or otherwise qualified physician.
The medical directors are in private practice and are one of the most
important sources of the dialysis center's business, since it is primarily
the physician's patients that utilize the services of the dialysis facility.
Certain of DCA's medical directors join with DCA in forming the subsidiary
to operate the new dialysis facility with which they will be affiliated and
receive a minority interest in that subsidiary. Such interest does not
fall within the "safe harbor" of the Anti-kickback Statute. Although DCA
endeavors in good faith to comply with all governmental regulations and
this arrangement has not been challenged, there can be no assurance that
DCA will not be required to change its practices or experience a material
adverse effect as a result of any such potential challenge.
The Omnibus Budget Reconciliation Act of 1993 contains the Physician
Ownership and Referral Act known as "Stark II" which, in tandem with the
Anti-kickback Statute, also restricts physician referrals for certain
"designated health services" to entities with which a physician or an
immediate family member has a "financial relationship." Designated health
services include, among others, outpatient prescription
<PAGE> 15
drugs, durable medical equipment and inpatient and outpatient hospital
services. As indicated, DCA in some instances provides certain of its
physician directors of its dialysis centers with a financial interest in
that facility. Financial relationships under Stark II include an ownership
interest or a compensation arrangement between the physician and the entity,
subject to several exceptions including personal service arrangements and
relationships with group practices meeting specific conditions. Although
management believes it meets certain of the enumerated exceptions, recent
rules promulgated by HCFA appear to indicate that dialysis operations as
provided by DCA are not deemed designated health services, since Congress
did not intend to include dialysis services and items provided incident to
dialysis operations to be within the Stark II prohibitions. The President
and Congress are in the process of attempting to reform the healthcare
system. It is possible that federal and state governments will impose
additional restrictions upon activities of the type conducted by DCA, which
might have a materially adverse effect on the Company's business and
results of operations.
DCA must comply with certain other rules and regulations of HCFA,
which agency sets the reimbursement rates for dialysis treatments and
other medical services. See "Business - Dialysis Operations - Medicare
Reimbursement" above. Although none of DCA's business arrangements has
been the subject of investigation by any governmental authority, no
assurance can be given that legislative developments will not require
restructuring business arrangements or that such will comply or be subject
to governmental review.
In August, 1996, President Clinton signed the "Health Insurance
Portability and Accountability Act of 1996," a package of health insurance
reforms which include a variety of provisions important to health care
providers, such as significant changes to the Medicare and Medicaid fraud
and abuse laws, some of which were self-executing provisions effective
January 1, 1997, while other provisions were implemented by regulations
which became effective July 1, 1997. These regulations substantially
increased the government's power to curb Medicare fraud through investi-
gation, and criminal and civil penalties.
DCA's dialysis centers are subject to hazardous waste laws and
non-hazardous medical waste regulation. Most of the waste is non-
hazardous waste, which is disposed of by medical waste sanitation
agencies which 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,
including providing employees subject to exposure with hepatitis B vaccina-
tion, protective equipment, written exposure control plan and training in
infection control and waste disposal.
The Company's record of compliance with federal, state and local
governmental laws and regulations has been excellent.
Any loss by DCA of its various federal certifications, its authori-
zation to participate in 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 is derived or a change resulting from
health care reform reducing dialysis reimbursement or reducing or elim-
inating coverage for dialysis services would have a material adverse
effect on DCA's business.
Patents and Trade Names
The Company sells certain of its medical supplies and products under
the trade name Medicore(tm). Certain of its lancets are marketed under
the trade names Medi-Lance(tm) and Lady Lite(tm).
<PAGE> 16
The Company is the assignee of three patents relating to its lancets.
The issuance of a patent does not assure protection against the development
of similar, if not superior processes, know-how and products. The Company
does not rely on patents or trademarks in its electro-manufacturing opera-
tions and manufacturing of medical products. Dependency is placed more on
design, engineering, manufacturing cost containment, quality and marketing
skills to establish or maintain market position.
Competition
The medical supply operations are extremely competitive and the
Company is not a significant competitive factor in this area.
In electro-mechanical manufacturing, Techdyne faces competition from
many areas including divisions of large electronic and high-technology
firms as well as from numerous smaller, specialized companies. Competitive
price advantages may also be available to competitors with less expensive
off-shore operations. Management believes the primary competitive factors
to be price, quality of production, prompt customer service, timely
delivery, engineering expertise and technical assistance to customers.
Among this mix of competitive standards, management believes it is very
competitive with respect to delivery time, quality, cost and customer
service. Management also believes its competitive position is enhanced
through Techdyne (Scotland)'s European manufacturing and marketing
operations. See "Business - Electro-Mechanical Manufacturing" above.
Due to the number and variety of competitors, reliable data relative to
Techdyne's competitive position in the electronic components and assembly
industry is difficult to develop and is not known.
The operation of kidney dialysis centers is very competitive with
numerous local providers, many owned by physicians, and several major
operators, some of which are public companies, which have substantially
greater financial resources and many more centers and patients than the
Company. This provides these larger facilities with a significant
advantage in competing for acquisitions of dialysis facilities and the
ability to attract and retain qualified nephrologists, who are normally a
substantial source of patients for the dialysis enter and who are respon-
sible for the supervision and operation of the centers. Hospitals and
other outpatient dialysis centers compete with the Company's dialysis
operations. Competitive factors that are most significant in dialysis
treatments are the quality of care and service, convenience of location
and pleasantness of environment. Peritoneal dialysis, a more convenient
and less expensive dialysis procedure, presents an additional competitive
aspect to hemodialysis treatment. The Company is not a significant
competitive factor in kidney dialysis services primarily based upon its
limited number of centers and size.
Employees
The Company and its subsidiaries employ approximately 524 full time
employees of which 14 are administrative, 37 are with the dialysis opera-
tions, 7 are engaged in the medical supply operations, and 470 are with
Techdyne's electro-mechanical manufacturing operations (domestic and
Scotland). In addition, Techdyne utilizes approximately 131 temporary
workers, retained through local agencies, on a regular basis.
Item 2. Properties
The Company leases 2,800 square feet for its executive offices in
Hialeah, Florida, and at a different location in Hialeah, Florida, leases
5,000 square feet for its medical supply operations, each lease
<PAGE> 17
through December 31, 2002. It also leases 3,900 square feet of space for
other executive offices in Hasbrouck Heights, New Jersey through March 31,
2001.
DCA acquired two properties in 1987, one in Easton, Maryland
consisting of land and a one and one-half story frame building of
approximately 8,000 square feet, of which 5,400 square feet is leased
to the purchaser of one of the dialysis centers DCA sold in 1989 and a
competitor of DCA. The lease expires March 31, 1998 with a five year
renewal option. That tenant also leases an additional 2,040 square feet
at this facility on a month-to-month basis. The second property consists
of land and a 15,230 square foot brick building in Lemoyne, Pennsylvania.
DCA constructed a 3,400 square foot center at this facility, approved for
13 dialysis stations, with space available for expansion. DCA leases this
facility to its subsidiary. DCA maintains its executive offices at this
facility which accounts for approximately 2,500 square feet of space.
See "Certain Relationships and Related Transactions" of the Company's
Proxy Statement relating to the Annual Meeting of Shareholders to be held
on June 10, 1998, which is incorporated herein by reference.
The properties are subject to mortgages from a Maryland banking
institution. As of December 31, 1997, the remaining principal amount of
the mortgages aggregated approximately $430,000. Each mortgage extends
through November, 2003, bears interest at 1% over the prime rate, and is
secured by the real property and DCA's personal property at those
locations. The bank also has a lien on rents due to DCA and security
deposits from leases of the properties. Written approval of the bank is
required for all leases, assignments or subletting, alterations and
improvements and sales of the properties. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
As lessor, DCA also leases approximately 2,200 square feet at its
Lemoyne, Pennsylvania property to two other unrelated parties for their
own business activities unrelated to dialysis services or to the Company.
The leases expire between March, 1998 and February, 1999.
The dialysis facility in Wellsboro, Pennsylvania consists of
approximately 3,500 square feet, with 12 dialysis stations and is leased
for five years through September 27, 2000. The Carlisle, Pennsylvania
dialysis facility, approximately 4,340 square feet of space accommodating
12 dialysis stations which became operational in July, 1997, is leased by
the Company's subsidiary, DSPC under a five year lease through June 30,
2002. DSNJ signed a five year lease for its new dialysis facility in
Manahawkin, New Jersey for approximately 5,000 square feet designed for
12 dialysis stations. Construction of this facility is underway.
The Lemoyne and Wellsboro facilities, both of which initiated
operations in 1995, are currently operating at approximately 68% and 77%
capacity, respectively, and Carlisle has operated at 55% capacity since
opening in July, 1997. The existing dialysis facilities could accommodate
greater patient volume, particularly if they increase hours and/or days of
operation without adding additional dialysis stations or any additional
capital expenditures.
The dialysis stations are equipped with modern dialysis equipment
under a November, 1996 master-lease/purchase agreement ("1996 Master
Lease") with a $1.00 purchase option at the end of the term. Information
regarding the general character of these dialysis facilities is provided
in Item 1, "Business - DCA Operations." DCA maintains additional executive
offices with its Parent at 2337 West 76th Street, Hialeah, Florida 33016.
Techdyne's domestic operations are headquartered in Hialeah, Florida
which consists of 28,000 square feet of space for its executive offices,
manufacturing facilities and warehousing, leased from the Company under
five year leases expiring March 31, 2000. These facilities are located
in two adjacent
<PAGE> 18
buildings acquired by the Company from Techdyne in 1990 which also
included the purchase of a parcel of land adjacent to these buildings
used for parking. See "Certain Relationships and Related Transactions"
of the Company's Proxy Statement relating to the Annual Meeting of Share-
holders to be held on June 10, 1998 incorporated herein by reference. The
Company owns a small parcel of land near Techdyne's offices in Hialeah,
Florida, also used as a parking lot, and a small, undeveloped parcel
adjacent to Techdyne's warehouse available for future expansion.
In 1997, Techdyne significantly increased its manufacturing facilities
by executing a lease through March, 2002 for 5,500 square feet of manu-
facturing and office space in Massachusetts, primarily for manufacture of
wire harnesses and to a lesser extent PCBs. Techdyne tripled its manu-
facturing space in Austin, Texas to 18,225 square feet under a lease to
April, 2002 (a minimal portion has been sublet on a month-to-month basis)
and expanded its manufacturing facility in Houston, Texas for 15,000 square
feet, including a warehouse, also leased until April, 2002. Each lease has
one five year renewal.
In July, 1997, Techdyne acquired Lytton and with that acquisition
leased a 77,800 square foot manufacturing and office facility under a lease
to July 31, 2002 with two renewals of five years each. The landlord, a
limited liability company, is owned by the President of Lytton and his
wife, the latter having sold Lytton to Techdyne. See "Certain Relation-
ships and Related Transactions." Techdyne has a right of first refusal
and an option to purchase these premises. This lease is guaranteed by
the Company.
Techdyne (Scotland) owns an approximately 31,000 square foot facility
in Livingston, Scotland subject to a 15-year mortgage due July, 2009 which
has a U.S. dollar equivalency of approximately $569,000 at December 31,
1997. See Item 1, "Business - Techdyne Operations" and Item 7, "Manage-
ment's Discussion and Analysis of Financial Condition and Results of
Operations."
Techdyne maintains state-of-the-art manufacturing, quality control,
testing and packaging equipment at all of its facilities. The Company
believes that its equipment and facilities are adequate for its current
operations.
Item 3. Legal Proceedings
The Company is not involved in or subject to any claims or litigation
of a material nature or that any adverse outcome would have a material
adverse effect on the Company's financial condition. See Note 7 to "Notes
to Consolidated Financial Statements."
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the Company's
fiscal year to a vote of security holders through the solicitation of
proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
(a) The Company's Common Stock traded on the American Stock Exchange
until June 3, 1996 when its Common Stock commenced trading on the Nasdaq
National Market under the symbol "MDKI." The table below reflects for the
periods indicated the high and low closing sales prices for the Company's
Common Stock as reported by the Nasdaq National Market.
<PAGE> 19
Sale Price
----------
High Low
---- ---
1996
- ----
1st Quarter 9 3/8 4
2nd Quarter 6 5/8 3 3/4
3rd Quarter 5 3/8 3 1/4
4th Quarter 5 3/4 2 3/8
1997
- ----
1st Quarter 5 2 5/8
2nd Quarter 4 1/2 2
3rd Quarter 3 3/8 2 1/8
4th Quarter 3 1 7/8
(b) As of March 5, 1998, there were 1,340 shareholders of record.
The Company estimates, based upon its 1997 proxy solicitation, that its
Common Stock is beneficially held by approximately 3,200 shareholders.
(c) The Company has not paid any cash dividends in the last two years.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction
with the consolidated financial statements, related notes and other
financial information included herein.
Consolidated Statements of Operations Data
(in thousands except per share amounts)
Years Ended December 31
---------------------------------------------------
1997(1) 1996(2) 1995 1994 1993
------- ------- ---- ---- ----
Revenues $44,119 $34,719 $36,660 $24,552 $18,958
Net income 2,241 2,417 2,251 864 18
Income per
common share:
Basic $.39 $.44 $.41 $.17 $--
Diluted $.36 $.39 $.37 $.16 $--
Consolidated Balance Sheet Data
(in thousands)
December 31
---------------------------------------------------
1997(1) 1996(2) 1995 1994 1993
------- ------- ---- ---- ----
Working capital $18,857 $13,844 $ 7,034 $ 4,871 $ 2,497
Total assets 40,862 27,085 21,247 15,955 11,322
Long-term debt 5,240 1,677 964 1,667 918
Stockholders'
equity(3) 16,077 13,021 9,754 8,027 5,881
(Notes on next page)
- ----------
<PAGE> 20
(1) Reflects (i) five months operations of Lytton, and its assets,
liabilities and stockholders' equity, which company was acquired by
Techdyne on July 31, 1997; and (ii) the sale of the Florida dialysis
operations on October 31, 1997 for $5,065,000 of which consideration
$4,585,000 was cash with the balance consisting of 13,873 shares of
common stock of the purchaser. See Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
Note 12 to "Notes to Consolidated Financial Statements."
(2) In 1996, the Company recorded estimated costs of $305,000 for shutdown
of its durable medical equipment operations.
(3) In 1993, the Company changed its method of accounting for income taxes
and implemented, on a retroactive basis, Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes." Prior
year amounts have been restated for the $188,000 retroactive effect
of adopting Statement No. 109.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Information
The statements contained in this Annual Report on Form 10-K that
are not historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of the 1934. The Private Securities Litigation Reform Act of
1995 (the "Reform Act") contains certain safe harbors regarding forward-
looking statements. Certain of the forward-looking statements include
management's expectations, intuitions and beliefs with respect to the
growth of the Company, the nature of the electronics industry in which
its 63% owned public subsidiary, Techdyne, is engaged as a manufacturer,
the character and development of the dialysis industry in which its 66%
owned public subsidiary, DCA, is engaged, the Company's business strategies
and plans for future operations, its needs for capital expenditures,
capital resources, liquidity and operating results, and similar matters
that are not historical facts. Such forward-looking statements are subject
to substantial risks and uncertainties that could cause actual results to
materially differ from those expressed in the statements, including general
economic and business conditions, opportunities pursued by the Company,
competition, changes in federal and state laws or regulations affecting
the Company, and other factors discussed periodically in the Company's
filings. Many of the foregoing factors are beyond the control of the
Company. 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 Company's Registration Statement, 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 as filed with the
Commission, Form SB-2 (effective September 13, 1995) and Forms S-3
(effective November 11, 1996 and November 4, 1997, respectively), and
DCA's Registration Statement, Form SB-2, as filed with the Commission
(effective on April 17, 1996). Accordingly, readers are cautioned not to
place undue reliance on such forward-looking statements which speak only
as of the date made and which the Company undertakes no obligation to
revise to reflect events after the date made.
Techdyne's electronic and electro-mechanical manufacturing operations
continue to depend upon a relatively small number of customers for a
significant percentage of its net revenue. Significant reductions in
sales to any of Techdyne's large customers would have a material adverse
effect on Techdyne's and the Company's results of operations. In the
past, certain of Techdyne's customers have either terminated their
manufacturing arrangement with or significantly reduced or delayed the
volume of manufacturing services
<PAGE> 21
ordered. The Company's and Techdyne's results also depend to a substan-
tial extent on the success of Techdyne's OEM customers in marketing their
products.
The industry segments of Techdyne's customers, manufacturing in the
telecommunications, data processing, instrumentation and food preparation
equipment industries, and the electronics industry as a whole, are subject
to rapid technological change and product obsolescence. Discontinuance or
modification of products containing components manufactured by Techdyne
could adversely affect the Company's and Techdyne's results of operations.
The electronics industry is also subject to economic cycles and has in the
past experienced, and is likely in the future to experience, recessionary
periods, which could have a material adverse effect on the Company's and
Techdyne's business, financial condition and results of operations.
Due to Techdyne's utilization of just-in-time inventory techniques, the
timely availability of many components to Techdyne is dependent on
Techdyne's ability to continuously develop accurate forecasts of customer
volume requirements. Component shortages could result in manufacturing and
shipping delays or increased component prices which could have a material
adverse effect on Techdyne's and the Company's results of operations. It
is important for Techdyne, and there are significant risks involved, to
efficiently manage inventory, proper timing of expenditures and allocations
of physical and personnel resources in anticipation of future sales, the
evaluation of economic conditions in the electronics industry and the mix
of products, whether PCBs, wire harnesses, cables, or turnkey products, for
manufacture.
Operating results can also be influenced by development and intro-
duction of new products by Techdyne's customers. The market for the
Company's manufacturing services is characterized by rapidly changing
technology. To continue to grow and be a successful competitor, the
Company must be able to maintain and enhance its technological capabil-
ities, develop and market manufacturing services which meet changing
customer needs and successfully anticipate or respond to technological
changes in manufacturing processes on a cost-effective and timely basis.
Although management believes that Techdyne's operations utilize the
assembly and testing technologies and equipment currently required by
Techdyne's customers, there can be no assurance that Techdyne's process
development efforts will be successful or that the emergence of new
technologies, industry standards or customer requirements will not render
its technology, equipment or processes obsolete or uncompetitive. In
addition, new assembly and testing technologies and equipment required
to remain competitive are likely to require significant capital investment.
Techdyne has been expanding its geographic and customer base and
management intends to continue to expand within the United States by
continuing to establish new manufacturing facilities and operations in
areas to better serve existing customers and to attract new OEMs, as well
as direct acquisition of contract manufacturing businesses complimentary
to Techdyne's operations. The Company will be competing with much larger
electronic manufacturing entities for such expansion opportunities.
Further, any such transactions may result in potentially dilutive issuance
of equity securities, the incurrence of debt and amortization expenses
related to goodwill and other intangible assets, and other costs and
expenses, all of which could materially adversely affect the Company's
and Techdyne's financial results. Such transactions also involve
numerous business risks, including difficulties in successfully
integrating acquired operations, technologies and products or formalizing
anticipated synergies, and the diversion of management's attention from
other business concerns. In the event that any such transaction does
occur, there can be no assurance as to the beneficial effect on Techdyne
and the Company's business and financial results.
Techdyne's, and in turn, the Company's results of operations are
also affected by other factors, including price competition, the level
and timing of customer orders, fluctuations in material costs, the over-
head efficiencies achieved in managing the costs of its operations,
experience in manufacturing a
<PAGE> 22
particular product, the timing of expenditures in anticipation of
increased orders, and selling, general and administrative expenses.
Accordingly, gross margins and operating income margins have gen-
erally improved during periods of high volume and high capacity
utilization. Techdyne generally has idle capacity and reduced
operating margins during periods of lower-volume production.
Quality control is also essential to Techdyne's operations, since
customers 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 and the Company's revenues and profitability. See Item 1, "Business -
Electro - Mechanical Manufacturing - Quality and Process Control."
With respect to the Company's dialysis operations engaged in through
DCA, essential to the Company's profitability is Medicare reimbursement
which is at a fixed rate determined by HCFA. The level of DCA's, and
therefore, the Company's revenues and profitability may be adversely
affected by potential legislation resulting in rate cuts. Additionally,
operating costs tend to increase over the years without any comparable
increases, if any, in the prescribed dialysis treatment rates, which
usually remain fixed and have decreased over the years. There also may
be reductions in commercial third-party reimbursement rates.
The dialysis industry is subject to stringent and extensive regula-
tions of federal and state authorities. There are a variety of anti-
kickback regulations, extensive prohibitions relating to self-referrals,
violations of which are punishable by criminal or civil penalties,
including exclusion from Medicare and other governmental programs.
Although the Company has never been challenged under these regulations
and believes it complies in all material respects with such laws and
regulations, there can be no assurance that there will not be unantici-
pated changes in healthcare programs or laws or that DCA will not be
required to change its practice or experience material adverse effects
as a result of any such challenges or changes.
DCA's future growth depends primarily on the availability of suitable
dialysis centers for acquisition or development in appropriate and
acceptable areas, and DCA's ability to develop these new potential
dialysis centers at costs within its budget while competing with larger
companies, some of which are public companies or divisions of public
companies with greater personnel and financial resources who have a
significant advantage in acquiring and/or developing facilities in areas
targeted by the Company. DCA opened its center in Carlisle, Pennsylvania
in July, 1997 and its fourth center in Manahawkin, New Jersey is presently
under construction. 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 and for nursing and technical staff at reasonable rates. There
is no certainty as to when any new centers or inpatient service contracts
with hospitals will be implemented, or the number of stations, or patient
treatments such may involve, or if such will ultimately be profitable.
Newly established dialysis centers, although contributing to increased
revenues, also adversely affect results of operations due to start-up
costs and expenses with a smaller developing patient base.
"Year 2000" Impact
The year 2000 computer information processing challenge associated
with the upcoming millennium change, with which all companies, public and
private, are faced to ensure continued proper operations and reporting of
financial condition, has been assessed by management of the Company and
its subsidiaries and is being addressed.
<PAGE> 23
The singular area impacting DCA is in its electronic billing and
maintenance of receivables. Management has evaluated its computer systems
and discussed the year 2000 issue with its computer software provider with
respect to its billing and maintenance of receivables. The software
provider is proceeding to deal with modifying the software used by DCA
to alleviate any interruptions in electronic billing and to have the new
software system available during fiscal 1998. The Company believes the
conversion of DCA's internal software program will be completed in a
timely manner. The Company does not presently have an estimate of the
cost of the new software modifications, but does not anticipate any
significant expenses to be incurred. As more information is made
available to the Company as to the costs to obtain a modified software
program for DCA, it will provide that disclosure.
In 1997 Techdyne commenced upgrading its operations software program
by acquiring a new Visual Manufacturing software package. It has been and
will be integrating this new software system into all of its facilities
except Lytton and Techdyne (Scotland). The software program is also
anticipated to be installed into Lytton's and Techdyne (Scotland)'s
operations sometime in early 1999, most likely with more sophisticated
modifications based upon the Company's experience with and internal
technological advances to the system. It is anticipated that the Visual
Manufacturing software will be fully integrated by 1999. This system is
anticipated to resolve the "year 2000" issue for Techdyne because the
software is already year 2000 compliant.
In addition to addressing each subsidiaries' own internal software
systems, the Company is communicating with its payors, suppliers, customers
and other key third parties with whom it deals to determine the extent of
their year 2000 problem and what actions they are taking to assess and
address that issue. To the extent such third parties are materially
adversely affected by the year 2000 issue and if it is not timely
corrected, the Company's relationship with such parties and its operations
could be adversely affected. No assurance can be given that the modifica-
tions of the Company's software systems or those of its key suppliers and
payors will be successful and that any such year 2000 compliance failures
will not have a material adverse effect on the Company's business or
results of operations.
Results of Operations
1997 Compared to 1996
Consolidated revenues increased by approximately $9,400,000 (27%) in
1997 compared to the previous year. Sales revenues increased by $9,208,000
(31%) compared to the preceding year. 1997 revenues included a $4,431,000
gain on the sale of certain assets of DCA's subsidiaries with 1996 having
included a $1,521,000 gain on securities offering of DCA, and a gain of
$2,584,000 on the sale of marketable securities attributable to the sale
of Viragen (a former subsidiary of the Company) common stock for which
the carrying value had been written-off in previous periods. See Note 2
to "Notes to Consolidated Financial Statements." Other income decreased by
$273,000 for 1997 compared to the previous year which included $140,000
from a litigation settlement and $228,000 on the Viragen note recovery.
Techdyne sales increased approximately $8,903,000 (37%) for the year
ended December 31, 1997 compared to the preceding year. The increase was
attributable principally to the inclusion of sales by Lytton totaling
$7,170,000 since August 1, 1997. There was an increase in domestic sales
of $12,184,000 (87%) that was offset by a decrease in European sales of
$3,281,000 (33%) compared to the same period of the preceding year. The
decrease in European-based sales was largely attributable to a decrease
of approximately $5,580,000 in sales to Compaq which was partially offset
by sales to new and existing customers.
<PAGE> 24
Approximately 63% of Techdyne's consolidated sales and 54% of the
Company's consolidated sales for 1997 were made to six customers.
Customers generating in excess of 10% of Techdyne's consolidated sales
with their respective portions of Techdyne's and the Company's consoli-
dated sales include IBM which accounted for 19% and 17% and EMC and its
related suppliers for 10% and 8%, respectively. Approximately $2,727,000
(38%) of Lytton's sales since its acquisition by Techdyne on July 31, 1997
were to its major customer. Significant reductions in sales to any of
Techdyne's major customers would have a material effect on the Company's
results of operation if such sales are not replaced.
Revenues of Techdyne's Scottish-based subsidiary Techdyne (Scotland)
continue to be highly dependent on sales to Compaq, which accounted for
approximately 42% and 84% of the sales of Techdyne (Scotland) for 1997
and 1996, respectively. The bidding for Compaq orders has become more
competitive which has resulted in substantially reduced Compaq sales and
lower profit margins on remaining Compaq sales. Techdyne (Scotland) is
pursuing new business development and has offset some of the lost Compaq
business with sales to other customers and is also continuing cost
reduction efforts to remain competitive on Compaq business. However,
there can be no assurance as to the success of such efforts.
Medical product sales revenues decreased by approximately $304,000
(18%) for 1997 compared to the previous year. The decrease reflected lost
revenues from All American Medical & Supply Corp. ("All American"), the
Company's home healthcare durable subsidiary which discontinued operations
in March, 1997.
Medical services revenues, represented by the revenues of the
Company's dialysis division, DCA, increased by $544,000 (14%) for 1997
compared to the preceding year. This growth was largely attributable to
increased revenues of approximately $533,000 at the Lemoyne, Pennsylvania
facility, which commenced operations in June 1995 and $329,000 from a new
dialysis center located in Carlisle, Pennsylvania, which commenced opera-
tions in July 1997. These additional revenues were offset by approximately
$312,000 of lost revenues from the sale of the Company's Florida dialysis
operations on October 31, 1997. Although the operations of the new Carlisle
center have resulted in additional revenues, during its developmental, this
center will adversely affect the Company's results of operations.
Cost of goods sold as a percentage of consolidated sales remained
relatively stable, increasing to 83% for the year ended December 31, 1997
compared to 82% for the preceding year.
Cost of goods sold for Techdyne as a percentage of sales remained
relatively stable, escalating to 87% for the year ended December 31, 1997
compared to 86% for the preceding year.
Cost of goods sold by the medical products division decreased to 63%
for 1997 compared to 68% for the preceding year, which reflects relatively
low margins in 1996 for the Company's medical durable subsidiary, All
American in the preceding year. The Company decided to shutdown the medical
durable subsidiary during the first quarter of 1997 due to its unprofitable
operations.
<PAGE> 25
Selling, general and administrative expenses increased $404,000 for
1997 compared to the preceding year. This increase reflected the selling,
general and administrative expenses of Lytton commencing August 1, 1997
($730,000) after Lytton was acquired by Techdyne on July 31, 1997, as
well as substantially increased operations of Techdyne's Round Rock,
Texas and Massachusetts facilities. The increase also reflected DCA's
opening of a new Pennsylvania dialysis center in Carlisle and its
expansion of the facility in Lemoyne, Pennsylvania, which was offset by
the decline in costs resulting from DCA's sale of its Florida dialysis
operations on October 31, 1997 and the shutdown of All American
($652,000 including shutdown costs of approximately $305,000). Included
in 1997 was stock compensation expense that occurred during the fourth
quarter of 1997 in the amount of $322,000 in conjunction with forgive-
ness of notes from option exercises of DCA common stock compared to a
similar expense of $344,000 in the preceding year.
Interest expense increased by approximately $175,000 for 1997
compared to the preceding year. This increase included interest of
$100,000 associated with Techdyne's financing of the Lytton acquisition
and interest from Lytton's financing and debt agreements of $71,000.
A substantial portion of the Company's outstanding borrowings are
tied to the prime interest rate. The prime rate was 8.50% at December 31,
1997 and 8.25% at December 31, 1996.
For fiscal 1998, the Company will adopt the provisions of Financial
Accounting Standards Board Statements No. 130, "Reporting Comprehensive
Income" and No. 131, "Disclosure About Segments of an Enterprise and
Related Information," which it is anticipated will not have a material
effect on its consolidated financial statements or significantly change
its segment reporting disclosures. See Note 1 to "Notes to Consolidated
Financial Statements."
1996 Compared to 1995
Consolidated revenues decreased approximately $1,941,000 (5%) in 1996
compared to the previous year. Sales revenues decreased $4,460,000 (13%)
in 1996 compared to the preceding year. 1996 revenues included a
$1,521,000 gain on a securities offering of DCA, the Company's dialysis
subsidiary, with 1995 revenues including a $2,002,000 gain on a securities
offering of Techdyne, the Company's electronic and electro-mechanical
subsidiary. See Note 8 to "Notes to Consolidated Financial Statements."
Gain on sale of marketable securities represents a gain attributable to
the sale of Viragen common stock for which the carrying value had been
written-off in previous periods (see Note 2 to "Notes to Consolidated
Financial Statements") with the 1996 gain amounting to $2,584,000 compared
to $183,000 for the preceding year. Other income increased approximately
$600,000, including a $228,000 gain on the Viragen note recovery (see Note
2 to "Notes to Consolidated Financial Statements"); $140,000 from a litiga-
tion settlement (see Note 7 to "Notes to Consolidated Financial Statements");
and an increase in interest income of $254,000 resulting from interest on
Scotland funds invested which were previously tied up in receivables and
inventory prior to the cutback in Compaq business in the third quarter of
1996 and interest on funds invested resulting from the Techdyne and DCA
public offerings.
Techdyne sales decreased $6,237,000 (21%) in 1996 compared to the
preceding year. Domestic sales of Techdyne decreased $4,019,000 (22%) and
European-based sales decreased $2,218,000 (18%) in 1996 compared to the
preceding year. The decrease in domestic sales compared to the preceding
year was largely attributable to a decrease in sales of $5,337,000 to Avid
Technology which was offset to some degree by a net increase in sales to
other customers. The decrease in European-based sales was largely
attributable to a decrease of $2,160,000 in sales to Compaq by Techdyne
(Scotland).
<PAGE> 26
Approximately 73% of Techdyne have consolidated sales and 60% of the
Company's consolidated sales for 1996 were made to four customers.
Customers generating in excess of 10% of Techdyne's consolidated sales
with their respective portions of Techdyne's and the Company's consolidated
sales included Compaq which accounted for 35% and 29%, IBM for 18% and 14%
and EMC and its related suppliers for 12% and 9%, respectively. The loss
of, or substantially reduced sales to any of these customers would have an
adverse effect on the Company's operations if such sales are not replaced.
The Company is pursuing new business development efforts to replace lost
sales, although there can be no assurance as to the success of such efforts.
Revenues of Techdyne's Scottish-based subsidiary Techdyne (Scotland),
continue to be highly dependent on sales to Compaq, which accounted for
approximately 84% and 86% of the sales of Techdyne (Scotland) for 1996 and
1995, respectively. The bidding for Compaq orders in Scotland has become
more competitive, which resulted in substantially reduced Compaq sales and
lower profit margins on remaining Compaq sales. Techdyne (Scotland) is
pursuing new business development efforts to replace significant reductions
in Compaq business and is pursuing cost reduction efforts to remain com-
petitive with respect to Compaq, although there can be no assurance as to
the success of such efforts.
Medical product sales revenues increased $310,000 (15%) for 1996
compared to the preceding year. This increase included sales of approxi-
mately $297,000 attributable to All American Medical & Surgical Supply
Corp., the Company's home healthcare durable subsidiary which commenced
operations in January, 1996.
Medical services sales revenues, which represents revenues of DCA,
the Company's dialysis division, increased $1,526,000 (66%) for 1996
compared to the preceding year. This increase was largely attributable
to increased revenues of approximately $1,292,000 (243%) compared to the
preceding year for the Company's new dialysis centers which commenced
operations in Lemoyne, Pennsylvania in June, 1995 and Wellsboro, Pennsyl-
vania in October, 1995. Although the new Lemoyne and Wellsboro, Pennsyl-
vania centers have resulted in increased revenues, during their develop-
mental stage, these centers will adversely affect the Company's results
of operations.
Cost of goods sold as a percentage of consolidated sales amounted
to 82% of sales for 1996 and the preceding year.
Cost of goods sold for Techdyne remained relatively stable,
increasing to 86% compared to 85% for the preceding year.
Cost of goods sold for the medical products division increased to 68%
for 1996 compared to 61% for the preceding year, which reflects reduced
margins on the principal product of the medical supply division and
relatively low margins for the Company's medical durable subsidiary,
All American Medical & Surgical Supply Corp. which the Company decided
to shutdown due to unprofitable operations.
Cost of medical services sales decreased to 65% for 1996 compared to
69% for the preceding year, largely as a result of a decrease in healthcare
salaries as a percentage of sales due to the increased sales revenues
generated by the Company's new Pennsylvania facilities.
Selling, general and administrative expenses increased $1,463,000 for
1996 compared to the preceding year. This increase included the Company's
two new Pennsylvania dialysis centers and the Company's new subsidiary,
All American Medical & Surgical Supply Corp. which commenced
<PAGE> 27
operations in January, 1996. The Company has recorded approximately
$305,000 in shutdown costs for All American. Also included was stock
compensation expense during the second quarter of 1996 of approximately
$344,000 for forgiveness of notes from option exercises and accrued
interest.
Interest expense decreased by approximately $29,000 in 1996 compared
to the preceding year as a result of changes in both average outstanding
borrowings and average interest rates associated with those borrowings.
The Company recorded a domestic tax credit of approximately $700,000
in the fourth quarter of 1997 largely from adjustment of its valuation
allowance which offset taxes of approximately $1,700,000 of DCA which re-
sulted from the sale of its Florida dialysis operations.
The bulk of the Company's outstanding borrowings are related to real
property and tied to the prime interest rate. The prime rate was 8.25% at
December 31, 1996 and 8.5% at December 31, 1995, respectively.
Liquidity and Capital Resources
Working capital totaled $18,857,000 at December 31, 1997, which
reflected an increase of $5,013,000 (36%) during 1997. This increase
includes working capital of Lytton that totaled $1,874,000 at December 31,
1997, a deferred tax asset of $1,295,000 including valuation allowance
adjustments and an increase in income taxes payable of approximately
$1,000,000 largely due to the sale of DCA's Florida dialysis operations
and changes in other components of working capital resulting from
increased sales levels.
Included in the changes in components of working capital was an
increase of $304,000 in cash and cash equivalents, which included net cash
used in operating activities of $3,024,000, net cash provided by investing
activities of $363,000 including proceeds from sale of subsidiaries'
assets ($4,584,000), net cash expended in the Lytton acquisition
($2,166,000) and additions to property plant and equipment ($2,135,000),
and net cash provided by financing activities of $3,084,000 (including
net proceeds from exercise of stock options and warrants ($696,000),
borrowings to fund the Lytton acquisition ($2,500,000), Lytton line of
credit borrowings ($549,000), payment on long-term debt ($430,000) and
repurchase of the Company's and a subsidiary's common stock ($223,000).
In February 1996, Techdyne refinanced its loan agreement with a
Florida bank. The refinancing provided for 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 Techyne's acquisition of Lytton
July 31, 1997, this line of credit was modified and increased to $2,500,000
with the interest rate reduced to prime plus .75% and various other modifi-
cations. The line was fully drawn down in connection with this acquisition
and $2,500,000 remained outstanding at the same interest rate of 9.25%
until the line was refinanced in December 1997.
The $2,500,000 line of credit was replaced effective December 29,
1997 with a five-year $1,500,000 ("notional amount under interest rate swap
agreement") commercial term loan with monthly principal payments of $25,000
plus interest at 8.60% and a $1,600,000 commercial revolving line of credit
with interest at prime of which $1,000,000 was outstanding at December 31,
1997. The commercial term loan matures December 15, 2002 and the commercial
line of credit, no longer a demand line, matures May 1, 2000. Techdyne
entered the swap agreement to obtain an acceptable fixed interest rate and
has no intent of prepaying the related debt. Accordingly, Techdyne does not
consider that it has
<PAGE> 28
any risk of significant loss under the agreement although early termina-
tion of the swap agreement could either result in a gain or loss based
on the movement in interest rates in relation to the Company's fixed
rate. See Note 2 to "Notes to Consolidated Financial Statements".
The Company had obtained two other term loans from its Florida bank.
One is a $712,500 term loan, which had a remaining principal balance of
$663,000 at December 31, 1997 and $691,000 at December 31, 1996, is secured
by two buildings and land owned by the Parent. The second term loan for
$200,000, which had a remaining principal balance of $127,000 at December
31, 1997 and $167,000 at December 31, 1996 is secured by Techdyne's
tangible personal property, goods and equipment. The Parent has guaranteed
these loans and subordinated the intercompany indebtedness due from
Techdyne, provided that Techdyne may make payments to the Parent 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 granted
waivers as of December 31, 1996 and extending through December 31, 1997.
See Note 2 to "Notes to Consolidated Financial Statements."
Techdyne has outstanding borrowings of $145,000 from a local bank
with interest payable monthly with the note, which was renewed during
1997, maturing April 2000. Techdyne (Scotland) has a line of credit with
a Scottish bank, with an U.S. dollar equivalency of approximately $330,000
at December 31, 1997 and $342,000 at December 31, 1996 that is secured by
assets of Techdyne (Scotland) and guaranteed by the Company. This line of
credit operates as an overdraft facility. No amounts were outstanding
under this line of credit as of December 31, 1997 or December 31, 1996.
In July, 1994 Techdyne (Scotland) purchased the facility housing its
operations for approximately $730,000, obtaining a 15-year mortgage which
had a U.S. dollar equivalency of approximately $569,000 and $622,000 at
December 31, 1997 and December 31, 1996, respectively, based on exchange
rates in effect at each of these dates.
On July 31, 1997, Techdyne acquired Lytton, which is engaged in the
manufacture and assembly of PCBs and other electronic products for
commercial customers. This acquisition required $2,500,000 cash 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 common stock on the date of acquisi-
tion. Techdyne has guaranteed $2,000,000 minimum proceeds ($2,400,000 if
certain earnings objectives are met over a specified twelve month period)
to the seller with respect to these shares. The Stock Purchase Agreement
also provides for incentive consideration to be paid in cash based on
specific sales levels of Lytton for each of three successive specified
years. Based upon the closing price of Techdyne's common stock on December
31, 1997, the shares issued in the Lytton acquisition had a fair value of
$1,313,000 which could result in additional consideration of approximately
$687,000 payable in either in cash or in approximately 157,000 shares of
Techdyne's stock based upon the closing stock price of $4.375. If the
earnings objective is met, an additional $400,000 would be payable in cash
or approximately 91,000 shares of common stock based on the December 31,
1997 closing stock price. The Lytton acquisition has expanded Techdyne's
customer base, broadened its product line, enhanced its manufacturing
capabilities and provided a new geographic area to better serve Techdyne's
existing customer base with opportunities to attract new customers.
In 1996, DCA was in default of certain covenants relating to mortgages
with a combined balance of $504,000 at December 31, 1996. The covenants
principally related to net worth and debt service ratio
<PAGE> 29
requirements for which the lender has waived compliance through
December 31, 1997. DCA is in compliance with these covenants at Decem-
ber 31, 1997.
The bank has liens on the real and personal property of DCA, including
a lien on all rents due and security deposits from the rental of these
properties. The loans contained a provision allowing the bank mandatory
repayment upon 90 days written notice after five years which has resulted
in the unpaid principal balances being reflected as a current liability.
The loans were modified effective December 1, 1997 and the call provision
was removed thereby eliminating the necessity of carrying the entire debt
balance as current. The unaffiliated Maryland dialysis center continues
to lease space from DCA in its Maryland building. The Pennsylvania center
relocated in 1995 to its own new facility at DCA's Pennsylvania building,
commencing treatments in June of that year.
DCA has an equipment purchase agreement for kidney dialysis machines
for its dialysis facilities which had a remaining principal balance of
$285,000 and $272,000 at December 31, 1997 and December 31, 1996, respec-
tively, which included additional financing of $190,000 during 1997 as
well as a decrease of $112,000 resulting from the purchaser of the Florida
operations assuming the equipment financing obligations related to those
operations.
During the third quarter of 1997, options to purchase 400,000 shares
of the Company's common stock, originally granted in September 1994, were
exercised at $1.25 per share by a consultant to the Company and its
affiliate, providing proceeds of $500,000 to the Company.
During 1997, the Company sold 10,000 shares of Viragen stock realizing
a gain and cash proceeds of $49,000. The carrying value of these securities
was previously written off. Under the provisions of FASB Statement No.
115, the remaining shares at December 31, 1997 have been recorded at an
estimated fair value of $283,000 with the unrealized gain, net of income
tax effect, credited to a separate component of stockholder's equity.
There is a convertible note issued by Techdyne, convertible at $1.75
per share for intercompany indebtedness due to the Company, which amounted
to approximately $2,292,000 including accrued interest at December 31,
1997, including $875,000 of the note that was converted into 500,000
shares of Techdyne common stock in November 1997. In connection with
Techdyne's 1995 public offering, during 1997 the Company recognized a
gain on warrant exercises of approximately $90,000 with applicable income
taxes of $34,000 which resulted in a net gain of approximately $56,000.
Techdyne is seeking to expand its operations possibly through suitable
acquisitions of companies in similar businesses. No assurance can be given
that its present funding, including the proceeds from its securities
offering would be sufficient to finance such acquisitions or that suffi-
cient outside financing from banking institutions would be available to
fund such expansion.
Techdyne has established a new manufacturing facility in Milford,
Massachusetts with the facility having an initial five-year lease term and
occupancy commencing in April 1997. 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 has increased its manufacturing capacity
at its Houston and Round Rock, 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 the Techdyne's 1995 security offering.
<PAGE> 30
DCA, having operated on a larger scale in the past, 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 securities offering. No assurance can be given that
DCA will be successful in implementing its growth strategy or that the
funds from the public sale of the DCA securities will be adequate to
finance expansion or that sufficient outside financing would be available
to fund expansion.
DCA has entered into agreements with several medical directors, and
intends to establish dialysis centers in New Jersey and in Pennsylvania.
It is anticipated that a New Jersey facility, which is currently under
construction, will be operational in the third quarter of 1998 and lease
negotiations are currently underway for new Pennsylvania and New Jersey
facilities with medical director agreements having been negotiated for
both of those facilities.
In February 1998, DCA redeemed the 20% minority interest in two of
its subsidiaries whose assets were included in the Florida dialysis
operations sale for a total consideration of $625,000, including $385,000
cash and one-half of the securities of the purchaser received on the sale
of DCA's Florida operations valued at $240,000 with the total value of
$480,000 for securities received having been guaranteed by the purchaser.
In November 1997, the Company announced its intent to repurchase up
to $1,000,000 of its outstanding common stock. As of December 31, 1997,
8,200 shares had been repurchased for approximately $17,000.
The bulk of the Company's cash balances are carried in interest-
yielding vehicles at various rates and mature at different intervals
depending on the anticipated cash requirements of the Company.
The Company anticipates that current levels of working capital and
working capital from operations will be adequate to successfully meet
liquidity demands for at least the next twelve months, including the debt
and financing obligations incurred in the acquisition of Lytton.
Inflation
Inflationary factors have not had a significant effect on the
Company's operations. The Company attempts to pass on increased costs
and expenses incurred in the electronic and electro-mechanical products
division 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 reimburse-
ment 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 voluntary increased to keep pace
with increases in nursing and other patient care costs.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section to this
report.
<PAGE> 31
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information on directors of the Company is included under the caption
"Election of Directors" of the Company's Proxy Statement relating to the
Annual Meeting of Shareholders to be held on Wednesday, June 10, 1998,
which is incorporated herein by reference.
The executive officers of the Company are elected each year by the
Board of Directors at its first meeting following the Annual Meeting of
Shareholders to serve during the ensuing year and until their respective
successors are elected and qualified. There are no family relationships
between any of the executive officers and directors of the Company. The
following information indicates the position and age of the executive
officers at March 12, 1998, and their business experience during the
prior five years.
Current Position and Position
Name Age Areas of Responsibility Held Since
- ---- --- ----------------------- ----------
Thomas K. Langbein 52 Chairman of the Board 1980
of Directors, Chief
Executive Officer and
President
Seymour Friend 77 Vice President and 1981
Director 1975
Daniel R. Ouzts 51 Vice President (Finance) 1986
and Controller 1983
Thomas K. Langbein was appointed as Chairman of the Board of Directors,
Chief Executive Officer and President in 1980. Mr. Langbein is an officer
and director of most of the Company's subsidiaries and was appointed
President and Chief Executive Officer of Techdyne in April, 1990. Barry
Pardon succeeded to the Presidency of Techdyne in November, 1991 at which
time Mr. Langbein reassumed the position of Chairman of the Board. He has
been a director of Techdyne since it was acquired by the Company in 1982.
He is also a director of Techdyne's subsidiary, Lytton, and of Techdyne's
foreign subsidiary, Techdyne (Scotland). Mr. Langbein is Chairman of the
Board and Chief Executive Officer of DCA. Mr. Langbein is President, sole
shareholder and director of Todd & Company, Inc. ("Todd") a broker-dealer
registered with the Commission and a member of the National Association of
Securities Dealers, Inc. Mr. Langbein devotes most of his time to the
affairs of the Company, Techdyne and DCA. See "Executive Compensation"
and "Certain Relationships and Related Transactions" of the Company's
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securi-
ties Exchange Act of 1934, the registrant has duly caused this report, as
amended, 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
May 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report, as amended, 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
- ---- ----- ----
Chairman of the Board
/s/ THOMAS K. LANGBEIN of Directors, Chief Executive
- ----------------------- Officer and President May 18, 1998
Thomas K. Langbein
/s/ SEYMOUR FRIEND Vice President and Director May 18, 1998
- -----------------------
Seymour Friend
Vice-President, Principal
/s/ DANIEL R. OUZTS Financial Officer and
- ----------------------- Controller May 18, 1998
Daniel R. Ouzts
/s/ PETER D. FISCHBEIN Director May 18, 1998
- -----------------------
Peter D. Fischbein
/s/ ANTHONY C. D'AMORE Director May 18, 1998
- -----------------------
Anthony C. D'Amore
/s/ ROBERT P. MAGRANN Director May 18, 1998
- -----------------------
Robert P. Magrann
<PAGE> 42
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a) (1) and (2), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1997
MEDICORE, INC.
HIALEAH, FLORIDA
<PAGE>
FORM 10-K--ITEM 14(a)(1) and (2)
MEDICORE, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Medicore, Inc.
and subsidiaries are included in Item 8:
Page
----
Consolidated Balance Sheets--December 31, 1997 and 1996............. F-3
Consolidated Statements of Income--Years ended December 31, 1997,
1996, and 1995................................................... F-4
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1997, 1996 and 1995................................. F-5
Consolidated Statements of Cash Flows--Years ended December 31,
1997, 1996, and 1995............................................. F-6
Notes to Consolidated Financial Statements--December 31, 1997....... F-7
The following financial statement schedule of Medicore, Inc. and
subsidiaries is included in Item 14(d):
Schedule II-Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Medicore, Inc.
We have audited the accompanying consolidated balance sheets of Medicore,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits
also included the Financial Statement Schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and signif-
icant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Medicore, Inc. and subsidiaries at December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in con-
formity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
Ernst & Young LLP
March 25, 1998
Miami, Florida
F-2
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $11,099,418 $10,795,298
Marketable securities 726,538 1,405,579
Accounts receivable, less allowances of
$231,000 in 1997 and $385,000 in 1996 6,298,089 3,711,600
Inventories, less allowance for
obsolescence of $238,000 in 1997
and $169,000 in 1996 8,683,439 3,637,556
Prepaid expenses and other current assets 862,613 589,502
Deferred tax asset 1,294,535 ---
----------- -----------
Total Current Assets 28,964,632 20,139,535
PROPERTY AND EQUIPMENT
Land and improvements 1,017,255 1,024,455
Building and building improvements 3,066,889 2,986,126
Equipment and furniture 9,129,583 6,364,188
Leasehold improvements 715,316 392,607
----------- -----------
13,929,043 10,767,376
Less accumulated depreciation and
amortization 5,024,016 4,728,167
----------- -----------
8,905,027 6,039,209
DEFERRED EXPENSES AND OTHER ASSETS 141,844 204,361
COSTS IN EXCESS OF NET TANGIBLE
ASSETS ACQUIRED, less accumulated
amortization of $438,000 in 1997
and $356,000 in 1996 2,850,016 701,747
----------- -----------
$40,861,519 $27,084,852
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings $ 548,698 $ ---
Accounts payable 4,384,430 2,726,817
Accrued expenses and other
current liabilities 2,342,197 1,412,623
Current portion of long-term debt 1,073,924 832,851
Income taxes payable 1,758,723 788,976
Deferred income taxes --- 534,120
----------- -----------
Total Current Liabilities 10,107,972 6,295,387
LONG-TERM DEBT 5,240,034 1,677,367
DEFERRED INCOME TAXES 2,592,843 2,155,603
MINORITY INTEREST IN SUBSIDIARIES 6,843,412 3,935,037
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
authorized 12,000,000 shares;
5,856,940 issued, 5,848,740 shares
outstanding in 1997; 5,456,940
shares issued and outstanding in 1996 58,569 54,569
Capital in excess of par value 13,040,877 11,493,255
Retained earnings 2,850,517 609,546
Foreign currency translation adjustment (31,128) (7,371)
Unrealized gain on marketable
securities for sale 175,213 871,459
Treasury stock at cost; 8,200
shares at December 31, 1997 (16,790) ---
----------- -----------
Total Stockholders' Equity 16,077,258 13,021,458
----------- -----------
$40,861,519 $27,084,852
=========== ===========
See notes to consolidated financial statements.
F-3
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
REVENUES
Sales $38,888,233 $29,680,520 $34,140,573
Gain on sale of
subsidiaries' assets 4,430,663
Gain on subsidiary securities
offering and warrants
exercise 89,898 1,521,127 2,002,277
Realized gain on sale of
marketable securities 49,493 2,583,500 182,670
Other income 661,195 934,259 334,560
----------- ----------- -----------
44,119,482 34,719,406 36,660,080
COST AND EXPENSES
Cost of goods sold 32,198,701 24,247,403 28,072,444
Selling, general and
administrative expense 6,615,768 6,211,485 4,748,113
Interest expense 393,515 217,615 246,393
----------- ----------- -----------
39,207,984 30,676,503 33,066,950
----------- ----------- -----------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 4,911,498 4,042,903 3,593,130
Income tax provision 953,000 1,350,746 1,295,626
----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST 3,958,498 2,692,157 2,297,504
Minority interest in income
of consolidated subsidiaries 1,717,527 274,888 46,233
----------- ----------- -----------
NET INCOME $ 2,240,971 $ 2,417,269 $ 2,251,271
=========== =========== ===========
Earnings per share:
Basic $.39 $.44 $.41
==== ==== ====
Diluted $.36 $.39 $.37
==== ==== ====
See notes to consolidated financial statements.
F-4
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Capital in Retained Foreign Notes Gain on
Common Excess of Earnings Currency Receivable Treasury Marketable
Stock Par Value (Deficit) Translation Options Stock Securities Total
------ ---------- --------- ----------- ---------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 54,549 $11,540,704 $(4,058,994) $ (227,745) $(326,400) $1,044,918 $8,027,032
Exercise of subsidiary stock
options 249 249
Foreign currency translation
adjustments (9,513) (9,513)
Sale of 172,500 shares of
Viragen (160,425) (160,425)
Net decrease in valuation of
remaining Viragen Shares (354,175) (354,175)
Net income 2,251,271 2,251,271
------- ----------- ---------- --------- ----------- --------- -------- -----------
Balance at December 31, 1995 54,549 11,540,953 (1,807,723) (237,258) (326,400) 530,318 9,754,439
Issuance of 2,000 shares of
common stock as compensation 20 5,540 5,560
Forgiveness of stock option
notes June 1996 326,400 326,400
Exercise of subsidiary stock
options (3,652) (3,652)
Conversion of portion of
Techdyne note (49,586) (49,586)
Foreign currency translation
adjustments 229,887 229,887
Sale of 681,800 shares of
Viragen (380,172) (380,172)
Net increase in valuation of
remaining Viragen shares 721,313 721,313
Net income 2,417,269 2,417,269
------- ----------- ---------- --------- ----------- --------- -------- -----------
Balance December 31, 1996 54,569 11,493,255 609,546 (7,371) 0 0 871,459 13,021,458
Exercise of stock options for
400,000 shares of common stock 4,000 713,000 717,000
Exercise of subsidiary stock
options (66,534) (66,534)
Conversion of portion of
Techdyne note (48,217) (48,217)
Repurchase of stock by
subsidiary (28,155) (28,155)
Subsidiary stock issuance for
acquisition 977,528 977,528
Foreign currency translation
adjustments (23,757) (23,757)
Sale of 10,000 shares of Viragen (32,364) (32,364)
Net decrease in valuation of
remaining Viragen shares (663,882) (663,882)
Repurchase of 8,200 common
shares (16,790) (16,790)
Net income 2,240,971 2,240,971
------- ----------- ---------- --------- ----------- --------- -------- -----------
Balance at December 31, 1997 $58,569 $13,040,877 $2,850,517 $(31,128) $ -0- $(16,790) $175,213 $16,077,258
======= =========== ========== ========= =========== ========= ======== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $2,240,971 $2,417,269 $2,251,271
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Gain of sale of subsidiaries' assets (4,430,663) --- ---
Depreciation 1,019,253 657,640 542,702
Amortization 106,126 79,329 69,980
Bad debt expense (net recovery) 42,276 275,408 136,221
Gain on Viragen note collection --- (227,703) ---
Provision for inventory obsolescence 153,011 91,913 294,860
Stock compensation expense 322,125 5,560 ---
Gain on sale of securities (49,493) (2,583,500) (182,671)
Minority interest 1,717,527 274,888 46,233
Forgiveness of option notes and accrued interest --- 344,871 ---
Deferred income taxes (493,000) 581,266 777,680
Gain on subsidiary stock offering and warrants exercise (89,899) (1,521,127) (2,002,277)
Increase (decrease) relating to operating activities from:
Accounts receivable (1,735,304) (63,409) (474,008)
Inventories (2,615,706) 320,742 (1,276,376)
Prepaid expenses and other current assets (237,547) 160,999 (373,819)
Accounts payable 374,871 (867,608) 1,246,694
Accrued expenses and other current liabilities (101,702) (249,504) 510,124
Income taxes payable 753,219 279,708 210,398
----------- ----------- ----------
Net cash (used in) provided by operating activities (3,023,935) (23,258) 1,777,012
INVESTING ACTIVITIES
Proceeds from sale of subsidiaries' assets 4,583,662 --- ---
Acquisition of subsidiary (2,166,010) --- ---
Additions to property and equipment, net of minor disposals (2,135,213) (797,968) (1,283,597)
Payments received on note receivable from Viragen, Inc. --- 373,948 21,470
Proceeds from sale of securities 49,493 2,583,500 217,717
Deferred expenses and other assets 30,801 98,041 (149,417)
Purchase portion of minority interest in subsidiary --- --- (15,250)
----------- ----------- ----------
Net cash provided by (used in) investing activities 362,733 2,257,521 (1,209,077)
FINANCING ACTIVITIES
Borrowings to finance subsidiary acquisition 2,500,000 --- ---
Short-term line of credit borrowings 548,698 --- ---
Net proceeds from subsidiary stock offering --- 3,445,158 3,320,784
Proceeds from long-term borrowings --- 181,476 ---
Payments on long-term borrowings (430,976) (270,945) (433,673)
Proceeds from exercise of stock options and warrants 695,953 59,700 400
Subsidiary repurchase of stock (206,250) --- ---
Repurchase of stock (16,790) --- ---
Dividend payments to minority shareholders (3,966) (7,467) (28,842)
Deferred financing costs (2,657) (14,438) (11,944)
----------- ----------- ----------
Net cash provided by (used in) financing activities 3,084,012 3,393,484 2,846,725
Effect of exchange rate fluctuations on cash (118,690) 142,085 (20,684)
----------- ----------- ----------
Increase in cash and cash equivalents 304,120 5,769,832 3,393,976
Cash and cash equivalents at beginning of year 10,795,298 5,025,466 1,631,490
----------- ----------- ----------
Cash and cash equivalents at end of year $11,099,418 $10,795,298 $5,025,466
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Techdyne is an international contract manufacturer of
electronic and electro-mechanical products primarily manufactured to customer
specifications in the data processing, telecommunication, instrumentation and
food preparation equipment industries. DCA owns and operates three kidney
dialysis centers located in Pennsylvania and has agreements to provide
inpatient dialysis treatments to various hospitals and provides supplies
and equipment for dialysis home patients. The Company is also engaged in
the manufacture and distribution of medical supplies.
Consolidation: The Consolidated Financial Statements include the
accounts of Medicore, Inc., Medicore's 66.0% owned subsidiary, Dialysis
Corporation of America ("DCA") and Medicore's 62.9% owned subsidiary,
Techdyne, Inc. ("Techdyne") and its subsidiaries Lytton Incorporated
("Lytton"), Techdyne (Scotland) Limited ("Techdyne (Scotland)"), and
Techdyne (Livingston) Limited which is a subsidiary of Techdyne (Scotland),
collectively known as the Company. All material intercompany accounts and
transactions have been eliminated in consolidation.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Sale of Stock By Subsidiaries: The Company follows an accounting policy
of recognizing income on sales of stock by its subsidiaries, which includes
exercise of warrants issued in subsidiary stock offerings.
Marketable Securities: The Company follows Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". Under this Statement, the Company is required to
classify its marketable equity securities as either trading or available-
for-sale. The Company does not purchase securities for the purpose of
short-term sales; accordingly, its securities are classified as available-
for-sale. Marketable securities are recorded at fair value. Unrealized
gains and losses relating to available-for-sale securities are included
as a separate component of shareholders' equity, net of income tax effect,
until realized. Realized gains and losses are computed based on the cost of
securities sold using the specific identification method. Marketable
securities are comprised of the following:
December 31, December 31,
1997 1996
---------- ------------
Viragen, Inc.
(259,268 shares with $1.09 per
share market value at December 31,
1997; 269,268 shares with $5.22 per
share market value at December 31,
1996) $282,602 $1,405,579
Renal Care Group, Inc.
(13,873 shares with $32.00 per
share market value at December 31,
1997) 443,936 ---
-------- ----------
$726,538 $1,405,579
======== ==========
F-7
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Inventories: Inventories are valued at the lower of cost (first-in,
first-out method) or market value. The cost of finished goods and work in
process consists of direct materials, direct labor and an appropriate
portion of fixed and variable manufacturing overhead. Inventories are
comprised of the following:
December 31, December 31,
1997 1996
------------ ------------
Electronic and mechanical components, net:
Finished goods $ 554,903 $ 486,863
Work in process 1,772,724 478,481
Raw materials and supplies 5,997,682 2,083,990
---------- ----------
8,325,309 3,049,334
Medical supplies 358,130 588,222
---------- ----------
$8,683,439 $3,637,556
========== ==========
Property and Equipment: Property and equipment is stated at cost.
Depreciation is computed by the straight-line method over the estimated
useful lives of the assets for financial reporting purposes and by accel-
erated methods for income tax purposes. Effective January 1, 1996, the
Company adopted the provisions of Financial Accounting Standards Board
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of". The adoption of the
provisions of FAS 121 had no material effect on the results of operations,
financial condition or cash flows of the Company. The Company, based on
current circumstances, does not believe any indicators of impairment are
present.
Costs in Excess of Net Tangible Assets Acquired: The costs in excess of
net tangible assets acquired are being amortized over 25 years. If, in the
opinion of management, an impairment in value occurs, based on the undis-
counted cash flow method, any necessary additional writedowns will be
charged to expense.
Deferred Expenses: Deferred expenses, except for deferred loan costs,
are amortized on the straight-line method, over their estimated benefit
period ranging to 60 months. Deferred loan costs are amortized over the
lives of the respective loans.
Income Taxes: Deferred income taxes at the end of each period are
determined by applying enacted tax rates applicable to future periods in
which the taxes are expected to be paid or recovered to differences between
financial accounting and tax basis of assets and liabilities.
The Company filed consolidated federal and state tax returns with
Techdyne until October 2, 1995, the date Techdyne's securities offering
was completed, after which Techdyne files separate income tax returns with
its income tax liability reflected on a separate return basis. DCA was
likewise included in the consolidated tax returns of the Company until
the completion of its public offering in April 1996, after which it files
separate income tax returns with its income tax liability reflected on a
separate return basis. See Note 8.
Stock Based Compensation: The Company follows Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25)
and related Interpretations in accounting for its employee stock options.
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation"(FAS 123) permits a company to elect to follow
the accounting provisions of APB 25 rather than the alternative fair value
accounting provided under FAS 123 but requires pro forma net income
F-8
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
and earnings per share disclosures as well as various other disclosures not
required under APB 25 for companies following APB 25.
Foreign Currency Translation: The financial statements of the foreign
subsidiary have been translated into U.S. dollars in accordance with State-
ment of Financial Accounting Standards No. 52. All balance sheet accounts
have been translated using the current exchange rates at the balance sheet
date. Income statement amounts have been translated using the average
exchange rate for the year. The translation adjustments resulting from the
change in exchange rates from year to year have been reported separately as
a component of stockholders' equity. Foreign currency transaction gains and
losses, which are not material, are included in results of operations.
These gains and losses result from exchange rate changes between the time
transactions are recorded and settled and, for unsettled transactions,
exchange rate changes between the time transactions are recorded and the
balance sheet date.
Other Income: Other income is comprised as follows:
Year Ended December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
Interest income $448,950 $414,207 $160,470
Gain on Viragen note recovery --- 227,703 ---
Litigation settlement --- 139,645 ---
Other 212,245 152,704 174,090
--------- -------- --------
$661,195 $934,259 $334,560
======== ======== ========
Earnings Per Share: In February 1997, the Financial Accounting
Standards Board issued FAS 128, "Earnings Per Share", which was adopted on
December 31, 1997. The Company has adopted FAS 128 which requires it to
change the method previously used to compute earnings per share and to
restate all prior periods. The new requirements for calculating basic
earnings per share exclude the dilutive effect of stock options and
warrants. Earnings per share under the diluted computation required under
FAS 128 includes stock options and warrants using the treasury stock method
using average market price.
Following is a reconciliation of amounts used in the basic and diluted
computations:
Year Ended December 31,
-----------------------------------
1997 1996 1995
---------- ---------- ----------
Net income, numerator basic-
computation $2,240,971 $2,417,269 $2,251,271
Adjustment due to subsidiaries'
dilutive securities (102,697) (61,971) (70,596)
---------- ---------- ----------
Net income as adjusted, numerator-
diluted computation $2,138,274 $2,355,798 $2,180,675
========== ========== ==========
Weighted average shares, denominator-
basic computation 5,733,104 5,456,251 5,454,940
Effect of dilutive stock securities:
Stock options 285,088 552,872 449,027
---------- ---------- ----------
Weighted average shares, as
adjusted, denominator-diluted
computation 6,018,192 6,009,123 5,903,967
========== ========== ==========
Earnings per share:
Basic $.39 $.44 $.41
==== ==== ====
Diluted $.36 $.39 $.37
==== ==== ====
F-9
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Cash and Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. The carrying amounts, reported in the balance sheet for
cash and cash equivalents approximate their fair values. The credit risk
associated with cash and cash equivalents are considered low due to the
high quality of the financial institutions in which these assets are
invested.
Customer Payment Terms: The majority of the Company's sales are made
at payment terms of net amount due in 30-45 days, depending on the customer.
Reclassifications: Certain reclassifications have been made to the
1996 and 1995 financial statements to conform to the 1997 presentation.
Estimated Fair Value of Financial Instruments: The carrying value of
cash, accounts receivable and debt in the accompanying financial statements
approximate their fair value because of the short-term maturity of these
instruments, and in the case of debt because such instruments bear variable
interest rates which approximate market.
New Pronouncements: The Company will adopt the provisions of Financial
Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income" (FAS 130) in 1998 which is required by FAS 130 for fiscal years
beginning after December 15, 1997. FAS 130 requires the presentation of
comprehensive income and its components in the financial statements and
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid in capital in the equity section of
the balance sheet. The Company does not believe that adoption of FAS 130
will have a material effect on its financial statements. The Company will
also adopt the provisions of Financial Accounting Standards Board Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Informa-
tion" (FAS 131) in 1998 which is required by FAS 131 for fiscal years
beginning after December 15, 1997. FAS 131 establishes standards for
reporting information about operating segments in annual financial state-
ments 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 Company does not believe that adoption of FAS 131 will significantly
change its segment reporting disclosures.
NOTE 2--TRANSACTIONS WITH VIRAGEN, INC.
The Company owns approximately 259,000 shares of Viragen (formerly a
majority-owned subsidiary of the Company) common stock as of December 31,
1997. During 1997, 1996 and 1995 the Company sold approximately 10,000
shares, 682,000 shares and 173,000 shares of Viragen stock and recognized
gains of approximately $49,000, $2,584,000 and $183,000, respectively. In
accordance with the Company's accounting policy, these shares are reflected
at fair value, using quoted market prices by the Nasdaq Stock Market, and
the unrealized gain is inclined as a separate component of shareholders'
equity. The closing bid price of Viragen common stock was $1.09 as of
December 31, 1997 and $5.22 as of December 31, 1996. The closing bid price
as of March 19, 1998 was $2.06.
F-10
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 2--TRANSACTIONS WITH VIRAGEN, INC.--Continued
The Company had a second mortgage and related note due from Viragen.
In March, 1996, Viragen prepaid $165,000 on this note and paid off the
remaining principal and accrued interest in August 1996. As a result of
Viragen repaying amounts which had been offset by an allowance for amounts
previously written off as uncollectable, the Company recognized a gain of
approximately $228,000 in 1996.
The Company has a royalty agreement with Viragen, pursuant to which it
is to receive a royalty on Viragen's net sales of interferon and related
products. The agreement provides for aggregate royalty payments of $2.4
million to be paid based on the following percentages of Viragen sales:
5% of the first $7 million, 4% of the next $10 million, and 3% of the next
$55 million. The effective date of the agreement was November 15, 1994,
with royalty payments due quarterly, commencing March 31,1995. In addition,
a payment of approximately $108,000, under a previous royalty agreement, is
due on the final payment under the new agreement.
NOTE 3--LONG-TERM DEBT
On February 8, 1996, Techdyne refinanced its term loan by entering into
three loan agreements with a Florida bank. One credit facility was a
$2,000,000 line of credit due on demand secured by Techdyne's accounts
receivable, inventory, furniture, fixtures and intangible assets and bore
interest at the bank's prime rate plus 1.25%. In conjunction with Techdyne's
acquisition of Lytton on July 31, 1997, the line of credit was modified
and increased to $2,500,000 with the interest rate reduced to prime plus
.75% and various other modifications. The line was fully drawn down in
connection with the Lytton acquisition with $2,500,000 remaining out-
standing, with interest due at 9.25%, until the line was refinanced in
December 1997.
The $2,500,000 line of credit agreement was refinanced and replaced
effective December 29, 1997 with a five year $1,500,000 commercial term
loan and $1,600,000 commercial revolving line of credit. The $1,600,000
line of credit had an outstanding balance of $1,000,000 at December 31,
1997. This line matures May 1, 2000 and has monthly payments of interest
at prime. Both credit facilities are collateralized by the corporate assets
of Techdyne. The new commercial term loan matures December 15, 2002 with
monthly principal payments of $25,000 plus interest. In connection with
the term loan, the Company entered into an interest rate swap agreement
with the bank to manage Techdyne's exposure to interest rates by effec-
tively converting a variable note obligation with an interest rate of
LIBOR plus 2.25% to a fixed rate of 8.60%. Early termination of the swap
agreement, either through prepayment or default on the term loan, may
result in a cost or a benefit to Techdyne. The December 29, 1997 re-
financing represents a noncash financing activity which is a supplemental
disclosure required by Financial Accounting Standards Board Statement No.
95 "Statement of Cash Flows" (FAS 95).
The bank extended two commercial term loans to Techdyne in February
1996, one for $712,500 for five years expiring on February 7, 2001 at an
annual rate of interest equal to 8.28% with a monthly payment of principal
and interest of $6,925 based on a 15-year amortization schedule with the
unpaid principal and accrued interest due on the expiration date. This term
loan had an outstanding balance of approximately $663,000 at December 31,
1997 and $691,000 at December 31, 1996 and is secured by a mortgage on
properties in Hialeah, Florida owned by the Company, two of which prop-
erties are leased to Techdyne and one parcel being vacant land used as a
parking lot. Under this term loan, Techdyne is obligated to adhere to a
variety of affirmative and negative covenants.
F-11
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 3--LONG-TERM DEBT--Continued
The second commercial term loan was for the principal amount of
$200,000 for a period of five years bearing interest at a per annum rate of
1.25% over the bank's prime rate and requiring monthly principal payments
with accrued interest of $3,333 through expiration on February 7, 2001.
This $200,000 term loan which had a balance of approximately $127,000 at
December 31, 1997 and $167,000 at December 31, 1996 is secured by all of
Techdyne's tangible personal property, goods and equipment, and all cash
or noncash proceeds of such collateral.
The February 1996 financing under the term loans provided cash proceeds
to Techdyne of approximately $181,000 and included payment of the balance
due under Techdyne's previous term loan of $517,000 and payment of a mort-
gage of the Company, including accrued interest, on a building leased to
Techdyne of $215,000 which represent noncash financing activities which
is a supplemental disclosure required by FAS 95.
The Company has unconditionally guaranteed the payment and performance
by Techdyne of the revolving loan and the three commercial term loans and
has subordinated Techdyne's intercompany indebtedness to the Company to
the bank's interest. There are cross defaults between the revolving and
term loans exclusive of the $200,000 term loan.
Lytton has a $1,500,000 revolving bank line of credit requiring monthly
interest payments at prime plus 1/2% which matures August 1, 1998. The
interest rate on this loan was 9% as of December 31, 1997. Lytton has a
$1,000,000 installment loan with the same bank maturing August 1, 2002 at an
annual rate of 9% until July 1999, with monthly payments of $16,667 plus
interest, at which time, Lytton will have an option to convert the note to
a variable rate. The balance outstanding on this loan was approximately
$933,000 as of December 31, 1997. Lytton also has a $500,000 equipment
loan agreement with the same bank payable over four years through August 1,
2002
F-12
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 3--LONG-TERM DEBT--Continued
with the same interest rate as the installment loan. There was no outstanding
balance on this loan as of December 31, 1997. All of these bank loans are
secured by the business assets of Lytton.
Long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Term loan secured by real property with a carrying value of
$1,005,000 at December 31, 1997. Monthly payments
of principal and interest as described above. $662,533 $690,894
Term loan secured by tangible personal property, goods and equipment
with a carrying value of $4,223,000 at December 31, 1997. Monthly
payments of principal and interest as described above. 126,764 166,764
Commercial term loan secured by corporate assets of
Techdyne with a carrying value of approximately
$14,449,000 as of December 31, 1997. Monthly
payments of principal and interest as described above. 1,500,000
Three-year revolving line of credit agreement
maturing May 1, 2000. Secured by corporate assets
of Techdyne with a carrying value of approximately
$14,449,000 at December 31, 1997. Monthly
payments of interest as described above. 1,000,000
Mortgage note secured by land and building with a net book value of
$865,000 at December 31, 1997. Quarterly payments of approximately
$20,000 based on exchange rates at December 31, 1997 for 15 years
commencing October, 1994 including interest at 2%
above bank base rate. 569,431 622,214
Promissory note secured by three certificates of deposit.
A single principal payment is due on April 21, 2000
with interest payable monthly at prime. 145,000 145,000
Mortgage note secured by land and building with a net book value of
$436,000 at December 31, 1997. Monthly principals payments of
$3,333 plus interest at 1% over the prime rate through November
2003. The loan is redeemable at the bank's option after November
30, 1993, and is, therefore, reflected as current at December 31,
1996. Loan modified in December 1997 with the call provision
removed. 240,036 280,032
Mortgage note secured by land and building with a net book value of
$742,000 at December 31, 1997. Monthly principal payments of $2,667
plus interest at 1% over the prime rate through November 2003.
The loan is redeemable at the bank's option after November 30,
1993 and is therefore, reflected as current at December 31, 1996.
Loan modified in December 1997 with the call provision removed. 191,963 223,968
Equipment financing agreement secured by DCA equipment with a net
book value of $311,000 at December 31, 1997. Combined monthly
payments pursuant to various schedules of $8,179 as of December
31, 1997 as described below, including principal and interest,
with interest at rates ranging from 8% to 12%. 284,518 271,586
</TABLE>
F-13
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 3--LONG-TERM DEBT--Continued
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
--------- --------
<S> <C> <C>
Mortgage note secured by land with a net book value of $107,000
at December 31, 1996. Monthly principal payments of $1,083
plus interest at 1.50% and 2% as of December 31, 1997 and
1996, respectively, over the prime rate. The entire unpaid
principal balance and accrued interest is due May 1, 2003. 69,295 82,334
Installment loan requiring monthly payments of $16,667 plus
interest at 9%. The loan is secured by all business assets of
Lytton with a carrying value of approximately $7,041,000.
Monthly payments of principal and interest as described above. 933,333
Equipment loan requiring monthly payments of $4,298 including
interest at 5.5% and maturing in April 2002. The loan is secured
by equipment of Lytton with a carrying value of approximately
$614,000 at December 31, 1997. 198,445
Equipment financing obligations requiring combined monthly payments of
$19,647 as of December 31, 1997 as described below, including
interest at rates ranging from 8.55% to 10.09% and secured by the
related assets of Lytton with a carrying value of approximately
$532,000 at December 31, 1997. 390,033
Other 2,607 27,426
---------- ----------
6,313,958 2,510,218
Less current portion 1,073,924 832,851
---------- ----------
$5,240,034 $1,677,367
========== ==========
</TABLE>
The prime rate was 8.50% as of December 31, 1997 and 8.25% as of
December 31, 1996.
The Company re-paid a mortgage in February 1996 through Techdyne's
bank loan refinancing. This represents noncash financing activity which is a
supplemental disclosure required by FAS 95.
The DCA equipment financing agreement provides financing for kidney
dialysis machines for DCA's facilities in Pennsylvania and was amended in
1996 to include equipment for DCA's Florida facility. The initial principal
balance was approximately $195,000. Additional financing totaled approxi-
mately $124,000 in 1996 and $190,000 in 1997. In conjunction with DCA's
sale of its Florida dialysis operations on October 31, 1997, the purchaser
assumed approximately $112,000 of these financing obligations . The balance
outstanding under this agreement amounted to approximately $285,000 at
December 31, 1997 and $272,000 at December 31, 1996. Payments under the
agreement are pursuant to various schedules extending through July 2002.
Financing under the equipment financing agreement is a noncash financing
activity which is a supplemental disclosure required by FAS 95.
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extend through July 1999. The
present value of annual future minimum payments required under these
financing obligations is included in the schedule of long-term debt above.
Financing under these agreements is a noncash financing activity which is a
supplemental disclosure required by FAS 95.
F-14
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 3--LONG-TERM DEBT--Continued
Techdyne (Scotland) has established a line of credit with a Scottish
bank with a U.S. dollar equivalency of approximately $330,000 at December
31, 1997. This line of credit operates as an overdraft facility and is
secured by assets of Techdyne (Scotland) with a carrying value of approxi-
mately $4,992,000 at December 31, 1997, and is guaranteed by Techdyne. No
amounts were outstanding under this line of credit as of December 31, 1997.
Scheduled maturities of long-term debt outstanding at December 31, 1997
are: 1998 - $1,074,000; 1999 - $927,000; 2000 - $1,940,000; 2001- $1,301,000;
2002- $593,000; thereafter - $479,000. Interest payments on all of the above
debt amounted to $355,000, $224,000 and $246,000 in 1997, 1996 and 1995.
The Company's various debt agreements contain certain restrictive
covenants that, among other things, restrict the payment of dividends,
restrict rent commitments, restrict additional indebtedness, prohibit
issuance or redemption of capital stock and require maintenance of
certain financial ratios.
NOTE 4--INCOME TAXES
At December 31, 1996, the Company had net operating loss carryforwards
of approximately five million dollars that expire in years 2003 through 2010.
These net operating loss carryforwards are only available to offset future
Techdyne (US) taxable income which became a 62.5% owned subsidiary pursuant
to its public offering completed on October 2, 1995 and which began filing
separate federal and state income tax returns with its income tax liability
reflected on a separate return basis subsequent to that date. Techdyne's
new subsidiary, Lytton, 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
tax return purposes generated by Lytton. See Note 11.
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,
----------------------
1997 1996
------- -------
Deferred tax liabilities:
Tax over book depreciation $ 408,000 $ 314,000
Gain on sale of Techdyne and DCA stock 2,067,000 2,053,000
Unrealized gain on marketable
securities 106,343 534,120
Other 11,500 1,880
---------- ----------
Total deferred tax liability 2,592,843 2,903,000
Deferred tax assets:
Obsolescence and other reserves 373,000 125,000
Inventory capitalization 113,000 79,000
Accrued expenses and other 227,000 229,000
---------- ----------
Sub-total 713,000 433,000
F-15
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 4--INCOME TAXES--Continued
December 31,
----------------------
1997 1996
------- -------
Net operating loss carryforward 1,432,000 1,368,000
Valuation allowance (850,465) (1,587,723)
---------- ----------
Net deferred tax asset 1,294,535 213,277
---------- ----------
Net deferred tax liability $1,298,308 $2,689,723
========== ==========
Due to the uncertainty as to the realizability of deferred tax assets, a
valuation allowance of $850,465 and $1,587,723 was recorded as of December
31, 1997 and December 31, 1996, respectively.
Deferred taxes in the accompanying balance sheets consist of the following
components:
December 31,
-------------------------
1997 1996
------- -------
Current deferred tax asset $1,294,535 $ 213,277
Long-term deferred tax asset --- ---
Long-term deferred tax liability 2,592,843 2,903,000
---------- ----------
Net long-term deferred tax
liability 2,592,843 2,903,000
---------- ----------
Net deferred tax liability $1,298,308 $2,689,723
========== ==========
A deferred tax liability of $2,067,000 at December 31, 1997 and
$2,053,000 at December 31, 1996, respectively, resulted from income tax
expense recorded on gains recognized for financial reporting purposes, but
not for income tax purposes, resulting in a difference between book and
tax basis of the Company's investment in Techdyne and DCA. This
temporary difference would reverse upon the occurrence of certain events
relating to the divestiture of Techdyne and DCA. This deferred tax
liability has been classified as noncurrent along with the remaining
portion of noncurrent deferred tax liabilities resulting from differences
in book and tax depreciation of Techdyne (Scotland). A current deferred
tax liability has been recorded for the unrealized gain on marketable
securities. See Note 2.
For financial reporting purposes, income before income taxes includes
the following components:
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
United States $5,201,054 $3,260,262 $2,086,741
Foreign (289,556) 782,641 1,506,389
---------- ---------- ----------
$4,911,498 $4,042,903 $3,593,130
========== ========== ==========
Significant components of the provision (benefit) for income taxes are
as follows:
Year Ended December 31,
--------------------------------------------
1997 1996 1995
---------- --------- ---------
Current:
Federal $1,306,000 $ 440,000 $ 24,660
Foreign (96,000) 259,270 493,286
State 236,000 70,000 ---
---------- ---------- ----------
$1,446,000 769,270 517,946
Deferred:
Federal (493,000) 578,000 761,000
Foreign --- 3,476 16,680
---------- ---------- ----------
(493,000) 581,476 777,680
---------- ---------- ----------
$ 953,000 $1,350,746 $1,295,626
========== ========== ==========
F-16
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 4--INCOME TAXES--Continued
The reconciliation of income tax attributable to income before income
taxes and minority interests computed at the U.S. federal statutory rate
(34%) to income tax expense is as follows:
Year Ended December 31,
------------------------------------------
1997 1996 1995
-------- ---------- ----------
Tax at statutory rate $1,669,909 $1,374,587 $1,221,664
Increase (reduction) in
taxes resulting from:
State income taxes-net
of federal income tax
effect 180,770 49,898 ---
Lower effective income
taxes of other countries 13,096 (7,826) (15,064)
Change in valuation
allowance (737,258) (65,913) 89,026
Other (173,517) --- ---
---------- ---------- ----------
$ 953,000 $1,350,746 $1,295,626
========== ========== ==========
Undistributed earnings of the Company's foreign subsidiary amounted to
approximately $2,736,000 at December 31, 1997 and $2,930,000 at December 31,
1996. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. Upon distribution of those earnings in the form of
dividends or otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable because of the complexities
associated with its hypothetical calculation; however, foreign tax credits
may be available to reduce some portion of the U.S. liability. Withholding
taxes of approximately $137,000 and $147,000 would be payable upon remit-
tance of all previously unremitted earnings at December 31, 1997 and
December 31, 1996, respectively.
Income tax payments were approximately $811,000 in 1997, $487,000 in
1996 and $300,000 in 1995.
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as is
discussed below, Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock Based Compensation" (FAS123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of
grant, no compensation expense was recognized.
In September 1994, the Company granted options to a consulting firm to
purchase 400,000 shares of common stock exercisable at $1.25 per share
through September 30, 1997. Options for 200,000 shares were 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 200,000 shares were
exercised in August 1997 and the remaining options for 200,000 shares were
exercised in September 1997.
F-17
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--Continued
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, presented in the
Stockholders' Equity section of the balance sheet, with interest at 5.36%.
The notes were secured by the 480,000 shares purchased, held in escrow by
the Company, with voting rights held by the shareholders until default, if
any, under the notes. In June 1996, the Company forgave the balances due
under the notes including accrued interest and accordingly recorded approx-
imately $344,000 in compensation expense.
The Company has 1,000,000 shares of common stock reserved for future
issuance pursuant to its 1989 Stock Option Plan. On April 18, 1995, the
Company granted non-qualified stock options for 809,000 shares of its
common stock, of which there are 806,000 outstanding at December 31, 1997,
as a service award to officers, directors, and certain employees of the
Company and certain of its subsidiaries under its 1989 Plan. The options
were exercisable at $3.00 per share, reduced to $2.38 per share on December
31, 1996, through April 17, 2000. On June 11, 1997, the Company's board of
directors granted a five-year non-qualified stock option under the 1989
Plan for 35,000 shares immediately exercisable with an exercise price of
$3.75 to a new board member, which exercise price was reduced to $2.38
per share on September 10, 1997, the fair market value on that date. In-
cluding 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 have been 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, the board of directors granted
227,500 options of which there are 171,600 outstanding as of December 31,
1997, to certain of its officers, directors, and employees. These options
are exercisable for a period of five years at $1 per share.
On February 27, 1995 Techdyne granted non-qualified stock options, not
part of the 1994 Plan, to directors of Techdyne and its subsidiary for
142,500 shares exercisable at $1.75 per share for five years. In April
1995, Techdyne granted a non-qualified stock option for 10,000 shares, not
part of the 1994 Plan, to its general counsel at the same price and terms
as the directors' options.
In June 1997, Techdyne's board of directors adopted a Stock Option Plan
for up to 500,000 options, and pursuant to the plan the Board guaranteed
375,000 options exercisable for five years through June 22, 2002 at $3.25
per share the closing price of the common stock on the date of grant.
In November 1995, DCA adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in November 1995, DCA's board of directors
granted 210,000 options to certain of its officers, directors and employees
of which there are 19,000 outstanding as of December 31, 1997. These options
vested immediately and are exercisable for a period of five years through
November 9, 2000 at $1.50 per share. On December 31, 1997, 162,500 options
were exercised by officers for which the Company received cash payments of
the par value and the Company forgave the remaining balance due and
recorded compensation expense of $322,000.
F-18
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--Continued
In August 1996, DCA's board of directors granted 15,000 medical
directors at its three kidney dialysis centers. Following the sale of DCA's
Florida operations on October 31, 1997 5,000 of these options were not
exercised and expired. These options vested immediately and are exercisable
for a period of three years through August 18, 1999 at $4.75 per share.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that State-
ment. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-
average assumptions for option grants in 1997, option modifications in 1996,
and options grants in 1995, respectively: risk-free interest rates of 5.59%,
5.65% and 6.75%; no dividend yield; volatility factor of the expected market
price of the Company's common stock of .97 for the options issued during
1997, .68 for the option modifications in 1996 and option grants in 1995;
and an expected life for the 1997 options of 2.5 years, and for the options
modified in 1996 of .75 years and for the 1995 options of 2.5 years.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restric-
tions and are fully transferable. In addition, option valuation models
require the input of highly subjective input assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different than those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. The
Company's pro forma information which includes the pro forma effect of its
own options, as well as the pro forma effects related to the Company's
interest in Techdyne and DCA pro forma adjustments follows:
1997 1996 1995
---------- ---------- ----------
Pro forma net income $1,671,720 $2,067,004 $1,868,863
========== ========== ==========
Pro forma earnings per share
Basic $.29 $.35 $.32
==== ==== ====
Diluted $.26 $.23 $.31
==== ==== ====
F-19
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
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 its newly
modified options being reflected as grants and the original grants being
modified reflected as cancellations:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- --------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- -------------- --------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 1,207,000 $2.01 1,209,000 $2.42 $ 400,000 $1.25
Granted 35,000 2.47 809,000 2.38 809,000 3.00
Cancellations (809,000) 3.00
Exercised (400,000) 1.25
Forfeited (1,000) 3.00
Expired (1,000) 2.38 (1,000) 3.00
---------- ------------
Outstanding-end of year 841,000 2.38 1,207,000 2.01 1,209,000 2.42
======= ========= =========
Exercisable at end of year 841,000 2.38 803,500 1.82 400,000 1.25
======= ========== ==========
Weighted-average fair value of
options granted, including
modified options, during the year $2.47 $.59 $1.37
===== ==== =====
</TABLE>
The weighted average remaining contractual life of those options is 2.38
years.
The Company has 1,339,000 shares reserved for future issuance at
December 31, 1997.
The fair value of Techdyne options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted
average assumptions for the options issued during 1997 and 1995, respec-
tively: risk-free interest rate of 5.59% and 6.75%; no dividend yield;
volatility factor of the expected market price of Techdyne common stock
of .60% and .56%; and an expected life of the options of 2.5 years for
the options issued during 1997 and 2.5 years for the options issued during
1995.
A summary of Techdyne's stock option activity, and related information
for the years ended December 31, follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- --------------- --------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year 326,500 378,400 227,500
Granted 375,000 3.25 --- 152,500 1.75
Exercised (300) 1.00 (50,700) 1.00 (400) 1.00
Expired (2,100) 1.00 (1,200) 1.00 (1,200) 1.00
------- ------- -------
Outstanding-end of year: 699,100 326,500 378,400
======= ======= =======
Outstanding and exercisable
at end of year:
May 1994 options 171,600 1.00 174,000 1.00 150,900 1.00
February and April 1995
options 152,500 1.75 152,500 1.75 227,500 1.75
June 1997 options 375,000 3.25 --- ---
-------
699,100 326,500 378,400
======= ======= =======
Weighted-average fair
value of options granted
during the year $1.33 $.69
===== ====
</TABLE>
F-20
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--Continued
The remaining contractual life for the 1994 options is 1.39 years for
the 1995 options is 2.2 years and for the 1997 options is 4.47 years.
The fair value of DCA options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions for options issued during 1996 and 1995, respectively:
risk-free interest rates of 5.75% and 6.5%; no dividend yield; volatility
factor of DCA common stock of .50 for both years; and a weighted average
expected life of the options of 1.5 years and 2.5 years.
A summary of DCA's stock option activity, and related information for
the years ended December 31, follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year: 209,000 210,000 ---
Granted 15,000 4.75 210,000 $1.50
Exercised (162,500) 1.50 (6,000) 1.50 ---
Forfeited --- --- ---
Expired (17,500) 2.43 (10,000) 1.50 ---
------- -------
Outstanding-end of year 29,000 209,000 210,000
======= ======= =======
Outstanding and exercisable
at end of year:
November 1995 options 19,000 1.50 194,000 1.50 210,000 1.50
August 1996 options 10,000 4.75 15,000 4.75 ---
------- -------
29,000 209,000 210,000
======= ======= =======
Weighted-average fair value
of options granted during
the year $1.30 $ .54
===== =====
</TABLE>
The remaining contractual life for the August 1996 options is 1.6
years and for the November 1995 options is 2.9 years.
NOTE 6--OPERATIONS BY INDUSTRY SEGMENT, GEOGRAPHIC LOCATION AND FOREIGN
OPERATIONS
Industry segment and geographical data and foreign operations for the
years ended December 31, 1997, 1996 and 1995, included on pages 1 and 2 of
Form 10-K are an integral part of these financial statements. The following
summarizes additional information about the reported industry segments:
Year Ended December 31,
-----------------------------------------
1997 1996 1995
-------- -------- --------
DEPRECIATION EXPENSE
Medical Services $278,761 $199,315 $116,510
Medical Products 31,355 33,053 19,735
Electro-Mechanical 616,663 368,619 332,602
CAPITAL EXPENDITURES
Medical Services $825,427 $386,502 $877,545
Medical Products 4,595 149,505 7,132
Electro-Mechanical 1,396,260 704,304 530,669
F-21
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 6--OPERATIONS BY INDUSTRY SEGMENT, GEOGRAPHIC LOCATION AND FOREIGN
OPERATIONS--Continued
A majority of the Company's electro-mechanical sales are to certain
major customers. The loss of, or substantially reduced sales to, any of
these customers would have an adverse effect on the Company's operations,
if such sales were not replaced, as occurred with Compaq and Avid as noted
below.
Electro-mechanical sales to major customers comprising 10% or more of
the Company's sales are as follows:
Year Ended December 31,
---------------------------------------
Customers 1997 1996 1995
--------- ---------- ---------- -----------
Compaq Computer Corp.(1) --- $8,497,000 $10,849,000
Avid Technology(1)(2) --- 5,653,000
IBM(3) $6,437,000 4,275,000 ---
- ------------------------------------
(1) Less than 10% of sales for 1997.
(2) Less than 10% of sales for 1996.
(3) Less than 10% of sales for 1995.
Sales to PMI Food Equipment Group by Lytton for the five months ended De-
cember 31, 1997, since Lytton's acquisition by Techdyne, amounted to approx-
imately $2,727,000 representing 15% of Techdyne's and 13% of the Company's
sales during this period and 8% of Techdyne's and 7% of the Company's sales
for the year ended December 31, 1997.
Included in the sales to Compaq were sales by Techdyne (Scotland) of
approximately $2,847,000 in 1997 and $8,427,000 in 1996, which accounted
for 42% and 84% of the sales of Techdyne (Scotland) for 1997 and 1996,
respectively. Increased competition in the bidding for this Compaq business
has resulted in a substantial loss of Compaq sales by Techdyne (Scotland)
commencing in the third quarter of 1996 and reduced profit margins on
remaining Compaq sales.
The Company experienced a loss of a majority of it sales to Avid in
1996 as a result of a change in one of the products it produced for Avid.
Medical services revenues, which represent revenues of the Company's
dialysis division, are attributable to payments received under Medicare,
which is supplemented by Medicaid or comparable benefits in the state in
which the Company operates. Reimbursement rates under these programs are
subject to regulatory changes and governmental funding restrictions.
Although the Company is not aware of any future rate changes, significant
changes in reimbursement rates could have a material effect on the Company's
operations.
Medical product sales are highly dependent on government contracts
which have become increasingly difficult to secure due to changes in
government procurement procedures. Significant reductions in government
contract revenues would have a material adverse effect on the operations
of the Medical Products Division. During 1996 the Company has decided to
shutdown the durable medical equipment portion of its medical products
business due to its unprofitable operations and recorded in 1996 approxi-
mately $305,000 in costs in connection with this shutdown. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations".
F-22
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 7--COMMITMENTS AND CONTINGENCIES
Commitments
The Company and its subsidiaries have leases on several facilities,
which expire at various dates. The aggregate lease commitments at December
31, 1997 are approximately: 1998--$738,000; 1999--$738,000; 2000--
$702,000; 2001--$624,000; 2002--$348,000. Total rent expense was
approximately $748,000 in 1997, $608,000 in 1996 and $533,000 in 1995.
Lytton leases its operating facilities from an entity which is owned by
Lytton former owner and its president. The operating lease, which expires
July 31, 2002, requires monthly lease payments of approximately $17,900 for
the first year, adjusted in subsequent years for the change in the Consumer
Price Index, and contains renewal options for a period of five to ten years
at the then fair market rental value.
Effective January 1, 1997, DCA established a 401(k) savings plan
(salary deferral plan) with an eligibility requirement of one year of
service and 21 year old age requirement. DCA has made no contributions
under this plan as of December 31, 1997.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially all
of its employees. The discretional profit sharing and matching expense since
the Company acquired Lytton on July 31, 1997 through December 31, 1997
amounted to approximately $16,000.
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.
NOTE 8--SUBSIDIARY STOCK OFFERINGS
In October 1995, Techdyne completed a public offering of its securities
resulting in net proceeds of approximately $3,321,000, for which the Company
recognized a gain of approximately $1,241,000 net of applicable income taxes
of $761,000. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
DCA completed a public offering in April 1996, with net offering
proceeds of approximately $3,445,000, for which the Company has recorded
a gain of approximately $943,000, net of applicable income taxes of
$578,000. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
In accordance with its accounting policy, the Company recognized a gain
of approximately $56,000, net of applicable income taxes of approximately
$34,000 during 1997 related to Techdyne warrant exercises.
F-23
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 9--RELATED PARTY TRANSACTIONS
During 1997, 1996 and 1995, the Company paid premiums of approximately
$529,000, $516,000, and $490,000, respectively, for insurance through a
director and stockholder, and the relative of a director and stockholder.
During 1997, 1996 and 1995, legal fees of approximately $191,000,
$202,000, and $217,000, respectively, were paid by the Company and its
public subsidiaries to an officer of the Company and DCA.
Lytton has a deferred compensation agreement with its President dated
August 1, 1997 in the amount of $200,140. The agreement calls for monthly
payments of $8,339 provided that Lytton's cash flow is adequate to cover
these payments with interest to be calculated on any unpaid balance as of
August 1, 1999. During the period ended December 31, 1997 a total of
$33,357 was paid under this agreement.
NOTE 10--QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following summarizes certain quarterly operating data:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996
---------------------------------------- ----------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- ------- -------- -------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $7,758 $8,087 $10,628 $12,415 $8,230 $7,524 $6,634 $7,293
Gross profit 1,593 1,550 1,764 1,782 1,593 1,396 1,288 1,156
Gain on sale of
subsidiaries' assets 4,431
Gain on subsidiary
securities offering
and warrant exercise 61 29 1,521
Realized gain on sale of
marketable securities 49 562 924 308 790
Net income 266 116 31 1,828 725 1,281 333 78
Earnings per share:
Basic $.05 $.02 $.01 $.31 $.13 $.23 $.06 $.01
Diluted $.04 $.02 $-- $.30 $.11 $.21 $.05 $.01
</TABLE>
Since the computation of earnings per share is made independently for
each quarter using the treasury stock method, the total of four quarters
earnings do not necessarily equal earnings per share for the year.
The Company recorded a deferred tax credit of approximately $700,000 in
the fourth quarter of 1997, shutdown costs of its durable medical operations
of approximately $305,000 in the fourth quarter of 1996 and expensing of
startup costs of new dialysis centers of approximately $80,000 in 1995.
NOTE 11--ACQUISTION
On July 31, 1997, Techdyne acquired Lytton, which manufactures and
assembles printed circuit boards and other electronic products. The purchase
price included $2,500,000 cash, paid at closing, and issuance of 300,00
shares of Techdyne's common stock which has 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. The difference of $968,750
between the fair value of the common stock on the acquisition date and the
guaranteed value has been included as part of the cost of the acquisi-
tion, and is reflected as additional paid in capital.
F-24
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 11-ACQUISTION--Continued
In addition, additional contingent consideration may be due if Lytton
reaches pre-defined earnings and sales levels over the next three years.
When the contingency is resolved and if additional consideration is due,
the then current fair value of the consideration will be recorded as good-
will, which will 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 in the accompanying consolidated condensed statement of income
since August 1, 1997. The total purchase price in excess of the fair value
of net assets acquired.
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 2,230,103
Other liabilities (1,335,432)
-------------
$ 4,256,010
============
Net cash portion of purchase price,
including costs $ 2,166,010
Estimated costs of acquisition 90,000
Common stock issued 2,000,000
------------
$ 4,256,010
============
The following pro forma consolidated condensed financial information
reflects the Lytton acquisition as if it had occurred on January 1, 1996.
The pro forma financial information does not purport to represent what the
Company's actual results of operations 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
Year Ended December 31,
---------------------------------
1997 1996
----------- -----------
Total revenues $54,818,000 $50,818,000
=========== ===========
Net income $ 2,501,000 $ 2,648,000
=========== ===========
Earnings per share:
Basic $.44 $.49
==== ====
Diluted $.40 $.43
==== ====
NOTE 12--SALE OF SUBSIDIARIES' ASSETS
On October 31, 1997, DCA concluded a sale ("Sale") of substantially all
of the assets of two of its 80% owned subsidiaries, Dialysis Services of
Florida, Inc. - Ft. Walton Beach ("DSF") (dialysis operations) and Dialysis
Medical, Inc. ("DMI") (Florida Method 2 home patient operations), and an
in-patient hospital service agreement of its 100% owned subsidiary, DCA
Medical Services, Inc. pursuant to an Asset Purchase Agreement. 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. Provided that the shares are sold within 30
days of their registration, the purchaser has agreed to make up any dif-
ference by which the sales proceeds are less than $480,000 in cash or
additional registered shares of the purchaser at its discretion. These
shares are carried at their market value of approximately $444,000 at
December 31, 1997 with the difference between the guaranteed value and
the market value being reflected as a receivable from the purchaser. In
February 1998, the Company acquired, in a transaction acounted for as a
purchase, the remaining 20% minority interests in two of the subsidiaries
whose assets were sold. The purchase price totaled $625,000, which
included one-half of the common shares originally received as part of the
consideration of the Sale.
F-25
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
December 31, 1997
NOTE 12--SALE OF SUBSIDIARIES' ASSETS--Continued
The pro forma consolidated condensed financial information presented
below reflects the Sale as if it had occurred on January 1, 1996. 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 opera-
tions sold and which were included in the actual result of operations of
these businesses. Such expenses amounted to approximately $125,000 and
$253,000 for the years ended December 31, 1997 and December 31, 1996,
respectively. No assumption has been included in the pro forma infor-
mation as to investment income to be realized from investment of the
proceeds of the sale.
The summary pro forma information, which excludes the gain on the
Sale, is not necessarily representative of what the Company's results of
operations would have been if the Sale had actually occurred as of January
1, 1996 and may not be indicative of the Company's operating results for
any future periods.
SUMMARY PRO FORMA INFORMATION
Year Ended December 31,
----------------------------
1997 1996
----------- -----------
Total revenue $37,978,000 $32,685,000
=========== ===========
Net income $ 517,000 $ 2,112,000
=========== ===========
Earnings (loss) per share:
Basic $.09 $.39
==== ====
Diluted $.07 $.34
==== ====
DCA has recorded a gain on the sale of approximately $2,747,000,
representing a pre-tax gain of approximately $4,431,000, net of estimated
income taxes of approximately $1,684,000, of which approximately $537,000
of the net after tax gain relates to the 20% minority interest in two of
the subsidiaries whose assets were sold. The Company's portion of the net
gain of $2,210,000 amounts to approximately $1,527,000 with the balance of
approximately $683,000 applicable to minority interest.
NOTE 13-REPURCHASE OF COMMON STOCK
In November 1997, the Company announced its intent to repurchase up to
$1,000,000 of its outstanding common stock. The shares that may be reacquired
may be used to fund stock option obligations. As of December 31, 1997, the
Company had repurchased 8,200 shares of common stock at a cost of approxi-
mately $17,000 which is reflected as treasury stock.
