FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-6906
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MEDICORE, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-0941551
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2337 West 76th Street, Hialeah, Florida 33016
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(Address of principal executive offices) (Zip Code)
(305) 558-4000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [x] or No [ ]
Common Stock Outstanding
Common Stock, $.01 par value - 5,832,240 shares as of July 31, 1998.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Income (Unaudited) for the
three months and six months ended June 30, 1998 and June 30, 1997
include the accounts of the Registrant and all its subsidiaries.
Item 1. Financial Statements
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1) Consolidated Condensed Statements of Income for the three
months and six months ended June 30, 1998 and June 30, 1997.
2) Consolidated Condensed Balance Sheets as of June 30, 1998 and
December 31, 1997.
3) Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 1998 and June 30, 1997.
4) Notes to Consolidated Condensed Financial Statements as of June
30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition
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and Results of Operations
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PART II -- OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders
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Item 5. Other Information
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Item 6. Exhibits and Reports on Form 8-K
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<PAGE>
PART I -- FINANCIAL INFORMATION
---------------------------------
Item 1. Financial Statements
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MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Sales $12,754,415 $ 8,086,790 $25,773,824 $15,844,626
Gain on subsidiary securities offering
and warrants exercise 28,917 89,898
Realized gain on sale of marketable
securities 49,493
Other income 178,690 144,798 353,000 290,742
----------- ----------- ----------- -----------
12,933,105 8,260,505 26,126,824 16,274,759
COST AND EXPENSES
Cost of goods sold 10,887,856 6,537,454 21,818,238 12,702,846
Selling, general and administrative
expenses 1,647,175 1,457,177 3,414,768 2,878,297
Interest expense 139,316 54,435 290,085 110,226
----------- ----------- ----------- -----------
12,674,347 8,049,066 25,523,091 15,691,369
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INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 258,758 211,439 603,733 583,390
Income tax benefit (78,259) (15,526) (107,666) (39,867)
----------- ----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST 337,017 226,965 711,399 623,257
Minority interest in earnings of
consolidated subsidiaries 167,691 111,275 330,656 241,204
----------- ----------- ----------- -----------
NET INCOME $ 169,326 $ 115,690 $ 380,743 $ 382,053
=========== =========== =========== ===========
Earnings per share:
Basic $.03 $.02 $.07 $.07
==== ==== ==== ====
Diluted $.02 $.02 $.05 $.06
==== ==== ==== ====
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997(A)
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,674,076 $11,099,418
Marketable securities 793,068 726,538
Accounts receivable, less allowances of $289,000 at
June 30, 1998 and $231,000 at December 31, 1997 6,116,174 6,298,089
Inventories, less allowance for obsolescence of $407,000
at June 30, 1998 and $238,000 at December 31, 1997 8,961,309 8,683,439
Prepaid expenses and other current assets 841,560 862,613
Deferred tax asset 1,191,758 1,294,535
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Total Current Assets 26,577,945 28,964,632
PROPERTY AND EQUIPMENT
Land and improvements 1,019,655 1,017,255
Building and building improvements 3,078,411 3,066,889
Equipment and furniture 9,705,519 9,129,583
Leasehold improvements 1,082,863 715,316
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14,886,448 13,929,043
Less accumulated depreciation and amortization 5,704,285 5,024,016
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9,182,163 8,905,027
DEFERRED EXPENSES AND OTHER ASSETS 143,976 141,844
COSTS IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED,
less accumulated amortization of $506,000 at June 30, 1997
and $438,000 at December 31, 1997 3,335,959 2,850,016
----------- -----------
$39,240,043 $40,861,519
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings $ $ 548,698
Accounts payable 4,385,726 4,384,430
Accrued expenses and other current liabilities 2,470,134 2,342,197
Current portion of long-term debt 1,028,638 1,073,924
Income taxes payable 191,008 1,758,723
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Total Current Liabilities 8,075,506 10,107,972
LONG-TERM DEBT 4,966,689 5,240,034
DEFERRED INCOME TAXES 2,594,043 2,592,843
MINORITY INTEREST IN SUBSIDIARIES 6,867,812 6,843,412
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 12,000,000 shares;
5,856,940 issued, 5,836,240 shares outstanding at June 30,
1998; 5,856,940 shares issued, 5,848,740 shares outstanding
at December 31, 1997 58,569 58,569
Capital in excess of par value 13,170,391 13,040,877
Retained earnings 3,231,260 2,850,517
Accumulated other comprehensive income:
Foreign currency translation adjustment (10,731) (31,128)
Unrealized gain on marketable securities 329,064 175,213
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Total accumulated other comprehensive income 318,333 144,085
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Treasury stock at cost; 20,700 shares at June 30, 1998;
shares at December 31, 1997 (42,560) (16,790)
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Total Stockholders' Equity 16,735,993 16,077,258
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$39,240,043 $40,861,519
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</TABLE>
(A) Reference is made to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 filed with the Securities and Exchange
Commission in March, 1998.
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 380,743 $ 382,053
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation 683,220 363,189
Amortization 75,189 35,695
Bad debt expense (net recovery) 59,132 26,051
Provision for inventory obsolescence 235,393 40,468
Gain on sale of securities (49,493)
Gain on subsidiary securities offering and
warrants exercise (89,899)
Minority interest 330,656 241,204
Deferred income taxes 36,118
Consultant stock option expense 7,004
Increase (decrease) relating to operating activities from:
Accounts receivable 135,526 (851,489)
Inventories (499,680) (588,964)
Prepaid expenses and other current assets (10,856) (100,792)
Accounts payable (5,556) 75,043
Accrued expenses and other current liabilities 138,269 83,682
Income taxes payable (1,567,715) (506,741)
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Net cash used in operating activities (38,675) (903,875)
INVESTING ACTIVITIES
Redemption of minority interest in subsidiaries (385,375)
Additions to property and equipment, net of minor disposals (758,302) (719,013)
Subsidiary acquisition payments (153,818)
Proceeds from sale of securities 49,493
Deferred expenses and other assets (9,350) (87,386)
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Net cash used in investing activities (1,306,845) (756,906)
FINANCING ACTIVITIES
Line of credit payments (548,698)
Subsidiary repurchase of stock (206,250)
Repurchase of stock (25,769)
Payments on long-term borrowings (509,950) (128,179)
Dividend payment to minority shareholder (2,998)
Deferred financing costs 169 1,237
Proceeds from exercise of warrants and stock options 1,150 194,328
----------- -----------
Net cash used in financing activities (1,083,098) (141,862)
Effect of exchange rate fluctuations on cash 3,276 (85,790)
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Decrease in cash and cash equivalents (2,425,342) (1,888,433)
Cash and cash equivalents at beginning of year 11,099,418 10,795,298
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,674,076 $ 8,906,865
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies
Consolidation
The Consolidated Condensed Financial Statements include the
accounts of Medicore, Inc., Medicore's 66.0% owned subsidiary, Dialysis
Corporation of America ("DCA") and Medicore's 61.5% 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 inter-
company accounts and transactions have been eliminated in consoli-
dation.
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:
June 30, December 31,
1998 1997
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Electronic and mechanical components, net:
Finished goods $ 675,227 $ 554,903
Work in process 2,073,190 1,772,724
Raw materials and supplies 5,806,478 5,997,682
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8,554,895 8,325,309
Medical supplies 406,414 358,130
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$8,961,309 $8,683,439
========== ==========
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
FAS 128, "Earnings Per Share", which was adopted on December 31, 1997
requiring a change in the method previously used to compute earnings per
share and restatement of 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 and average market price. No
potentially dilutive securities were included in the diluted earnings
per share computation for the three months ended or six months ended
June 30, 1998 since they were anti-dilutive.
Following is a reconciliation of amounts used in the basic and
diluted computations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income, numerator-basic computation $ 169,326 $ 115,690 $ 380,743 $ 382,053
Adjustment due to subsidiaries' dilutive
securities (33,557) (12,065) (65,199) (34,406)
---------- ---------- ---------- ----------
Net income as adjusted, numerator-diluted
computation $ 135,769 $ 103,625 $ 315,544 $ 347,647
========== ========== ========== ==========
Weighted average shares, denominator-basic
computation 5,838,013 5,456,940 5,842,728 5,456,940
Effect of dilutive stock securities:
Stock options 360,615 428,177
---------- ---------- ---------- ----------
Weighted average shares as adjusted,
denominator-diluted computation 5,838,013 5,817,555 5,842,728 5,885,117
========== ========== ========== ==========
Earnings per share:
Basic $.03 $.02 $.07 $.07
==== ==== ==== ====
Diluted $.02 $.02 $.05 $.06
==== ==== ==== ====
</TABLE>
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 1998
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Comprehensive Income
The Company has adopted 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 adoption of FAS 130 has no impact on
the Company's net income or stockholders' equity since foreign currency
translation adjustments and the unrealized gain on marketable
securities were previously reflected as components of stockholders'
equity. Below is a detail of comprehensive income (loss) for the three
months and six months ended June 30, 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 169,326 $ 115,690 $ 380,743 $ 382,053
Other comprehensive income:
Foreign currency translation adjustments (826) (36,482) 20,397 (1,007)
Unrealized gain (loss) on marketable securities:
Unrealized holding gain (loss) arising during
period, net of tax (72,970) 4,823 153,851 (432,407)
Less: reclassification adjustment, net of tax,
for gain included in net income (32,364)
--------- --------- --------- ---------
Unrealized gain (loss) on marketable securities (72,970) 4,823 153,851 (464,771)
--------- --------- --------- ---------
Total other comprehensive income (loss) 73,796 (31,569) 174,248 (465,778)
--------- --------- --------- ---------
Comprehensive income (loss) $ 95,530 $ 84,031 $ 554,991 $ (83,725)
========= ========= ========= =========
</TABLE>
Segment Reporting
The Company has adopted the provisions of Financial Accounting
Standards Board Statement No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (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 statements with operating segments repre-
senting components of an enterprise evaluated by the enterprise's chief
operating decision maker for purposes of making decisions regarding
resource allocation and performance evaluation. FAS 131 also requires
that certain segment information be presented in interim financial
statements. Interim information is not required in the first year of
implementation; however, in subsequent years in which the first year
of implementation is a comparative year, any required interim infor-
mation for the initial year of implementation must be presented.
Reclassification
Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
NOTE 2--Interim Adjustments
The financial summaries for the three months and six months ended
June 30, 1998 and June 30, 1997 are unaudited and include, in the
opinion of management of the Company, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the earnings
for such periods. Operating results for the three months and six
months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1998.
While the Company believes that the disclosures presented are
adequate to make the information not misleading, it is suggested that
these Consolidated Condensed Financial Statements be read in conjunc-
tion with the financial statements and notes included in the Company's
latest annual report for the year ended December 31, 1997.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 1998
(Unaudited)
NOTE 3--Transactions With Viragen, Inc.
The Company owns approximately 259,000 shares of common stock of
Viragen, formerly a majority-owned subsidiary of the Company. The
carrying value of these securities was written off as of December 31,
1991.
The Company sold 10,000 shares of Viragen stock and recognized a
gain of approximately $49,000 during the first quarter of 1997, with no
such sales during the second quarter of 1997 or during the first half
of 1998. The Company has recorded these securities at their fair value
of approximately $487,000 at June 30, 1998 and $283,000 at December 31,
1997 with the unrealized gain credited to a separate component of stock-
holders' equity, net of income tax effect. Fair value was determined
using quoted market prices by the Nasdaq stock market. The closing
price of Viragen stock was $1.88 as of June 30, 1998 and $1.09 per
share as of December 31, 1997.
NOTE 4--Long-Term Debt
Techdyne's $1,600,000 line of credit had an outstanding balance of
$1,000,000 at June 30, 1998 and December 31, 1997. This line matures
May 1, 2000 and has monthly payments of interest at prime. The new
commercial term loan effective December 29, 1997 with an initial
principal balance of $1,500,000 had an outstanding balance of
$1,350,000 at June 30, 1998 and $1,500,000 at December 31, 1997, and
matures December 15, 2002 with monthly principal payments of $25,000
plus interest. In connection with the term loan, Techdyne entered
into an interest rate swap agreement with the bank to manage
Techdyne's exposure to interest rates by effectively converting a
variable note obligation with an interest rate of LIBOR plus 2.25% to
a fixed rate of 8.60%.
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 approx-
imately $651,000 at June 30, 1998 and $663,000 at December 31, 1997
and is secured by a mortgage on properties in Hialeah, Florida owned
by the Company, two of which properties are leased to Techdyne and one
parcel being vacant land used as a parking lot. Under this term loan,
Techdyne is obligated to adhere to a variety of affirmative and negative
covenants. 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
$107,000 at June 30, 1998 and $127,000 at December 31, 1997 is secured
by all of Techdyne's tangible personal property, goods and equipment,
and all cash or noncash proceeds of such collateral.
The Company has unconditionally guaranteed the payment and per-
formance 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.
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% at June 30, 1998 and
December 31, 1997. There was no outstanding balance on this loan as of
June 30, 1998 with $549,000 outstanding at 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 $833,000 at June 30, 1998 and $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 with
the same interest rate as the installment loan. There was no out-
standing balance on this loan as of June 30, 1998 or December 31, 1997.
All of these bank loans are secured by the business assets of Lytton.
The prime rate was 8.5% as of June 30, 1998 and December 31, 1997.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 1998
(Unaudited)
NOTE 4--Long-Term Debt--(Continued)
In December 1988, DCA obtained a $480,000 fifteen year mortgage
through November 2003 on its building in Lemoyne, Pennsylvania with
interest at 1% over the prime rate. The remaining principal balance
under this mortgage amounted to approximately $176,000 and $192,000 at
June 30, 1998 and December 31, 1997, respectively. Also in December
1988, DCA obtained a $600,000 mortgage on its building in Easton, Mary-
land on the same terms as the Lemoyne property. The remaining principal
balance under this mortgage amounted to approximately $220,000 and
$240,000 at June 30, 1998 and December 31, 1997, respectively.
DCA has an equipment financing agreement providing financing for
kidney dialysis machines for its facilities with interest at rates
ranging from 8% to 12 % pursuant to various schedules extending through
July 2002. The balance outstanding under this agreement amounted to
approximately $427,000 at June 30, 1998 and $285,000 at December 31,
1997. Additional financing of $185,000 during the first half of 1998
represents a noncash financing activity which is a supplemental dis-
closure required by FAS 95.
Lytton conducts a portion of its operations with equipment
acquired under equipment financing obligations which extend through
July 1999 with interest rates ranging from 8.55 to 10.09%. The
remaining principal balance under these financing obligations amounted
to $283,000 at June 30, 1998 and $390,000 at December 31, 1997. Lytton
has an equipment loan at an annual interest rate of 5.5% maturing in
April 2001 with monthly payments of principal and interest of $4,298.
This loan had a balance of approximately $178,000 at June 30, 1998 and
$198,000 at December 31, 1997 and is secured by equipment.
Techdyne (Scotland) had a line of credit with a Scottish bank with
a U.S. dollar equivalency of approximately $330,000 at December 31, 1997
which is not being renewed This line of credit operated as an overdraft
facility and was secured by assets of Techdyne (Scotland) and guaranteed
by Techdyne. No amounts were drawn on this line of credit during 1998,
and no amounts were outstanding under the line of credit as of December
31, 1997. Techdyne (Scotland) has a mortgage on its facility which had
a principal balance with a U.S. dollar equivalency of $562,000 at June
30, 1998 and $569,000 at December 31, 1997.
Interest payments on long-term debt amounted to $143,000 and $305,000
for the three months and six months ended June 30, 1998 and $54,000 and
$108,000 for the same period of the preceding year.
NOTE 5--Income Taxes
Subsequent to its public offering completed on October 2, 1995,
Techdyne began filing separate federal and state income tax returns with
its income tax liability reflected on a separate return basis.
Techdyne's new subsidiary, Lytton, is included in Techdyne's consoli-
dated federal tax return effective August 1, 1997 with remaining
Techdyne net operating loss carryforwards able to be utilized to offset
income taxable for federal tax return purposes generated by Lytton.
Subsequent to its public offering in April 1996, DCA began filing
separate federal and state income tax returns with its income tax
liability reflected on a separate return basis.
Deferred income taxes reflect the net tax effect of temporary dif-
ferences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The unrealized gain on marketable securities for sale is
net of deferred taxes.
The Company had a domestic income tax expense (benefit) of approxi-
mately $(20,000) and $(44,000) for the three months and six months
ended June 30, 1998 and a domestic income tax expense of $(7,000) and
$26,000 for the same periods of the preceding year, with the prior
year amount including deferred taxes of approximately $11,000 and
$34,000 for the three months and six months ended June 30, 1997 on a
gain on Techdyne warrant exercises.
Techdyne (Scotland) had an income tax benefit of approximately
$58,000 and $63,000 for the three months and six months ended June 30,
1998 and $8,000 and $54,000 for the same periods of the preceding year.
Income tax payments were $27,000 and $1,605,000 for the three
months and six months ended June 30, 1998 and $406,000 for the six
months ended June 30, 1997 with no payments during the second quarter
of 1997.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 1998
(Unaudited)
NOTE 6--Stock Options
The Company has 1,000,000 shares of common stock reserved for
future issuance pursuant to its 1989 Stock Option Plan. On April 18,
1995, the Company granted non-qualified stock options for 809,000 shares
of its common stock as a service award to officers, directors, and
certain employees of the Company and certain of its subsidiaries under
its 1989 Plan. The options are exercisable at $2.38 per share, 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. There are
841,000 options outstanding under the 1989 Plan.
In May 1994, Techdyne adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in May 1994, Techdyne's board of
directors granted 227,500 to certain of its officers, directors, and
employees. These options are exercisable at $1.00 per share through
May 24, 1999. On June 30, 1998, 115,000 of these options were exercised
leaving a balance of 56,600 outstanding. Techdyne received cash payment
of the par value and the balance in three year promissory notes with
interest at 5.16%.
On February 27, 1995 Techdyne granted non-qualified stock options, not
part of the 1994 Plan, to directors of Techdyne and its subsidiaries for
142,500 shares exercisable at $1.75 per share through February 26, 2000.
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 granted
375,000 options exercisable through June 22, 2002 at $3.25 per share.
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 9,000 outstanding as of June 30, 1998.
These options are exercisable for a period of five years through Novem-
ber 9, 2000 at $1.50 per share.
In August 1996, DCA's board of directors granted 15,000 options to
its medical directors at its three kidney dialysis centers of which
10,000 options were outstanding at June 30, 1998. These options were
originally exercisable for a period of three years through August 18,
1999 at $4.75 per share with the exercise price for 5,000 of the
options having been reduced to $2.25 per share on June 10, 1998.
On June 10, 1998, DCA's board of directors granted a five-year non-
qualified stock option to a new board member for 5,000 shares exer-
cisable at $2.25 per share through June 9, 2003.
As part of the consideration for an investor relations agreement,
the Company granted options for 20,000 shares of its common stock exer-
cisable for three years through May 14, 2001 at $4.25 per share and
Techdyne granted options for 25,000 shares of its common stock exer-
cisable for three years through May 14, 2001 at $4.25 per share. The
options vest and are exercisable quarterly on the basis of 25% at the
end of each quarter commencing June 30,1998. Pursuant to FAS 123,
$7,004 expense was recorded for options vesting during the quarter
ended June 30, 1998. See Note 7.
NOTE 7--Commitments And Contingencies
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 June 30, 1998.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially
all of its employees. The discretional profit sharing and matching
expense for the six months ended June 30, 1998 amounted to approximately
$21,000. The Company and Techdyne have adopted this plan as partici-
pating employers effective July 1, 1998. The Plan has one year of
service and 21 years of age eligibility requirements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 1998
(Unaudited)
NOTE 7--Commitments And Contingencies--(Continued)
Lytton has a deferred compensation agreement with its President.
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 calcu-
lated on any unpaid balance as of August 1, 1999. During the six months
ended June 30, 1998 a total of $58,000 was paid under this agreement
leaving a balance of approximately $108,000 as of June 30, 1998. Lytton
leases its operating facilities from an entity owned by the president of
Lytton and his wife, Lytton's former owner. The lease, which expires
July 31, 2002, requires monthly lease payments of approximately $17,900
for the first year to be adjusted in subsequent years for the Consumer
Price Index.
The Company together with Techdyne entered an agreement for investor
relations and corporate communications services as of May 15, 1998 for
which the monthly retainer is $5,500 per month plus expenses. Options
for 20,000 shares of the Company's common stock and options for 25,000
shares of Techdyne's common stock were issued as part of the agreement.
See Note 6.
NOTE 8--Subsidiary Stock Offerings
During the first half of 1997, approximately 41,000 Techdyne warrants
were exercised providing net proceeds of approximately $194,000 after
underwriter commissions on warrant exercises. In accordance with its
accounting policy of income statement recognition for sales of stock by
subsidiaries, which includes exercises of warrants issued in subsidiary
stock offerings, the Company recognized a gain of approximately $61,000
with applicable income taxes of approximately $23,000, which resulted in
a net gain of approximately $38,000 during the first quarter of 1997 and
a gain of approximately $29,000 with applicable income taxes of approxi-
mately $11,000, which resulted in a net gain of approximately $18,000
during the second quarter of 1997.
NOTE 9--Acquisition
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 of cash, paid at closing, and issuance
of 300,000 shares of Techdyne's common stock which has been registered
for the seller of Lytton ("Seller"). Techdyne has guaranteed that the
Seller will realize a minimum of $2,400,000 from the sale of these
shares of common stock based on Lytton having achieved certain earnings
objectives resulting in an increase of $400,000 in the valuation of
$2,000,000 originally recorded for these securities. The total purchase
price in excess of the fair value of net assets acquired which originally
amounted to approximately $2,230,000 will be amortized over 25 years.
Further, additional contingent consideration may be due if Lytton
achieves certain sales levels defined in the Stock Purchase Agreement
over a three year period. Additional consideration of approximately
$154,000 based on sales levels was paid in April 1998 pursuant to the
Stock Purchase Agreement. As the contingencies are resolved, if addi-
tional consideration is due, the then current fair value of the consid-
eration will be recorded as goodwill, 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 Company's
statement of income since August 1, 1997.
The terms of the Guaranty in the Stock Purchase Agreement were
modified in June, 1998 by Techdyne and the Seller ("Modified Guaranty").
The modified terms provide that the Seller will sell an amount of common
stock which will provide $1,300,000 gross proceeds, and Techdyne will
guarantee that to the extent that the Seller has less than 150,000
shares of Techdyne's common stock remaining, Techdyne will issue addi-
tional shares to the Seller. In July 1998, Techdyne advanced the
Seller approximately $1,278,000 ("Advance") toward the $1,300,000 from
the sale of Techdyne common stock in addition to the Seller having sold
5,000 shares of common stock in July 1998. Proceeds from the sale of
Techdyne's common stock owned by the Seller, up to 195,000 shares,
would repay the Advance and to the extent proceeds from the sale of
these shares were insufficient to pay the Advance, the balance of the
Advance would be forgiven. Techdyne has also guaranteed the Seller
aggregate proceeds of no less than $1,100,000 from the sale of the
remaining common stock if sold on or prior to July 31, 1999 ("Extended
Guaranty").
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 1998
(Unaudited)
The following pro forma consolidated condensed financial informa-
tion reflects the Lytton acquisition as if it had occurred on January
1, 1997. The pro forma financial information does not purport to
represent what the Company's actual results of operations would have
been had the acquisition occurred as of January 1, 1997 and may not be
indicative of operating results for any future periods.
SUMMARY PRO FORMA INFORMATION
Six Months Ended
June 30,1997
----------------
Total revenues $25,491,000
===========
Net income $ 577,000
===========
Earnings per share:
Basic $.11
====
Diluted $.09
====
NOTE 10--Sale of Subsidiaries' Assets
On October 31, 1997, DCA concluded a sale ("Sale") of its Florida
operations consisting of the assets of two subsidiaries and an in-
patient agreement of another subsidiary pursuant to an Asset Purchase
Agreement. Consideration for the assets sold was $5,065,000 consisting
of $4,585,000 cash and $480,000 of the purchaser's common stock which
the purchaser agreed to register within one year. Provided that the
shares are sold within 30 days of their registration, the purchaser
agreed to make up any difference by which the sales proceeds are less
than $480,000 in cash or additional registered shares of the purchaser
at its discretion. These shares were 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 re-
ceivable from the purchaser. In February 1998, DCA acquired, in a
transaction accounted for as a purchase, the remaining 20% minority
interests in two of the subsidiaries whose assets were sold for an
aggregate of $625,000, which included one-half of the common shares
originally received as part of the consideration of the Sale. The
remaining shares are carried at their market value of approximately
$306,000 at June 30, 1998 with the net unrealized gain, which is net
of income tax effect, included in stockholders' equity in other compre-
hensive income.
The pro forma consolidated condensed financial information presented
below reflects the Sale as if it had occurred on January 1, 1997. For
purposes of pro forma statement of income information, no assumption has
been made that expenses have been eliminated which were included in
corporate expense allocations by the Company and DCA to the business
operations sold and which were included in the actual result of opera-
tions of these businesses. Such expenses amounted to approximately
$70,000 for the six months June 30, 1997. No assumption has been
included in the pro forma information as to investment income to be
realized from investment of the proceeds of the sale.
The summary pro forma information, is not necessarily representative
of what the Company's results of operations would have been if the Sale
had actually occurred as of January 1, 1997 and may not be indicative of
the Company's operating results for any future periods.
SUMMARY PRO FORMA INFORMATION
Six Months Ended
June 30, 1998
----------------
Total revenue $15,280,000
===========
Net income $ 245,000
===========
Earnings per share:
Basic $.04
====
Diluted $.02
====
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 1998
(Unaudited)
NOTE 11--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 reacquired shares may
be used to fund stock option obligations. As of June 30, 1998, the
Company had repurchased approximately 21,000 shares of common stock at a
cost of approximately $43,000 which is reflected as treasury stock.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q that
are not historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securi-
ties 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 manu-
facturer, 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, oppor-
tunities 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 Regis-
tration 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 opera-
tions 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 major customers would have a material
adverse effect on Techdyne's and the Company's results of operations.
The industry segments served by Techdyne 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 experi-
enced, 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.
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 noncom-
petitive. 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 compli-
mentary to Techdyne's operations. The Company will be competing with
much larger electronic manufacturing entities for such expansion oppor-
tunities. 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 transac-
tions 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's and the Company's business and financial results.
Quality control is also essential to Techdyne's operations, since
customers demand strict compliance with design and product specifica-
tions. 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.
<PAGE>
Forward-Looking Information--Continued
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 accept-
able 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 a new center in Carlisle, Pennsylvania in July, 1997. Its
fourth center in Manahawkin, New Jersey is due to begin patient care
pending regulatory approval. One additional center, in Pennsylvania is
now under construction and one in New Jersey is in the planning and
architectural stages. 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.
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
anticipates having 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 modifica-
tions, 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 dis-
closure.
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 its
facilities and anticipates installing it 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, cus-
tomers 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 modifications 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.
<PAGE>
Results of Operations
Consolidated revenues increased by approximately $4,673,000 (57%)
and $9,852,000 (61%) for the three months and six months ended June 30,
1998 compared to the same periods of the preceding year. Sales revenues
increased by $4,668,000 (58%) and $9,929,000 (63%) compared to the
preceding year.
Techdyne sales increased approximately $4,972,000 (75%) and
$10,502,000 (81%) for the three months and six months ended June 30,
1998 compared to the same periods of the preceding year. The increase
was largely attributable to the inclusion of sales of Lytton of
$5,122,000 and $9,650,000. There was an increase in domestic sales
of $5,754,000 (120%) and $10,903,000 (112%), including the Lytton
sales, and a decrease in European sales of $782,000 (43%) and $401,000
(12%) compared to the same periods of the preceding year.
Approximately 46% of Techdyne's consolidated sales and 42% of the
Company's consolidated sales for the six months ended June 30, 1998 were
made to four customers. Customers generating in excess of 10% of
Techdyne's consolidated sales with their respective portions of
Techdyne's and the Company's consolidated sales include Motorola which
accounted for 13% and 12% and PMI Food Equipment Group for 16% and 15%,
respectively. PMI Food Equipment Group is Lytton's major customer and
represented 40% of Lytton's sales for the six months ended June 30, 1998.
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 were not replaced.
Revenues of Techdyne's Scottish-based subsidiary Techdyne (Scotland)
continue to be highly dependent on sales to Compaq, which although sub-
stantially reduced, accounted for approximately 26% and 50% of the sales
of Techdyne (Scotland) for the six months ended June 30, 1998 and June 30,
1997, respectively. The bidding for Compaq orders has become more
competitive which has resulted in substantial reductions in 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 $75,000
(20%) and $(128,000) (15%) for the three months and six months ended
June 30, 1998 compared to the same periods of the preceding year due to
decreased sales of the principal product of this division.
Medical services revenues, representing the revenues of the Company's
dialysis division, DCA, decreased approximately $231,000 (22%) and
$447,000 (21%) for the three months and six months ended June 30, 1998
compared to the same periods of the preceding year. This decrease
reflected lost revenues of approximately $499,000 and $992,000 resulting
from the sale of DCA's Florida dialysis operations on October 31, 1997,
which were offset to some degree by increased revenues of DCA's Pennsyl-
vania dialysis centers of approximately $269,000 and $546,000 for the
three months and six months ended June 30, 1998 including revenues of
approximately $207,000 and $428,000 for the three months and six months
ended June 30, 1998 from a new dialysis center located in Carlisle,
Pennsylvania, which commenced operations in July 1997. Although the
operations of the new Carlisle center have resulted in additional
revenues, it is in the developmental stage and, accordingly, its
operating results will adversely affect the Company's results of
operations until it achieves a sufficient patient count to cover fixed
operating costs.
Other income increased approximately $34,000 and $62,000 for the
three months and six months ended June 30, 1998 largely due to interest
earned on proceeds invested from the October 1997 sale of DCA's Florida
dialysis operations.
Cost of goods sold as a percentage of consolidated sales amounted
to 85% for the three months and six months ended June 30, 1998 compared
to 81% and 80% for the same periods of the preceding year reflecting
increases for Techdyne, the medical products division and the medical
services division.
Cost of goods sold for Techdyne as a percentage of sales amounted
to 87% and 86% for the three months and six months ended June 30, 1998
compared to 85% for the same periods of the preceding year reflecting
changes in product mix and a diversification of Techdyne's customer base
including changes due to Lytton.
Cost of goods sold by the medical products division increased to 68%
for three months and six months ended June 30, 1998 compared to 66% and
63% for the same periods of the preceding year as a result on a change in
product mix due to decreased sales of the principal product of this
division.
<PAGE>
Results of Operations--Continued
Cost of medical services sales increased to 73% and 72% for the three
months and six months ended June 30, 1998 compared to 63% and 62% for the
same periods of the preceding year reflecting increases in healthcare
salaries and supply costs as a percentage of sales and including the
operations of DCA's new Carlisle, Pennsylvania center which is still in
its developmental stage.
Selling, general and administrative expenses increased $190,000 and
$536,000 for the three months and six months ended June 30, 1998
compared to the same periods of the preceding year. This increase re-
flected the selling, general and administrative expenses of Lytton, a
new dialysis center in Carlisle, Pennsylvania, expenses in connection
with the startup of a new dialysis center in Manahawkin, New Jersey and
two other planned dialysis centers, and increased DCA support functions,
which were offset by the decline in expenses resulting from DCA's sale
of its Florida dialysis operations on October 31, 1997.
Interest expense increased by approximately $85,000 and $180,000
for the three months and six months ended June 30, 1998 compared to the
same periods of the preceding year. This increase included interest of
$52,000 and $106,000 associated with Techdyne's financing of the Lytton
acquisition and interest from Lytton's financing and debt agreements of
$35,000 and $78,000.
A substantial portion of the Company's outstanding borrowings are
tied to the prime interest rate. The prime rate was 8.5% at June 30, 1998
and December 31, 1997.
Liquidity and Capital Resources
Working capital totaled $18,502,000 at June 30, 1998, which reflected
a decrease of $354,000 (2%) during the six months ended June 30, 1998.
Included in the changes in components of working capital was a decrease
of $2,425,000 in cash and cash equivalents, which included net cash used
in operating activities of $39,000 (including a decrease in income taxes
payable of $1,568,000 largely from tax payments on the gain on the
Florida dialysis operations sale), net cash used in investing activities
of $1,307,000 (including funds used for redemption of minority interest
of dialysis subsidiaries of $385,000, additions to property, plant and
equipment of $758,000 and additional consideration of $154,000 regarding
the Lytton acquisition) and net cash used in financing activities of
$1,083,000 (including short-term line of credit payments of $549,000 and
payments on long-term debt of $ 510,000).
Techdyne has 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 8.6% which had an outstanding balance of
$1,350,000 at June 30, 1998 and $1,500,000 at December 31, 1997 and a
$1,600,000 commercial revolving line of credit with interest at prime of
which $1,000,000 was outstanding at June 30, 1998 and 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. See Note
4 to "Notes to Consolidated Condensed Financial Statements."
Techdyne had obtained two other term loans from its Florida bank.
One is a $712,500 term loan, which had a remaining principal balance of
$651,000 at June 30, 1998 and $663,000 at December 31, 1997, is secured
by two buildings and land owned by the Company. The second term loan for
$200,000, which had a remaining principal balance of $107,000 at June 30,
1998 and $127,000 at December 31, 1997 is secured by Techdyne's tangible
personal property, goods and equipment. The Company has guaranteed these
loans and subordinated the intercompany indebtedness due from Techdyne,
provided that Techdyne may make payments to the Company on this sub-
ordinated debt from additional equity that is injected into Techdyne and
from earnings. See Note 4 to "Notes to Consolidated Condensed 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) had a line of credit with
a Scottish bank, with an U.S. dollar equivalency of approximately
$330,000 at December 31, 1997 that was secured by assets of Techdyne
(Scotland) and guaranteed by Techdyne. This line of credit, which is
not being renewed, operated as an overdraft facility. No amounts were
drawn on this line of credit during 1998 and no amounts were outstanding
as December 31, 1997. 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
$562,000 at June 30, 1998 and $569,000 at December 31, 1997, based on
exchange rates in effect at each of these dates. See Note 4 to "Notes
to Consolidated Condensed Financial Statements."
<PAGE>
Liquidity and Capital Resources--Continued
On July 31, 1997, Techdyne acquired Lytton, which is engaged in the
manufacture and assembly of PCBs and other electronic products for com-
mercial 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 acquisition. Techdyne has guaranteed $2,400,000 minimum proceeds
from the sale of these securities based on Lytton having achieved certain
earnings objectives. The Stock Purchase Agreement also provides for
incentive consideration to be paid in cash based on specific sales levels
of Lytton for each of three successive specified years. Additional
consideration of approximately $154,000 based on sales levels was paid
in April 1998 with the Stock Purchase Agreement providing for possible
additional sales level incentives over a two year period. Based upon the
closing price of Techdyne's common stock on June 30, 1998, the shares
issued in the Lytton acquisition had a fair value of $1,350,000 which
could result in additional consideration of approximately $1,050,000
payable in either in cash or in approximately 233,000 shares of
Techdyne's stock. 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. See Note 9 to "Notes to Consolidated Condensed Financial
Statements."
The Guaranty in the Stock Purchase Agreement was modified by Techdyne
and the Seller in June, 1998. Techdyne advanced approximately $1,280,000
to Seller. In addition to the Seller having sold 5,000 shares of
Techdyne's common stock in July 1998. The Seller is to sell sufficient
shares to yield aggregate proceeds of no more than $1,300,000 towards the
Modified Guaranty. Upon the sale of Seller's remaining shares up to
195,000 shares, she will repay the Advance. Techdyne funded the Advance
to the Seller largely through a drawdown of the previously unused $600,000
of its line of credit and advances from the Company. To the extent that
Seller does not have 150,000 shares remaining Techdyne would make up the
difference. If the sale of shares is insufficient to repay the Advance,
the balance would be forgiven. Pursuant to the Extended Guaranty, sale
of the remaining Techdyne shares is guaranteed to yield no less than
$1,100,000 if sold on or prior to July 1, 1999 or else Techdyne will make
up the difference in either cash or additional common stock or a combina-
tion of both. See Note 9 to "Notes to Consolidated Financial Statements."
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. There was no outstanding balance on this loan as of June 30, 1998
with $549,000 outstanding at 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 $833,000 at June 30, 1998 and $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 with the same
interest rate as the installment loan. There was no outstanding balance
on this loan as of June 30, 1998 or December 31, 1997. All of these
bank loans are secured by the business assets of Lytton. See Note 4
to "Notes to Consolidated Condensed Financial Statements."
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extend through July 1999
with interest rates ranging from 8.55% to 10.09%. The remaining
principal balance under these financing obligations amounted to $283,000
at June 30, 1998 and $390,000 at December 31, 1997. Lytton has an
equipment loan at an annual interest rate of 5.5% maturing in April
2001 with monthly payments of principal and interest of $4,298. This
loan has a balance of approximately $178,000 at June 30, 1998 and
$198,000 at December 31, 1997 and is secured by equipment. See Note
4 to "Notes to Consolidated Condensed Financial Statements."
During 1988, the Company, through DCA, its dialysis subsidiary,
obtained mortgages totaling $1,080,000 on its two buildings, one in
Lemoyne, Pennsylvania and the other in Easton, Maryland. The mort-
gages had a combined remaining balance of $396,000 and $432,000 at
June 30, 1998 and December 31, 1997, respectively. 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.
See Note 4 to "Notes to Consolidated Condensed Financial Statements."
DCA has an equipment purchase agreement for kidney dialysis
machines for its dialysis facilities which had a remaining principal
balance of $427,000 and $285,000 at June 30, 1998 and December 31,
1997, respectively, which included additional financing of approxi-
mately $185,000 in the first half of 1998. See Note 4 to "Notes to
Consolidated Condensed Financial Statements."
<PAGE>
Liquidity and Capital Resources--Continued
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 in 1996 and
sale of its Florida dialysis operations in 1997. No assurance can be
given that DCA will be successful in implementing its growth strategy
or that the funds from its security offering and sale of its Florida
dialysis operations will be adequate to finance such expansion. See
Note 10 to "Notes to Consolidated Condensed Financial Statements."
DCA will begin actual patient care at its fourth center in Mana-
hawkin, New Jersey pending regulatory approval and has entered into
agreements with medical directors, and intends to establish two
dialysis centers, one in New Jersey and one in Pennsylvania. It is
anticipated that the Pennsylvania facility, currently under construc-
tion, will commence operations in the third quarter of 1998. A lease
was recently negotiated for the center planned in New Jersey. The
professional corporation providing medical director services to both
the Manahawkin, New Jersey center and the other New Jersey center
will have a 20% interest in those subsidiaries of DCA.
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 purchaser's securities valued at
$240,000 with the total value of $480,000 for securities received
having been guaranteed by the purchaser. See Note 10 to "Notes to
Consolidated Condensed Financial Statements."
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. In the Company's medical services
segment, revenue per dialysis treatment is subject to reimbursement
rates established and regulated by the federal government. These rates
do not automatically adjust for inflation. Any rate adjustments relate
to legislation and executive and Congressional budget demands, and have
little to do with the actual cost of doing business. Therefore,
dialysis services revenues cannot be voluntary increased to keep pace
with increases, supply costs or nursing and other patient care costs.
<PAGE>
PART II -- OTHER INFORMATION
------- -----------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
On June 10, 1998, the annual meeting of shareholders was held to
elect two members to the Class 3 members of the board of directors of
the Company to serve for a three year term until the annual meeting of
shareholders in the year 2001. Messrs. Thomas K. Langbein, Chairman of
the Board, Chief Executive Officer and President of the Company, and
Seymour Friend, Vice President of the Company, each of whom have been
directors of the Company for many years, were reelected as Class 3
board members by a substantial margin as follows:
Broker
For Against Abstain No-Vote
--- ------- ------- -------
Thomas K. Langbein 3,446,851 17,591 64,910 1,200
Seymour Friend 3,443,266 21,176 64,910 1,200
Item 5. Other Information
- ------ -----------------
Lytton, a wholly owned subsidiary acquired in July, 1997 by
Techdyne, a 63% owned public subsidiary of the Company, sponsors an
Incentive Savings and Retirement Plan ("Plan"). On June 10, 1998, the
board adopted the Plan as a participating employer, effective July 1,
1998. Employee eligibility requires one year of service and 21 years
of age. The Plan is paid for entirely by employee pre-tax contributions
through salary deferrals (up to 15% of salary to a maximum per year of
$10,000). The Company may provide a limited percentage of the employee's
salary deferred contribution as a matching contribution, and as deter-
mined by the board of directors, a discretionary contribution. The Plan
provides for vesting schedules, benefit payments based on different
terminations with respect to salary deferred and regular accounts, breaks
in service, methods of payment, and related benefit and termination pro-
visions. Since the Plan is a defined contribution plan and not a defined
benefit pension plan, benefits under the Plan are not insured by the
Pension Benefit Guaranty Corporation. Trustees of the Plan include
officers and employees of Lytton.
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
Part I Exhibits
(27) Financial Data Schedule (for SEC use only)
Part II Exhibits
None
(b) Reports on Form 8-K
A Form 8-K Current Report was filed on May 26, 1998, Item 5,
"Other Events" relating to the Company and its subsidiary,
Techdyne, Inc., having retained an investor relations group.
No financial statements were filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MEDICORE, INC.
/s/ DANIEL R. OUZTS
By-----------------------------------
DANIEL R. OUZTS, Vice President/
Finance, Controller and Principal
Accounting Officer
Dated: August 11, 1998
<PAGE>
EXHIBIT INDEX
Exhibit
No.
- -------
Part I Exhibits
(27) Financial Data Schedule (for SEC use only)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,674,076
<SECURITIES> 793,068
<RECEIVABLES> 6,116,174<F1>
<ALLOWANCES> 0
<INVENTORY> 8,961,309<F2>
<CURRENT-ASSETS> 26,577,945
<PP&E> 14,886,448
<DEPRECIATION> 5,704,285
<TOTAL-ASSETS> 39,240,043
<CURRENT-LIABILITIES> 8,075,506
<BONDS> 4,966,689
0
0
<COMMON> 58,569
<OTHER-SE> 16,677,424
<TOTAL-LIABILITY-AND-EQUITY> 39,240,043
<SALES> 25,773,824
<TOTAL-REVENUES> 26,126,824
<CGS> 21,818,238
<TOTAL-COSTS> 21,818,238
<OTHER-EXPENSES> 3,414,768
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 290,085
<INCOME-PRETAX> 603,733
<INCOME-TAX> (107,666)
<INCOME-CONTINUING> 380,743
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 380,743
<EPS-PRIMARY> .07
<EPS-DILUTED> .05
<FN>
<F1>Accounts receivable are net of allowance of $289,000 at June 30,
1998.
<F2>Inventories are net of reserve of $407,000 at June 30, 1998.
</FN>
</TABLE>
