FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2337 West 76th Street, Hialeah, Florida 33016
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(Address of principal executive offices) (Zip Code)
(305) 558-4000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [x] or No [ ]
Common Stock Outstanding
Common Stock, $.01 par value - 5,707,540 shares as of July 31, 1999
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Operation (Unaudited) for the
three months and six months ended June 30, 1999 and June 30, 1998 include
the accounts of the Registrant and all its subsidiaries.
Item 1. Financial Statements
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1) Consolidated Condensed Statements of Operations for the three
months and six months ended June 30, 1999 and June 30, 1998.
2) Consolidated Condensed Balance Sheets as of June 30, 1999 and
December 31, 1998.
3) Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 1999 and June 30, 1998.
4) Notes to Consolidated Condensed Financial Statements as of June
30, 1999.
Item 2. Management's Discussion and Analysis of Financial Condition
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and Results of Operations
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PART II -- OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders
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Item 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 Six Months Ended
------------------ ------------------
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Sales $12,175,190 $12,754,415 $23,434,286 $25,773,824
Realized gain on sale of
marketable securities 228,078 228,078
Other income 124,184 178,690 256,491 353,000
----------- ----------- ----------- -----------
12,527,452 12,933,105 23,918,855 26,126,824
COST AND EXPENSES
Cost of goods sold 10,423,042 10,909,597 20,243,663 21,864,354
Selling, general and administrative
expenses 2,174,797 1,625,434 4,042,690 3,368,652
Interest expense 150,832 139,316 289,854 290,085
----------- ----------- ----------- -----------
12,748,671 12,674,347 24,576,207 25,523,091
(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (221,219) 258,758 (657,352) 603,733
Income tax benefit (5,480) (78,259) (50,567) (107,666)
----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE MINORITY INTEREST (215,739) 337,017 (606,785) 711,399
Minority interest in (loss) earnings of
consolidated subsidiaries (89,357) 167,691 (193,866) 330,656
----------- ----------- ----------- -----------
NET (LOSS) INCOME $ (126,382) $ 169,326 $ (412,919) $ 380,743
=========== =========== =========== ===========
(Loss) earnings per share:
Basic $(.02) $.03 $(.07) $.07
===== ==== ===== ====
Diluted $(.02) $.02 $(.07) $.05
===== ==== ===== ====
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998(A)
---- ------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 5,789,145 $ 7,294,707
Marketable securities 24,876 210,007
Accounts receivable, less allowances of $361,000
at June 30, 1999 and $317,000 at December 31, 1998 7,199,834 6,260,748
Inventories, less allowances for obsolescence of $649,000
at June 30, 1999 and $559,000 at December 31, 1998 9,911,365 8,393,770
Prepaid expenses and other current assets 563,693 648,088
Deferred tax asset 643,272 561,822
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Total current assets 24,132,185 23,369,142
PROPERTY AND EQUIPMENT
Land and improvements 1,008,855 1,018,455
Building and building improvements 3,050,252 3,073,777
Equipment and furniture 10,527,761 10,279,217
Leasehold improvements 1,646,808 1,489,445
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16,233,676 15,860,894
Less accumulated depreciation and amortization 6,556,736 6,360,632
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9,676,940 9,500,262
DEFERRED EXPENSES AND OTHER ASSETS 124,875 183,771
COSTS IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED,
less accumulated amortization of $665,000 at June 30, 1999
and $585,000 at December 31, 1998 3,466,325 3,256,915
----------- -----------
$37,400,325 $36,310,090
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings $ 1,337,756 $ 962,407
Accounts payable 5,065,613 3,607,414
Accrued expenses and other current liabilities 2,250,382 2,023,030
Current portion of long-term debt 2,647,282 953,452
Income taxes payable 150,299 402,333
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Total current liabilities 11,451,332 7,948,636
LONG-TERM DEBT 3,410,452 5,126,530
DEFERRED INCOME TAXES 1,800,143 1,800,143
MINORITY INTEREST IN SUBSIDIARIES 5,936,786 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 June 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 12,296,294 12,470,817
Retained earnings 2,536,019 2,948,938
Accumulated other comprehensive (loss) income:
Foreign currency translation adjustment (85,089) (19,457)
Unrealized (loss) gain on marketable securities for sale (2,687) 130,204
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Total accumulated other comprehensive (loss) income (87,776) 110,747
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Treasury stock at cost; 141,400 shares --- (221,379)
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Total Stockholders' Equity 14,801,612 15,367,692
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$37,400,325 $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>
Six Months Ended
June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (412,919) $ 380,743
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation 835,568 683,220
Amortization 87,391 75,189
Bad debt expense 46,467 59,132
Provision for inventory obsolescence 167,072 235,393
Gain on sale of securities (228,078)
Minority interest (193,866) 330,656
Stock option compensation 153,000 7,004
Increase (decrease) relating to operating activities from:
Accounts receivable (1,008,630) 135,526
Inventories (1,705,928) (499,680)
Prepaid expenses and other current assets 179,575 (10,856)
Accounts payable 1,463,923 (5,556)
Accrued expenses and other current liabilities 238,961 138,269
Income taxes payable (252,034) (1,567,715)
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Net cash used in operating activities (629,497) (38,675)
INVESTING ACTIVITIES
Redemption of minority interest in subsidiaries -- (385,375)
Additions to property and equipment, net of minor disposals (988,966) (758,302)
Subsidiary acquisition payments (289,531) (153,818)
Proceeds from sale of securities 128,591
Purchase of marketable securities (29,210)
Minority interest in subsidiaries 4,000
Deferred expenses and other assets 51,314 (9,350)
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Net cash used in investing activities (1,123,802) (1,306,845)
FINANCING ACTIVITIES
Net short-term line of credit borrowings (payments) 375,349 (548,698)
Long-term borrowings 375,000
Repurchase of stock (8,166) (25,769)
Payments on long-term borrowings (460,519) (509,950)
Deferred financing costs (452) 169
Proceeds from exercise of stock options 500 1,150
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Net cash provided by (used in) financing activities 281,712 (1,083,098)
Effect of exchange rate fluctuations on cash (33,975) 3,276
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Decrease in cash and cash equivalents (1,505,562) (2,425,342)
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Cash and cash equivalents at beginning of year 7,294,707 11,099,418
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,789,145 $ 8,674,076
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 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 60.9% (at July 31, 1999, 64.5%) owned subsid-
iary, 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:
June 30, December 31,
1999 1998
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Electronic and mechanical components, net:
Finished goods $ 601,354 $ 794,297
Work in process 2,333,562 1,845,954
Raw materials and supplies 6,383,644 5,234,249
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9,318,560 7,874,500
Medical supplies 592,805 519,270
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$ 9,911,365 $ 8,393,770
=========== ===========
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities is comprised as follows:
June 30, December 31,
1999 1998
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Accrued compensation $ 775,486 $ 507,901
Other 1,474,896 1,515,129
----------- -----------
$ 2,250,382 $ 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 six months ended June 30, 1999 as
a result of exercise prices and the net loss and none were included for the
same period 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)
June 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 Six Months Ended
------------------ ------------------
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income, numerator-basic
computation $ (126,382) $ 169,326 $ (412,919) $ 380,743
Adjustment due to subsidiaries'
dilutive securities (102) (33,557) -- (65,199)
----------- ----------- ----------- -----------
Net (loss) income as adjusted,
numerator-diluted computation $ (126,484) $ 135,769 $ (412,919) $ 315,544
=========== =========== =========== ===========
Weighted average shares,
denominator-basic computation 5,712,287 5,838,013 5,713,905 5,842,728
Effect of dilutive stock securities:
Stock options
----------- ----------- ----------- -----------
Weighted average shares as adjusted,
denominator-diluted computation 5,712,287 5,838,013 5,713,905 5,842,728
=========== =========== =========== ===========
(Loss) earnings per share:
Basic $(.02) $.03 $(.07) $.07
===== ==== ===== ====
Diluted $(.02) $.02 $(.07) $.05
===== ==== ===== ====
</TABLE>
Comprehensive Income
In 1998, the Company adopted Financial Accounting Standards Board State-
ment No. 130, "Reporting Comprehensive Income" (FAS 130). This statement
establishes rules for the reporting of comprehensive income and its compo-
nents. 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 six months ended June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income $ (126,382) $ 169,326 $ (412,919) $ 380,743
Other comprehensive income:
Foreign currency translation adjustments (22,960) (826) (65,632) 20,397
Unrealized gain (loss) on marketable
securities:
Unrealized holding (loss) gain arising
during period, net of tax (2,687) (72,970) (2,687) 153,851
Less: reclassification adjustment, net
of tax, for gain included in net
(loss) income (80,373) -- (130,204) --
---------- ---------- ---------- ----------
Unrealized (loss) gain on marketable
securities (83,060) (72,970) (132,891) 153,851
---------- ---------- ---------- ----------
Total other comprehensive (loss) income (106,020) (73,796) (198,523) 174,248
---------- ---------- ---------- ----------
Comprehensive (loss) income $ (232,402) $ 95,530 $ (611,442) $ 554,991
========== ========== ========== ==========
</TABLE>
Marketable Securities
Marketable securities are classified as available for sale and are
reported at fair value. Following is a summary of marketable securities:
June 30, December 31,
1999 1998(A)
--------- ---------
Cost $ 29,210 $ --
Unrealized holding gains 210,007
Unrealized holding losses (4,334) --
Fair value $ 24,876 $ 201,007
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 1999
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Unrealized holding losses and gains, which amounted to $(4,334), less a
deferred tax credit of $1,647 at June 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 three months and six
months ended June 30, 1999 with no sales during the same periods of the
preceding year. See Note 3.
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 activi-
ties 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 state-
ments to conform to the 1999 presentation.
NOTE 2--Interim Adjustments
The financial summaries for the three months and six months ended June
30, 1999 and June 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. Oper-
ating results for the three months and six months ended June 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 Consoli-
dated Condensed Financial Statements be read in conjunction with the
financial statements and notes included in the Company's latest annual
report for the year ended December 31, 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 Decem-
ber 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 June 30, 1999 and December 31, 1998. 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 $1,050,000 at June 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)
June 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 $621,000 at June 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 $67,000 at June 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 8.25% at June 30, 1999 and at December 31, 1998. There was
an outstanding balance on this loan of $1,308,000 at June 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 $633,000 at June 30, 1999 and $733,000 at December 31, 1998.
Lytton also has a $500,000 equipment loan agreement with the same bank pay-
able 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.
This loan had an outstanding balance of $375,000 at June 30, 1999 with no
outstanding balance at December 31, 1998. All of these bank loans are
secured by the business assets of Lytton.
The prime rate was 7.75% as of June 30, 1999 and December 31, 1998.
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 $76,000 at June 30,
1999 and $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 approxi-
mately $135,000 at June 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 $502,000 at June 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 $141,000 and $160,000 at June 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 $177,000 and $200,000 at June 30, 1999 and December 31, 1998,
respectively.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 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
February 2005. The balance outstanding under this agreement amounted to
approximately $486,000 at June 30, 1999 and $449,000 at December 31, 1998.
Additional financing of $90,000 and $185,000 during the six months ended
June 30, 1999 and June 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 $144,000 and $286,000
for the three months and six months ended June 30, 1999 and $143,000 and
$305,000 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 benefit of approximately $5,000
and $51,000 for the three months and six months ended June 30, 1999 and
$20,000 and $44,000 for the same periods of the preceding year.
Techdyne (Europe) had an income tax benefit of approximately $58,000 and
$63,000 for the three months and six months ended June 30, 1998 with no such
benefit or provision for the same periods of 1999.
Income tax payments (refunds) were $96,000 and $(33,000) for the three
months and six months ended June 30, 1999 and $27,000 and $1,605,000 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)
June 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.
Techdyne entered into a consulting agreement on July 1, 1999 for finan-
cial 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.
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 435,000 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
March 31, 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
participating employers effective July 1, 1998. The discretionary profit
sharing and matching expense including that of the Company, Techdyne and
Lytton for the six months ended June 30, 1999 amounted to approximately
$41,000, with such expense amounting to approximately $21,000 and including
only Lytton for the six months ended June 30, 1998.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 1999
(Unaudited)
NOTE 7--Commitments And Contingencies--(Continued)
Lytton has a deferred compensation agreement with its former 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 calculated on any
unpaid balance as of August 1, 1999. During the six months ended June 30,
1999, a total of $50,000 was paid under this agreement leaving an unpaid
balance of approximately $8,000 as of June 30, 1999. 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 six months ended June 30, 1999, $109,000
was paid under the lease compared to $107,000 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, 1998.
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 Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BUSINESS SEGMENT REVENUES
Electro-Mechanical
External $10,473,061 $11,606,048 $20,306,708 $23,458,175
Intersegment Sales -- 48,408 23,468 99,019
Medical Products 263,442 373,242 543,657 752,931
Medical Services 1,557,611 929,091 2,812,735 1,874,129
Corporate 301,896 86,063 393,230 161,972
Elimination of corporate rental charges
to electro-mechanical manufacturing (23,500) (23,361) (46,907) (46,722)
Elimination of corporate interest charge
to electro-mechanical manufacturing (44,514) (35,100) (89,121) (68,819)
Elimination of corporate interest charge
to medical services -- (2,878) -- (4,842)
Elimination of medical services
interest charge to corporate 544 -- (1,447) --
Elimination of electro-mechanical
manufacturing sales to medical products -- (48,408) (23,468) (99,019)
----------- ----------- ----------- -----------
$12,527,452 $12,933,105 $23,918,855 $26,126,824
=========== =========== =========== ===========
BUSINESS SEGMENT PROFIT (LOSS)
Electro-Mechanical $ 38,024 $ 557,394 $ (84,191) $ 1,106,953
Medical Products (74,180) (59,304) (84,564) (77,839)
Medical Services (323,508) (152,927) (542,770) (269,087)
Corporate 138,535 (86,405) 54,173 (156,294)
----------- ----------- ----------- -----------
$ (221,219) $ 258,758 $ (657,352) $ 603,733
=========== =========== =========== ===========
</TABLE>
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 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 six months ended June 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 opera-
tions.
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.
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)
June 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 first 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
repurchased 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 June 4, 1999, the Company entered into a letter of intent with DCA
and MainStreet IPO, LLC, a newly organized company which is developing a
central website to provide any company with the tools to perform self-
underwritten offering of their securities.
The letter of intent provides for several simultaneous transactions.
One, the merger of MainStreet into DCA, which will be the surviving company
and will change its name to MainStreet IPO.com or such name as new management
will choose and with the MainStreet shareholders to own approximately 80% of
the surviving company. Another simultaneous transaction is the 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 all of DCA's long-term debt and
liabilities up to the closing date of the merger, and the Company's waiver of
any cash proceeds assuming exercise of the underwriters' purchase option
(assuming full exercise for the common stock and the warrants represents a
potential aggregate of $1,530,000) and upon exercise of DCA's 2,300,000
outstanding warrants (assuming full exercise represents $10,350,000 before
expenses or commissions), provided the Company is entitled to 20% of the net
warrant proceeds but not more than $1,000,000. A third simultaneous trans-
action is the acquisition by DCA of The CEO Letter, LLC, an affiliate of
MainStreet, for 1,000,000 shares of DCA common stock of which 750,000 shares
are to be held in escrow subject to certain earnings and revenues performance
formulas for The CEO Letter.
The proposed merger and acquisition transactions are subject to a
variety of contingencies, including, among others, the negotiation and
completion of merger and acquisition agreements, and DCA shareholder
approval exclusive of any vote of the Company's 68% equity ownership of
DCA.
<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, intu-
itions 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 strate-
gies and plans for future operations, its needs for capital expenditures,
capital resources, liquidity and operating results, and similar matters that
are not historical facts. Such forward-looking statements are subject to
substantial risks and uncertainties that could cause actual results to
materially differ from those expressed in the statements, including general
economic and business conditions, opportunities pursued by the Company,
competition, changes in federal and state laws or regulations affecting the
Company, and other factors discussed periodically in the Company's filings.
Many of the foregoing factors are beyond the control of the Company. Among
the factors that could cause actual results to differ materially are the
factors detailed in the risks discussed in the "Risk Factors" section
included in the Company's Registration Statement, Form S-3, as filed with
the Securities and Exchange Commission ("Commission") (effective May 15,
1997) and the Registration Statements of the Company's subsidiaries,
Techdyne's Registration Statements as filed with the Commission, Form
SB-2 (effective September 13, 1995) and 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 signif-
icant 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
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 amortiza-
tion 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 efficiencies
achieved in managing the costs of its operations, experience in manufacturing
a particular product, the timing of expenditures in anticipation of increased
orders, and selling, general and administrative expenses. Accordingly, gross
margins and operating income margins have 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.
Additionally, operating costs tend to increase over the years without any
comparable increases, if any, in the prescribed dialysis treatment rates,
which usually remain fixed and have decreased over the years. There also
may be reductions in commercial third-party reimbursement rates.
The dialysis industry is subject to stringent and extensive 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 accep-
table 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 in New Jersey is in the planning and architectural
stage. The dialysis industry is highly competitive. There is intense
competition for retaining qualified nephrologists, who normally are the main
source of patients and are responsible 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 substantially completed integrating the new software system into all
of Techdyne's subsidiaries. Our European facility went on line July 1,
1999, and our Lytton subsidiary is in the process of installing the system,
which should be operational in September, 1999. Lytton has an existing ERP
system which is Year 2000 compliant. 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 to better track actual costs against its quotes,
thereby allowing Techdyne to more effectively
<PAGE>
Year 2000 Readiness (continued)
control costs and manage operating margins. The Visual Manufacturing
system also provides the bookkeeping, accounting and financial recording
and information functions for us and our subsidiaries. The Visual Manu-
facturing 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 identifying 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
efficiencies 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 is currently being tested and cost,
for equipment, software and training, 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 electronically 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 condition, 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 con-
tinuing 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. Al-
though 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 decreased by approximately $406,000 (3%) and
$2,208,000 (8%) for the three months and six months ended June 30, 1999
compared to the same periods of the preceding year. Sales revenues for the
three months and six months ended June 30, 1999 decreased by $579,000 (5%)
and $2,340,000 (9%) compared to the preceding year. Other income decreased
approximately $55,000 and $97,000 for the three months and six ended June 30,
1999 compared to the same periods of the preceding year due largely to 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.
Techdyne sales decreased approximately $1,157,000 (10%) and $3,194,000
(14%) for the three months and six months ended June 30, 1999 compared to
the same periods of the preceding year. There was a decrease in domestic
sales of $823,000 (8%) and $2,008,000 (10%) and a decrease in European sales
of $334,000 (32%) and $1,186,000 (42%) 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 six months ended June 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 17% and
15%, respectively. PMI Food Equipment Group is Lytton's major customer and
represented 31% of Lytton's sales for the six months ended June 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 $201,000 and $278,000 for the
three months and six months ended June 30, 1999 and $129,000 and $141,000
for the same periods of the preceding year. Management is evaluating the
future prospects for this facility.
<PAGE>
Results of Operations (continued)
There was a decrease in sales to Compaq (Europe) by Techdyne (Europe)
of $214,000 (84%) and $1,520,000 (93%) for the three months and six months
ended June 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
six months ended June 30, 1999 compared to 57% for the same period of the
preceding year. The bidding for Compaq orders has become more competitive
which has continued to result in substantial reductions in Compaq sales and
lower profit margins on remaining Compaq sales. 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 to increase sales of Techdyne (Europe) have not been
successful to date.
Medical product sales revenues decreased by approximately $110,000 (42%)
and $209,000 (28%) for the three months and six months ended June 30, 1999
compared to the same periods of the preceding year 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 $639,000(78%) and $989,000
(61%) for the three months and six months ended June 30, 1999 compared to
the same periods of the preceding year. This increase reflected increased
revenues of DCA's Pennsylvania dialysis centers of approximately $489,000
and $753,000 for the three months and six months ended June 30, 1999,
including revenues of approximately $203,000 and $347,000 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 $150,000 and $236,000 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 increased to
86% for both the three months and six months ended June 30, 1999 compared to
86% and 85% for the same periods of the preceding year which included
increases for Techdyne in both periods. Also included were an increase
for the medical products division for the second quarter of 1999 and a
decrease for the medical services division for the second quarter of 1999,
with the cost percentage the same for the first half of 1999 and the same
period of 1998 for both of these divisions.
Cost of goods sold for Techdyne as a percentage of sales to 88% and 89%
for the three months and six months ended June 30, 1999 compared to 87% and
86% 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 83% and
74% for the three months and six months ended June 30, 1999 compared to 74%
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 70% and 72% for the three
months and six months ended June 30, 1999 compared to 73% and 72% for the
same periods of the preceding year reflecting improvements at existing
centers which offset higher costs at the Company's new dialysis centers
which are still in their developmental stage.
Selling, general and administrative expenses increased by $549,000 and
$674,000 for the three months and six months ended June 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
expenses on issuance of DCA stock options in April 1999 (see Note 6 to "Notes
to Consolidated Condensed Financial Statements") and costs increases asso-
ciated with increased sales of Lytton.
Interest expense increased by approximately $12,000 for the three months
ended June 30, 1999 compared to the same period of the preceding year due to
increased borrowings in the second quarter of 1999 and reflected little change
for the first half compared to the preceding year.
A substantial portion of the Company's outstanding borrowings are tied
to the prime interest rate. The prime rate was 7.75% at June 30, 1999 and
December 31, 1998.
<PAGE>
Liquidity and Capital Resources
Working capital totaled $12,681,000 at June 30, 1999, which reflected a
decrease of $2,740,000 (18%) during the six months ended June 30, 1999.
Included in the changes in components of working capital was a decrease of
$1,506,000 in cash and cash equivalents, which included net cash used in
operating activities of $629,000, net cash used in investing activities of
$1,124,000 (including additions to property, plant and equipment of $989,000
and additional consideration of $290,000 regarding the Lytton acquisition),
and net cash provided by financing activities of $282,000 (including net line
of credit borrowings of $375,000, long-term borrowing of $375,000 and pay-
ments on long-term debt of $461,000).
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
$1,050,000 at June 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 June 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 $621,000 at June 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 $67,000 at
June 30, 1999 and $87,000 at December 31, 1998 is secured by Techdyne's
tangible personal property, goods and equipment. The Company has guar-
anteed 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 $502,000 at
June 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
manufacture and assembly of PCBs and other electronic products for commer-
cial 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 $1,278,000 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, a
$1,400,000 installment loan payable in 60 installments commencing August 1,
1999 with the final installments due June 30, 2004 and a $500,000 equipment
loan agreement payable through June 30, 2004. All of these bank loans are
secured by the business assets of Lytton. See Note 4 to "Notes to Consoli-
dated 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%, and 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 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 $318,000 and $360,000 at June 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
$486,000 and $449,000 at June 30, 1999 and December 31, 1998, respectively,
which includes additional financing of approximately $90,000 and $185,000
during the six months ended June 30, 1999 and June 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
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. DCA's opened its fifth center in Chambersburg, Pennsyl-
vania 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 profes-
sional association which is to provide medical director services to another
New Jersey center presently in the planning and architectural stage 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 six months ended June 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 June 4, 1999, the Company and DCA entered into a letter of intent
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 dif-
ferent 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 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
On June 9, 1999, the annual meeting of shareholders was held to elect
one member, Peter D. Fischbein, to the Class 1 members of the board of
directors of the Company to serve for a three-year term until the annual
meeting of shareholders in the year 2002. Mr. Fischbein was reelected as
the sole Class 1 board member by a vote of 4,773,432 shares for, 17,648
shares against, abstentions of 158,762 shares and no broker non-votes.
Ernst & Young LLP, the Company's independent accountants, received
3,266,090 votes for ratification as the Company's independent auditors for
1999, with 176,496 votes against ratification and 1,507,256 abstentions.
As of August 6, 1999, the Company determined to replace Ernst & Young LLP
with new independent auditors, Wiss & Company, LLP.
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 June
30, 1999.
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: August 16, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,789,145
<SECURITIES> 24,876
<RECEIVABLES> 7,199,834
<ALLOWANCES> 0
<INVENTORY> 9,911,365
<CURRENT-ASSETS> 24,132,185
<PP&E> 16,233,676
<DEPRECIATION> 6,556,736
<TOTAL-ASSETS> 37,400,325
<CURRENT-LIABILITIES> 11,451,332
<BONDS> 3,410,452
0
0
<COMMON> 57,075
<OTHER-SE> 14,744,537
<TOTAL-LIABILITY-AND-EQUITY> 37,400,325
<SALES> 23,434,286
<TOTAL-REVENUES> 23,918,855
<CGS> 20,243,663
<TOTAL-COSTS> 20,243,663
<OTHER-EXPENSES> 4,042,690
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289,854
<INCOME-PRETAX> 657,352
<INCOME-TAX> (50,567)
<INCOME-CONTINUING> (412,919)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (412,919)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
<FN>
<F1>Accounts receivable are net of allowance of $361,000 at June 30, 1999.
<F2>Inventories are net of reserve of $649,000 at June 30, 1999.
</FN>
</TABLE>
