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, 2000
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission file number 0-6906
------
MEDICORE, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-0941551
--------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2337 West 76th Street, Hialeah, Florida 33016
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(305) 558-4000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
---------------------------------------------------------------
(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 - 5,710,540 shares as of July 31, 2000
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
------ ---------------------
The Consolidated Condensed Statements of Operations (Unaudited) for the
three months and nine months ended September 30, 2000 and September 30, 1999
include the accounts of the Registrant and all its subsidiaries.
Item 1. Financial Statements
------ --------------------
1) Consolidated Condensed Statements of Operations for the three months
and nine months ended September 30, 2000 and September 30, 1999.
2) Consolidated Condensed Balance Sheets as of September 30, 2000 and
December 31, 1999.
3) Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 2000 and September 30, 1999.
4) Notes to Consolidated Condensed Financial Statements as of September
30, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------ -----------------------------------------------------------------------
of Operations
-------------
PART II -- OTHER INFORMATION
------- -----------------
Item 6. Exhibits and Reports on Form 8-K
------ --------------------------------
<PAGE>
PART I -- FINANCIAL INFORMATION
---------------------------------
Item 1. Financial Statements
------ --------------------
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Sales $16,112,940 $15,993,496 $45,449,175 $39,427,782
Realized gain on sale of marketable
securities --- --- --- 228,078
Gain on subsidiary warrants exercise --- --- 251,330 ---
Other income 132,030 104,485 398,005 360,976
----------- ----------- ----------- -----------
16,244,970 16,097,981 46,098,510 40,016,836
COST AND EXPENSES
Cost of goods sold 13,521,332 13,313,681 38,816,154 33,557,344
Selling, general and administrative
expenses 2,275,658 2,064,583 7,077,323 6,107,273
Interest expense 237,678 186,052 663,263 475,906
----------- ----------- ----------- -----------
16,034,668 15,564,316 46,556,740 40,140,523
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST 210,302 533,665 (458,230) (123,687)
Income tax provision 126,281 98,621 307,927 48,054
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST 84,021 435,044 (766,157) (171,741)
Minority interest in earnings (loss) of
consolidated subsidiaries 66,579 220,673 (98,075) 26,807
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 17,442 $ 214,371 $ (668,082) $ (198,548)
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $ -- $.04 $(.12) $(.03)
==== ==== ===== =====
Diluted $ -- $.04 $(.12) $(.04)
==== ==== ===== =====
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999(A)
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 533,663 $ 4,151,150
Marketable securities 13,970 9,520
Accounts receivable, less allowances of $394,000 at
September 30, 2000 and $431,000 at December 31, 1999 9,136,193 8,958,837
Note receivable 2,200,000 ---
Inventories, less allowance for obsolescence of $851,000
at September 30, 2000 and $724,000 at December 31, 1999 11,194,106 10,097,974
Prepaid expenses and other current assets 1,120,825 810,806
Deferred tax asset 626,897 614,308
----------- -----------
Total current assets 24,825,654 24,642,595
PROPERTY AND EQUIPMENT
Land and improvements 1,204,708 1,012,455
Building and building improvements 3,605,412 3,071,948
Equipment and furniture 11,740,733 11,455,449
Leasehold improvements 2,306,415 2,243,658
----------- -----------
18,857,268 17,783,510
Less accumulated depreciation and amortization 8,054,927 7,309,250
----------- -----------
10,802,341 10,474,260
DEFERRED EXPENSES AND OTHER ASSETS 125,074 111,392
COSTS IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED,
less accumulated amortization of $885,000 at September 30, 2000
and $749,000 at December 31, 2000 3,641,754 3,381,718
----------- -----------
$39,394,823 $38,609,965
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings $ --- $ 30,024
Accounts payable 4,583,391 5,568,972
Accrued expenses and other current liabilities 2,453,009 2,210,345
Current portion of long-term debt 966,719 732,677
Income taxes payable 270,613 260,481
----------- -----------
Total current liabilities 8,273,732 8,802,499
LONG-TERM DEBT 9,638,641 8,363,497
DEFERRED INCOME TAXES 1,910,249 1,814,743
MINORITY INTEREST IN SUBSIDIARIES 6,375,485 5,346,779
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 12,000,000 shares;
issued and outstanding 5,710,540 shares at September 30, 2000
and 5,707,540 shares at December 31, 1999 57,105 57,075
Capital in excess of par value 11,651,152 11,961,030
Retained earnings 1,667,799 2,335,881
Accumulated other comprehensive loss:
Foreign currency translation adjustment (161,765) (74,505)
Unrealized (loss) gain on marketable securities for sale (17,575) 2,966
----------- -----------
Total accumulated other comprehensive loss (179,340) (71,539)
----------- -----------
Total stockholders' equity 13,196,716 14,282,447
----------- -----------
$39,394,823 $38,609,965
=========== ===========
</TABLE>
(A) Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 filed with the Securities and Exchange Commission
in March, 2000.
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
September 30,
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (668,082) $ (198,548)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 1,438,794 1,275,569
Amortization 164,455 132,624
Bad debt expense 145,668 75,908
Provision for inventory obsolescence 361,626 304,665
Gain on sale of securities --- (228,078)
Minority interest (98,075) 26,807
Stock option compensation 96,750 153,000
Consultant stock options expense 23,448 ---
Finders fee stock option expense 64,500 ---
Gain on subsidiary warrants exercise (251,330) ---
Deferred income taxes 95,506 ---
Increase (decrease) relating to operating activities from:
Accounts receivable (385,729) (4,025,045)
Inventories (1,503,714) (2,942,683)
Prepaid expenses and other current assets (203,333) 117,742
Accounts payable (968,246) 3,515,663
Accrued expenses and other current liabilities 277,695 479,197
Income taxes payable 10,215 (173,764)
----------- -----------
Net cash used in operating activities (1,399,852) (1,486,943)
INVESTING ACTIVITIES
Additions to property and equipment, net of minor disposals (1,706,467) (1,383,767)
Additions to note receivable (2,200,000) ---
Loan to MainStreet (140,000) ---
Subsidiary acquisition payments (395,806) (1,389,531)
Proceeds from sale of securities --- 228,078
Purchase of marketable securities (37,580) (29,210)
Sale of minority interest in subsidiaries 206,000 6,040
Deferred expenses and other assets (43,206) 40,356
----------- -----------
Net cash used in investing activities (4,317,059) (2,528,034)
FINANCING ACTIVITIES
Line of credit net borrowings 1,791,481 1,906,514
Short-term bank borrowings --- 375,000
Payments on short-term borrowings (30,024) (375,000)
Repurchase of stock --- (8,166)
Long-term borrowings 150,000 766,667
Payments on long-term borrowings (553,630) (749,073)
Exercise of stock options and warrants 739,168 500
Deferred financing costs (386) (139)
----------- -----------
Net cash provided by financing activities 2,096,609 1,916,303
Effect of exchange rate fluctuations on cash 2,815 (17,224)
----------- -----------
Decrease in cash and cash equivalents (3,617,487) (2,115,898)
Cash and cash equivalents at beginning of year 4,151,150 7,294,707
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 533,663 $ 5,178,809
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies
Consolidation
The Consolidated Condensed Financial Statements include the accounts of
Medicore, Inc., Medicore's 59.4% owned subsidiary, Dialysis Corporation of
America ("DCA") and its subsidiaries and Medicore's 70.9% 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 and/or
weighted average cost method) or market value. The cost of finished goods
and work in process consists of direct materials, direct labor and an
appropriate portion of fixed and variable manufacturing overhead. Inventories
are comprised of the following:
September 30, December 31,
2000 1999
------------ ------------
Electronic and mechanical components, net:
Finished goods $ 696,290 $ 1,018,131
Work in process 2,489,117 2,463,191
Raw materials and supplies 7,181,475 6,010,987
----------- -----------
10,366,882 9,492,309
Medical supplies 827,224 605,665
----------- -----------
$11,194,106 $10,097,974
=========== ===========
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities is comprised as follows:
September 30, December 31,
2000 1999
------------ ------------
Accrued compensation $ 614,413 $ 609,708
Other 1,838,596 1,600,637
----------- -----------
$ 2,453,009 $ 2,210,345
=========== ===========
Earnings (Loss) Per Share
Diluted earnings (loss) 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 or nine months ended September 30, 2000 or for
the same period of the preceding year as a result of exercise prices and or net
losses, since to include them would be anti-dilutive.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--Continued
Following is a reconciliation of amounts used in the basic and diluted
computations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss), numerator-basic
computation $ 17,442 $ 214,371 $ (668,082) $ (198,548)
Adjustment due to subsidiaries' dilutive
securities --- (10,011) --- (22,242)
----------- ----------- ----------- -----------
Net income (loss) as adjusted,
numerator-diluted computation $ 17,442 $ 204,360 $ (668,082) $ (220,790)
=========== =========== =========== ===========
Weighted average shares-denominator
basic computation 5,710,540 5,707,540 5,709,821 5,705,540
Effect of dilutive securities:
Stock options 20,131 --- --- ---
Weighted average shares, as
adjusted-denominator diluted computation 5,730,671 5,705,540 5,709,821 5,705,540
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $ -- $.04 $(.12) $(.03)
==== ==== ===== =====
Diluted $ -- $.04 $(.12) $(.04)
==== ==== ===== =====
</TABLE>
SALE OF STOCK BY SUBSIDIARIES: The Company follows an accounting policy
of recognizing income on sales of stock by its subsidiaries, which includes
exercise of warrants issued in subsidiary stock offerings. See Note 9.
MARKETABLE SECURITIES: The Company classifies its marketable equity
securities as either trading or available-for-sale. The Company does not
purchase equity securities for the purpose of short-term sales; accordingly,
its securities are classified as available-for-sale. Marketable securities
are recorded at fair value. Unrealized gains and losses relating to available-
for-sale securities are included separately as a component of accumulated
other comprehensive income (loss) included in shareholders' equity, net of
income tax effect, until realized. Realized gains and losses are computed
based on the cost of securities sold using the specific identification method.
Marketable securities are comprised of the following:
September 30, December 31,
2000 1999
------------ ------------
Cost $ 42,317 $ 4,737
Unrealized holding (losses) gains (28,347) 4,783
-------- --------
Fair value $ 13,970 $ 9,520
======== ========
Unrealized holding (losses) gains, which amounted to $(28,347) less a
deferred tax (credit) provision of $(10,772) at September 30, 2000, and
$4,783 less deferred taxes of $1,817 at December 31, 1999, are included
separately as a component of accumulated other comprehensive (loss) in
stockholders' equity.
Comprehensive (Loss) Income
Comprehensive (loss) income consists of net (loss) income, foreign
currency translation adjustments and unrealized gain (loss) on marketable
securities. Below is a detail of comprehensive (loss) income for the three
months and nine months ended September 30, 2000 and September 30, 1999:
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--Continued
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 17,442 $ 214,371 $ (668,082) $ (198,548)
Other comprehensive (loss) income:
Foreign currency translation adjustments (18,333) 41,393 (87,260) (24,239)
Unrealized loss on marketable securities:
Unrealized holding loss arising during
period, net of tax (2,323) (2,329) (20,541) (5,016)
Less: reclassification adjustment, net
of tax, for gain included in net loss --- --- --- (130,204)
---------- ---------- ---------- ----------
Unrealized loss on marketable securities (2,323) (2,329) (20,541) (135,220)
---------- ---------- ---------- ----------
Total other comprehensive (loss) income (20,656) 39,064 (107,801) (159,459)
---------- ---------- ---------- ----------
Comprehensive (loss) income $ (3,214) $ 253,435 $ (775,883) $ (358,007)
========== ========== ========== ==========
</TABLE>
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, 2000. FAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires, among other things, that all derivatives be recognized
as either assets or liabilities in the statement of financial position and that
these instruments be measured at fair value. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its
consolidated financial statements.
NOTE 2--Interim Adjustments
The financial summaries for the three months and nine months ended
September 30, 2000 and September 30, 1999 are unaudited and include, in the
opinion of management of the Company, all adjustments (consisting of normal
recurring accruals) necessary to present fairly the earnings for such periods.
Operating results for the three months and nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 2000.
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, 1999.
NOTE 3--Long-Term Debt
In February 2000, Techdyne refinanced its line of credit and term loans
through the same bank which handles Lytton's financing. One credit facility
is a $4,500,000 three year line of credit maturing February, 2003 with
interest payable monthly at prime minus 1/4% and an option to fix the rate for
up to 180 days at LIBOR plus 2.50%. This line of credit had an outstanding
balance of approximately $3,807,000 at September 30, 2000. The bank also
extended a $1,000,000 five year term loan maturing February 2005 with the same
interest rate as for the line of credit. This term loan had an outstanding
balance of approximately $883,000 at September 30, 2000. If Techdyne achieves
certain financial criteria for its year ended December 31, 2000, it would
receive a rate reduction under both the prime and LIBOR alternatives. The
loans are secured by the business assets of Techdyne and are cross-
collateralized with the debt of Lytton. These loans replaced bank debt which
consisted at December 31, 1999 of a line of credit with an outstanding balance
of $1,600,000, term loans with a combined outstanding balance of approximately
$1,552,000 and another bank loan with an outstanding balance of $145,000. The
total principal
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 3--Long-Term Debt--Continued
balance refinanced was approximately $3,260,000 representing a non-cash
financing activity which is a supplemental disclosure required by Financial
Accounting Standards Board Statement No. 95, "Statement of Cash Flows"
(FAS 95). The refinancing also included payment of approximately $17,000
accrued interest.
In conjunction with Techdyne's refinancing, the bank amended the terms of
the Lytton line of credit and term loan and equipment loan agreements to make
Lytton's line of credit a three year facility and to amend the interest rates
on Lytton's line of credit, term loan and equipment loan agreements to coincide
with those of Techdyne's loan agreements.
Lytton has a $3,000,000 three year line of credit facility maturing
February 2003 with interest payable monthly at prime minus 1/4%. There was an
outstanding balance on this loan of approximately $2,985,000 at September 30,
2000 and $2,830,000 at December 31, 1999. Lytton has a $1,400,000 installment
loan with interest at prime minus 1/4% and monthly payments of $23,333 plus
interest payable in 60 monthly installments commencing August 1, 1999 with the
final installment due June 30, 2004. The balance outstanding on this loan was
approximately $1,091,000 at September 30, 2000 and $1,283,000 at December 31,
1999. Lytton also has a $500,000 equipment loan agreement with the same bank
payable through June 30, 2004 with interest at prime minus 1/4%. This loan had
an outstanding balance of $150,000 at September 30, 2000 with no outstanding
balance as of December 31, 1999. All of these bank loans are secured by the
business assets of Lytton and all have an option to fix the rate for up to 180
days at LIBOR plus 2.50%.
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 $78,000 at September 30, 2000 and $113,000
at December 31, 1999 and is secured by equipment.
In July 1994, Techdyne (Europe) purchased the facility housing its
operations obtaining a 15 year mortgage which had a U.S. dollar equivalency of
approximately $421,000 at September 30, 2000 and $489,000 at December 31, 1999
based on exchange rates in effect at each of these dates.
The Company's medical products division had two lines of credit with local
Florida banks, one a secured $350,000 line with a maturity of April 22, 2001
with interest at prime plus 1% payable monthly. This line of credit is secured
by the accounts receivable and inventory of the Company's medical products
division and had an outstanding balance of approximately $106,000 at September
30, 2000 and no balance outstanding at December 31, 1999. The other line was
an unsecured $65,000 line of credit which matured May 1, 2000 with interest at
prime payable monthly. This line had an outstanding balance of approximately
$30,000 at December 31, 1999.
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 $101,000 and $125,000 at September 30, 2000 and December 31,
1999, 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
$127,000 and $157,000 at September 30, 2000 and December 31, 1999,
respectively.
DCA through its subsidiary, DCA of Vineland, LLC, pursuant to a December
3, 1999 loan agreement obtained a $700,000 development and equipment line of
credit with interest at 8.75% which is secured by the acquired assets of DCA
of Vineland and a second mortgage on DCA's real property in Easton, Maryland
on which an affiliated bank holds the first mortgage. Outstanding borrowings
are subject to monthly payments of interest and principal with any remaining
balance due September 1, 2003. There were no outstanding borrowings under
this line of credit as of September 30, 2000 or December 31, 1999.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 3--Long-Term Debt--(Continued)
DCA has an equipment purchase agreement for certain kidney dialysis
machines at its facilities with interest at rates ranging from 4.14% to 11.84%
pursuant to various schedules extending through August 2005. Additional
financing of $108,000 and $141,000 during the nine months ended September 30,
2000 and September 30, 1999 represents a noncash financing activity, which is
a supplemental disclosure required by FAS 95. The remaining principal balance
under this agreement amounted to approximately $781,000 and $731,000 at
September 30, 2000 and December 31, 1999, respectively.
The prime rate was 9.5% as of September 30, 2000 and 8.5% as of December
31, 1999.
Interest payments on long-term debt amounted to approximately $239,000 and
$612,000 for the three months and nine months ended September 30, 2000 and
$161,000 and $449,000 for the same periods of the preceding year.
NOTE 4--Income Taxes
Techdyne and DCA each file separate federal and state income tax returns
with their income tax liability reflected on a separate return basis.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The unrealized gain on
marketable securities for sale is net of deferred taxes. 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 expense of approximately $126,000
and $308,000 for the three months and nine months ended September 30, 2000,
respectively, which included deferred taxes of $96,000 for the nine month
period with no such taxes during the third quarter on DCA warrant exercises,
and a domestic income tax provision of approximately $99,000 and $48,000 for
the same periods of the preceding year. See Note 9.
Techdyne (Europe) had no income tax expense or benefit for the three
months or nine months ended September 30, 2000 or for the same periods of the
preceding year due to its loss and it having utilized all available tax loss
carrybacks.
Income tax payments refunds were approximately $4,000 and $192,000 for
the three months and nine months ended September 30, 2000 and $41,000 and
$6,000 for the same periods of the preceding year.
NOTE 5--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 were
exercisable at $3.00 per share, reduced to $2.38 per share on December 31,
1996, through April 17, 2000 at which time they expired. On June 11, 1997,
the Company's board of directors granted a five-year non-qualified stock
option under the 1989 Plan for 35,000 shares immediately exercisable with an
exercise price of $3.75 to a new board member, which exercise price was reduced
to $2.38 per share on September 10, 1997, the fair market value on that date.
There were 838,000 options outstanding at March 31, 2000 under the 1989 plan,
of which 803,000 options expired, leaving a balance of 35,000 options
outstanding at September 30, 2000. On July 27, 2000, the board granted 820,000
five-year non-qualified stock options to 17 officers, directors and employees
of the Company and its subsidiaries under the 1989 Plan. The options are
exercisable at $1.38, the market price on the date of grant.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 5--Stock Options-Continued
On February 17, 2000, the Company adopted a new 2000 Stock Option Plan
for up to 500,000 shares and granted 175,000 non-qualified and 300,000
incentive stock options which was subject to shareholder approval obtained May
24, 2000, prior to which the options were restricted from exercise. The
Company recorded an expense of approximately $97,000 on 75,000 of these options
in May 2000.
In May 1994, Techdyne adopted a stock option plan for up to 250,000
options. The options were exercisable for a period of five years at $1 per
share. On June 30, 1998, 115,000 of these options were exercised and on May
10, 1999, 50,000 of the remaining options were exercised. The Company
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 non-qualified stock options, not
part of the 1994 Plan, to directors of Techdyne and its subsidiary for 142,500
shares exercisable at $1.75 per share for five years. 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. On February 25, 2000, 145,000 of these options were exercised.
Techdyne received cash payment of the par value and the balance in three year
promissory notes with interest at 6.19%.
In June 1997, Techdyne's board of directors adopted a Stock Option Plan
for up to 500,000 options, and pursuant to the plan the board granted 375,000
options exercisable for five years through June 22, 2002 at $3.25 per share
the closing price of the common stock on the date of grant with 325,000 of
these options outstanding at September 30, 2000. On June 30, 1999, Techdyne
granted 52,000 options exercisable for three years through June 29, 2002 at
$4.00 per share with 10,000 options outstanding at September 30, 2000. On
August 25, 1999, Techdyne granted 16,000 options exercisable for three years
through August 24, 2002 at $4.00 per share with 13,000 options outstanding at
September 30, 2000. On December 15, 1999, Techdyne granted 19,000 options
exercisable for three years through December 14, 2002 at $4.00 per share with
13,000 options outstanding at September 30, 2000. On May 24, 2000, Techdyne
granted 3,000 options exercisable for three years through May 23, 2000 at
$4.00 per share which remain outstanding at September 30, 2000. On October 16,
2000, Techdyne granted 90,000 three year stock options with one-third of the
options vesting immediately, one-third vesting on October 16, 2001 and one-
third vesting on October 16, 2002.
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 and
consultants of which there were 4,500 outstanding as of September 30, 2000.
These options vested immediately and were exercisable for a period of five
years through November 9, 2000 at $1.50 per share. On June 10, 1998, DCA's
board of directors granted an option under the 1995 plan to a new board member
for 5,000 shares exercisable at $2.25 per share though June 9, 2003.
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 340,000 options
exercisable through April 20, 2000 and 460,000 options exercisable through
April 20, 2004. DCA recorded expense of $153,000 on 340,000 of these options
pursuant to FAS 123 and APB 25 in the second quarter of 1999. In April 2000,
the 340,000 one-year options were exercised for which DCA received cash payment
of the par value and the balance in three-year recourse promissory notes with
interest at the short-term treasury rate.
In May, 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 1998 with no additional options to vest due to cancellation of this
agreement in August, 1998.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 5--Stock Options--Continued
Techdyne entered into a consulting agreement on July 1, 1999 for financial
advisory services which agreement ended on September 15, 2000. The consultant
received non-qualified stock options to purchase 100,000 shares of Techdyne's
common stock exercisable at $3.50 per share that expired on September 15, 2000.
These options were valued at $40,000 and resulted in approximately $7,000 and
$23,000 expense during the three months and nine months ended September 30,
2000.
NOTE 6--Commitments and Contingencies
Effective January 1, 1997, DCA established a 401(k) savings plan (salary
deferral plan) with an eligibility requirement of one year of service and 21
years of age requirement. DCA has made no contributions under this plan as of
September 30, 2000.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially all
of its employees. The Company and Techdyne 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
three months and nine months ended September 30, 2000 amounted to approximately
$25,000 and $67,000, with such expense amounting to approximately $26,000 and
$67,000 for the same periods of the preceding year.
Lytton leases its operating facilities from an entity owned by the former
President and currently the part-time Assistant to the President of Lytton and
his wife, Lytton's former owner. The lease, which expires July 31, 2002,
requires annual lease payments of approximately $218,000 adjusted each year
based upon the Consumer Price Index. During the nine months ended September
30, 2000, approximately $169,000 was paid under the lease compared to
approximately $164,000 paid for the same period of the preceding year.
NOTE 7--Business Segment and Geographic Area Data
The following summarizes information about the Company's four reported
business segments. The medical products and new technology divisions have 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 approximate market price.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 7--Business Segment and Geographic Area Data--Continued
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
BUSINESS SEGMENT REVENUES
Electro-Mechanical
External $13,625,918 $14,141,050 $38,571,510 $34,447,758
Intersegment Sales --- --- --- 23,468
Medical Products 228,943 312,644 881,262 856,301
Medical Services 2,391,747 1,641,114 6,388,918 4,453,849
New Technology 53,261 --- 130,384 ---
Corporate 48,081 72,081 385,531 465,311
Elimination of corporate rental charges
to electro-mechanical manufacturing (35,690) (23,500) (92,980) (70,407)
Elimination of corporate rental charges
to medical products (1,810) --- (5,470) ---
Elimination of corporate interest charge
to electro-mechanical manufacturing (8,020) (45,357) (22,426) (134,478)
Elimination of medical services interest
charge to new technology (53,261) --- (130,384) ---
Elimination of medical services
interest charge to corporate (4,199) (51) (7,835) (1,498)
Elimination of electro-mechanical
manufacturing sales to medical products --- --- --- (23,468)
----------- ----------- ----------- -----------
$16,244,970 $16,097,981 $46,098,510 $40,016,836
=========== =========== =========== ===========
BUSINESS SEGMENT PROFIT (LOSS)
Electro-Mechanical $ 331,000 $ 736,932 $ 139,703 $ 652,741
Medical Products (71,875) (46,365) (213,554) (130,929)
Medical Services 22,812 (49,981) (212,388) (592,751)
New Technology --- --- (64,500) ---
Corporate (71,635) ( 106,921) (107,491) (52,748)
----------- ----------- ----------- -----------
$ 210,302 $ 533,665 $ (458,230) $ (123,687)
=========== =========== =========== ===========
</TABLE>
NOTE 8--Acquisition
On July 31, 1997, Techdyne acquired Lytton, which manufactures and
assembles printed circuit boards and other electronic products, for $2,500,000
cash, paid at closing, and issuance of 300,000 shares of Techdyne's common
stock. 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. The purchase price in excess of
the fair value of net assets acquired is being amortized over 25 years.
Additional contingent consideration was due if Lytton achieved pre-defined
sales levels. Additional consideration of approximately $396,000, $290,000
and $154,000 was paid in April 2000, April 1999 and April 1998, respectively,
based on sales levels. As the contingencies have been resolved, additional
consideration due, has been recorded as goodwill, and is being amortized over
the remainder of the initial 25 year life of the goodwill.
In July 1998, Techdyne advanced the seller approximately $1,278,000
("Advance") toward the guarantee for the sale of Techdyne's common stock in
addition to the prior sales by the seller. Subsequently, Techdyne 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.
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 1998 satisfied Techdyne's remaining obligation under the
$2,400,000 guarantee. The 295,000 shares held by the seller were returned to
Techdyne and were cancelled.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
NOTE 9--Subsidiary Stock Offerings
Pursuant to a 1998 public offering, DCA issued common stock and 2,300,000
redeemable common stock purchase warrants to purchase one DCA common share
each with an exercise price of $4.50, originally exercisable through April 16,
1999 and extended to June 30, 2000, at which time the remaining outstanding
warrants expired. The underwriters received options to purchase 100,000 shares
of DCA common stock and 200,000 common stock purchase warrants, with the
options exercisable at $4.50 per unit through April 16, 2001 with the
underlying warrants being substantially identical to the public warrants
except that they are exercisable at $5.40 per share.
During the first half of 2000, approximately 170,000 DCA warrants were
exercised with net proceeds to DCA of approximately $727,000. In accordance
with its accounting policy, the Company recognized a gain of approximately
$251,000 and deferred income taxes of approximately $96,000 related to DCA
warrant exercises during the nine months ended September 30, 2000.
NOTE 10--Proposed Merger and Acquisition
On October 20, 1999, DCA entered into an Agreement and Plan of Merger
with MainStreet IPO.com Inc. ("MainStreet"). In August 2000, DCA terminated
the proposed merger as a result of MainStreet's failure to satisfy conditions
contemplated by the merger agreement.
NOTE 11--Investment
On January 27, 2000, the Company acquired a 6% interest, with an option
to acquire an additional 2%, in Linux Global Partners, a holding company
investing in Linux software companies, and loaned Linux Global Partners
$1,500,000 with a 10% annual interest rate to be repaid with accrued interest
by January 26, 2001. In March 2000, the Company exercised the option to
acquire the additional 2% interest in Linux Global Partners in conjunction
with which it loaned Linux Global Partners an additional $500,000. On August
9, 2000, the Company loaned an additional $200,000 to Linux Global Partners at
an annual interest rate of 10% initially for 30 days, with the maturity having
been extended. The Company borrowed the funds for the loans from DCA with an
annual interest rate of 10%, with the loans having the same interest rates and
maturities as the Company's loans to Linux Global Partners. Interest on the
notes amounted to approximately $53,000 and $130,000 for the three months and
nine months ended September 30, 2000.
The Company issued options to purchase 150,000 shares of its common stock
to MainStreet and two of its officers as a finder's fee in conjunction with the
Company's investment in the Linux Global Partners and recorded an expense of
approximately $65,000 on these options in January 2000. See Note 10.
NOTE 12--Loan to MainStreet
In July 2000, DCA loaned $140,000 to MainStreet pursuant to a one year
convertible promissory note secured by 300,000 shares of Linux Global
Partners owned by MainStreet. The note is recorded as prepaid expenses and
other current assets on the Company's balance sheet. The note bore interest
at prime plus 1/2% payable on the earlier of failure of DCA's shareholder to
approve its proposed merger with MainStreet before November 1, 2000 or at
maturity on July 11, 2001. The proposed merger was terminated in, and
accordingly the note came due November 1, 2000. See Note 10. Upon
MainStreet's failure to repay the loan, DCA has retained the 300,000 shares
of Linux Global Partners held as security in satisfaction of MainStreet's
obligations under the note. See Note 11.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
------ -----------------------------------------------------------------------
of Operations
-------------
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q that are
not historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of the 1934. The Private Securities Litigation Reform Act of 1995
contains certain safe harbors regarding forward-looking statements. Certain
of the forward-looking statements include management's expectations,
intuitions and beliefs with respect to the growth of the Company, the nature
of the electronics industry in which its public subsidiary, Techdyne, is
engaged as a manufacturer, the character and development of the dialysis
industry in which its public subsidiary, DCA, is engaged, our business
strategies and plans for future operations, our needs for capital expendi-
tures, 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 our
filings. Many of the foregoing factors are beyond our control. 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 our
Registration Statement, Form S-3, as filed with the Securities and Exchange
Commission ("Commission") (effective May 15, 1997) and the Registration
Statements of our subsidiaries, Techdyne's Registration Statement as filed
with the Commission, Form S-3 (effective December 11, 1996), and DCA's
Registration Statement, Form S-3, as filed with the Commission (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 we undertake 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 large customers would have a material adverse effect on Techdyne's
and the Company's results of operations. The level and timing of orders placed
by a customer vary due to the customer's attempts to balance its inventory,
design modifications, changes in a customer's manufacturing strategy,
acquisitions of or consolidations among customers, and variation in demand for
a customer's products due to, among other things, product life cycles,
competitive conditions and general economic conditions. Any terminations of
manufacturing relationships or changes, reductions or delays in orders, as has
occurred in the past, could have an adverse effect on our results of operations
and financial condition. Our and Techdyne's results also depend to a substan-
tial extent on the success of Techdyne's OEM customers in marketing their
products. Techdyne continues the diversification of its customer base to reduce
its reliance on its few major customers.
The industry segments served by Techdyne and the electronics industry
generally are subject to rapid technological change and product obsolescence.
Discontinuance or modification of products containing components manufactured
by Techdyne could adversely affect our 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 our and Techdyne's
business, financial condition and results of operations.
Techdyne must continuously develop improved manufacturing procedures to
accommodate customer needs for increasingly complex products. To continue to
grow and be a successful competitor, we must be able to maintain and enhance
our technological capabilities, develop and market manufacturing services
which meet changing customer needs and successfully anticipate or respond to
technological changes in manufacturing processes on a cost-effective and
timely basis. There can be no assurance that our process development efforts
will be successful or that the emergence of new technologies, industry
standards or customer requirements will not render our technology, equipment
or processes obsolete or uncompetitive. Further, to the extent that we
determine that new assembly and testing technologies and equipment are
required to remain competitive, the acquisition and implementation of such
technologies and equipment are likely to require significant capital
investment.
<PAGE>
Techdyne uses enterprise resource planning through its Visual
Manufacturing system in its efforts to continuously develop accurate
forecasts of customer volume requirements. Techdyne is dependent on the
imely availability of many components. Component shortages resulted in
manufacturing and shipping delays and increased component prices, which have
had an adverse effect on Techdyne's and our results of operations during the
first nine months of 2000. It is paramount that Techdyne efficiently manages
inventory, follows proper timing of expenditures and allocates physical and
personnel resources in anticipation of future sales, the evaluation of economic
conditions in the electronics industry, and the mix of products for
manufacture.
Techdyne's, and in turn, our results of operations are 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 our dialysis operations, essential to profitability is
Medicare reimbursement, which is at a fixed rate determined by HCFA. The level
of DCA's, and therefore, our revenues and profitability are affected by
potential legislation relating to reimbursement rates. There is currently
proposed legislation which, if adopted, would increase dialysis rates an
additional 1.2% in 2001. Operating costs in treatment tend to increase over
the years with the commencement of treatment at new centers. There also may
be reductions in commercial third-party reimbursement rates.
The healthcare and in particular, the dialysis industry, is subject to
extensive regulations of federal and state authorities. There are a variety of
fraud and abuse measures promulgated by the government to combat government
waste, which include 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 DCA and the Company have never been challenged under these
regulations and believe that DCA 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 restructure its practice and will not 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 development or acquisition 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 or divisions of public companies with greater personnel and
financial resources who have a significant advantage in acquiring and/or
developing facilities in areas targeted by DCA. Additionally, there is
intense competition for retaining qualified nephrologists, who are the primary
source of patients and are responsible for the supervision of the dialysis
centers. There is no certainty as to when any new centers or inpatient service
contracts with hospitals will be profitable, if at all. It has been our
experience that newly established dialysis centers, although contributing to
increased revenues, have adversely affected our results of operations due to
start-up costs and expenses with a smaller developing patient base.
Results of Operations
Consolidated revenues increased by approximately $147,000 (1%) and
$6,082,000 (15%) for the three months and nine months ended September 30, 2000
compared to the same periods of the preceding year. Sales revenues increased
by approximately $119,000 (1%) and $6,021,000 (15%) compared to the preceding
year. Other income increased approximately $28,000 and $37,000 for the three
months and nine months ended September 30, 2000 compared to the same periods
of the preceding year, which includes interest earned on the Company's loan to
Linux Global Partners which more than offset a reduction in interest on other
invested funds. We recorded gains of approximately $251,000 related to DCA
warrant exercises during the first nine months of 2000. See Notes 9 and 11 to
"Notes to Consolidated Condensed Financial Statements."
Techdyne sales decreased approximately $513,000 (4%) for the three months
ended September 30, 2000 and increased approximately $4,114,000 (12%) for the
nine months ended September 30, 2000 compared to the
<PAGE>
same periods of the preceding year. There was a decrease in domestic sales of
$1,102,000 (8%) for the three months ended September 30, 2000 and an increase
of $2,984,000 (9%) for the nine months ended September 30, 2000 compared to the
same periods of the preceding year. European sales increased $590,000 (71%)
and $1,130,000 (46%) for the three months and nine months ended September 30,
2000 compared to the same periods of the preceding year. Significant
reductions in sales of Techdyne (Europe) over recent years have resulted in
continuing losses with net losses for this subsidiary amounting to $16,000 and
$223,000 for the three months and nine months ended September 30, 2000 and
$164,000 and $442,000 for the same periods of the preceding year. Techdyne
(Europe) has continued its efforts at new business development which has
resulted in increased sales and reduced losses in 2000 compared to 1999.
Approximately 54% of Techdyne's consolidated sales and 46% of our
consolidated sales for the nine months ended September 30, 2000 were made to
five customers. Customers generating in excess of 10% of Techdyne's
consolidated sales with their respective portions of Techdyne's and our
consolidated sales include PMI Food Group, which accounted for 17% and 15%,
Alcatel, which accounted for 12% and 10%, and Trilithic which accounted for
10% and 9%, respectively. Approximately $6,661,000 (36%) of Lytton's sales
were to PMI Food Group, its major customer. The loss of, or substantially
reduced sales to any of Techdyne's major customers would have a material
adverse effect on Techdyne's and our operations if such sales were not
replaced.
Medical product sales revenues decreased by approximately $84,000 (26%)
and increased by $25,000 (3%) for the three months and nine months ended
September 30, 2000, compared to the same periods of the preceding year.
Decreased sales of the principal product of this division due to reductions
in government purchases and foreign competition have been offset by sales of
new products. The medical products division has expanded its product line
with several diabetic disposable products. Management is attempting to be
more competitive in lancet sales through overseas production and expansion of
its customer base. No assurance can be given that these efforts will be
successful.
Medical service revenues, which represent the revenues of our dialysis
division, DCA, increased approximately $716,000 (46%) and $1,859,000 (45%)
for the three months and nine months ended September 30, 2000 compared to the
same periods of the preceding year. This increase reflects increased revenues
of our Pennsylvania dialysis centers of approximately $174,000 and $749,000,
increased revenues of approximately $58,000 and $113,000 for the Manahawkin,
New Jersey center, and revenues of $484,000 and $997,000 for our new center in
Vineland, New Jersey which commenced operations in February 2000. Although
operations of new centers result in additional revenues, while they are in the
developmental stage their operating results adversely affect DCA's and our
results of operations. As a result of having centers in the developmental
stage which have not achieved sufficient patient count to cover fixed
operating costs, DCA has continued to experience operational losses.
Cost of goods sold as a percentage of consolidated sales amounted to 84%
and 85%for the three months and nine months ended September 30, 2000 compared
to 83% and 85% for the same periods of the preceding year.
Cost of goods sold for Techdyne as a percentage of sales amounted to 88%
and 89% for the three months and nine months ended September 30, 2000 compared
to 85% and 87% for the same periods of the preceding year reflecting changes
in product mix and a diversification of Techdyne's customer base. Increases
in component costs during the first nine months of 2000 has had a negative
effect on profit margins. Additionally, a worldwide shortage of key electronic
components has adversely impacted Techdyne's, and accordingly our, sales and
earnings.
Cost of goods sold by the medical products division increased to 85% and
86% for the three months and nine months ended September 30, 2000 compared to
79% and 76% for the same periods of the preceding year, as a result of a
change in product mix due to decreased sales of the principal product of the
division and sales of new products with lower profit margins.
Cost of medical services sales amounted to 64% and 65% for the three
months and nine months ended September 30, 2000 compared to 67% and 70% for
the same periods of the preceding year reflecting a decrease in both supply
costs and healthcare salaries as a percentage of sales.
Selling, general and administrative expenses increased by approximately
$211,000 and $970,000 for the three months and nine months ended September 30,
2000 compared to the same periods of the preceding year. This
<PAGE>
increase reflects operations of DCA's new dialysis center in Vineland, New
Jersey, $65,000 expense from issuance by us of stock options as a finders
fee related to our investment in Linux Global Partners and approximately
$97,000 in conjunction with issuance of non-employee stock options. Also
included are the cost of additional support personnel for both DCA and
Techdyne, and increased marketing costs associated with Techdyne's efforts to
expand sales.
Interest expense increased by approximately $52,000 and $187,000 for the
three months and nine months ended September 30, 2000 compared to the same
periods of the preceding year, which includes increased borrowings of Lytton,
including funding of the remaining $1,100,000 payment in July, 1999, on the
Lytton purchase price guarantee, increased borrowings by Techdyne due to
working capital requirements from increased business and interest on
borrowings under our line of credit for our medical products division to
fund payments under letters of credit for foreign purchases.
A substantial portion of our outstanding borrowings are tied to the prime
interest rate. The prime rate was 9.5% at September 30, 2000 and 8.5% at
December 31, 1999.
Liquidity and Capital Resources
Working capital totaled $16,552,000 at September 30, 2000, which reflected
an increase of $712,000 (4%) during the nine months ended September 30, 2000.
This included a decrease in cash of $3,617,000, including net cash used in
operating activities of $1,400,000 net cash used in investing activities of
$4,317,000 (including additions to property, plant and equipment of $1,706,000,
loans to Linux Global Partners of $2,200,000, a $140,000 loan to MainStreet by
DCA, $396,000 additional consideration regarding the Lytton acquisition and
$206,000 from the sale of minority interests in dialysis subsidiaries), and
net cash provided by financing activities of $2,097,000 (including net line
of credit borrowings of $1,791,000, other long-term borrowings of $150,000,
payments on long-term debt of $554,000, and proceeds from exercise of DCA
warrants of $727,000).
During the first nine months of 2000, approximately 170,000 of DCA's
2,300,000 publicly traded redeemable stock purchase warrants were exercised
with net proceeds to DCA of approximately $727,000 with the balance of these
warrants having expired on September 30, 2000. See Note 9 to "Notes to
Consolidated Condensed Financial Statements."
On January 27, 2000, we acquired a 6% interest in Linux Global Partners
for $90, in connection with which we loaned Linux Global Partners $1,500,000
at a 10% annual interest rate, to be repaid with accrued interest by January
26, 2001. We had an option which we exercised on March 27, 2000 to acquire
an additional 2% interest in Linux Global Partners for $30 in conjunction with
which we loaned an additional $500,000 to Linux Global Partners. On August 9,
2000, we loaned an additional $200,000 to Linux Global Partners at an annual
interest rate of 10% initially for 30 days, which has been extended. We
borrowed the funds for the loans from DCA at a 10% annual interest rate. See
Note 11 to "Notes to Consolidated Condensed Financial Statements." Thomas K.
Langbein, Chairman of the Board and CEO of DCA and our Company, of which he is
also President, is a director of Linux Global Partners.
In July 2000, DCA loaned $140,000 to MainStreet pursuant to a secured
convertible promissory note. DCA retained 300,000 shares of Linux Global
Partners held as security for the loan when MainStreet failed to repay the
loan on November 1, 2000. See Notes 10 and 12 to "Notes to Consolidated
Condensed Financial Statements."
On February 9, 2000, Techdyne entered into two credit facilities with
The Provident Bank in Ohio for an aggregate borrowing of $5,500,000. This new
financing replaced a line of credit and three commercial loans with NationsBank
of Florida and a smaller borrowing from another Florida bank. The new financing
includes a $4,500,000 three-year revolving line of credit, renewable annually
at the discretion of the bank, which credit line carries an interest rate of
prime minus .25%, or at a fixed rate equal to the relevant quoted LIBOR rate
plus 2.5%, at our election, and a five-year term loan of $1,000,000 at the
same interest rate as the revolving line of credit. The line of credit had an
outstanding balance of approximately $3,807,000 at September 30, 2000 and the
term loan had an outstanding balance of approximately $883,000 at September
30, 2000. Total outstanding borrowings under the refinanced loans amounted
to approximately $3,297,000 at December 31, 1999. See Note 3 to "Notes to
Consolidated Condensed Financial Statements."
<PAGE>
Lytton has a $3,000,000 three year line of credit, a $1,400,000 term loan
and a $500,000 equipment loan agreement. The line of credit originally for one
year, was amended to a three-year term coinciding with the term of our line of
credit with the interest rates the same as provided to Techdyne in its credit
facilities. The line of credit had a balance of approximately $2,985,000 at
September 30, 2000 and approximately $2,830,000 at December 31, 1999. The term
loan had a balance of approximately $1,091,000 at September 30, 2000 and
$1,283,000 at December 31, 1999. The equipment loan agreement had an
outstanding balance of $150,000 at September 30, 2000 with no balance
outstanding at December 31, 1999. See Note 3 to "Notes to Consolidated
Condensed Financial Statements."
Lytton has an equipment loan maturing in April 2001 which had an
outstanding balance of $78,000 at September 30, 2000 and $113,000 at December
31, 1999. In July 1994, Techdyne (Europe) obtained a 15-year mortgage on its
facility which had a U.S. dollar equivalency of $421,000 at September 30, 2000
and $489,000 at December 31, 1999. See Note 3 to "Notes to Consolidated
Condensed Financial Statements."
Techdyne acquired Lytton on July 31, 1997. 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 $396,000, $290,000 and $154,000
paid in April 2000, April, 1999, and April, 1998, respectively. See Note 8 to
"Notes to Consolidated Condensed Financial Statements."
DCA has mortgages on its two buildings, one in Lemoyne, Pennsylvania and
the other in Easton, Maryland, with a combined balance of $228,000 at
September 30, 2000 and $282,000 at December 31, 1999. DCA has an equipment
financing agreement for kidney dialysis machines for its facilities. DCA had
outstanding balances under this agreement of $781,000 at September 30, 2000
and $731,000 at December 31, 1999. See Note 3 to "Notes to Consolidated
Condensed Financial Statements."
DCA through its subsidiary DCA of Vineland, LLC, has a $700,000
development and equipment line of credit secured by the acquired assets of DCA
of Vineland and a second mortgage on DCA's real property in Easton, Maryland.
There were no outstanding borrowings under this line of credit as of September
30, 2000 or December 31, 1999.
DCA is seeking to expand its outpatient dialysis treatment facilities
and inpatient dialysis care. Such expansion, whether through acquisitions of
existing centers or the development of its own dialysis centers, requires
capital. DCA opened three new dialysis centers since February, 2000, one in
New Jersey and two in Georgia, and anticipates opening a ninth dialysis
facility in Ohio in the fourth quarter of 2000. DCA has a 40% ownership
interest in that facility. Additionally, DCA initiated acute in-hospital
services in hospitals in New Jersey and Pennsylvania in October, 2000. DCA
is in different phases of negotiations with physicians for additional out-
patient centers various states. No assurance can be given that we will be
successful in implementing our growth strategy or that our available funds
will be adequate to finance such expansion.
The bulk of our cash balances are carried in interest-yielding vehicles
at various rates and mature at different intervals depending on our anticipated
cash requirements.
We anticipate 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.
New Accounting 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, 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. We are in the process of
determining the impact that the adoption of FAS 133 will have on our
consolidated financial statements.
Proposed DCA Merger and Acquisition
On October 20, 1999, DCA entered into an Agreement and Plan of Merger
pursuant to which MainStreet IPO.com Inc. would merge with DCA and own
approximately 80% of DCA. The proposed merger was terminated in August 2000.
Inflation
We attempt to pass on increased costs and expenses incurred in the
electronic and electro-mechanical and medical products divisions by increasing
selling prices when and where possible, and by developing different and
improved products for our customers that can be sold at targeted profit
margins. In our 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 voluntarily increased to keep
pace with increases in supply costs or nursing and other patient care costs.
Increases in component costs have had an adverse affect on the results of
operations of our electronic and electro-mechanical division during the first
nine months of 2000.
<PAGE>
PART II -- OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports on Form 8-K
------ --------------------------------
(a) Exhibits
Part I Exhibits
None
Part II Exhibits
None
(b) Reports on Form 8-K
(i) Item 5, "Other Events" re: appointment of Class 1 director filed
July 20, 2000.
(ii) Item 5, "Other Events" re: grant of non-qualified stock options;
and loan to Linux Global Partners, Inc., and borrowing from
Dialysis Corporation of America filed August 10, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDICORE, INC.
/s/ Daniel R. Ouzts
By---------------------------------
DANIEL R. OUZTS, Vice President/
Finance, Controller and Chief
Financial Officer
Dated: November 14, 2000
