FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 ---------
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
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2337 West 76th Street, Hialeah, Florida 33016
- ---------------------------------------- ----------
(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 - 5,715,540 shares as of October 31,
1998.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
- ------ ---------------------
The Consolidated Condensed Statements of Income (Unaudited) for
the three months and nine months ended September 30, 1998 and September
30, 1997 include the accounts of the Registrant and all its subsidi-
aries.
Item 1. Financial Statements
- ------ --------------------
1) Consolidated Condensed Statements of Income for the three
months and nine months ended September 30, 1998 and
September 30, 1997.
2) Consolidated Condensed Balance Sheets as of September 30,
1998 and December 31, 1997.
3) Consolidated Condensed Statements of Cash Flows for the nine
months ended September 30, 1998 and September 30, 1997.
4) Notes to Consolidated Condensed Financial Statements as of
September 30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ----------------------------------------------------------------
Results of Operations
---------------------
PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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<PAGE>
PART I -- FINANCIAL INFORMATION
---------------------------------
Item 1. Financial Statements
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MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Sales $12,129,860 $10,627,557 $37,903,684 $26,472,183
Gain on subsidiary securities
offering and warrants
exercise 89,898
Realized gain on sale of
marketable securities 12,780 12,780 49,493
Other income 252,501 166,361 605,501 457,103
----------- ----------- ----------- -----------
12,395,141 10,793,918 38,521,965 27,068,677
COST AND EXPENSES
Cost of goods sold 10,350,179 8,864,058 32,168,417 21,566,904
Selling, general and
administrative expenses 1,896,556 1,671,516 5,311,324 4,549,813
Interest expense 146,632 124,352 436,717 234,578
----------- ----------- ----------- -----------
12,393,367 10,659,926 37,916,458 26,351,295
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 1,774 133,992 605,507 717,382
Income tax (benefit) provision (132,329) 11,107 (239,995) (28,760)
----------- ----------- ----------- -----------
INCOME BEFORE MINORITY
INTEREST 134,103 122,885 845,502 746,142
Minority interest in earnings
of consolidated subsidiaries 57,840 92,101 388,496 333,305
----------- ----------- ----------- -----------
NET INCOME $ 76,263 $ 30,784 $ 457,006 $ 412,837
=========== =========== =========== ===========
Earnings per share:
Basic $.01 $.01 $.08 $.08
==== ==== ==== ====
Diluted $.01 $ -- $.07 $.06
==== ==== ==== ====
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997(A)
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,618,456 $11,099,418
Marketable securities 339,641 726,538
Accounts receivable, less allowances
of $347,000 at September 30, 1998
and $231,000 at December 31, 1997 6,019,000 6,298,089
Inventories, less allowance for obsolescence
of $492,000 at September 30, 1998 and
$238,000 at December 31, 1997 8,949,870 8,683,439
Prepaid expenses and other current assets 660,559 862,613
Deferred tax asset 1,272,860 1,294,535
----------- -----------
Total Current Assets 24,860,386 28,964,632
PROPERTY AND EQUIPMENT
Land and improvements 1,023,255 1,017,255
Building and building improvements 3,092,312 3,066,889
Equipment and furniture 9,958,868 9,129,583
Leasehold improvements 1,204,852 715,316
----------- -----------
15,279,287 13,929,043
Less accumulated depreciation and amortization 6,082,695 5,024,016
----------- -----------
9,196,592 8,905,027
DEFERRED EXPENSES AND OTHER ASSETS 149,008 141,844
COSTS IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED,
less accumulated amortization of $546,000 at
September 30, 1997 and $438,000 at December 31, 1997 3,296,116 2,850,016
----------- -----------
$37,502,102 $40,861,519
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings $ 286,194 $ 548,698
Accounts payable 3,808,475 4,384,430
Accrued expenses and other current liabilities 2,107,174 2,342,197
Current portion of long-term debt 1,032,920 1,073,924
Income taxes payable 217,921 1,758,723
----------- -----------
Total Current Liabilities 7,452,684 10,107,972
LONG-TERM DEBT 5,319,695 5,240,034
DEFERRED INCOME TAXES 2,500,042 2,592,843
MINORITY INTEREST IN SUBSIDIARIES 6,333,932 6,843,412
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized
12,000,000 shares; 5,856,940 issued,
5,780,040 shares outstanding at September 30,
1998; 5,848,740 shares outstanding at
December 31, 1997 58,569 58,569
Capital in excess of par value 12,434,863 13,040,877
Retained earnings 3,307,523 2,850,517
Accumulated other comprehensive income:
Foreign currency translation adjustment 16,840 (31,128)
Unrealized gain on marketable securities 210,577 175,213
----------- -----------
Total accumulated other comprehensive income 227,417 144,085
----------- -----------
Treasury stock at cost; 76,900 shares at
September 30, 1998; 8,200 shares at
December 31, 1997 (132,623) (16,790)
----------- -----------
Total Stockholders' Equity 15,895,749 16,077,258
----------- -----------
$37,502,102 $40,861,519
=========== ===========
</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>
Nine Months Ended
September 30,
------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 457,006 $ 412,837
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation 1,058,588 689,299
Amortization 118,690 61,786
Bad debt expense (net recovery) 107,954 34,464
Provision for inventory obsolescence 368,472 91,423
Gain on sale of securities (12,780) (49,493)
Gain on subsidiary securities offering
and warrants exercise (89,899)
Minority interest 388,496 333,305
Deferred income taxes (92,984) 37,096
Consultant stock option expense 17,651
Increase (decrease) relating to operating
activities from:
Accounts receivable 197,885 (1,280,292)
Inventories (612,963) (2,039,637)
Prepaid expenses and other current assets 170,996 (415,172)
Accounts payable (586,876) 920,423
Accrued expenses and other current liabilities (229,301) (7,753)
Income taxes payable (1,540,802) (677,250)
----------- -----------
Net cash used in operating activities (189,968) (1,978,863)
INVESTING ACTIVITIES
Redemption of minority interest in subsidiaries (385,375)
Additions to property and equipment, net of
minor disposals (1,123,450) (1,690,844)
Subsidiary acquisition payments (153,818) (2,166,011)
Advance toward subsidiary acquisition price guarantee (1,277,711)
Proceeds from sale of securities 252,780 49,493
Deferred expenses and other assets (17,890) (105,611)
----------- -----------
Net cash used in investing activities (2,705,464) (3,912,973)
FINANCING ACTIVITIES
Line of credit funding for subsidiary acquisition 2,500,000
Other line of credit (payments) borrowings (262,504) 373,889
Subsidiary repurchase of stock (63,605) (206,250)
Repurchase of stock (115,833)
Payments on long-term borrowings (162,593) (253,581)
Exercise of stock options 1,150
Dividend payment to minority shareholder (3,966)
Deferred financing costs 374 (2,979)
Proceeds from exercise of warrants and stock options 694,328
----------- -----------
Net cash (used in) provided by
financing activities (603,011) 3,101,441
Effect of exchange rate fluctuations on cash 17,481 (129,169)
----------- -----------
Decrease in cash and cash equivalents (3,480,962) (2,919,564)
Cash and cash equivalents at beginning of year 11,099,418 10,795,298
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,618,456 $ 7,875,734
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies
Consolidation
The Consolidated Condensed Financial Statements include the
accounts of Medicore, Inc., Medicore's 67.1% 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:
September 30, December 31,
1998 1997
----------- -----------
Electronic and mechanical components, net:
Finished goods $ 772,372 $ 554,903
Work in process 2,207,956 1,772,724
Raw materials and supplies 5,555,303 5,997,682
----------- -----------
8,535,631 8,325,309
Medical supplies 414,239 358,130
----------- -----------
$8,949,870 $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 poten-
tially dilutive securities were included in the diluted earnings per
share computation for the three months ended or nine months ended
September 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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income, numerator-basic
computation $ 76,263 $ 30,784 $ 457,006 $ 412,837
Adjustment due to subsidiaries'
dilutive securities (10,073) (7,935) (74,905) (42,289)
---------- ---------- ---------- ----------
Net income as adjusted,
numerator-diluted computation $ 66,190 $ 22,849 $ 382,101 $ 370,548
========== ========== ========== ==========
Weighted average shares,
denominator-basic computation 5,814,845 5,548,244 5,833,363 5,487,709
Effect of dilutive stock
securities:
Stock options 283,998 380,117
---------- ---------- ---------- ----------
Weighted average shares
as adjusted, denominator-
diluted computation 5,814,845 5,832,242 5,833,363 5,867,826
========== ========== ========== ==========
Earnings per share:
Basic $.01 $.01 $.08 $.08
==== ==== ==== ====
Diluted $.01 $ -- $.07 $.06
==== ==== ==== ====
</TABLE>
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 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 nine months ended September 30, 1998 and September 30, 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 78,263 $ 30,784 $ 457,006 $ 412,837
Other comprehensive income:
Foreign currency translation
adjustments 27,571 (48,908) 47,968 (49,915)
Unrealized gain (loss) on
marketable securities:
Unrealized holding gain
(loss) arising during
period, net of tax (91,626) (30,542) 62,225 (462,949)
Less: reclassification
adjustment, net of tax, for
gain included in net income (26,861) (26,861) (32,364)
---------- ---------- ---------- ----------
Unrealized gain (loss) on
marketable securities (118,487) (30,542) 35,364 (495,313)
---------- ---------- ---------- ----------
Total other comprehensive
income (loss) (90,616) (79,450) 83,332 (545,228)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (12,653) $ (48,666) $ 540,338 $ (132,391)
========== ========== ========== ==========
</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 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. 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 information 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 nine months ended
September 30, 1998 and September 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 nine months
ended September 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 audited annual report for the year ended December 31, 1997.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 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 remainder of 1997 or during the first nine
months of 1998. The Company has recorded these securities at their
fair value of approximately $340,000 at September 30, 1998 and $283,000
at December 31, 1997 with the unrealized gain credited to a separate
component of stockholders' equity, net of income tax effect. Fair
value was determined using quoted market prices by the Nasdaq stock
market. The closing price of Viragen stock was $1.31 as of September
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 $1,600,000 at September 30, 1998 and $1,000,000 at December 31, 1997.
This line matures May 1, 2000 and has monthly payments of interest at
prime. Techdyne's commercial term loan effective December 29, 1997 with
an initial principal balance of $1,500,000 had an outstanding balance of
$1,275,000 at September 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 approximately $644,000 at
September 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 $97,000 at
September 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 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.
Lytton has a $1,500,000 revolving bank line of credit requiring
monthly interest payments at prime plus 1/2% which matured August 1, 1998
and was renewed on the same terms and conditions through June 30, 1999.
The interest rate on this loan was 9% at September 30, 1998 and December
31, 1997. There was an outstanding balance on this loan of $286,000 as of
September 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 $783,000 at September 30, 1998 and $933,000 as
of December 31, 1997. Lytton also has a $500,000 equipment loan agreement
with the same bank payable through August 1, 2003 with interest at prime
plus 1%. There was no outstanding balance on this loan as of September 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 September 30, 1998 and December 31,
1997.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1998
(Unaudited)
NOTE 4--Long-Term Debt--(Continued)
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 $231,000 at
September 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 $167,000 at September 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 was not renewed. 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 $565,000
at September 30, 1998 and $569,000 at December 31, 1997.
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 $168,000 and $192,000 at
September 30, 1998 and December 31, 1997, respectively. Also in December
1988, DCA obtained a $600,000 mortgage on its building in Easton,
Maryland on the same terms as the Lemoyne property. The remaining
principal balance under this mortgage amounted to approximately $210,000
and $240,000 at September 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 5.4% to 11.8 % pursuant to various schedules extending
through July 2002. The balance outstanding under this agreement
amounted to approximately $408,000 at September 30, 1998 and $285,000
at December 31, 1997. Additional financing of $185,000 during 1998
represents a noncash financing activity which is a supplemental
disclosure required by FAS 95.
Interest payments on long-term debt amounted to $147,000 and
$444,000 for the three months and nine months ended September 30, 1998
and $115,000 and $223,000 for the same periods of the preceding year.
NOTE 5--Income Taxes
Techdyne files separate federal and state income tax returns with
its income tax liability reflected on a separate return basis. Lytton
is included in Techdyne's consolidated 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. DCA also files 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
differences 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 benefit of approximately
$103,000 and $147,000 for the three months and nine months ended
September 30, 1998 and a domestic income tax expense of $48,000 and
$72,000 for the same periods of the preceding year, with the prior
year amount including deferred taxes of approximately $34,000 for the
nine months ended September 30, 1997 from a gain on Techdyne warrant
exercises with no such deferred taxes in the third quarter of 1997.
Techdyne (Scotland) had an income tax benefit of approximately
$29,000 and $93,000 for the three months and nine months ended September
30, 1998 and $36,000 and $100,000 for the same periods of the preceding
year.
Income tax payments were $19,000 and $1,623,000 for the three months
and nine months ended September 30, 1998 and $364,000, and $770,000 for
the three months and nine months ended September 30, 1997.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 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 per share through May 24,
1999. On June 30, 1998, 115,000 of these options were exercised with a
remaining balance of 56,600 outstanding as of September 30, 1998.
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 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 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 which options are exercisable for a period of five years
through November 9, 2000 at $1.50 per share. On June 10, 1998, DCA
granted a five-year non-qualified stock option to a new board member for
5,000 shares exercisable at $2.25 per share through June 9, 2003. At
September 30, 1998 there are 13,000 options outstanding under the 1995
Plan.
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 September 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.
As part of the consideration pursuant to an agreement for investor
relations and corporate communications services agreement, the Company
granted options for 20,000 shares of its common stock exercisable for
three years through May 14, 2001 at $4.25 per share and Techdyne granted
options for 25,000 shares of its common stock exercisable for three
years through May 14, 2001 at $4.25 per share. Options for 5,000 shares
of the Company's common stock and 6,250 shares of Techdyne's common
stock vested during the quarter ended June 30, 1998 with no additional
options vesting due to cancellation of this agreement in August 1998.
Pursuant to FAS 123, the Company recorded approximately $18,000 expense
for options vesting under this agreement. 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 years of age requirement. DCA has made no contributions
under this plan as of September 30, 1998.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially
all of its employees. The discretionary profit sharing and matching
expense of Lytton for the nine months ended September 30, 1998 amounted
to approximately $33,000. The Company and Techdyne have adopted this
plan as participating employers effective
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1998
(Unaudited)
NOTE 7--Commitments And Contingencies--(Continued)
July 1, 1998 with no discretionary profit sharing and matching
expense as of September 30, 1998 other than that of Lytton. The Plan
has one year of service and 21 years of age eligibility requirements.
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 cal-
culated on any unpaid balance as of August 1, 1999. During the nine
months ended September 30, 1998 a total of $83,000 was paid under this
agreement leaving an unpaid balance of approximately $83,000 as of
September 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.
NOTE 8--Subsidiary Stock Offerings
During the first nine months 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 approxi-
mately $90,000 with applicable income taxes of approximately $34,000,
which resulted in a net gain of approximately $56,000 during the first
nine months 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 cash and issuance of 300,000 shares
of Techdyne's common stock which have been registered for the 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 is
being amortized over 25 years. 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 additional consideration is due, the then current fair value
of the consideration 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 operations 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. The advance is presented in the
Stockholders' Equity section of Techdyne's balance sheet with capital in
excess of par value and minority interest having been adjusted in the
Company's balance sheet for the Company's and minority interest respec-
tive ownership interest in Techdyne. 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)
September 30, 1998
(Unaudited)
NOTE 9--Acquisition--(Continued)
The following pro forma consolidated condensed financial information
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
Nine Months Ended
September 30,1997
-----------------
Total revenues $37,769,000
===========
Net income $ 646,000
===========
Earnings per share:
Basic $.11
====
Diluted $.10
====
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 inpatient 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
receivable 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 were sold in September 1998 for approximately $253,000
resulting in a gain of approximately $13,000.
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
results of operations of these businesses. Such expenses amounted
to approximately $105,000 for the nine months ended September 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
Nine Months Ended
September 30, 1997
------------------
Total revenue $25,552,000
===========
Net income $ 250,000
===========
Earnings per share:
Basic $.05
====
Diluted $.04
====
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 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 September
30, 1998, the Company had repurchased approximately 77,000 shares of
common stock at a cost of approximately $133,000 which is reflected
as treasury stock.
In September 1998, DCA announced its intent to repurchase up to
300,000 shares of its outstanding common stock. DCA repurchased 60,000
shares for approximately $64,000 in September 1998, and had previously
acquired 100,000 shares for approximately $206,000 in June 1997.
<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
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 62% owned public subsidiary, Techdyne, is engaged
as a manufacturer, the character and development of the dialysis industry
in which its 67% 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 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 State-
ment, Form SB-2, as filed with the Commission (effective on April 17,
1996) as amended and supplemented. 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 obso-
lescence. 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.
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 noncompetitive. In
addition, new assembly and testing technologies and equipment required to
remain competitive are likely to require significant capital investment.
The Company competes with much larger electronic manufacturing
entities for expansion opportunities. 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'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 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.
<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 the Health Care Financing Admin-
istration ("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 com-
mercial 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 suit-
able 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 a new center in Carlisle, Pennsyl-
vania in July, 1997. Its fourth center in Manahawkin, New Jersey has
commenced patient treatment and is awaiting regulatory approval. Two
additional centers, one in Pennsylvania and one in New Jersey are under
construction. 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
which has modified the software to alleviate any interruptions in
electronic billing and is currently being tested. The cost of the new
software modifications to date has been minimal and the Company does
not anticipate that there will be any additional material expenses
involved. Substantial revenues are derived from Medicare reimbursement
and DCA has recently been advised by the HCFA that it is working
diligently to insure Medicare's computer systems and networks are year
2000 compliant and that billing systems interface and work properly with
no interruptions in claims and payment processing. DCA's equipment
suppliers have also indicated the year 2000 issue will not affect per-
formance so that DCA, and therefore the Company may continue to provide
proper patient care.
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. The Visual Manufacturing
software will be fully integrated prior to the end of 1999 and should
resolve the "year 2000" issue for Techdyne because the software is
already year 2000 compliant.
<PAGE>
"Year 2000" Impact (continued)
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 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.
Results of Operations
Consolidated revenues increased by approximately $1,601,000 (15%)
and $11,453,000 (42%) for the three months and nine months ended
September 30, 1998 compared to the same periods of the preceding year.
Sales revenues for the three months and nine months ended September 30,
1998 increased by $1,502,000 (14%) and $11,432,000 (43%) compared to
the preceding year.
Techdyne sales increased approximately $1,995,000 (22%) and
$12,496,000 (57%) for the three months and nine months ended September
30, 1998 compared to the same periods of the preceding year. The
increase was largely attributable to Lytton for which sales of
$5,146,000 and $14,796,000 were included for the three months and nine
months ended September 30, 1998 compared to $2,779,000 for the same
periods of the prior year commencing with Techdyne's acquisition of
Lytton on July 31, 1998. There was an increase in domestic sales of
$2,558,000 (34%) and $13,461,000 (78%), including the Lytton sales, and
a decrease in European sales of $563,000 (36%) and $964,000 (20%)
compared to the same periods of the preceding year.
Approximately 46% of Techdyne's consolidated sales and 41% of the
Company's consolidated sales for the nine months ended September 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 11% and 10% and PMI Food Equipment Group for 18% and 16%,
respectively. PMI Food Equipment Group is Lytton's major customer and
represented 42% of Lytton's sales for the nine months ended September 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.
Sales of Techdyne's Scottish-based subsidiary Techdyne (Scotland)
accounted for approximately 28% and 45% of the sales of Techdyne
(Scotland) for the nine months ended September 30, 1998 and September
30, 1997, respectively. The bidding for Compaq orders has become more
competitive which has continued to result 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; however,
there can be no assurance as to the success of such efforts.
Medical product sales revenues decreased by approximately $113,000
(36%) and $241,000 (18%) for the three months and nine months ended
September 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 $392,000 (31%)
and $839,000 (25%) for the three months and nine months ended September
30, 1998 compared to the same periods of the preceding year. This
decrease reflected lost revenues of approximately $515,000 and $1,507,000
for those periods 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 Pennsylvania dialysis centers of approxi-
mately $103,000 and $648,000 for the three months and nine months
ended September 30, 1998 including revenues of approximately $107,000
and $535,000 for the three months and nine months ended September 30,
1998 from a new dialysis center located in Carlisle, Pennsylvania,
which commenced operations in July 1997. Although the operations of
the 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 $86,000 and $148,000 for the
three months and nine months ended September 30, 1998 which included
interest earned on proceeds invested from the October 1997 sale of
DCA's Florida dialysis operations.
<PAGE>
Results of Operations (continued)
Cost of goods sold as a percentage of consolidated sales amounted
to 85% for the three months and nine months ended September 30, 1998
compared to 83% and 81% 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% for the three months and nine months ended September 30, 1998
compared to 88% and 86% 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 69%
and 68% for three months and nine months ended September 30, 1998 compared
to 66% and 64% for the same periods of the preceding year as a result of a
change in product mix due to decreased sales of the principal product of
this division.
Cost of medical services sales increased to 72 % for the three months
and nine months ended September 30, 1998 compared to 60% and 61% 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 the Company's new Carlisle, Pennsylvania center which is
still in its developmental stage with the preceding year including higher
hospital treatment revenues, which have a substantially lower cost of
sales, with the Company's Florida hospital operations having been sold on
October 31, 1997.
Selling, general and administrative expenses increased $225,000 and
$762,000 for the three months and nine months ended September 30, 1998
compared to the same periods of the preceding year. This increase
reflected 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 centers presently under construction, 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 $22,000 and $202,000 for
the three months and nine months ended September 30, 1998 compared to the
same periods of the preceding year. This includes increases in interest
of approximately $16,000 and $122,000 for the three months and nine
months ended September 30, 1998 associated with Techdyne's financing of
the Lytton acquisition and increases in interest on Lytton's financing
and debt agreements of approximately $11,000 and $89,000 for these periods
with such interest included since Lytton's acquisition on July 31, 1997.
A substantial portion of the Company's outstanding borrowings are
tied to the prime interest rate. The prime rate was 8.5% at September 30,
1998 and December 31, 1997.
Liquidity and Capital Resources
Working capital totaled $17,408,000 at September 30, 1998, which
reflected a decrease of $1,449,000 (8%) during the nine months ended
September 30, 1998. Included in the changes in components of working
capital was a decrease of $3,481,000 in cash and cash equivalents, which
included net cash used in operating activities of $190,000 (including a
decrease in income taxes payable of $1,541,000 largely from tax payments
on the gain on the Florida dialysis operations sale), net cash used in
investing activities of $2,705,000 (including funds used for redemption
of minority interest of dialysis subsidiaries of $385,000, additions to
property, plant and equipment of $1,123,000 and additional consideration
of $154,000 regarding the Lytton acquisition and an advance of $1,278,000
toward the Lytton stock price guarantee) and net cash used in financing
activities of $603,000 (including line of credit payments of $263,000,
stock repurchases of $179,000 and payments on long-term debt of $163,000).
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
$1,275,000 at September 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 $1,600,000 was outstanding at September 30, 1998 and $1,000,000 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. See Note 4 to "Notes to Consolidated Condensed Financial State-
ments."
<PAGE>
Liquidity and Capital Resources (continued)
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
$644,000 at September 30, 1998 and $663,000 at December 31, 1997, and 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 $97,000 at
September 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 indebted-
ness due from Techdyne, provided that Techdyne may make payments to the
Company on this subordinated 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 was
not 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
$565,000 at September 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."
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, 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, resulting in additional consideration of approximately $154,000
for first year sales levels paid in April 1998. Based upon the closing
price of Techdyne's common stock on September 30, 1998, the shares
issued in the Lytton acquisition had a fair value of $1,164,000 which
could result in additional consideration of approximately $1,236,000
payable in either in cash or in approximately 319,000 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. Techdyne advanced approximately $1,280,000 to
the 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 combination of both. See
Note 9 to "Notes to Consolidated Condensed Financial Statements."
Lytton has a $1,500,000 revolving bank line of credit requiring
monthly interest payments at prime plus 1/2% which matured August 1,
1998 and was renewed on the same terms and conditions. There was an
outstanding balance on this loan of $286,000 as of September 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 $783,000 at September 30, 1998 and $933,000 as of December
31, 1997. Lytton also has a $500,000 equipment loan agreement with the
same bank payable through August 1, 2003 with interest at prime plus 1%.
There was no outstanding balance on this loan as of September 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."
<PAGE>
Liquidity and Capital Resources (continued)
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
$231,000 at September 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 $167,000 at
September 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, obtained mortgages totaling
$1,080,000 on its two buildings, one in Lemoyne, Pennsylvania and the
other in Easton, Maryland, which housed the Company's dialysis centers.
These centers were sold in October, 1989. The mortgages had a combined
remaining balance of $378,000 and $432,000 at September 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
$408,000 and $285,000 at September 30, 1998 and December 31, 1997,
respectively, which includes additional financing of approximately
$185,000 in 1998. See Note 4 to "Notes to Consolidated Condensed
Financial Statements."
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 expan-
sion or that sufficient outside financing would be available to fund
expansion. See Note 10 to "Notes to Consolidated Condensed Financial
Statements."
DCA's fourth center in Manahawkin, New Jersey is awaiting regu-
latory approval as a Medicare provider, and DCA is constructing two
new dialysis centers, one in New Jersey and one in Pennsylvania.
The professional corporation providing medical director services to
both the New Jersey centers has a 20% interest in those DCA subsidi-
aries.
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 Company has repurchased 69,000 shares of its common stock for
approximately $116,000 during the first nine months of 1998. In
September 1998, DCA repurchased 60,000 shares of its outstanding
common stock for approximately $64,000. See Note 11 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
<PAGE>
Inflation (continued)
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. There-
fore, 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 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
There were no reports on Form 8-K filed for the quarter ended
September 30, 1998.
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: November 16, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,618,456
<SECURITIES> 339,641
<RECEIVABLES> 6,019,000<F1>
<ALLOWANCES> 0
<INVENTORY> 8,949,870<F2>
<CURRENT-ASSETS> 24,860,386
<PP&E> 15,279,287
<DEPRECIATION> 6,082,695
<TOTAL-ASSETS> 37,502,102
<CURRENT-LIABILITIES> 7,452,684
<BONDS> 5,319,695
0
0
<COMMON> 58,569
<OTHER-SE> 15,837,180
<TOTAL-LIABILITY-AND-EQUITY> 37,502,102
<SALES> 37,903,684
<TOTAL-REVENUES> 38,521,965
<CGS> 32,168,417
<TOTAL-COSTS> 32,168,417
<OTHER-EXPENSES> 5,311,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 436,717
<INCOME-PRETAX> 605,507
<INCOME-TAX> (239,995)
<INCOME-CONTINUING> 845,502
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 457,006
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
<FN>
<F1> Accounts receivable are net of allowance of $347,000 at September
30, 1998.
<F2> Inventories are net of reserve of $492,000 at September 30, 1998.
</FN>
</TABLE>
