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 March 31, 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 - 5,832,240 shares as of July 31, 1998.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
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The Consolidated Condensed Statements of Operations (Unaudited) for the
three months ended March 31, 1999 and March 31, 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
ended March 31, 1999 and March 31, 1998.
2) Consolidated Condensed Balance Sheets as of March 31, 1999 and
December 31, 1998.
3) Consolidated Condensed Statements of Cash Flows for the three months
ended March 31, 1999 and March 31, 1998.
4) Notes to Consolidated Condensed Financial Statements as of March 31,
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
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Item 1. Financial Statements
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MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
-------------------------
1999 1998
---- ----
REVENUES
Sales $11,259,096 $13,019,409
Other income 132,307 174,310
----------- -----------
11,391,403 13,193,719
COST AND EXPENSES
Cost of goods sold 9,820,621 10,954,757
Selling, general and administrative expenses 1,867,893 1,743,218
Interest expense 139,022 150,769
----------- -----------
11,827,536 12,848,744
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(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (436,133) 344,975
Income tax benefit (45,087) (29,407)
----------- -----------
(LOSS) INCOME BEFORE MINORITY INTEREST (391,046) 374,382
Minority interest in (loss) earnings of
consolidated subsidiaries (104,509) 162,965
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NET (LOSS) INCOME $ (286,537) $ 211,417
=========== ===========
(Loss) earnings per share:
Basic $(.05) $.04
===== ====
Diluted $(.05) $.03
===== ====
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1999 1998(A)
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,477,862 $ 7,294,707
Marketable securities 129,634 210,007
Accounts receivable, less allowances of
$346,000 at March 31, 1999 and $317,000
at December 31, 1998 6,494,809 6,260,748
Inventories, less allowances for obsolescence
of $574,000 at March 31, 1999 and $559,000
at December 31, 1998 8,175,453 8,393,770
Prepaid expenses and other current assets 339,870 648,088
Deferred tax asset 592,364 561,822
----------- -----------
Total current assets 22,209,992 23,369,142
PROPERTY AND EQUIPMENT
Land and improvements 1,012,455 1,018,455
Building and building improvements 3,055,034 3,073,777
Equipment and furniture 10,746,759 10,279,217
Leasehold improvements 1,593,015 1,489,445
----------- -----------
16,407,263 15,860,894
Less accumulated depreciation and amortization 6,686,585 6,360,632
----------- -----------
9,720,678 9,500,262
DEFERRED EXPENSES AND OTHER ASSETS 170,820 183,771
COSTS IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED,
less accumulated amortization of $623,000
at March 31, 1999 and $585,000 at December
31, 1998 3,219,098 3,256,915
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$35,320,588 $36,310,090
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings $ 635,658 $ 962,407
Accounts payable 3,760,522 3,607,414
Accrued expenses and other current liabilities 2,077,915 2,023,030
Current portion of long-term debt 928,501 953,452
Income taxes payable 200,589 402,333
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Total current liabilities 7,603,185 7,948,636
LONG-TERM DEBT 4,992,741 5,126,530
DEFERRED INCOME TAXES 1,800,143 1,800,143
MINORITY INTEREST IN SUBSIDIARIES 5,935,867 6,067,089
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized
12,000,000 shares; 5,856,940 shares issued
and 5,715,540 shares outstanding 58,569 58,569
Capital in excess of par value 12,470,817 12,470,817
Retained earnings 2,662,401 2,948,938
Accumulated other comprehensive income:
Foreign currency translation adjustment (62,129) (19,457)
Unrealized gain on marketable securities
for sale 80,373 130,204
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Total accumulated other comprehensive
income 18,244 110,747
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Treasury stock at cost; 141,400 shares (221,379) (221,379)
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Total Stockholders' Equity 14,988,652 15,367,692
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$35,320,588 $36,310,090
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(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)
Three Months Ended
March 31,
-------------------------
1999 1998
---- ----
OPERATING ACTIVITIES
Net (loss) income $ (286,537) $ 211,417
Adjustments to reconcile net (loss) income
to net cash used in by operating activities:
Depreciation 407,111 338,598
Amortization 41,463 37,123
Bad debt expense 7,636 30,459
Provision for inventory obsolescence 77,051 79,271
Minority interest (104,509) 162,965
Increase (decrease) relating to operating
activities from:
Accounts receivable (259,519) (863,429)
Inventories 129,259 423,483
Prepaid expenses and other current assets 304,726 48,965
Accounts payable 159,032 82,534
Accrued expenses and other current
liabilities 62,818 (6,144)
Income taxes payable (201,744) (1,570,500)
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Net cash provided by (used in)
operating activities 336,787 (1,025,258)
INVESTING ACTIVITIES
Redemption of minority interest in subsidiaries --- (385,375)
Additions to property and equipment, net of
minor disposals (579,849) (129,245)
Deferred expenses and other assets 9,086 (112,392)
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Net cash used in investing activities (570,763) (627,012)
FINANCING ACTIVITIES
Repurchase of stock --- (11,394)
Net short-term line of credit (payments)
borrowings (326,749) 6,575
Payments on long-term borrowings (231,527) (256,937)
Deferred financing costs (303) 169
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Net cash used in financing activities (558,579) (261,587)
Effect of exchange rate fluctuations on cash (24,290) 5,834
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Decrease in cash and cash equivalents (816,845) (1,908,023)
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 $ 6,477,862 $ 9,191,395
=========== ===========
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 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 61.5% 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:
March 31, December 31,
1999 1998
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Electronic and mechanical components, net:
Finished goods $ 655,518 $ 794,297
Work in process 1,686,389 1,845,954
Raw materials and supplies 5,285,796 5,234,249
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7,627,703 7,874,500
Medical supplies 547,750 519,270
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$8,175,453 $8,393,770
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Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities is comprised as follows:
March 31, December 31,
1999 1998
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Accrued compensation $ 654,346 $ 507,901
Other 1,423,569 1,515,129
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$2,077,915 $2,023,030
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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
potential dilutive securities were included in the diluted earnings per
share computation for the three months ended March 31, 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.
Following is a reconciliation of amounts used in the basic and diluted
computations:
Three Months Ended
March 31,
------------------------
1999 1998
---- ----
Net (loss) income, numerator-basic
computation $ (286,537) $ 211,417
Adjustment due to subsidiaries'
dilutive securities --- (32,820)
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Net (loss) income as adjusted,
numerator-diluted computation $ (286,537) $ 178,597
========== ==========
Weighted average shares 5,715,540 5,852,048
========= =========
(Loss) earnings per share:
Basic $(.05) $.04
===== ====
Diluted $(.05) $.03
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<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Comprehensive Income
In 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income" (FAS 130). This
statement 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 ended March 31, 1999 and March 31, 1998:
Three Months Ended
March 31,
------------------------
1999 1998
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Net (loss) income $ (286,537) $ 211,417
Other comprehensive (loss) income:
Foreign currency translation adjustments (42,672) 21,223
Unrealized holding (loss) gain arising
during period, net of tax (49,831) 226,821
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Total other comprehensive (loss) income (92,503) 248,044
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Comprehensive (loss) income $ (379,040) $ 459,461
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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 quarters of fiscal years beginning after June 15, 1999.
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 state-
ment 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 ended March 31, 1999 and
March 31, 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 ended March 31, 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 Consolidated
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.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
NOTE 3--Transactions With Viragen, Inc.
The Company owns approximately 259,000 shares of common stock of Viragen,
formerly a majority-owned subsidiary of the Company. The carrying value of
these securities was written off as of December 31, 1991. The Company has
recorded these securities at their fair value of approximately $130,000 at
March 31, 1999 and $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
closing price of Viragen stock was $.50 as of March 31, 1999 and $.81 per
share as of December 31, 1998.
NOTE 4--Long-Term Debt
Techdyne's $1,600,000 line of credit had an outstanding balance of
$1,600,000 at March 31, 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 $1,125,000 at March 31,
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%.
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 out-
standing balance of approximately $629,000 at March 31, 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 approximately $77,000 at March 31,
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 of 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 has a $1,500,000 revolving bank line of credit requiring monthly
interest payments at prime plus 1/2% which matured August 1, 1998 and was
renewed on the same terms and conditions through June 30, 1999. The interest
rate on this loan was 8.25% at March 31, 1999 and at December 31, 1998.
There was an outstanding balance on this loan of $636,000 at March 31, 1999
and $962,000 at December 31, 1998. Lytton has a $1,000,000 installment loan
with the same bank maturing August 1, 2002 at an annual rate of 9% until July
1999, with monthly payments of $16,667 plus interest, at which time, Lytton
will have an option to convert the note to a variable rate. The balance
outstanding on this loan was approximately $667,000 at March 31, 1999 and
$733,000 at December 31, 1998. Lytton also has a $500,000 equipment loan
agreement with the same bank payable through August 1, 2003 with interest at
prime plus 1%. There was no outstanding balance on this loan as of March 31,
1999 or December 31, 1998. All of these bank loans are secured by the
business assets of Lytton.
The prime rate was 7.75% as of March 31, 1999 and December 31, 1998.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
NOTE 4--Long-Term Debt--(Continued)
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extend through July 1999 with
interest rates ranging from 8.55% to 10.09%. The remaining principal
balance under these financing obligations amounted to $91,000 at March 31,
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 approximately $146,000 at March 31, 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 $521,000 at March 31, 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 $149,000 and $160,000 at March 31, 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 $187,000 and $200,000 at March 31, 1999 and December 31, 1998,
respectively.
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 approxi-
mately $516,000 at March 31, 1999 and $449,000 at December 31, 1998.
Additional financing of $90,000 and $17,000 during the three months ended
March 31, 1999 and March 31, 1998, respectively, represents a noncash
financing activity which is a supplemental disclosure required by FAS 95.
Interest payments on long-term debt amounted to $142,000 and $162,000
for the three months ended March 31, 1999 and March 31, 1998, respectively.
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 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 dif-
ferences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
unrealized gain on marketable securities for sale is net of deferred taxes.
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 $45,000
for the three months ended March 31, 1999 and $24,000 for the same period of
the preceding year.
Techdyne (Europe) had an income tax benefit of approximately $5,000 for
the three months ended March 31, 1998 with no such benefit or provision for
the first quarter of 1999.
Income tax payments were $218,000 for the three months ended March 31,
1999 and $1,578,000 for the three months ended March 31, 1998.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS-- (Continued)
March 31, 1999
(Unaudited)
NOTE 6--Stock Options
The Company has 1,000,000 shares of common stock reserved for future
issuance pursuant to its 1989 Stock Option Plan. On April 18, 1995, the
Company granted non-qualified stock options for 809,000 shares of its common
stock as a service award to officers, directors, and certain employees of
the Company and certain of its subsidiaries under its 1989 Plan. The options
are exercisable at $2.38 per share, through April 17, 2000. On June 11,
1997, the Company's board of directors granted a five-year non-qualified
stock option under the 1989 Plan for 35,000 shares immediately exercisable
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.
In May 1994, Techdyne adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in May 1994, Techdyne's board of directors
granted 227,500 to certain of its officers, directors, and employees. These
options are exercisable at $1 per share through May 24, 1999. On June 30,
1998, 115,000 of these options were exercised with a remaining balance of
56,300 outstanding as of March 31, 1999. Techdyne received cash payment of
the par value and the balance in three year promissory notes with interest
at 5.16%.
On February 27, 1995 Techdyne granted stock options, not part of the
1994 Plan, to directors of Techdyne and its subsidiaries for 142,500 shares
exercisable at $1.75 per share through February 26, 2000. In April 1995,
Techdyne granted a non-qualified stock option for 10,000 shares, not part of
the 1994 Plan, to its general counsel at the same price and terms as the
directors' options.
In June 1997, Techdyne adopted a Stock Option Plan for up to 500,000
options, and pursuant to the plan the board granted 375,000 options exercis-
able through June 22, 2002 at $3.25 per share.
In November 1995, DCA adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in November 1995, DCA's board of directors
granted 210,000 options to certain of its officers, directors and employees
which options are exercisable for a period of five years through November 9,
2000 at $1.50 per share. On June 10, 1998, DCA granted a five-year non-
qualified stock option to a new board member for 5,000 shares exercisable at
$2.25 per share through June 9, 2003. At 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.
As part of the consideration pursuant to an agreement for investor
relations and corporate communications services agreement, the Company
granted options for 20,000 shares of its common stock exercisable for three
years through May 14, 2001 at $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)
March 31, 1999
(Unaudited)
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 March 31, 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 three months ended March 31, 1999 amounted to approximately $20,000, with
such expense amounting to approximately $10,000 and including only Lytton for
the three months ended March 31, 1999.
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 three months ended
March 31, 1999, a total of $25,000 was paid under this agreement leaving an
unpaid balance of approximately $33,000 as of March 31, 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 three months ended March 31,
1999, $54,579 was paid under the lease compared to $53,676 paid for the same
period last year.
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 included unallocated cash,
deferred income taxes, corporate fixed assets and goodwill not allocated to
any of the segments. Intersegment sales are generally intended to approximate
market price.
Three Months Ended
March 31,
-------------------------
1999 1998
---- ----
BUSINESS SEGMENT REVENUES
Electro-Mechanical
External $ 9,833,647 $11,852,127
Intersegment Sales 23,468 50,611
Medical Products 280,215 379,689
Medical Services 1,255,124 945,038
Corporate 91,334 75,909
Elimination of corporate rental charges
to electro-mechanical manufacturing (23,407) (23,361)
Elimination of corporate interest charge
to electro-mechanical (44,607) (33,719)
Elimination of corporate interest charge
to medical services --- (1,964)
Elimination of medical services
interest charge to corporate (903) ---
Elimination of electro-mechanical
manufacturing sales to medical products (23,468) (50,611)
----------- -----------
$11,391,403 $13,193,719
=========== ===========
BUSINESS SEGMENT PROFIT (LOSS)
Electro-Mechanical $ (122,215) $ 549,559
Medical Products (10,384) (18,535)
Medical Services (219,172) (116,160)
Corporate (84,362) (69,889)
----------- -----------
$ (436,133) $ 344,975
=========== ===========
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
March 31, 1999
(Unaudited)
NOTE 8--Business Segment and Geographic Area Data-(Continued)
A significant customer of Techdyne, which accounted for 4% of both
Techdyne's and the Company's sales for the three months ended March 31, 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 have been registered for the seller. Techdyne has
guaranteed that the seller will realize a minimum of $2,400,000 from the sale
of these shares of common stock based on Lytton having achieved certain
earnings objectives resulting in an increase of $400,000 in the valuation of
$2,000,000 originally recorded for these securities. The total purchase price
in excess of the fair value of net assets acquired which originally amounted
to approximately $2,230,000 is being amortized over 25 years. Additional
contingent consideration may be due if Lytton achieves certain sales levels.
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 con-
sideration 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 provide that the seller will sell an amount of common stock which will
provide $1,300,000 gross proceeds, and Techdyne will guarantee that to the
extent that the seller has less than 150,000 shares of Techdyne's common stock
remaining, Techdyne will issue 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 has also guaranteed the seller aggregate proceeds of no
less than $1,100,000 from the sale of the remaining common stock if sold on
or prior to July 31, 1999.
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 orig-
inally 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)
March 31, 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. The reacquired shares may be
used to fund stock option obligations. As of March 31, 1999, the Company
had repurchased approximately 141,000 shares of common stock at a cost of
approximately $221,000 which is reflected as treasury stock, with no such
purchases during the first quarter of 1999.
In September 1998, DCA announced its intent to repurchase up to 300,000
shares of its outstanding common stock at market prices. DCA has repurchased
205,000 shares for approximately $315,000, including 100,000 shares
previously repurchased for approximately $206,000 in June 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
- ---------------------
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q that are
not historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of the 1934. The Private Securities Litigation Reform Act of 1995
contains certain safe harbors regarding forward-looking statements. Certain
of the forward-looking statements include management's expectations,
intuitions and beliefs with respect to the growth of the Company, the nature
of the electronics industry in which its 62% owned public subsidiary,
Techdyne, is engaged as a manufacturer, the character and development of
the dialysis industry in which its 68% owned public subsidiary, DCA, is
engaged, the Company's business strategies and plans for future operations,
its needs for capital expenditures, capital resources, liquidity and
operating results, and similar matters that are not historical facts. Such
forward-looking statements are subject to substantial risks and uncertainties
that could cause actual results to materially differ from those expressed in
the statements, including general economic and business conditions, oppor-
tunities pursued by the Company, competition, changes in federal and state
laws or regulations affecting the Company, and other factors discussed
periodically in the Company's filings. Many of the foregoing factors are
beyond the control of the Company. Among the factors that could cause actual
results to differ materially are the factors detailed in the risks discussed
in the "Risk Factors" section included in the Company's Registration
Statement, Form S-3, as filed with the Securities and Exchange Commission
("Commission") (effective May 15, 1997) and the Registration Statements of
the Company's subsidiaries, Techdyne's Registration Statements as filed with
the Commission, Form SB-2 (effective September 13, 1995) and Forms S-3
(effective November 11, 1996 and November 4, 1997, respectively), and DCA's
Registration Statement, Form SB-2, as filed with the Commission (effective on
April 17, 1996) as amended and supplemented. Accordingly, readers are
cautioned not to place undue reliance on such forward-looking statements
which speak only as of the date made and which the Company undertakes no
obligation to revise to reflect events after the date made.
Techdyne's electronic and electro-mechanical manufacturing 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 obsolescence.
Discontinuance or modification of products containing components manufactured
by Techdyne could adversely affect the Company's and Techdyne's results of
operations. The electronics industry is also subject to economic cycles and
has in the past experienced, and is likely in the future to experience,
recessionary periods, which could have a material adverse effect on the
Company's and Techdyne's business, financial condition and results of opera-
tions.
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 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.
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 anticipa-
tion 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.
<PAGE>
Forward-Looking Information (continued)
With respect to the Company's dialysis operations engaged in through DCA,
essential to the Company's profitability is Medicare reimbursement which is at
a fixed rate determined by the Health Care Financing 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 regu-
lations, 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 in New
Jersey is in the planning and architectural stage. There is intense competi-
tion for retaining qualified nephrologists, who normally are the sole 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 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 and has evaluated its computerized systems and equipment, and
communicated with its major vendors, and has substantially made the opera-
tions of the Company Year 2000 compliant.
In 1997, the Company commenced upgrading its 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 several computers and certain software were acquired by and applied
to the Company. The system is in the process of being installed into Lytton's
and Techdyne (Europe)'s operations. This new system has greatly enhanced
Techdyne's enterprise resources planning, essential to bids for new business,
production scheduling, inventory and information technology, and overall
operations. Management believes this new system is providing it with leverage
in material pricing, production and timely-delivery, thereby enabling the
Company to be more competitive in bidding for manufacturing business. This
Visual Manufacturing system also enables the Company to better track actual
costs against its quotes, thereby allowing the Company to more effectively
control costs and manage operating margins. The Visual Manufacturing system
also provides the bookkeeping, accounting and financial recording and
information functions for the Company and its subsidiaries. The Visual
Manufacturing system has been pre-tested and guaranteed by the manufacturer
to be Year 2000 compliant.
With respect to non-information technology systems which typically
include embedded technology such as microcontrollers, the major equipment
used in the Company's manufacturing operations as well as in its dialysis
operations are not date sensitive, and should not pose any threat of a system
breakdown due to the Year 2000 issue. Techdyne's personal computer hardware
and software systems have been checked and have been determined to be Year
2000 compliant.
<PAGE>
Year 2000 Readiness (continued)
The Company has communicated with its key vendors, customers and other
third parties with whom its operations are essential to inquire of their
assessment of their Year 2000 issues and actions being taken to resolve
those issues. A substantial number have responded of which many have given
written assurance that they are Year 2000 compliant, with the balance
assuring the Company 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. 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 the
Company's business, results of operations or financial condition.
The singular area impacting DCA 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 compli-
ance guidelines, which guidelines require not only system but also Year
2000 compatibility. 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. Therefore, with respect to any
financial impact in view of electronic billing and maintenance of receiva-
bles, management does not presently anticipate any future problems. No
other significant computer issues are presently known by the Company that
would affect DCA's ability to electronically bill or otherwise maintain its
records and conduct its daily operations.
Another area that could significantly impact the Company's operations
in providing dialysis treatment to patients relates to third-party providers,
specifically, the utility companies providing water, an extremely necessary
resource for dialysis treatments, and electricity. These providers and
services are beyond the control of the Company. Should any of these
utilities fail to provide services, such would seriously adversely impact
the Company, its patients, as well as the Company's competitors in such
affected areas.
There can be no assurance, however, that the Year 2000 issues, whether
internal and believed to have been addressed, or from third parties,
although the Company has checked and been assured that its third-party
payors and suppliers are Year 2000 compliant or will be prior to the end
of 1999, will not have a material adverse effect on the Company's business,
results of operations or financial condition.
Results of Operations
Consolidated revenues decreased by approximately $1,802,000 (14%) for
the three months ended March 31, 1999 compared to the same period of the
preceding year. Sales revenues for the three months ended March 31, 1999
decreased by $1,760,000 (14%) compared to the preceding year. Other income
decreased approximately $42,000 for the three months ended March 31, 1999
compared to the same period of the preceding year due to a decrease in
interest earned as a result of a decrease in invested funds.
Techdyne sales decreased approximately $2,037,000 (17%) for the three
months ended March 31, 1999 compared to the same period of the preceding
year. There was a decrease in domestic sales of $1,185,000 (12%) and a
decrease in European sales of $852,000 (48%) compared to the same period of
the preceding year.
Approximately 45% of Techdyne's consolidated sales and 39% of the
Company's consolidated sales for the three months ended March 31, 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 include IBM which accounted for 10% and 9% and
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 three months ended March 31, 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.
<PAGE>
Results of Operations (continued)
The decrease in European-based sales, included a decrease of approxi-
mately $417,000 (86%) in sales to Compaq (Europe), as well as decreases in
sales to other customers. Sales of Techdyne's Scottish-based subsidiary
Techdyne (Europe) to Compaq accounted for approximately 7% and 27% of the
sales of Techdyne (Europe) for the three months ended March 31, 1999 and
March 31, 1998, respectively. 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) is pursuing new business development; however, there can be no
assurance as to the success of such efforts.
Medical product sales revenues decreased by approximately $99,000 (35%)
for the three months ended March 31, 1999 compared to the same period 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 $349,000 (43%) for the three
months ended March 31, 1999 compared to the same period of the preceding year.
This increase reflected increased revenues of DCA's Pennsylvania dialysis
centers of approximately $264,000 and for the three months ended March 31,
1999, including revenues of approximately $144,000 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
$85,000 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 87%
for the three months ended March 31, 1999 compared to 84% the same period of
the preceding year which included increases for Techdyne and the medical
services division and a decrease for the medical products division.
Cost of goods sold for Techdyne as a percentage of sales increased to 90%
for the three months ended March 31, 1999 compared to 86% for the same period
of the preceding year reflecting changes in product mix and a diversification
of Techdyne's customer base.
Cost of goods sold by the medical products division decreased to 65% for
three months ended March 31, 1999 compared to 74% for the same period of the
preceding year as a result of decreased cost for the principal product of this
division and a change in product mix resulting in decreased sales of this
product.
Cost of medical services sales increased to 74% for the three months
ended March 31, 1999 compared to 72% for the same period of the preceding year
reflecting operations of DCA's new dialysis centers which are still in their
developmental stage.
Selling, general and administrative expenses increased $125,000 for the
three months ended March 31, 1999 compared to the same period of the preceding
year. This increase reflected expenses of DCA's new dialysis centers.
Interest expense decreased by approximately $12,000 for the three months
ended March 31, 1999 compared to the same period of the preceding year re-
flecting lower interest rates and reduced average borrowings.
A substantial portion of the Company's outstanding borrowings are tied to
the prime interest rate. The prime rate was 7.75% at March 31, 1999 and
December 31, 1998.
<PAGE>
Liquidity and Capital Resources
Working capital totaled $14,607,000 at March 31, 1999, which reflected
a decrease of $814,000 (5%) during the three months ended March 31, 1999.
Included in the changes in components of working capital was a decrease of
$817,000 in cash and cash equivalents, which included net cash provided by
operating activities of $337,000, net cash used in investing activities of
$571,000 (including additions to property, plant and equipment of $580,000),
and net cash used in financing activities of $559,000 (including net line of
credit payments of $327,000, and payments on long-term debt of $232,000).
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
$1,125,000 at March 31, 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 March 31, 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
$629,000 at March 31, 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 $77,000 at March 31,
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 with 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 $521,000 at
March 31, 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 commercial
customers. This acquisition required $2,500,000 cash, funded by the modified
bank line of credit, as well as 300,000 shares of Techdyne's common stock
which had a fair value of approximately $1,031,000 based on the closing price
of Techdyne common stock on the date of acquisition. Techdyne has guaranteed
$2,400,000 minimum proceeds from the sale of these securities based on Lytton
having achieved certain earnings objectives. The Stock Purchase Agreement
also provides for incentive consideration to be paid in cash based on specific
sales levels of Lytton for each of three successive specified years, resulting
in additional consideration of approximately $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. See Note 9 to "Notes to Consolidated Condensed
Financial Statements."
With one bank, Lytton has (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%. All of these bank loans are secured by the business assets
of Lytton. See Note 4 to "Notes to Consolidated Condensed Financial
Statements."
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extend through July 1999 with
interest rates ranging from 8.55% to 10.09%, 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."
<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 $336,000 and $360,000 at March 31, 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 $516,000
and $449,000 at March 31, 1999 and December 31, 1998, respectively, which
includes additional financing of approximately $90,000 and $17,000 during the
three months ended March 31, 1999 and March 31, 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 and the
professional association which is to provide medical director services to
another New Jersey center presently in the planning and architectural stage
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
the Company's sales for the three months ended March 31, 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 quarters of fiscal years beginning after June 15, 1999. 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>
Inflation
Inflationary factors have not had a significant effect on the Company's
operations. The Company attempts to pass on increased costs and expenses
incurred in the electronic and electro-mechanical products division by
increasing selling prices when and where possible and by developing different
and improved products for its customers that can be sold at targeted profit
margins. In the Company's medical services segment, revenue per dialysis
treatment is subject to reimbursement rates established and regulated by the
federal government. These rates do not automatically adjust for inflation.
Any rate adjustments relate to legislation and executive and Congressional
budget demands, and have little to do with the actual cost of doing business.
Therefore, dialysis services revenues cannot be voluntary increased to keep
pace with increases, supply costs or nursing and other patient care costs.
<PAGE>
PART II -- OTHER INFORMATION
------- -----------------
Item 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
March 31, 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 Principal
Accounting Officer
Dated: May 14, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,477,862
<SECURITIES> 129,634
<RECEIVABLES> 6,494,809
<ALLOWANCES> 0
<INVENTORY> 8,175,453
<CURRENT-ASSETS> 22,209,992
<PP&E> 16,407,263
<DEPRECIATION> 6,686,585
<TOTAL-ASSETS> 35,320,588
<CURRENT-LIABILITIES> 7,603,185
<BONDS> 4,992,741
0
0
<COMMON> 58,569
<OTHER-SE> 14,930,083
<TOTAL-LIABILITY-AND-EQUITY> 35,320,588
<SALES> 11,259,096
<TOTAL-REVENUES> 11,391,403
<CGS> 9,820,621
<TOTAL-COSTS> 9,820,621
<OTHER-EXPENSES> 1,867,893
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 139,022
<INCOME-PRETAX> (436,133)
<INCOME-TAX> (45,087)
<INCOME-CONTINUING> (286,537)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (286,537)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
<FN>
<F1>Accounts receivable are net of allowance of $346,000 at March 31,
1999.
<F2>Inventories are net of reserve of $574,000 at March 31, 1999.
</FN>
</TABLE>
