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, 1999
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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
- --------------------------------------------- --------------------
(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 - 5,707,540 shares as of October 31, 1999
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Operations (Unaudited) for
the three months and nine months ended September 30, 1999 and September 30,
1998 include the accounts of the Registrant and all its subsidiaries.
Item 1. Financial Statements
- ------ --------------------
1) Consolidated Condensed Statements of Operations for the three
months and nine months ended September 30, 1999 and September 30,
1998.
2) Consolidated Condensed Balance Sheets as of September 30, 1999 and
December 31, 1998.
3) Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998.
4) Notes to Consolidated Condensed Financial Statements as of September
30, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
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PART II -- OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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<PAGE>
PART I -- FINANCIAL INFORMATION
---------------------------------
Item 1. Financial Statements
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MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Sales $15,993,496 $12,129,860 $39,427,782 $37,903,684
Realized gain on sale of marketable
securities --- 12,780 228,078 12,780
Other income 104,485 252,501 360,976 605,501
----------- ----------- ----------- -----------
16,097,981 12,395,141 40,016,836 38,521,965
COST AND EXPENSES
Cost of goods sold 13,313,681 10,354,055 33,557,344 32,218,409
Selling, general and administrative
expenses 2,064,583 1,892,680 6,107,273 5,261,332
Interest expense 186,052 146,632 475,906 436,717
----------- ----------- ----------- -----------
15,564,316 12,393,367 40,140,523 37,916,458
INCOME (LOSS)BEFORE INCOME TAXES
AND MINORITY INTEREST 533,665 1,774 (123,687) 605,507
Income tax provision (benefit) 98,621 (132,329) 48,054 (239,995)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST 435,044 134,103 (171,741) 845,502
Minority interest in earnings (loss)
of consolidated subsidiaries 220,673 57,840 26,807 388,496
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 214,371 $ 76,263 $ (198,548) $ 457,006
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $.04 $.01 $(.03) $.08
==== ==== ===== ====
Diluted $.04 $.01 $(.04) $.07
==== ==== ===== ====
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998(A)
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,178,809 $ 7,294,707
Marketable securities 21,120 210,007
Accounts receivable, less allowances of $388,000
at September 30, 1999 and $317,000 at December 31, 1998 10,207,676 6,260,748
Inventories, less allowances for obsolescence of $746,000
at September 30, 1999 and $559,000 at December 31, 1998 11,033,515 8,393,770
Prepaid expenses and other current assets 564,705 648,088
Deferred tax asset 644,699 561,822
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Total current assets 27,650,524 23,369,142
PROPERTY AND EQUIPMENT
Land and improvements 1,017,255 1,018,455
Building and building improvements 3,088,810 3,073,777
Equipment and furniture 10,583,373 10,279,217
Leasehold improvements 1,761,305 1,489,445
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16,450,743 15,860,894
Less accumulated depreciation and amortization 6,711,619 6,360,632
----------- -----------
9,739,124 9,500,262
DEFERRED EXPENSES AND OTHER ASSETS 133,291 183,771
COSTS IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED,
less accumulated amortization of $707,000 at September 30,
1999, and $585,000 at December 31, 1998 3,424,022 3,256,915
----------- -----------
$40,946,961 $36,310,090
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings $ 2,868,921 $ 962,407
Accounts payable 7,124,022 3,607,414
Accrued expenses and other current liabilities 2,500,522 2,023,030
Current portion of long-term debt 2,693,730 953,452
Income taxes payable 228,569 402,333
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Total current liabilities 15,415,764 7,948,636
LONG-TERM DEBT 3,540,492 5,126,530
DEFERRED INCOME TAXES 1,800,143 1,800,143
MINORITY INTEREST IN SUBSIDIARIES 5,470,779 6,067,089
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 12,000,000 shares;
5,707,540 shares issued and outstanding at September 30,
1999; 5,856,940 shares issued and 5,715,540 shares outstanding
at December 31, 1998 57,075 58,569
Capital in excess of par value 11,961,030 12,470,817
Retained earnings 2,750,390 2,948,938
Accumulated other comprehensive (loss) income:
Foreign currency translation adjustment (43,696) (19,457)
Unrealized (loss) gain on marketable securities for sale (5,016) 130,204
----------- -----------
Total accumulated other comprehensive (loss) income (48,712) 110,747
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Treasury stock at cost; 141,400 shares --- (221,379)
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Total Stockholders' Equity 14,719,783 15,367,692
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$40,946,961 $36,310,090
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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, 1998 filed with the Securities and Exchange
Commission in March, 1999.
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,
-------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (198,548) $ 457,006
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation 1,275,569 1,058,588
Amortization 132,624 118,690
Bad debt expense (net recovery) 75,908 107,954
Provision for inventory obsolescence 304,665 368,472
Gain on sale of securities (228,078) (12,780)
Minority interest 26,807 388,496
Deferred income taxes --- (92,984)
Stock option compensation 153,000 ---
Consultant stock options expense --- 17,651
Increase (decrease) relating to operating activities from:
Accounts receivable (4,025,045) 197,885
Inventories (2,942,683) (612,963)
Prepaid expenses and other current assets 117,742 170,996
Accounts payable 3,515,663 (586,876)
Accrued expenses and other current liabilities 479,197 (229,301)
Income taxes payable (173,764) (1,540,802)
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Net cash used in operating activities (1,486,943) (189,968)
INVESTING ACTIVITIES
Redemption of minority interest in subsidiaries --- (385,375)
Additions to property and equipment, net of minor disposals (1,383,767) (1,123,450)
Subsidiary acquisition payments (1,389,531) (153,818)
Advance toward subsidiary acquisition price guarantee --- (1,277,711)
Proceeds from sale of securities 228,078 252,780
Purchase of marketable securities (29,210) ---
Minority interest in subsidiaries 6,040 ---
Deferred expenses and other assets 40,356 (17,890)
----------- -----------
Net cash used in investing activities (2,528,034) (2,705,464)
FINANCING ACTIVITIES
Borrowings for subsidiary acquisition guarantee advance --- 600,000
Net short-term line of credit borrowings (payments) 1,906,514 (262,504)
Short-term bank borrowings 375,000 ---
Payments on short-term borrowings (375,000) ---
Subsidiary repurchase of stock --- (63,605)
Repurchase of stock (8,166) (115,833)
Long-term borrowings 766,667 ---
Payments on long-term borrowings (749,073) (762,593)
Exercise of stock options 500 1,150
Deferred financing costs (139) 374
----------- -----------
Net cash provided by (used in) financing activities 1,916,303 (603,011)
Effect of exchange rate fluctuations on cash (17,224) 17,481
----------- -----------
Decrease in cash and cash equivalents (2,115,898) (3,480,962)
Cash and cash equivalents at beginning of year 7,294,707 11,099,418
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,178,809 $ 7,618,456
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies
Consolidation
The Consolidated Condensed Financial Statements include the accounts of
Medicore, Inc., Medicore's 68% owned subsidiary, Dialysis Corporation of
America ("DCA") and Medicore's 72.5% owned subsidiary, Techdyne, Inc.
("Techdyne") and its subsidiaries Lytton Incorporated ("Lytton"), Techdyne
(Europe) Limited ("Techdyne (Europe)"), and Techdyne (Livingston) Limited
which is a subsidiary of Techdyne (Europe), collectively known as the Company.
All material intercompany accounts and transactions have been eliminated in
consolidation.
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,
1999 1998
------------ ------------
Electronic and mechanical components, net:
Finished goods $ 1,321,169 $ 794,297
Work in process 2,528,888 1,845,954
Raw materials and supplies 6,551,477 5,234,249
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10,401,534 7,874,500
Medical supplies 631,981 519,270
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$11,033,515 $ 8,393,770
=========== ===========
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities is comprised as follows:
September 30, December 31,
1999 1998
------------ -----------
Accrued compensation $ 875,262 $ 507,901
Other 1,625,260 1,515,129
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$ 2,500,522 $ 2,023,030
=========== ===========
Earnings Per Share
Diluted earnings per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants, using the treasury stock method and average market price. No
potentially dilutive securities were included in the diluted earnings per
share computation for the three months or nine months ended September 30,
1999 as a result of exercise prices during the third quarter and as a result
of exercise prices and the net loss for the nine month period and none were
included for the same periods of the preceding year due to exercise prices,
since to include them would be anti-dilutive.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
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,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income, numerator-basic
computation $ 214,371 $ 76,263 $ (198,548) $ 457,006
Adjustment due to subsidiaries' dilutive
securities (10,011) (10,073) (22,242) (74,905)
----------- ----------- ----------- -----------
Net (loss) income as adjusted, numerator -
diluted computation $ 204,360 $ 66,190 $ (220,790) $ 382,101
=========== =========== =========== ===========
Weighted average shares 5,707,540 5,814,845 5,705,540 5,833,363
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $.04 $.01 $(.03) $.08
==== ==== ===== ====
Diluted $.04 $.01 $(.04) $.07
==== ==== ===== ====
</TABLE>
Comprehensive Income
In 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income" (FAS 130). This state-
ment establishes rules for the reporting of comprehensive income and its
components. Comprehensive income consists of net income (loss), foreign
currency translation adjustments and unrealized gain (loss) on marketable
securities. Below is a detail of comprehensive (loss) income for the three
months and nine months ended September 30, 1999 and September 30, 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 214,371 $ 76,263 $ (198,548) $ 457,006
Other comprehensive income:
Foreign currency translation adjustments 41,393 27,571 (24,239) 47,968
Unrealized gain (loss) on marketable
securities:
Unrealized holding (loss) gain arising
during period, net of tax (2,329) (91,626) (5,016) 62,225
Less: reclassification adjustment, net of
tax, for gain included in net income(loss) (26,861) (130,204) (26,861)
----------- ----------- ----------- -----------
Unrealized (loss) gain on marketable
securities (2,329) (118,487) (135,220) 35,364
----------- ----------- ----------- -----------
Total other comprehensive income (loss) 39,064 (90,916) (159,459) 83,332
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 253,435 $ (14,653) $ (358,007) $ 540,338
=========== =========== =========== ===========
</TABLE>
Marketable Securities
Marketable securities are classified as available for sale and are
reported at fair value. Following is a summary of marketable securities:
September 30, December 31,
1999 1998(A)
---- ------
Cost $ 29,210 $ --
Unrealized holding gains 210,007
Unrealized holding losses (8,090) --
Fair value $21,120 $201,007
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Unrealized holding losses and gains, which amounted to $(8,090), less a
deferred tax credit of $3,074 at September 30, 1999 and $210,007, less
deferred tax of $79,803, at December 31, 1998, are included as a separate
component of stockholders' equity. Proceeds and realized gains on sales
of securities available for sale were approximately $228,000 for the nine
months ended September 30, 1999. Proceeds from sales of securities were
approximately $253,000 with a gain of approximately $13,000 for the same
period of the preceding year. See Notes 3 and 10.
New Pronouncements:
In June, 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for
fiscal years beginning after June 15, 2000. FAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities
and requires, among other things, that all derivatives be recognized as
either assets or liabilities in the statement of financial position and that
these instruments be measured at fair value. The Company is in the process
of determining the impact that the adoption of FAS 133 will have on its
consolidated financial statements.
Reclassification
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
NOTE 2--Interim Adjustments
The financial summaries for the three months and nine months ended
September 30, 1999 and September 30, 1998 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, 1999 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 1999.
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these Consol-
idated Condensed Financial Statements be read in conjunction with the
financial statements and notes included in the Company's latest annual report
for the year ended December 31, 1998.
NOTE 3--Transactions With Viragen, Inc.
The Company owned approximately 259,000 shares of common stock of
Viragen, formerly a majority-owned subsidiary of the Company, as of December
31, 1998. The carrying value of these securities was written off as of
December 31, 1991. These securities were recorded at their fair value of
approximately $210,000 at December 31, 1998 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 NASDAQ. The Company
sold these securities during the second quarter of 1999 realizing a gain of
approximately $228,000.
NOTE 4--Long-Term Debt
Techdyne's $1,600,000 line of credit had an outstanding balance of
$1,600,000 at September 30, 1999 and December 31, 1998. This line matures
May 1, 2000 and has monthly payments of interest at prime. Techdyne's commer-
cial term loan effective December 29, 1997 with an initial principal balance
of $1,500,000,had an outstanding balance of $975,000 at September 30, 1999
and $1,200,000 at December 31, 1998, 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%.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(Unaudited)
NOTE 4--Long-Term Debt--(Continued)
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 $614,000 at September
30, 1999 and $636,000 at December 31, 1998 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 approxi-
mately $57,000 at September 30, 1999 and $87,000 at December 31, 1998, 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 on the revolving loan and the three commercial term loans and
has subordinated Techdyne's intercompany indebtedness to the Company to the
bank's position.
Lytton had a $1,500,000 revolving bank line of credit requiring monthly
interest payments at prime plus 1/2% maturing June 30, 1999 which was
increased to $3,000,000 and extended to June 30, 2000. The interest rate on
this loan was 8.75% at September 30, 1999 and 8.25% at December 31, 1998.
There was an outstanding balance on this loan of $2,839,000 at September 30,
1999 and $962,000 at December 31, 1998. Lytton had 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 was to have an option to convert the note to a variable rate. Lytton
replaced this loan on June 30, 1999 with a $1,400,000 installment loan with
the additional funding in July 1999 with monthly payments of $23,333 plus
interest payable in 60 monthly installments commencing August 1, 1999 and
interest at prime plus 1/2%. The balance outstanding on this loan was
approximately $1,353,000 at September 30, 1999 and $733,000 at December 31,
1998. Lytton also has a $500,000 equipment loan agreement with the same bank
payable through June 30, 2004 with interest at prime plus 1%, which replaced
an agreement of the same amount which had a maturity of August 1, 2003.
There was no balance outstanding on this loan as of September 30, 1999 or
December 31, 1998. All of these bank loans are secured by the business
assets of Lytton.
The prime rate was 8.25% as of September 30, 1999 and 7.75% as of
December 31, 1998.
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extended through July 1999 with
nterest rates ranging from 8.55% to 10.09%. The remaining principal balance
under these financing obligations amounted to $112,000 at December 31, 1998.
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 $124,000 at September 30, 1999 and
$157,000 at December 31, 1998 and is secured by equipment.
Techdyne (Europe) has a mortgage on its facility which had a principal
balance with a U.S. dollar equivalency of $513,000 at September 30, 1999 and
$545,000 at December 31, 1998.
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 $133,000 and $160,000 at September 30, 1999 and
December 31, 1998, 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 $167,000 and $200,000 at September 30, 1999 and
December 31, 1998, respectively.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(Unaudited)
NOTE 4--Long-Term Debt--(Continued)
DCA has an equipment financing agreement providing financing for kidney
dialysis machines for its facilities with interest at rates ranging from
4.13% to 11.84% pursuant to various schedules extending through May 2005.
The balance outstanding under this agreement amounted to approximately
$507,000 at September 30, 1999 and $449,000 at December 31, 1998. Addi-
tional financing of $141,000 and $185,000 during the nine months ended
September 30, 1999 and September 30, 1998, respectively, represents a noncash
financing activity which is a supplemental disclosure required by FAS 95.
Interest payments on long-term debt amounted to $161,000 and $449,000
for the three months and nine months ended September 30, 1999 and $444,000
and $147,000 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 available to
be utilized to offset income taxable for federal tax return purposes,
including that 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 differ-
ences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
unrealized (loss) gain on marketable securities for sale is net of deferred
taxes. For financial reporting purposes, a valuation allowance has been
recognized to offset a portion of the deferred tax assets.
The Company had a domestic income tax provision (benefit) of approxi-
mately $99,000 and $48,000 for the three months and nine months ended
September 30, 1999 and $(103,000) and $(147,000) for the same periods of
the preceding year.
Techdyne (Europe) had an income tax benefit of approximately $29,000 and
$93,000 for the three months and nine months ended September 30, 1998 with no
such benefit or provision for the same periods of 1999.
Income tax payments were $41,000 and $6,000 for the three months and
nine months ended September 30, 1999 and $19,000 and $1,623,000 for the same
periods of the preceding year.
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 through
June 10, 2002 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.
As part of the consideration pursuant to an agreement for investor
relations and corporate communications services, the Company granted options
for 20,000 shares of its common stock exercisable for three years through
May 14, 2001 at $2.25 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 that agreement
in August 1998. Pursuant to FAS 123, the Company recorded approximately
$18,000 expense for options vesting under that agreement.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(Unaudited)
NOTE 6--Stock Options--(Continued)
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 and on May 10, 1999, 50,000 of
the remaining options were exercised. Techdyne received cash payment of the
par value and the balance in three year promissory notes with interest at
5.16% for the June 1998 exercises and 4.49% for the May 1999 exercises.
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 exer-
cisable through June 22, 2002 at $3.25 per share. On June 30, 1999, Techdyne
granted 52,000 options exercisable for three years through June 29, 2002 at
$4.00 per share. On August 25, 1999, Techdyne granted 16,000 options exer-
cisable for three years through August 24, 2002 exercisable at $4.00 per
share.
Techdyne entered into a consulting agreement on July 1, 1999 for
financial advisory services with the agreement to end on September 15, 2000.
As compensation, the consultant received non-qualified stock options to
purchase 100,000 shares of Techdyne's common stock exercisable at $3.50 per
share that will expire on September 15, 2000. These options were valued at
$40,000 resulting in $8,300 expense during the quarter ended September 30,
1999.
In April 1999, DCA adopted a stock option plan pursuant to which its
board of directors granted 800,000 options exercisable at $1.25 per share to
certain of its officers, directors, employees and consultants with 365,000
options exercisable through April 20, 2000 and 460,000 options exercisable
through April 20, 2004. DCA recorded expense of $153,000 on 340,000 of these
options pursuant to FAS 123 and APB 25.
In November 1995, DCA adopted a stock option plan for up to 250,000
options and the board 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, 1999 there are 9,500 options outstanding under the 1995 Plan.
In August 1996, DCA's board of directors granted 15,000 options to its
then medical directors of which 10,000 options were outstanding at March 31,
1999. 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.
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 June 30, 1999.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially all
of its employees. The Company and Techdyne have adopted this plan as parti-
cipating employers effective July 1, 1998. The discretionary profit sharing
and matching expense including that of the Company, Techdyne and Lytton for
the nine months ended September 30, 1999 amounted to approximately $67,000,
with such expense amounting to approximately $33,000 and including only
Lytton for the nine months ended September 30, 1998.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(Unaudited)
NOTE 7--Commitments And Contingencies--(Continued)
Lytton had a deferred compensation agreement with its former President.
The agreement called for monthly payments of $8,339 provided that Lytton's
cash flow was adequate to cover these payments with interest to be calculated
on any unpaid balance as of August 1, 1999. During the nine months ended
September30, 1999, a total of $58,000 was paid under this agreement which
fully paid the agreement. 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 annual lease payments of
approximately $218,000 adjusted each year based upon the Consumer Price
Index. During the nine months ended September 30, 1999, $164,000 was paid
under the lease compared to $161,000 paid for the same period last year.
Techdyne entered into a one year agreement for investor relations and
corporate communications services as of April 1, 1999 with a monthly fee of
$3,500. The agreement provides for issuance of up to 50,000 stock options
if the consultant satisfies various performance criteria and may be
cancelled upon 15 days written notice by either party. This agreement was
cancelled effective August 1, 1999.
NOTE 8--Business Segment and Geographic Area Data
The following summarizes information about the Company's three reported
business segments. The medical products division has been shown separately
even though not required by FAS 131. Corporate activities include general
corporate revenues and expenses. Corporate assets include unallocated cash,
deferred income taxes, corporate fixed assets and goodwill not allocated to
any of the segments. Intersegment sales are generally intended to approxi-
mate market price.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BUSINESS SEGMENT REVENUES
Electro-Mechanical
External $14,141,050 $11,078,905 $34,447,758 $34,537,080
Intersegment Sales --- 41,026 23,468 140,045
Medical Products 312,644 310,521 856,301 1,063,452
Medical Services 1,641,114 998,791 4,453,849 2,872,920
Corporate 72,081 74,137 465,311 236,109
Elimination of corporate rental charges
to electro-mechanical manufacturing (23,500) (23,361) (70,407) (70,083)
Elimination of corporate interest charge
to electro-mechanical manufacturing (45,357) (42,807) (134,478) (111,626)
Elimination of corporate interest charge
to medical services --- (1,036) --- (5,878)
Elimination of medical services
interest charge to corporate (51) (9) (1,498) (9)
Elimination of electro-mechanical
manufacturing sales to medical products --- (41,026) (23,468) (140,045)
----------- ----------- ----------- -----------
$16,097,981 $12,395,141 $40,016,836 $38,521,965
BUSINESS SEGMENT PROFIT (LOSS)
Electro-Mechanical $ 736,932 $ 203,706 $ 652,741 $ 1,310,659
Medical Products (46,365) 29,049 (130,929) (48,789)
Medical Services (49,981) (129,564) (592,751) (398,651)
Corporate (106,921) (101,417) (52,748) (257,712)
----------- ----------- ----------- -----------
$ 533,665 $ 1,774 $ (123,687) $ 605,507
=========== =========== =========== ===========
</TABLE>
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(Unaudited)
NOTE 8--Business Segment and Geographic Area Data--(Continued)
A significant customer of Techdyne, which accounted for 4% of Techdyne's
and 3% of the Company's sales for the nine months ended September 30, 1999 and
9% of Techdyne's and 8% of the Company's sales for the same period of the
preceding year has been slow in paying amounts due to Techdyne. Techdyne
has substantial receivables and inventory relating to a sales contract with
the customer. Techdyne anticipates an ongoing business relationship with the
customer and believes that the receivables and inventory relating to the
customer are recoverable. If any significant amount of receivables and
inventory were not recoverable, this could have a material adverse effect on
Techdyne's and the Company's financial position and results of operations.
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 had been registered for the seller. Techdyne guaranteed
that the seller would 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. Additional consideration of approximately $290,000 and $154,000
was paid in April 1999 and April 1998, respectively, based on sales levels
with the Stock Purchase Agreement providing for a possible additional sales
level incentive for a specified one year period. 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 terms of the Guaranty in the Stock Purchase Agreement were modified
in June, 1998 by Techdyne and the seller ("Modified Guaranty"). The modified
terms provided that the seller would sell an amount of common stock which
would provide $1,300,000 gross proceeds, and Techdyne guaranteed, that to the
extent that the seller had less than 150,000 shares of Techdyne's common stock
remaining, Techdyne would issue additional 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 respective 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 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. In July 1999, Techdyne forgave the Advance and issued payment
of $1,100,000 to the seller, which together with the proceeds realized by the
seller from the sale of stock in July 1998 satisfied the Company's remaining
obligation under the $2,400,000 guarantee. The 295,000 shares held by the
seller were returned to Techdyne and have been cancelled.
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. 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.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
September 30, 1999
(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. As of December 31, 1999,
the Company had repurchased approximately 141,000 shares of common stock at
a cost of approximately $221,000 which reflected as treasury stock. During
the second quarter of 1999, an additional 8,000 shares were repurchased for
approximately $8,000.
In September 1998, DCA announced its intent to repurchase up to 300,000
shares of its outstanding common stock at current market prices. DCA repur-
chased 205,000 shares for approximately $315,000.
All treasury shares of both the Company and DCA were cancelled during
the second quarter of 1999.
NOTE 12--Proposed Merger and Acquisition
On October 20, 1999, DCA entered into an Agreement and Plan of Merger
with MainStreet IPO.com, Inc. ("MSI") and its wholly-owned subsidiary,
MainStreet Acquisition Inc. ("MainStreet"). The merger will be effected
by MainStreet merging into DCA with DCA surviving, changing its name to
MainStreet, and becoming a wholly-owned subsidiary of MSI. DCA's share-
holders will receive, on a one-for-one basis, shares of common stock of MSI,
which company is in the process of preparing a registration statement for
filing with the SEC covering the issuance of approximately 1,396,000 shares
of its common stock, plus an indeterminate number of shares for resale by
certain affiliates of the Company, MSI and certain private investors of MSI.
The registration statement is to be filed in the near future in conjunction
with DCA's proxy statement seeking its shareholder approval of the merger
and related transactions.
Immediately prior to the proposed merger, DCA will be selling all of its
assets to Dialysis Acquisition Corp., a wholly-owned subsidiary of the
Company, with this subsidiary also assuming all liabilities of DCA. The
proposed sale of assets and merger transactions are subject to a variety of
contingencies, most importantly shareholder approval. Should DCA's share-
holders approve the transactions, the Company will own 100% of the dialysis
operations, and DCA's shareholders will become shareholders of MSI.
MSI is a recently established company which has developed a central
website to provide business entities with the necessary tools to perform
direct public offering of their securities. Another company, CEO Letter,
LLC, which will become a wholly-owned subsidiary of MSI at the time of the
merger, provides chief executive officers of public companies the forum to
discuss their companies to the multitude of potential internet investors.
<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
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 public subsidiary, Techdyne, is
engaged as a manufacturer, the character and development of the dialysis
industry in which its public subsidiary, DCA, is engaged, the Company's
business strategies and plans for future operations, its needs for capital
expenditures, capital resources, liquidity and operating results, and similar
matters that are not historical facts. Such forward-looking statements are
subject to substantial risks and uncertainties that could cause actual results
to materially differ from those expressed in the statements, including general
economic and business conditions, opportunities pursued by the Company,
competition, changes in federal and state laws or regulations affecting the
Company, and other factors discussed periodically in the Company's filings.
Many of the foregoing factors are beyond the control of the Company. Among
the factors that could cause actual results to differ materially are the
factors detailed in the risks discussed in the "Risk Factors" section included
in the Company's Registration Statement, Form S-3, as filed with the Securi-
ties and Exchange Commission ("Commission") (effective May 15, 1997) and the
Registration Statements of the Company's subsidiaries, Techdyne's Registra-
tion Statements as filed with the Commission, Form SB-2 (effective September
13, 1995) and Form S-3 (effective November 11, 1996), and DCA's Registration
Statements, Form SB-2, as filed with the Commission (effective on April 17,
1996) and Form S-3 (effective July 1, 1999) 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 operations
continue to depend upon a relatively small number of customers for a signifi-
cant 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 obsoles-
cence. Discontinuance or modification of products containing components
manufactured by Techdyne could adversely affect the Company's and Techdyne's
results of operations. The electronics industry is also subject to economic
cycles and has in the past experienced, and is likely in the future to
experience, recessionary periods, which could have a material adverse effect
on the Company's and Techdyne's business, financial condition and results of
operations.
Due to Techdyne's utilization of just-in-time inventory techniques, the
timely availability of many components is dependent on Techdyne's ability to
continuously develop accurate forecasts of customer volume requirements.
Component shortages could result in manufacturing and shipping delays or
increased component prices which could have a material adverse effect on
Techdyne's and the Company's results of operations. It is important for the
Company, and there are significant risks involved, to efficiently manage
inventory, proper timing of expenditures and allocations of physical and
personnel resources in anticipation of future sales, the evaluation of
economic conditions in the electronics industry and the mix of products,
whether PCBs, wire harnesses, cables or turnkey products, for manufacture.
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 tech-
nologies, 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 poten-
tially 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.
<PAGE>
Forward-Looking Information (continued)
Techdyne's, and in turn, the Company's results of operations are also
affected by other factors, including price competition, the level and timing
of customer orders, fluctuations in material costs, the overhead efficien-
cies achieved in managing the costs of its operations, experience in
manufacturing a particular product, the timing of expenditures in antici-
pation of increased orders, and selling, general and administrative
expenses. Accordingly, gross margins and operating income margins have
generally improved during periods of high volume and high capacity
utilization. Techdyne generally has idle capacity and reduced operating
margins during periods of lower-volume production.
With respect to the Company's dialysis operations, essential to the
Company's profitability is Medicare reimbursement which is at a fixed rate
determined by the Health Care Financing Administration ("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. Addi-
tionally, 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 regulations
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 unanticipated changes in healthcare programs
or laws or that DCA will not be required to change its practice or experience
material adverse effects as a result of any such challenges or changes.
DCA's future growth depends primarily on the availability of suitable
dialysis centers for acquisition or development in appropriate and acceptable
areas, and DCA's ability to develop these new potential dialysis centers at
costs within its budget while competing with larger companies, some of which
are public companies or divisions of public companies with greater personnel
and financial resources which have a significant advantage in acquiring
and/or developing facilities in areas targeted by the Company. DCA opened a
center in Carlisle, Pennsylvania in July, 1997. It opened its fourth center
in Manahawkin, New Jersey and received regulatory approval as a Medicare
provider during the fourth quarter of 1998 and opened its fifth center in
Chambersburg, Pennsylvania during the first quarter of 1999. Another
dialysis center being developed in New Jersey is expected to commence
operations in the first quarter of 2000. The dialysis industry is highly
competitive. There is intense competition for retaining qualified
nephrologists, who normally are the main source of patients and are respon-
sible for the supervision of the dialysis centers and for nursing and
technical staff at reasonable rates. Newly established dialysis centers,
although contributing to increased revenues, also initially adversely affect
results of operations due to start-up costs and expenses with a smaller
developing patient base.
"Year 2000" Readiness
The Year 2000 computer information processing challenge associated with
the upcoming millennium change concerns the ability of computerized informa-
tion systems to properly recognize date sensitive information, with which
many companies, public and private, are faced to ensure continued proper
operations and reporting of financial condition. Failure to correct and
comply with the Year 2000 change may cause systems that cannot recognize the
new date and millenium information to generate erroneous data or to fail to
operate. Management is fully aware of the Year 2000 issues, has made its
assessments, has evaluated its computerized systems and equipment to insure
each component operates properly with the date advanced to the year 2000,
and has communicated with its major vendors, and has substantially made the
operations of the Company Year 2000 compliant.
In 1997, we commenced upgrading our operations software program in
conjunction with Techdyne by acquiring a new Visual Manufacturing software
package. The Visual Manufacturing software system is primarily for Techdyne,
although we acquired several computers and certain software. We have been
integrating the new software system into all of Techdyne's subsidiaries.
Our European facility went on line July 1, 1999. Our Lytton subsidiary, its
existing ERP system being Year 2000 compliant. is in the process of installing
the system, which should be operational for that subsidiary in mid-2000.
This new system has greatly enhanced Techdyne's ERP, essential to bids for
new business, production scheduling, inventory and information technology,
and overall operations. Management believes this new system is providing
us with leverage in material pricing, production and timely-delivery,
thereby enabling us to be more competitive in bidding for manufacturing
business. This Visual Manufacturing system also enables Techdyne
<PAGE>
Year 2000 Readiness (continued)
to better track actual costs against its quotes, thereby allowing Techdyne to
more effectively control costs and manage operating margins. The Visual Manu-
facturing system also provides the bookkeeping, accounting and financial
recording and information functions for us and our subsidiaries. The Visual
Manufacturing system has been pre-tested and guaranteed by the manufacturer
to be Year 2000 compliant. Our cost for this new software program has been
approximately $590,000. We have an ongoing consulting, training and
servicing arrangement with the system's manufacturer for $25,000 per year.
One of the more significant Year 2000 issues as it relates to Techdyne's
operations is the readiness of Techdyne's suppliers. Most of Techdyne's
products are manufactured to customer specifications, requiring specialized
tooling as well as customer directed supplies and suppliers. Any Year 2000
problems with such suppliers could adversely affect Techdyne's production of
these specific products. However, this would only impact a limited range of
products, since Techdyne manufactures over 850 products for our 100 customers.
For any significant worse case scenario, such supplier failure would have to
be widespread which would also impact many of our competitors. This would
seem remote based upon responses we have had from our suppliers. Assuming a
worse case scenario that Techdyne's critical suppliers have a millenium
problem and limit, delay or are unable to deliver supplies, we are identi-
fying other sources of supplies and, if necessary, will seek customer
approval to purchase from these alternate sources, as well as request our
major suppliers to carry more inventory earmarked for us, and maintain
specific contacts with those suppliers.
With respect to non-information technology systems which typically
include embedded technology such as microcontrollers, the major equipment
used in Techdyne's manufacturing operations, as well as in DCA's dialysis
operations, are not date sensitive, and should not pose any threat of a
system breakdown due to the Year 2000 issue. All of Techdyne's date
sensitive equipment has been tested and is compliant. Techdyne's personal
computer hardware and software systems have been checked and have also been
determined to be Year 2000 compliant. Most of DCA's equipment is new and is
Year 2000 compliant. DCA maintains technicians who test and maintain the
dialysis equipment.
In addition to addressing our own internal software systems and equip-
ment, we have communicated with our key vendors, customers, service
providers and other third parties with whom our operations are essential
including, among others, banks, insurance companies and utilities, to inquire
of their assessment of their Year 2000 issues and actions being taken to
resolve those issues. We have received a substantial response, of which most
have given written assurance that they are Year 2000 compliant, with the
balance assuring us they will be Year 2000 compliant before the millenium
change. To the extent such third parties are potentially adversely affected
by the Year 2000 issues, and such is not timely and properly resolved by such
persons, this could disrupt Techdyne's operations to the extent that it will
have to find alternative vendors or customers that have resolved their Year
2000 issues and DCA to find alternative sources of supplies. No assurance can
be given that the Company's new Visual Manufacturing software program will be
successful in its anticipated operational benefits as assessed above or that
key vendors and customers will have successful conversion programs, and that
any such failures, whether relating to the manufacturing operational efficien-
cies or the Year 2000 issue, will not have a material adverse effect on
Techdyne's and our business, results of operations or financial condition.
DCA recently installed a new Year 2000 compliant accounting package,
which provides it with its own independent system of bookkeeping, accounting
and financial records. This new system's cost for equipment, software and
training was approximately $40,000.
One of the most significant risks in DCA's operations with respect to
the Year 2000 change is in its electronic billing of Medicare, Medicaid and
third-party insurance companies. DCA receives a substantial portion of its
revenues from Medicare for the treatment of dialysis patients and related
services. HCFA, through whom the Medicare program and payments are effected,
has indicated it is doing everything to become Year 2000 compliant and is
assuring the Medicare program will operate smoothly. In 1998, DCA installed
a new electronic billing software program that was developed according to
Medicare's compliance guidelines, which guidelines require not only system
but also Year 2000 compatible. The software designer has tested the software
for Year 2000 compliance and DCA has initiated its billing and reimbursement
with the new software without any problems. DCA has also successfully elec-
tronically billed Medicaid using the new software. Assuming a worse case
scenario that DCA's critical suppliers have a millenium problem and limit,
delay or are unable to deliver supplies for patient treatment, which could
have a material adverse impact on DCA's and our business and financial condi-
tion, we are identifying other sources of supplies and, if necessary, will
overstock certain critical supplies, as well as order several more weeks in
advance, request major suppliers to carry more inventory earmarked for us,
and maintain specific contacts with those suppliers.
<PAGE>
Year 2000 Readiness (continued)
Another area that could significantly impact DCA's operations in
providing dialysis treatment to patients relates to third-party suppliers
and service providers, specifically, the utility companies providing water,
an extremely necessary resource for dialysis treatments, and electricity.
These providers and services are beyond our control. Should any of these
utilities fail to provide services, such would seriously adversely impact
DCA's and our operations and patients in such affected areas. Our contin-
uing plans to reduce the impact of such utility shortages or outages
includes notification to our utilities companies of our facilities'
locations, schedules and emergency services required and a 24-hour contact
as well as notification to each of our landlords to assure access to the
facility for our staff and key service providers.
We may experience material unanticipated negative consequences beginning
in the Year 2000 due to Year 2000 problems that have gone undetected. Although
we believe our assessment and implementation of our Year 2000 issues have been
satisfactorily completed, there are many uncertainties involved, which include
two primary areas. One is our ability to deal with Year 2000 contingencies that
may arise that we were unaware of, and second is how third parties with whom we
deal have dealt with the Year 2000 issue. Accordingly, the results of our Year
2000 program and the extent of any impact on our results of operations could
vary materially from what we have disclosed. The complexity of the Year 2000
issues does not allow us the ability to predict with any significant accuracy
or to qualify its impact upon us for the following reasons:
o third party systems, whether suppliers, utilities or others, are
beyond our control, although critical to our operations, such as water
and electrical supply
o complexity of testing interconnected systems and networks that depend
on third-party systems
o uncertainty of costs we might incur as a result of Year 2000 failures
that occur despite implementation of our program to deal with the issues
Results of Operations
Consolidated revenues increased by approximately $3,703,000 (30%) and
$1,495,000 (4%) for the three months and nine months ended September 30, 1999
compared to the same periods of the preceding year. Sales revenues for the
three months and nine months ended September 30, 1999 increased by $3,864,000
(32%) and $1,524,000 (4%) compared to the preceding year. Other income
decreased approximately $148,000 and $245,000 for the three months and nine
months ended September 30, 1999 compared to the same periods of the preceding
year which includes a decrease in interest earned as a result of a decrease in
invested funds. The Company recorded a gain of approximately $228,000 from
the sale of marketable securities in the second quarter of 1999, with a gain
of approximately $13,000 in the third quarter of 1998.
Techdyne sales increased approximately $3,156,000 (29%) for the three
months ended September 30, 1999 with a small decrease of approximately $38,000
for the nine months ended September 30 1999. compared to the same periods of
the preceding year. There was an increase in domestic sales of $3,321,000
(33%) and $1,313,000 (4%) and a decrease in European sales of $165,000 (17%)
and $1,351,000 (35%) compared to the same periods of the preceding year.
Approximately 44% of Techdyne's consolidated sales and 38% of the
Company's consolidated sales for the nine months ended September 30, 1999
were made to five customers. Customers generating in excess of 10% of
Techdyne's consolidated sales with their respective portions of Techdyne's
and the Company's consolidated sales included PMI Food Equipment Group for
15% and 13%, respectively, and Motorola for 11% and 10%, respectively. PMI
Food Equipment Group is Lytton's major customer and represented 31% of
Lytton's sales for the nine months ended September 30, 1999. 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.
Significant reductions in sales of Techdyne (Europe) have resulted in
net losses for this subsidiary amounting to $164,000 and $442,000 for the
three months and nine months ended September 30, 1999 and $141,000 and
$283,000 for the same periods of the preceding year. Management is evalu-
ating the future prospects for this facility and has formulated a plan which
includes outside purchase of certain products previously produced internally
in an effort to reduce costs for more competitive bidding. There can be no
assurance as to the future success of management's plan.
<PAGE>
Results of Operations (continued)
There was a decrease in sales to Compaq (Europe) by Techdyne (Europe)
of $294,000 (84%) and $925,000 (85%) for the three months and nine months
ended September 30, 1999, compared to the same periods of the preceding
year. Sales of Techdyne (Europe) to Compaq, which was at one time a major
customer of Techdyne (Europe), accounted for only approximately 6% of sales
for the nine months ended September 30, 1999 compared to 29% for the same
period of the preceding year. Techdyne (Europe) has been pursuing new
business development to offset the substantial reductions in Compaq sales
as well as substantial reductions in sales to other customers; however,
these efforts have not been successful to date.
Medical product sales revenues increased slightly $(2,000) for the
three months ended September 30, 1999 and decreased by $207,000 (19%) for
the nine months ended September 30, 1999 compared to the same periods
of the preceding year with the year-to-date decrease due to decreased sales
of the principal product of this division as a result of substantially
reduced government purchases and foreign competition.
Medical services revenues, representing the revenues of the Company's
dialysis division, DCA, increased approximately $664,000 (75%) and $1,653,000
(66%) for the three months and nine months ended September 30, 1999 compared
to the same periods of the preceding year. This increase reflected increased
revenues of DCA's Pennsylvania dialysis centers of approximately $468,000
and $1,222,000 for the three months and nine months ended September 30,
1999, including revenues of approximately $230,000 and $578,000 for DCA's
new Chambersburg, Pennsylvania dialysis center which commenced operations in
January, 1999. Also included in the increase in revenues are revenues of
approximately $196,000 and $431,000 from the Manahawkin, New Jersey center
which commenced operations in the fourth quarter of 1998. Although the
operations of the new centers have resulted in additional revenues, they are
in the developmental stage and, accordingly, their operating results will
adversely affect the Company's results of operations until they achieve a
sufficient patient count to cover fixed operating costs.
Cost of goods sold as a percentage of consolidated sales amounted to 83%
and 85% for the three months and nine months ended September 30, 1999
compared to 85% for the same periods of the preceding year which reflected a
decreased cost percent for Techdyne in the third quarter of 1999 compare to
the preceding year. Also included were an increase for the medical products
division for both periods and a decrease for the medical services division
for both periods compared to the preceding year.
Cost of goods sold for Techdyne as a percentage of sales to 85% and 87%
for the three months and nine months ended September 30, 1999 compared to 87%
for the same periods of the preceding year reflecting changes in product mix
and a diversification of Techdyne's customer base.
Cost of goods sold for the medical products division amounted to 79% and
76% for the three months and nine months ended September 30, 1999 compared to
70% and 69% for the same periods of the preceding year as a result of cost
changes for the principal product of this division and a change in product
mix resulting from decreased sales of this product.
Cost of medical services sales amounted to 67% and 70% for the three
months and nine months ended September 30, 1999 compared to 72% for the same
periods of the preceding year with improvements at existing centers more than
offsetting higher costs at the Company's new dialysis centers which are still
in their developmental stage.
Selling, general and administrative expenses increased by $172,000 and
$846,000 for the three months and nine months ended September 30, 1999
compared to the same periods of the preceding year. This increase reflected
expenses of DCA's new dialysis centers and costs in the second quarter of
1999 of approximately $93,000 associated with DCA's decision not to go through
with plans to construct a facility in New Jersey and $153,000 in compensation
expense on issuance of DCA stock options in April 1999 (see Note 6 to "Notes
to Consolidated Condensed Financial Statements") and costs increases
associated with increased sales of Lytton.
Interest expense increased by approximately $39,000 for the three months
and nine months ended September 30, 1999 compared to the same periods of the
preceding year due to increased borrowings in the third quarter of 1999.
A substantial portion of the Company's outstanding borrowings are tied
to the prime interest rate. The prime rate was 8.25% at September 30, 1999
and 7.75% at December 31, 1998.
<PAGE>
Liquidity and Capital Resources
Working capital totaled $12,235,000 at September 30, 1999, which
reflected a decrease of $3,186,000 (21%) during the nine months ended
September 30, 1999. Included in the changes in components of working capital
was a decrease of $2,116,000 in cash and cash equivalents, which included net
cash used in operating activities of $1,487,000, net cash used in investing
activities of $2,528,000 (including additions to property, plant and equipment
of $1,384,000, additional consideration of $1,390,000 regarding the Lytton
acquisition and proceeds from the sale of securities of $228,000), and net
cash provided by financing activities of $1,916,000 (including net line of
credit borrowings of $1,907,000, long-term borrowings of $767,000 and pay-
ments on long-term debt of $749,000).
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
$975,000 at September 30, 1999 and $1,200,000 at December 31, 1998 and a
$1,600,000 commercial revolving line of credit with interest at prime of
which $1,600,000 was outstanding at September 30, 1999 and December 31,
1998. The commercial term loan matures December 15, 2002 and the commercial
line of credit matures May 1, 2000. See Note 4 to "Notes to Consolidated
Condensed Financial Statements."
Techdyne had obtained in 1996 two other term loans from its Florida bank.
One is a $712,500 term loan, which had a remaining principal balance of
$614,000 at September 30, 1999 and $636,000 at December 31, 1998, 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 $57,000 at
September 30, 1999 and $87,000 at December 31, 1998 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.
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 and the note, which was renewed during 1997,
maturing April 2000. In July, 1994 Techdyne (Europe) purchased the facility
housing its operations for approximately $730,000, obtaining a 15-year
mortgage which had a U.S. dollar equivalency of approximately $513,000 at
September 30, 1999 and $545,000 at December 31, 1998, 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 manu-
facture 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 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 provided 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 $290,000 and $154,000 for first
two years of sales levels paid in April 1999 and April 1998. 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. The Guaranty in the Stock Purchase Agreement was
modified by Techdyne and the seller. In July 1999, the Company issued a
payment of $1,100,000 and forgave an advance of $1,278,000 made in July
1998 to satisfy its remaining obligation under the $2,400,000 guarantee.
See Note 9 to "Notes to Consolidated Condensed Financial Statements."
With one bank, Lytton had (i) a $1,500,000 revolving bank line of credit
requiring monthly interest payments at prime plus 1/2%, (ii) a $1,000,000
installment loan 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, and (iii) a
$500,000 equipment loan agreement payable through August 1, 2003 with interest
at prime plus 1%. These loans were replaced on June 30, 1999 with a
$3,000,000 revolving line of credit maturing June 30, 2000, with interest
at prime plus 1/2%, a $1,400,000 installment loan payable in 60 installments
commencing August 1, 1999 with the final installment due June 30, 2004 with
interest at prime plus 1/2% and a $500,000 equipment loan agreement payable
through June 30, 2004 with interest at prime plus 1%. 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)
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 $300,000 and $360,000 at September 30, 1999 and December 31, 1998,
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
$507,000 and $449,000 at September 30, 1999 and December 31, 1998, respec-
tively, which includes additional financing of approximately $141,000 and
$185,000 during the nine months ended September 30, 1999 and September 30,
1998, respectively. 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 devel-
opment 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. DCA's opened its fifth center in Chambersburg, Pennsylvania in
January 1999 and intends to establish additional facilities in the New Jersey
and Pennsylvania area. The professional corporation providing medical
director services to the Manahawkin, New Jersey center, the professional
association which is to provide medical director services to another New
Jersey center presently being developed and the professional corporation
providing medical director services to the Carlisle and Chambersburg,
Pennsylvania facilities have a 20% interest in those subsidiaries. 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 or that sufficient outside
financing would be available to fund expansion. 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.
A significant customer of Techdyne, which accounted for 4% of Techdyne's
and 3% of the Company's sales for the nine months ended September 30, 1999
and 9% of Techdyne's and 8% of the Company's sales for the same period of
the preceding year has been slow in paying amounts due to the Company.
Techdyne has substantial receivables and inventory relating to a sales
contract with the customer. See Note 8 to "Notes to Consolidated Condensed
Financial Statements."
New Pronouncement
In June, 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 133, "Accounting For Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for
fiscal years beginning after June 15, 2000. FAS 133 establishes accounting
and reporting standards for derivative instruments and for hedging
activities and requires, among other things, that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that those instruments be measured at fair value. The Company
is in the process of determining the impact that the adoption of FAS 133 will
have on its consolidated financial statements.
<PAGE>
Proposed Merger and Acquisition
On October 20, 1999, DCA entered into an Agreement and Plan of Merger
pursuant to which another company would merge into DCA and own approximately
80% of DCA, the surviving company, a simultaneous sale of DCA's assets to
the Company in consideration for approximately 90% of the Company's ownership
in DCA, the Company's assumption of DCA's long-term debt and other liabili-
ties, and the Company's waiver of most proceeds from the potential exercise
of outstanding DCA warrants and DCA underwriters' options. See Note 12 to
"Notes to Consolidated Condensed Financial Statements."
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 in 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
(i) Item 4, "Changes in Registrant's Certifying Accountant,"
filed August 13, 1999
(ii) Amendment to Item 4, "Changes in Registrant's Certifying
Accountant," filed August 27, 1999
(iii) Item 5, "Other Events," re: conversion of subsidiary's
promissory note for stock of subsidiary filed October 12, 1999
No financial statements were filed with any of the current reports
on Form 8-K.
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
Chief Financial Officer
Dated: November 15, 1999
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,178,809
<SECURITIES> 21,120
<RECEIVABLES> 10,207,676
<ALLOWANCES> 0
<INVENTORY> 11,033,515
<CURRENT-ASSETS> 27,650,524
<PP&E> 16,450,743
<DEPRECIATION> 6,711,619
<TOTAL-ASSETS> 40,946,961
<CURRENT-LIABILITIES> 15,415,764
<BONDS> 3,540,492
0
0
<COMMON> 57,075
<OTHER-SE> 14,662,708
<TOTAL-LIABILITY-AND-EQUITY> 40,946,961
<SALES> 39,427,782
<TOTAL-REVENUES> 40,016,836
<CGS> 33,557,344
<TOTAL-COSTS> 33,557,344
<OTHER-EXPENSES> 6,107,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 475,906
<INCOME-PRETAX> (123,687)
<INCOME-TAX> 48,054
<INCOME-CONTINUING> (198,548)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (198,548)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.04)
<FN>
<F1>Accounts receivable are net of allowance of $388,000 at September 30,
1999.
<F2>Inventories are net of reserve of $746,000 at September 30, 1999.
</FN>
</TABLE>
