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
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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 - 5,710,540 shares as of July 31, 2000
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
------ ---------------------
The Consolidated Condensed Statements of Operation (Unaudited) for the
three months and six months ended June 30, 2000 and June 30, 1999 include
the accounts of the Registrant and all its subsidiaries.
Item 1. Financial Statements
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1) Consolidated Condensed Statements of Operations for the three
months and six months ended June 30, 2000 and June 30, 1999.
2) Consolidated Condensed Balance Sheets as of June 30, 2000 and
December 31, 1999.
3) Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 2000 and June 30, 1999.
4) Notes to Consolidated Condensed Financial Statements as of June
30, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition
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and Results of Operations
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PART II -- OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders
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Item 6. Exhibits and Reports on Form 8-K
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<PAGE>
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
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MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Sales $14,606,437 $12,175,190 $29,336,235 $23,434,286
Realized gain on sale of marketable
securities --- 228,078 --- 228,078
Gain on subsidiary warrants exercise 4,970 --- 251,330 ---
Other income 150,438 124,184 265,975 256,491
----------- ----------- ----------- -----------
14,761,845 12,527,452 29,853,540 23,918,855
COST AND EXPENSES
Cost of goods sold 12,380,462 10,423,042 25,294,822 20,243,663
Selling, general and administrative
expenses 2,422,692 2,174,797 4,801,665 4,042,690
Interest expense 219,123 150,832 425,585 289,854
----------- ----------- ----------- -----------
15,022,277 12,748,671 30,522,072 24,576,207
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES
AND MINORITY INTEREST (260,432) (221,219) (668,532) (657,352)
Income tax provision (benefit) 91,029 (5,480) 181,646 (50,567)
----------- ----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST (351,461) (215,739) (850,178) (606,785)
Minority interest in loss of
consolidated subsidiaries (35,546) (89,357) (164,654) (193,866)
----------- ----------- ----------- -----------
NET LOSS $ (315,915) $ (126,382) $ (685,524) $ (412,919)
=========== =========== =========== ===========
Loss per share:
Basic $(.06) $(.02) $(.12) $(.07)
===== ===== ===== =====
Diluted $(.06) $(.02) $(.12) $(.07)
===== ===== ===== =====
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999(A)
---- ------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,707,693 $ 4,151,150
Marketable securities 17,716 9,520
Accounts receivable, less allowances of
$383,000 at June 30, 2000 and $431,000 at December 31, 1999 9,091,155 8,958,837
Note receivable 2,000,000 ---
Inventories, less allowance for obsolescence
of $840,000 at June 30, 2000 and $724,000 at December 31, 1999 10,832,796 10,097,974
Prepaid expenses and other current assets 1,025,551 810,806
Deferred tax asset 625,474 614,308
----------- -----------
Total current assets 25,300,385 24,642,595
PROPERTY AND EQUIPMENT
Land and improvements 1,208,308 1,012,455
Building and building improvements 3,194,247 3,071,948
Equipment and furniture 11,710,957 11,455,449
Leasehold improvements 2,304,257 2,243,658
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18,417,769 17,783,510
Less accumulated depreciation and amortization 7,706,152 7,309,250
----------- -----------
10,711,617 10,474,260
DEFERRED EXPENSES AND OTHER ASSETS 87,372 111,392
COSTS IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED,
less accumulated amortization of $838,000 at June 30, 2000
and $749,000 at December 31, 2000 3,688,488 3,381,718
----------- -----------
$39,787,862 $38,609,965
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings $ --- $ 30,024
Accounts payable 5,680,004 5,568,972
Accrued expenses and other current liabilities 2,518,320 2,210,345
Current portion of long-term debt 931,284 732,677
Income taxes payable 205,117 260,481
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Total current liabilities 9,334,725 8,802,499
LONG-TERM DEBT 9,026,526 8,363,497
DEFERRED INCOME TAXES 1,910,249 1,814,743
MINORITY INTEREST IN SUBSIDIARIES 6,316,432 5,346,779
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 12,000,000 shares;
issued and outstanding 5,710,540 shares at June 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 1,650,357 2,335,881
Accumulated other comprehensive loss:
Foreign currency translation adjustment (143,432) (74,505)
Unrealized (loss) gain on marketable securities for sale (15,252) 2,966
----------- -----------
Total accumulated other comprehensive loss (158,684) (71,539)
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Total Stockholders' Equity 13,199,930 14,282,447
----------- -----------
$39,787,862 $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)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (685,524) $ (412,919)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 946,483 835,568
Amortization 108,089 87,391
Bad debt expense 101,930 46,467
Provision for inventory obsolescence 239,950 167,073
Gain on sale of securities --- (228,078)
Minority interest (164,654) (193,866)
Stock option compensation 96,750 153,000
Consultant stock options expense 16,553 ---
Finder's 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 (287,313) (1,008,630)
Inventories (1,022,927) (1,705,928)
Prepaid expenses and other current assets (243,149) 179,575
Accounts payable 128,824 1,463,923
Accrued expenses and other current liabilities 342,243 238,961
Income taxes payable (55,281) (252,034)
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Net cash used in operating activities (569,350) (629,497)
INVESTING ACTIVITIES
Additions to property and equipment, net of minor disposals (1,202,338) (988,966)
Additions to notes receivable (2,000,000) ---
Subsidiary acquisition payments (395,806) (289,531)
Proceeds from sale of securities --- 128,591
Purchase of marketable securities (37,580) (29,210)
Sale of minority interest in subsidiaries 206,000 4,000
Deferred expenses and other assets 4,425 51,314
----------- -----------
Net cash used in investing activities (3,425,299) (1,123,802)
FINANCING ACTIVITIES
Line of credit net borrowings 1,041,169 375,349
Payments on short-term bank borrowings (30,024) ---
Proceeds from long-term borrowings 150,000 375,000
Payments on long-term borrowings (375,083) (460,519)
Repurchase of stock --- (8,166)
Deferred financing costs (407) (452)
Exercise of stock options and warrants 739,168 500
----------- -----------
Net cash provided by financing activities 1,524,823 281,712
Effect of exchange rate fluctuations on cash 26,369 (33,975)
----------- -----------
Decrease in cash and cash equivalents (2,443,457) (1,505,562)
Cash and cash equivalents at beginning of year 4,151,150 7,294,707
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,707,693 $5,789,145
========== ==========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 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:
June 30, December 31,
2000 1999
----------- ------------
Electronic and mechanical components, net:
Finished goods $ 635,434 $ 1,018,131
Work in process 2,692,595 2,463,191
Raw materials and supplies 6,739,568 6,010,987
----------- -----------
10,067,597 9,492,309
Medical supplies 765,199 605,665
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$10,832,796 $10,097,974
=========== ===========
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities is comprised as follows:
June 30, December 31,
2000 1999
----------- ------------
Accrued compensation $ 597,526 $ 609,708
Other 1,920,794 1,600,637
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$ 2,518,320 $ 2,210,345
=========== ===========
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 six months ended June
30, 2000 or for the same period of the preceding year as a result of exercise
prices and the net loss, since to include them would be anti-dilutive.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 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 Six Months Ended
------------------ ------------------
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss, numerator-basic
computation $(315,915) $(126,382) $(685,524) $(412,919)
Adjustment due to subsidiaries'
dilutive securities --- (102) --- ---
--------- --------- --------- ---------
Net loss as adjusted, numerator-
diluted computation $(315,915) $(126,484) $(685,524) $(412,919)
========= ========= ========= =========
Weighted average shares 5,710,540 5,712,287 5,709,458 5,713,905
========= ========= ========= =========
Loss per share:
Basic $(.06) $(.02) $(.12) $(.07)
===== ===== ===== =====
Diluted $(.06) $(.02) $(.12) $(.07)
===== ===== ===== =====
</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:
June 30, December 31,
2000 1999
----------- ------------
Cost $ 42,317 $ 4,737
Unrealized holding (losses) gains (24,601) 4,783
--------- --------
Fair value $ 17,716 $ 9,520
========= ========
Unrealized holding (losses) gains, which amounted to $(24,601) less a
deferred tax (credit) of $(9,349) at June 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.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
NOTE 1--Summary of Significant Accounting Policies--(Continued)
Comprehensive Loss
Comprehensive loss consists of net loss, foreign currency translation
adjustments and unrealized (loss) gain on marketable securities. Below is
a detail of comprehensive loss for the three months and six months ended
June 30, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(315,915) $(126,382) $(685,524) $(412,919)
Other comprehensive loss:
Foreign currency translation adjustments (63,364) (22,960) (68,927) (65,632)
Unrealized loss on marketable securities:
Unrealized holding loss arising during
period, net of tax (30,514) (2,687) (18,218) (2,687)
Less: reclassification adjustment, net of
tax, for gain included in net (loss) income --- (80,373) --- (130,204)
--------- --------- --------- ---------
Unrealized loss on marketable securities (30,514) (83,060) (18,218) (132,891)
--------- --------- --------- ---------
Total other comprehensive loss (93,878) (106,020) (87,145) (198,523)
--------- --------- --------- ---------
Comprehensive loss $(409,793) $(232,402) $(772,669) $(611,442)
========= ========= ========= =========
</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 six months ended June
30, 2000 and June 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. Opera-
ting results for the three months and six months ended June 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.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
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 out-
standing balance of approximately $3,255,000 at June 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 $933,000 at June 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 balance refinanced was approximately
$3,260,000 representing a non-cash financing activity which is a supple-
mental 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 committed 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 $2,742,000 at June 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 $1,153,000 at June 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 June
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 $90,000 at June 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 $439,000 at June 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 $152,000 at
June 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 approxi-
mately $30,000 at December 31, 1999.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
NOTE 3--Long-Term Debt--(Continued)
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 $109,000 and $125,000 at June 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 $137,000 and $157,000 at June 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 June 30, 2000 or December 31, 1999.
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 May 2005. Additional
financing of $34,000 and $90,000 during the six months ended June 30, 2000 and
June 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 $717,000 and $731,000 at June 30, 2000 and
December 31, 1999, respectively.
The prime rate was 9.50% as of June 30, 2000 and 8.50% as of December 31,
1999.
Interest payments on long-term debt amounted to approximately $208,000
and $373,000 for the three months and six months ended June 30, 2000 and
$144,000 and $286,000 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 $91,000
and $182,000 for the three months and six months ended June 30, 2000, which
included deferred taxes of $2,000 and $96,000, respectively, on DCA warrant
exercises, and a domestic income tax benefit of approximately $5,000 and
$51,000 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 six months ended June 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 $10,000 and $188,000 for
the three months and six months ended June 30, 2000 and $96,000 and $(33,000)
for the same periods of the preceding year.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
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 June 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.
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.
On May 6, 1996, the Company adopted a Key Employee Stock Plan reserving
100,000 shares of its common stock for issuance from time to time to officers,
directors, key employees, advisors and consultants as bonus or compensation
for performances and or services rendered to the Company or otherwise
providing substantial benefit for the Company. 2,000 shares under this plan
were issued to the managing director of Techdyne's European operations.
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 345,000 of
these options outstanding at June 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 36,000 options outstanding at June 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
June 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
16,000 options outstanding at June 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 June 30, 2000.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
NOTE 5--Stock Options
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 June 30, 2000.
These options vested immediately and are 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.
Techdyne entered into a consulting agreement on July 1, 1999 for
financial advisory services with the agreement to end on September 15, 2000.
As compensation, the consultant received non-qualified stock options to
purchase 100,000 shares of Techdyne's common stock exercisable at $3.50 per
share that will expire on September 15, 2000. These options were valued at
$40,000 and resulted in approximately $8,000 and $16,000 expense during the
three months and six months ended June 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 June 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 six months ended June 30, 2000 amounted to approximately
$19,000 and $42,000, with such expense amounting to approximately $21,000 and
$41,000 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 six months ended
June 30, 2000, approximately $112,000 was paid under the lease compared to
approximately $109,000 paid for the same period of the preceding year.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
BUSINESS SEGMENT REVENUES
Electro-Mechanical
External $12,296,979 $10,473,061 $24,945,592 $20,306,708
Intersegment Sales --- --- --- 23,468
Medical Products 252,425 263,442 652,319 543,657
Medical Services 2,206,807 1,557,611 3,997,171 2,812,735
New technology 49,863 --- 77,123 ---
Corporate 53,269 301,896 337,450 393,230
Elimination of corporate rental charges
to electro-mechanical manufacturing (35,670) (23,500) (57,290) (46,907)
Elimination of corporate rental charges
to medical products (1,830) --- (3,660) ---
Elimination of corporate interest charge
to electro-mechanical manufacturing (7,427) (44,514) (14,406) (89,121)
Elimination of medical services interest
charge to new technology (49,863) --- (77,123) ---
Elimination of medical services
interest charge to corporate (2,708) (544) (3,636) (1,447)
Elimination of electro-mechanical
manufacturing sales to medical products --- --- --- (23,468)
----------- ----------- ----------- -----------
$14,761,845 $12,527,452 $29,853,540 $23,918,855
=========== =========== =========== ===========
BUSINESS SEGMENT PROFIT (LOSS)
Electro-Mechanical $ 29,402 $ 38,024 $ (191,297) $ (84,191)
Medical Products (99,735) (74,180) (141,679) (84,564)
Medical Services (23,011) (323,508) (235,200) (542,770)
New technology --- --- (64,500) ---
Corporate (167,088) 138,535 (35,856) 54,173
----------- ----------- ----------- -----------
$ (260,432) $ (221,219) $ (668,532) $ (657,352)
=========== =========== =========== ===========
</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 twenty five
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.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
NOTE 8-Acquisition--Continued
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.
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 out-
standing 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. Certain of
these proceeds may go to MainStreetIPO.com Inc. if the proposed merger of DCA
with that company is completed. See Note 10. In accordance with its
accounting policy, the Company recognized gains of approximately $5,000 and
$251,000 and deferred income taxes of approximately $2,000 and $96,000
related to DCA warrant exercises during the three months and six months
ended June 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") and its wholly-owned subsidiary,
MainStreet Acquisition Inc. ("MainStreet Sub"). The proposed merger
anticipates MainStreet Sub merging into DCA with DCA surviving, changing its
name to MainStreet Sub, and becoming a wholly-owned subsidiary of MainStreet.
DCA shareholders would receive, on a one-for-one basis, shares of common
stock of MainStreet, which company filed a registration statement in February
2000 with the SEC covering the issuance of approximately 1,396,000 shares of
its common stock, plus an indeterminate number of shares for resale by certain
affiliates of DCA, MainStreet and certain private investors of MainStreet.
DCA's proxy statement, which is part of MainStreet's registration statement,
will solicit the minority shareholders for approval of the merger and related
transactions at such time as the SEC declares the registration effective.
There were extensive comments by the SEC staff to the registration statement
including certain regulatory issues as to MainStreet's requirement to register
as a broker-dealer, which MainStreet has been attempting to resolve.
Immediately prior to the proposed merger, DCA will be selling all of its
assets to Dialysis Acquisition Corp., a wholly-owned subsidiary of the
Company, with this subsidiary also assuming all liabilities of DCA. The
proposed sale of assets and merger transactions are subject to a variety of
contingencies, most importantly, MainStreet's ability to satisfy a variety of
SEC concerns, the SEC declaring MainStreet's registration statement, which
includes DCA's proxy statement, effective, and thereafter, DCA shareholder
approval. Should DCA's minority shareholders approve the transactions, the
Company will own 100% of the dialysis operations, and DCA's shareholders will
become shareholders of MainStreet.
<PAGE>
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)
June 30, 2000
(Unaudited)
NOTE 10--Proposed Merger and Acquisition--Continued
Assuming completion of the proposed merger, 20% of the net proceeds
from exercise of DCA's publicly traded warrants from the date of the Merger
Agreement, October 20, 1999, up to $1,000,000, would go to the Company. If
the merger is not completed, net proceeds from warrant exercises would remain
with DCA to be used in its business and for development of additional dialysis
centers. See Note 9.
MainStreet developed a central website to provide business entities with
the necessary tools to perform direct public offering of their securities.
Based on regulatory issues, MainStreet is restructuring its proposed opera-
tions, but a substantial amount of time has elapsed since it filed its
registration statement in February, 2000, and there can be no assurance that
MainStreet will satisfy the SEC's concerns and the regulatory issues its
proposed plan of operations faces. Another company, CEO Letter, LLC, which
will become a wholly-owned subsidiary of MainStreet at the time of the merger,
provides chief executive officers of public companies the forum to discuss
their companies over the internet. MainStreet has not initiated its proposed
operations to date. See Notes 11 and 12.
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
for 30 days at an annual interest rate of 10%. The Company borrowed the funds
for the loans from DCA with an annual interest rate of 10%, with the loans
having the same maturities as the Company's loans to Linux Global Partners.
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. DCA has the right to convert the note into common shares
of MainStreet at the exercise price of $1.23 per share. The note bears
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. See Notes 10 and 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, DCA's proposed merger with
MainStreet and sale of its dialysis operations to us, our needs for capital
expenditures, capital resources, liquidity and operating results, and similar
matters that are not historical facts. Such forward-looking statements are
subject to substantial risks and uncertainties that could cause actual
results to materially differ from those expressed in the statements,
including general economic and business conditions, opportunities pursued by
the Company, competition, changes in federal and state laws or regulations
affecting the Company, and other factors discussed periodically in 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 Statements as filed
with the Commission, Form SB-2 (effective September 13, 1995) and Form S-3
(effective December 11, 1996), and DCA's Registration Statements, Form SB-2,
as filed with the Commission (effective on April 17, 1996) and Form S-3
(effective July 1, 1999) as amended and supplemented. Accordingly, readers
are cautioned not to place undue reliance on such forward-looking statements
which speak only as of the date made and which 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
significant 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 termina-
tions 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 substantial 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 Manufac-
turing system in its efforts to continuously develop accurate forecasts of
customer volume requirements. Techdyne is dependent on the timely 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 half 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 continues to seek to expand its geographic and customer base
through establishment of new manufacturing facilities and operations in areas
to better serve existing customers and to attract new OEMs, as well as direct
acquisition of contract manufacturing businesses complimentary to Techdyne's
operations. For such expansion opportunities, Techdyne competes with much
larger electronic manufacturing entities. Further, in order to effectuate any
such transactions, it may result in potentially dilutive issuance of equity
securities, the incurrence of debt and amortization expenses related to
goodwill and other intangible assets, as well as other costs and expenses,
all of which could materially adversely affect our and Techdyne's financial
results. Any expansion may also involve numerous business risks, including
difficulties in successfully integrating acquired operations, technologies
and products or formalizing anticipated synergies, which would require the
diversion of management's attention from other business concerns. In the
event that any such transaction does occur, there can be no assurance that
there would be a beneficial effect on Techdyne and our business and financial
results.
Techdyne's, and in turn, our results of operations are also affected by
other factors, including price competition, the level and timing of customer
orders, fluctuations in material costs, the overhead efficiencies achieved
in managing the costs of its operations, experience in manufacturing a
particular product, the timing of expenditures in anticipation of increased
orders, and selling, general and administrative expenses. Accordingly, gross
margins and operating income margins have generally improved during periods
of high volume and high capacity utilization. Techdyne generally has idle
capacity and reduced operating margins during periods of lower-volume
production.
With respect to 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 may be
adversely affected by any potential legislation resulting in rate cuts.
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 companies or divisions of public companies with greater personnel
and financial resources who have a significant advantage in acquiring and/or
developing facilities in areas targeted by 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.
<PAGE>
Results of Operations
Consolidated revenues increased by approximately $2,234,000 (18%) and
$5,935,000 (25%) for the three months and six months ended June 30, 2000
compared to the same periods of the preceding year. Sales revenues increased
by approximately $2,431,000 (20%) and $5,902,000 (25%) compared to the
preceding year. Other income increased approximately $26,000 and $9,000 for
the three months and six months ended June 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 $5,000 and $251,000
related to DCA warrant exercises during the first and second quarters of 2000.
See Notes 9 and 11 to "Notes to Consolidated Condensed Financial Statements."
Techdyne sales increased approximately $1,824,000 (17%) and $4,627,000
(23%) for the three months and six months ended June 30, 2000 compared to the
same periods of the preceding year. There was an overall increase in domestic
sales of $1,369,000 (14%) and $4,086,000 (22%), and an increase in European
sales of $455,000 (63%) and $541,000 (33%) compared to 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 $114,000 and $207,000 for the three months and six months ended June 30,
2000 and $201,000 and $278,000 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;
however, the continuing losses have resulted in our ongoing evaluation of the
future prospects for this facility.
Approximately 51% of Techdyne's consolidated sales and 44% of our
consolidated sales for the six months ended June 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 Motorola, which accounted for 11% and 9%, and PMI Food Group, which
accounted for 16% and 14%, respectively. Approximately $3,963,000 (34%) 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 are
not replaced.
Medical product sales revenues decreased by approximately $11,000 (4%)
for the three months ended June 30, 2000 and increased by $109,000 (20%) for
the six months ended June 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. Management is attempting to be more
competitive in lancet sales through overseas production and expansion of
its customer base. The Medical Products Division has expanded its product
line with several diabetic disposable products. 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 $619,000 (43%) and $1,143,000 (44%)
for the three months and six months ended June 30, 2000 compared to the same
periods of the preceding year. This increase reflects increased revenues of
our Pennsylvania dialysis centers of approximately $227,000 and $574,000,
increased revenues of approximately $16,000 and $55,000 for the Manahawkin,
New Jersey center, and revenues of $376,000 and $514,000 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 operations losses.
Cost of goods sold as a percentage of consolidated sales amounted to 85%
and 86% for the three months and six months ended June 30, 2000 compared to 86%
for the same periods of the preceding year.
<PAGE>
Cost of goods sold for Techdyne as a percentage of sales amounted to 88%
and 90% for the three months and six months ended June 30, 2000 and 88% and
89% 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 half of 2000 has had a negative effect on profit
margins.
Cost of goods sold by the medical products division increased to 93% and
87% for the three months and six months ended June 30, 2000 compared to 83%
and 74% 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 six months ended June 30, 2000 compared to 70% and 72% 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
$248,000 and $759,000 for the three months and six months ended June 30, 2000
compared to the same periods of the preceding year. This 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 $68,000 and $136,000 for the
three months and six months ended June 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 9.50% at June 30, 2000 and 8.50% at
December 31, 1999.
Liquidity and Capital Resources
Working capital totaled $15,966,000 at June 30, 2000, which reflected
an increase of $126,000 (1%) during the six months ended June 30, 2000.
This included a decrease in cash of $2,443,000, including net cash used in
operating activities of $569,000, net cash used in investing activities of
$3,425,000 (including additions to property, plant and equipment of
$1,202,000, a loan to Linux Global Partners of $2,000,000, $396,000
additional consideration regarding the Lytton acquisition and $206,000 from
the sale of minority interest in dialysis subsidiaries), and net cash
provided by financing activities of $1,525,000 (including net line of credit
borrowings of $1,041,000, other long-term borrowings of $150,000, payments
on long-term debt of $375,000 and proceeds from exercise of DCA warrants of
$739,000).
During the first half 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
expiring on June 30, 2000. See Notes 9 and 10 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 for
30 days at an annual interest rate of 10%. 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 one year
secured convertible promissory note. See Notes 10 and 12 to "Notes to
Consolidated Condensed Financial Statements."
<PAGE>
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 $3,255,000 at
June 30, 2000 and the term loan had an outstanding balance of approximately
$933,000 at June 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."
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
$2,742,000 at June 30, 2000 and approximately $2,830,000 at December 31, 1999.
The term loan had a balance of approximately $1,153,000 at June 30, 2000 and
$1,283,000 at December 31, 1999. The equipment loan agreement had an
outstanding balance of $150,000 at June 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 $90,000 at June 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 $730,000 at June 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."
Techdyne is seeking to further expand its operations possibly through
acquisitions of companies in similar businesses, as with the Lytton acquisi-
tion. There can be no assurance that Techdyne would be able to finance such
acquisitions from its own capital or be able to obtain sufficient external
financing.
DCA has mortgages on its two buildings, one in Lemoyne, Pennsylvania and
the other in Easton, Maryland, with a combined balance of $246,000 at June
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 $717,000 at June 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 develop-
ment 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 June 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 has entered into agreements with medical directors and intends
to establish additional facilities in Georgia and Ohio. As of June 30, 2000,
the professional corporations providing medical director services to the
Manahawkin, New Jersey and Carlisle and Chambersburg, Pennsylvania facilities
had a 20% interest in those subsidiaries. In April 2000, a professional
association with which the medical director for the Vineland, New Jersey center
is affiliated acquired an additional 29% interest for $203,000, increasing the
minority ownership in that facility to 49% and reducing DCA's ownership to 51%.
DCA purchased land in February 2000 in South Georgia and is in the process of
constructing a new dialysis center which we anticipate will commence operations
in the fourth quarter of 2000. There will be a 30% minority ownership in this
facility with DCA owning 70%. We have entered lease and medical director
agreements and are in the planning stage for a new center in Ohio in which DCA
will have a 40% ownership interest and the medical director will have a 60%
ownership with the center expected to commence operations in the fourth quarter
of 2000. DCA is in different phases of negotiations with physicians for
additional outpatient 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.
<PAGE>
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, and issue its shares to the DCA shareholders, with
a simultaneous sale of DCA's assets to us in consideration for approximately
90% of our ownership in DCA, our assumption of DCA's long-term debt and other
liabilities, and our waiver of most proceeds from the potential exercise of
outstanding DCA warrants and DCA underwriters' options. These proposed
transactions are subject to the approval of the public minority shareholders
of DCA (we are not voting our minority interest of DCA). The SEC has provided
extensive comments to MainStreet's registration statement, which includes
DCA's proxy statement, including its position that MainStreet should register
as a broker-dealer. The parties are attempting to resolve these matters.
There is no assurance the proposed DCA merger with MainStreet and sale of DCA
operations to us will be approved or completed. See Notes 10, 11 and 12 to
"Notes to Consolidated Condensed Financial Statements."
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 half of 2000.
<PAGE>
PART II -- OTHER INFORMATION
----------------------------
Item 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
On May 24, 2000, the annual meeting of shareholders was held to elect
two members, Anthony D'Amore and Robert P Magrann, to the Class 2 members of
the board of directors of the Company to serve for a three-year term until
the annual meeting of shareholders in the year 2003. Mr. D'Amore was
reelected as board member by a vote of 5,033,441 shares for, 13,740 shares
Against, abstentions of 312,862 shares and no broker non-votes. Mr. Magrann
was reelected as a board member by a vote of 5,037,001 shares for, 10,188
shares against, abstentions of 312,862 and no broker non-votes. Wiss & Co.
LLP, the Company's independent accountants were ratified as the Company's
independent auditors for 2000, with 5,331,617 votes for ratification, with
16,667 votes against ratification and 11,757 abstentions with no broker non-
votes.
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
There were no reports on Form 8-K filed for the quarter ended June
30, 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: August 14, 2000
