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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (I.R.S. Employer
incorporation or organization) Identification No.)
2337 WEST 76TH STREET, HIALEAH, FLORIDA 33016
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (305) 558-4000
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $.01 par value
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 No____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant based upon the closing price of the common stock on March 12,
1999 was approximately $6,225,000.
As of March 12, 1999 the Company had outstanding 5,715,540 shares of
common stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Proxy Statement
in connection with the Registrant's Annual Meeting of Shareholders to be held on
June 9, 1999.
Registrant's Annual Reports, Forms 10-K, for the years ended December
31, 1994, 1995 and 1997, Part IV, Exhibits.
Annual Reports for Registrant's Subsidiary, Techdyne, Inc., Forms 10-K
for the years ended December 31, 1991, 1995 and 1997, Part IV, Exhibits.
Registration Statement of Registrant's Subsidiary, Techdyne, Inc., Form
SB-2, effective September 13, 1995, Registration No. 33-94998-A, Part II, Item
27, Exhibits.
Registration Statement of Registrant's Subsidiary, Techdyne, Inc., Form
S-3, Effective December 11, 1996, Registration No. 333-15371, Part II, Item 16,
Exhibits.
Annual Report for Registrant's Subsidiary Dialysis Corporation of
America, Form 10-K for the years ended December 31, 1996, 1997 and 1998, Part
IV, Exhibits.
Registration Statement of Registrant's Subsidiary, Dialysis Corporation
of America, Form SB-2, effective April 17, 1996, Registration No. 333-80877A,
Part II, Item 27, Exhibits.
MEDICORE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
Page
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PART I
Item 1. Business.............................................. 1
Item 2. Properties............................................ 19
Item 3. Legal Proceedings..................................... 21
Item 4. Submission of Matters to a Vote of Security Holders... 21
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters....................... 21
Item 6. Selected Financial Data............................... 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 22
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................... 35
Item 8. Financial Statements and Supplementary Data........... 35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 35
PART III
Item 10. Directors and Executive Officers of the
Registrant............................................ 36
Item 11. Executive Compensation................................ 36
Item 12. Security Ownership of Certain
Beneficial Owners and Management...................... 36
Item 13. Certain Relationships and Related Transactions........ 37
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................... 38
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Annual Report on Form 10-K that are
not historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 ("Securities Act") and Section 21E of the
Securities Exchange Act of the 1934. The Private Securities Litigation Reform
Act of 1995 (the "Reform Act") contains certain safe harbors regarding
forward-looking statements. Certain of the forward-looking statements include
management's expectations, intuitions and beliefs with respect to the growth of
the Company, the nature of the electronics industry in which its 62% owned
public subsidiary, Techdyne, Inc. ("Techdyne") is involved as a manufacturer,
the nature of and future development of the dialysis industry in which its 68%
owned public subsidiary, Dialysis Corporation of America ("DCA"), is engaged,
the Company's business strategies and plans for future operations, its needs for
capital expenditures, capital resources, liquidity and operating results, and
similar matters that are not historical facts. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations." 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 or abandoned, competition, changes in federal and state laws or
regulations affecting the Company and its operations, and other factors
discussed periodically in the Company's filings. Many of the foregoing factors
are beyond the control of the Company. Among the factors that could cause actual
results to differ materially are the factors detailed in the risks discussed in
the "Risk Factors" section included in the Company's Registration Statement,
Form S-3, as filed with the Securities and Exchange Commission ("Commission")
(effective May 15, 1997) and the Registration Statements of the Company's
subsidiaries, Techdyne's Registration Statements as filed with the Commission,
Form SB-2 (effective September 13, 1995) and Forms S-3 (effective November 11,
1996 and November 4, 1997, respectively), and DCA's Registration Statement, Form
SB-2, as filed with the Commission (effective on April 17, 1996). Accordingly,
readers are cautioned not to place undue reliance on such forward-looking
statements which speak only as of the date made and which the Company undertakes
no obligation to revise to reflect events after the date made.
ITEM 1. BUSINESS
GENERAL
Medicore, Inc., incorporated in Florida in 1961, has three business
segments. One is the medical product division which distributes medical
supplies. This division recently initiated its own production of lancets. A
second business segment is the international contract manufacturing of
electronic and electro-mechanical products, primarily for the data processing,
telecommunications, instrumentation and food preparation equipment industries.
This is accomplished through Medicore, Inc.'s 62% owned public subsidiary,
Techdyne, Inc. ("Techdyne"). Techdyne's wholly-owned subsidiaries include Lytton
Incorporated ("Lytton") acquired in July 1997, Techdyne (Scotland) Limited
("Techdyne (Scotland)") and Techdyne Livingston Limited, a subsidiary of
Techdyne (Scotland). The third business segment involves the operation of kidney
dialysis centers through its 68% owned public subsidiary Dialysis Corporation of
America ("DCA"). See Note 6 to "Notes to Consolidated Financial Statements."
Medicore and its subsidiaries are collectively hereinafter referred to
as "Medicore" or the "Company."
The Company's executive offices are located at 2337 West 76th Street,
Hialeah, Florida 33016 and at 777 Terrace Avenue, Hasbrouck Heights, New Jersey
07604. Its telephone number in Florida is (305) 558-4000 and in New Jersey is
(201) 288-8220.
MEDICAL PRODUCTS
The Company develops and distributes medical supplies, primarily
disposables, both domestically and internationally, to hospitals, blood banks,
laboratories and retail pharmacies. Products distributed include exam gloves,
prepackaged swabs and bandages and glass tubing products for laboratories. The
Company additionally distributes a line of blood lancets used to draw blood for
testing. Developed by the Company and previously manufactured by Techdyne, which
lancet manufacturing has recently been taken over by Medicore, the lancets are
distributed under the names Medi-Lance(TM) and Lady Lite(TM) or under a private
label if requested by the customer. Marketing of medical products is conducted
by independent manufacturer representatives and employees of the Company.
ELECTRONIC MANUFACTURING INDUSTRY
Techdyne is an international contract manufacturer of electronic and
electro-mechanical products, primarily manufactured to customer specifications
and designed for original equipment manufacturers ("OEMs") and distributors in
the data processing, telecommunications, instrumentation and food preparation
equipment industries. Included among its customers are several Fortune 500
companies. Approximately 89% of sales are domestic and 11% are effected by
Techdyne's Scottish subsidiary, Techdyne (Scotland) in the European markets and
to a limited extent in the Middle East.
Custom-designed products that the Company produces through Techdyne
primarily include complex printed circuit boards ("PCBs"), conventional and
molded cables and wire harnesses, and electro-mechanical assemblies. Techdyne
also provides OEMs with value-added, turnkey contract manufacturing services and
total systems assembly and integration, and delivers manufacturing and test
engineering services and materials management, with flexible and
service-oriented manufacturing and assembly services for its customers'
high-tech and rapidly changing products.
The Company believes that many OEMs view contract manufacturers as an
integral part of their manufacturing strategy. Outsourcing their manufacturing
of electronic assemblies enables OEMs to focus on product development, reduce
working capital requirements, improve inventory management and marketability.
OEMs are looking more to contract manufacturers, like Techdyne, to provide a
broader scope of value-added services, including manufacturing, engineering and
test services. OEMs rely on contract manufacturers for partial component
assemblies and complete turnkey manufacturing of entire finished products.
Another factor which leads OEMs to utilize contract manufacturers is reduced
time-to-market using the contract manufacturer's expertise and advanced and
automated manufacturing processes.
TECHDYNE'S BUSINESS STRATEGY
In recent years, the electronic contract manufacturing industry has
exhibited substantial growth. The Company believes this growth has resulted from
a vastly increased number of OEMs adopting an external manufacturing philosophy
coupled with the overall growth of the electronics industry. This philosophy is
motivated by the increased capital necessary to acquire modern, highly automated
manufacturing equipment for the OEMs to access leading manufacturing
technologies and capabilities,
2
to reduce inventory, and to realize the cost benefits of the improved purchasing
power, labor efficiency and overall cost benefits of contract manufacturers. In
response to these industry trends, the Company's objective is to become a
stronger competitive force and provider of electronic contract manufacturing
services for OEM customers, particularly in view of constantly changing and
improving technology and therefore, shorter product life cycles. Techdyne will
continue to seek to develop strong, long-term alliances with major-growth OEMs
of complex, market leading products. The Company believes that creating and
maintaining long-term relationships with customers requires providing high
quality, cost-effective manufacturing services marked by a high degree of
customer responsiveness and flexibility. The Company intends to maintain its
high quality of service through expansion of Techdyne's vertically integrated
manufacturing capabilities, final system assemblies and testing.
Management also believes it develops closer and more economically
beneficial relationships with its customers through its geographically diverse
manufacturing and assembly operations, presently located in Florida, Texas,
Massachusetts, Ohio and Scotland. Techdyne's diverse locations help reduce costs
and ensure timely delivery to its customers. Management continues to pursue
expansion in different markets to better serve existing customers and obtain
additional new customers. Techdyne's acquisition of Lytton in 1997 provided the
Company with a new geographic and end user market and continues to complement
Techdyne's operations and further its business strategy by expanding its
customer base, broadening its product line, entering new geographic areas, and
enhancing its manufacturing capabilities.
More emphasis is placed on value-added turnkey business for the
manufacture of complete finished assemblies. This is accomplished with extended
technology, continuous improvement of its processes, and Techdyne's early
involvement in the design process using its computer-aided design ("CAD")
system.
Techdyne is improving its material acquisition process in an attempt to
better its purchasing power by identifying materials used across customer lines
through installation of a new software program. See "Supplies and Material
Management" and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Management is also attempting to
consolidate vendors to achieve better purchasing power. Techdyne believes these
efforts will provide it with better leverage in material pricing, and permit
Techdyne to be more competitive when bidding for manufacturing work and turnkey
business by allowing it to track actual costs against customer quotes, thereby
enabling it to reduce costs and more accurately manage operating margins.
PRODUCTS AND SERVICES
Approximately 850 products, including complete turnkey finished
products, sub-assemblies, molded and non-molded cable assemblies, wire
harnesses, PCBs, injection molded and electronic assembly products, are
manufactured by Techdyne for over 100 OEM customers.
PRINTED CIRCUIT BOARDS
PCB assemblies are electronic assemblies consisting of a basic printed
circuit laminate with electronic components including diodes, resistors,
capacitors and transistors, inserted and wave soldered. PCBs may be used either
internally within the customer's products or in peripheral devices. The variety
of PCBs produced by Techdyne include pin-through-hole ("PTH") assemblies, low
and medium volume surface mount technology ("SMT") assemblies, and mixed
technology PCBs, which include multilayer PCBs.
3
PTH assembly involves inserting electronic components with pins or
leads through pre-drilled holes in a PCB and soldering the pins to the
electrical circuit.
In SMT production, electronic components are attached and soldered
directly onto the surface of a circuit board rather than inserted through holes.
SMT components are smaller, can be spaced more closely together and, unlike PTH
components, can be placed on both sides of a PCB. This allows for product
miniaturization, while enhancing the electronic properties of the circuit. SMT
manufacturing requires substantial capital investment in expensive, automated
production equipment which requires high usage. Techdyne has computerized
testing for substantially all of its PCBs to verify that components have been
installed properly and meet certain functional standards, that the electrical
circuits have been properly completed, and that the PCB assembly will perform
its intended functions.
Techdyne also produces multilayer PCBs, which consist of three or more
layers of a PCB laminated together and interconnected by plated-through holes
with metallic interconnecting paths on a non-conductive material, typically
laminated epoxy glass. Holes drilled in the laminate and plated through with
conductive material from one surface to another, called plated-through holes,
are used to receive component leads and to interconnect the circuit layers.
Multilayer boards increase packaging density, improve power and ground
distribution, and permit the use of higher speed circuitry. The development of
electronic components with increased speed, higher performance and smaller size
has stimulated a demand for multilayer PCBs, as they provide increased
reliability, density and complexity.
Fiscal 1996 reflected sales revenues of approximately 8% derived from
PCBs. However, 1997 expansions, particularly the acquisition of Lytton, have
resulted in PCB manufacturing yielding approximately 48% of Techdyne's 1998
sales revenues.
CABLE AND HARNESS ASSEMBLIES
A cable is an assembly of electrical conductors insulated from each
other and twisted around a central core and jacketed. Cables may be molded or
non-molded.
Techdyne offers a wide range of custom manufactured cable and harness
assemblies for molded and mechanical applications. These assemblies include
multiconductor, ribbon, co-axial cable assemblies, and discrete wire harness
assemblies. Techdyne uses advanced automated and semi-automated manufacturing
processes, in-line inspection and computer testing.
Techdyne maintains a large assortment of standard tooling for
D-Subminiature ("D-Subs"), DIN connectors and phono connectors. D-Subs are
connectors which are over-molded with the imprint of the customer's name and
part number. DIN connectors are circular connectors with from two to four pairs
of wires used for computer keyboards. Today's computers are multi-media,
providing audio as well as video, such as the CD-ROM.
Flat ribbon cable or ribbon cable assemblies are cables with wires
(conductors) on the same plane with connectors at each end. Flat ribbon cables
are used in computer assemblies and instrumentation.
Discrete cable assemblies are wires with contacts and connectors.
Harnesses are prefabricated wiring with insulation and terminals ready to be
attached to connectors. The cable sales of Techdyne comprised approximately 42%
of its total sales revenue for 1998.
4
CONTRACT MANUFACTURING
Contract manufacturing involves the manufacture of complete finished
assemblies with all sheet metal, power supplies, fans, PCBs as well as complete
sub-assemblies for integration into an OEM's finished products, such as speaker
and lock-key assemblies and diode assemblies that consist of wire, connectors
and diodes that are over-molded, packaged and bar coded for distribution. These
products can be totally designed and manufactured by the Company through its CAD
system, engineering and supply procurement. Techdyne develops manufacturing
processes and tooling and test sequences for new products of its customers. It
also provides design and engineering services in the early stages of product
development thereby assuring mechanical and electrical considerations are
integrated with a total system. Alternatively, the customer may provide
specifications and the Company will assist in the design and engineering or
manufacture to the customer's specifications. Contract manufacturing products
include rack assemblies for data processing and video editing and custom disk
drive enclosures for OEMs.
REWORKING AND REFURBISHING
Customers provide Techdyne with materials and sub-assemblies acquired
from other sources which the customer has determined requires modified design or
engineering changes. Techdyne redesigns, reworks, refurbishes and repairs these
materials and sub-assemblies.
Contract manufacturing, medical product sales, reworking and
refurbishing together amounted to approximately 10% of sales of Techdyne for
1998. Management believes that PCB sales and contract manufacturing will provide
Techdyne with substantial increases in revenues in the next few years.
MANUFACTURING
Components and products are custom designed and developed to fit
specific customer requirements and specifications. Techdyne attempts to develop
a "partnership" relationship with many of its customers by providing a
responsive, flexible, total manufacturing service. Such service includes
computer integrated manufacturing and engineering services, quick-turnaround
manufacturing and prototype development, materials procurement, quality
assurance, inventory management, development of special manufacturing processes
and acquisition of special equipment for that particular customer and its needs,
tooling and test sequences for new products from product designs received from
its customers or developed by Techdyne from customer requirements. The Company's
industrial, electrical and mechanical engineers work in close liaison with its
customers' engineering departments from inception through design, prototypes,
production and packaging. Upon completion of engineering, a prototype or
preproduction samples are produced. Materials procurement includes planning,
purchasing and warehousing electronic components and materials used in the
assemblies and finished products.
Techdyne's PCB assembly operations are geared toward advanced SMT.
Lytton provides Techdyne with increased PCB production through state-of-the-art
manufacturing equipment and processes and a highly trained and experienced
engineering and manufacturing workforce. The manufacturing of PCBs involves
several steps including the attachment of various electronic components, such as
integrated circuits, capacitors, microprocessors and resistors.
Techdyne also offers a wide range of custom manufactured cables and
harnesses for molded and mechanical applications. The Company uses advanced
manufacturing processes, in-line inspection and testing to focus on process
efficiencies and quality. The cable and harness assembly process is accomplished
with automated and semi-automated preparation and insertion equipment and manual
5
assembly techniques. Techdyne maintains a large assortment of standard tooling
and modern state-of-the-art equipment at all of its facilities for crimping,
stripping, terminating, soldering, sonic welding and sonic cleaning which
permits it to produce conventional and complex molded cables.
In addition to assembly operations in the last few years, Techdyne has
become more involved in contract manufacturing of moderate to high volume
turnkey assemblies and sub-assemblies, including injection molded and electronic
assembly products.
The Scottish manufacturing facility, located in Livingston, Scotland,
focuses mainly on the electronics industry producing primarily wire harnesses,
electro-mechanical assemblies, and molded cables, incorporating multifaceted
design and production capabilities.
SUPPLIES AND MATERIALS MANAGEMENT
Materials used in Techdyne's operations consist of metals, electronic
components such as cable, wire, resistors, capacitors, diodes, PCBs and plastic
resins. These materials are readily available from a large number of suppliers
and manufacturers, and Techdyne has not experienced any significant disruptions
from shortages of materials or delivery delays of its suppliers and believes
that its present sources and the availability of its required materials are
adequate. Techdyne utilizes a computerized system of material requirements
planning, purchasing, sales and marketing functions, which is being updated
through the installation of the Visual Manufacturing software in all of its
facilities, most of which has been accomplished, and is expected to be
completely integrated in its Ohio and Scottish facilities by June 30, 1999. This
new software not only has improved its material acquisition process but is also
Year 2000 compliant. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Techdyne procures components from a select group of vendors which meet
its standards for timely delivery, high quality and cost effectiveness, and
orders supplies generally when it has a purchase order or commitment from its
customer for the completed assembly. Techdyne's inventory management allows its
customers to increase or decrease volume requirements within established
frameworks and results in reduced obsolescence problems, which in turn improves
overall efficiency. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
QUALITY AND PROCESS CONTROL
Quality control is essential to Techdyne's operations since low-cost
and high quality production are primary competitive standards and are vital to
the services of the Company. See "Competition" below. In March, 1995 for its
Hialeah, Florida facility Techdyne received from Underwriter's Laboratories, an
independent quality assurance organization, the ISO 9002 quality assurance
designation, which is the international standard of quality with respect to all
systems of operations, including, among others, purchasing, engineering,
manufacturing, sales, inventory control and quality. Techdyne (Scotland)
received its BS 5750 quality assurance designation in 1991 from British
Standards Institute. Lytton received its ISO 9002 quality designation in 1995
from Eagle Registrations, Inc. Product components, assemblies and sub-assemblies
manufactured by Techdyne are thoroughly inspected visually and electronically to
assure all components are made to strict specifications and are functional and
safe. These quality assurance designations are only provided to those
manufacturers which exhibit stringent quality and process control assurances
after extensive evaluation and auditing by these independent quality assurance
organizations.
6
Strict process controls are also standard operating procedure. Process
controls deal with the controls relating to the entire manufacturing process.
Techdyne strives for a CPK of two, i.e., twice as critical as customer
tolerances. During the course of initial qualification and production cycles,
new and existing customers inspect Techdyne and its operations. Over the years
Techdyne's product and manufacturing quality has received excellent ratings.
Management believes it is one of the manufacturers of choice for the major
Fortune 500 companies, certain of which are its customers, based upon its
excellent record of quality production.
Total quality, timely delivery and customer satisfaction is
management's philosophy. High levels of quality in every area of Techdyne's
operations are essential. Quality standards are established for each operation,
performance tracked against those standards, and identifying work flow and
implementing necessary changes to deliver higher quality levels. Techdyne
maintains regular contact with its customers to assure adequate information
exchange and other activities necessary to assure customer satisfaction and to
support its high level of quality and on-time delivery.
CUSTOMERS
Techdyne serves a wide range of businesses from emerging growth
companies to multinational OEMs involved in a variety of markets including
computer networking systems, computer workstations, telecommunications, mass
data storage systems, instrumentation and food preparation equipment industries.
Techdyne's revenue was distributed over the following industry segments:
Year Ended December 31,
--------------------------------------------
1998 1997 1996
-------- -------- --------
Data processing 29% 40% 74%
Telecommunications 20% 7% 9%
Instrumentation 17% 16% 8%
Food preparation equipment (1) 18% 19% --%
(1) Accomplished through Lytton, a Techdyne subsidiary acquired in July, 1997.
The Company seeks to serve a sufficiently large number of customers to
avoid dependence on any one customer or industry. Nevertheless, historically a
substantial percentage of Techdyne's net sales have been to multiple locations
of a small number of customers. Significant reductions or delays in sales to any
of those major customers would have a material adverse effect on the Company's
results of operations. In the past, certain customers have terminated their
manufacturing relationship with Techdyne, or otherwise significantly reduced
their product orders. There can be no insurance that any major customer may not
terminate or otherwise significantly reduce or delay manufacturing orders, any
of which such terminations or changes in manufacturing orders could have a
material adverse effect on the Company's results of operations.
Techdyne and consequently the Company are dependent upon the continued
growth, viability and financial stability of Techdyne's customers, which are in
turn substantially dependent on the growth of the personal computer, computer
peripherals, the communications, instrumentation, data processing and food
preparation equipment industries. Most of these industries have been
characterized by rapid technological change, short product life cycles, pricing
and margin pressures. In addition, many of Techdyne's customers in these
industries are affected by general economic conditions. The factors affecting
these industries in general, and/or the Company's customers in particular, could
have a material adverse effect on the Company's results of operations.
7
Techdyne also generates significant accounts receivable in connection
with providing manufacturing services to its customers. If one or more of its
customers were to become insolvent or otherwise were unable to pay for the
manufacturing services provided by Techdyne, the Company's operating results and
financial condition would be adversely affected.
In 1998, 50% of Techdyne's sales were made to numerous locations of
five major customers. The table below sets forth the respective portion of net
sales for the applicable period attributable to customers and related suppliers
who accounted for more than 10% of net sales in any respective period.
Percentage of Net Revenue
1998 1997 1996
---- ---- ----
PMI Food Equipment Group ("PMI") 18% * *
Compaq Computer Corporation ("Compaq") * * 35%
International Business Machines ("IBM") * 19% 18%
EMC * 10% 12%
Motorola, Inc ("Motorola") 10% * *
* less than 10% for that year
Techdyne sells to approximately an additional 100 other companies,
which comprise the remaining 50% of sales. Lytton had approximately 41% of its
sales for fiscal 1998 to PMI. Techdyne (Scotland) had a substantial portion of
its 1998 sales, approximately 26%, to Compaq and related suppliers. During the
last three years, bidding for Compaq orders became more competitive due to Far
Eastern competitors which resulted in substantially reduced sales to that
customer with lower profit margins on remaining sales. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MARKETING AND SALES
Techdyne continues to pursue expansion and diversification of its
customer base and it is targeting emerging OEMs in high growth industry
segments. The Company's principal sources of new business are the expansion in
the volume and scope of services provided to existing customers, referrals from
customers and suppliers, direct sales through its sales managers and executive
staff, and through its independent sales representatives. Sales managers,
directed and supported by the executive staff, identify and attempt to develop
relationships with potential customers who exemplify financial stability, a need
for electronic and electro-mechanical component assembly and manufacturing,
anticipated unit volume, and a history of establishing long-term relationships.
Domestic sales are generated by six regional sales managers covering
the Northeast, Southeast, West and Southwest regions of the United States. There
are also 11 in-house sales/marketing personnel, including Barry Pardon, the
President of Techdyne. The regional sales managers have four independent
manufacturer representative agencies who employ approximately 13 sales
representatives. Sales are also generated through catalogues, brochures and
trade shows.
Techdyne (Scotland) has four in-house sales personnel who market its
products, primarily ribbon, harness and cable assemblies, electro-mechanical
products, and molded cable assemblies, as well as its reworked and refurbished
products (see "Business - Electronic Manufacturing Industry - Reworking and
Refurbishing" above) to customers in Scotland, England, Ireland, Germany and the
Middle East.
8
Substantially all of Techdyne's sales and reorders are effected through
competitive bidding. Most sales are accomplished through purchase orders with
specific quantity, price and delivery terms. Some distribution is accomplished
under open purchase orders with components released against customer requests.
BACKLOG
On December 31, 1998, Techdyne's backlog of orders amounted to
approximately $11,817,000, of which approximately $8,354,000 (approximately 71%)
was represented by the orders from its Lytton operations and approximately
$673,000 (approximately 6%) was represented by orders for Techdyne (Scotland)
operations. Last year the backlog was approximately $14,029,000 of which
approximately $7,300,000 was derived from Lytton operations and approximately
$2,054,000 was represented by orders of Techdyne (Scotland) operations.
Management believes, based on past experience and relationships with its
customers and knowledge of its manufacturing capabilities, that substantially
all of Techdyne's backlog orders are firm and should be filled within six
months. The purchase orders that Techdyne has do not provide for cancellation,
but Techdyne occasionally allows cancellations and frequently rescheduling of
deliveries at its discretion. Over the last several years cancellations have
been minimal and management does not believe that any significant amount of the
backlog orders will be canceled. The variations in the size and delivery
schedules of purchase orders received by Techdyne may result in substantial
fluctuations in backlog from period to period. Since orders and commitments may
be rescheduled or cancelled, and customers' lead times may vary, backlog does
not necessarily reflect the timing or amount of future sales.
DIALYSIS OPERATIONS
The Company, through DCA and its subsidiaries, currently operates five
outpatient dialysis treatment centers, four in Pennsylvania and one in New
Jersey, with a current capacity of 41 licensed stations but designed for a
maximum of 71 stations. The Company also provides inpatient dialysis services to
several hospitals where the dialysis facilities are located. The outpatient
dialysis centers in Pennsylvania are located in Carlisle, Lemoyne, Wellsboro and
Chambersburg, Pennsylvania. The New Jersey facility is situated in Manahawkin,
New Jersey, and another facility in Toms River, New Jersey is in development.
Other new dialysis facilities are anticipated, presently through construction
and development of new dialysis centers as opposed to acquisition.
Home patient dialysis services, or Method II patient treatment, which
includes dialysis training for patients at home, primarily for continuous
ambulatory peritoneal dialysis ("CAPD") or continuous cycling peritoneal
dialysis ("CCPD"), which involves providing equipment and supplies, training,
patient monitoring and follow-up assistance to patients who are able to perform
treatment at home. DCA Medical Services, Inc. ("DCAMS") is a wholly owned
subsidiary which operates the homecare operations in Pennsylvania.
ESRD TREATMENT OPTIONS
Kidneys generally act as a filter removing harmful substances and
excess water from the blood, enabling the body to maintain proper and healthy
balances of chemicals and water. Chronic kidney failure, or End-Stage Renal
Disease ("ESRD"), which results from chemical imbalance and buildup of toxic
chemicals, is a state of kidney disease characterized by advanced irreversible
renal impairment. ESRD is a likely consequence of complications resulting from
diabetes, hypertension, advanced age, and
9
specific hereditary, cystic and urological diseases. Without regular treatment
or kidney transplantation ESRD is fatal.
Treatment options for ESRD patients include (1) hemodialysis, performed
either at (i) an outpatient facility, or (ii) inpatient hospital facility, or
(iii) the patient's home; (2) peritoneal dialysis, either CAPD or CCPD, usually
performed at the patient's home; and/or (3) kidney transplant. The significant
portion of ESRD patients receive treatments at non-hospital owned outpatient
dialysis facilities (approximately 83%) with the remaining patients treated at
home through hemodialysis or peritoneal dialysis. Patients treated at home are
monitored by a designated outpatient facility.
The most prevalent form of treatment for ESRD patients is hemodialysis,
which involves the use of an artificial kidney, known as a dialyzer, to perform
the function of removing toxins and excess fluids from the bloodstream. The
toxins and excess fluid pass through a semi-permeable membrane into one chamber
and the dialysis fluid is circulated through the other chamber. On the average,
patients usually receive three treatments per week with each treatment taking
three to five hours. Dialysis treatments are performed by teams of licensed
nurses and trained technicians pursuant to the staff physician's instruction and
supervision.
A second treatment for ESRD patients is peritoneal dialysis, which is
usually performed at home. All forms of peritoneal dialysis use the patient's
peritoneal (abdominal) cavity to eliminate fluid and toxins from the patient.
CAPD utilizes dialysis solution installed manually into the patient's peritoneal
cavity through a surgically-placed catheter remaining in the abdominal cavity
for a three to five hour period and is then drained. The cycle is then repeated.
CCPD is performed in a manner similar to CAPD, but utilizes a mechanical device
to cycle dialysis solution while the patient is sleeping.
The third modality for patients with ESRD is kidney transplantation.
While this is the most desirable form of therapeutic intervention, the scarcity
of suitable donors and possibility of donor rejection limits the availability of
this surgical procedure as a treatment option.
DCA'S BUSINESS STRATEGY
DCA, having 22 years experience in successfully developing and
operating dialysis treatment facilities, plans to use such experience and
expertise to expand its dialysis operations, including provision of ancillary
services to patients. First in DCA's objectives is top quality patient care. In
June, 1998, there were approximately 3,470 Medicare approved ESRD facilities of
which approximately 65% were independent for-profit dialysis centers
(non-hospital centers). A substantial number of these freestanding centers are
owned by physicians or major corporations, certain of which are public
companies. Management intends to continue to establish alliances with physicians
and hospitals and to initiate dialysis service arrangements with nursing homes
and managed care organizations, and to continue to emphasize its high quality
patient care, its smaller size which allows it to focus on each patient's
individual needs while remaining sensitive to the physicians' professional
concerns.
A new Vice President was added to DCA management in 1998 to direct and
supervise the development and acquisition of new dialysis facilities. Under his
direction, DCA is actively seeking and negotiating with several physicians to
establish new outpatient dialysis facilities at several locations. While the
Company is continually pursuing new opportunities, there are no firm agreements,
other than the Toms River, New Jersey facility, to acquire or develop any
additional facilities or to provide inpatient dialysis treatment, and no
assurance can be given that any such agreements will be made or that development
of the Toms River facility will be completed.
10
DCA endeavors to increase same center growth by adding quality staff
and management and attracting new patients to its existing facilities by
rendering high caliber patient care in convenient, safe and serene conditions
for everyone involved. The Company believes that it has existing adequate space
and stations within DCA's facilities to accommodate greater patient volume and
maximize its treatment potential and is working to achieve such increase, to
lower its fixed costs, and operate at a greater efficiency level.
One of the primary elements in acquiring or developing facilities is
locating an area with an existing patient base under the current treatment of a
local nephrologist. Other considerations in evaluating a proposed acquisition or
development of a dialysis facility are the availability and cost of qualified
and skilled personnel, particularly nursing and technical staff, the size and
condition of the facility and its equipment, the atmosphere for the patients,
the area's demographics and population growth estimates, state regulation of
dialysis and healthcare services, and the existence of competitive factors such
as hospital or proprietary non-hospital owned and existing outpatient dialysis
facilities within reasonable proximity to the proposed center.
Expansion of the Company's dialysis operations is being approached
presently through the development of its own dialysis facilities. Acquisition of
existing outpatient dialysis centers, which the Company has not done in the
past, is a faster but much more costly means of growth.
To construct and develop a new facility ready for operations may take
an average of four to six months and 12 months or longer to generate income, all
of which are subject to location, size and competitive elements. To construct a
12 station facility may cost in a range of $600,000 to $750,000 depending on
location, size and related services to be provided by the proposed facility.
Acquisition of existing facilities may range from $40,000 to $70,000 per
patient. Therefore, a facility with 30 patients could cost from $1,200,000 to
$2,100,000 subject to location, competition, nature of facility and negotiation.
OPERATIONS OF DIALYSIS FACILITIES
DCA's dialysis facilities are designed specifically for outpatient
hemodialysis and generally contain, in addition to space for dialysis
treatments, a nurses' station, a patient weigh-in area, a supply room, water
treatment space used to purify the water used in hemodialysis treatments, a
dialyzer reprocessing room (where, with both the patient's and physician's
consent, the patient's dialyzer is sterilized for reuse), staff work area,
offices and a staff lounge. DCA's facilities also have a designated area for
training patients in home dialysis. Each facility also offers amenities for the
patients, such as a color television with headsets for each dialysis station, to
ensure the patients are comfortable and relaxed.
In accordance with participation requirements under the Medicare ESRD
program, each facility retains a medical director qualified and experienced in
the practice of nephrology and the administration of a renal dialysis facility.
See "Physician Relationships" below. Each facility is overseen by a nurse
administrator who supervises the daily operations and the staff, which consists
of registered nurses, licensed practical nurses, patient care technicians, a
part-time social worker and a part-time registered dietitian, who all supervise
each aspect of patient treatments. The Company must continue to attract and
retain skilled nurses and other staff, competition for whom is intense.
11
DCA's facilities offer high-efficiency and conventional hemodialysis,
which, in the Company's experience, provides the most viable treatment for most
patients. The Company considers its dialysis equipment to be both modern and
efficient, providing state of the art treatment in a safe and comfortable
environment. In 1998, DCA leased an additional 17 machines which are more
advanced and include better safety features and updated technology. The addition
of the improved equipment enhances DCA's ability to provide more efficient
treatment.
DCA's facilities also offer home dialysis, primarily CAPD and CCPD.
Training programs for CAPD or CCPD generally encompass two to three weeks at
each facility, and such training is conducted by the facility's home training
nurse. After the patient completes training, they are able to perform treatment
at home with equipment and supplies provided by DCA.
Dialysis Services of PA., Inc. - Lemoyne commenced operations in June,
1995 and for the years ended December 31, 1997 and 1998, provided approximately
7,241 and 7,468 dialysis treatments, respectively. Dialysis Services of PA.,
Inc. - Wellsboro commenced operations in September, 1995 and for the years ended
December 31, 1997 and 1998, provided 2,298 and 3,602 dialysis treatments,
respectively. Dialysis Services of PA., Inc. -Carlisle commenced operations in
the third quarter of 1997, providing 1,346 treatments at year end and for the
year ended December 31, 1998, provided 3,483 treatments. From July, 1998 to
December 31, 1998, Dialysis Services of NJ - Manahawkin provided 247 treatments.
The Chambersburg, Pennsylvania facility became operational in January, 1999.
The Company estimates that on average DCA's centers were operating at
approximately 56% of capacity as of December 31, 1998, based on the assumption
that a dialysis center is able to provide up to three treatments a day per
station, six days a week. The Company believes that DCA may increase the number
of dialysis treatments at its centers without making additional capital
expenditures.
DCA sold four of its dialysis centers in 1989, and since that time it
has incurred operational losses. Although DCA has reflected income over the
years, this was due to interest income, including interest on funds received
through advances to the Company.
INPATIENT SERVICES
Management is also seeking to increase acute dialysis care contracts
with hospitals for inpatient dialysis services. The Company provides acute care
inpatient dialysis services to three hospitals in areas serviced by three of the
Company's five dialysis facilities and is in the process of negotiating
additional contracts in the areas surrounding its other facilities and in tandem
with development of future proposed sites. Each of its dialysis facilities
provides training, supplies and on-call support services for home peritoneal
patients. Hospitals are willing to enter into such inpatient care arrangements
to eliminate the administrative burdens of providing dialysis services to their
patients as well as the expense involved in maintaining dialysis equipment,
supplies and personnel. DCA believes that these arrangements are beneficial to
its operations, since the contract rates are negotiated and are not fixed by
government regulation as is the case with Medicare reimbursement fees for ESRD
patient treatment.
ANCILLARY SERVICES
The Company's dialysis facilities provide certain ancillary services to
ESRD patients, including the administration of erythropoietin ("EPO") upon a
physician's prescription. EPO is a bio-engineered protein which stimulates the
production of red blood cells and is used in connection with dialysis to treat
anemia, a medical complication frequently experienced by ESRD patients. EPO
decreases the necessity
12
for blood transfusions in ESRD patients. Other ancillary services that DCA
provides to patients in addition to EPO are electrocardiograms and blood
transfusions, all of which are separately reimbursed by Medicare. See "Medicare
and Medicaid Reimbursement" below.
PHYSICIAN RELATIONSHIPS
An integral element to the success of a facility is its association
with area nephrologists. A dialysis patient generally seeks treatment at a
facility near the patient's home and where such patient's nephrologist has
established practice privileges. Consequently, DCA relies on its ability to
attract and satisfy the needs of referring nephrologists to gain new patients
and to provide quality dialysis care through these referring physicians.
The conditions of a facility's participation in the Medicare ESRD
program mandate that treatment at a dialysis facility be under the general
supervision of a medical director who is a physician. DCA retains by written
agreement qualified physicians or groups of qualified physicians to serve as
medical directors for each of its facilities. Generally, the medical directors
are board eligible or board certified in internal medicine by a professional
board specializing in nephrology and have had at least 12 months of experience
or training in the care of dialysis patients at ESRD facilities. DCA's medical
directors are typically a significant source of referrals to the particular
center served.
Agreements with medical directors are usually for a term of five years
or more with renewal provisions. Each agreement specifies the duties,
responsibilities and compensation of the medical director. Under each agreement,
the medical director or professional association maintains his, her or its own
medical malpractice insurance. The agreements also provide for non-competition
in a limited geographic area surrounding that particular dialysis center during
the term of the agreement and upon termination for a limited period.
The Company's ability to establish a dialysis facility in a particular
area is significantly geared to the availability of a qualified physician or
nephrologist with an existing patient base to serve as the Company's medical
director. The loss of a medical director who could not be readily replaced would
have a material adverse effect on the operations of that facility, DCA and the
Company.
QUALITY ASSURANCE
DCA implements a quality assurance program to maintain and improve the
quality of dialysis treatment and care it provides to its patients in every
facility. Quality assurance activities involve the ongoing examination of care
provided, the identification of deficiencies in that care and any necessary
improvements of the quality of care. DCA's manager of compliance, who is a
registered nurse, oversees this program in addition to ensuring that DCA meets
federal and state compliance requirements for dialysis centers. See "Regulation"
below.
PATIENT REVENUES
DCA's net revenues are derived primarily from four sources: (i)
outpatient hemodialysis services; (ii) home dialysis services, including Method
II services; (iii) inpatient hemodialysis services for acute patient care
provided through agreements with hospitals and other healthcare entities; and
(iv) ancillary services associated with dialysis treatments, primarily certain
tests and the administration of EPO. For each of the two years ended December
31, 1997 and 1998, approximately 74% of DCA's revenues were derived from
Medicare reimbursement. Average net revenue per treatment, which
13
includes all sources of payments, governmental or private, for DCA's in-center
and home patients, including ancillary services, was approximately $205 for the
year ended December 31, 1998, as compared to $206 for the year ended December
31, 1997.
According to statistics published by the Health Care Financing
Administration ("HCFA"), 92% of all ESRD patients who receive dialysis treatment
are funded under the Medicare ESRD Program established by the federal government
under the Social Security Act, and administered in accordance with prescribed
rates set by HCFA of the Department of Health and Human Services ("HHS"). Under
the ESRD Program, payments for dialysis services are determined pursuant to Part
B of the Medicare Act which presently pays approximately 80% of the allowable
charges for each dialysis treatment furnished to patients. The maximum payments
vary based on location of the center. See "Medicare Reimbursement" below. The
remaining 20% may be paid by Medicaid if the patient is eligible, or if not,
from private insurance funds or the patient's personal funds. Pennsylvania and
New Jersey, presently the states in which the Company operate, provide Medicaid
or comparable benefits to qualified recipients to supplement their Medicare
coverage.
Medicare and Medicaid programs are subject to regulatory changes,
statutory limitations and governmental funding restrictions, which may adversely
affect DCA's and the Company's revenues and dialysis services payments. See
"Medicare and Medicaid Reimbursement" below.
The inpatient dialysis services are paid for by the hospital pursuant
to contractual pre-determined fees. Inpatient treatments accounted for
approximately 16% and 11% of DCA's revenues for the years ended December 31,
1997 and 1998, respectively.
MEDICARE AND MEDICAID REIMBURSEMENT
DCA is reimbursed primarily from third party payors including Medicaid,
commercial insurance companies, and substantially by Medicare under a
prospective reimbursement system for chronic dialysis services, including
dialysis treatments, supplies used for such treatments, certain laboratory tests
and medications. Under this system, the reimbursement rates are fixed in advance
and have been adjusted from time to time by Congress. This form of reimbursement
limits the allowable charge per treatment, but provides DCA with predictable and
recurring per treatment revenues and allows it to retain any profit earned.
DCA receives reimbursement for outpatient dialysis services provided to
Medicare-eligible patients at rates that are currently between $122 and $124 per
treatment, depending upon regional wage variations. The Medicare reimbursement
rate is subject to change by legislation and recommendations by the Medicare
Payment Advisory Commission ("MedPAC"), a new commission mandated by the
Balanced Budget Act of 1997 and continuing the work of the Prospective Payment
Assessment Commission ("PROPAC"). Congress increased the ESRD reimbursement
rate, effective January 1, 1991, resulting in an average ESRD reimbursement rate
of $126 per treatment for outpatient dialysis services. The current maximum
composite reimbursement rate is $134 per treatment. In 1990, Congress required
that HHS and PROPAC study dialysis costs and reimbursement and make findings as
to the appropriateness of ESRD reimbursement rates. Any rate increase by
Congress must be considered in the context of Medicare budgetary concerns. In
1998, MedPAC recommended a 2.7% increase in the amount paid to dialysis
facilities for performance of services, which if passed by Congress, would
constitute the second increase that has been approved for the ESRD program since
its inception. Congress is not required to implement such recommendation and
could either raise or lower the reimbursement rate.
14
Other ancillary services and items are eligible for separate
reimbursement under Medicare and are not part of the composite rate, including
certain drugs such as EPO. The proposal to reduce the reimbursement rate of EPO
from $10 per 1000 units to $9 per 1000 units could adversely impact DCA's income
from EPO if the proposal is enacted by Congress in 1999. There is no assurance,
though, that Congress will legislate the EPO reduction into law.
Medicaid programs are state administered programs partially funded by
the federal government. These programs are intended to provide coverage for
patients whose income and assets fall below state defined levels and who are
otherwise uninsured. The programs also serve as supplemental insurance programs
for the Medicare co-insurance portion and provide certain coverages (e.g., oral
medications) that are not covered by Medicare. DCA is a licensed ESRD Medicaid
provider in Pennsylvania, and has applied to be an approved Medicaid provider in
New Jersey.
The Company is unable to predict what, if any, future changes may occur
in the rate of reimbursement. Any reduction in the Medicare composite
reimbursement rate or Medicaid reimbursement could have a material adverse
effect on DCA and the Company's business, revenues and net earnings.
REGULATION
TECHDYNE
Techdyne's operations are subject to certain federal, state and local
regulatory requirements relating to environmental waste management and health
and safety matters. These regulations provide for civil and criminal fines,
injunctions and other sanctions and, in certain instances, allow third parties
to sue to enforce compliance. Management believes that Techdyne complies with
applicable regulations pertaining to health and safety in the workplace,
including those promulgated by OSHA, and the use, storage, discharge and
disposal of chemicals used in its manufacturing processes. Techdyne periodically
generates and temporarily handles limited amounts of materials that are
considered hazardous waste. The current costs of compliance are not material to
Techdyne or the Company. Nevertheless, no assurances can be given that
additional or modified requirements will not be imposed in the future, and if so
imposed, will not involve substantial additional expenditures.
DCA
Dialysis treatment centers must comply with various state and federal
health laws which are generally applicable to healthcare facilities. The
dialysis center must meet a variety of governmental standards including but not
limited to maintenance of equipment and proper records, personnel and quality
assurance programs. Each of the dialysis facilities must be certified by HCFA,
and the Company must comply with certain rules and regulations established by
HCFA regarding charges, procedures and policies. Each dialysis center is also
subject to periodic inspections by federal and state agencies to determine if
their operations meet the appropriate regulatory standards. These requirements
have been satisfied by each of the Company's dialysis facilities.
DCA's record of compliance with federal, state and local governmental
laws and regulations remains excellent. DCA regularly reviews legislative
changes and developments and will restructure a business arrangement if
management determines such might place it in material noncompliance with such
law or regulation. To date, none of DCA's business arrangements with physicians,
patients or
15
others have been the subject of investigation by any governmental authority.
No assurance can be given, however, that DCA's business arrangements will not be
the subject of a future investigation or prosecution by a federal or state gov-
ernmental authority which could result in civil and/or criminal sanctions.
The Social Security Act prohibits, as do many state laws, the payment
of patient referral fees for treatments that are otherwise paid for by Medicare,
Medicaid or similar state programs under the Medicare and Medicaid Patient and
Program Protection Act of 1987, or the "Anti-kickback Statute." The
Anti-kickback Statute and similar state laws impose criminal and civil sanctions
on persons who knowingly and willfully solicit, offer, receive or pay any
remuneration, directly or indirectly, in return for, or to include, the referral
of a patient for treatment, among other things. The federal government in 1991
and 1992 published regulations that established exceptions, "safe harbors," to
the Anti-kickback Statute for certain business arrangements that would not be
deemed to violate the illegal remuneration provisions of the federal statute.
All conditions of the safe harbor must be satisfied to meet the exception, but
failure to satisfy all elements does not mean the business arrangement violates
the illegal remuneration provision of the statute.
DCA attempts to structure its arrangements with its physicians to
comply with the Anti-Kickback Statute. However, many of these physicians refer
patients to DCA's facilities, therefore the federal Anti-kickback Statute could
be found to apply to referrals by such physicians to the Company's facilities.
Management believes that the illegal remuneration provisions described above are
primarily directed at abusive practices that increase the utilization and cost
of services covered by governmentally funded programs. The dialysis services
provided by DCA generally cannot, by their very nature, be over-utilized, since
dialysis treatment is not elective and cannot be prescribed unless there is
temporary or permanent kidney failure. However, these relationships do not
satisfy all of the criteria for the safe harbor, and there can be no assurance
that the relationships with DCA's medical directors will not subject DCA and the
Company to investigation or prosecution by enforcement agencies. There can be no
assurance that DCA will not be required to change its practices or experience a
material adverse effect as a result of any such potential challenge. The Company
cannot predict the outcome of the rule-making process or whether changes in the
safe harbor rules will affect the Company's position with respect to the
Anti-kickback Statute, but does believe it will remain in compliance.
The Physician Ownership and Referral Act ("Stark II") was adopted and
incorporated into the Omnibus Budget Reconciliation Act of 1993 and became
effective January 1, 1995. Stark II bans physician referrals, with certain
exceptions, for certain "designated health services" as defined in the statute
to entities in which a physician or an immediate family member has a "financial
relationship" which includes an ownership or investment interest in, or a
compensation arrangement between the physician and the entity. This ban is
subject to several exceptions. If Stark II is found to be applicable to the
facility, the entity is prohibited from claiming reimbursement, will receive
civil penalties and may be excluded from the Medicare program.
Last year, HCFA released proposed rules that interpret the provisions
of Stark II ("Proposed Rules"). Management believes, based upon the Proposed
Rules and the industry practice, that Congress did not intend to include
dialysis services and the services and items provided by DCA incident to
dialysis services within the Stark II prohibitions. There can be no assurance,
though, that final Stark II regulations will adopt such a position.
If the provisions of Stark II were found to apply to DCA's arrangements
with its medical directors, however, the Company believes that it would be in
compliance. DCA compensates its
16
nephrologist-physicians as medical directors of its dialysis centers pursuant to
Medical Director Agreements. Also, acute care inpatient hospital arrangements
for dialysis services are excluded under the Proposed Rules from the prohibition
on physician referrals based upon the fact that the services provided under
these arrangements are rendered under emergency circumstances and are necessary
treatments. The Company believes that DCA's contractual arrangements with hos-
pitals for acute care inpatient dialysis services are in compliance with this
exception.
If HCFA or any other government entity takes a contrary position in the
Stark II final regulations or otherwise, DCA may be required to restructure
certain existing compensation agreements with its medical directors, or, in the
alternative, to refuse to accept referrals for designated health services from
certain physicians. There can be no assurance that such prospective compliance,
if permissible, would not have a material adverse effect on the Company.
In 1996, President Clinton signed the Health Insurance Portability and
Accountability Act of 1996 ("HIPA"), a package of health insurance reforms which
include a variety of provisions important to healthcare providers, such as
significant changes to the Medicare and Medicaid fraud and abuse laws. Under
these programs, these governmental entities will undertake a variety of
monitoring activities which were previously left to providers to conduct,
including medical utilization and fraud review, cost report audits, secondary
payor determinations, reports of fraud and abuse actions against providers will
be shared as well as encouraged by rewarding whistleblowers with money collected
from civil fines.
The Company's dialysis centers are subject to hazardous waste laws and
non-hazardous medical waste regulation. Most of the Company's waste is
non-hazardous. HCFA requires that all dialysis facilities have a contract with a
licensed medical waste handler for any hazardous waste. Medical waste at each of
DCA's facilities is handled by licensed local medical waste sanitation agencies,
who are primarily responsible for compliance.
There are a variety of regulations promulgated under OSHA relating to
employees exposed to blood and other potentially infectious materials requiring
employers, including dialysis centers, to provide protection. The Company
adheres to OSHA's protective guidelines, including regularly testing employees
and patients for exposure to hepatitis B and providing employees subject to such
exposure with hepatitis B vaccinations on an as-needed basis, protective
equipment, a written exposure control plan and training in infection control and
waste disposal.
Although the Company believes that DCA substantially complies with
currently applicable state and federal laws and regulations and to date has not
had any difficulty in maintaining its licenses or its Medicare and Medicaid
authorizations, the healthcare service industry is and will continue to be
subject to substantial and continually changing regulation at the federal and
state levels, and the scope and effect of such and its impact on the Company's
operations cannot be predicted. No assurance can be given that DCA's activities
will not be reviewed or challenged by regulatory authorities.
PATENTS AND TRADE NAMES
The Company sells certain of its medical supplies and products under
the trade name Medicore(TM). Certain of its lancets are marketed under the trade
names Medi-Lance(TM) and Lady Lite(TM).
The Company is the assignee of three patents relating to its lancets.
The issuance of a patent does not assure protection against the development of
similar, if not superior processes, know-how and products. The Company does not
rely on patents or trademarks in its electro-manufacturing operations and
17
manufacturing of medical products. The Company instead places its importance
more upon design, engineering, manufacturing cost containment, quality and
marketing skills to establish or maintain market position.
COMPETITION
The medical supply operations are extremely competitive and the Company
is not a significant competitive factor in this area.
In the electronics manufacturing industry, the Company experiences
substantial competition from many areas including divisions of large electronic
and high-technology firms, as well as from numerous smaller but more specialized
companies. Competitive price advantages may also be available to competitors
with less expensive off-shore operations, especially in the Far East. Techdyne
also competes with in-house manufacturing operations of current and potential
customers. Although Techdyne has been expanding, certain of the Company's
competitors have broader geographic coverage to serve their customers and
attract additional business, and are more established in the industry with
substantially greater financial, manufacturing and marketability resources than
the Company. Management believes the primary competitive factors to be price,
quality of production, manufacturing capability, prompt customer service, timely
delivery, engineering expertise, and technical assistance to customers. The
Company believes it competes favorably in these areas. During downtimes in the
electronics industry, OEMs become more price sensitive and those manufacturers
who have greater direct buying power with component suppliers or who have lower
cost structures are more competitive. In the PCB area major competitors include
SCI Systems, Inc., Jabil Circuit, Sanmina Corporation, Benchmark Electronics,
Inc., ACT Manufacturing, Inc. and others. Major competitors in the cable and
harness assembly market include Volex Interconnect Systems, Inc., Foxconn, ACT
Manufacturing, Inc., Escod Industries and others.
The operation of kidney dialysis centers is extremely competitive and
DCA competes with numerous providers, many of which are facilities owned by
physicians or major corporations, some of which are public. The Company's
operations are small in comparison to these public companies. Many of these
competitors, including Fresenius AG, Renal Care Group, Inc., Total Renal Care
Holdings, Inc., and Everest Healthcare Service Corp., have substantially greater
financial resources and many more centers and patients than DCA, which provides
these larger facilities with a significant advantage in competing for
acquisitions of dialysis facilities and the ability to attract and retain
qualified nephrologists, who are normally a substantial source of patients for
the dialysis center. Hospitals and other outpatient dialysis centers also
compete with the Company's dialysis operations. Competitive factors that are
most significant in dialysis treatment are the quality of care and service,
convenience of location, availability of a local nephrologist, and pleasantness
of environment. The Company is not a significant competitive force in kidney
dialysis services primarily based upon DCA's ownership of a limited number of
centers and the size of each of its facilities.
Based upon advances in surgical techniques, immune suppression and
computerized tissue typing, cross-matching of donor cells and donor organ
availability, renal transplantation instead of dialysis is becoming a
competitive factor. It is presently the second most commonly used modality in
ESRD therapy.
EMPLOYEES
The Company and its subsidiaries employ approximately 560 full time
employees of which 14 are administrative, 42 are with the dialysis operations, 6
are engaged in the medical supply operations, and 503 are with Techdyne's
electronic manufacturing operations (domestic and Scotland). In addition,
Techdyne
18
utilizes approximately 70 temporary workers, retained through local agencies,
on a regular basis, and DCA employs 16 part-time and 9 part-time contract
employees.
ITEM 2. PROPERTIES
The Company leases 2,800 square feet for its executive offices in
Hialeah, Florida, and at a different location in Hialeah, Florida, leases 5,000
square feet for its medical supply operations, each lease through December 31,
2002. It also leases 3,900 square feet of space for other executive offices in
Hasbrouck Heights, New Jersey through March 31, 2001.
DCA owns two properties, one located in Lemoyne, Pennsylvania, and the
second in Easton, Maryland. The Maryland property consists of approximately
7,400 square feet which is leased to the purchaser (in 1989) of one of DCA's
dialysis centers and a competitor of DCA, through March 31, 2003. The Lemoyne
property of approximately 15,000 square feet houses DCA's dialysis center of
approximately 5,400 square feet and 2,500 square feet of its space for its
executive offices. DCA's subsidiary leases this facility from DCA under a five
year lease that commenced December 23, 1998, with two renewal periods of five
years. The Easton, Maryland and Lemoyne, Pennsylvania properties are subject to
mortgages from a Maryland banking institution extending through November, 2003.
As of December 31, 1998, the remaining principal amount of the mortgage on the
Lemoyne property was approximately $160,000 and on the Easton property was
approximately $200,000. Each mortgage bears interest at 1% over the prime rate
and is secured by the real property and DCA's personal property at each
location. The bank has a lien on rents due DCA and security deposits from the
leases. The bank has to approve all leases, subleases, alterations, improvements
and sales relating to the properties. See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As lessor, DCA also leases space at its Lemoyne, Pennsylvania property
to one other unrelated party for their own business activities unrelated to
dialysis services or to the Company. The lease is for approximately 1,500 square
feet through December 31, 2002.
The dialysis facility in Wellsboro, Pennsylvania consists of
approximately 3,500 square feet, leased by DCA's subsidiary in Wellsboro for
five years through September, 27, 2000 with two renewals of five years each. The
Carlisle, Pennsylvania 4,340 square foot dialysis facility is leased under a
five year lease through June 30, 2002, with two renewals of five years each.
DCA's subsidiary in Manahawkin, New Jersey signed a five year lease for its new
dialysis facility for approximately 3,700 square feet, renewable for two
consecutive five year periods commencing December 1, 1998, with an additional
940 square feet of space free of rent until June 30, 2000, after which time
DCA's subsidiary will pay the agreed per square foot price as stipulated in the
original lease. The facility in Chambersburg, Pennsylvania, consisting of 7,000
square feet of space, is leased for a five year term with two renewal periods of
five years each commencing January 1, 1999. Approximately 1,800 square feet was
sublet to a medical practice.
DCA's new subsidiary in Toms River signed a lease agreement to
construct a new facility in Toms River, New Jersey for a term of five years from
December 8, 1998, with two renewal periods of five years each.
The Lemoyne and Wellsboro, Pennsylvania facilities, both of which
initiated operations in 1995, are currently operating at approximately 72% and
68% capacity, respectively, and Carlisle, Pennsylvania has operated at 47%
capacity for 1998. Since DCA's subsidiaries in Manahawkin, New Jersey and
19
Chambersburg, Pennsylvania, recently commenced operations, an accurate
operational capacity is not known at this point. The existing dialysis
facilities could accommodate greater patient volume subject to obtaining
appropriate governmental approval.
The dialysis stations are equipped with modern dialysis equipment under
a November, 1996 master-lease/purchase agreement ("1996 Master Lease") with a
$1.00 purchase option at the end of the term. DCA leased new equipment for its
Manahawkin, New Jersey and Chambersburg, Pennsylvania facilities beginning May
and November, 1998, respectively, under the 1996 Master Lease in addition to the
1997 leases for equipment at the Lemoyne and Carlisle, Pennsylvania facilities.
Techdyne's domestic operations are headquartered in Hialeah, Florida
which consists of 16,000 square feet of space for its executive offices and
12,000 square feet for its manufacturing facilities and warehousing, leased from
the Company under five year leases expiring March 31, 2000. These facilities are
located in two adjacent buildings acquired by the Company from Techdyne in 1990
which also included the purchase of a parcel of land adjacent to these buildings
used for parking. See "Certain Relationships and Related Transactions" of the
Company's Proxy Statement relating to the Annual Meeting of Shareholders to be
held on June 9, 1999 incorporated herein by reference. The Company also owns a
small parcel of land near Techdyne's offices in Hialeah, Florida which is used
as a parking lot, and a small, undeveloped parcel adjacent to Techdyne's
warehouse available for future expansion.
Techdyne leases manufacturing, warehousing and office facilities in (i)
Houston, Texas for 15,000 square feet, leased until April, 2002, (anticipates
subleasing certain non-manufacturing space), (ii) Austin, Texas for 18,225
square feet under a lease to May, 2002, and (iii) Milford, Massachusetts for
5,500 square feet of space through March, 2002. Each lease has one five year
renewal. Techdyne is using the additional space at its Austin, Texas facility by
combining its Houston non-manufacturing and part of its Houston manufacturing
operations. A minimal portion of the Austin facility has been sublet on a
month-to-month basis. The Company keeps a sales representative at its
manufacturing facility in Houston, Texas.
In July, 1997, Techdyne acquired Lytton in Dayton, Ohio and with that
acquisition leased a 77,800 square foot manufacturing and office facility under
a lease to July 31, 2002 with two renewals of five years each. The landlord, a
limited liability company, is owned by the former president of Lytton. See
"Certain Relationships and Related Transactions" of the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on June 9,
1999, incorporated herein by reference. Techdyne has a right of first refusal
and an option to purchase these premises. This lease is guaranteed by the
Company.
Techdyne (Scotland) owns an approximately 31,000 square foot facility
in Livingston, Scotland subject to a 15-year mortgage due July, 2009 which has a
U.S. dollar equivalency of approximately $545,000 at December 31, 1998. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Techdyne maintains state-of-the-art manufacturing, quality control,
testing and packaging equipment at all of these facilities and believes that its
equipment and facilities are adequate for Techdyne's current operations.
20
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in or subject to any claims or litigation
of a material nature or that any adverse outcome would have a material adverse
effect on the Company's financial condition. See Note 7 to "Notes to
Consolidated Financial Statements."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the Company's
fiscal year to a vote of security holders through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock traded on the American Stock Exchange until
June 3, 1996 when its Common Stock commenced trading on the Nasdaq National
Market under the symbol "MDKI." The table below reflects for the periods
indicated the high and low closing sales prices for the Company's common stock
as reported by the Nasdaq National Market.
SALE PRICE
----------
HIGH LOW
---- ---
1997
1st Quarter................. $5.00 $2.63
2nd Quarter................. 4.50 2.00
3rd Quarter................. 3.38 2.13
4th Quarter................. 3.00 1.88
HIGH LOW
---- ---
1998
1st Quarter................. $2.38 $1.94
2nd Quarter................. 2.88 1.84
3rd Quarter................. 2.13 1.25
4th Quarter................. 1.56 0.94
The high and low sales price of Medicore common stock at March 15, 1999
were $1.88 and $1.25, respectively.
As of March 15, 1999, there were 1,266 shareholders of record. The
Company estimates, based upon its 1997 proxy solicitation, that its common stock
is beneficially held by approximately 2,100 shareholders.
21
The Company has not paid any cash dividends in the last two years.
Dividends are paid at the discretion of the board of directors, and no such
payments are expected to be made in the future. Any earnings of the Company will
be retained for use in the business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the consolidated financial statements, related notes and other financial
information included herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands except per share amounts)
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------------
1998 1997(1) 1996(2) 1995 1994
---- ---- ---- ---- ----
Revenues $50,149 $44,119 $34,719 $36,660 $24,552
Net income 98 2,241 2,417 2,251 864
Income per common share:
Basic $.02 $.39 $.44 $.41 $.17
Diluted $.01 $.36 $.39 $.37 $.16
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
DECEMBER 31
-------------------------------------------------------------------------
1998 1997(1) 1996(2) 1995 1994
---- ---- ---- ---- ----
Working capital $15,421 $18,857 $13,844 $ 7,034 $ 4,871
Total assets 36,310 40,862 27,085 21,247 15,955
Long-term debt 5,127 5,240 1,677 964 1,667
Stockholders' equity 15,368 16,077 13,021 9,754 8,027
(1) REFLECTS (I) FIVE MONTHS OPERATIONS OF LYTTON, AND ITS ASSETS,
LIABILITIES AND STOCKHOLDERS' EQUITY, WHICH COMPANY WAS ACQUIRED BY
TECHDYNE ON JULY 31, 1997; AND (II) THE SALE OF THE FLORIDA DIALYSIS
OPERATIONS ON OCTOBER 31, 1997 FOR $5,065,000 CONSISTING OF $4,585,000
OF CASH WITH THE BALANCE CONSISTING OF 13,873 SHARES OF COMMON STOCK OF
THE PURCHASER. SEE ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND NOTE 12 TO "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS."
(2) IN 1996, THE COMPANY RECORDED ESTIMATED COSTS OF $305,000 FOR SHUTDOWN
OF ITS DURABLE MEDICAL EQUIPMENT OPERATIONS.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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,
changes in a customer's manufacturing strategy, acquisitions of or consolida-
tions 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 could have an
22
adverse effect on the Company's results of operations or financial condition.
The Company's and Techdyne's results also depend to a substantial extent on the
success of Techdyne's OEM customers in marketing their products. Techdyne is
always seeking to diversify its customer base to reduce its reliance on its few
major customers. See "Techdyne's Business Strategy" and "Customers" under Item
1, "Business - Electronic Manufacturing Industry."
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 the Company's and Techdyne's results of
operations. The electronics industry is also subject to economic cycles and has
in the past experienced, and is likely in the future to experience, recessionary
periods, which could have a material adverse effect on the Company's and
Techdyne's business, financial condition and results of operations. To continue
to grow and be a successful competitor, the Company must be able to maintain and
enhance its 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.
Techdyne must continuously develop improved manufacturing procedures to
accommodate customer needs for increasingly complex products. To continue to
grow and be a successful competitor, the Company must be able to maintain and
enhance its 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 the Company's process
development efforts will be successful or that the emergence of new
technologies, industry standards or customer requirements will not render the
Company's technology, equipment or processes obsolete or uncompetitive. Further,
to the extent that the Company determines 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.
Techdyne uses enterprise resource planning through its Visual
Manufacturing system (see Item 1, "Business - Electronic Manufacturing Industry
- - Supplies and Materials Management" and "Year 2000 Readiness" below) in its
efforts to continuously develop accurate forecasts of customer volume
requirements. Techdyne is dependent on the timely availability of many
components. Component shortages could result in manufacturing and shipping
delays or increased component prices which could have a material adverse effect
on Techdyne's and the Company's results of operations. It is 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. See "Manufacturing" and "Supplies and Materials
Management" under Item 1, "Business - Electronic Manufacturing Industry."
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, the Company competes with much
larger electronic manufacturing entities. Further, in order to effectuate any
such transactions, it may result in potentially dilutive issuance of equity se-
curities, the Company's 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 the Company's and Techdyne's finan-
cial 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
23
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 the Company's business and financial results.
Techdyne's, and in turn, the Company's results of operations are also
affected by other factors, including price competition, the level and timing of
customer orders, fluctuations in material costs, the overhead efficiencies
achieved in managing the costs of its operations, experience in manufacturing a
particular product, the timing of expenditures in anticipation of increased
orders, and selling, general and administrative expenses. Accordingly, gross
margins and operating income margins have generally improved during periods of
high volume and high capacity utilization. Techdyne generally has idle capacity
and reduced operating margins during periods of lower-volume production.
With respect to the Company's dialysis operations engaged in through
DCA, essential to the Company's profitability is Medicare reimbursement, which
is at a fixed rate determined by HCFA. The level of DCA's, and therefore, the
Company's revenues and profitability may be adversely affected by any potential
legislation resulting in rate cuts. Operating costs of the Company 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 the Company. Additionally, there is
intense competition for retaining qualified nephrologists, who are a
significant, if not the sole, source of patient referrals 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
implemented, or the number of stations, or patient treatments such may involve,
or if such will ultimately be profitable. Newly established dialysis centers,
although contributing to increased revenues, also adversely affect results of
operations due to start-up costs and expenses with a smaller developing patient
base.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Consolidated revenues increased by approximately $6,029,000 (14%) in
1998 compared to the previous year. Sales revenues increased by approximately
$10,494,000 (27%) compared to the preceding year. 1997 revenues included both
a gain of $4,431,000 on the sale of certain assets of DCA's
24
subsidiaries and a gain of $90,000 on subsidiary warrant exercises. See Note
12 to "Notes to Consolidated Financial Statements."
Techdyne sales increased approximately $11,647,000 (35%) for the year
December 31, 1998 compared to the preceding year. The increase was attributable
principally to the inclusion of sales of Lytton for which sales of $20,062,000
were included during the current year compared to $7,170,000 for the preceding
year commencing with the Company's acquisition of Lytton on July 31, 1997. There
was an overall increase in domestic sales of $13,771,000 (52%), including
Lytton, and a decrease in European sales of $2,125,000 (31%) compared to the
preceding year. The decline in European-based sales was mainly attributable to a
decrease of approximately $1,656,000 (58%) in sales to Compaq (Europe) by
Techdyne (Scotland) which was partially offset by sales to new customers and
increased sales to existing customers.
Approximately 50% of Techdyne's consolidated sales and 45% of the
Company's consolidated sales for 1998 were made to five customers. Customers
generating in excess of 10% of Tecdyne's consolidated sales with their
respective portions of Techdyne's and the Company's consolidated sales include
Motorola, which accounted for 10% and 9%, and PMI Food Group, which accounted
for 18% and 17%, respectively. Approximately $8,183,000 (41%) of Lytton's sales
for 1998 were to PMI Food Group, its major customer. The loss of, or substan-
tially reduced sales to any of Techdyne's major customers would have a material
adverse effect on Techdyne's and the Company's operations if such sales are not
replaced.
Revenues of Techdyne's Scotland-based subsidiary Techdyne (Scotland)
continue to be highly dependent on sales to Compaq, which accounted for
approximately 26% of sales for the current year compared to 42% in the preceding
year. The bidding for Compaq orders has become more competitive which has
continued to result in substantial reductions in Compaq sales and lower profit
margins on remaining Compaq sales. Techdyne (Scotland) is pursuing new business
development and has offset some of the lost Compaq business with sales to other
customers. However there can be no assurance as to the success of such efforts.
Medical product sales revenues decreased by approximately $373,000
(22%) for 1998 compared to the previous year due to decreased sales of the
principal product of this division. This was due to substantially reduced
government purchase and foreign competition. Management is attempting to be more
competitive in lancet sales through overseas production and expansion of its
customer base. The Medical Products Division is also expanding its product line
with several diabetic disposable products. No assurance can be given that said
efforts will be successful.
Medical service revenues, represented by the revenues of the Company's
dialysis division, DCA, decreased approximately $823,000 (19%) for the year
ended December 31, 1998 compared to the preceding year. This decrease reflects
a decrease of approximately $1,663,000 compared to the preceding year
attributable to the sale of the Company's Florida dialysis operations on October
31, 1997, which was offset to some degree by increased revenues of the Company's
Pennsylvania dialysis centers of approximately $782,000 including increased
revenues of approximately $510,000 at the Company's dialysis center located in
Carlisle, Pennsylvania, which commenced operations in July, 1997, and $58,000
from a new dialysis center located in Manahawkin, New Jersey, which received
regulatory approval in December, 1998. Although the operations of these centers
have resulted in additional revenues, they are in the developmental stage and,
accordingly, their operating results will adversely affect DCA's and the
Company's results of operations until they achieve a sufficient patient count to
cover fixed operating costs.
25
Cost of goods sold as a percentage of consolidated sales increased to
86% for the year ended December 31, 1998 compared to 83% for the preceding year.
Cost of goods sold for Techdyne as a percentage of sales remained
relatively stable amounting to 88% for the year ended December 31, 1998 compared
to 87% for the preceding year.
Cost of goods sold by the medical products division increased to 69%
for 1998 compared to 65% for the preceding year, as a result of a change in
product mix due to decreased sales of the principal product of the division.
Cost of medical services sales increased to 71% in 1998 compared to 62%
in 1997 reflecting increases in healthcare salaries and supply costs as a
percentage of sales, including the operations of the Company's centers in
Carlisle, PA and Manahawkin, NJ which are still in their developmental stage.
The preceding year included higher hospital treatment revenues, which have a
substantially lower cost of sales, with the Company's Florida hospital
operations having been sold on October 31, 1997.
Selling, general and administrative expenses increased $508,000 for
1998 compared to the preceding year. This increase reflected inclusion of the
selling, general and administrative expenses of Lytton for all of 1998 versus
five months in 1997, as well as inclusion of the new dialysis center in
Carlisle, Pennsylvania for all of 1998, expenses in connection with the startup
of a new dialysis center in Manahawkin, New Jersey, a new center in
Chambersburg, Pennsylvania, which commenced operations in January, 1999, and
another center presently under construction in New Jersey, which was offset by
the decline in expenses resulting from DCA's sale of its Florida dialysis
operations on October 31, 1997. Included in 1997 was stock compensation expense
that occurred during the fourth quarter of 1997 in the amount of $322,000 in
conjunction with forgiveness of notes from option exercises of DCA common stock.
Interest expense increased by approximately $199,000 for 1998 compared
to the preceding year. This increase included additional interest of $122,000
associated with the financing the Lytton acquisition and increases in Lytton's
financing and debt agreements of approximately $81,000 which was partially
offset from DCA's reduced average outstanding borrowings.
The Company recorded an adjustment to the valuation allowance relating
to its deferred tax asset of approximately $300,000 during the fourth quarter of
1998 and $700,000 during the fourth quarter of 1997 which offset taxes of
approximately $1,700,000 of DCA which resulted from the sale of its Florida
dialysis operations.
A substantial portion of the Company's outstanding borrowings are tied
to the prime interest rate. The prime rate was 7.75% at December 31, 1998 and
8.25% at December 31, 1997.
1997 COMPARED TO 1996
Consolidated revenues increased by approximately $9,400,000 (27%) in
1997 compared to the previous year. Sales revenues increased by $9,208,000 (31%)
compared to the preceding year. 1997 revenues included a $4,431,000 gain on the
sale of certain assets of DCA's subsidiaries with 1996 having included a
$1,521,000 gain on securities offering of DCA, and a gain of $2,584,000 on the
sale of marketable securities attributable to the sale of Viragen (a former sub-
sidiary of the Company) common stock for which the carrying value had been
written-off in previous periods. See Note 2 to "Notes to Consolidated Financial
Statements." Other income decreased by $273,000 for 1997 compared to the
26
previous year which included $140,000 from a litigation settlement and $228,000
on the Viragen note recovery.
Techdyne sales increased approximately $8,903,000 (37%) for the year
ended December 31, 1997 compared to the preceding year. The increase was
attributable principally to the inclusion of sales
by Lytton totaling $7,170,000 since August 1, 1997. There was an increase in
domestic sales of $12,184,000 (87%) that was offset by a decrease in European
sales of $3,281,000 (33%) compared to the same period of the preceding year. The
decrease in European-based sales was largely attributable to a decrease of
approximately $5,580,000 in sales to Compaq which was partially offset by sales
to new and existing customers.
Approximately 63% of Techdyne's consolidated sales and 54% of the
Company's consolidated sales for 1997 were made to six customers. Customers
generating in excess of 10% of Techdyne's consolidated sales with their
respective portions of Techdyne's and the Company's consolidated sales include
IBM which accounted for 19% and 17% and EMC and its related suppliers for 10%
and 8%, respectively. Approximately $2,727,000 (38%) of Lytton's sales since its
acquisition by Techdyne on July 31, 1997 were to its major customer. Significant
reductions in sales to any of Techdyne's major customers would have a material
effect on the Company's results of operation if such sales are not replaced.
Revenues of Techdyne's Scottish-based subsidiary Techdyne (Scotland)
continue to be highly dependent on sales to Compaq, which accounted for
approximately 42% and 84% of the sales of Techdyne (Scotland) for 1997 and 1996,
respectively. The bidding for Compaq orders has become more competitive which
has resulted in substantially reduced Compaq sales and lower profit margins on
remaining Compaq sales. Techdyne (Scotland) is pursuing new business development
and has offset some of the lost Compaq business with sales to other customers
and is also continuing cost reduction efforts to remain competitive on Compaq
business. However, there can be no assurance as to the success of such efforts.
Medical product sales revenues decreased by approximately $304,000
(18%) for 1997 compared to the previous year. The decrease reflected lost
revenues from All American Medical & Supply Corp. ("All American"), the
Company's home healthcare durable subsidiary which discontinued operations in
March, 1997.
Medical services revenues, represented by the revenues of the Company's
dialysis division, DCA, increased approximately $544,000 (14%) for the year
ended December 31, 1997 compared to the preceding year. This growth was largely
attributable to increased revenues of approximately $533,000 at the Company's
Lemoyne, Pennsylvania facility, which commenced operations in June 1995 and
$329,000 from a new dialysis center located in Carlisle, Pennsylvania, which
commenced operations in July 1997. These increased revenues were offset by
approximately $312,000 of lost revenues from the sale of the Company's Florida
dialysis operations on October 31, 1997. Although the operations of the new
Carlisle center have resulted in additional revenues during 1997, it is in the
developmental stage and, accordingly, its operating results will likely
adversely affect the Company's results of operations until they achieve a
sufficient patient count to cover fixed operating costs.
Cost of goods sold as a percentage of consolidated sales remained
relatively stable, increasing to 83% for the year ended December 31, 1997
compared to 82% for the preceding year. The net increase in cost of goods sold
is primarily attributable to the reasons noted above for fluctuations in sales.
27
Cost of goods sold for Techdyne as a percentage of sales remained
relatively stable, increasing to 87% for the year ended December 31, 1997
compared to 86% for the preceding year. The net increase in cost of goods sold
is primarily attributable to the reasons noted above for fluctuations in sales.
Cost of goods sold by the medical products division decreased to 63%
for 1997 compared to 68% for the preceding year, which reflects relatively low
margins in 1996 for the Company's medical durable subsidiary, All American in
the preceding year. The Company decided to shutdown the medical durable subsidi-
ary during the first quarter of 1997 due to its unprofitable operations.
Selling, general and administrative expenses increased $404,000 for
1997 compared to the preceding year. This increase reflected the selling,
general and administrative expenses of Lytton commencing August 1, 1997
($730,000) after Lytton was acquired by Techdyne on July 31, 1997, as well as
substantially increased operations of Techdyne's Round Rock, Texas and
Massachusetts facilities. The increase also reflected DCA's opening of a new
Pennsylvania dialysis center in Carlisle and its expansion of the facility in
Lemoyne, Pennsylvania, which was offset by the decline in costs resulting from
DCA's sale of its Florida dialysis operations on October 31, 1997 and the
shutdown of All American ($652,000 including shutdown costs of approximately
$305,000). Included in 1997 was stock compensation expense that occurred during
the fourth quarter of 1997 in the amount of $322,000 in conjunction with
forgiveness of notes from option exercises of DCA common stock compared to a
similar expense of $344,000 in the preceding year.
Interest expense increased by approximately $175,000 for 1997 compared
to the preceding year. This increase included interest of $100,000 associated
with Techdyne's financing of the Lytton acquisition and interest from Lytton's
financing and debt agreements of $71,000.
The Company recorded an adjustment to the valuation allowance relating
to its deferred tax assets of approximately $700,000 in the fourth quarter of
1997 which offset taxes of approximately $1,700,000 of DCA which resulted from
the sale of its Florida dialysis operations.
A substantial portion of the Company's outstanding borrowings are tied
to the prime interest rate. The prime rate was 8.50% at December 31, 1997 and
8.25% at December 31, 1996.
During 1998, the Company adopted the provisions of Financial Accounting
Standards Board Statements No. 130, "Reporting Comprehensive Income" and No.
131, "Disclosure About Segments of an Enterprise and Related Information." The
adoption of FAS 130 and FAS 131 did not have a material effect on the Company's
consolidated financial statements and did not significantly change its segment
reporting disclosures. See Note 1 to "Notes to Consolidated Financial State-
ments."
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $15,421,000 at December 31, 1998, which
reflected a decrease of $3,436,000 (18%) during 1998. Included in the changes in
components of working capital was a decrease of $3,805,000 in cash and cash
equivalents, which included net cash used in operating activities of $28,000
(including a decrease in income taxes payable of $1,356,000 largely from tax
payments on the gain on the Florida dialysis operations sale), net cash used in
investing activities of $3,397,000 (including funds used for redemption of
minority interest of dialysis subsidiaries of $385,000, additions to property,
plant and equipment of $1,776,000, additional consideration of $154,000
regarding the Lytton acquisition, $253,000 proceeds from the sale of securities,
and an advance of $1,278,000 toward the Lytton stock price guarantee) and net
cash used in financing activities of $380,000 (including stock
28
purchases of $205,000, borrowings on Techdyne's line of credit of $600,000 to
fund the advance on the subsidiary acquisition price guarantee, borrowings under
Lytton's line of credit of $414,000, and payments on long-term debt of
$1,082,000).
Techdyne has a five-year $1,500,000 ("notional amount under interest
rate swap agreement") commercial term loan with monthly principal payments of
$25,000 plus interest at 8.60%, which had an outstanding balance of $1,200,000
at December 31, 1998 and $1,500,000 at December 31, 1997; and a $1,600,000
commercial revolving line of credit with interest at prime which was fully drawn
down as of December 31, 1998 with an outstanding balance of $1,000,000 as of De-
cember 31, 1997. The commercial term loan matures December 15, 2002 and the
commercial line of credit, no longer a demand line, matures May 1, 2000. See
Note 3 to "Notes to Consolidated Financial Statements."
Techdyne had obtained in 1996 two other term loans from its Florida
bank. One is a $712,500 term loan, which had a remaining principal balance of
$636,000 at December 31, 1998 and $663,000 at December 31, 1997, and is secured
by two buildings and land owned by the Company. The second term loan for
$200,000, which had a remaining principal balance of $87,000 at December 31,
1998 and $127,000 at December 31, 1997, is secured by the Techdyne's tangible
personal property, goods and equipment. The Company has guaranteed these loans
and subordinated the intercompany indebtedness due it from Techdyne, provided
that Techdyne may make payments to the Company on this subordinated debt from
additional equity that is injected into the Techdyne and from earnings.
See Note 3 to "Notes to Consolidated Financial Statements."
Techdyne has outstanding borrowings of $145,000 from a local bank
with interest payable monthly with the note, which was renewed during 1997,
maturing April 2000. Techdyne (Scotland) had a line of credit with a Scottish
bank, with a U.S. dollar equivalency of approximately $330,000 at December 31,
1997 that was secured by assets of Techdyne (Scotland) and guaranteed by the
Techdyne. This line of credit, which was not renewed, operated as an overdraft
facility. No amounts were drawn on this line of credit during 1998 and no
amounts were outstanding at December 31, 1997. In July, 1994 Techdyne (Scotland)
purchased the facility housing its operations for approximately $730,000,
obtaining a 15-year mortgage which had a U.S. dollar equivalency of
approximately $545,000 at December 31, 1998 and $569,000 at December 31, 1997,
based on exchange rates in effect at each of these dates. See Note 3 to "Notes
to Consolidated Financial Statements."
On July 31, 1997, the Techdyne acquired Lytton, which is engaged in the
manufacture and assembly of PCBs and other electronic products for commercial
customers. This acquisition required $2,500,000 cash, funded by the modified
bank line of credit, as well as 300,000 shares of the Techdyne's common stock
which had a fair value of approximately $1,031,000 based on the closing price of
the Techdyne's common stock on the date of acquisition. Techdyne guaranteed
$2,400,000 minimum proceeds from the sale of these securities based on Lytton
having achieved certain earnings objectives. The Stock Purchase Agreement also
provides for incentive consideration to be paid in cash based on specific sales
levels of Lytton for each of three successive specified years, resulting in
additional consideration of approximately $154,000 for the first year of sales
levels paid in April 1998. The Lytton acquisition has expanded the Company's
customer base, broadened its product line, enhanced its manufacturing
capabilities and provided a new geographic area to better serve Techdyne's
existing customer base with opportunities to attract new customers. See Note 11
to "Notes to Consolidated Financial Statements."
The Guaranty in the Stock Purchase Agreement was modified by Techdyne
and the seller. Techdyne advanced approximately $1,278,000 to the seller. In
addition to the seller having sold 5,000
29
shares of Techdyne's common stock in July 1998, the seller is to sell sufficient
shares to yield aggregate proceeds of no more than $1,3000,000 toward the Modi-
fied Guaranty. Upon the sale of seller's remaining shares up to 195,000 shares,
she will repay the advance. Techdyne funded the advance to the seller largely
through a drawdown of the previously unused $600,000 of its line of credit and
advances from the Company. To the extent that seller does not have 150,000
shares remaining, Techdyne would make up the difference. If the sale of shares
is insufficient to repay the advance, the balance would be forgiven. Pursuant
to the Extended Guaranty, sale of the remaining Techdyne shares is guaranteed to
yield no less than $1,100,000 if sold on or prior to July 1, 1999 or else
Techdyne will make up the difference in either cash or additional common stock
or a combination of both. See Note 11 to "Notes to Consolidated Financial
Statements."
Lytton has a $1,500,000 revolving bank line of credit requiring monthly
interest payments at prime plus 1/2% which matured August 1, 1998 and was
renewed on the same terms and conditions. There was an outstanding balance on
this loan of $962,000 as of December 31, 1998 with $549,000 outstanding December
31, 1997. Lytton has a $1,000,000 installment loan with the same bank maturing
August 1, 2002, at an annual rate of 9% until July 1999, with monthly payments
of $16,667 plus interest, at which time Lytton will have an option to convert
the note to a variable rate. The balance outstanding on this loan was
approximately $733,000 at December 31, 1998 and $933,000 as of December 31,
1997. Lytton also has a $500,000 equipment loan agreement with the same bank
payable through August 1, 2003 with interest at prime rate plus 1%. There was no
outstanding balance on this loan as of December 31, 1998 or December 31, 1997.
All these bank loans are secured by the business assets of Lytton. See Note 3
to "Notes to Consolidated Financial Statements."
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extend through July 1999 with
interest rates ranging from 8.55% to 10.09%. The remaining principal balance
under these financing obligations amounted to $112,000 at December 31, 1998 and
$390,000 at December 31, 1997. Lytton has an equipment loan at an annual
interest rate of 5.5% maturing in April 2002 with monthly payments of principal
and interest of $4,298. This loan has a balance of approximately $157,000 at
December 31, 1998 and $198,000 at December 31, 1997 and is secured by equipment.
See Note 3 to "Notes to Consolidated Financial Statements."
Techdyne is seeking to further expand its operations possibly through
acquisitions of companies in similar businesses, as with the Lytton acquisition.
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.
A significant customer of Techdyne (which sales to this customer
represented 9% of Techdyne's and 8% of the Company's 1998 sales) has been slow
in paying amounts owed to Techdyne. At December 31, 1998, Techdyne had a
receivable of approximately $879,000 from this customer, and held inventory of
approximately $1,160,000 to fulfill a sales contract relating to this customer,
which represents 15% and 13%, and 14% and 13% of Techdyne's and the Company's
accounts receivable and inventory balances, respectively, at that date. Techdyne
anticipates an ongoing business relationship with this customer and believes the
receivables and inventories relating to the customer are recoverable. However,
future events may occur which could have a material adverse effect on Techdyne's
and the Company's results of operations and financial positions.
DCA has mortgages on its two buildings, one in Lemoyne, Pennsylvania
and the other in Easton, Maryland, with a combined balance of $360,000 at
December 31, 1998. In 1998, DCA was in default of certain covenants relating to
these mortgages. The covenants principally related to debt service ratio re-
quirements for which the lender has waived compliance through December 31, 1998.
30
The debt service ratio requirement is tested on an annual basis and
thus, is effectively waived through December 31, 1999 as compliance with the
covenant will not be determined until final results for 1999 are available in
early 2000.
The bank has liens on the real and personal property of DCA, including
a lien on all rents due and security deposits from the rental of these
properties. Through November 30, 1997, the loans contained a provision allowing
the bank mandatory repayment upon 90 days written notice after five years, which
resulted in the unpaid principal, balances being reflected as a current
liability. The loans were modified effective December 1, 1997 and the call
provision was removed thereby eliminating the necessity of carrying the entire
debt balance as current. An unaffiliated Maryland dialysis center continues to
lease space from DCA in its building. The Pennsylvania center relocated during
1995 and DCA constructed its own dialysis facility at the property that com-
menced treatments in June 1995. See Note 3 to "Notes to Consolidated Financial
Statements."
DCA has an equipment financing agreement for kidney dialysis machines
for its facilities. There was additional financing of $245,000 during 1998
pursuant to this agreement. DCA had an outstanding balances under this agreement
of $449,000 at December 31, 1998 and $285,000 at December 31, 1997.
During 1998, DCA repurchased 105,000 shares of its outstanding common
stock for approximately $109,000. See Note 13 to "Notes to Consolidated
Financial Statements."
In February 1998 DCA redeemed the 20% minority interest in two of its
subsidiaries whose assets were included in the Florida dialysis operations sale
for a total consideration of $625,000, including $385,000 cash and one-half of
the purchaser's securities valued at $240,000 with the total value of $480,000
for securities received having been guaranteed by the purchaser.
DCA opened its fourth center in Manahawkin, New Jersey and received
regulatory approval as a Medicare provider during the fourth quarter of 1998 and
opened its fifth center in Chambersburg, Pennsylvania during the first quarter
of 1999 and received appropriate regulatory approval and is constructing another
dialysis center in New Jersey. The professional corporation providing medical
director services to both the New Jersey centers has a 20% interest in those DCA
subsidiaries.
DCA, having operated on a larger scale in the past, is seeking to
expand its outpatient dialysis treatment facilities and inpatient dialysis care.
Such expansion, whether through acquisitions of existing centers or the
development of its own dialysis centers requires capital, which was the basis
for the Company's security offering in 1996 and sale of its Florida dialysis
operations in 1997. No assurance can be given that the Company will be
successful in implementing its growth strategy or that the funds from its
securities offering and Florida dialysis operations sale will be adequate to
finance such expansion. See Item 1, "Business - Business Strategy" and Notes 8
and 12 to "Notes to Consolidated Financial Statements."
In November 1997, the Company announced its intent to repurchase up to
$1,000,000 of its outstanding common stock. The Company has repurchased
approximately 141,000 shares of its common stock for approximately $221,000,
having repurchased approximately 133,000 shares at a cost of $205,000 during
1998.
The bulk of the Company's cash balances are carried in
interest-yielding vehicles at various rates and mature at different intervals
depending on the anticipated cash requirements of the Company.
31
The Company anticipates that current levels of working capital and
working capital from operations will be adequate to successfully meet liquidity
demands for at least the next twelve months, including the debt and financing
obligations incurred in the acquisition of Lytton.
YEAR 2000 READINESS
The Year 2000 computer information processing challenge associated with
the upcoming millennium change concerns the ability of computerized information
systems to properly recognize date sensitive information, with which many
companies, public and private, are faced to ensure continued proper operations
and reporting of financial condition. Failure to correct and comply with the
Year 2000 change may cause systems that cannot recognize the new date and
millenium information to generate erroneous data or to fail to operate. Manage-
ment is fully aware of the Year 2000 issues, has made its assessments and has
evaluated its computerized systems and equipment, and communicated with its
major vendors, and has substantially made the operations of the Company Year
2000 compliant.
In 1997, the Company commenced upgrading its operations software
program in conjunction with Techdyne by acquiring a new Visual Manufacturing
software package. The Visual Manufacturing software system is primarily for
Techdyne, although several computers and certain software were acquired by and
applied to the Company. The system is in the process of being installed into
Lytton's and Techdyne (Scotland)'s operations which should be completed sometime
prior to June 30, 1999. This new system has greatly enhanced Techdyne's
enterprise resources planning, essential to bids for new business, production
scheduling, inventory and information technology, and overall operations.
Management believes this new system is providing it with leverage in material
pricing, production and timely-delivery, thereby enabling the Company to be more
competitive in bidding for manufacturing business. This Visual Manufacturing
system also enables the Company to better track actual costs against its quotes,
thereby allowing the Company to more effectively control costs and manage
operating margins. The cost of this new software program for the Company is
approximately $58,000 and for Techdyne was approximately $367,000, for an
aggregate cost of approximately $425,000. The cost for the software program for
Techdyne's Ohio and Scottish operations is estimated to be approximately
$220,000. The Visual Manufacturing system has been pre-tested and guaranteed by
the manufacturer to be Year 2000 compliant. The Company has an ongoing con-
sulting, training and servicing arrangement with the system's manufacturer for
approximately $25,000 per annum. The Visual Manufacturing system also provides
the bookkeeping, accounting and financial recording and information functions
for the Company and its subsidiaries.
With respect to non-information technology systems which typically
include embedded technology such as microcontrollers, the major equipment used
in the Company's manufacturing operations as well as in its dialysis operations
are not date sensitive, and should not pose any threat of a system breakdown
due to the Year 2000 issue. Techdyne's quality control "Cirrus testers" have
recently been tested and are Year 2000 compliant. Techdyne's personal computer
hardware and software systems have been checked and most have been determined to
be Year 2000 compliant. Any upgrading and replacements would cost approximately
$1,500 per unit.
The Company has communicated with its key vendors, customers and other
third parties with whom its operations are essential to inquire of their
assessment of their Year 2000 issues and actions being taken to resolve those
issues. Approximately 90% have responsed of which half have given written
assurance that they are Year 2000 compliant, with the balance assuring the
Company they will be Year 2000 compliant before the millenium change. To the
extent such third parties are potentially adversely affected by the Year 2000
issues, and such is not timely and properly resolved by such persons, this could
32
disrupt Techdyne's operations to the extent that it will have to find alterna-
tive vendors or customers that have resolved their Year 2000 issues. No
assurance can be given that the Company's new Visual Manufacturing software
program will be successful in its anticipated operational benefits as assessed
above or that key vendors and customers will have successful conversion
programs, and that any such failures, whether relating to the manufacturing
operational efficiencies or the Year 2000 issue, will not have a material
adverse effect on Techdyne's and the Company's business, results of operations
or financial condition.
The singular area impacting DCA with respect to the Year 2000 change
is in its electronic billing of Medicare, Medicaid and third-party insurance
companies. DCA receives approximately 74% of its revenues from Medicare for
the treatment of dialysis patients and related services. HCFA, through whom the
Medicare program and payments are effected, has indicated it is doing everything
to become Year 2000 compliant and is assuring the Medicare program will operate
smoothly. In 1998, DCA installed a new electronic billing software program that
was developed according to Medicare's compliance guidelines, which guidelines
require not only system but also Year 2000 compatibility. The software
designer has tested the software for Year 2000 compliance and DCA initiated
its first billing and reimbursement with the new software without any
problems. DCA has also successfully electronically billed Medicaid using
the new software. Therefore, with respect to any financial impact in view
of electronic billing and maintenance of receivables, management does not
presently anticipate any future problems. No other significant computer issues
are presently known by the Company that would affect DCA's ability to elec-
tronically bill or otherwise maintain its records and conduct its daily
operations. The costs of the software modifications have been minimal,
approximately $1,000, and the Company does not anticipate that any costs
involved in any future Year 2000 compliance will be material or that they will
have a material adverse effect on its business.
DCA's bookkeeping, financial records and statements, and accounting are
accomplished through certain common officers and personnel and facilities with
the Company. See "Certain Relationships and Related Transactions" of the
Company's Proxy Statement relating to the Annual Meeting of Shareholders to be
held on June 9, 1999, incorporated herein by reference. The Visual Manufacturing
system presently handles these programs. Management is evaluating new, Year 2000
compliant accounting packages, which would provide DCA with its own independent
system of bookkeeping, accounting and financial records and reduce its
dependence on the Company's personnel and facilities. Management anticipates
such Year 2000 compliant accounting and bookkeeping system to be ready at or
about June 30, 1999. The cost of such new accounting system is estimated in a
range of approximately $10,000 to $20,000.
Another area that could significantly impact the Company's operations
in providing dialysis treatment to patients relates to third-party providers,
specifically, the utility companies providing water, an extremely necessary
resource for dialysis treatments, and electricity. These providers and services
are beyond the control of the Company. Should any of these utilities fail to
provide services, such would seriously adversely impact the Company, its
patients, as well as the Company's competitors in such affected areas.
There can be no assurance, however, that the Year 2000 issues, whether
internal and believed to have been addressed, or from third parties, although
the Company has checked and been assured that its third-party payors and
suppliers are Year 2000 compliant or will be prior to the end of 1999, will not
have a material adverse effect on the Company's business, results of operations
or financial condition.
33
OTHER MATTERS
The Company is exposed to market risks from changes in interest rates
and foreign currency exchange rates. Sensitivity of results of operations to
interest rate risks on the Company's investments is managed by conservatively
investing liquid funds in short-term government securities and interest bearing
accounts at financial institutions in which the Company had approximately
$6,700,000 invested as of December 31, 1998.
Interest rate risk on debt is managed by negotiation of appropriate
rates on new financing obligations based on current market rates and by use of
interest rate swap and other agreements which cap interest rates on some of its
debt obligations. Agreements which cap interest rates totaled approximately
$1,933,000 as of December 31, 1998 and contain provisions which can either
result in a gain or a loss to the Company for early settlement of the related
debt depending on whether rates have increased or decreased since the agreements
were negotiated. At December 31, 1998, early settlement of these debt obliga-
tions would have a negative impact on the Company's results of operations of
approximately $17,000.
The Company has exposure to both rising and falling interest rates.
It has an interest rate exposure on debt agreements with variable
interest rates of which the Company had approximately $3,800,000 of such debt
outstanding as of December 31, 1998. A 1% increase in interest rates on its
year-end variable rate debt would result in a negative impact of approximately
$23,000 on the Company's results of operations.
A 1/2% decrease in rates on the Company's year-end investments would
result in a negative impact of approximately $14,000 on its results of opera-
tions.
The Company's exposure to market risk from foreign currency exchange
rates relates to Techdyne's Scottish subsidiary whose results of operations when
translated into U.S. Dollars are impacted by changes in foreign exchange rates.
A 10% strengthening of the U.S. Dollar against the local Scottish currency, the
pound, would have negatively impacted 1998 earnings by approximately $27,000.
The Company has not incurred any significant realized losses on foreign exchange
transactions and does not utilize foreign exchange contracts to hedge foreign
currency fluctuations. If realized losses on foreign transactions were to be-
come significant, the Company would evaluate appropriate strategies, including
the possible use of foreign exchange contracts to reduce such losses.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Finan-
cial Accounting Standards Board Statement No. 133, "Accounting For Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 is effective for fiscal
quarters of fiscal years beginning after June 15, 1999. FAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires, among other things, that all derivatives be recognized
as either assets or liabilities in the statement of financial position and that
those instruments be measured at fair value. The Company is in the process of
determining the impact that the adoption of FAS 133 will have on its consoli-
dated financial statements.
34
INFLATION
Inflationary factors have not had a significant effect on the Company's
operations. The Company attempts to pass on increased costs and expenses
incurred in the electronic and electro-mechanical products divisions by
increasing selling prices when and where possible and by developing different
and improved products for its customers that can be sold at targeted profit
margins. In the Company's medical services segment, revenue per dialysis
treatment is subject to reimbursement rates established and regulated by the
federal government. These rates do not automatically adjust for inflation. Any
rate adjustments relate to legislation and executive and Congressional budget
demands, and have little to do with the actual cost of doing business.
Therefore, dialysis services revenues cannot be voluntarily increased to keep
pace with increases in supply costs or nursing and other patient care costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion is presented under the heading "Other Matters" with
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section to this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on directors of the Company is included under
The executive officers of the Company are appointed each year by the
board of directors at its first meeting following the Annual Meeting of
Shareholders to serve during the ensuing year. The following information indi-
cates the position with the Company and age of the executive officers at March
15, 1999.
CURRENT POSITION AND POSITION
NAME AGE AREAS OF RESPONSIBILITY HELD SINCE
- ---- --- ----------------------- ----------
Thomas K. Langbein 53 Chairman of the Board of 1980
Directors, Chief Executive
Officer and President
Seymour Friend 78 Vice President and 1981
Director 1975
Daniel R. Ouzts 52 Vice President (Finance) 1986
and Controller 1983
For more detailed information about executive officers and directors of
the Company you are referred to the caption "Information About Directors and
Executive Officers" of the Company's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on June 9, 1999, which is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information on executive compensation is included under the caption
"Executive Compensation" of the Company's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on June 9, 1999, incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on beneficial ownership of the Company's voting securities
by each director and all officers and directors as a group, and for each of the
named executive officers disclosed in the Summary Compensation Table (see
"Executive Compensation" of the Company's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on June 9, 1999, incorporated herein by
reference), and by any person known to beneficially own more than 5% of any
class of voting security of the Company, is included under the caption
"Beneficial Ownership of the Company's Securities" of the Company's Proxy
Statement relating to the Annual Meeting of Shareholders to be held on June 9,
1999, incorporated herein by reference.
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions is
included under the caption "Certain Relationships and Related Transactions" of
the Company's Proxy Statement relating to the Annual Meeting of Shareholders to
be held on June 9, 1999, incorporated herein by reference.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following is a list of documents filed as part of this report.
1. All financial statements - See Index to Consolidated Financial
Statements.
2. Financial statement schedules - See Index to Consolidated
Financial Statements.
3. Refer to subparagraph (c) below.
(b) Current Reports on Form 8-K filed during fourth quarter.
1. The Company filed a Current Report on Form 8-K dated November
25, 1998, Item 5, "Other Events," announcing the execution of
a financial advisory agreement with Dominick & Dominick on
November 16, 1998 to provide financial consulting services to
the Company and its subsidiary, Techdyne, Inc.
(c) Exhibits*
(3)(i) Restated Certificate of Incorporation, Articles of
Incorporation, as amended (incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended De-
cember 31, 1997 ("1997 Form 10-K"), Part IV, Item 14(c)(3)
(i)).
(ii) By-laws, as amended (incorporated by reference to the Com-
pany's 1997 Form 10-K, Part IV, Item 14(c)(3)(ii)).
(4) Instruments defining the rights of security holders,
including indentures.
(i) 1989 Stock Option Plan (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 4(i)).
(ii) Form of Stock Option Agreement issued pursuant to the 1989
Stock Option Plan (incorporated by reference to the Com-
pany's 1997 Form 10-K, Part IV, Item 4(ii)).
(iii) Form of Additional Non-Qualified Stock Option Agreement
issuable under the Stock Option Agreement (incorporated by
reference to the Company's 1997 Form 10-K, Part IV, Item
4(iii)).
(10) Material contracts.
(i) Employment Agreement between the Company and Thomas K.
Langbein dated August, 1998.
38
(ii) Lease between the Company and Heights Plaza Associates,
dated April 30, 1981 (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 14(c)(10)(ii)).
(iii) Amendment to lease between the Company and Heights Plaza
Associates, dated March 31, 1996 (incorporated by reference
to the Company's 1997 Form 10-K, Part IV, Item
14(c)(10)(iii)).
(iv) Lease Agreement between the Company and Techdyne, Inc.(1)
dated July 17, 1990 (incorporated by reference to
Techdyne's Annual Report on Form 10-K for the year ended
December 31, 1991, Part IV, Item 14(a) 3 (10)(i)).
(v) Lease Renewal Letter from Techdyne, Inc.(1) dated December
19, 1994 (incorporated by reference to Techdyne's
Registration Statement on Form SB-2, Registration No.
33-94998-A ("Techdyne's Form SB-2"), Part II, Item 27,
10(b)).
(vi) Royalty Agreement between the Company and Viragen, Inc.(2)
dated November 7, 1986 (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 14(c)(10)(vi)).
(vii) Amended Royalty Agreement between the Company and Viragen,
Inc.(2) dated November 21, 1989 (incorporated by reference
to the Company's 1997 Form 10-K, Part IV, Item
14(c)(10)(vii)).
(viii) Employment Agreement between Techdyne (Scotland) Limited(3)
and John Clark Grieve dated March 11, 1988 (incorporated by
reference to Techdyne's Annual Report on Form 10-K for the
year ended December 31, 1997 ("Techdyne's 1997 Form 10-K"),
Part IV, Item 14(a)(10)(v)).
(ix) Guarantee of Techdyne (Scotland) Limited(3) Line of Credit
with The Royal Bank of Scotland Plc dated March 3, 1989
(incorporated by reference to the Techdyne's 1997 Form
10-K, Part IV, Item 14(a)(10)(vi)).
(x) Promissory Note of Techdyne, Inc. (1) to the Company dated
April 10, 1991 (incorporated by reference to Techdyne's
Form SB-2, Part II, Item 27, 3(4)).
(xi) Lease between the Company and Viragen, Inc.(2) dated
December 8, 1992 (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 14(c)(10)(xi)).
(xii) Addendum to Lease between the Company and Viragen, Inc.(2)
dated January 15, 1993 (incorporated by reference to the
Company's 1997 Form 10-K, Part IV, Item 14(c)(10)(xii)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
39
(xiii) Lease Renewal Letter by the Company to Viragen, Inc.(2)
lease dated August 12, 1997 (incorporated by reference to
the Company's 1997 Form 10-K, Part IV, Item
14(c)(10)(xiii)).
(xiv) Loan Agreement between Dialysis Corporation of America(4)
and Mercantile-Safe Deposit and Trust Company dated
November 30, 1988(5) (incorporated by reference to Dialysis
Corporation of America's Form 10-Q for the quarter ended
March 31, 1998 ("DCA's March, 1998 Form 10-Q"), Part II,
Item 6(a), Part II, Item 10(iii)).
(xv) First Amendment to Loan Agreement between Dialysis
Corporation of America(4) and Mercantile-Safe Deposit and
Trust Company dated December 1, 1997(5) (incorporated by
reference to Dialysis Corporation of America's Annual
Report on Form 10-K for the year ended December 31, 1997
("DCA's 1997 Form 10-K"), Part IV, Item 14(c)(xxviii)).
(xvi) Promissory Note to Mercantile-Safe Deposit and Trust
Company by Dialysis Corporation of America(4) dated
November 30, 1988(5) (incorporated by reference to DCA's
March, 1998 Form 10-Q, Part II, Item 6(a), Part II, Item
10(ii)).
(xvii) First Amendment and Modification to Promissory Note to
Mercantile-Safe Deposit and Trust Company by Dialysis
Corporation of America(4)(5) (incorporated by reference to
DCA's 1997 Form 10-K, Part IV, Item 14(c)(xxix)).
(xviii) Lease Agreement between Dialysis Services of Pennsylvania,
Inc. - Wellsboro(6) and James and Roger Stager dated
January 15, 1995 (incorporated by reference to the
Company's 1994 Form 10-K, Part IV, Item 14(a) 3
(10)(lxii)).
(xix) Lease between Dialysis Corporation of America(4) and
Dialysis Services of Pennsylvania, Inc. - Lemoyne(6) dated
December 23, 1998 (incorporated by reference to Dialysis
Corporation of America's Annual Report on Form 10-K for the
year ended December 31, 1998 ("DCA's 1998 Form 10-K"), Part
IV, Item 14(c)(ii)).
(xx) Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Wellsboro(6) and George Dy, M.D. dated
September 29, 1994 [*] (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994 as amended January, 1995
("September, 1994 Form 10-Q"), Part II, Item 6(a)(10)(i)).
(xxi) Agreement for In-Hospital Dialysis Services between
Dialysis Services of Pennsylvania, Inc. - Wellsboro(6) and
Soldiers & Sailors Memorial Hospital dated September 28,
1994 [*] (incorporated by reference to the Company's
September, 1994 Form 10-Q, Part II, Item 6(a)(10)(ii)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
40
(xxii) Medical Director Agreement between Dialysis Services of
Pennsylvania, Inc. - Lemoyne(6) and Herbert I. Soller, M.D.
dated January 30, 1995 [*] (incorporated by reference to
the Company's 1994 Form 10-K, Part IV, Item 14(a) 3
(10)(lx)).
(xxiii) Agreement for In-Hospital Dialysis Services between
Dialysis Services of Pennsylvania, Inc. - Lemoyne(6) and
Pinnacle Health Hospitals dated June 1, 1997 [*]
(incorporated by reference to Dialysis Corporation of
America's Current Report on Form 8-K dated June 19, 1997,
Part II, Item 7(c)(10)(i)).
(xxiv) Form of Exclusive Sales Representative Agreement between
Techdyne, Inc.(1) and sales representative ** (incorporated
by reference to the Company's 1994 Form 10-K, Part IV, Item
14(a) 3 (10)(lxiv)).
(xxv) 1994 Stock Option Plan of Techdyne, Inc.(1) (incorporated
by reference to the Company's 1994 Form 10-K, Part IV, Item
14(a) 3 (10)(lxv)).
(xxvi) Form of Stock Option Certificate issued under 1994 Stock
Option Plan of Techdyne, Inc.(1) (incorporated by reference
to the Company's 1994 Form 10-K, Part IV, Item 14(a) 3
(10)(lxvi)).
(xxvii) Form of Stock Option Agreement dated February 17, 1995
issued to directors of Techdyne, Inc.(1) *** (incorporated
by reference to the Company's 1994 Form 10-K, Part IV, Item
14(a) 3 (10)(lxvii)).
(xxviii) Lease Agreement between the Company and Brett D. Anderson
and Suzanne M. Anderson dated November 17, 1992
(incorporated by reference to the Company's 1997 Form 10-K,
Part IV, Item 14(c)(10)(xxix)).
(xxix) Lease Renewal Letter from the Company to Brett and Suzanne
Anderson dated October 20, 1997 (incorporated by reference
to the Company's 1997 Form 10-K, Part IV, Item
14(c)(10(xxx)).
(xxx) Mortgage between Techdyne (Scotland) Limited(3) and The
Royal Bank of Scotland dated August 8, 1994 (incorporated
by reference to the Company's June, 1994 Form 10-Q, Part
II, Item 6(a)(28)(vi)).
(xxxi) Agreement ("Missives") between Techdyne (Scotland)
Limited(3) and Livingston Development Corporation regarding
Purchase by Techdyne (Scotland) Limited(3) of its Facility
dated June 15, 1994 (incorporated by reference to the
Company's June, 1994 Form 10-Q, Part II, Item
6(a)(28)(vii)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
41
(xxxii) Loan and Security Agreement between Techdyne, Inc.(1) and
Barnett Bank of South Florida, N.A. ("Barnett Bank") for
$2,000,000 dated February 8, 1996 (incorporated by
reference to Techdyne, Inc.'s Current Report on Form 8-K
dated February 23, 1996 ("Techdyne's February, 1996 Form
8-K), Item 7(c)(99)(i)).
(xxxiii) Loan Agreement for $712,500 between Techdyne, Inc.(1) and
Barnett Bank dated February 8, 1996 (incorporated by
reference to Techdyne's February, 1996 Form 8-K, Item
7(c)(99)(v)).
(xxxiv) Promissory Note for $712,500 from Techdyne, Inc.(1) to
Barnett Bank, dated February 8, 1996 (incorporated by
reference to Techdyne's February, 1996 Form 8-K, Item
7(c)(99)(vi)).
(xxxv) Mortgage and Security Agreement between the Company and
Barnett Bank dated February 8, 1996 (incorporated by
reference to Techdyne's February, 1996 Form 8-K, Item
7(c)(99)(vii)).
(xxxvi) Assignment of Leases, Rents and Profits by the Company in
favor of Barnett Bank dated February 8, 1996 (incorporated
by reference to Techdyne's February, 1996 Form 8-K, Item
7(c)(99)(viii)).
(xxxvii) Promissory Note for $200,000 from Techdyne, Inc.(1) to
Barnett Bank dated February 8, 1996 (incorporated by
reference to Techdyne's February, 1996 Form 8-K, Item
7(c)(99)(ix)).
(xxviii) Security Agreement between Techdyne, Inc.(1) and Barnett
Bank dated February 8, 1996 (incorporated by reference to
Techdyne's February, 1996 Form 8-K, Item 7(c)(99)(x)).
(xxxix) First Amendment to Loan and Security Agreement, Loan
Agreement and Security Agreement between Techdyne, Inc.(1)
and Barnett Bank, N.A. dated July 31, 1997 (incorporated by
reference to Techdyne's Current Report on Form 8-K dated
August 12, 1997 ("Techdyne August, 1997 Form 8-K"), Item
7(c)(99)(i)).
(xl) Revolving Demand Promissory Note from Techdyne, Inc.(1) to
Barnett Bank, N.A. dated July 31, 1997 (incorporated by
reference to Techdyne's August, 1997 Form 8-K, Item
7(c)(99)(ii)).
(xli) Unconditional and Continuing Guaranty of Payments and
Performance by the Company in favor of Barnett Bank, N.A.
dated July 31, 1997 (incorporated by reference to
Techdyne's August, 1997 Form 8-K, Item 7(c)(99)(iii)).
(xlii) Subordination Agreement among the Company, Barnett Bank,
N.A. and the Company dated July 31, 1997 (incorporated by
reference to Techdyne's August, 1997 Form 8-K, Item
7(c)(99)(iv)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
42
(xliii) Second Amendment to Loan and Security Agreement between
Techdyne, Inc.(1) and Barnett Bank, N.A. dated as of
December 29, 1997 (incorporated by reference to Techdyne's
Form 8-K dated January 20, 1998 ("Techdyne's January, 1998
Form 8-K"), Item 7(c)(99)(i)).
(xliv) Revolving Promissory Note from Techdyne, Inc.(1) to Barnett
Bank, N.A. for $1,600,000 dated as of December 29, 1997
(incorporated by reference to Techdyne's January, 1998 Form
8-K, Item 7(c)(99)(ii)).
(xlv) Unconditional and Continuing Guaranty of Payment and
Performance(7) by the Company in favor of Barnett Bank,
N.A. dated as of December 29, 1997 (incorporated by
reference to Techdyne's January, 1998 Form 8-K, Item
7(c)(99)(iii)).
(xlvi) Subordination Agreements(8) among the Company, Barnett
Bank, N.A. and Techdyne, Inc.(1) (incorporated by reference
to Techdyne's January, 1998 Form 8-K, Item 7(c)(99)(iv)).
(xlvii) Loan Agreement for $1,500,000 between Techdyne, Inc.(1) and
Barnett Bank, N.A. dated as of December 29, 1997
(incorporated by reference to Techdyne's January, 1998 Form
8-K, Item 7(c)(99)(v)).
(xlviii) Promissory Note from Techdyne, Inc.(1) to Barnett Bank,
N.A. for $1,500,000 dated as of December 29, 1997
(incorporated by reference to Techdyne's January, 1998 Form
8-K, Item 7(c)(99)(vi)).
(xlix) Commercial Security Agreement between Techdyne, Inc.(1) and
Barnett Bank, N.A. dated as of December 29, 1997
(incorporated by reference to Techdyne's January, 1998 Form
8-K, Item 7(c)(99)(vii)).
(l) International Swap Dealers Association, Inc. Master
Agreement between Techdyne, Inc.(1) and Barnett Bank, N.A.
dated as of December 22, 1997 (incorporated by reference to
Techdyne's January, 1998 Form 8-K, Item 7(c)(99)(viii)).
(li) Employment Agreement between Techdyne, Inc.(1) and Barry
Pardon dated March 13, 1996 (incorporated by reference to
Techdyne, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1995, Part IV, Item 14(a)(10)(viii)).
(lii) Service Agreement between the Company and Techdyne Inc.(1),
dated October 25, 1996 (incorporated by reference to
Techdyne's Registration Statement on Form S-3, Registration
No. 333-15371, Part II, Item 16, Exhibit 10(a)).
(liii) Service Agreement renewal letter from the Company to
Techdyne, Inc.(1), dated September 30, 1998.
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
43
(liv) Lease Agreement between Techdyne, Inc.(1) and Route 495
Commerce Park Limited Partnership dated March 25, 1997
(incorporated by reference to Techdyne's Quarterly Report
on Form 10-Q for the quarter ended March 30, 1997, Item
6(a), Part II, Item 10(i)).
(lv) Lease Agreement between Techdyne, Inc.(1) and PruCrow
Industrial Properties, L.P. dated April 30, 1997
(incorporated by reference to Techdyne's Current Report on
Form 8-K dated June 4, 1997 ("Techdyne's June 4, 1997 Form
8-K"), Item 7(c)(10)(i)).
(lvi) Lease Agreement between Techdyne, Inc.(1) and EGP Houston
Partners Ltd. dated April 29, 1997 (incorporated by
reference to Techdyne's June 4, 1997 Form 8-K, Item
7(c)(10)(ii)).
(lvii) Stock Purchase Agreement between Patricia A. Crossley,
Lytton Incorporated(3) and Techdyne, Inc.(1) dated July 31,
1997 (incorporated by reference to Techdyne's August, 1997
Form 8-K, Item 7(c)(2)(i)).
(lviii) Amendment to Stock Purchase Agreement between Techdyne,
Inc.(1) and Patricia Crossley dated June 29, 1998
(incorporated by reference to Techdyne's Current Report on
Form 8-K dated July 6, 1998, Item 7(c)(99)(i)).
(lvix) 1995 Stock Option Plan of Dialysis Corporation of
America(4) (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995 ("1995 Form 10-K"), Part IV, Item 14(a) 3
(10)(lxiii).
(lx) Form of Stock Option Certificate dated November 10, 1995
issued under 1995 Stock Option Plan of Dialysis Corporation
of America(4) (incorporated by reference to the Company's
1995 Form 10-K, Part IV, Item 14(a) 3 (10)(lxiv).
(lxi) 1995 Stock Option Plan of Dialysis Corporation of
America(4) (November 10, 1995) (incorporated by reference
to DCA Form SB-2, Part II, Item 27, 10(5)).
(lxii) Form of Dialysis Corporation of America(4) Stock Option
Certificate under 1995 Stock Option Plan (November 10,
1995) (incorporated by reference to DCA Form SB-2, Part II,
Item 27, 10(4)).
(lxiii) Form of Dialysis Corporation of America(4) Non-Qualified
Stock Option granted to Medical Directors of Dialysis
Corporation of America(4) (incorporated by reference to
Dialysis Corporation of America's Annual Report on Form
10-K for the year ended December 31, 1996 (" DCA's 1996
Form 10-K"), Part IV, Item 14(a) 3 (10)(xxi)).
(lxiv) Lease between Dialysis Services of PA., Inc. - Carlisle(6)
and Lester P. Burkholder, Jr. and Kirby K. Burkholder dated
November 1, 1996 (incorporated by reference to DCA's 1996
Form 10-K, Part IV, Item 14(a) 3 (10)(xxiii)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
44
(lxv) Lease between Dialysis Services of NJ., Inc. -
Manahawkin(9) and William P. Thomas dated January 30, 1997
(incorporated by reference to DCA's 1996 Form 10-K, Part
IV, Item 14(a) 3 (10)(xxiv)).
(lxvi) Addendum to Lease Agreement between William P. Thomas and
Dialysis Services of NJ., Inc. - Manahawkin(9) dated June
4, 1997 (incorporated by reference to DCA's 1997 Form 10-K,
Part IV, Item 14(c)(10)(xviii)).
(lxvii) Medical Director Agreement between Dialysis Services of NJ,
Inc. - Manahawkin(9) and Atlantic Nephrology Group, Inc.
dated January 21, 1998(10)(11) [*] (incorporated by
reference to DCA's 1998 Form 10-K, Part IV, Item
14(c)(xxv)).
(lxviii) Medical Director Agreement between Dialysis Services of
PA., Inc. - Carlisle(6) and Herb Soller, M.D. dated October
1, 1996(12) [*] (incorporated by reference to Dialysis
Corporation of America's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, Part II, Item 6(a),
Part II, Exhibit 10(ii)).
(lxvix) Equipment Master Lease Agreement BC-105 between Dialysis
Corporation of America(4) and B. Braun Medical, Inc. dated
November 22, 1996 (incorporated by reference to DCA's 1996
Form 10-K, Part IV, Item 14(a) 3 (10)(xxvii)).
(lxx) Schedule of Leased Equipment 0597 commencing June 1, 1997
to Master Lease BC-105 (incorporated by reference to
Dialysis Corporation of America's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 ("DCA's June, 1997
10-Q"), Part II, Item 6(a), Part II, Exhibit 10(i)).(13)
(lxxi) Asset Purchase Agreement by and among Dialysis Corporation
of America, Dialysis Services of Florida, Inc. - Fort
Walton Beach(6), DCA Medical Services, Inc.(6), Dialysis
Medical, Inc.(6), Renal Care Group, Inc., Renal Care Group
of the Southeast, Inc. and Henry M. Haire, M.D. dated
October 31, 1997 (incorporated by reference to Dialysis
Corporation of America's Current Report on Form 8-K dated
November 12, 1997, Part II, Item 7(c)(2.1)).
(lxxii) Form of Techdyne, Inc.(1) 1997 Stock Option Plan
(incorporated by reference to Techdyne's Current Report on
Form 8-K dated June 24, 1997 ("Techdyne's June 24, 1997
Form 8-K"), Item 7(c)(4)(i)).
(lxxiii) Form of Techdyne, Inc.(1) 1997 Incentive Stock Option
(incorporated by reference to Techdyne's June 24, 1997 Form
8-K, Item 7(c)(4)(ii)).
(lxxiv) Form of Techdyne, Inc.(1) 1997 Non-Qualified Stock Option
(incorporated by reference to Techdyne's June 24, 1997 Form
8-K, Item 7(c)(4)(iii)).
[*] Confidential portions omitted have been filed separately with the
Securities and Exchange Commission.
45
(lxxv) Form of Stock Option to The Investor Relations Group, Inc.
(incorporated by reference to Techdyne's Current Report on
Form 8-K dated May 28, 1998, Item 7(c)(10)(i)).
(lxxvi) Supplement to Techdyne, Inc.'s(1) Prospectus dated July 13,
1998 (incorporated by reference to Techdyne's Current
Report on Form 8-K dated July 13, 1998, Item 7(c)(99)(i)).
(lxxvii) Lease between Dialysis Services of PA., Inc. -
Chambersburg(6) and BPS Development Group dated April 13,
1998 (incorporated by reference to DCA's March, 1998 Form
10-Q, Part II, Item 6(a), Part II, Item 10(i)).
(lxxviii) Lease between Dialysis Services of NJ, Inc. - Toms River(9)
and Lotano Development, Inc. dated July 1, 1998
(incorporated by reference to DCA's 1998 Form 10-K, Part
IV, Item 14(c)(10)(xxv)).
(lxxix) Stock Purchase Agreement between Dialysis Corporation of
America(4) and Atlantic Nephrology Group, Inc.
(incorporated by reference to Dialysis Corporation of
America's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, Part II, Item 6(a), Part II, Item
10(i)).
(lxxx) Lease between Dialysis Corporation of America(4) and
Wirehead Networking Solutions, Inc. dated December 1, 1998
(incorporated by reference to DCA's 1998 Form 10-K, part
IV, Item 14(c)(10)(xxvi)).
(21) Subsidiaries of the registrant.
(23) Consent of experts and counsel.
(i) Consent of Independent Certified Public Accountants.
(27) Financial Data Schedule (for SEC use only).
- ---------
(1) 62% owned subsidiary.
(2) Former public subsidiary of the Company; spun-off in 1986. (3) 100%
owned subsidiary of Techdyne, Inc.
(4) 68% owned subsidiary.
(5) Dialysis Corporation of America has two loans with Mercantile Safe
Deposit and Trust Company and such loan documents and promissory notes
conform to the exhibit filed but for the amount of each loan.
(6) 100% owned subsidiary of Dialysis Corporation of America.
46
(7) Each of the $1,600,000 Revolving Loan and $1,500,000 Term Loan has been
unconditionally guaranteed by the Company and each unconditional
guarantee agreement is substantially similar to the exhibit filed for
the Revolving Loan.
(8) The Company has subordinated indebtedness due to it from Techdyne, Inc.
to the Revolving and Term Loans; each Subordination Agreement is
substantially similar to the exhibit filed for the Revolving Loan.
(9) 80% owned subsidiary of Dialysis Corporation of America.
(10) Previously filed with the same Medical Director under the name
Oceanview Medical Group, P.A.
(11) There are two Medical Director Agreements with Atlantic Nephrology
Group, Inc. and such Medical Director Agreements conform to the exhibit
filed but for the compensation and facility.
(12) There are two Medical Director Agreements with Herbert I. Soller, M.D.
and such agreements conform to the exhibit filed but for the facility,
the other being located in Chambersburg, Pennsylvania.
(13) Dialysis equipment is leased from time to time and a new Schedule is
added to the Master Lease; other than the nature of the equipment and
length of the lease, the Schedules conform to the exhibit filed and the
terms of the Master Lease remain the same.
* Documents incorporated by reference not included in Exhibit Volume.
** There are four such Agreements, all the same but for the territory
assigned.
*** Options to directors are the same except as to amounts of
underlying shares purchasable.
47
(d) Schedule II - Valuation and Qualifying Accounts
Medicore, Inc. and Subsidiaries
December 31, 1998
- ------------------------------------------ ---------- ----------------------- ------------ ----------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------ ---------- ----------------------- ------------ ----------
Additions
(Deductions) Additions Other
Charged Charged Changes
Balance at (Credited) to Other Add Balance
Beginning to Cost and Accounts (Deduct) at End of
Classification of Period Expenses Describe Describe Period
- ------------------------------------------ ---------- ----------------------- ------------ ----------
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 231,000 $ 106,000 $ (20,000)(1) $ 317,000
Reserve for inventory obsolescence 238,000 437,000 (116,000)(3) 559,000
Valuation allowance for deferred tax asset 850,465 (322,465) --- 528,000
---------- --------- --------- --------- ----------
$1,319,465 $ 220,535 $ 0 $ (136,000) $1,404,000
========== ========= ========= ========== ==========
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 385,000 $ 42,000 $(150,000)(1) $ 231,000
(46,000)(3)
Reserve for inventory obsolescence 169,000 153,000 (84,000)(3) 238,000
Valuation allowance for deferred tax asset 1,587,723 (737,258) --- 850,465
---------- --------- --------- --------- ----------
$2,141,723 $(542,258) $ 0 $(280,000) $1,319,465
========== ========= ========= ========= ==========
YEAR ENDED DECEMBER 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectable accounts $ 244,000 $ 275,408 $(134,408)(1) $ 385,000
Reserve for inventory obsolescence 319,000 91,913 (241,913)(2) 169,000
Valuation allowance for deferred tax asset 2,205,113 (617,390) --- 1,587,723
---------- --------- --------- --------- ----------
$2,768,113 $(250,069) $ 0 $(376,321) $2,141,723
========== ========= ========= ========= ==========
(1) Uncollectable accounts written off, net of recoveries.
(2) Net write-offs against inventory reserves.
(3) Sale of subsidiaries' assets.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
By /s/ THOMAS K. LANGBEIN
--------------------------------------------
THOMAS K. LANGBEIN, Chairman
of the Board of Directors, Chief
Executive Officer and President
March 22, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ THOMAS K. LANGBEIN Chairman of the Board of Directors,
- ------------------------------------ Chief Executive Officer and President March 22, 1999
Thomas K. Langbein
/s/ SEYMOUR FRIEND Vice President and Director March 22, 1999
- ------------------------------------
Seymour Friend
/s/ DANIEL R. OUZTS Vice-President, Principal Financial
- ------------------------------------ Officer and Controller March 22, 1999
Daniel R. Ouzts
/s/ PETER D. FISCHBEIN Director March 22, 1999
- ------------------------------------
Peter D. Fischbein
/s/ ANTHONY C. D'AMORE Director March 22, 1999
- ------------------------------------
Anthony C. D'Amore
/s/ ROBERT P. MAGRANN Director March 22, 1999
- ------------------------------------
Robert P. Magrann
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A) (1) AND (2), (C) AND (D)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1998
MEDICORE, INC.
HIALEAH, FLORIDA
FORM 10-K--ITEM 14(a)(1) AND (2)
MEDICORE, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Medicore, Inc. and
subsidiaries are included in Item 8:
Page
----
Consolidated Balance Sheets--December 31, 1998 and 1997 .................. F-3
Consolidated Statements of Income--Years ended December 31, 1998,
1997, and 1996 ........................................................ F-4
Consolidated Statements of Stockholders' Equity--
Years ended December 31, 1998, 1997 and 1996........................... F-5
Consolidated Statements of Cash Flows--Years ended
December 31, 1998, 1997, and 1996 ..................................... F-6
Notes to Consolidated Financial Statements--December 31, 1998 ............ F-7
The following financial statement schedule of Medicore, Inc. and
subsidiaries is included in Item 14(d):
Schedule II-Valuation and qualifying accounts.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Medicore, Inc.
We have audited the accompanying consolidated balance sheets of Medicore, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. Our audits also included the
Financial Statement Schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Medicore, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
March 22, 1999
Miami, Florida
F-2
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,294,707 $ 11,099,418
Marketable securities 210,007 726,538
Accounts receivable, less allowances of
$317,000 in 1998 and $231,000 in 1997 6,260,748 6,298,089
Inventories, less allowance for obsolescence
of $559,000 in 1998 and $238,000 in 1997 8,393,770 8,683,439
Prepaid expenses and other current assets 648,088 862,613
Deferred tax asset 561,822 1,294,535
------------ ------------
Total current assets 23,369,142 28,964,632
PROPERTY AND EQUIPMENT
Land and improvements 1,018,455 1,017,255
Building and building improvements 3,073,777 3,066,889
Equipment and furniture 10,279,217 9,129,583
Leasehold improvements 1,489,445 715,316
------------ ------------
15,860,894 13,929,043
Less accumulated depreciation and amortization 6,360,632 5,024,016
------------ ------------
9,500,262 8,905,027
DEFERRED EXPENSES AND OTHER ASSETS 183,771 141,844
COSTS IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED,
less accumulated amortization of $585,000 in 1998 and $438,000 in 1997 3,256,915 2,850,016
------------ ------------
$ 36,310,090 $ 40,861,519
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings $ 962,407 $ 548,698
Accounts payable 3,607,414 4,384,430
Accrued expenses and other current liabilities 2,023,030 2,342,197
Current portion of long-term debt 953,452 1,073,924
Income taxes payable 402,333 1,758,723
------------ ------------
Total current liabilities 7,948,636 10,107,972
LONG-TERM DEBT 5,126,530 5,240,034
DEFERRED INCOME TAXES 1,800,143 2,592,843
MINORITY INTEREST IN SUBSIDIARIES 6,067,089 6,843,412
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 12,000,000 shares;
5,856,940 shares issued and 5,715,540 shares outstanding
in 1998; 5,856,940 shares issued and 5,848,740 shares
outstanding in 1997 58,569 58,569
Capital in excess of par value 12,470,817 13,040,877
Retained earnings 2,948,938 2,850,517
Accumulated other comprehensive income:
Foreign currency translation adjustment (19,457) (31,128)
Unrealized gain on marketable securities for sale 130,204 175,213
------------ ------------
Total accumulated other comprehensive income 110,747 144,085
------------ ------------
Treasury stock at cost; 141,400 shares at December 31, 1998
8,200 shares at December 31, 1997 (221,379) (16,790)
------------ ------------
Total Stockholders' Equity 15,367,692 16,077,258
------------ ------------
$ 36,310,090 $ 40,861,519
============ ============
See notes to consolidated financial statements.
F-3
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ----------- -----------
REVENUES
Sales $ 49,381,765 $38,888,233 $29,680,520
Gain on sale of subsidiaries' assets -- 4,430,663 --
Gain on subsidiary securities offering and
warrants exercise -- 89,898 1,521,127
Realized gain on sale of marketable securities 12,780 49,493 2,583,500
Other income 753,984 661,195 934,259
------------ ----------- -----------
50,148,529 44,119,482 34,719,406
COST AND EXPENSES
Cost of goods sold 42,460,760 32,198,701 24,247,403
Selling, general and administrative expense 7,123,888 6,615,768 6,211,485
Interest expense 592,414 393,515 217,615
------------ ----------- -----------
50,177,062 39,207,984 30,676,503
------------ ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (28,533) 4,911,498 4,042,903
Income tax (benefit) provision (352,369) 953,000 1,350,746
------------ ----------- -----------
INCOME BEFORE MINORITY INTEREST 323,836 3,958,498 2,692,157
Minority interest in income of consolidated subsidiaries 225,415 1,717,527 274,888
------------ ----------- -----------
NET INCOME $ 98,421 $ 2,240,971 $ 2,417,269
============ =========== ===========
Earnings per share:
Basic $ .02 $ .39 $ .44
============ =========== ===========
Diluted $ .01 $ .36 $ .39
============ =========== ===========
See notes to consolidated financial statements.
F-4
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
CAPITAL IN COMPRE- RETAINED OTHER NOTES
COMMON EXCESS OF HENSIVE EARNINGS COMPREHENSIVE RECEIVABLE TREASURY
STOCK PAR VALUE INCOME (DEFICIT) INCOME OPTIONS STOCK TOTAL
----- --------- ------- --------- ------ ------- ----- -----
Balance at January 1, 1996 $54,549 $11,540,953 $(1,807,723) $ 293,060 $(326,400) $9,754,439
Comprehensive income:
Net income $2,417,269 2,417,269
Foreign currency translation
adjustments 229,887 229,887
Unrealized gain on marketable
securities:
Unrealized holding gain arising
during period, net of tax 721,313 721,313
Less: Reclassification adjustment,
net of tax, for gain
included in net income (380,172) (380,172)
----------
Comprehensive income $2,988,297 2,988,297
==========
Issuance of 2,000 shares of
common stock as compensation 20 5,540 5,560
Forgiveness of stock option
notes June 1996 326,400 326,400
Exercise of subsidiary stock options (3,652) (3,652)
Conversion of portion of Techdyne note (49,586) (49,586)
------ ----------- ----------- --------- --------- ---------- -----------
Balance December 31, 1996 54,569 11,493,255 609,546 864,088 -0- -0- 13,021,458
Comprehensive income:
Net income $2,240,971 2,240,971
Foreign currency translation (23,757) (23,757)
adjustments
Unrealized loss on
marketable securities:
Unrealized holding loss
arising during period,
net of tax (663,882) (663,882)
Less reclassification adjustments,
net of tax, for gain included
in net income (32,364) (32,364)
----------
Comprehensive income $1,520,968 1,520,968
==========
Exercise of stock options for
400,000 shares of common stock 4,000 713,000 717,000
Exercise of subsidiary stock options (66,534) (66,534)
Conversion of portion of Techdyne note (48,217) (48,217)
Repurchase of stock by subsidiary (28,155) (28,155)
Subsidiary stock issuance
for acquisition 977,528 977,528
Repurchase of 8,200 common shares (16,790) (16,790)
------ ----------- ---------- --------- --------- ----------- ----------
Balance at December 31, 1997 58,569 13,040,877 2,850,517 144,085 0 (16,790) 16,077,258
Comprehensive income:
Net income $ 98,421 98,421
Foreign currency translation
adjustments 11,671 11,671
Unrealized loss on
marketable securities:
Unrealized holding loss arising
during period, net of tax (45,009) (45,009)
----------
Comprehensive income $ 65,083 65,083
==========
Exercise of subsidiary stock options (150,756) (150,756)
Repurchase of stock by subsidiary 78,696 78,696
Subsidiary advance toward
acquisition price guarantee (785,792) (785,792)
Subsidiary acquisition price adjustment 251,600 251,600
Subsidiary acquisition
of minority interest 23,386 23,386
Consultant stock options 12,806 12,806
Repurchase of 133,200 common shares (204,589) (204,589)
------- ----------- ----------- --------- --------- ---------- -----------
Balance December 31, 1998 $58,569 $12,470,817 $ 2,948,938 $ 110,747 $ 0 $ (221,379) $15,367,692
======= =========== =========== ========= ========= ========== ===========
See notes to consolidated financial statements.
F-5
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 98,421 $ 2,240,971 $ 2,417,269
Adjustments to reconcile net income
to net cash used in operating activities:
Gain of sale of subsidiaries' assets -- (4,430,663) --
Depreciation 1,434,638 1,019,253 657,640
Amortization 161,542 106,126 79,329
Bad debt expense 106,364 42,276 275,408
Gain on Viragen note collection -- -- (227,703)
Provision for inventory obsolescence 437,095 153,011 91,913
Stock compensation expense -- 322,125 5,560
Gain on sale of securities (12,780) (49,493) (2,583,500)
Minority interest 225,415 1,717,527 274,888
Forgiveness of option notes and accrued interest -- -- 344,871
Deferred income taxes (29,295) (493,000) 581,266
Consultant stock option expense 17,651 -- --
Gain on subsidiary stock offering and warrants exercise -- (89,899) (1,521,127)
Increase (decrease) relating to operating activities from:
Accounts receivable (59,740) (1,735,304) (63,409)
Inventories (138,866) (2,615,706) 320,742
Prepaid expenses and other current assets 181,018 (237,547) 160,999
Accounts payable (783,100) 374,871 (867,608)
Accrued expenses and other current liabilities (307,010) (101,702) (249,504)
Income taxes payable (1,359,496) 753,219 279,708
------------ ------------ ------------
Net cash used in operating activities (28,143) (3,023,935) (23,258)
INVESTING ACTIVITIES
Redemption of minority interest in subsidiaries (385,375) -- --
Proceeds from sale of subsidiaries' assets -- 4,583,662 --
Subsidiary acquisition payments (153,818) (2,166,010) --
Advance on subsidiary acquisition price guarantee (1,277,711) -- --
Additions to property and equipment, net of minor disposals (1,776,381) (2,135,213) (797,968)
Payments received on note receivable from Viragen, Inc. -- -- 373,948
Proceeds from sale of securities 252,780 49,493 2,583,500
Deferred expenses and other assets (56,414) 30,801 98,041
Purchase portion of minority interest in subsidiary -- --
------------ ------------ ------------
Net cash (used in) provided by investing activities (3,396,919) 362,733 2,257,521
FINANCING ACTIVITIES
Borrowings to finance subsidiary acquisition 600,000 2,500,000 --
Short-term line of credit borrowings 413,709 548,698 --
Net proceeds from subsidiary stock offering -- -- 3,445,158
Proceeds from long-term borrowings -- -- 181,476
Payments on long-term borrowings (1,081,928) (430,976) (270,945)
Proceeds from exercise of stock options and warrants 1,150 695,953 59,700
Subsidiary repurchase of stock (108,690) (206,250) --
Repurchase of stock (204,589) (16,790) --
Dividend payments to minority shareholders -- (3,966) (7,467)
Deferred financing costs -- (2,657) (14,438)
------------ ------------ ------------
Net cash (used in) provided by financing activities (380,348) 3,084,012 3,393,484
Effect of exchange rate fluctuations on cash 699 (118,690) 142,085
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (3,804,711) 304,120 5,769,832
Cash and cash equivalents at beginning of year 11,099,418 10,795,298 5,025,466
------------ ------------ ------------
Cash and cash equivalents at end of year $ 7,294,707 $ 11,099,418 $ 10,795,298
============ ============ ============
See notes to consolidated financial statements.
F-6
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: The Company has three operating business segments. The
electro-mechanical segment, Techdyne, is an international contract manufacturer
of electronic and electro-mechanical products primarily manufactured to customer
specifications in the data processing, telecommunication, instrumentation and
food preparation equipment industries. The medical services segment, DCA, owns
and operates five kidney dialysis centers located in Pennsylvania and New Jersey
and has agreements to provide inpatient dialysis treatments to various hospitals
and provides supplies and equipment for dialysis home patients. The medical
products segment is engaged in the manufacture and distribution of medical
supplies.
CONSOLIDATION: The Consolidated Financial Statements include the
accounts of Medicore, Inc., Medicore's 68.0% owned subsidiary, Dialysis
Corporation of America ("DCA") and Medicore's 61.5% owned subsidiary, Techdyne,
Inc. ("Techdyne") and its subsidiaries Lytton Incorporated ("Lytton"), Techdyne
(Scotland) Limited ("Techdyne (Scotland)"), and Techdyne (Livingston) Limited
which is a subsidiary of Techdyne (Scotland), collectively known as the Company.
All material intercompany accounts and transactions have been eliminated in
consolidation.
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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.
MARKETABLE SECURITIES: The Company follows Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Under this Statement, the Company is required to classify
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 as a separate component of
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:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Viragen, Inc.
(259,268 shares with $.81 per share market value
at December 31, 1998; 259,268 shares with $1.09
per share market value at December 31, 1997) $ 210,007 $ 282,602
Renal Care Group, Inc.
(13,873 shares with $32.00 per share market value
at December 31, 1997) -- 443,936
------------ ------------
$ 210,007 $ 726,538
============ ============
F-7
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
INVENTORIES: Inventories are valued at the lower of cost (first-in,
first-out method) or market value. The cost of finished goods and work in
process consists of direct materials, direct labor and an appropriate portion of
fixed and variable manufacturing overhead. Inventories are comprised of the
following:
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
Electronic and mechanical components, net:
Finished goods $ 794,297 $ 554,903
Work in process 1,845,954 1,772,724
Raw materials and supplies 5,234,249 5,997,682
-------------- --------------
7,874,500 8,325,309
Medical supplies 519,270 358,130
-------------- --------------
$ 8,393,770 $ 8,683,439
============== ==============
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets, which range from 5 to 34 years for buildings and improve-
ments; 3 to 10 years for machinery, computer and office equipment, and
furniture; and 5 to 15 years for leasehold improvements. Replacements and
betterments that extend the lives of assets are capitalized. Maintenance and
repairs are expensed as incurred. Upon the sale or retirement of assets, the
related cost and accumulated depreciation are removed and any gain or loss is
recognized.
LONG-LIVED ASSET IMPAIRMENT: Pursuant to Financial Accounting Standards
Board Statement No. 121 "Accounting for the Impairment of Long-lived Assets to
be Disposed of," impairment of long-lived assets, including intangibles related
to such assets, is recognized whenever events or changes in circumstances indi-
cate that the carrying amount of the asset, or related groups of assets, may not
be fully recoverable from estimated future cash flows and the fair value of the
related assets is less than their carrying value. The Company, based on current
circumstances, does not believe any indicators of impairment are present.
COSTS IN EXCESS OF NET TANGIBLE ASSETS ACQUIRED: The costs in excess of
net tangible assets acquired are being amortized on a straight-line basis over
25 years. If, in the opinion of management, an impairment in value occurs,
based on the undiscounted cash flow method, any writedowns will be charged to
expense.
DEFERRED EXPENSES: Deferred expenses, except for deferred loan costs,
are amortized on the straight-line method, over their estimated benefit period
ranging to 60 months. Deferred loan costs are amortized over the lives of the
respective loans.
INCOME TAXES: Deferred income taxes at the end of each period are
determined by applying enacted tax rates applicable to future periods in which
the taxes are expected to be paid or recovered to differences between financial
accounting and tax basis of assets and liabilities.
The Company filed consolidated federal and state tax returns with
Techdyne until October 2, 1995, the date Techdyne's securities offering was
completed, after which Techdyne files separate income tax returns with its
income tax liability reflected on a separate return basis. DCA was likewise
included in the consolidated tax returns of the Company until the completion of
its public offering in April 1996, after which it files separate income tax
returns with its income tax liability reflected on a separate return basis.
F-8
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
STOCK BASED COMPENSATION: The Company follows Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25) and
related Interpretations in accounting for its employee stock options. Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation"(FAS 123) permits a company to elect to follow the accounting
provisions of APB 25 rather than the alternative fair value accounting provided
under FAS 123 but requires pro forma net income and earnings per share
disclosures as well as various other disclosures not required under APB 25 for
companies following APB 25.
FOREIGN CURRENCY TRANSLATION: The financial statements of the foreign
subsidiary have been translated into U.S. dollars in accordance with Statement
of Financial Accounting Standards No. 52. All balance sheet accounts have been
translated using the current exchange rates at the balance sheet date. Income
statement amounts have been translated using the average exchange rate for the
year. The translation adjustments resulting from the change in exchange rates
from year to year have been reported separately as a component of accumulated
other comprehensive income included in stockholders' equity. Foreign currency
transaction gains and losses, which are not material, are included in results of
operations. These gains and losses result from exchange rate changes between the
time transactions are recorded and settled and, for unsettled transactions,
exchange rate changes between the time transactions are recorded and the balance
sheet date.
OTHER INCOME: Other income is comprised as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
Interest income $ 417,339 $ 448,950 $ 414,207
Gain on Viragen note recovery -- -- 227,703
Litigation settlement -- -- 139,645
Other 336,645 212,245 152,704
------------ ------------ ------------
$ 753,984 $ 661,195 $ 934,259
============ ============ ============
EARNINGS PER SHARE: Diluted earnings per share gives effect to
potential common shares that were dilutive and outstanding during the period,
such as stock options and warrants, using the treasury stock method and average
market price.
Following is a reconciliation of amounts used in the basic and diluted
computations:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Net income, numerator-basic computation $ 98,421 $ 2,240,971 $ 2,417,269
Adjustment due to subsidiaries' dilutive securities (52,219) (102,697) (61,971)
----------- ----------- -----------
Net income as adjusted, numerator-diluted computation $ 46,202 $ 2,138,274 $ 2,355,298
=========== =========== ===========
Weighted average shares, denominator-basic computation 5,804,506 5,733,104 5,456,251
Effect of dilutive stock securities:
Stock options -- 285,088 552,872
----------- ----------- -----------
Weighted average shares as adjusted, denominator-diluted computation 5,804,506 6,018,192 6,009,123
=========== =========== ===========
Earnings per share:
Basic $ .02 $ 39 $ .44
=========== =========== ===========
Diluted $ .01 $ .36 $ .39
=========== =========== ===========
F-9
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. The carrying amounts, reported in the balance sheet for cash and
cash equivalents approximate their fair values. The credit risk associated with
cash and cash equivalents are considered low due to the high quality of the
financial institutions in which these assets are invested.
CUSTOMER PAYMENT TERMS: The majority of the Company's sales are made at
payment terms of net amount due in 30-45 days, depending on the customer.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1997
and 1996 financial statements to conform to the 1998 presentation.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of
cash, accounts receivable and debt in the accompanying financial statements
approximate their fair value because of the short-term maturity of these
instruments, and in the case of debt because such instruments bear variable
interest rates which approximate market.
BUSINESS SEGMENTS: The Company has adopted the provisions of Financial
Accounting Standards Board Statement No. 131, " Disclosures About Segments of an
Enterprise and Related Information" (FAS 131) required for fiscal years
beginning after December 15, 1997. FAS 131 establishes standards for reporting
information about operating segments in annual financial statements with
operating segments representing components of an enterprise evaluated by the
enterprise's chief operating decision maker for purposes of making decisions
regarding resource allocation and performance evaluation. The adoption of FAS
131 has not changed the Company's reported business segments, but has resulted
in changes in the Company's segment reporting disclosures.
COMPREHENSIVE INCOME: In 1998 the Company adopted Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income" (FAS 130).
This statement establishes rules for the reporting of comprehensive income and
its components. Comprehensive income consists of net income, foreign currency
translation adjustments and unrealized gains on marketable securities and is
presented in the Consolidated Statement of Shareholders' Equity. Prior year
financial statements have been reclassified to conform with these requirements.
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 effec-
tive for fiscal quarters of fiscal years beginning after June 15, 1999. FAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires, among other things, that all derivatives be
recognized as either assets or liabilities in the statement of financial posi-
tion and that those instruments be measured at fair value. The Company is in
the process of determining the impact that the adoption of FAS 133 will have on
its consolidated financial statements.
NOTE 2--TRANSACTIONS WITH VIRAGEN, INC.
The Company owns approximately 259,000 shares of Viragen (formerly a
majority-owned subsidiary of the Company) common stock as of December 31, 1998.
During 1997 and 1996 the Company sold approximately 10,000 shares and 682,000
shares of Viragen stock and recognized gains of approximately $49,000 and
$2,584,000, respectively. In accordance with the Company's accounting policy,
these shares are reflected at fair value, using quoted market prices by the
Nasdaq Stock Market, and the unrealized gain is included as a separate component
of accumulated other comprehensive income included in shareholders' equity. The
closing bid price of Viragen common stock was $.81 as of December 31, 1998 and
$1.09 as of December 31, 1997.
F-10
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 2-TRANSACTIONS WITH VIRAGEN, INC.--CONTINUED
The Company had a second mortgage and related note due from Viragen. In
March, 1996, Viragen prepaid $165,000 on this note and paid off the remaining
principal and accrued interest in August 1996. As a result of Viragen repaying
amounts which had been offset by an allowance for amounts previously written off
as uncollectable, the Company recognized a gain of approximately $228,000 in
1996.
The Company has a royalty agreement with Viragen, pursuant to which it
is to receive a royalty on Viragen's net sales of interferon and related
products. The agreement provides for aggregate royalty payments of $2.4 million
to be paid based on the following percentages of Viragen sales: 5% of the first
$7 million, 4% of the next $10 million, and 3% of the next $55 million. The
effective date of the agreement was November 15, 1994, with royalty payments due
quarterly, commencing March 31, 1995. No royalty income was earned under the
agreement in 1998 or 1997. In addition, a payment of approximately $108,000,
earned under a previous royalty agreement, is due as the final payment under the
new agreement.
NOTE 3--LONG-TERM DEBT
On February 8, 1996, Techdyne refinanced its term loan by entering into
three loan agreements with a Florida bank. One credit facility was a $2,000,000
line of credit due on demand secured by Techdyne's accounts receivable,
inventory, furniture, fixtures and intangible assets and bore interest at the
bank's prime rate plus 1.25%. In conjunction with Techdyne's acquisition of
Lytton on July 31, 1997, the line of credit was modified and increased to
$2,500,000 with the interest rate reduced to prime plus .75% and various other
modifications. The line was fully drawn down in connection with the Lytton
acquisition with $2,500,000 remaining outstanding, with interest due at 9.25%,
until the line was refinanced in December 1997.
The $2,500,000 line of credit agreement was refinanced and replaced
effective December 29, 1997 with a five year $1,500,000 commercial term loan and
$1,600,000 commercial revolving line of credit. The $1,600,000 line of credit
had an outstanding balance of $1,600,000 at December 31, 1998 and $1,000,000 at
December 31, 1997. This line matures May 1, 2000 and has monthly payments of
interest at prime. Both credit facilities are collateralized by the corporate
assets of Techdyne. The new commercial term loan with an outstanding balance of
$1,200,000 at December 31, 1998 and $1,5000,000 at December 31, 1997 matures
December 15, 2002 with monthly principal payments of $25,000 plus interest. In
connection with the term loan, the Company entered into an interest rate swap
agreement with the bank to manage Techdyne's exposure to interest rates by
effectively converting a variable note obligation with an interest rate of LIBOR
plus 2.25% to a fixed rate of 8.60%. Early termination of the swap agreement,
either through prepayment or default on the term loan, may result in a cost or a
benefit to Techdyne. The December 29, 1997 refinancing represents a noncash
financing activity which is a supplemental disclosure required by Financial
Accounting Standards Board Statement No 95 "Statement of Cash Flows" (FAS 95).
The bank extended two commercial term loans to Techdyne in February
1996, one for $712,500 for five years expiring on February 7, 2001 at an annual
rate of interest equal to 8.28% with a monthly payment of principal and interest
of $6,925 based on a 15-year amortization schedule with the unpaid principal and
accrued interest due on the expiration date. This term loan had an outstanding
balance of approximately $636,000 at December 31, 1998 and $663,000 at December
31, 1997 and is secured by a mortgage on properties in Hialeah, Florida owned by
the Company, two of which properties are leased to Techdyne and one parcel being
vacant land used as a parking lot. Under this term loan, Techdyne is obligated
to adhere to a variety of affirmative and negative covenants.
F-11
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 3--LONG-TERM DEBT--CONTINUED
The second commercial term loan was for the principal amount of
$200,000 for a period of five years bearing interest at a per annum rate of
1.25% over the bank's prime rate and requiring monthly principal payments with
accrued interest of $3,333 through expiration on February 7, 2001. This $200,000
term loan which had a balance of approximately $87,000 at December 31, 1998 and
$127,000 at December 31, 1997 is secured by all of Techdyne's tangible personal
property, goods and equipment, and all cash or noncash proceeds of such
collateral.
The February 1996 financing under the term loans provided cash proceeds
to Techdyne of approximately $181,000 and included payment of the balance due
under Techdyne's previous term loan of $517,000 and payment of a mortgage of the
Company, including accrued interest, on a building leased to Techdyne of
$215,000 which represent noncash financing activities which is a supplemental
disclosure required by FAS 95.
The Company has unconditionally guaranteed the payment and performance
by Techdyne of the revolving loan and the three commercial term loans and has
subordinated Techdyne's intercompany indebtedness to the Company to the bank's
interest. There are cross defaults between the revolving and term loans
exclusive of the $200,000 term loan.
Lytton has a $1,500,000 revolving bank line of credit requiring monthly
interest payments at prime plus 1/2% which matured August 1, 1998 and was
renewed on the same terms and conditions through June 30, 1999. There was an
outstanding balance on this loan of approximately $962,000 at December 31, 1998
and $549,000 at December 31, 1997. The interest rate on this loan was 8.25% at
December 31, 1998 and 9% as of December 31, 1997. Lytton has a $1,000,000
installment loan with the same bank maturing August 1, 2002 at an annual rate of
9% until July 1999, with monthly payments of $16,667 plus interest, at which
time, Lytton will have an option to convert the note to a variable rate. This
loan is subject to a prepayment penalty during the fixed rate period. The
balance outstanding on this loan was approximately $733,000 as of December 31,
1998 and $933,000 as of December 31, 1997. Lytton also has a $500,000 equipment
loan agreement with the same bank payable through August 1, 2003 with interest
at prime plus 1%. There was no outstanding balance on this loan as of December
31, 1998 or December 31, 1997. All of these bank loans are secured by the
business assets of Lytton.
Long-term debt is as follows:
DECEMBER 31,
--------------------------
1998 1997
---------- ---------
Term loan secured by real property with a carrying value of $976,000 at
December 31, 1998. Monthly payments of principal and interest as
described above. $ 636,438 $ 662,533
Term loan secured by tangible personal property, goods and equipment
with a carrying value of $6,190,000 at December 31, 1998. Monthly
payments of principal and interest as described above. 86,763 126,764
Commercial term loan secured by corporate assets of Techdyne with a
carrying value of approximately $14,762,000 as of December 31, 1998.
Monthly payments of principal and interest as described above.
1,200,000 1,500,000
Three-year revolving line of credit agreement maturing May 1, 2000.
Secured by corporate assets of Techdyne with a carrying value of
approximately $14,762,000 at December 31, 1998. Monthly payment of
interest as described above. 1,600,000 1,000,000
F-12
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 3--LONG-TERM DEBT--CONTINUED
DECEMBER 31,
---------------------------
1998 1997
---------- ----------
Mortgage note secured by land and building with a net book value of
$840,000 at December 31, 1998. Quarterly payments of approximately
$20,000 based on exchange rates at December 31, 1998 for 15 years
commencing October, 1997 including interest at 2% above bank base
rate. 544,528 569,431
Promissory note secured by three certificates of deposit. A single
principal payment is due on April 21, 2000 with interest payable
monthly at prime. 145,000 145,000
Mortgage note secured by land and building with a net book value of of
$414,000 at December 31, 1998. Monthly principal payments of $3,333
plus interest at 1% over the prime rate through November 2003.
200,040 240,036
Mortgage note secured by land and building with a net book value of
$706,000 at December 31, 1998. Monthly principal payments of $2,667
plus interest at 1% over the prime rate through November 2003.
159,960 191,963
Equipment financing agreement secured by DCA equipment with a net book
value of $487,000 at December 31, 1998. Combined monthly payments
pursuant to various schedules of $8,582 as of December 31, 1998 as
described below, including principal and interest, with interest at
rates ranging from 5.47% to 11.84%. 448,566 284,518
Mortgage note secured by land with a net book value of $107,000 at
December 31, 1998. Monthly principal payments of $1,083 plus
interest at 1.5% over the prime rate. The entire unpaid principal
balance and accrued interest is due May 1, 2003. 56,288 69,295
Installment loan requiring monthly payments of $16,667 plus interest at
9%. The loan is secured by all business assets of Lytton with a
carrying value of approximately $9,111,000. Monthly payments of
principal and interest as described above. 733,333 933,333
Equipment loan requiring monthly payments of $4,298 including interest
at 5.5% and maturing in April 2002. The loan is secured by equipment
of Lytton with a carrying value of approximately $503,000 at
December 31, 1998. 156,746 198,445
Equipment financing obligations requiring combined monthly payments of
$19,467 as of December 31, 1998 as described below, including
interest at rates ranging from 8.55% to 10.09% and secured by the
related assets of Lytton with a carrying value of approximately
$341,000 at December 31, 1998. 112,320 390,033
Other -- 2,607
---------- ----------
6,079,982 6,313,958
Less current portion 953,452 1,073,924
---------- ----------
$5,126,530 $5,240,034
========== ==========
The prime rate was 7.75% as of December 31, 1998 and 8.50% as of
December 31, 1997.
The Company re-paid a mortgage in February 1996 through Techdyne's bank
loan refinancing. This represents noncash financing activity which is a
supplemental disclosure required by FAS 95.
F-13
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 3--LONG-TERM DEBT--CONTINUED
The DCA equipment financing agreement provides financing for kidney
dialysis machines for DCA's facilities in Pennsylvania and New Jersey and was
amended in 1996 to include equipment for DCA's Florida facility. The initial
principal balance was approximately $195,000. Additional financing totaled
approximately $124,000 in 1996 $190,000 in 1997 and $245,000 in 1998. In
conjunction with DCA's sale of its Florida dialysis operations on October 31,
1997, the purchaser assumed approximately $112,000 of these financing obliga-
tions. Payments under the agreement are pursuant to various schedules extending
through July 2002. Financing under the equipment financing agreement is a non-
cash financing activity which is a supplemental disclosure required by FAS 95.
Lytton conducts a portion of its operations with equipment acquired
under equipment financing obligations which extend through July 1999. The
present value of annual future minimum payments required under these financing
obligations is included in the schedule of long-term debt above. Financing under
these agreements is a noncash financing activity which is a supplemental
disclosure required by FAS 95.
Techdyne (Scotland) had a line of credit with a Scottish bank with a
U.S. dollar equivalency of approximately $330,000 at December 31, 1997 which was
not renewed. No amounts were drawn down on this line of credit during 1998 and
no amounts were outstanding under this line of credit as of December 31, 1997.
Scheduled maturities of long-term debt outstanding at December 31, 1998
are: 1999 - $953,000; 2000 - $2,613,00; 2001 - $1,371,000; 2002- $666,000; 2003-
$165,000; thereafter - $312,000. Interest payments on all of the above debt
amounted to $583,000, $355,000 and $224,000 in 1998, 1997 and 1996.
The Company's various debt agreements contain certain restrictive
covenants that, among other things, restrict the payment of dividends, restrict
rent commitments, restrict additional indebtedness, prohibit issuance or
redemption of capital stock and require maintenance of certain financial ratios.
In 1998, DCA was in default of certain covenants relating to its mortgage agree-
ments totaling $360,000. The covenants principally related to debt service ratio
requirements, for which the lender has waived compliance through December 31,
1998.
NOTE 4--INCOME TAXES
The Company has net operating loss carryforwards of approximately
$2,590,000 at December 31, 1998 and $5,000,000 at December 31, 1997 that
expire in years 2003 through 2010. Of these net operating loss carryforwards,
$2,400,000 and $5,000,000, respectively, are available to offset future Techdyne
(US) taxable income which became a 62.5% owned subsidiary pursuant to its public
offering completed on October 2, 1995 and which began filing separate federal
and state income tax returns with its income tax liability reflected on a
separate return basis subsequent to that date. Techdyne's new subsidiary,
Lytton, is included in Techdyne's consolidated federal tax return effective
August 1, 1997 with Techdyne's net operating loss carryforwards able to be uti-
lized to offset any income taxable for federal tax return purposes generated by
Lytton. Of the December 31, 1998 net operating loss carryforwards, $190,000 are
available to offset future taxable income, excluding the results of Techdyne and
DCA.
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. Significant
components of the Company's deferred tax liabilities and assets are as follows:
F-14
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 4--INCOME TAXES--CONTINUED
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
Deferred tax liabilities:
Tax over book depreciation $ 201,943 $ 408,000
Gain on sale of Techdyne and DCA stock 2,067,000 2,067,000
Unrealized gain on marketable securities 79,052 106,343
Other 24,965 11,500
----------- -----------
Total deferred tax liability 2,372,960 2,592,843
Deferred tax assets:
Obsolescence and other reserves 463,051 373,000
Tax credits 48,000 --
Inventory capitalization 73,688 113,000
Accrued expenses and other 135,106 227,000
----------- -----------
Sub-total 719,845 713,000
Net operating loss carryforward 942,794 1,432,000
Valuation allowance (528,000) (850,465)
----------- -----------
Net deferred tax asset 1,134,639 1,294,535
----------- -----------
Net deferred tax liability $ 1,238,321 $ 1,298,308
=========== ===========
Due to the uncertainty as to the realizability of deferred tax assets, a
valuation allowance of $528,000 and $850,465 was recorded as of December 31,
1998 and December 31, 1997, respectively.
Deferred taxes in the accompanying balance sheets consist of the following
components:
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
Current deferred tax asset $ 590,133 $ 1,294,535
Current deferred tax liabilities (28,311) --
----------- -----------
Net current deferred tax asset 561,822 1,294,535
Long-term deferred tax asset 544,506 --
Long-term deferred tax liability (2,344,649) (2,592,843)
----------- -----------
Net long-term deferred tax liability (1,800,143) (2,592,843)
----------- -----------
Net deferred tax liability $(1,238,321) $(1,298,308)
=========== ===========
A deferred tax liability of $2,067,000 at December 31, 1998 and
December 31, 1997, resulted from income tax expense recorded on gains recognized
for financial reporting purposes, but not for income tax purposes, resulting in
a difference between book and tax basis of the Company's investment in Techdyne
and DCA. This temporary difference would reverse upon the occurrence of certain
events relating to the divestiture of Techdyne and DCA. This deferred tax
liability has been classified as noncurrent along with the remaining portion of
noncurrent deferred tax liabilities resulting from differences in book and tax
depreciation of Techdyne (Scotland). A current deferred tax liability has been
recorded for the unrealized gain on marketable securities. See Note 2.
F-15
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 4--INCOME TAXES--CONTINUED
For financial reporting purposes, (loss) income before income taxes includes the
following components:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
United States income $ 508,933 $ 5,201,054 $ 3,260,262
Foreign (loss) income (537,466) (289,556) 782,641
----------- ----------- -----------
$ (28,533) $ 4,911,498 $ 4,042,903
=========== =========== ===========
Significant components of the provision (benefit) for income taxes are as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Current:
Federal $ (415,468) $ 1,306,000 $ 440,000
Foreign -- (96,000) 259,270
State 92,394 236,000 70,000
----------- ----------- -----------
$ (323,074) $ 1,446,000 769,270
Deferred:
Federal 66,602 (493,000) 578,000
Foreign (95,897) -- 3,476
----------- ----------- -----------
(29,295) (493,000) 581,476
----------- ----------- -----------
$ (352,369) $ 953,000 $ 1,350,746
=========== =========== ===========
The reconciliation of income tax attributable to income before income
taxes and minority interests computed at the U.S. federal statutory rate (34%)
to income tax expense is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Tax at statutory rate $ (9,526) $ 1,669,909 $ 1,374,587
Adjustments resulting from:
State income taxes-net of federal income tax effect 105,215 180,770 49,898
Lower effective income taxes of other countries 86,841 13,096 (7,826)
Non deductible items 62,235 -- --
Prior year tax return to provision adjustment (287,623) -- --
Change in valuation allowance (322,465) (737,258) (65,913)
Other 12,954 (173,517) --
----------- ----------- -----------
$ (352,369) $ 953,000 $ 1,350,746
=========== =========== ===========
Undistributed earnings of the Company's foreign subsidiary amounted to
approximately $2,294,000 at December 31, 1998 and $2,736,000 at December 31,
1997. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable.
Determination of the amount of unrecognized deferred U.S. income tax liability
is not practicable because of the complexities associated with its hypotheti-
cal calculation; however, foreign tax credits may be available to reduce some
portion of the U.S. liability. Withholding taxes of approximately $115,000 and
$137,000 would be payable upon remittance of all previously unremitted earnings
at December 31, 1998 and December 31, 1997, respectively.
Income tax payments were approximately $1,203,000 in 1998, $811,000 in
1997 and $487,000 in 1996.
F-16
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as is
discussed below, Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock Based Compensation" (FAS123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense was recognized.
In September 1994, the Company granted options to a consulting firm to
purchase 400,000 shares of common stock exercisable at $1.25 per share through
September 30, 1997. Options for 200,000 shares were transferred by the
consulting firm to another party in September 1996. The options vested on the
basis of 25% of the aggregate as of the end of each quarter beginning with the
quarter ended December 31, 1994. Options for 200,000 shares were exercised in
August 1997 and the remaining options for 200,000 shares were exercised in
September 1997.
In September 1994, options to purchase 480,000 shares of common stock
at $.69 per share were exercised. The Company received cash payment of the par
value and the balance in three year promissory notes, presented in the
Stockholders' Equity section of the balance sheet, with interest at 5.36%. The
notes were secured by the 480,000 shares purchased, held in escrow by the
Company, with voting rights held by the shareholders until default, if any,
under the notes. In June 1996, the Company forgave the balances due under the
notes including accrued interest and, accordingly, recorded approximately
$344,000 in compensation expense.
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. 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. Including the June 1997 grant, there are 841,000
options outstanding at December 31, 1998 under the 1989 plan.
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 have been
issued to the managing director of the Company's European operations for which
the Company recorded approximately $6,000 in compensation expense during the
second quarter of 1996.
In May 1994, Techdyne adopted a stock option plan for up to 250,000
options. Pursuant to this plan, in May 1994, the board of directors granted
227,500 options to certain of its officers, directors, and employees. These
options are exercisable for a period of five years at $1 per share. On June 30,
1998, 115,000 of these options were exercised, with a balance of 56,600
outstanding as of December 31, 1998. The Company received cash payment of the
par value and the balance in three year promissory notes with interest at 5.16%.
F-17
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
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.
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 guaranteed 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.
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 are 4,500 outstanding as of December 31, 1998. 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. On December 31, 1997,
162,500 options were exercised by officers for which the Company received cash
payments of the par value and the Company forgave the remaining balance due and
recorded compensation expense of $322,000.
In August 1996, DCA's board of directors granted 15,000 medical
directors at its three kidney dialysis centers of which 10,000 options were
outstanding as of December 31, 1998. These options vested immediately and are
exercisable for a period of three years through August 18, 1999 at $4.75 per
share with the exercise price of 5,000 of the options having been reduced to
$2.25 per share on June 10, 1998.
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. Pursuant to FAS 123, the Company recorded approxi-
mately $18,000 expense for options vesting under this agreement.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for option grants in 1998, option grants in 1997, option
modifications in 1996, and options grants in 1995, respectively: risk-free
interest rates of 5.55%, 5.59%, 5.65% and 6.75%; no dividend yield; volatility
factor of the expected market price of the Company's common stock of .72 for the
options issued in 1998, .97 for the options issued during 1997, .68 for the
option modifications in 1996 and option grants in 1995; and an expected life of
3 years for the options issued during 1998 for the 1997 options of 2.5 years,
and for the options modified in 1996 of .75 years and for the 1995 options of
2.5 years.
F-18
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 5--STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective input assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different than those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of
options is amortized to expense over the options' vesting period. The Company's
pro forma information which includes the pro forma effect of its own options, as
well as the pro forma effects related to the Company's interest in Techdyne and
DCA pro forma adjustments follows:
1998 1997 1996
---- ---- ----
Pro forma net income $87,212 $1,671,720 $2,067,004
======= ========== ==========
Pro forma earnings per share
Basic $.02 $.29 $.35
==== ==== ====
Diluted $.01 $.26 $.23
==== ==== ====
A summary of the Company's stock option activity, and related
information for the years ended December 31, follows, with its newly modified
options being reflected as grants and the original grants being modified
reflected as cancellations:
1998 1997 1996
---- ---- ----
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding-beginning of year 841,000 $2.38 1,207,000 $2.01 1,209,000 $2.42
Granted 5,000 2.25 35,000 2.47 809,000 2.38
Cancellations -- --- (809,000) 3.00
Exercised -- (400,000) 1.25 ---
Forfeited -- --- (1,000) 3.00
Expired -- (1,000) 2.38 (1,000) 3.00
-- ------- ---------
Outstanding-end of year 846,000 841,000 1,207,000 2.01
======= ======= =========
Exercisable at end of year:
1994, 1995 and 1997 options 841,000 2.38 841,000 2.38 803,500 1.82
1998 options 5,000 2.25 -- --
------- ------- ---------
846,000 841,000 803,500
======= ======= =========
Weighted-average fair value of
Options granted, including
Modified options, during the year $.98 $ 2.47 $.59
==== ======= ====
The weighted average remaining contractual life at December 31, 1998 of
the 1995 and 1997 of options is 1.4 years. The remaining contractual life at
December 31, 1998 for the 1998 options is 2.4 years.
The Company has 1,503,000 shares reserved for future issuance at
December 31, 1998, including: 1,000,000 shares for 1989 plan; 98,000 shares for
key employee stock plan; 5,000 shares for consultant stock options; and 400,000
shares for employment agreement.
F-19
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 5-STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
The fair value of Techdyne options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for the options issued during 1998 and 1997, respectively: risk-free
interest rate of 5.55% and 5.59%; no dividend yield; volatility factor of the
expected market price of Techdyne common stock of .58% and .60%; and an expected
life of the options of 3 years for the options issued during 1998 and 2.5 years
for the options issued during 1997.
A summary of Techdyne's stock option activity, and related information
for the years ended December 31, follows:
1998 1997 1996
---- ---- ----
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding-beginning of year 699,100 326,500 378,400
Granted 6,250 $4.25 375,000 $3.25 ---
Exercised (115,000) 1.00 (300) 1.00 (50,700) $1.00
Expired -- (2,100) 1.00 (1,200) 1.00
------- ------- -------
Outstanding-end of year 590,350 699,100 326,500
======= ======= =======
Outstanding and exercisable
at end of year:
May 1994 options 56,600 1.00 171,600 1.00 174,000 1.00
February and April 1995 options 152,500 1.75 152,500 1.75 152,500 1.75
June 1997 options 375,000 3.25 375,000 3.25 --
May 1998 options 6,250 4.25 -- --
------- ------- -------
590,350 699,100 326,500
======= ======= =======
Weighted-average fair value of
options granted during the $2.04 $1.33
year ===== =====
The remaining contractual life at December 31, 1998 is 3.4 years, 1.2
years and .39 years for the options issued in 1997, 1995 and 1994, respectively.
The fair value of DCA options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted average assump-
tions for options granted/modified during 1998 and the options issued during
1996 risk-free interest rates of 5.55% and 5.75%; no dividend yield; volatility
factor of DCA common stock of .93 for the options granted/modified during 1998
and .50 for the options granted in 1996 and a weighted average expected life of
the options of 2.0 years for the options granted/modified during 1998 and 1.5
years for the options granted in 1996.
A summary of DCA's stock option activity, and related information for
the years ended December 31, follows:
1998 1997 1996
---- ---- ----
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding-beginning of year 29,000 209,000 210,000
Granted 10,000 $4.75 -- 15,000 $4.75
Cancellations (5,000) 4.75 -- --
Exercised -- (162,500) $1.50 (6,000) 1.50
Forfeited -- --
Expired (14,500) 1.50 (17,500) 2.43 (10,000) 1.50
------- -------- -------
Outstanding-end of year 19,500 29,000 209,000
======= ======== =======
Outstanding and exercisable
at end of year:
November 1995 options 4,500 1.50 19,000 1.50 194,000 1.50
August 1996 and June 1998 10,000 2.25 10,000 4.75 15,000 4.75
options
August 1996 options 5,000 4.75 -- --
------- -------- -------
19,500 29,000 209,000
======= ======== =======
Weighted-average fair value of
options granted during the year $.79 $1.30
===== =====
F-20
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 5-STOCK OPTIONS AND STOCK COMPENSATION--CONTINUED
The remaining contractual life at December 31, 1998 is 4.4 years, .6
year and 1.9 years for the options issued in June 1998, August 1998 and November
1995, respectively.
NOTE 6-BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA
The following summarizes information about the Company's three reported
business segments. The medical products division has been shown separately even
though not required by FAS 131. Corporate activities include general corporate
revenues and expenses. Corporate assets included unallocated cash, deferred
income taxes, corporate fixed assets and goodwill not allocated to any of the
segments. Intersegment sales are generally intended to approximate market price.
BUSINESS SEGMENT REVENUES
1998 1997 1996
------------ ------------ ------------
Electro-Mechanical
External $ 44,755,164 $ 32,954,795 $ 24,155,715
Intersegment Sales 171,567 213,985 278,465
Medical Products 1,335,128 1,708,488 2,012,498
Medical Services 4,003,935 9,220,798 4,136,970
Corporate 310,713 488,268 4,671,800
Elimination of corporate rental charges
to electro-mechanical manufacturing (93,444) (93,640) (103,450)
Elimination of corporate interest charge
to electro-mechanical (156,197) (151,901) (139,672)
Elimination of corporate interest charge
to medical services (5,878) (7,326) (14,455)
Elimination of medical services
interest charge to corporate (892) -- --
Elimination of electro-mechanical
manufacturing sales to medical products (171,567) (213,985) (278,465)
------------ ------------ ------------
$ 50,148,529 $ 44,119,482 $ 34,719,406
============ ============ ============
BUSINESS SEGMENT PROFIT (LOSS)
Electro-Mechanical $ 924,924 $ 861,248 $ 1,010,454
Medical Products (87,818) 6,485 (638,858)
Medical Services (441,010) 4,266,683 (10,988)
Corporate (424,629) (222,918) 3,682,295
------------ ------------ ------------
$ (28,533) $ 4,911,498 $ 4,042,903
============ ============ ============
BUSINESS SEGMENT ASSETS
Electro-Mechanical $ 23,767,144 $ 24,625,147 $ 13,224,196
Medical Products 667,955 606,305 1,000,710
Medical Services 9,348,924 11,637,765 7,552,289
Corporate 2,579,117 4,018,482 5,323,157
Elimination of intersegment trade receivables (53,050) (26,180) (15,500)
------------ ------------ ------------
$ 36,310,090 $ 40,861,519 $ 27,084,852
============ ============ ============
OTHER BUSINESS SEGMENT INFORMATION
INTEREST INCOME:
Electro-Mechanical $ 78,315 $ 136,054 $ 166,134
Medical Products -- -- 140
Medical Services 296,943 227,790 168,950
Corporate 205,048 244,333 233,110
Elimination of corporate intercompany
interest charge to electro-mechanical (156,197) (151,901) (139,672)
Elimination of corporate intercompany
interest charge to medical services (5,878) (7,326) (14,455)
Elimination of medical services intercompany
interest change to corporate (892) -- --
------------ ------------ ------------
$ 417,339 $ 448,950 $ 414,207
============ ============ ============
F-21
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 6--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA--Continued
1998 1997 1996
------------ ------------ ------------
INTEREST EXPENSE:
Electro-Mechanical $ 662,856 $ 456,621 $ 271,736
Medical Products -- -- 1,498
Medical Services 81,531 86,129 86,694
Corporate 10,994 9,992 11,814
Elimination of corporate intercompany
interest charge to electro-mechanical (156,197) (151,901) (139,672)
Elimination of corporate intercompany
interest charge to medical services (5,878) (7,326) (14,455)
Elimination of medical services intercompany
interest charge to corporate (892) -- --
------------ ------------ ------------
$ 592,414 $ 393,515 $ 217,615
============ ============ ============
DEPRECIATION AND AMORTIZATION:
Electro-Mechanical $ 1,115,023 $ 669,239 $ 384,048
Medical Products 35,617 40,657 43,083
Medical Services 334,387 289,877 210,550
Corporate 111,153 125,606 99,288
------------ ------------ ------------
$ 1,596,180 $ 1,125,379 $ 736,969
============ ============ ============
OTHER SIGNIFICANT NON-CASH ITEMS:
Electro mechanical:
Provision for inventory obsolescence $ 437,095 $ 153,011 $ 91,913
Medical services:
Stock compensation expense -- 322,125 --
UNUSUAL ITEMS:
Medical services:
Gain on sale of subsidiaries' assets $ -- $ 4,430,663 $ --
CORPORATE:
Gain on subsidiary securities offering $ -- $ 89,898 $ 1,521,127
Gain on sale of marketable securities 12,780 49,493 2,583,500
CAPITAL EXPENDITURES:
Electro-Mechanical $ 832,410 $ 1,396,260 $ 704,304
Medical Products 23,652 4,595 149,505
Medical Services 1,149,373 825,427 386,502
Corporate 24,438 74,296 27,136
------------ ------------ ------------
$ 2,029,873 $ 2,300,578 $ 1,267,447
============ ============ ============
GEOGRAPHIC AREA SALES
United States $ 44,735,318 $ 32,116,905 $ 19,628,229
Europe(1) 4,646,447 6,771,328 10,052,291
------------ ------------ ------------
$ 49,381,765 $ 38,888,233 $ 29,680,520
============ ============ ============
(1) Techdyne (Scotland) sales are primarily
to customers in the United Kingdom.
GEOGRAPHIC AREA PROPERTY, PLANT AND EQUIPMENT (NET)
United States $ 8,114,120 $ 7,421,547 $ 4,410,961
Europe 1,386,142 1,483,480 1,628,248
------------ ------------ ------------
$ 9,500,262 $ 8,905,027 $ 6,039,209
============ ============ ============
MAJOR CUSTOMERS
A majority of the Company's electro-mechanical sales are to certain
major customers. The loss of, or substantially reduced sales to, any of these
customers would have an adverse effect on the Company's operations, if such
sales were not replaced, as occurred with Compaq and Avid as noted below.
F-22
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 6--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA--Continued
Electro-mechanical sales to major customers comprising 10% or more of
the Company's sales are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
CUSTOMERS 1998 1997 1996
--------- ---------- --------- ---------
PMI Food Equipment Group(1) $8,183,000 $ -- $ --
Compaq Computer Corp.(1)(2) -- -- 8,497,000
IBM(2) -- 6,437,000 4,275,000
- -----------------
(1) Less than 10% of sales for 1997.
(2) Less than 10% of sales for 1998.
Sales to PMI Food Equipment Group by Lytton represented approximately
41% of Lytton's sales, 18% of Techdyne's sales and 17% of the Company's sales
for the year ended December 31, 1998.
Sales to Compaq Computer Corp., which has been a major customer of
Techdyne (Scotland) amounted to $1,192,000 in 1998, $2,847,000 in 1997 and
$8,427,000 in 1996 representing 26%, 42% and 84% of the sales of Techdyne
(Scotland) for 1998, 1997 and 1996, respectively. Sales to this customer have
shown substantial declines as a result of increased competition in bidding for
Compaq business which has also resulted in reduced profit margins on remaining
Compaq sales. Sales by Techdyne (Scotland) to Compaq accounted to 13% of its
sales for the fourth quarter of 1998 compared to 35% for the same period of
1997.
A significant customer of Techdyne (which sales to this customer
represented 9% of Techdyne's and 8% of the Company's 1998 sales) has been slow
in paying amounts owed to the company. At December 31, 1998, the company had a
receivable of approximately $879,000 from this customer, and held inventory of
approximately $1,160,000 to fulfill a sales contract relating to this customer,
which represents 15% and 13% and 14% and 13% of Techdyne's and the Company's
accounts receivable and inventory balances, respectively, at that date. Techdyne
anticipates an ongoing business relationship with this customer, and it also
believes the receivables and inventories relating to this customer are
recoverable. However, future events may occur to cause the Company to change
its estimate of loss which could have a material adverse effect on Techdyne's
and the Company's results of operations and financial position.
Medical services revenues, which represent revenues of the Company's
dialysis division, are attributable to payments received under Medicare, which
is supplemented by Medicaid or comparable benefits in the states in which the
Company operates. Reimbursement rates under these programs are subject to
regulatory changes and governmental funding restrictions. Although the Company
is not aware of any future rate changes, significant changes in reimbursement
rates could have a material effect on the Company's operations.
Medical product sales are highly dependent on government contracts
which have become increasingly difficult to secure due to changes in government
procurement procedures. Significant reductions in government contract revenues
would have had a material adverse effect on the operations of the Medical
Products Division. During 1996, the Company decided to shutdown the durable
medical equipment portion of its medical products business due to its
unprofitable operations and recorded in 1996 approximately $305,000 in costs in
connection with this shutdown. See Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
F-23
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 7--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company and its subsidiaries have leases on several facilities,
which expire at various dates. The aggregate lease commitments at December 31,
1998 are approximately: 1999 - $865,000; 2000 - $819,000; 2001 - $773,000; 2002
- - $572,000, 2003-$382,000. Total rent expense was approximately $916,000,
$748,000 and $608,000 in 1998, 1997 and 1996, respectively.
Lytton leases its operating facilities from an entity which is owned by
Lytton's former owner and former President. The operating lease, which expires
July 31, 2002, requires monthly lease payments of approximately $17,900 for the
first year, adjusted in subsequent years for the change in the Consumer Price
Index, and contains renewal options for a period of five to ten years at the
then fair market rental value.
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 year old age requirement. DCA has made no contributions under this plan
as of December 31, 1998.
Lytton sponsors a 401(k) Profit Sharing Plan covering substantially all
of its employees. The Company and Techdyne have adopted this plan as partici
pating employers effective July 1, 1998. The discretionary profit sharing and
matching expense including that of the Company, Techdyne and Lytton for the
years ended December 31, 1998 and December 31, 1997 amounted to approximately
$49,000 and $16,000, respectively.
CONTINGENCIES
In the first quarter of 1996, a temporary worker provided by a
temporary personnel agency was injured while working at Techdyne. The worker was
insured through the temporary personnel agency. While the full extent of the
temporary worker's injuries and the ultimate costs associated with those
injuries are not presently known, the Company anticipates that its insurance is
adequate to cover any potential claims which might arise.
NOTE 8--SUBSIDIARY STOCK OFFERINGS
DCA completed a public offering in April 1996, with net offering
proceeds of approximately $3,445,000, for which the Company has recorded a gain
of approximately $943,000, net of applicable income taxes of $578,000. See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In accordance with its accounting policy, the Company recognized a gain
of approximately $56,000, net of applicable income taxes of approximately
$34,000, during 1997 related to Techdyne warrant exercises.
NOTE 9--RELATED PARTY TRANSACTIONS
During 1998, 1997 and 1996, the Company paid premiums of approximately
$589,000, $529,000 and $516,000, respectively, for insurance through a director
and stockholder, and the relative of a director and stockholder.
F-24
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 9-RELATED PARTY TRANSACTIONS--CONTINUED
During 1998, 1997 and 1996, legal fees of approximately $277,000,
$191,000 and $202,000, respectively, were paid by the Company and its public
subsidiaries to an officer of the Company and DCA.
Lytton has a deferred compensation agreement with its former President
dated August 1, 1997 in the amount of $200,140. The agreement calls for monthly
payments of $8,339 provided that Lytton's cash flow is adequate to cover these
payments with interest to be calculated on any unpaid balance as of August 1,
1999. During the period ended December 31, 1998 a total of $59,000 was paid
under this agreement. The balance outstanding under this agreement amounted to
approximately $108,000 at December 31, 1998 and $167,000 at December 31, 1997.
NOTE 10 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summarizes certain quarterly operating data:
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
-------------------------------------------- --------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- ------- -------- ------- -------- -------
(In thousands except per share data)
Net Sales $13,020 $12,754 $12,130 $11,478 $7,758 $8,087 $10,628 $12,415
Gross profit 2,089 1,866 1,780 1,186 1,593 1,550 1,764 1,782
Gain on sale of
subsidiaries' assets -- -- -- -- -- -- -- 4,431
Gain on subsidiary
securities offering and
warrant exercise -- -- -- -- 61 29 -- --
Realized gain on sale of
marketable securities -- -- -- -- 49 -- -- --
Net income (loss) 212 169 76 (359) 266 116 31 1,828
Earnings (loss)per share:
Basic $.04 $.03 $.01 $(.06) $.05 $.02 $.01 $.31
Diluted $.03 $.02 $.01 $(.06) $.04 $.02 $ -- $.30
Since the computation of earnings per share is made independently for
each quarter using the treasury stock method, the total of four quarters
earnings do not necessarily equal earnings per share for the year.
The Company recorded an adjustment to the valuation allowance relating
to its deferred tax asset of approximately $300,000 during the fourth quarter of
1998 and $700,000 during the fourth quarter of 1997.
F-25
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 11--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
which have been registered for the seller. Techdyne has guaranteed that the
seller will realize a minimum of $2,400,000 from the sale of these shares of
common stock based on Lytton having achieved certain earnings objectives. Those
earnings objectives were achieved in 1998, resulting in an increase of $400,000
to the valuation of $2,000,000 originally recorded for these securities. The
difference (of $968,750) between the fair value of the common stock at the date
of acquisition and the guaranteed value was considered part of the cost of the
acquisition and is reflected as additional paid in capital on Techdyne.
Additional contingent consideration may be due if Lytton reaches pre-defined
sales levels. Additional consideration of approximately $154,000 based on sales
levels was paid in April 1998 with the Stock Purchase Agreement providing for
possible additional sales level incentives over a two year period. As the
contingencies are resolved, if additional consideration is due, the then current
fair value of the consideration will be recorded as goodwill, which will be
amortized over the remainder of the initial 25 year life of the goodwill.
The acquisition was accounted for under the purchase method of
accounting and, accordingly, the results of operations of Lytton have been
included in the accompanying consolidated condensed statement of income since
August 1, 1997. The net purchase price in excess of the fair value of net assets
acquired is being amortized over twenty five years. The net purchase price,
including the original $2,000,000 and the additional 1998 consideration, was
allocated as follows:
ORIGINAL 1997 ADDITIONAL 1998 TOTAL
----------- --------------- -----------
Working capital, other than cash $ 1,398,588 $ 1,398,588
Property, plant and equipment 1,959,751 1,959,751
Other assets 3,000 3,000
Goodwill 2,230,103 553,818 2,783,921
Other liabilities (1,335,432) (1,335,432)
----------- ----------- -----------
$ 4,256,010 $ 553,818 $ 4,809,828
=========== =========== ===========
Net cash portion of purchase price,
including costs $ 2,166,010 $ 153,818 $ 2,319,828
Estimated costs of acquisition 90,000 90,000
Common stock issued 2,000,000 400,000 2,400,000
----------- ----------- -----------
$ 4,256,010 $ 553,818 $ 4,809,828
=========== =========== ===========
The terms of the Guaranty in the Stock Purchase Agreement were modified
in June, 1998 by the Company and the Seller ("Modified Guaranty"). The modified
terms provide that the Seller will sell an amount of common stock which will
provide $1,300,000 gross proceeds, and the Company will guarantee that, to the
extent that the Seller has less than 150,000 shares of the Company's common
stock remaining, the Company will issue additional shares to the Seller. In July
1998, the Company advanced the Seller approximately $1,278,000 ("Advance")
toward the $1,300,000 from the sale of the Company's common in addition to the
Seller having sold 5,000 shares of common stock in July, 1998. The advance is
presented in the Stockholders' Equity Section of the balance sheet. Proceeds
from the sale of the Company's common stock owned by the Seller, up to 195,000
shares, would repay the Advance and to the extent proceeds from the sale of
these shares were insufficient to pay the advance, the balance of the Advance
would be forgiven. The Advance has been presented in the Stockholder's Equity
section of the balance sheet. The Company has also guaranteed the Seller
aggregate proceeds of no less than $1,100,000 from the sale of the remaining
common stock if sold on or prior to July 31, 1999 ("Extended Guaranty").
F-26
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 11-ACQUISITION--CONTINUED
The following summary pro forma financial information reflects the
Lytton acquisition as if it had occurred on January 1, 1996. The pro forma
financial information does not purport to represent what the Company's actual
results of operations would have been had the acquisition occurred as of January
1, 1996 and may not be indicative of operating results for any future periods.
SUMMARY PRO FORMA INFORMATION
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996
----------- -----------
Total revenues $54,818,000 $50,818,000
=========== ===========
Net income $ 2,501,000 $ 2,648,000
=========== ===========
Earnings per share:
Basic $.44 $.49
==== ====
Diluted $.40 $.43
==== ====
NOTE 12--SALE OF SUBSIDIARIES' ASSETS
On October 31, 1997, DCA concluded a sale ("Sale") of substantially all
of the assets of two of its 80% owned subsidiaries, Dialysis Services of
Florida, Inc. - Ft. Walton Beach ("DSF") (dialysis operations) and Dialysis
Medical, Inc. ("DMI") (Florida Method 2 home patient operations), and an
in-patient hospital service agreement of its 100% owned subsidiary, DCA Medical
Services, Inc. pursuant to an Asset Purchase Agreement. Consideration for the
assets sold was $5,065,000 consisting of $4,585,000 in cash and $480,000 of the
purchaser's common stock which the purchaser has agreed to register within one
year. Provided that the shares are sold within 30 days of their registration,
the purchaser agreed to make up any difference by which the sales proceeds were
less than $480,000 in cash or additional registered shares of the purchaser at
its discretion. These shares were carried at their market value of approximately
$444,000 at December 31, 1997 with the difference between the guaranteed value
and the market value being reflected as a receivable from the purchaser. In
February 1998, DCA acquired, in a transaction accounted for as a purchase,
the remaining 20% minority interests in two of the subsidiaries whose assets
were sold. The purchase price totaled $625,000, which included one-half of the
common shares originally received as part of the consideration of the Sale.
The remaining shares were sold in September 1998 for approximately $253,000
resulting in a gain of approximately $13,000.
The pro forma consolidated condensed financial information presented
below reflects the Sale as if it had occurred on January 1, 1997. For purposes
of pro forma statement of operations information, no assumption has been made
that expenses have been eliminated which were included in corporate expense
allocations by the Company and DCA to the business operations sold and which
were included in the actual result of operations of these businesses. Such
expenses amounted to approximately $125,000 for the year ended December 31,
1997. No assumption has been included in the pro forma information as to
investment income to be realized from investment of the proceeds of the sale.
F-27
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
DECEMBER 31, 1998
NOTE 12-SALE OF SUBSIDIARIES' ASSETS--CONTINUED
The following summary pro forma financial information, which excludes
the gain on the Sale, is not necessarily representative of what the Company's
results of operations would have been if the Sale had actually occurred as of
January 1, 1996 and may not be indicative of the Company's operating results for
any future periods.
SUMMARY PRO FORMA INFORMATION
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996
----------- -----------
Total revenue $37,978,000 $32,685,000
=========== ===========
Net income $ 517,000 $ 2,112,000
=========== ===========
Earnings per share:
Basic $.09 $.39
==== ====
Diluted $.07 $.34
==== ====
DCA recorded a gain on the sale of approximately $2,747,000,
representing a pre-tax gain of approximately $4,431,000, net of estimated income
taxes of approximately $1,684,000, of which approximately $537,000 of the net
after tax gain relates to the 20% minority interest in two of the subsidiaries
whose assets were sold. The Company's portion of the net gain of $2,210,000
amount to approximately $1,527,000 with the balance of approximately $683,000
applicable to minority interest.
NOTE 13--REPURCHASE OF COMMON STOCK
In November 1997, the Company announced its intent to repurchase up to
$1,000,000 of its outstanding common stock. The shares that may be reacquired
may be used to fund stock option obligations. As of December 31, 1998, the
Company had repurchased approximately 141,000 shares of common stock at a cost
of approximately $221,000 which is reflected as treasury stock.
In September 1998, DCA announced its intent to repurchase up to 300,000
shares of its outstanding common stock. DCA has repurchased a total of 205,000
shares for approximately $315,000, including 100,000 shares acquired in June
1998.
F-28