<PAGE>
As filed with the Securities and Exchange Commission on May 9, 1997
Registration No. 333-____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MEDICORE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Florida 59-0941551
- ---------------------------------------------------------------- -----------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
DANIEL R. OUZTS, Vice President, Controller and Treasurer
2337 W. 76th Street 2337 West 76th Street
Hialeah, Florida 33016 Hialeah, Florida 33016
(305) 558-4000 (305) 558-4000
</TABLE>
(Address, including zip code and telephone number, including (Name, address,
including zip code and telephone number, area code, of registrant's
principal executive offices) including area code, of agent for service)
It is requested that copies of notices and communications be sent to:
LAWRENCE E. JAFFE, ESQ.
777 Terrace Avenue
Hasbrouck Heights, NJ 07604
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement
as determined by market conditions.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------ ------------------------ ----------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
Proposed Proposed
Maximum Maximum
Title of Each Class Amount to Be Registered Offering Aggregate Amount of
of Securities to be Registered Price Offering Price Registration Fee
Per Unit (1)(2) (1)(2)
- ------------------------------------------ ------------------------ ----------------- ---------------------- -------------------
Common Stock, $.01 par value .......... 1,207,000 (1)(2) $2.44 $2,945,080 $892
- ------------------------------------------ ------------------------ ----------------- ---------------------- -------------------
================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457. Represents (i) 400,000 shares of Common Stock
issuable under a 1994 Stock Option Agreement ("1994 Options") exercisable
through September 30, 1997 at $1.25 per share; and (ii) 807,000 shares of
Common Stock issuable under 1995 Stock Options ("1995 Options") exercisable
through April 17, 2000 at $2.38 per share.
(2) This Registration Statement covers, in addition, such indeterminate number
of shares of Common Stock as may be issuable pursuant to the anti-dilution
provision of the 1994 and 1995 Options.
---------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BY ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Preliminary Prospectus Dated May 9, 1997
Subject to Completion
MEDICORE, INC.
1,207,000 Shares of Common Stock
($.01 par value)
The 1,207,000 shares of Common Stock are being offered pursuant to
1994 Stock Options for 400,000 shares of common stock, $.01 par value ("Common
Stock") held by two persons (see "Selling Stockholders") exercisable at $1.25
per share through September 30, 1997 ("1994 Options"), and 1995 Stock Options
for 807,000 shares of Common Stock held by 21 officers, directors and employees
of the Company (see "Selling Stockholders") exercisable at $2.38 per share
through April 17, 2000 ("1995 Options"). See "Description of
Securities-Options." The 1994 Options and the 1995 Options, unless the context
otherwise indicates, will be referred to collectively as the "Options."
No commissions are to be paid upon exercise of the Options. Proceeds
from the exercise of the Options are payable to the Company. See "Use of
Proceeds". The Common Stock obtainable upon the exercise of the Options are
being offered by the Selling Stockholders for sale from time to time in the
over-the-counter market or in negotiated transactions or otherwise at the then
prevailing market prices or other negotiated prices. Proceeds from the sale of
the Common Stock by the Selling Stockholders are payable to them. See "Use of
Proceeds."
The Common Stock is listed for trading on the Nasdaq National Market
under the symbol "MDKI". The bid and asked quotations as reported by Nasdaq on
May 2, 1997 for the Common Stock was $2.38 and $2.75, respectively.
The exercise price of the Options was based on the fair market value of
the Common Stock on the date of grant of each option. The exercise price of the
1995 Options was reduced on December 30, 1996 from $3.00 per share to the then
current market price of $2.38 per share. The exercise prices of the Options are
not to be deemed indicative of the value of the Common Stock.
The Selling Stockholders, one of whom is a broker-dealer registered
with the Securities and Exchange Commission ("Commission") and with the National
Association of Securities Dealers, Inc. ("NASD"), and 21 of whom are officers,
directors and/or employees of the Company, are subject to the provisions of
Regulation M under the Securities Exchange Act of 1934 ("Exchange Act"). Sales
by the Selling Stockholders and acceptance of Common Stock issued hereby for
sale by any broker or dealer, shall constitute the representation and agreement
of each such Selling Stockholder, or broker or dealer, that such selling
stockholder or broker or dealer has not taken and will not take any action with
respect to the offering of the Common Stock hereby in violation of Regulation M.
See "Selling Stockholders" and "Plan of Distribution."
All of the expenses of this Offering, other than Selling Stockholders
commission and counsel fees, will be paid by the Company.
-----------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVESTMENT THEREIN
INVOLVES A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY
THE DISCUSSION UNDER "RISK FACTORS". SEE PAGE 7.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ________ , 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports and other information
with the Commission. Information concerning the Company, and its two public
subsidiaries, Techdyne, Inc. ("Techdyne") and Dialysis Corporation of America
("DCA") and their respective directors and officers, their remuneration and
options granted to them, their principal holders of securities and any material
interests of such persons in transactions with them, as of particular dates, is
set forth in information and proxy statements and annual reports distributed to
security holders and filed with the Commission and with Nasdaq. Such reports,
proxy statements and other information may be inspected without charge at the
public reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, NW, Room 1024, Washington, D.C. 20549, and at the regional offices
of the Commission, Region 1, Northeast Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048 and Region 3, Midwest Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. The Commission also maintains a Web site that contains reports,
proxy and information regarding registrants that file electronically with the
Commission at http:\www.sec.gov. Copies of all or any part of such materials may
be obtained upon payment of fees prescribed by the Commission from the Public
Reference Section of the Commission at its principal office in Washington, D.C.,
and its regional offices as set forth above. Such reports, information and proxy
statements and other information may also be inspected at the offices of the
Nasdaq National Market, 1735 K Street, NW, Washington, D.C. 20549.
The Company has filed with the Commission, 450 Fifth Street, NW,
Washington, D.C. 20549, a Registration Statement under the Securities Act of
1933 (the "Securities Act"), with respect to the Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and regulations
of the Commission. For further information, reference is hereby made to the
Registration Statement, including the schedules and exhibits filed as a part
thereof, which may be obtained from the Commission upon payment of the fees
prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December
31, 1996 ("Form 10-K") and the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997, each of which have been filed by the Company with
the Commission, are incorporated herein by reference.
All documents filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering of the Common Stock
offered hereby shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference in this Prospectus shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any document incorporated by reference in this Prospectus, other than exhibits
to any such document. Requests for such documents should be directed to
Medicore, Inc., 2337 W. 76th Street, Hialeah, Florida 33016, Attention: Daniel
R. Ouzts Vice President, Controller and Treasurer, telephone number (305)
558-4000; or Medicore, Inc., 777 Terrace Avenue, Hasbrouck Heights, New Jersey
07604, Attention: Lawrence E. Jaffe, Secretary, telephone number (201)
288-8220.
2
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the detailed information
and financial statements and notes thereto appearing elsewhere or incorporated
by reference in this Prospectus.
The Company
Medicore, Inc. ("Medicore"), incorporated in Florida in 1961, is an
international contract manufacturer of electronic, electromechanical and plastic
insert and injection molded products primarily for the data processing,
telecommunications and instrumentation industries through its 63% owned public
subsidiary, Techdyne, including its wholly-owned subsidiary Techdyne (Scotland)
Limited ("Techdyne (Scotland)") and Techdyne Livingston Limited which is a
subsidiary of Techdyne (Scotland). Medicore also owns and operates three kidney
dialysis centers through its 67% owned public subsidiary DCA. See "Business".
Medicore and its subsidiaries are collectively hereinafter referred to
as the "Company."
The Company 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. In addition, the
Company distributes a line of blood lancets used to draw blood for testing.
Developed by the Company and manufactured by Techdyne, the lancets are
distributed under the names Medi-Lance(Trademark) and Lady Lite(Trademark) or
as a private label if requested by the customer.
Through its subsidiary, Techdyne, the Company custom designs and
assembles primarily for original equipment manufacturers ("OEM's") over 800
components and finished products for approximately 80 accounts. For the year
ended December 31, 1996, approximately 58% of Techdyne's sales were domestic and
42% were effected by Techdyne's wholly owned subsidiary, Techdyne (Scotland) in
the European market and to a limited extent in the Middle East. See
"Business-Electro-Mechanical Manufacturing." The customer base consists
primarily of Fortune 100 companies. For the year ended December 31, 1996
approximately 73% of Techdyne's sales were made to numerous locations of four
major customers, Compaq Computer Corporation ("Compaq") (35%), IBM (18%), EMC
and its related suppliers (12%), and Motorola (9%). Sales to Avid Technology,
Inc. ("Avid") went from 19% in 1995 to 1% in 1996 as a result of a change in the
product produced for Avid, and not based on quality or service. During 1996,
bidding for Compaq orders became more competitive which resulted in
substantially reduced sales to Compaq with lower profit margins on remaining
sales. A loss or substantially reduced sales to any major customer would have
an adverse effect on Techdyne and the Company as was the case with Compaq in
Europe and with Avid in the United States.
The Company is pursuing new customer orders. Techdyne sales decreased
$6,237,000 (21%) in 1996 compared to the preceding years. Domestic sales of
Techdyne decreased $4,019,000 (22%), and European sales decreased $2,218,000
(18%) in 1996 compared to the preceding year. The decrease in domestic sales was
largely attributable to a decrease in sales to Avid, and the decrease in
European sales was largely attributable to declining sales to Compaq by Techdyne
(Scotland). See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
3
<PAGE>
The Company, through DCA and its subsidiaries, operates three
outpatient kidney dialysis treatment centers. The centers are located in Fort
Walton Beach, Florida, and Lemoyne and Wellsboro, Pennsylvania with a total
capacity of 42 stations. The Company plans to begin operations in a new facility
in Carlisle, Pennsylvania in the third quarter of 1997. DCA also expects to open
a facility in the Manahawkin area of New Jersey, but plans for its operations
are still in the developmental stage. Through its outpatient dialysis centers
and other DCA subsidiaries, the Company also provides inpatient dialysis
services to several hospitals, as well as providing home patient dialysis
services including the sale of medical supplies for dialysis treatments. Each of
the dialysis centers offers home training to qualified patients who wish to be
treated at home. Such treatments include continuous ambulatory peritoneal
dialysis ("CAPD") and continuous cycling peritoneal dialysis ("CCPD").
Individuals with End Stages Renal Disease ("ESRD"), chronic kidney
failure which is irreversible, receive dialysis treatments or kidney
transplantation to sustain life. The most prevalent form of treatment for ESRD
patients is home dialysis, 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. This is accomplished with a dialysis machine. See
"Business-Dialysis Operations."
Since DCA sold four of its dialysis centers in 1989, 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. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company leases 2,800 square feet in Hialeah, Florida; and 3,900
square feet in Hasbrouck Heights, New Jersey for its executive and
administrative offices. It also leases 5,000 square feet of space in Hialeah,
Florida for its medical supply and consumer products operations, including
offices and warehousing for that operation.
The Company owns two buildings in Hialeah Florida. One is a 16,000
square foot building housing Techdyne's executive and administrative offices
(approximately 5,000 square feet); engineering (approximately 2,000 square
feet); and prototype and production assemblies and plastic injection molding
(approximately 9,000 square feet). Adjacent to that facility is the second
building consisting of 12,000 square feet which houses a warehouse and
inspection segments of Techdyne's operations. The Company leases these
facilities to Techdyne. The Company also owns several parcels of land in
Hialeah, Florida, one located adjacent to Techdyne's executive and
administrative offices, and another small parcel of land near to Techdyne's
offices each used as parking lots. A small undeveloped parcel is near Techdyne's
warehouse facilities held for future expansion. The Company also leases office
space in New Jersey for its executive offices.
Techdyne also maintains approximately 18,000 square feet of
manufacturing, warehouse and office facilities in Austin and Houston, Texas
(both facilities being relocated and subject to lease negotiations), with a new
5,500 square foot facility in Milford, Massachusetts . Its overseas operations,
headquartered in Livingston, Scotland, consist of a 31,000 square foot facility.
See "Business-Property."
DCA owns two buildings in Maryland and Pennsylvania. The property in
Easton, Maryland, is comprised of approximately 8,000 square feet of which 5,400
square feet is leased to a competitor. DCA also maintains an office on the
premises. The property located in Lemoyne, Pennsylvania, consists of land and a
building that is 15,230 square feet and houses 13 dialysis stations with space
available for expansion. The Lemoyne and Easton properties are subject to
mortgages from a Maryland bank with remaining principal at December 31, 1996 of
$224,000 and $280,000, respectively. The mortgages are secured by the real and
personal property of each location and the bank also has a lien on the rents due
to DCA from these properties.
4
<PAGE>
DCA's subsidiary, Dialysis Services of Pennsylvania, Inc.- Carlisle
("DSP-C"), will begin a 5 year lease for the Carlisle, Pennsylvania, dialysis
facility upon completion of construction of the center anticipated to be in the
third quarter of 1997. The facility will consist of 4,340 square feet for 12
dialysis stations. One of DCA's other subsidiaries, Dialysis Services of New
Jersey, Inc. - Manahawkin, ("DSNJ") has completed negotiations for a 5 year
lease for a new facility in Manahawkin, New Jersey, that will house 12 dialysis
stations. Construction will begin subject to the ability to upgrade the systems
servicing the facility. See "Business-Property."
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. The Company's telephone number in Florida is (305) 558-4400, and in New
Jersey is (201) 288-8220.
The Offering
Common Stock:
Offered ............................. 1,207,000(1)
Outstanding .......................... 5,456,940(2)
Trading Symbols
Nasdaq National Market
Common Stock.................... MDKI
Use of Proceeds................................ The Company will not receive
any proceeds from the sale of
the Common Stock by the
Selling Stockholders and will
only receive proceeds upon
the exercise of the
Options. Assuming all the
presently outstanding Options
are exercised, the Company
would realize approximately
$2,421,000 less expenses of
this offering estimated at
$50,000. The net proceeds are
expected to be used for (i)
acquisition or construction of
new dialysis facilities; (ii)
new Techdyne satellite
facilities; (iii) expand
existing Techdyne products;
(iv) upgrade Techdyne plant
and equipment; and (v) for
working capital. See "Use of
Proceeds."
There is no assurance when or if
any of the Options will be
exercised by an Optionee.
- -------------------------
(1) Includes (i) 400,000 shares of Common Stock issuable under the 1994
Options, exercisable at $1.25 per share through September 30, 1997;and (ii)
807,000 shares of Common Stock issuable under the 1995 Options exercisable
at $2.38 per share through April 17, 2000; provided no more that 25% of the
1995 Option shares may be sold in any six month period without the consent
of the board of directors. See "Selling Stockholders" and "Description of
Securities."
(2) Does not include 807,000 shares of Common Stock underlying the 1995
Options granted in April, 1995 under the Company's 1989 Stock Option
Plan, which shares are included in this Prospectus for offer by the
Selling Stockholders.
5
<PAGE>
Dividends.......................................... The Company's board of
directors determines the
timing and amount of
dividends; no dividends
have been paid in the last
10 years; future
dividends, if any, will
depend, among other
things, upon the
Company's future
earnings, capital
requirements and financial
condition. See "Dividend
Policy."
Price Range of Securities......................... The Common Stock at May
2, 1997 closed at $2.50.
See "Market for the
Company's Securities."
Risk Factors...................................... Investment in these
securities involves a high
degree of risk. See
"Risk Factors".
Summary Consolidated Financial Information
The summary consolidated financial information set forth below is
derived from the more detailed consolidated financial statements and notes
thereto appearing elsewhere in this Prospectus or incorporated herein by
reference. All information should be read in conjunction with the consolidated
financial statements of the Company and the notes contained elsewhere in this
Prospectus or incorporated herein by reference.
Consolidated Statements of Operations Data
<TABLE>
<CAPTION>
Consolidated Statements of Operations Data
(in thousands except per share amounts)
Years Ended December 31
---------------------------------------------------------------------
1996(1) 1995 1994 1993 1992(2)
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<S> <C> <C> <C> <C> <C>
Revenues $34,719 $36,660 $24,552 $18,958 $18,737
Net income (loss) 2,417 2,251 864 18 (869)
Income (loss) per common share .40 .38 .16 -- (.19)
Weighted average shares
outstanding and equivalents 6,031,004 5,929,215 5,314,261 4,564,940 4,553,710
<CAPTION>
Consolidated Balance Sheet Data
(in thousands)
December 31
---------------------------------------------------------------------
1996(1) 1995 1994 1993 1992(2)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $13,844 $ 7,034 $ 4,871 $ 2,497 $ 2,557
Total assets 27,085 21,247 15,955 11,322 11,723
Long-term debt 1,677 964 1,667 918 1,249
Stockholders' equity(3) 13,021 9,754 8,027 5,881 5,885
</TABLE>
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(1) In 1996, the Company recorded estimated costs of $305,000 for shutdown
of its durable medical equipment operations.
(2) In 1992 estimated useful lives for plant equipment and tools and molds,
previously 7 years, were increased to 10 years. The effect of this change
in estimate was to reduce 1992 depreciation expense by approximately
$215,000 or $.05 per common share, loss before extraordinary credit by
$203,000 or $.04 per common share and net loss by $215,000 or $.05 per
common share.
(3) In 1993, the Company changed its method of accounting for income taxes
and implemented, on a retroactive basis, Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes". Prior
year amounts have been restated for the $188,000 retroactive effect of
adopting Statement No. 109.
6
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK. BEFORE MAKING AN INVESTMENT IN THE COMPANY, PROSPECTIVE PURCHASERS OF
THE COMMON STOCK OFFERED HEREIN SHOULD GIVE CAREFUL CONSIDERATION TO THE
FOLLOWING RISK FACTORS AFFECTING THE BUSINESS OF THE COMPANY AND ITS SECURITIES,
TOGETHER WITH OTHER INFORMATION IN THIS PROSPECTUS.
Risk Factors Relating to the Business of the Company
1. Dependence on Major Customers. A substantial portion of the business of
Techdyne, the Company's public subsidiary, is with divisions of four major
customers, Compaq, IBM, EMC and its related suppliers and Motorola, which
customers accounted for approximately 35%, 18%, 12% and 9%, respectively, of the
Company's sales for the year ended December 31, 1996. Although the Company has
maintained a good and long-standing relationship with these customers, the loss
of any of them would have a materially adverse effect on the Company.
Substantially reduced sales to Compaq, which customer accounted for 84% of
Techdyne (Scotland's) business in 1996, resulted in reduced earnings and a lower
profit margin for that subsidiary. Techdyne's sales to Avid Technology were down
from 19% in 1995 to 1% in 1996. No assurance can be given that Techdyne's major
customers will continue to use the Company for the design and manufacture of
their products. There are no long-term contracts with any customers.
Substantially all of the Company's sales and reorders are subject to competitive
bids. A loss or substantially reduced sales to any major customer would
necessarily have a materially adverse effect on the Company. See
"Business-Marketing and Sales."
2. Secured Loans-Existence of Liens on Significant Portion of Assets.
(i) Techdyne. A significant portion of Techdyne's assets have been
pledged as collateral to secure several bank loans. The financing provides for a
$2,000,000 line of credit, due on demand, secured by Techdyne's accounts
receivable, inventory, furniture, fixtures and intangible assets. There were no
amounts outstanding under this line of credit at December 31, 1996 and no
amounts have been drawn down on this line. A $712,500 term loan which had a
balance of $691,000 at December 31, 1996 is secured by two buildings and land
owned by the Company. The second term loan for $200,000, which had a balance of
$167,000 at December 31, 1996, is secured by Techdyne's tangible personal
property, goods and equipment. The Company has guaranteed these loans and has
subordinated $2,500,000 due from Techdyne, provided that Techdyne may make
payments to the Company on this subordinated debt from funds from Techdyne's
security offering and from earnings. Techdyne further agreed that in the event
that it should sell its interest in Techdyne (Scotland), which is not
anticipated, 50% of the selling price would be used to repay the $712,500 term
loan facility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 3 to "Notes to Consolidated Financial
Statements" to the Form 10-K. The Company was in default of certain financial
reporting requirements regarding these loans as of December 31, 1996 for which
the bank has granted waivers as of December 31, 1996 and through December 31,
1997.
(ii) DCA. A significant portion of DCA's assets have been pledged as
collateral to secure its indebtedness including its properties in Pennsylvania
and Maryland. Since these assets are pledged to secure outstanding indebtedness,
they are unavailable to secure additional debt financing, which could adversely
affect DCA's ability to borrow in the future. In the event DCA defaults on
payment of its obligations, including the making of required payment of
principal and interest, its indebtedness could be declared immediately due and
payable and, in certain cases, its assets could be foreclosed upon. By their
terms, these loans may now be called on 90 days notice, and have accordingly
been reflected as current
7
<PAGE>
liabilities. DCA has been and continues to be in default of certain provisions
of these financing agreements, except as to its timely payment of principal and
interest, which defaults the bank has waived through December 31, 1996. See
"Business-Properties," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 3 to " Notes to Consolidated
Financial Statements" to the Form 10-K.
3. Competition.
(i) Medical Supply Operations. The medical supply operations are
extremely competitive and the Company is not a significant competitive factor
in this area.
(ii) Techdyne. Manufacture and assembly of electro-mechanical and
electronic components is a highly competitive industry characterized by a
diversity and sophistication of products and components. Techdyne competes with
major electronics firms and, to a lesser extent, divisions of large concerns
with substantially greater financial and technical resources and personnel than
the Company. In addition, there are several offshore manufacturers with lower
labor rates, and therefore, lower product costs. The Company's customers could
elect to manufacture in-house the products they presently purchase from the
Company, which would have a negative affect on the Company. See
"Business-Competition."
(iii) DCA. The operation of kidney dialysis centers is very
competitive, in terms of both operations and acquisition of existing dialysis
centers. There are numerous local providers, many owned by physicians, and a
variety of major operators, who have substantially greater financial resources
and many more centers and patients than the Company. In 1996 there were in
excess of 2,860 Medicare approved ESRD facilities of which approximately 2,000
were independent dialysis centers. There is extensive competition for
acquisition of existing dialysis centers in the markets targeted by the Company,
which has increased the cost of acquiring such facilities. Hospitals and other
outpatient dialysis centers compete with the Company's dialysis operations.
Competition is also intense for qualified nursing and technical staff as well as
for neurologists with an adequate patient base. Peritoneal dialysis, a more
convenient and less expensive dialysis procedure, presents an additional
competitive aspect to hemodialysis treatment. The Company is not a significant
competitive factor in kidney dialysis services primarily based upon its limited
number of centers and size. See "Business-Competition."
4. Dependence on Key Employees. The continued services of Thomas K. Langbein,
Chairman of the Board of Directors, Chief Executive Officer of the Company,
Techdyne and DCA, and President of the Company, and Barry Pardon, President of
Techdyne, Joseph Verga, Sr. Vice President, Secretary and Treasurer of Techdyne,
John Grieve, Managing Director and Vice President of European Operations for
Techdyne, and Bart Pelstring, President of DCA are essential to the Company.
Messrs. Langbein and Pardon have employment agreements with the Company and
Techdyne, respectively. The loss of these individuals would have a materially
adverse effect upon the Company. The Company does not have nor has
any immediate plans to obtain "key-man" insurance. See "Management."
5. Material Factors Relating to Operation of the Business.
(i) Techdyne. Techdyne's existing and future operations are and will be
influenced by several factors including technological developments, the ability
of the Company to efficiently meet the design and production requirements of its
customers, and the market acceptance of its customer's products. Further factors
impacting the success of the Company's operations in this area are increases in
expenses associated with continued sales growth, the ability to control costs,
management's ability to evaluate new orders to target satisfactory profit
margins, the capacity of Techdyne to develop and manage the introduction of new
products, and competition. Quality control is also essential to Techdyne's
operations, since customers demand strict compliance with design and product
specifications. Any adverse change in the Company's quality and process controls
would adversely affect its relationship with customers and ultimately its
8
<PAGE>
revenues and profitability. See "Business-Quality and Process Control."
(ii) DCA. DCA's growth will be through acquisition and/or development
of additional dialysis centers and expanded inpatient services. Implementation
is dependent on availability of suitable centers for acquisition, the timely
development of outpatient dialysis centers in acceptable areas, the ability to
acquire or develop such dialysis centers at costs within the budget of the
Company, and the availability of qualified and cost-effective nursing and other
technical personnel. The Company is always seeking new opportunities in the
dialysis industry, and is currently negotiating with several physicians for the
acquisition and development of additional dialysis centers. There is no
assurance that any or all of these factors will be satisfied, that the Company
will be able to enter into favorable relationships with physicians who would
become Medical Directors of such proposed dialysis centers, or that the Company
will be able to acquire or develop any new dialysis centers within a favorable
geographic area. There is also no certainty as to when any new centers might be
established or the number of stations or patient treatments such centers may
involve. See "Business-Business Strategy." The dialysis facilities and those
centers the Company is seeking to acquire and/or develop are dependant upon
referrals of ESRD patients for treatment by physicians specializing in
nephrology. The normal procedure in the industry is for the nephrologist or
medical professional association of physicians supervising a particular center's
operations, usually called the Medical Director, to account for all or a
significant portion of the patient base. The loss of certain key referring
physicians at a particular center could have a material adverse effect of the
operations of the center and could adversely affect the Company's operations.
See "Business-Dialysis Operations-Physician Relationships."
6. Operating Losses. DCA sold four of its five dialysis centers in 1989, and
since that time has incurred operational losses. Although DCA has reflected
income over the years, this has been due to interest income from the funds
received upon sale of the dialysis centers and interest income on advances to
the Company. DCA incurred losses for fiscal 1996 and 1995 of $22,961 and
$167,271, respectively. See "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in the Form 10-K Consolidated Financial Statements. Up to
mid-1995, DCA advanced funds from the sales of its dialysis centers to the
Company for its and its subsidiaries' operations. DCA initiated its expansion
program in 1995 with two new centers which it developed in Pennsylvania and a
marketing division, Renal Services. These centers are in the developmental stage
and generated losses in 1996 due to operational costs and sufficient time needed
to develop full capacity dialysis treatments. See Risk Factor No. 5 under "Risk
Factors Relating to the Business of the Company" and "Business-Dialysis
Operations-Business Strategy." There is no assurance that the Company's
expansion strategy will be effected, or if so, although increased revenues may
be anticipated, that the Company will operate profitably.
7. Government Regulation. The dialysis operations must adhere to stringent
regulations of federal and state authorities. Its operations are subject to the
terms of the Social Security Act and similar state laws which provide that it is
unlawful to solicit, offer, receive or pay any remuneration, directly or
indirectly, for referring a patient for treatment that is paid in whole or in
part by Medicare, Medicaid or similar state program. The major federal
legislation that affects operations are the following:
(i) The Omnibus Budget Reconciliation Act of 1993 contains the
Physician Ownership and Referral Act known as "Stark II" that has certain
provisions that restrict physician referrals for certain "designated health
services" to entities with which a physician or an immediate family member has a
"financial relationship." Designated health services include, among others, home
health services and inpatient and outpatient hospital services. DCA at its Fort
Walton Beach facility, provided inpatient dialysis treatments for a local
hospital. The physician director of DCA's Fort Walton Beach center has a
financial interest in that facility and has patients at the local hospital which
thereby could have been deemed self-referrals for inpatient hospital services.
In 1995, DCA restructured its inpatient hospital treatment relationship through
9
<PAGE>
another subsidiary. The President and Congress are in the process of attempting
to reform the health care system. It is possible that federal and state
governments will impose additional restrictions upon activities of the type
conducted by DCA, which might have a materially adverse effect on the Company's
business and results of operations.
(ii) The Social Security Act prohibits, as do many state laws, the
payment of patient referral fees for treatments that are paid for by Medicare,
Medicaid or similar state programs. As required by Medicare regulation, each of
DCA's dialysis centers is supervised by a Medical Director, a licensed
nephrologist or otherwise qualified physician. The Medical Directors are in
private practice and are one of the most important sources of the dialysis
center's business, since it is such physician's patients that utilize the
services of the center. DCA has never been challenged under these statutes and
believes its arrangement with Medical Directors are in material compliance with
applicable law. DCA endeavors in good faith to comply with all governmental
regulations.
(iii) DCA must comply with certain rules and regulations of the Health
Care Financing Administration ("HCFA"), which agency sets the reimbursement
rates for dialysis treatments and other medical services. Although none of DCA's
business arrangements have been the subject of investigation by any governmental
authority, no assurance can be given that legislative developments will not
require restructuring business arrangements or that such will comply or be
subject to governmental review.
(iv) In August, 1996, President Clinton signed the Health Insurance
Portability and Accountability Act of 1996, a package of health insurance
reforms which include a variety of provisions important to health care
providers, such as significant changes to the Medicare and Medicaid fraud and
abuse laws, which provisions were effective January 1, 1997.
(v) DCA's dialysis centers are subject to hazardous waste laws and
non-hazardous medical waste regulation. Most of the waste is non-hazardous
waste, which is disposed of by medical waste sanitation agencies which are
primarily responsible for compliance with such laws.
(vi) 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,
including providing employees subject to exposure with hepatitis B vaccination,
protective equipment, written exposure control plan and training in infection
control and waste disposal.
Although the Company believes it complies in all material respects with
currently applicable laws and regulations and to date has not had any difficulty
in maintaining its licenses or its Medicare and Medicaid authorizations, the
health care service industry is and will continue to be subject to substantial
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 the Company's activities will not be reviewed or challenged by
regulatory authorities.
Any loss by DCA of its various federal certifications, its
authorization to participate in the Medicare or Medicaid programs or its
licenses under the laws of any state or other governmental authority from which
a substantial portion of its revenues is derived or a change resulting from
health care reform reducing dialysis reimbursement or reducing or eliminating
coverage for dialysis services would have a material adverse effect on DCA's
business. See "Business-Dialysis Operations-Government Regulation."
8. Medicare Reimbursement; Fixed Rates. Most of the Company's revenues from its
dialysis operations are attributable to payment received from Medicare under the
Medicare ESRD program which reimburses 80% of the patient charges for each
dialysis treatment. This reimbursement rate is determined by HCFA. The
10
<PAGE>
level of the Company's revenues and profitability may be affected by potential
legislation resulting in rate cuts. The national average per treatment
reimbursement rate has decreased from $138 in 1983 to approximately $126 current
average per treatment rate. The Company's reimbursement rates range from $117 to
$123 per treatment. Management is unable to predict whether future rate changes
will be made, and even if made whether they will have a material effect on the
Company's revenue and net earnings. See "Medicare Reimbursement" and "Government
Regulation" under the caption "Business-Dialysis Operations." Furthermore,
operating costs tend to increase over the years without any comparable
increases, if there are any increases at all in the prescribed dialysis
treatment rates, which usually remain fixed and have decreased over the years.
Similarly, the states in which the Company operates, Florida and
Pennsylvania, provide Medicaid or comparable benefits to qualified recipients to
supplement their Medicare payments, and these programs are subject to regulatory
changes and governmental funding restrictions. The Company is not able to
predict whether such regulations and funding will adversely affect these
reimbursement programs. See "Business - Dialysis Operations - Medicore
Reimbursement."
9. Limited Operating History of New Centers. The Company, through DCA, operates
three dialysis centers, two of which Dialysis Services of Pa., Inc.- Lemoyne,
("DSP-L") and Dialysis Services of Pa., Inc.-Wellsboro ("DSP-W") commenced
operations in 1995. These new dialysis facilities operate at approximately 50%
and 25% capacity, respectively. DSP-W is in a rural area and is anticipated to
take a longer time to develop. It has been the Company's experience that a newly
developed dialysis center, as opposed to the acquisition of an existing
operating facility, takes approximately one year to develop sufficient patients
and dialysis treatments to break even. These new dialysis centers, although
generating increased revenues for the Company, reflected losses through fiscal
1996. DSP-C is under construction and is anticipated to be operation in the
third quarter of 1997. There is no assurance that those facilities or any new
dialysis facilities that might be acquired or developed by the Company will be
operated profitably. See Risk Factor No. 5 above and "Dialysis Operations,"
"Business Strategy" and "Competition" under the caption "Business."
Primary factors that determine whether a dialysis center will be
profitable are its geographic location, the availability of nephrologist
physicians to supervise the facility and provide a significant portion of the
patient base, the ability to retain qualified and cost effective nursing and
other technical personnel, and competition. See "Business Strategy" and
"Competition" under the caption "Business-Dialysis Operations."
10. Insurance and Potential Liability. For its dialysis operations, the Company
maintains and intends to continue to do so, insurance, including insurance
relating to personal injury and medical professional liability insurance in
amount the Company considers adequate and customary for the industry. The
Company has never had a claim asserted against it notwithstanding the extensive
dialysis treatments it has provided over the years. Nevertheless, a partially or
wholly uninsured claim against the Company, if successful and of sufficient
magnitude, could have a material adverse effect on the Company. There is no
assurance such insurance will continue to be available to the Company in the
future, or if so, that it will provide adequate coverage against potential
liabilities or that a liability claim will not have a material adverse effect on
the Company.
11
<PAGE>
Risk Factors Relating to the Securities and the Offering
1. Controlling Shareholders; Potential Conflict of Interest. Assuming full
exercise of the Options there will be an additional 1,207,000 shares of Common
Stock outstanding, which shares are being offered pursuant to this Prospectus
(see "Selling Stockholders"), and which shares represent approximately 18.1% of
the Common Stock to be outstanding. Assuming full exercise of the Options, the
officers, directors, and employees of the Company and its subsidiaries will own
approximately 2,672,000 shares of Common Stock (approximately 40% of the
Company). Although such is not numerical control, it provides practical ability
to control the policies of the Company and voting. Therefore, these individuals
will have a significant influence on all matters on which shareholders are
entitled to vote.
Two of the executive officers and/or directors of the Company are also
executive officers and/or directors of Techdyne and DCA, Thomas K. Langbein,
Chairman of the Board of Directors, Chief Executive Officer and President of the
Company, is also Chairman of the Board and Chief Executive Officer of Techdyne
and DCA; and Daniel R. Ouzts, Vice President (Finance) and Controller of the
Company, holds those positions with Techdyne and DCA, the latter of which he is
also Treasurer. Messrs. Peter D. Fishbein and Anthony C. D'Amore are each
directors of the Company and Techdyne. See "Management." Compensation of the
common executive personnel and certain other administrative services, facilities
and other central operating costs provided by the Company to Techdyne and DCA
are charged on the basis of direct usage when identifiable or on the basis of
time spent. The amount of expenses charged by the Company to Techdyne and DCA,
respectively, was approximately $408,000 and $240,000 for each of the years
ended December 31, 1996, 1995 and 1994. See "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held on June 11, 1997, which is incorporated
herein by reference.
In addition, Mr. D'Amore, director of the Company and Techdyne,
obtained $9,500 in commissions for general liability insurance coverage in 1996,
and George Langbein, an independent sales representative for the Company and
brother of Chairman of the Board, sold group health insurance to several
executives of the Company. Related party transactions are disclosed to the board
which decides whether the transactions are in the best interests of the Company
and on terms no less favorable than could be obtained from unaffiliated third
parties. However, there can be no assurance that any further conflicts of
interest will be resolved in favor of the Company. See "Business- Property,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held on June 11, 1997, which is incorporated herein by
reference.
2. Possible Volatility of Share Price. The Common Stock traded on the American
Stock Exchange from 1986 through June 3, 1996 at which time the Common Stock
commenced trading on the Nasdaq National Market. Further announcements
concerning the Company or its competitors, including operational results, shares
eligible for future sale (see Risk Factor No. 5 under "Risk Factors Relating to
the Securities and the Offering"), government regulatory changes, or
technological innovations may have a significant impact on the market price of
the Company's securities. As a result of these factors, the price of the Common
Stock may fluctuate significantly.
3. Possible Delisting and Risks of Low Priced Stocks. The Common Stock trades on
the Nasdaq National Market. The minimum maintenance criteria for securities
listed on the Nasdaq National Market includes two alternatives, the first
requiring $4,000,000 in net tangible assets, 750,000 share public float,
$5,000,000 market value of public float, a bid price of $1.00, two market makers
and at least 400 shareholders of record, all of which criteria the Company
satisfies. The second alternative maintenance standard is much more stringent
requiring a market capitalization $50,000,000 or the issuer must have
$50,000,000 in total assets and total revenues, a public float of 1,100,000
shares with a market value of $15,000,000, and a minimum bid price of $5.00 and
four market makers. If the Company is unable to satisfy the Nasdaq National
Market maintenance criteria, the Common Stock may be delisted from trading on
the Nasdaq National Market. In
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<PAGE>
such event, trading in the Common Stock would be considered on the Nasdaq
SmallCap Market, which lacks the prestige and liquidity of Nasdaq National
Market. As a consequence, an investor would most likely find it more difficult
to dispose of the Common Stock and may be exposed to a risk in a decline in the
market price of the Common Stock.
4. Dividends Unlikely. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the board of directors out of funds
legally available therefor. To date, the Company has not paid any cash
dividends. The board does not intend to declare any cash dividends in the
foreseeable future and earnings, if any, will be used to finance the capital
requirements of the Company.
5. Shares Available for Future Sale. Officers and directors of the Company and
its subsidiaries own approximately 2,655,000 (approximately 40%) shares of the
Company, including the 807,000 shares of Common Stock issuable upon exercise of
the 1995 Options, which shares are being offered for sale pursuant to this
Prospectus, substantially all of which shares are not "restricted" from resale,
except such persons may be deemed "affiliates" (control persons) of the Company
as defined in Rule 144 promulgated under the Securities Act, and may only sell
their shares absent registration, in accordance with the provisions of Rule 144,
exclusive of the one-year holding period. In addition, there are 400,000 shares
(approximately 18% of the outstanding shares) of Common Stock underlying the
1994 Options, being offered by two entities through this Prospectus. Rule 144
entitles affiliates holding non-restricted securities of the Company to sell
every three months in ordinary brokerage transactions an amount of shares which
does not exceed the greater of 1% of the Common Stock outstanding, or the
average weekly trading volume as reported by Nasdaq during the four calendar
weeks prior to said sales. Any substantial sales pursuant to Rule 144, including
the sale of the Common Stock by the Selling Stockholders, may have an adverse
effect on the market price of the Common Stock, and may hamper the Company's
ability to arrange subsequent equity or debt financing or affect the terms and
time of such financing. See "Shares Eligible for Future Sale."
6. Determination of Option Exercise Price. The exercise price of the Options was
based on the fair market value of the Common Stock on the date of grant of each
option. The exercise price of the 1995 Options was reduced on December 30, 1996
from $3.00 per share to the then current market price of $2.38 per share. The
exercise prices of the Options are not to be deemed indicative of the value of
the Common Stock.
USE OF PROCEEDS
The Company will not realize any proceeds from the sale of the Common
Stock from the exercise of the Options held by the Selling Stockholders. The
Company will only receive proceeds from the exercise of the Options. Assuming
exercise of all the Options, the Company would realize net proceeds of
approximately $2,421,000, less expenses of the offering to be paid by the
Company estimated at approximately $50,000. See "Plan of Distribution."
The Company plans to use any proceeds received primarily for (i)
acquisition or construction of new dialysis facilities; (ii) new Techdyne
satellite facilities; (iii) development of new Techdyne products including low
to medium volume surface mount printed circuit boards ("PCBs") and new custom
designed products (see "Business-Electro-Mechanical-Manufacturing Products and
Services"); (iv) upgrading Techdyne's plant and equipment (see
"Business-Electro-Mechanical Manufacturing-Manufacturing and Supplies"); and (v)
working capital.
There is no assurance when, or if any, of the Options will be exercised
by Optionees and, therefore, there can be no assurance that the Company will
realize any proceeds.
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<PAGE>
None of the expenditures allocated to the above categories is a firm
commitment by the Company. These are the current plans of the Company. Future
events may make shifts in the allocation of funds necessary or desirable.
Although the Company has no current plans or intentions to reallocate the
proceeds that may result from the exercise of the Options, management, subject
to the approval of the board of directors, may reallocate the proceeds in such
manner it deems appropriate.
Pending use of the proceeds, if any, from the exercise of the Options,
the Company may invest such funds in short term investments of high quality,
bank time deposits, certificates of deposit, or similar investments.
MARKET FOR THE COMPANY'S SECURITIES
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 indicates the high and low sales
prices by quarter for the Company's Common Stock for the two years ended
December 31, 1996.
<TABLE>
<CAPTION>
Sale Price
--------------------------------------------
High Low
---- ---
1996
<S> <C> <C>
1st Quarter.................. 9 3/8 4
2nd Quarter................. 6 5/8 3 3/4
3rd Quarter................. 5 3/8 3 1/4
4th Quarter................. 5 3/4 2 3/8
1995
1st Quarter.................. 4 2 3/8
2nd Quarter................. 3 13/16 2 3/4
3rd Quarter.................. 7 1/2 3
4th Quarter.................. 6 1/2 3 1/4
</TABLE>
On May 2, 1997, the closing price of the Common Stock was $2.50.
As of May 2, 1997, the Company had 1,400 shareholders of record. The
Company estimates, based upon its 1997 proxy solicitation, that its Common Stock
is held by approximately 4,000 beneficial shareholders.
DIVIDEND POLICY
The Company has not paid, nor does it have any present plans to pay
cash dividends on its Common Stock in the immediate future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations". The
Company's board of directors would determine the timing and amount of any
dividends, if such were to be granted in the future. Such future dividends, if
any, will depend on the Company's future earnings, capital requirements and
financial condition.
14
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data for the five years
ended December 31, 1996 are derived from the consolidated financial statements
audited by Ernst & Young LLP, independent certified public accountants. This
data is qualified in its entirety by reference to and should be read in
conjunction with the Consolidated Financial Statements and Notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are included or incorporated by reference elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Consolidated Statements of Operations Data
(in thousands except per share amounts)
Years Ended December 31
---------------------------------------------------------------------
1996(1) 1995 1994 1993 1992(2)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $34,719 $36,660 $24,552 $18,958 $18,737
Net income (loss) 2,417 2,251 864 18 (869)
Income (loss) per common share .40 .38 .16 -- ( .19)
Weighted average shares
outstanding and equivalents 6,031,004 5,929,215 5,314,261 4,564,940 4,553,710
<CAPTION>
Consolidated Balance Sheet Data
(in thousands)
December 31
---------------------------------------------------------------------
1996(1) 1995 1994 1993 1992(2)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $13,844 $ 7,034 $ 4,871 $ 2,497 $ 2,557
Total assets 27,085 21,247 15,955 11,322 11,723
Long-term debt 1,677 964 1,667 918 1,249
Stockholders' equity(3) 13,021 9,754 8,027 5,881 5,885
</TABLE>
- ----------------------------
(1) In 1996, the Company recorded estimated costs of $305,000 for
shutdown of its durable medical equipment operations.
(2) In 1992 estimated useful lives for plant equipment and tools and molds,
previously 7 years, were increased to 10 years. The effect of this
change in estimate was to reduce 1992 depreciation expense by
approximately $215,000 or $.05 per common share, loss before
extraordinary credit by $203,000 or $.04 per common share and net loss
by $215,000 or $.05 per common share.
(3) In 1993, the Company changed its method of accounting for
income taxes and implemented, on a retroactive basis, Statement of
Financial Accounting Standard No. 109, "Accounting for Income
Taxes". Prior year amounts have been restated for the $188,000
retroactive effect of adopting Statement No. 109.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this Prospectus that are not historical are
forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act including statements regarding the
Company expectations, intentions, beliefs, or strategies regarding the future.
Forward looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability, and anticipated expense levels in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" including the pursuit of new Techdyne business development efforts
to replace lost sales from several major customers in 1996, and the development
of new products and facilities, anticipated development and acquisition of
dialysis centers, new facility completions and related anticipated costs. All
forward looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward looking statements. 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 this Prospectus.
Techdyne's electronic and electro-mechanical manufacturing and assembly
operations are subject to substantial competition from divisions of large
electronic and high technology firms and numerous smaller, specialized
companies. Strong competition derives from price advantages of competitors with
less expensive off-shore operations. This imposes pressure on Techdyne's bidding
orders and profit margins.
The Company's future growth as an international contract manufacturer
of precision electronic, electro-mechanical and plastic insert and injection
molded products for OEMs in the data processing, telecommunication and
instrumentation industries, will be influenced by several factors including
technological developments, the ability of the Company to efficiently meet the
design and production requirements of its customers, and the market acceptance
of its customer's products. Further factors impacting the success of the
Company's electronic manufacturing operations are increases in expenses
associated with continued sales growth, the ability of Techdyne to control
costs, management's ability to evaluate new orders to target satisfactory profit
margins, the capacity of Techdyne to develop and manage the introduction of new
products, and competition. Quality control is also essential to Techdyne's
operations, since customers demand strict compliance with design and product
specifications. Any adverse change in Techdyne's excellent quality and process
controls could adversely affect its relationship with customers and ultimately
its revenues and profitability.
The dialysis industry is highly competitive and subject to extensive
regulation, including the limitation on fees for dialysis treatments and
services. Significant competitive factors include quality of care and service,
convenience of location and pleasant environment. Additionally, there is intense
competition for retaining qualified nephrologists who normally are the sole
source of patient referrals and are responsible for the supervision of the
dialysis centers. There is also substantial competition for obtaining qualified
nurse and technical staff. Major companies, some of which are public companies
or divisions of public companies, have many more centers, physicians and
financial resources than does the Company's subsidiary, DCA and by virtue of
such have a significant advantage in competing for acquisitions of dialysis
facilities in areas targeted by the Company.
The Company's growth in dialysis operations depends primarily on the
availability of suitable dialysis centers for acquisition or development in
appropriate and acceptable areas, and the Company's ability to compete with
larger companies with greater personnel and financial resources to develop these
new potential dialysis centers at costs within the budget of the Company. Its
ability to retain qualified
16
<PAGE>
nephrologists, nursing and technical staff at reasonable rates
is also a significant factor. Management continues in negotiations with
nephrologists for the acquisition or development of new dialysis facilities, as
well as hospitals and other health care maintenance entities. The Company has
its fourth center in Carlisle, Pennsylvania under construction and its fifth
center is awaiting approval to upgrade services to that facility before the
lease can be effective and construction to commence. Several agreements for
acute inpatient services are under review, but there is no assurance that such
agreements would be completed. Even if the Company were to establish new centers
in the near future, or complete inpatient treatment arrangements, there is no
certainty as to when any new centers or service contracts would be implemented,
or the number of stations, or patient treatments such may involve, or if such
will ultimately be profitable.
Results of Operations
1996 Compared to 1995
Consolidated revenues decreased approximately $1,941,000 (5%) in 1996
compared to the previous year. Sales revenues decreased $4,460,000 (13%) in 1996
compared to the preceding year. 1996 revenues included a $1,521,000 gain on a
securities offering of DCA, the Company's dialysis subsidiary, with 1995
revenues including a $2,002,000 gain on a securities offering of Techdyne, the
Company's electronic and electro-mechanical subsidiary. See Note 8 to "Notes to
Consolidated Financial Statements" in the Form 10-K. Gain on sale of marketable
securities represents a gain attributable to the sale of Viragen common stock
for which the carrying value had been written-off in previous periods (see Note
2 to "Notes to Consolidated Financial Statements" in the Form 10-K) with the
1996 gain amounting to $2,584,000 compared to $183,000 for the preceding year.
Other income increased approximately $600,000, including a $228,000 gain on the
Viragen note recovery (see Note 2 to "Notes to Consolidated Financial
Statements" in the Form 10-K); $140,000 from a litigation settlement (see Note 7
to "Notes to Consolidated Financial Statements" in the Form 10-K); and an
increase in interest income of $254,000 resulting from interest on Scotland
funds invested which were previously tied up in receivables and inventory prior
to the cutback in Compaq business in the third quarter of 1996 and interest on
funds invested resulting from the Techdyne and DCA public offerings.
Techdyne's sales decreased $6,237,000 (21%) in 1996 compared to the
preceding year. Domestic sales of Techdyne decreased $4,019,000 (22%) and
European-based sales decreased $2,218,000 (18%) in 1996 compared to the
preceding year. The decrease in domestic sales compared to the preceding year
was largely attributable to a decrease in sales of $5,337,000 to Avid Technology
which was offset to some degree by a net increase in sales to other customers.
The decrease in European-based sales was largely attributable to a decrease of
$2,160,000 in sales to Compaq Computer Corp. by Techdyne (Scotland).
Approximately 73% of Techdyne's consolidated sales and 60% of the
Company's consolidated sales for 1996 were made to four customers. Customers
generating in excess of 10% of Techdyne's consolidated sales with their
respective portions of Techdyne's and the Company's consolidated sales included
Compaq which accounted for 35% and 29%, IBM for 18% and 14% and EMC and its
related suppliers for 12% and 9%. 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 are not replaced. The Company is pursuing new business development
efforts to replace lost sales, although there can be no assurance as to the
success of such efforts.
17
<PAGE>
Revenues of Techdyne Scottish-based subsidiary Techdyne (Scotland),
continue to be highly dependent on sales to Compaq, which accounted for
approximately 84% and 86% of the sales of Techdyne (Scotland) for 1996 and 1995,
respectively. The bidding for Compaq orders in Scotland has become more
competitive, which resulted in substantially reduced Compaq sales and lower
profit margins on remaining Compaq sales. Techdyne (Scotland) is pursuing new
business development efforts to replace significant reductions in Compaq
business and is pursuing cost reduction efforts to remain competitive with
respect to Compaq, although there can be no assurance as to the success of such
efforts.
Medical product sales revenues increased $310,000 (15%) for 1996
compared to the preceding year. This increase included sales of approximately
$297,000 attributable to All American Medical & Surgical Supply Corp., the
Company's home healthcare durable subsidiary which commenced operation in
January, 1996.
Medical services sales revenues, which represents revenues of DCA, the
Company's dialysis division, increased $1,526,000 (66%) for 1996 compared to the
preceding year. This increase was largely attributable to increased revenues of
approximately $1,292,000 (243%) compared to the preceding year for the Company's
new dialysis centers which commenced operations in Lemoyne, Pennsylvania in
June, 1995 and Wellsboro, Pennsylvania in October, 1995. Although the new
Lemoyne and Wellsboro, Pennsylvania centers have resulted in increased revenues,
during their developmental stage, these centers will adversely affect the
Company's results of operations.
Cost of goods sold as a percentage of consolidated sales amounted to
82% of sales for 1996 and the preceding year.
Cost of goods sold for Techdyne remained relatively stable, increasing
to 86% compared to 85% for the preceding year.
Cost of goods sold for the medical products division increased to 68%
for 1996 compared to 61% for the preceding year, which reflects reduced margins
on the principal product of the medical supply division and relatively low
margins for the Company's medical durable subsidiary, All American Medical &
Surgical Supply Corp., which the Company decided to shutdown due to unprofitable
operations.
Cost of medical services sales decreased to 65% for 1996 compared to
69% for the preceding year, largely as a result of a decrease in healthcare
salaries as a percentage of sales due to the increased sales revenues generated
by the Company's new Pennsylvania facilities.
Selling, general and administrative expenses increased $1,463,000 for
1996 compared to the preceding year. This increase included the Company's two
new Pennsylvania dialysis centers and the Company's new subsidiary, All American
Medical & Surgical Supply Corp. which commenced operations in January, 1996. The
Company has recorded approximately $305,000 in shutdown costs for All American.
Also included was stock compensation expense during the second quarter of 1996
of approximately $344,000 for forgiveness of notes from option exercises and
accrued interest.
Interest expense decreased by approximately $29,000 in 1996 compared to
the preceding year as a result of changes in both average outstanding borrowings
and average interest rates associated with those borrowings.
The bulk of the Company's outstanding borrowings are related to real
property and tied to the prime interest rate. The prime rate was 8.25% at
December 31, 1996 and 8.5% at December 31, 1995 respectively.
18
<PAGE>
1995 Compared to 1994
Consolidated revenues increased $12,108,000 (49%) in 1995 compared to
the previous year, including a $2,002,000 gain on a securities offering of
Techdyne, the Company's electronic and electro-mechanical subsidiary. See
"Liquidity and Capital Resources" below and Note 8 to "Notes to Consolidated
Financial Statements" to the Form 10-K. Techdyne accounted for most of the
$10,410,000 (44%) sales increase. Techdyne revenues increased $9,889,000 (48%)
over 1994 with domestic revenues increasing $5,459,000 (43%) and European-based
revenues increasing $4,430,000 (56%).
The increase in domestic revenues of Techdyne for the year resulted
from an overall net increase in sales to existing customers, and continuing new
customer development efforts, coupled with additional revenues resulting from an
increased level of customer service made possible through Techdyne's Texas
manufacturing facilities, one in Houston, Texas and the other recently
established in Austin, Texas.
The revenues of Techdyne's Scottish-based subsidiary, Techdyne
(Scotland), continue to be highly dependent on sales to Compaq Computer Corp.
which accounted for approximately 86% and 80% of the sales of Techdyne
(Scotland) for 1995 and 1994, respectively. Sales by Techdyne (Scotland) to
Compaq in 1995 increased $4,280,000 (68%) compared to the preceding year. While
the Company believes that Techdyne (Scotland) will maintain substantial sales to
Compaq, the bidding for Compaq orders in Scotland has become more competitive,
which the Company anticipates may result in some loss of Compaq business and
will result in lower profit margins on Compaq sales. Techdyne (Scotland) intends
to pursue new business development efforts to replace reductions in Compaq
business and to pursue cost reduction efforts to remain competitive with respect
to Compaq, although there can be no assurance as to the success of such efforts.
Approximately 80% of Techdyne's consolidated sales and 72% of the
Company's consolidated sales for 1995 were made to five customers. Compaq
accounted for 36% and 32%, Avid Technology for 19% and 17%, and the other three
customers each accounted for less than 10% of Techdyne's and the Company's
consolidated sales. The loss, or substantially reduced sales to, any of these
customers would have an adverse effect on the Company's operations. Techdyne had
sales of $5,653,000 to Avid for 1995. As a result of a change in the product
platform of the product produced for Avid, Techdyne anticipates a loss of a
majority of its sales to Avid during the next year. Techdyne intends to pursue
new business development efforts to replace these lost sales, although there can
be no assurance as to the success of such efforts.
Medical supply sales revenues increased $144,000 (9%) in 1995 compared
to the preceding year. The principal product of this division the
Medi-lance(Trademark), accounted for 76% and 70% of medical product sales
revenues in 1995 and 1994, respectively.
Medical services sales revenues, which represents revenues of the
Company's dialysis division, increased $475,000 (26%) in 1995 compared to the
preceding year. This increase primarily resulted from the commencement of
treatments at the Company's new dialysis centers in Lemoyne, Pennsylvania in
June 1995 and Wellsboro, Pennsylvania in October 1995, which accounted for
approximately $531,000 in revenues for the year ended December 31, 1995.
Revenues related to the Company's dialysis center in Fort Walton Beach, Florida
decreased approximately $57,000, which included revenues lost as a result of a
19
<PAGE>
hurricane (see "Liquidity and Capital Resources" below), for the year ended
December 31, 1995 compared to the same period of the preceding year. Although
the new Lemoyne and Wellsboro, Pennsylvania centers (see "Liquidity and Capital
Resources" below) are expected to result in increased revenues, as was the case
for the year ended December 31, 1995, during their development stage, these
centers will adversely affect the Company's results of operations.
Gain on sale of marketable securities represents a gain attributable to
the sale of Viragen, Inc. common stock for which the carrying value had been
written-off in previous periods. See "Liquidity and Capital Resources" below.
Cost of goods sold as a percentage of consolidated sales remained
relatively stable between the periods, increasing in 1995 from 81% to 82% of
sales revenues.
Cost of goods sold for the Company's electronic and electro-mechanical
subsidiary, Techdyne, increased to 85% in 1995 compared with 84% in the
preceding year. The increase in sales revenues, along with improved
manufacturing efficiencies and overall cost reduction efforts resulted in an
increase in operating profits of $929,000 for 1995 for this subsidiary compared
to the preceding year.
Cost of goods sold for the medical product division was 61% for both
1995 and 1994. Operating profit for this division decreased approximately $7,000
in 1995 compared to the preceding year, which included start-up costs of
approximately $37,000 for the Company's new medical durable subsidiary, All
American Medical & Surgical Supply Corporation.
Cost of medical services sales increased to 69% for the year ended
December 31, 1995 compared to 62% for the preceding year. This increase is
largely attributable to higher costs associated with the low volume of
treatments at the new Pennsylvania dialysis centers and includes relatively high
salary and benefit costs for the new facilities due to the competition for
health care workers in the area. Operating losses of the Company's new dialysis
centers which are in their developmental stages, resulted in an increase in
operating losses of $295,000 for 1995 for the Company's dialysis subsidiary
compared to the preceding year, which included start-up costs for the two new
dialysis centers of approximately $80,000.
Selling, general and administrative expenses increased $685,000 (17%)
in 1995 over the previous year. This increase included increased support
activities associated with the increase in sales revenues, including increases
in administrative personnel and related benefits and sales commissions and also
included start-up costs of approximately $117,000 related to the Company's new
medical durable subsidiary and two new dialysis centers, which were expensed
during the fourth quarter of 1995 rather than being deferred. Management of the
Company believes that due to probable changes in the accounting for start-up
costs it is no longer prudent to capitalize start-up costs. Selling, general and
administrative expenses as a percentage of sales decreased to 14% for the year
ended December 31, 1995, compared to 17% for the preceding year as a result of
increased sales, costs containment efforts and economies of scale, despite
start-up costs for the new companies.
Interest expense increased by approximately $39,000 (19%) in 1995 over
the previous year largely as a result of the mortgage associated with Techdyne
(Scotland)'s purchase of its manufacturing facility, previously leased, and an
increase in average interest rates.
The bulk of the Company's borrowings are related to real property
mortgages and Techdyne's line of credit, all of which are tied to the prime
interest rate. The prime rate was 8.5% at December 31,1995 and 1994,
respectively.
20
<PAGE>
Liquidity and Capital Resources
Working capital totaled $13,844,000 at December 31, 1996, an increase
of $6,810,000 over the prior year. The increase reflects net proceeds of DCA's
public offering of approximately $3,445,000 and proceeds from sales of Viragen
stock of approximately $2,584,000. Also included was an increase of $344,000 in
the net of tax valuation of marketable securities pursuant to Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities and a substantial reduction in current debt as a
result of Techdyne's bank refinancing and the litigation settlement proceeds.
Included in the changes in components of working capital was an
increase of $5,829,000 in cash and cash equivalents, which included net cash
used in operating activities of $23,000, net cash provided by investing
activities of $2,317,000 (including proceeds of $2,584,000 from the sale of
Viragen stock, $374,000 in payment received on the Viragen note receivable, and
additions to property plant and equipment of $798,000) and net cash provided by
financing activities of $3,393,000 (including proceeds from DCA's securities
offering of approximately $3,445,000 and from the bank refinancing of $181,000
and repayments on long-term debt of $271,000).
In February, 1996, Techdyne refinanced its bank loan agreement with
another Florida bank. The new financing provides for a $2,000,000 line of
credit, due on demand, secured by Techdyne's accounts receivable, inventory,
furniture, fixtures and intangible assets. There were no amounts outstanding
under this line of credit at December 31, 1996 and no amounts have been drawn
down on this line. A $712,500 term loan which had a balance of $691,000 at
December 31, 1996 is secured by two buildings and land owned by the Company. The
second term loan for $200,000 which had a balance of $167,000 at December 31,
1996 is secured by Techdyne's tangible personal property, goods and equipment.
The Company has guaranteed these loans and has subordinated $2,500,000 due from
Techdyne, provided that Techdyne may make payments to the Company on this
subordinated debt from funds from Techdyne's security offering and from
earnings. Techdyne further agreed that in the event that it should sell its
interest in Techdyne (Scotland), which is not anticipated, 50% of the selling
price would be used to repay the $712,500 term loan facility. See Note 3 to
"Notes to Consolidated Financial Statements" to the Form 10-K. The Company was
in default of certain financial reporting requirements regarding these loans as
of December 31, 1996 for which the bank has granted waivers as of December 31,
1996 and through December 31, 1997.
Techdyne has outstanding borrowings of $145,000 from a local bank with
interest payable monthly and the notes maturing April, 1997. In October, 1994,
the Company obtained a replacement mortgage of $230,000 to refinance the first
and second mortgages on a building it leases to Techdyne. The principal balance
under this mortgage amounted to $213,000 at December 31, 1995. This loan was
paid off through the refinanced Techdyne bank loan agreement which became
effective in February, 1996. In April, 1993, the Company purchased a vacant lot
adjacent to Techdyne's facility in Hialeah, Florida for possible future
expansion. In connection with this purchase, the Company obtained a $130,000
mortgage. The principal balance outstanding under this mortgage amounted to
$82,000 and $95,000 at December 31, 1996 and December 31, 1995, respectively.
Techdyne (Scotland) has a line of credit with a Scottish bank, with a
US dollar equivalency of approximately $342,000 at December 31, 1996 and had an
option for additional funding which provided a total line of $620,000 at
December 31, 1995. The line of credit is secured by the assets of Techdyne
(Scotland) and guaranteed by Techdyne. This line of credit operates as an
overdraft facility. No amounts were outstanding under this line of credit as of
December 31, 1996 or December 31, 1995. In October, 1994, Techdyne (Scotland)
purchased the facility housing its operations for approximately $730,000,
obtaining a 15-year mortgage which had a US dollar equivalency of approximately
$622,000 and $591,000 at December 31, 1996 and December 31 ,1995, respectively.
21
<PAGE>
During 1988, the Company, through DCA, its dialysis subsidiary,
obtained mortgages totaling $1,080,000 on its two buildings, one in Lemoyne,
Pennsylvania and the other in Easton, Maryland, which housed the Company's
dialysis centers. These centers were sold in October, 1989. The mortgages had a
combined remaining balance of $504,000 and $576,000 at December 31, 1996 and
December 31, 1995, respectively. DCA was in default of certain covenants
principally relating to net worth and debt service ratio requirements under
these loan agreements as of December 31, 1996. The lender has waived compliance
with these covenants as of December 31, 1996 and through December 31, 1997.
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. The loans contain a provision allowing the bank mandatory repayment
upon 90 days written notice after five years, which period has elapsed.
Accordingly, while no notice has been given, the unpaid principal balance is
carried as a current liability.
The Company has an equipment purchase agreement for kidney dialysis
machines for its Florida and Pennsylvania dialysis facilities which had a
remaining principal balance of $272,000 and $185,000 at December 31, 1996 and
December 31, 1995, respectively, which reflected an increase due to a financed
equipment purchase for the Company's Florida dialysis center in 1996. See Note 3
to "Notes to Consolidated Financial Statements" to the Form 10-K.
Since the Company established Viragen in 1980, it had advanced
substantial sums to that former subsidiary, spun-off in 1986. In August, 1993,
the Company and Viragen executed a modified mortgage and promissory note, with
interest at prime plus 1%, effective as of September 1, 1993 in the amount of
$429,400, which was amortized over a 20-year term in equal monthly installments
with a balloon payment of all remaining unpaid principal and interest due August
1, 1996. In March, 1996, Viragen prepaid $165,000 on this note. Viragen repaid
the remaining balance in August, 1996, which had been offset by an allowance for
amounts previously written off as uncollectible. The Company recognized a gain
of $228,000, included in other income, as a result of collecting the previously
reserved note balance. Interest was at a prime plus 1%. Interest earned under
the note amounted to $14,000 for 1996 and $40,000 for the preceding year. See
note 3 to "Notes to Consolidated Financial Statement" to the Form 10-K.
During 1996, the Company sold 682,000 shares of Viragen stock realizing
a gain and cash proceeds of $2,583,000. During 1995, the Company sold 173,000
shares of Viragen common stock, realizing a gain and cash proceeds of $183,000.
The carrying value of these securities was previously written off. Under the
provisions of FASB Statement No. 115, the remaining shares at December 31, 1996
have been recorded at an estimated fair value of $1,406,000 with the unrealized
gain, net income tax effect, credited to a separate component of stockholder's
equity.
Techdyne completed a public offering on October 2, 1995, realizing net
proceeds of approximately $3,321,000 from which it repaid $1,500,000 of
intercompany indebtedness to the Company with the balance of the proceeds to be
used to establish new facilities, expand existing products, upgrade plant and
equipment, hire additional direct sales personnel and for working capital. There
is a convertible note issued by Techdyne, convertible at $1.75 per share for the
balance of intercompany indebtedness due to the Company which amounted to
approximately $2,998,000 including accrued interest at December 31, 1996 with
$350,000 of the note having been converted into 200,000 shares of Techdyne
common stock in June, 1996. As a result of the offering, the Company's ownership
in Techdyne decreased from 83.1% to 62.5% and was 63.5% at December 31, 1996. In
connection with the Techdyne offering, in the fourth quarter of 1995, the
Company recognized a gain of approximately $2,002,000, with applicable income
taxes of $761,000, which resulted in a net gain of approximately $1,241,000. See
Note 8 to "Notes to Consolidated Financial Statements" to the Form 10-K.
22
<PAGE>
Techdyne is seeking to expand its operations possibly through suitable
acquisitions of companies in similar businesses. No assurance can be given that
its present funding, including the proceeds from its securities offering, would
be sufficient to finance such acquisitions or that sufficient outside financing
would be available to fund such expansion.
Techdyne anticipates the future establishment of satellite facilities,
one of which is presently under consideration for the Northwestern United
States, such facilities requiring approximately $300,000 for leasehold
improvements, equipment and furniture and fixtures. Most of these costs will be
provided from the proceeds of Techdyne's 1995 security offering which, together
with Techdyne's refinanced credit facilities, should be adequate for these
expenditures required over the next 12 months.
In November, 1995, DCA, the Company's dialysis subsidiary, authorized
the declaration of a $1.30 per share dividend for which the Company's portion
related to its ownership interest in DCA amounted to approximately $3,134,000
which was paid by a reduction in the intercompany advances receivable from the
Company and the minority interest portion of approximately $29,000 was paid in
cash. In October, 1995, after receiving a $1,500,000 repayment from Techdyne on
intercompany advances, the Company repaid approximately $1,000,000 of its
intercompany indebtedness to DCA. In the second quarter of 1996, DCA completed a
public offering realizing net proceeds of approximately $3,445,000. In
connection with the DCA offering, in the second quarter of 1996, the Company
recognized a gain of approximately $1,521,000, with applicable income taxes of
$578,000, which resulted in a net gain of approximately $943,000. As a result of
the offering, the Company's ownership in DCA decreased from 99.1% to 67.2%. See
Note 8 to "Notes to Consolidated Financial Statements" to the Form 10-K.
DCA, having operated on a larger scale in the past, is seeking to
expand its outpatient dialysis treatment facilities and inpatient dialysis care.
Such expansion, whether through acquisition of existing centers, or the
development of its own dialysis centers, requires capital, which was the basis
for DCA's securities offering. No assurance can be given that DCA will be
successful in implementing its growth strategy or that the funds from the public
sale of the DCA securities will be adequate to finance expansion or that
sufficient outside financing would be available to fund expansion.
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.
Given its current level of working capital and Techdyne's refinanced
bank loan, management believes current levels of working capital are adequate to
successfully meet liquidity demands for at least the next twelve months.
Inflation
Inflationary factors have not had a significant effect on the Company's
operations. The Company attempts to pass on increased costs and expenses 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. However, in the Company's medical services segment, revenue per
dialysis treatment is subject to reimbursement rates established and regulated
by the federal government. These rates do not automatically adjust for
inflation. Any rate adjustments relate to legislation and executive and
Congressional budget demands, and have little to do with the actual cost of
doing business. Therefore, dialysis services revenues cannot be voluntary
increased to keep pace with increases in nursing and other patient care costs.
See Risk Factor No. 8 under "Risk Factors Relating to the Business of the
Company" and "Business-Dialysis Operations-Medicare Reimbursement."
23
<PAGE>
BUSINESS
General
The Company, incorporated in Florida in 1961, manufactures and
distributes medical products, and through its 63% owned public subsidiary,
Techdyne, is an international contract manufacturer of electronic,
electro-mechanical and plastic insert and injection molded products primarily
for the data processing, telecommunications and instrumentation industries
through Techdyne, including its wholly-owned subsidiary Techdyne (Scotland) and
Techdyne Livingston Limited, a subsidiary of Techdyne Scotland. Medicore also
owns and operates three kidney dialysis centers through its 67% owned public
subsidiary DCA.
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.
Financial Information Relating to Industry Segments
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
Revenues 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Electro-mechanical................................... $24,434,180 $30,424,358 $20,535,683
Medical products..................................... 2,012,498 1,702,042 1,557,993
Medical services..................................... 4,136,970 2,469,372 2,024,589
Earned at corporate level............................ 4,517,673 2,413,790 735,759
Elimination of intersegment revenues:
Parent company real estate rental
charges to electro-mechanical manufacturing....... (103,450) (130,000) (130,000)
Electro-mechanical manufacturing
sales to medical services......................... (278,465) (219,482) (172,331)
----------- ----------- -----------
Total Revenues.............................. $34,719,406 $36,660,080 $24,551,693
========== ========== ==========
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating Profit (Loss) (1)
Electro-mechanical................................... $1,282,190 $2,218,269 $1,289,134
Medical products(4).................................. (637,360) 34,789 41,967
Medical services..................................... 75,706 (322,156) (26,849)
---------- ----------- ------------
Total Operating Profit...................... 720,536 1,930,902 1,304,252
Earned at corporate level............................ 4,517,673 2,413,790 735,759
General corporate expenses........................... 977,691 505,169 660,445
Interest expense..................................... 217,615 246,393 207,703
---------- ---------- ----------
Income before income taxes, and minority interest.... $4,042,903 $3,593,130 $1,171,863
========= ========= =========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Identifiable Assets (2)
Electro-mechanical......................................... $13,224,196 $12,879,101 $ 8,741,418
Medical products............................................ 985,210 780,343 696,564
Medical services ............................................ 7,552,289 3,971,867 2,303,560
----------- ----------- -----------
21,761,695 17,631,311 11,741,542
---------- ---------- ----------
Corporate assets............................................. 5,323,157 3,615,843 4,213,782
----------- ----------- -----------
Total Assets...................................... $27,084,852 $21,247,154 $15,955,324
========== ========== ==========
<CAPTION>
Financial Information Relating to Foreign
and Domestic Operations and Export Sales
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Sales and Other Income
United States..................................... $24,559,290 $24,349,700 $16,670,955
Europe (3)........................................ 10,160,116 12,310,380 7,880,738
---------- ---------- -----------
$34,719,406 $36,660,080 $24,551,693
========== ========== ==========
Net Income (Loss)
United States(4).................................. $ 1,897,373 $ 1,254,849 $ 297,950
Europe (3)........................................ 519,896 996,422 566,158
----------- ----------- -----------
$ 2,417,269 $ 2,251,271 $ 864,108
=========== ========== ===========
Identifiable Assets (2)
United States..................................... $21,299,640 $14,645,274 $12,044,745
Europe (3)........................................ 5,785,212 6,601,880 3,910,579
--------- --------- ---------
$27,084,852 $21,247,154 $15,955,324
========== ========== ==========
</TABLE>
- ------------------------------
(1) Operating profit is total revenue exclusive of revenues earned at the
corporate level, less operating expenses and includes any applicable
amortization of costs in excess of net tangible assets acquired.
Operating expenses exclude general corporate expenses, interest expense
and minority interest of subsidiaries.
(3) Identifiable assets by segment include assets directly identifiable
with the applicable operations. Corporate assets consist primarily of
cash, receivables, marketable securities, real property and deferred
expenses.
(3) Techdyne (Scotland) sales are primarily to customers in the
United Kingdom. In 1994, sales were expanded to Ireland, Germany
and Israel.
(4) Includes estimated costs of $305,000 for shutdown of durable medical
equipment operations.
Medical Products
The Company 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. In addition, the
Company distributes a line of blood lancets used to draw blood for testing.
Developed by the Company and manufactured by Techdyne, the lancets are
distributed under the names Medi-Lance(Trademark) and Lady Lite(Trademark) or
25
<PAGE>
as a private label item if requested by the customer.
The Company has decided to shutdown its durable medical equipment
subsidiary, All American Medical & Surgical Supply Corp. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Marketing of medical products is conducted by independent manufacturer
representatives and employees of the Company.
Electro-Mechanical Manufacturing
Techdyne is an international contract manufacturer of
electro-mechanical, electronic, and plastic insert and injection molded
products, primarily manufactured to customer specifications and designed for
original equipment manufacturers ("OEMs") and distributors in the data
processing, telecommunications and instrumentation industries. Included among
its customers are several Fortune 100 companies. Approximately 58% of sales are
domestic and 42% was effected through Techdyne (Scotland) in the European
markets and to a limited extent in the Middle East.
Custom-designed products primarily include conventional and molded
cables and wire harnesses, and to a more limited extent, printed circuit boards
("PCBs") and electro-mechanical assemblies. Techdyne also manufactures complete
finished assemblies as well as conducts contract manufacturing for other
companies. Manufacturing is accomplished, if applicable, in accordance with
Underwriters Laboratories specifications and the Canadian Standards Association
requirements. Techdyne has an ISO 9002 quality assurance designation for its
Hialeah, Florida and Houston, Texas facilities, which similar quality assurance
designation is held by its European subsidiary Techdyne (Scotland). See "Quality
Control" below.
Techdyne is also engaged in horizontal injection molding and vertical
insert molding for production of medical products and electronic components.
Medical products produced for the Company's medical supply operations include
the Medi-Lance(Trademark), Medi-Let and Lady Lite(Trademark) lancets, the
latter developed for women's use. See "Medical Supplies" above.
Products and Services
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 maintains a large assortment of standard tooling for
D-subminiature connectors (connectors over molded with the imprint of the
customer's name and part number), Din connectors (circular connectors with from
two to four pairs of wires used for computer keyboards), phono connectors, flat
ribbon cables, and discrete cable assemblies. 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 82%
of its total sales revenue for 1996.
26
<PAGE>
Printed Circuit Boards and Molded Assemblies
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 include through-hole assemblies, low and medium volume surface
mount PCB assemblies, and mixed technology PCBs. Through-hole assemblies are
standard rigid boards with components on one side and solder pads on the other
side. Surface mount circuit assemblies are components with no leads which are
soldered to pads on the surface of the PCB. The mixed technology PCB combines
both through-hole and surface mount.
Contract Manufacturing Products
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 Techdyne through its
computer-aided design system, engineering and supply procurement. Alternatively,
the customer may provide specifications and Techdyne will assist in the design
and engineering, or just manufacture to the customer's specifications. Contract
manufacturing products also include rack assemblies for data processing and
video editing and custom disk drive enclosures for OEMs.
By contracting assembly production, OEMs are able to keep pace with
continuous and complex technological changes and improvements by making rapid
modifications in their products without costly retooling and without any
extensive capital investments for new or altered equipment.
Medical Products
Lancets are produced for the Company for its medical supplies
distribution. A lancet is a small sharp pointed instrument used to prick the
finger to draw blood for testing. Lancets produced by Techdyne are vertical
insert molded disposable products distributed under the trade names
Medi-Lance,(Trademark) and Lady Lite(Trademark) and Medi-Let or under a private
label if requested by the customer. See "Medical Supplies" above.
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 constitute approximately 9% of sales.
Manufacturing and Supplies
Components and products are custom designed and developed to fit
specific customer requirements and specifications. Techdyne's industrial,
electrical and mechanical engineers work in close liaison with its customers'
engineering departments from inception through design, prototypes, production
and packaging. The engineering staff also determines any special capital
equipment requirements, tooling and dies, which must be acquired.
Techdyne maintains a large assortment of standard tooling and modern
state-of-the-art equipment at all of its facilities. Techdyne operates
simultaneous production and assembly lines for its diverse mix of electrical and
electro-mechanical products.
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In addition to assembly operations, 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. See
"Business - Electro-Mechanical Manufacturing Products" above. Finished turnkey
assemblies include the entire finished product and the entire manufacturing
process from design and engineering to purchasing raw materials manufacturing
and assembly of the component parts, testing, packaging and delivery of the
product to the customer. By contracting assembly production, OEMs are able to
keep pace with continuous and complex technological changes and improvements by
making rapid modifications to their products without costly retooling and
without any extensive capital investments for new or altered equipment.
Techdyne (Scotland)'s manufacturing facility, located in Livingston,
Scotland, focuses mainly on the electronics industry producing primarily molded
cables, wire harnesses and electro-mechanical assemblies, incorporating
multifaceted design and production capabilities.
Techdyne also has "supplier partnerships" to meet customers' needs.
This involves Techdyne accomplishing the in-house manufacturing requirements of
the customer. Through EDI (electronic data interchange) the customer conveys its
needs on a weekly basis based on a rolling quarterly forecast.
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. Techdyne has not experienced any significant disruptions from
shortages in materials or delivery delays of its suppliers and believes that its
present sources and the availability of its required materials are adequate.
Techdyne has a completely computerized system of material requirements planning,
purchasing, sales and marketing functions.
Quality and Process Control
Techdyne has an ISO 9002 quality assurance designation for its Hialeah,
Florida and Houston, Texas facilities, which is the international standard of
quality with respect to all quality systems of operations, including, among
others, purchasing, design, engineering, processes, manufacturing, sales,
inventory control and quality. Techdyne (Scotland) also holds a similar quality
assurance designation.
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 Techdyne. See "Competition" below. Products, components,
assemblies and sub-assemblies manufactured by Techdyne are thoroughly inspected
visually and electronically to assure components are to strict specifications
and are functional and safe. Management believes it is one of the manufacturers
of choice for the major Fortune 100 companies who are its customers based upon
its excellent record of quality production. The Company's extremely low product
return rate of less than 50 PPM attests to its dedication to quality.
Strict process controls are also standard operating procedure. Process
controls deal with the controls relating to the entire manufacturing process.
The Company 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. Techdyne's product
and manufacturing quality receives excellent ratings and quality awards.
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Marketing and Sales
Domestic sales are generated by five regional sales managers. There are
also two in-house sales people, including the President of Techdyne. The
regional sales managers have six independent manufacturer representative
agencies. Sales are also generated through catalogues, brochures and trade
shows. Within the last year, the Company hired three new sales managers to
maximize its growth potential in circuit board and contract manufacturing sales.
The Company believes that the new additions to the sales staff will effectively
accomplish this in the coming year.
The manufacturer sales representatives, primarily marketing electronic
and similar high technology-products, are retained under exclusive sales
representative agreements for specific territories and are paid on a commission
basis. The sales representatives cannot represent any other person engaged in
the business of manufacturing services similar to those of Techdyne, nor
represent any person who may be in competition with Techdyne. The agreements
further prohibit the sales representative from disclosing trade secrets or
calling on customers of Techdyne for one year from termination of their
agreement.
Techdyne (Scotland) has four in-house sales personnel who market its
products, primarily ribbon and discrete cable assemblies, electro-mechanical
products and molded cable assemblies, as well as engaging in rework and
refurbishing products for customers in Scotland, England, Ireland, Germany and
the Middle East.
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 production, such as its
supplier partnerships (see "Manufacturing and Supplies" above), are accomplished
under open purchase orders with components released against customer requests.
Techdyne's customer base consists primarily of Fortune 100 companies.
In 1996, approximately 73% of Techdyne's sales were made to numerous locations
of four major customers Compaq (35%), IBM (18%), EMC and its related suppliers
(12%), and Motorola (9%). Techdyne sells to these major companies as well as
approximately 80 other smaller customers which comprise the remaining 25% of
sales. Techdyne's sales to Avid Technology, Inc. ("Avid") totaling 19% of sales
for 1995 year were down to 1% for fiscal 1996. Techdyne (Scotland) had a
substantial portion of its sales, approximately 84% to Compaq. During 1996,
bidding for Compaq orders became more competitive due to Far Eastern competition
which resulted in substantially reduced sales to that customer with lower profit
margins on remaining sales. A loss or substantially reduced sales to any major
customer would necessarily have a materially adverse effect on Techdyne and the
Company as was the case with Compaq in Europe and Avid in the United States. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Backlog
At December 31, 1996, Techdyne's backlog of orders amounted to
approximately $7,300,000, of which approximately $1,320,000 was represented by
the orders for Techdyne (Scotland) operations. Management believes, based on
past experience and relationships with its customers and knowledge of its
manufacturing capabilities, that substantially all of its backlog orders are
firm and will be filled within this fiscal year. The purchase orders within
which Techdyne performs do not provide for cancellation. Over the last several
years cancellations have been minimal. There is no assurance that the backlog
data is a reliable indicator of future sales.
.
Dialysis Operations
The Company, through DCA and its subsidiaries, operates three
outpatient dialysis treatment centers with a capacity of 42 stations in pleasant
surroundings for approximately 130 dialysis patients and in 1996 performed
approximately 13,800 outpatient dialysis treatments. A fourth center is under
construction in Carlisle, Pennsylvania and the lease for a fifth dialysis
facility in the southern New Jersey area is being
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concluded subject to a variance, with a medical director already in place for
that proposed facility. Medical services provided method two home patient supply
sales for the year ended December 31, 1996 of approximately $600,000. The
Company performed approximately 1,375 inpatient dialysis treatments in 1996.
Home dialysis treatments are effected through two separate subsidiaries, DCA
Medical Services ("Medical Services") and Dialysis Medical, Inc. ("DMI"), the
latter having commenced operations January 1, 1997. The Pennsylvania dialysis
centers and Medical Services have acute care contracts with hospitals in their
respective regions to provide inpatient dialysis services.
In December, 1995 the Company established a subsidiary, Renal Services
of Pa., Inc. ("Renal Services"), to implement the Company's growth strategy to
obtain new inpatient dialysis services at hospitals and to assist in
establishing or acquiring outpatient dialysis centers. Renal Services obtained
the new proposed location in Manahawkin, New Jersey and a medical director has
been retained for that proposed facility.
There are a variety of Medicare approved ESRD facilities such as
transplant hospitals and centers. According to statistics developed by HCFA, at
the end of 1995 there were approximately 2,000 independent dialysis facilities.
Approximately 70% of the independent dialysis centers are non-hospital
proprietary owned facilities.
ESRD Treatment Options
Kidneys generally act as a filter removing harmful substances and
enabling the body to maintain proper and healthy balances of chemicals and water
in the blood. Chronic kidney failure is also known as end-stage renal disease
("ESRD") which results in chemical imbalance and buildup of toxic chemicals. It
is a state of kidney disease characterized by advanced renal impairment which is
irreversible, and without treatment or kidney transplantation, is fatal.
Treatment options for ESRD patients include (1) hemodialysis, performed
either at (i) an outpatient facility, or (ii) inpatient hospital facility, or
(iii) home through hemodialysis and peritoneal dialysis, either CAPD or CCPD;
and (2) kidney transplant. The significant portion of ESRD patients receive
treatments at outpatient dialysis facilities (approximately 82%) 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 blood-stream. This is
accomplished with the dialysis machine, a complex blood filtering device which
takes the place of certain functions of the kidney and which machine also
controls external blood flow and monitors the toxic and fluid removal process.
The dialyzer has two separate chambers divided by a semi-permeable membrane, and
when the blood circulates through one chamber, a dialyzer fluid is circulated
through the other chamber. The toxins and excess fluid pass through the membrane
into the dialysis fluid. 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 physician's
instructions.
ESRD patients may be treated at home with either hemodialysis or
peritoneal dialysis. Home hemodialysis treatment requires the patient to be
medically suitable and have a qualified assistant. Additionally, home dialysis
requires training for both the patient and the assistant, which usually takes
two to three weeks. The use of conventional home hemodialysis has declined and
is minimal due to the stress to the patient and the need for the presence of a
partner and is more expensive than CAPD.
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Another home treatment for ESRD patients is through peritoneal
dialysis. There are several variations of peritoneal dialysis, the most common
being CAPD and CCPD. All forms of peritoneal dialysis use the patient's
peritoneal (abdominal) cavity to eliminate fluid and toxins from the patient.
CAPD utilizes dialysis solution and the patient's peritoneal cavity to eliminate
fluid and toxins from the patient and does not require a mechanical device or an
assistant. CCPD is performed in a manner similar to CAPD, but utilizes a
mechanical device to cycle dialysis solution while the patient is sleeping.
Peritoneal dialysis is the third most common form of ESRD therapy following
center hemodialysis and renal transplant.
The second most common modality for patients with ESRD is kidney
transplantation which the Company does not provide. While this is the most
desirable form of therapeutic intervention, the shortage of suitable donors and
possibility of donor rejection limits the availability of this alternative.
Location, Capacity and Use of Facilities
DCA currently operates three outpatient dialysis centers with a total
capacity of 42 licensed stations. The Company owns and operates those centers
through its subsidiaries. Dialysis Services of Florida, Inc.-Ft. Walton Beach
("DSF") is located in Florida and the other two, Dialysis Services of
Pennsylvania, Inc.-Lemoyne ("DSP-L") and Dialysis Services of Pennsylvania,
Inc.-Wellsboro ("DSP-W") are in Pennsylvania. A new dialysis center is under
construction in Carlisle, Pennsylvania and the Company is completing a lease,
subject to approval for upgrading services to the building, for a new dialysis
facility in the Manahawkin area of New Jersey.
DCA also provides acute inpatient dialysis services to three hospitals,
one in each of the regions where its facilities are located. Each of its
dialysis facilities provides training, supplies and on-call support services for
home peritoneal dialysis.
The Fort Walton Beach, Florida dialysis facility, which commenced
operations in 1989 and is approved for 17 dialysis stations, for the years ended
December 31, 1994, 1995 and 1996 provided approximately 9,920, 9,400 and 12,050
dialysis treatments, respectively. This includes Medical Services which provided
approximately 400 acute patient care treatments, and approximately 4,550 home
patient treatments for the year ended December 31, 1996. The Lemoyne,
Pennsylvania center commenced operations in June, 1995 and through December 31,
1995, its initial period of operations, provided approximately 2,100 dialysis
treatments, and for the year ended December 31, 1996, provided approximately
5,570 dialysis treatments. The Wellsboro, Pennsylvania dialysis facility
commenced operations on September 28, 1995 and provided approximately 390
dialysis treatments for the year ended December 31, 1995 and approximately 2,130
dialysis treatments for the year ended December 31, 1996.
Operations of Dialysis Centers
The Company'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 and kitchen. DCA 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 to each dialysis
station. The Fort Walton Beach facility is located on the Gulf of Mexico,
providing the dialysis patient with a beautiful and relaxing view and
atmosphere.
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In accordance with conditions for participation in the Medicare ESRD
program, each facility has a qualified Medical Director. See "Physician
Relationships" below. Each facility also has a nurse administrator who
supervises the day-to-day 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.
DCA's facilities offer high-flux and high-efficiency hemodialysis,
which utilize machinery that allow patients to dialyze in a shorter period of
time per treatment because such methods cleanse the blood at a faster rate than
conventional hemodialysis. DCA's facilities also offer conventional
hemodialysis, which, in the Company's experience, provides the most viable
treatment for the patients. The Company considers its dialysis equipment to be
modern and efficient.
DCA also offers various forms of home dialysis, primarily CAPD and
CCPD. Home dialysis services consist of providing equipment and supplies,
training, patient monitoring and follow-up assistance to patients who prefer and
are able to receive dialysis treatments in their homes. Patients and their
families or other patient helpers are trained by a registered nurse to perform
either CAPD or CCPD at home. Training programs for CAPD or CCPD generally
encompass two to three weeks.
Inpatient Dialysis Services
DCA provides inpatient dialysis services to three hospitals. These
services (excluding physician professional services) are for a per treatment fee
individually negotiated with the hospital. DCA either transports the dialysis
equipment and supplies to the hospital when requested, or maintains the
equipment and supplies at the hospital, and administers the dialysis treatments
as required. Inpatient services are typically required for patients with acute
kidney failure resulting from trauma or similar causes, patients in the early
stages of ESRD, and ESRD patients who require hospitalization for other reasons.
One of the Pennsylvania in-hospital treatment agreements expires on May 30, 1997
and if not favorably renegotiated will adversely impact patient treatment and
revenues.
Ancillary Services
Dialysis facilities provide certain ancillary services to ESRD
patients, including the administration of Erythropoeitin ("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 all forms of
dialysis to treat anemia, a medical complication frequently experienced by ESRD
patients. Other ancillary services may include studies to test the degree of
bone deterioration; electrocardiograms; nerve conduction studies to test the
degree of deterioration of nerves; doppler flow testing to test the
effectiveness of the patient's vascular access for dialysis; blood transfusions;
and therapeutic plasmapheresis. See "Medicare Reimbursement" below.
Physician Relationships
A key factor in the success of a facility is its relationship with area
nephrologists. An ESRD patient generally seeks treatment at a facility near such
patient's home and where such patient's nephrologist has practice privileges.
Consequently, DCA relies on its ability to provide quality dialysis care and to
meet the needs of referring physicians in order to continue to receive physician
referrals of ESRD patients.
The conditions of participation in the Medicare ESRD program mandate
that treatment at a
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dialysis facility be under the general supervision of a Director who is a
physician. DCA has engaged by written agreement qualified physicians or groups
of qualified physicians to serve as Medical Directors for each of its
facilities. Generally, the Medical Director must be board eligible or board
certified in internal medicine and have had at least 12 months of experience or
training in the care of patients at ESRD facilities. DCA's Medical Directors
refer patients to the Company's centers and are typically the substantial source
of referrals to the particular center served.
Under the Medical Director Agreements, the Medical Director elects the
alternate reimbursement plan under the ESRD program, whereby the physician's fee
for services is billed to the government payment authority on a direct basis,
and such fee is paid directly to the physician or professional association as
the case may be. The Medical Director (or professional association) maintains
its own medical malpractice insurance. The agreements provide for
non-competition for an average of one to two years in a limited area related to
DCA's dialysis centers. The Medical Director Agreement does not prohibit the
physician from providing direct patient care services at other locations and
consistent with law, such Agreement does not require a physician to refer
patients to DCA's dialysis center. DCA's ability to establish a dialysis
facility is significantly geared to the availability of a qualified physician or
nephrologist, with a patient base, to serve as DCA's Medical Director. The loss
of a Medical Director or an important referring physician at a particular center
could have a material adverse effect on the operations of that facility, DCA and
the Company. Compensation of Medical Directors is separately negotiated for each
facility and generally depends on competitive factors in the local market, the
physician's qualifications and the size of the facility.
Quality Assurance
Pursuant to the over-all direction of Charles Coe, a Vice President,
DCA implements a quality assurance program to maintain and improve the quality
of dialysis treatment and care it provides to its patients. This program
requires each center, through its Medical Director and administrator, to review
quality assurance data, whether related to direct dialysis treatment services,
or equipment and technical improvements, to environmental improvements and
staff-patient, personal relationships. These evaluations are in addition to
assuring regulatory compliance with HCFA and the Occupational Safety and Health
Administration ("OSHA").
Patient Revenues
Substantially all of the fees for outpatient dialysis treatments are
funded under the ESRD Program administered and in accordance with rates
established by HCFA. The balance of the outpatient charges are paid by private
payers including the patient's medical insurance or private funds. Under the
ESRD Program, payments for dialysis services are determined pursuant to Part B
of the Medicare Act which presently pays 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 inpatient dialysis services are paid for by the hospital pursuant
to contractual pre-determined fees for the different dialysis treatments.
Inpatient treatments accounted for approximately 11% and 12% of DCA's revenues
for the year ended December 31, 1995 and December 31, 1996, respectively.
Florida and Pennsylvania, the two states in which DCA presently
operates, provide Medicaid or comparable benefits to qualified recipients to
supplement their Medicare coverage. Medicaid payments to DCA have not been
significant. Medicare and Medicaid programs are subject to regulatory changes,
statutory limitations and governmental funding restrictions, which may adversely
affect DCA's revenues and dialysis services payments. See "Medicare
Reimbursement" below.
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Medicare Reimbursement
DCA is reimbursed primarily from third party payers including Medicaid,
commercial insurance companies, and substantially by Medicare under a
prospective reimbursement system for chronic dialysis services provided to ESRD
patients. Under this system, the reimbursement rates are fixed in advance and
have been adjusted from time to time by Congress. Although this form of
reimbursement limits the allowable charge per treatment, it provides DCA with
predictable and recurring per treatment revenues and allows DCA to retain any
profit earned. Medicare has established a composite rate set by HCFA that
governs the Medicare reimbursement available for a designated group of dialysis
services, including the dialysis treatment, supplies used for such treatment,
certain laboratory tests and certain medications. HCFA recently eliminated
routine Medicare coverage for nerve conduction studies, electrocardiograms,
chest x-rays and bone mineral density measurements, and will only pay for such
tests when there is documentation of medical necessity. The Medicare composite
rate is subject to regional differences. Certain other services and items are
eligible for separate reimbursement under Medicare and are not part of the
composite rate, including certain drugs (including EPO, the allowable rate
currently $10 per 1000 units), blood (for amounts in excess of three units per
patient per year), and certain physician-ordered tests provided to dialysis
patients. The ancillary services are not significant segments of income to DCA.
DCA routinely submits claims monthly and is usually paid by Medicare within 30
days of the submission.
DCA receives reimbursement for outpatient dialysis services provided to
Medicare-eligible patients at rates that are currently between $117 and $123 per
treatment, depending upon regional wage variations. The Medicare reimbursement
rate is subject to change by legislation and recommendations by the Prospective
Payment Assessment Commission ("PROPAC"). The current maximum composite
reimbursement rate is $134 per treatment. The Company is unable to predict what,
if any, future changes may occur in the rate of reimbursement, or, if made,
whether any such changes will have a material effect on DCA's revenues and net
earnings.
Medicaid Reimbursement
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. State regulations generally
follow Medicare reimbursement levels and coverages without any co-insurance
amounts. Certain states, however, require beneficiaries to pay a monthly share
of the cost based upon levels of income or assets. The State of Florida does not
provide Medicaid benefits on a primary insurance basis, but does provide
benefits as a secondary insurer to Medicare. Within the State of Florida,
various governmental subdivision agencies provide insurance coverage for the
indigent who are otherwise uninsured. Pennsylvania has a Medical Assistance
Program comparable to Medicaid, with primary and secondary insurance coverage to
those who qualify. DCA is a licensed ESRD Medicaid provider in all states in
which it does business.
Business Strategy
The Company, having 20 years experience in successfully developing and
operating dialysis treatment centers, is intent upon using its expertise to
expand its dialysis operations, including provision of additional ancillary
services to patients. Expansion of its dialysis facilities is being approached
through the acquisition of existing outpatient dialysis centers and/or
developing its own dialysis centers.
As in operating dialysis centers, the key element in acquiring or
developing centers is locating a
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nephrologist or group of nephrologists with a substantial patient base, since
the center is primarily going to serve such patients. Other considerations in
evaluating a proposed acquisition or development of a dialysis center are the
availability and cost of qualified labor, 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,
whether a certificate of need is required, and the existence of competitive
factors such as hospital or proprietary non-hospital owned and existing
outpatient dialysis facilities within reasonable proximity of the proposed
center.
DCA estimates that the development of a new outpatient dialysis center,
subject to location, size and services, would cost from $600,000 to $750,000. An
acquisition, which usually costs more than construction and development of a new
center, can be accomplished quickly once the parties are in agreement. To
construct and develop a new center ready for operations may take an average of
four to six months and 12 months or more to generate income, all of which are
subject to location, size and competitive elements. DCA is frequently in
initial negotiations with nephrologists to develop or acquire dialysis centers.
There is no assurance these negotiations will result in any final or firm
arrangements for the development of any new dialysis facilities.
Management is also seeking to increase acute dialysis care contracts
with hospitals for inpatient dialysis services. These contracts are sought with
hospitals in areas serviced by its centers. Hospitals are willing to enter into
such inpatient care arrangements for cost efficiencies and to eliminate the
administrative burdens of providing dialysis services to their patients. It is
simpler for the hospital to engage an independent party with the expertise and
the knowledge, such as DCA, to provide the inpatient dialysis treatments; and
the Company finds these arrangements beneficial, 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.
DCA has recently initiated a non-exclusive relationship with a managed
care facility to treat its dialysis patients at DSP-L and is reviewing other
proposed agreements with nursing homes and managed care facilities to provide
its residents with dialysis treatment care. Part of the Company's growth
strategy is to expand into alliances with managed care organizations,
particularly those with multi-units throughout the region. The initial
arrangement and agreements being reviewed provide for DCA to bill Medicare as is
its normal procedure rather than the nursing home or managed care facility. This
is a new area of development for the Company and may not materialize into
significant growth.
Any significant expansion, whether through acquisition or development
of new centers, is dependent upon existing funds or financing from other
sources. To construct a 10 station center 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 center with 30 patients could cost from
$1,200,000 to $2,100,000 subject to location, competition, nature of facility
and negotiation. Should such acquisition opportunities arise, there can be no
assurance that DCA or the Company would have available or be able to raise the
necessary financing.
Potential Liability and Insurance
Participants in the health care market are subject to lawsuits based
upon alleged negligence, many of which involve large claims and significant
defense costs. DCA, although involved in chronic and acute kidney dialysis
services for approximately 20 years, has never been subject to any suit relating
to its dialysis operations. DCA currently has in force general liability
insurance, including professional and products liability, with coverage limits
of $1 million per occurrence and $3 million in the aggregate annually. DCA's
insurance policies provide coverage on an "occurrence" basis and are subject to
annual
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renewal. A successful claim against DCA in excess of its insurance coverage
could have a material adverse effect upon DCA's business and results of
operations.
Government Regulation
General
Dialysis treatment centers must comply with various state and federal
health laws which are generally applicable to medical care facilities. The
dialysis center must meet standards relating but not limited to maintenance of
equipment and proper records, personnel and quality assurance programs. Each
dialysis center is subject to periodic inspections by state agencies to
determine if the operations meet these regulatory standards. DCA must comply
with certain rules and regulations of and each dialysis center must be certified
by HCFA. These requirements have been satisfied by DCA's dialysis facilities.
HCFA's regulations generally control and regulate the charges, procedures and
policies which must be followed by dialysis centers.
Many states have eliminated the requirement for dialysis centers to
obtain a certificate of need, a requirement for regulating the establishment and
expansion of dialysis centers. There are no certificate of need requirements in
Florida or Pennsylvania where DCA presently operates. In past years, DCA has
always been able to comply with applicable certificate of need laws.
DCA's record of compliance with federal, state and local governmental
laws and regulations has been excellent. Regulation of health care facilities,
including dialysis centers, is extensive with legislation continually proposed
relating to safety, reimbursement rates, licensing and other areas of
operations. The Company is unable to predict the scope and effect of any changes
in governmental regulations, particularly any modifications in the reimbursement
rate for medical services or requirements to obtain certification from HCFA.
Enforcement may also become more stringent adding to compliance costs as well as
potential sanctions. There are few regulations and decisions interpreting the
laws relating to and addressing dialysis operations. Therefore, it is difficult
to assess whether DCA's past or present operations and contractual arrangements
might be successfully challenged, or whether DCA would be able to modify its
contracts or business practices to comport with the law and to maintain its
licenses and approvals, the failure of which could adversely effect its
business. The Company 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. See "Social Security Act"
and "Stark II" below. None of DCA's business arrangements with physicians,
patients or others has been the subject of investigation by any governmental
authority. No assurance can be given that DCA's business arrangements will not
be the subject of an investigation or prosecution by a federal or state
governmental authority which could result in any type of civil or criminal
sanction.
Social Security Act
The Social Security Act provides Medicare coverage to most persons
regardless of age or financial condition for dialysis treatments as well as
kidney transplants. See "Patient Revenues" and "Medicare Reimbursement" under
"Business - Dialysis Operations." The Social Security Act further 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. Although the
Social Security Act expressly prohibits kickbacks, bribes or rebates for patient
referrals, the courts have broadly construed the wrongful transaction language
relating to patient referrals, which could subject dialysis treatment operators
to criminal and civil violations, including imprisonment, fines or exclusion of
the provider from future participation in the Medicare program.
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The federal government in 1991 and 1992 published regulations that
established exceptions, "safe harbors", for certain business arrangements that
would not be deemed to violate the illegal remuneration provision of the federal
statute. All elements must be satisfied to meet the safe harbor exception, but
failure to satisfy all elements does not mean the business arrangement violates
the illegal remuneration provision of the statute. As required by Medicare
regulations, each of the Company's dialysis centers is supervised by a Medical
Director, a licensed nephrologist or otherwise qualified physician. The Medical
Directors are in private practice and are one of the most important sources of
the dialysis center's business, since it is such physician's patients that
utilize the services of the center. The compensation of the Company's Medical
Directors is fixed by the Medical Director Agreement and reflects competitive
factors in their respective location, and the size of the center. See
"Business-Dialysis Operations-Physician Relationships." The Company has never
been challenged under these statutes and believes its arrangement with its
Medical Directors are in material compliance with applicable law. The Company
endeavors in good faith to comply with all governmental regulations. However,
there can be no assurance that the Company will not be required to change its
practices or experience a material adverse effect as a result of any such
potential challenge.
The Company's dialysis facility in Fort Walton Beach, Florida is
operated by DSF, a subsidiary in which the Medical Director, whose patients are
dialyzed at the facility, holds a minority ownership interest. By virtue of the
Stark II legislation restricting certain physician referrals for certain
"designated health services," that center's inpatient treatments were succeeded
to by Medical Services, another subsidiary of DCA. See "Business-Dialysis
Operations-Location, Capacity and Use of Facilities" and "Stark II" below.
Florida has legislation prohibiting physicians from holding financial
interests in various types of medical facilities to which they refer patients,
of which dialysis facilities are not included. Specifically, the Florida statute
prohibits health care providers (which term includes physicians) from referring
a patient for designated health care services to an entity in which the health
care provider (physician) has an investment interest. Designated health services
includes clinical laboratory services, physical therapy services, diagnostic
imaging services, radiation therapy and comprehensive rehabilitative services.
The Florida statute also precludes a physician from referring a patient for any
other health care item or service to an entity in which the physician has an
investment interest unless the entity is a publicly traded corporation meeting
certain substantial criteria or certain disclosure requirements are met as well
as other terms and criteria, which disclosure criteria the Company believes it
satisfies. The Company provides its Fort Walton Beach, Florida patients with a
written disclosure form informing the patient of the existence of an investment
interest of the Medical Director of that facility, and with the names and
addresses of at least two alternative sources of such services. A violation of
the disclosure requirements constitutes a misdemeanor and may be grounds for
disciplinary action.
Stark II
The Physician Ownership and Referral Act ("Stark II") was adopted and
incorporated into the Omnibus Budget Reconciliation Act of 1993. Stark II
restricts physician referrals, with certain exceptions, for certain "designated
health services" to entities in which a physician or an immediate family member
has a "financial relationship" defined to include an ownership or investment
interest in, or a compensation arrangement between the physician, and the
entity. The entity is prohibited from claiming payment for such services under
the Medicare or Medicaid programs, is liable for the refund of amounts received
pursuant to prohibited claims, can be imposed with civil penalties of up to
$15,000 per service and can be excluded from participation in the Medicare and
Medicaid programs. Stark II provisions which may be relevant to DCA became
effective on January 1, 1995.
37
<PAGE>
For purposes of Stark II, "designated health services" includes, among
others, clinical laboratory services, durable medical equipment, parenteral and
enteral nutrients, home health services, and inpatient and outpatient hospital
services. The Company believes, based upon the language and the legislative
history of Stark II and the industry practice, that Congress did not intend to
include dialysis services and the services and items provided incident to
dialysis services as accomplished by DCA within the Stark II prohibitions. DCA
compensates its nephrologist-physicians as Medical Directors of its dialysis
centers pursuant to Medical Director Agreements. As a condition to participating
in the Medicare ESRD program, dialysis treatments at a center must be under the
supervision of a Director who is a physician. "Business-Dialysis
Operations-Physician Relationships." The physician's compensation is fixed by
agreement and is not geared to the number of patients treated at or patient
referrals to the dialysis center. Non-affiliated physicians who send or treat
their patients at any of DCA's facilities do not receive any compensation from
DCA. DCA bills Medicare for the patient treatment and the non-affiliated
physician bills the patient, or other third party reimbursement source, for his
services. DCA's provision of inpatient services to a hospital in the area of the
Fort Walton Beach, Florida, dialysis facility operated by DSF in which
subsidiary the Medical Director holds an investment interest might have been
deemed referral for designated health services, since the Medical Director was
also affiliated with and treating those patients at the local hospital. DSF
terminated its inpatient treatment contract with that hospital, which inpatient
treatment services were succeeded to by another subsidiary of DCA in which no
physician has any investment or ownership interest.
Medicare
The Medicare program represents a substantial portion of the federal
budget. Congress has taken action in most recent legislative sessions to modify
the Medicare program for the purpose of reducing the amounts otherwise payable
from the program to health care providers. However, there are no significant
proposed cuts in dialysis payments. HCFA is initiating a
Congressionally-mandated ESRD managed care demonstration project to last three
years to determine fees for dialysis and transplant patients. In the budget bill
now undergoing reconciliation in Congress, the ESRD program received a five year
waiver from reduction in Medicare outlays to allow for the results of the HCFA
project. Legislation or regulations may be enacted in the future that may
significantly modify the ESRD program or substantially reduce the amount paid
for Company services. Further, statutes or regulations may be adopted which
impose additional requirements in order for the Company to be eligible to
participate in the federal and state payment programs. Such new legislation or
regulations may adversely affect DCA's business operations, as well as its
competitors.
On August 21, 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 health care
providers, such as significant changes to the Medicare and Medicaid fraud and
abuse laws. The fraud and abuse provisions were effective January 1, 1997. While
many of the provisions are self-implementing, some require further rulemaking by
HHS. HIPA established two programs that will coordinate federal, state and local
health care fraud and abuse activities, to be known as the Fraud and Abuse
Control Program and the Medicare Integrity Program. Under these programs,
governmental and, in some cases private entities may undertake a variety of
activities (including medical, utilization and fraud review, cost report audits,
secondary payer determinations), new safe harbors may be created or edited and
reports of fraud and abuse actions against providers will be shared. HIPA
further seeks to encourage whistleblower reports by individuals. HIPA further
extends coverage of the fraud and abuse laws to all federally funded health care
programs and to private health plans; but the anti-kickback statute does not
apply to private health plans.
38
<PAGE>
HIPA also sets forth a program intended to assist providers in
understanding the requirements of the fraud and abuse laws. HIPA first permits
individuals to petition the Department for written advisory opinions regarding
whether an arrangement constitutes prohibited remuneration under the federal
anti-fraud abuse laws, satisfies the requirement of an existing safe harbor
and/or constitutes grounds for imposition of civil and criminal sanctions under
the federal anti-fraud and abuse laws. Such opinions will be binding on HHS and
the party receiving the opinions. HHS is required to publish regulations
specifying the procedures governing the application and response processes
respecting these advisory opinions.
HIPA also increases significantly the amount of civil monetary
penalties for offenses related to health care fraud and abuse, increasing civil
monetary penalties from $2,000 plus twice the amount of each false claim to
$10,000 plus three times the amount of each false claim. HIPA expressly
prohibits four practices, namely (1) submitting a claim that the person knows or
has reason to know is for medical items or services that are not medically
necessary, (2) transferring remuneration to Medicare and Medicaid beneficiaries
that is likely to influence such beneficiary to order or receive items or
services, (3) certifying the need for home health services knowing that all of
the coverage requirements have not been met, and (4) engaging in a pattern or
practice of upcoming claims in order to obtain greater reimbursement. However,
HIPA creates a tougher burden of proof for the government by requiring that the
government establish that the person "knowingly presented" a false or fraudulent
claim, where "knowingly presented" is defined to require "deliberate ignorance"
or "reckless disregard" of the law. Merely negligent conduct should nor violate
the Civil False Claims Act. HIPA further adds health care fraud, theft,
embezzlement, obstruction of investigations and false statements to the general
federal criminal code with respect to federally funded health programs, thus
subjecting such acts to criminal penalties. Moreover, a court imposing a
sentence on a person convicted of federal health care offense may order the
person to forfeit all real or personal property that is derived from the
criminal offense. HIPA did not clarify, modify or eliminate provisions of Stark
II.
In January, 1997 HHS proposed a new regulation that would revise and
update ESRD conditions for coverage. The proposal focuses on patients' rights
and reforms and expands coverage. The proposal also reflects new developments in
technology and equipment.
Hazardous Waste and Other Regulations
The Company's dialysis centers are subject to hazardous waste laws and
non-hazardous medical waste regulation. Much of DCA's waste is non-hazardous.
Medical waste is handled separately and is disposed of pursuant to contracts
with licensed medical waste sanitation agencies which are primarily responsible
for compliance with such laws.
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, including
providing employees subject to such exposure with hepatitis B vaccinations,
protective equipment, written exposure control plan and training in infection
control and waste disposal.
Although the Company believes it complies in all material respects with
currently applicable laws and regulations and to date has not had any difficulty
in maintaining its licenses or its Medicare and Medicaid authorizations, the
health care service industry is and will continue to be subject to substantial
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 the Company's activities will not be reviewed or challenged by
regulatory authorities.
39
<PAGE>
Any loss by DCA of its various federal certifications, its
authorization to participate in the Medicare or Medicaid programs or its
licenses under the laws of any state or other governmental authority from which
a substantial portion of its revenues is derived or a change resulting from
health care reform reducing dialysis reimbursement or reducing or eliminating
coverage for dialysis services would have a material adverse effect on the
Company's business.
Patents and Trade Names
The Company sells certain of its medical supplies and products under
the trade name Medicore(Trademark). Certain of its lancets are marketed under
the trade names Medi-Lance(Trademark) and Lady Lite(Trademark). See "Business -
Medical Products" above.
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
manufacturing of medical products. Dependency is placed more on 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 electro-mechanical manufacturing, Techdyne faces competition from
many areas including divisions of large electronic and high-technology firms as
well as from numerous smaller, specialized companies. Competitive price
advantages may also be available to competitors with less expensive off-shore
operations. Management believes the primary competitive factors to be price,
quality of production, prompt customer service, timely delivery, engineering
expertise and technical assistance to customers. Among this mix of competitive
standards, management believes it is competitive with respect to delivery time,
quality, cost and customer service. Management also believes its competitive
position is enhanced through Techdyne (Scotland)'s European manufacturing and
marketing operations. See "Business - Electro-Mechanical Manufacturing" above.
Due to the number and variety of competitors, reliable data relative to
Techdyne's competitive position in the electronic components and assembly
industry is difficult to develop and is not known.
The operation of kidney dialysis centers is very competitive with
numerous local providers, many owned by physicians, and several major operators,
who have substantially greater financial resources and many more centers and
patients than the Company. By virtue of such these companies have a significant
advantage in competing for acquisitions of dialysis facilities in areas and
market targeted by the Company. Competition for acquisitions has increased the
cost of acquiring existing dialysis facilities.
Another significant competitive factor is the ability to attract and
retain qualified nephrologists who normally are the sole source of patient
referrals to the dialysis center and who are responsible for the supervision and
operations of the center. Additionally, there is always substantial competition
for obtaining qualified, competent nurses and technical staff at reasonable
labor costs.
As a result of advances in surgical techniques, immune suppression and
computerized tissue typing, cross-matching of donor cells and donor organ
availability, renal transplantation is becoming a competitive factor. It is
presently the second most commonly used modality in ESRD therapy. With
40
<PAGE>
greater availability of kidney donations, currently the most limiting factor,
renal transplantations could become a more significant competitive aspect to
dialysis treatments provided by the Company. Although kidney transplant is a
most favored treatment for ESRD, certain patients who have undergone such
transplants have lost their transplant function and returned to dialysis
treatments.
Based upon its ownership of four centers, one in Florida and three
dialysis facilities in Pennsylvania (one under construction), the Company is not
a significant competitive force in this industry. In 1996 there were in excess
of 2,860 Medicare approved ESRD facilities of which approximately 2,000 were
independent dialysis centers. Hospitals and other outpatient dialysis centers
compete with the Company's dialysis operations. Competitive factors that are
most significant in dialysis treatments are the quality of care and service,
convenience of location and pleasantness of environment.
Employees
The Company and its subsidiaries employ approximately 321 full-time
employees of which 14 are administrative, 39 are with the dialysis operations,
13 are engaged in the medical supply operations, and 225 are with Techdyne's
electro-mechanical manufacturing operations (domestic and Scotland). In
addition, Techdyne utilizes approximately 50 temporary workers, retained through
local agencies, on a regular basis.
Properties
Ownership
DCA acquired two properties in 1987, one in Easton, Maryland consisting
of land and a one and one-half story frame building of approximately 8,000
square feet, of which 5,400 square feet is leased to the purchaser of one of the
dialysis centers DCA sold in 1989 and a competitor of DCA. The tenant recently
leased an additional 2,040 square feet at this facility. DCA maintains an office
at this facility. The second property consists of land and a 15,230 square foot
brick building in Lemoyne, Pennsylvania. DCA constructed a new 3,400 square foot
center at this facility, approved for 13 dialysis stations, with space available
for expansion, which it anticipates initiating in the near future. DCA leases
this facility to its subsidiary. See "Certain Relationships and Related
Transactions" of the Company's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held on June 11, 1997, which is hereby
incorporated by reference.
The Carlisle, Pennsylvania dialysis facility, currently under
construction, is leased by the Company's subsidiary, DSP-C, under a five-year
lease to commence when the space is substantially completed, with two renewals
of five years each. The facility consists of 4,340 square feet of space to house
12 dialysis stations at an annual rental of $32,550.
DSNJ, a new subsidiary of the Company, has completed a five year lease
for its new dialysis facility in Manahawkin, New Jersey for approximately 4,000
square feet at an annual rate of approximately $38,000 per annum plus its
proportionate share of the real estate taxes and casualty insurance premiums.
The lease is renewable for two consecutive five year periods. The facility is
designed for 12 dialysis stations. For construction to commence, approval for
upgraded services is being sought. There is no assurance that such approval will
be granted, and, if not, further delays in opening this new dialysis facility
will be encountered until a proper location is secured.
The properties in Lemoyne, Pennsylvania and Easton, Maryland, are
subject to mortgages from a Maryland banking institution. As of December 31,
1996, the remaining principal amount of the mortgage
41
<PAGE>
on the Lemoyne property was approximately $224,000 and on the Easton, Maryland
property was approximately $280,000. Each mortgage extends through November,
2003, bears interest at 1% over the prime rate, and is secured by the real
property and DCA's personal property at those locations. The bank also has a
lien on rents due DCA and security deposits from leases of the properties.
Written approval of the lender is required for all leases, assignments or
subletting, alterations and improvements and sales of the properties. Under the
terms of the mortgages, the bank has the immediate right to demand repayment of
the outstanding balances. See "Management's Discussions and Analysis of
Financial Condition and Results of Operations."
In 1990, the Company acquired two buildings from Techdyne, one a 16,000
square foot building in Hialeah, Florida housing Techdyne's executive and
administrative offices (approximately 5,000 square feet); engineering
(approximately 2,000 square feet); and prototype and production assemblies and
plastic injection molding(approximately 9,000 square feet). Adjacent to that
facility is the second building consisting of 12,000 square feet used as a
warehouse and inspection segments of Techdyne's operations. The Company leases
these facilities to Techdyne. See below. The Company also owns a parcel of land
located adjacent to Techdyne's executive and administrative offices in Hialeah,
Florida, 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 11, 1997, which is incorporated herein by reference.
The Company owns a small parcel of land near Techdyne's offices in
Hialeah, also used as a parking lot, and a small undeveloped parcel near
its warehouse facilities purchased for future expansion.
42
<PAGE>
<TABLE>
<CAPTION>
Leases - Company as Lessor
Lessee Space Property Term Rent
------ ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Renal Treatment 7,440 sq. ft. 402 Marvel Ct. 5 yrs. to $80,000/yr
Centers-Maryland, Easton, PA March 31, 1998; (for 5,400 sq. ft.)
Inc. (1)(2) one 5-yr renewal escalating 5% the
last 2 yrs; $2400
per yr. (for 2040 sq.
ft.) (2)plus utilities
and real estate taxes
Dialysis Services of 3,400 sq. ft. 27 Miller Ave(4) 5 yrs. to $33,730
Pennsylvania, Lemoyne, PA Nov. 30, 2000; plus utilities,
Inc. - Lemoyne (1)(3) two 5 year real estate
renewals taxes and insurance
MCI 247 sq. ft. 27 Miller Ave. 5 yrs. to $3,035/yr.
Communications Lemoyne, PA Feb. 28, 1998 plus
Corp. electric and taxes
JA Hunt Services, Inc. 1,947 sq. ft. 27 Miller Ave. 3 yrs. to $17,010/yr.
Lemoyne, PA March 31, plus taxes.
1998
Techdyne(4) 16,000 sq. ft. 2230 W. 77th St. 5 yrs. to $130,000/yr
(exec. off. Hialeah, FL March 31, plus tax
and mfg.) 2000 utilities,
insurance (net, net)
(5)
Techdyne(4) 12,000 sq. ft. 2200 W. 77th St 5 yrs. To $130,000/yr
(warehouse) Hialeah, FL March 31, plus taxes,
2000 utilities,
insurance
(net, net)(5)
<CAPTION>
Leases - Company or Subsidiary as Lessee
Identity of
Lessee Space Property Landlord Term Rent
<S> <C> <C> <C> <C> <C>
The Company 2,800 sq. ft. 2337 W. 76th St. Viragen, Inc.(6) 5 yrs. to $19,600/yr
(exec. and Hialeah, FL Dec. 31, plus
admin.) 1997; two taxes and
5 yr. utilities
renewals
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Identity of
Lessee Space Property Landlord Term Rent
- ----------- ----------- ---------------- ---------- --------- ------
<S> <C> <C> <C> <C> <C>
The Company 5,000 sq. ft. 75 W. Commerce Brett and 5 yrs. to Dec. $18,200/yr
(medical Center Suzanne 11, 1997; (escalating
supply and 2647 W. 81 St Anderson one 5 year 3%, each
consumer Hialeah, FL renewal year) plus
product utilities
operations-
offices
and warehouse)
The Company 3,900 sq. ft. 777 Terrace Ave. Heights Plaza 5 yrs. to $62,000/yr
(exec. Hasbrouck Associates March 31, plus
offices) Heights, NJ 2001 electricity,
taxes and
operational
increases
Techdyne 11,000 sq ft 9742 and 9750 George Whimpey month $5,490 per
(mfg. Whithorn Drive of Texas, Inc. to month month
& offices) Houston, TX
Techdyne 5,500sq ft 495 Commerce Pk. 495 Commerce 5 yrs.to $33,600
(mfg. & 113 Cedar St. Park Ltd March 31, first 2 yrs;
office) Milford, MA Partnership 2002; 5 yr. $37,200 3rd &
` renewal 4th yrs.;
$38,400
5th yr.
plus utilities,
insurance
(net, net)
Techdyne 6,825 sq. ft. 800 Paloma Drive Amorron Park 3 yrs. to $45,000/yr
(mfg. & Round Rock (Austin), Ltd. April 14, plus taxes,
offices) TX(7) 1998; utilities,
one three insurance
year renewal (net, net)
Dialysis 5,214 sq. Paradise JACO, L.C. 5 yrs to $61,000/yr
Services ft. (3 story Village Oct. 31,
of Florida, dialysis Professional 1999; one
Inc.-Fort facility) Park 5 yr.
Walton Bch.(8) Fort Walton renewal
Beach, FL
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Identity of
Lessee Space Property Landlord Term Rent
<S> <C> <C> <C> <C> <C>
Dialysis 4,000 sq. ft. 675 Route 72 East William P. 5 yrs to $38,000/yr.
Services of (12 stations) Manahawkin, NJ Thomas commence plus taxes,
Inc.- when space insurance and
Manahawkin(3) completed; utilities
two 5 yr.
renewals
Dialysis 4,000 sq. 14 Tioga St. James & 5 yrs. to $25,000/yr
Services of ft. (12 Wellsboro, PA Roger Stager Sept. 27 plus utilities
PA, Inc- stations) 2000; two
Wellsboro(3) 5 yr. renewals
Dialysis 4,340 sq. 101 Noble Blvd. Lester and 5 yrs. to $32,550/yr
Services ft. (dialysis Carlisle, PA Kirby commence plus utilities
of PA, Inc.- stations) Burkholder when space and
Carlisle(3) completed janitorial
Renal Services(3) 300 sq. ft. 45 Delaware Street Ronald Peck 1 yr. to $490 per
(offices) Woodbury, NJ January 1, month
1998
</TABLE>
Techdyne has an additional lease for two properties in Hialeah,
Florida owned by the Company. See above "Leases - Company as Lessor."
In 1994, Techdyne (Scotland) purchased the 27,000 square foot facility
it had been leasing in Livingston, Scotland. The purchase was accomplished for
approximately $730,000 with a 15-year mortgage which has a U.S. dollar
equivalency of approximately $591,000 at December 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." This
facility was recently expanded by 3,500 square feet.
Techdyne and DCA believe that their equipment and facilities are
adequate for their current operations.
- -----------------
(1) DCA (67% owned subsidiary) is the Lessor.
(2) Leases guaranteed by parent, Renal Treatment Centers, Inc. DCA has
acknowledged to lessees and their bank that such bank's security
interest in lessees' property is superior to any interest which DCA may
have as landlord. 2,040 square feet leased on a month-to-month basis
through the term.
(3) 100% owned subsidiary of DCA.
(4) 63% owned public subsidiary.
(5) The $130,000 per year rental is the aggregate for both properties, 2230
West 77th Street, Hialeah, Florida and 2200 West 77th Street, Hialeah,
Florida with adjacent parking. The rent was reduced to $94,000 per
annum for the 12 months from April 1, 1996 to March 31, 1997.
45
<PAGE>
(6) Viragen, Inc. ("Viragen") is a former subsidiary of the Company
which was spun-off in 1986. Viragen is indebted to the Company for
approximately $108,000 in accrued royalties.
(7) Right of first refusal to lease adjacent space (approximately 5,400
square feet).
(8) 80% owned subsidiary of DCA.
Legal Proceedings
The Company is not involved in or subject to any claims or litigation.
A temporary worker at Techdyne was injured in the first quarter of 1996. The
injured party was insured through his temporary personnel agency. Although the
extent of said injuries are not known nor the associated costs, Techdyne
anticipates that its insurance is adequate to cover any potential claim. See
Note 7 to "Notes to Consolidated Financial Statements" to the Form 10-K.
MANAGEMENT
Directors and Executive Officers
<TABLE>
<CAPTION>
Position
Current Position and Held
Name Age Areas of Responsibility Since
- ---- --- ----------------------- -----
<S> <C> <C> <C>
Thomas K.
Langbein 51 Chairman of the Board 1980
of Directors, Chief
Executive Officer and
President
Seymour Friend 76 Vice President and 1981
Director 1975
Daniel R. Ouzts 50 Vice President (Finance) 1986
and Controller 1983
</TABLE>
Thomas K. Langbein was appointed as Chairman of the Board of Directors,
Chief Executive Officer and President in 1980, which latter position was
relinquished in January, 1983 and reassumed in April, 1985 upon completion of
Techdyne's public offering. Mr. Langbein is an officer and director of most of
the Company's subsidiaries and was appointed President and Chief Executive
Officer of Techdyne in April, 1990. Barry Pardon succeeded to the Presidency of
Techdyne in November, 1991 at which time Mr. Langbein reassumed the position of
Chairman of the Board. He has been a director of Techdyne since it was acquired
by the Company in 1982. He is also a director of Techdyne's foreign subsidiary,
Techdyne (Scotland). Mr. Langbein is Chairman of the Board and Chief Executive
Officer of DCA. He also held those positions with Viragen, Inc., a public
company and former subsidiary of the Company, until his resignation in April,
1993. Mr. Langbein is President, sole shareholder and director of Todd &
Company, Inc. ("Todd"), a broker-dealer registered with the Securities and
Exchange Commission and a member of the National Association of Securities
Dealers, Inc. Mr. Langbein devotes most of his time to the affairs of the
Company, Techdyne and DCA. See "Executive Compensation" and "Certain
Relationships and Related Transactions" in the Company's definitive Proxy
Statement relating to
46
<PAGE>
the Annual Meeting of Shareholders to be held on June 11,
1997, which is incorporated herein by reference.
Seymour Friend is a real estate investor and devotes a portion of his
time to the affairs of the Company. He resigned as a director of Viragen, Inc.
in May, 1993. See "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held on June 11, 1997, which is incorporated herein by
reference.
Daniel R. Ouzts, a certified public accountant, joined the Company in
1980 as Controller of its plasma division. In 1983 he became Controller of the
Company and DCA, and in 1986 became Vice-President of Finance. Mr. Ouzts also
serves as Vice President of Finance and Controller for Techdyne since 1986. In
June, 1996, Mr. Ouzts was appointed Vice President of Finance and Treasurer of
DCA. See "Certain Relationships and Related Transactions" of the Company's
definitive Proxy Statement relating to the Annual Meeting of Shareholders to be
held on June 11, 1997, which is incorporated herein by reference.
Other Significant Employees
Position
Current Position and Held
Name Age Areas of Responsibility Since
Barry Pardon 45 President and 1991
Director of Techdyne 1990
Barry Pardon joined Techdyne in November, 1980 as national sales
manager and initiated the independent manufacturer representatives sales force.
Mr. Pardon became Vice President of Marketing of Techdyne in 1981, was appointed
Executive Vice President (Marketing) in January, 1988, and appointed President
in November, 1991. Mr. Pardon is a director of Techdyne (Scotland).
SELLING STOCKHOLDERS
The Selling Stockholders offering Common Stock included in the
Prospectus are:
<TABLE>
<CAPTION>
Beneficial Ownership (2)
Common -------------------------------------------------
Relationship Stock Being Before After
Name to Company Offered(1) Offering %(3)(4) Offering % (4)(5)
- ---- ---------- ------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 Options
Thomas K. Chairman of Board, 250,000 1,074,014 (6) 18.8% 824,014 12.4%
Langbein CEO and President
Seymour Friend Vice President and 75,000 432,705 (7) 7.8% 357,705 5.4%
Director
Anthony C. Director 75,000 273,890 (7) 4.9% 198,890 2.9%
D'Amore
Lawrence E. Jaffe Counsel and Secretary 75,000 201,575 (8) 3.6% 126,575 1.9%
to Company
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION> Beneficial Ownership (2)
Common -----------------------------------------------
Relationship Stock Being Before After
Name to Company Offered(1) Offering %(3)(4) Offering % (4)(5)
- ---- ---------- ------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Peter D. Fischbein Director 75,000 372,611 (9) 6.7%
Barry Pardon President of Techdyne 75,000 135,750 (10) 2.5% 60,750 *
Bart Pelstring President and Director 30,000 85,000 (11) 1.5% 55,000 *
of DCA
Joseph Verga Director 30,000 79,075 (11) 1.4% 49,075 *
Daniel R. Ouzts Vice President (Finance) 30,000 71,050 (11) 1.3% 41,050 *
and Controller
Dennis W. None 50,000 50,000 * * --
Healey (12)
Bonnie Kaplan Employee 5,000 5,000 * -- --
William Langbein Employee 5,000 5,000 * -- --
Sandra Molina Employee 1,000 1,000 * -- --
Isabel Rodriguez Employee 1,000 1,000 * -- --
Maria Rios Employee 1,000 1,000 * -- --
Gilda Gort Employee 1,000 1,000 * -- --
Moni Noa Employee 1,000 1,000 * -- --
Georgette Ysrael Employee 1,000 1,000 * -- --
Lillie Allen Employee 1,000 1,000 * -- --
1994 Options(13)
Performance Former 200,000 200,000 3.7% -- --
Capital Consultant
Corporation (14)
Joseph Dillon
and Company(15) Consultant 200,000 200,000 3.7% -- --
</TABLE>
- ----------------------------------
*less than 1%
(1) On April 18, 1995, the Board granted the 1995 Options under the 1989 Stock
Option Plan, of which these are presently 807,000 1995 Options Outstanding.
The Options were originally exercisable at $3.00 per share through April
17, 2000, and on December 30, 1996, the 1995 Option exercise price was
reduced to $2.38 per share based upon the closing price of the Company's
Common Stock as reported by the Nasdaq National Market on that date. Each
Selling Stockholder of the Common Stock underlying the 1995 Options is
restricted to the sale of 25% of the Common Stock obtained upon exercise of
the 1995 Options within any six-month period absent prior approval from the
board of directors. 25% of the Common Stock obtained upon exercise of the
1995 Options may be sold immediately.
48
<PAGE>
The only other shares of Common Stock being offered under this Prospectus
are 400,000 shares underlying the 1994 Options held 200,000 each by two
Selling Stockholders. The 1994 Options are at $1.25 per share through
September 30, 1997. See "Executive Compensation-Options, Warrants or
Rights" to the Company's Proxy Statement relating to its Annual Meeting of
Shareholders to be held on June 11, 1997 which is incorporated hereby
reference.
The closing price of the Company's Common Stock on May 2, 1997 was $2.50.
(2) Based upon information furnished to the Company by either the directors and
officers or obtained from the stock transfer books of the Company. The
Company is informed that these persons hold sole voting and dispositive
power with respect to the shares of Common Stock except as noted herein.
(3) Based on 5,456,940 shares outstanding. Does not include 807,000 shares of
Common Stock underlying the 1995 Options or the 400,000 shares of Common
Stock underlying the 1994 Options included in this Prospectus.
(4) For purposes of computing the percentage of outstanding shares held by each
person or group of persons named above, any security which such person or
group of persons has the right to acquire within 60 days of May 2, 1997
is deemed to be outstanding for purposes of computing the percentage
ownership of such person or persons, but is not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
(5) Assuming all the 1994 and the 1995 Options are fully exercised. Therefore,
there would be an additional 1,207,000 shares of Common Stock issued and
there would then be 6,663,940 shares of Common Stock outstanding.
(6) Includes (i) 15,700 shares each held in the names of Mr. Langbein's two
children who are of majority age but live in the same household, to which
shares Mr. Langbein disclaims beneficial ownership; and (ii) 250,000 shares
of Common Stock underlying the 1995 Options. Does not include an option to
acquire up to 400,000 shares of Common Stock in lieu of a lump sum payment,
which option is not presently exercisable except in the event of a change
in control of the Company. See Note (1) and "Employment Contracts and
Terminations of Employment and Change-In-Control Arrangements" and
"Options, Warrants or Rights" under the caption "Executive Compensation."
Of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on June 11, 1997, which is incorporated herein by
reference.
(7) Includes 75,000 shares of Common Stock underlying the 1995 Options. See
Note (1).
(8) Includes (i) 10,000 shares of Common Stock owned by his daughter residing
in the same household; and (ii) 75,000 shares of Common Stock underlying
the 1995 Options. See Note (1).
(9) Includes (i) 100,000 shares held in trust for his infant son; Mr.
Fischbein's wife is trustee; Mr. Fischbein disclaims beneficial interest in
the 100,000 shares held in trust for his son; and (ii) 75,000 shares of
Common Stock underlying the 1995 Options. Does not include 196,382 shares
of Common Stock owned by his wife in which shares, based on her financial
independence, Mr. Fischbein disclaims beneficial interest.
(10) Includes (i) 7,200 shares of Common Stock held in the name of his wife;
and (ii) 75,000 shares of Common Stock underlying the 1995 Options. See
Note (1).
49
<PAGE>
(11) Includes 30,000 shares of Common Stock underlying the 1995 Options. See
Note (1).
(12) Former Sr. Vice President and Treasurer of the Company until July, 1996,
Upon his resignation he was granted an extension of his 1995 Option
through the expiration date. See Note (1).
(13) Exercisable at $1.25 per share through September 30, 1997.
(14) Obtained in September, 1994, for consulting arrangement and earned 25% per
quarter throughout 1995. That consulting arrangement expired on September,
1996, upon which Performance Capital Corporation transferred 50% of its
1994 Options (for 200,000 shares of Common Stock) to Joseph Dillon &
Company, Inc. ("Joseph Dillion"), with respect to an arrangement between
those companies.
(15) Underwriters of the public offering for Techdyne in 1995 and DCA in 1996,
pursuant to which it received certain commissions and expenses, including a
consulting arrangement from each subsidiary for 18 months at $3,000 per
month, which consulting fee was paid in full by each of Techdyne and DCA
upon completion of their respective offerings. The DCA consulting agreement
is still in effect through October 16, 1997. Joseph Dillon acquired the
1994 Option for 200,000 shares of Common Stock from Performance Capital
Corporation. See Note (14) above.
The Selling Stockholders are aware of Regulation M recently adopted to
replace in part, Rule 10b-6 of the Exchange Act, which prohibits persons engaged
in a distribution of securities from bidding or for purchasing (including others
to bid for or purchase) the securities that are being distributed, until they
have completed their distribution. One of the purposes of Regulation M is to
protect persons with a financial interest in a distribution from affecting the
integrity of the independent pricing mechanisms of the market for the securities
that are in distribution.
Distribution is defined broadly distinguishing the concept from
ordering, trading by the magistrate of the offering and the presence of special
selling efforts and selling methods. The definite applies to "shelf offerings"
of securities as is the case with secondary offerings by selling stockholders
from time to time in the open market at current market prices. Whether sales by
the Selling Stockholders are deemed to be a distribution under Regulation M
depends, among other factors, on the amount of securities registered, the public
float, the trading volume and the presence of any special selling effort, if it
is determined that a distribution exists, the bidding for and the purchasing
prohibitions of Regulation M will apply to those securities being distributed by
those persons participating in the distribution.
The Selling Stockholders shall be deemed to be engaged in a
distribution from the time they determine to proceed with the shelf-registered
offering. Since there may be extended periods during which there are no selling
efforts under an effective shelf-registered offering, the Commission believes it
is unnecessary to subject issuers, broker-dealers, selling security holders and
other persons who may be deemed participating, to the strict prohibitions of
bidding for, purchasing or inducing others to purchase the securities subject to
the distribution throughout the life of the shelf registration.
Although Joseph Dillon, a registered broker-dealer with the Commission
and a member of the NASD (thereby knowledgeable with respect to the requirements
of Regulation M), is one of the Selling Stockholders, there is no agreement or
arrangement or among the Selling Stockholders and Joseph Dillon for the latter
to act as agent for any or all of the Selling Stockholders, who may exercise
their 1994 until 1995 Options and sell the underlying Common Stock from time to
time at their sole discretion and judgement. The Selling Stockholders have been
apprised of
50
<PAGE>
the restriction of Regulation M and have agreed to abide by their
obligations under the Exchange Act and, in particular, Regulation M. Nothing
herein is deemed a determination as to whether this shelf-registered offering by
the Selling Stockholder is a distribution, whether such Selling Stockholders may
be deemed underwriters, whether regulations, relaxes, or whether the Selling
Stockholder's market activities are to create actual or apparent trading to
artificially affect the independent market activities or to create actual or
apparent trading to artificially affect the independent market forces or prices
of the Company's securities and are therefore otherwise manipulative.
Nothing herein is deemed a determination as to whether this
shelf-registered offering by the Selling Stockholders is a distribution, whether
such Selling Stockholders may be deemed underwriters, whether for Registration M
purposes, or otherwise, at what point the prohibition against bidding for or
purchasing the securities commences or relaxes, or whether the Selling
Stockholders' market activities are to create actual or apparent trading to
artificially affect the independent market forces or prices of the Company's
securities and are therefore otherwise manipulative.
DESCRIPTION OF SECURITIES
General
The Company has an authorized capital of 12,000,000 shares of Common
Stock, $.01 par value, of which 5,456,940 shares are currently outstanding. The
issued and outstanding shares of Common Stock are fully paid and non-assessable,
and all the shares of Common Stock underlying the Options, when paid for and
issued, will be fully paid and non-assessable.
Holders of the Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders and do not have cumulative
voting rights in the election of directors. Assuming complete exercise of the
1994 and 1995 Options, the officers and directors of the Company will own
approximately 38% of the voting equity of the Company, and will be able to
substantially influence the vote on all matters. See Risk Factor No. 1 under
"Risk Factors Relating to the Securities and the Offering."
Holders of the Common Stock are entitled to share pro rata in such
dividends as may be declared by the board of directors out of funds legally
available. See "Dividend Policy." On any dissolution, liquidation or winding-up
of the Company, the holders of Common Stock will be entitled to share pro rata
in all distributions made after the payment of or provision for the payment of
all debts and prior claims. There are no preemptive rights or conversion
privileges applicable to the Common Stock.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the Options are subject to adjustment upon the occurrence
of certain events, including stock dividends, stock splits, combinations or
reclassification of the Common Stock. The Options do not confer upon the holders
any voting or any other rights as shareholders of the Company.
Continental Stock Transfer & Trust Company, 2 Broadway, New York, New
York, 10004, serves as Transfer Agent for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has 5,456,940 shares of Common Stock outstanding. Assuming
all the Options are exercised, there will be an additional 1,207,000 shares of
Common Stock outstanding for an aggregate of 6,663,940 shares of Common Stock
outstanding. The officers and directors of the Company and its
51
<PAGE>
subsidiaries currently beneficially own approximately 42% of the
Company, and assuming exercise of all the Options, will beneficially own
approximately 38% of the Common Stock outstanding. Joseph Dillon (a consultant
to DCA) and Performance Capital Corporation, a former consultant to the Company,
each beneficially own 3.7% of the outstanding Common Stock, and assuming full
exercise of the Options will each beneficially own 3%, and together will
beneficially own 6% of the Common Stock to be outstanding. See Risk Factor No. 5
under "Risk Factors Relating to the Securities and the Offering." A substantial
amount of the 2,530,070 shares of Common Stock beneficially owned by the
officers and directors of the Company and its subsidiaries are freely tradable,
except affiliates of the Company (as defined as control persons under the
Securities Act and Rule 144 of that Act) are entitled to sell their shares
absent a registration statement only in accordance with the conditions of Rule
144 except with respect to the one-year holding period applicable to restricted
securities. Rule 144 entitles such affiliates to sell in any three-month period,
a number of shares, which does not exceed the greater of 1% of the total number
of shares of Common Stock outstanding, or if the Common Stock is trading on
Nasdaq, which it is, or a national stock exchange, the average weekly trading
volume of the shares during the four calendar weeks preceding the sale. This
means that the officers and directors of the Company and its subsidiaries could
each sell at least 54,569 shares of Common Stock every three-month period, so
long as none of such persons are acting in concert, which means they do not have
any agreement or arrangement as to how they will sell their shares of Common
Stock. Sales under Rule 144 are also subject to satisfaction of certain
additional conditions, including the names and method of sale, notice and the
availability of current public information about the Company.
Any sales under Rule 144 would be in addition to the 1,207,000 shares
of Common Stock being offered under this Prospectus, which for the 1995 Options
is subject to a restriction imposed by the Company of 25% of the 1995 Options
within any six-month period absent consent for greater sales by the board of
directors.
Sales of substantial amounts of shares of Common Stock in the public
market under Rule 144 and/or pursuant to this Prospectus or otherwise, could
adversely affect the prevailing market price of the Common Stock. See Risk
Factor No. 5 under "Risk Factors Relating to the Securities and the Offering."
PLAN OF DISTRIBUTION
The Common Stock underlying the Options are being offered for sale by
the Selling Stockholders from time to time in the over-the-counter market
through the usual brokerage channels and transactions at the then prevailing
market prices, or at private sale or otherwise at negotiated prices related to
the prevailing market prices at the time of offer or sale or by a combination of
such methods. See "Market for the Company's Securities" and "Selling
Stockholders." The Selling Stockholder and any broker-dealer acting on their
behalf may be deemed underwriters within the meaning of the Securities Act and
any commissions received or profits realized by them may be deemed underwriting
commissions. The Company will receive none of the proceeds from the sale of the
securities by the Selling Stockholder. See "Use of Proceeds."
The Selling Stockholders have agreed with the Company that any Common
Stock to be offered by them to the public from time to time will be offered and
sold in compliance with the Securities Act and the Exchange Act as well as any
private agreement between the Company and Selling Stockholder. The Selling
Stockholders have agreed that they will not pay, directly or indirectly, to any
person any compensation for soliciting another to purchase any Common Stock,
except for sales of these securities in ordinary brokerage transactions in which
the broker is paid no more than the usual and customary commission for such
transaction.
52
<PAGE>
One or more supplements to the Prospectus will be filed under the
Securities Act to describe any material arrangement or modification in the sale
or resale of the Common Stock.
LEGAL MATTERS
The validity of the Common Stock issuable upon exercise of the Options
will be passed upon by Lawrence E. Jaffe, Esq., 777 Terrace Avenue, Hasbrouck
Heights, New Jersey. Mr. Jaffe is Secretary and counsel to the Company and
devotes a significant amount of his time and receives a substantial portion of
his fees for services rendered to the Company, primarily in corporate and
securities matters. Fees paid to Mr. Jaffe by the Company for 1996 totaled
approximately $107,000. Mr. Jaffe maintains his principal office at the premises
that the Company utilizes for its New Jersey executive offices. He owns 1995
Options for 75,000 shares of Common Stock which shares are included in this
Prospectus. See "Selling Stockholders."
EXPERTS
The consolidated financial statements of Medicore, Inc. and
subsidiaries at December 31, 1996 and 1995 and for each of the three years in
the period ended December 31, 1996 incorporated by reference in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent certified public accountants, as set forth in their report
thereon included therein and incorporated herein by reference in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The certificate of incorporation and by-laws of the Company provide
that the Company shall indemnify to the fullest extent permitted by Florida law
any person whom it may indemnify thereunder, including directors, officers,
employees and agents of the Company. Such indemnification (other than as ordered
by a court) shall be made by the Company only upon a determination that
indemnification is proper the circumstances because the individual met the
applicable standard of conduct. Advances for such indemnification may be made
pending such determination. Such determination shall be made by a majority vote
of a quorum consisting of disinterested directors, or by independent legal
counsel or by the shareholders. In addition, the certificate of incorporation
provides for the elimination, to the extent permitted by Florida law, of
personal liability of directors to the Company and its shareholders for monetary
damages for breach of fiduciary duty as directors.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore
un-inforcible. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of Expenses, incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the latter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
53
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following is a schedule of estimated expenses to be
incurred by the Registrant in connection with the issuance and
distribution of the Common Stock being registered hereby, other than
commissions that might be payable by the Selling Stockholders to any
broker or dealer that each or any of them might use to sell their
Common Stock. See the Prospectus under the caption "Selling
Stockholdes." The Selling Stockholders have no obligation for the
expenses of this offering; provided, however, that the Company is not
responsible for any counsel fees for counsel retained by the Selling
Stockholders nor any selling commissions incurred by the Selling
Stockholders for their Common Stock, which such selling commissions and
related expenses shall be the sole responsibility of the Selling
Stockholders.
Registration Fee $ 1,006
Printing and Engraving* 5,000
Accounting Fees* 5,000
Blue Sky Filing Fee and Expenses* 1,000
Legal Fees and Expenses* 37,000
Miscellaneous* 994
----------
Total $ 50,000
- --------------------------------
* Estimated
Item 15. Indemnification of Directors and Officers
Reference is made to Part II, "Information Not Required In Prospectus",
Item 17, with regard to indemnification of directors and officers and the
Commission's position relating thereto.
Section 607.014 of the Florida General Corporation Act provides for the
indemnification of officers and directors under certain terms and conditions.
The Certificate of Incorporation of the Registrant further provides in
Article VIII, "Powers of Directors":
"The business of the Corporation shall be managed and its corporate
powers shall be exercised by its Board of Directors. The Board of Directors
shall have power, without shareholder action, to exercise all of the corporate
power to which the Corporation is entitled under Florida law including but not
limited to
1. The power to cause the Corporation to indemnify each director
and officer of the Corporation against all or any portion of
any expenses reasonably incurred by him in connection with or
arising out of any action, suit or proceeding in which he may
be involved, by reason of his being or having been an officer
or director of the Corporation (whether or not he continues to
be an officer or director at the time of incurring such
expenses) to the extent and scope permitted by the laws of the
State of Florida.
II-1
<PAGE>
Item 16. Exhibits
(4) Instruments defining the rights of stockholders, including
indentures.
(i) 1989 Stock Option Plan (incorporated by reference to the
Company's current report of Form 8-K, dated July 10, 1989
("July 1989 Form 8-K"), Item 7(c)(ii)).
(ii) Form of Stock Option Agreement issued pursuant to the 1989
Stock Option Plan (incorporated by reference to the Company's
July, 1989 Form 8-K, Item 7(c)(iii)).
(iii) Form of Additional Non-Qualified Stock Option Agreement
issuable under the Stock Option Agreement (incorporated by
reference to the Company's July, 1989 Form 8-K, Item
7(c)(iv)).
(iv) Stock Option Agreement between the Company and Performance
Capital Corporation dated September 26, 1996 (incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 ("1996 Form 10-K"), Part IV, Item
14(a)3(10)(xxxii)).
(v) Stock Option Agreement between the Company and Joseph Dillon
& Company, Inc. dated September 26, 1996 (incorporated by
reference to the Company's 1996 Form 10-K, Part IV, Item
14(a)3(10)(xxxiii)).
(5) Opinion of Lawrence E. Jaffe, Esq. (including consent)
(23) Consents of Experts and Counsel
(i) Consent of Ernst & Young LLP (included on page II-5)
(ii) Consent of Lawrence E. Jaffe, Esq. (included in his opinion
of counsel filed as Exhibit 5)
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424 (b) if, in the aggregate the changes in volume
and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
II-2
<PAGE>
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, That paragraphs (a)(1)(i) and (a)(1)(ii) of this
section do not apply if the registration statement is on Form S-3, Form S-8 of
Form F-3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to section 13 or section
15(d) of the Securities Exchange Act of 1934 that are incorporated by reference
in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at this time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that such a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy in the Act and will be governed
by the final adjucation of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City Hialeah, State of Florida on the 8th day of May, 1997.
MEDICORE, INC.
By: /s/ Thomas K. Langbein
----------------------
Thomas K. Langbein
Chairman of the Board of Directors,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Thomas K. Langbein Chairman of the Board of Directors, May 8, 1997
- --------------------------------- Chief Executive Officer and President
Thomas K. Langbein
/s/ Seymour Friend Vice-President and Director May 8, 1997
- ---------------------------------
Seymour Friend
/s/ Daniel R. Ouzts Vice-President (Finance) May 8, 1997
- --------------------------------- and Controller
Daniel R. Ouzts
/s/ Peter D. Fischbein
- -------------------------------- Director May 8, 1997
Peter D. Fischbein
/s/ Anthony C. D'Amore
- -------------------------------- Director May 8, 1997
Anthony C. D'Amore
</TABLE>
II-4
<PAGE>
Consent of Independent Certified Public Accountants
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" in the Registration Statement (Form S-3) and related
prospectus of Medicore, Inc. for the registration of 1,207,000 shares of its
common stock and to the incorporation by reference therein of our report dated
March 21, 1997, with respect to the consolidated financial statements and
schedule of Medicore, Inc. included in its Annual Report (Form 10-K) for the
year ended December 31, 1996, filed with the Securities and Exchange Commission.
Ernst & Young LLP
/s/ Ernst & Young LLP
Miami, Florida
May 6, 1997
II-5
<PAGE>
CONSENT OF COUNSEL
The consent of Lawrence E. Jaffe, Esq. is contained in his opinion
filed as Exhibit 5 to this Registration Statement.
II-6
<PAGE>
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------
MEDICORE, INC.
(Exact name of registrant as specified in character)
--------------------------------------
EXHIBITS
<PAGE>
EXHIBIT INDEX
(4) Instruments defining the rights of stockholders, including indentures.
(vi) 1989 Stock Option Plan (incorporated by reference to the
Company's current report of Form 8-K, dated July 10, 1989
("July 1989 Form 8-K"), Item 7(c)(ii)).
(vii) Form of Stock Option Agreement issued pursuant to the 1989
Stock Option Plan (incorporated by reference to the Company's
July, 1989 Form 8-K, Item 7(c)(iii)).
(viii) Form of Additional Non-Qualified Stock Option Agreement
issuable under the Stockk Option Agreement (incorporated by
reference to the Company's July, 1989 Form 8-K, Item
7(c)(iv)).
(ix) Stock Option Agreement between the Company and Performance
Capital Corporation dated September 26, 1996 (incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 ("1996 Form 10-K"), Part IV, Item
14(a)3(10)(xxxii)).
(x) Stock Option Agreement between the Company and Joseph Dillon
& Company, Inc. dated September 26, 1996 (incorporated by
reference to the Company's 1996 Form 10-K, Part IV, Item
14(a)3(10)(xxxiii)).
(5) Opinion of Lawrence E. Jaffe, Esq. (including consent)
(23) Consents of Experts and Counsel
(i) Consent of Ernst & Young LLP (included on page II-5)
(ii) Consent of Lawrence E. Jaffe, Esq. (included in his opinion
of counsel filed as Exhibit 5)
EXHIBIT 5
May 8, 1997
Medicore, Inc.
2337 West 76th Street
Hialeah, Florida 33016
Re: Registration Statement-Form S-3
1,207,000 Shares of Common Stock
Gentlemen:
I have acted as counsel for Medicore, Inc, a Florida Corporation (the
"Company") in connection with the preparation and filing by the Company of a
registration statement on Form S-3 (the "Registration Statement") relating to
the offer and sale by the Selling Stockholders as identified in the registration
statement throughout 1,207,000 shares of Common Stock, $.01 par value (the
"Common Stock").
In rendering this opinion, I have examined originals or copies
certified or otherwise identified to my satisfaction as being true copies of the
registration statement, the reinstated Certificate of Incorporation, as amended,
of the Company, its bylaws, minutes of meetings of the Board of Directors of the
Company, and such other documents as I have deemed relevant and necessary as a
basis for this opinion. In my examination I have assumed the genuiness of all
signatures, the authenticity of all documents submitted to me, the conformity to
original documents submitted to me as certified or photostatic copies, and the
authenticity of the originals of such latter documents. Capitalized terms used
in the context of this opinion shall have the same meaning ascribed thereto
within the registration statement.
I am admitted to the bars of the states of New York, New Jersey and
Florida and express no opinion as to the laws of any other jurisdiction except
with respect to the laws of the United States, typically applicable to
transactions of the type contemplated by the registration statement. I assume no
obligation to supplement this opinion if any applicable laws change after the
date hereof, or if I become aware any facts that may change the opinions
expressed herein after the date hereof.
The opinion expressed in this letter is solely for the use of the
Company and the Selling Stockholders in connection with the Registration
Statement. This opinion may not be relied on by any other person or in any other
connection without my prior written approval. The opinion expressed in this
letter is limited to the matters set forth herein, and no other opinions should
be inferred beyond the matters expressly stated.
On the basis of the foregoing, I am of the opinion that the Common
Stock issuable upon the exercise of the Options have been duly and validly
authorized, and when issued, delivered and paid for in a manner set forth in the
Registration Statement, will be fully paid and non-accessible and conform to the
description as contained in the Registration Statement.
<PAGE>
I hereby consent to the reference to myself under the heading "Legal
Matters" in the Prospectus which is part of the Registration Statement, and to
the filing of the opinion as Exhibit 5 to the Registration Statement.
Very truly yours,
/s/ Lawrence E. Jaffe
LAWRENCE E. JAFFE
LEJ:GS
