<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
February 5, 1997
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Date of Report (Date of earliest event reported)
Renal Treatment Centers, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 1-14142 23-2518331
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification
Number)
1180 W. Swedesford Road, Building 2, Suite 300, Berwyn, PA 19312
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 610-644-4796
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<PAGE>
ITEM 5. OTHER EVENTS
On July 23, 1996, Renal Treatment Centers, Inc. (the "Company") consummated its
acquisition of two dialysis centers from Panama City Artificial Kidney Center,
Inc. and North Florida Artificial Kidney Center, Inc. (collectively the
"Group"). Both of the dialysis centers are located in Florida. The acquisition
was structured as a merger of the acquired companies with and into a wholly-
owned subsidiary of the Company. For accounting purposes, the acquisition of
the Group has been treated as a pooling-of-interests. Accordingly, the
accompanying consolidated selected financial data, management's discussion and
analysis and consolidated financial statements and financial statement schedule
as of December 31, 1993, 1994 and 1995 and for each of the three years in the
period ended December 31, 1995 have been restated to give retroactive effect to
the merger with the Group and include the combined operations of the Company and
the Group for all periods presented. The Company previously filed this
information as supplemental financial statements, in a Current Report on Form
8-K dated August 23, 1996. Since that time, the Company has filed
post-combination results of operations including the Group. Accordingly, the
accompanying financial statements are being filed as the historical financial
statements of the Company.
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<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
Selected Consolidated Financial Data
The selected consolidated financial data presented below as of December 31, 1994
and 1995, and for the years ended December 31, 1993, 1994 and 1995, have been
derived from the Company's audited consolidated financial statements and should
be read in conjunction with such audited consolidated financial statements and
notes thereto, which are included herein. The selected consolidated financial
data presented below as of December 31, 1991, 1992 and 1993, and for the years
ended December 31, 1991 and 1992 have been derived from the Company's audited
consolidated financial statements not included herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(dollars in thousands, except for per share data)
Statement of Income Data:
Net patient revenue $36,651 $54,041 $73,043 $115,457 $164,568
Operating costs and
expenses:
Patient care costs 15,233 27,854 37,172 57,096 79,451
General and administrative 14,574 17,050 22,307 35,743 46,143
Depreciation and amortization 2,488 3,123 4,145 7,603 12,066
Merger expenses 0 0 0 0 2,088
Income from operations 4,356 6,014 9,419 15,015 24,820
Interest, net 1,796 1,433 1,536 648 2,557
Income before income taxes 2,560 4,581 7,883 14,367 22,263
Provision for income taxes 542 1,052 2,102 4,316 7,632
Net income $2,018 $3,529 $5,781 $10,051 $14,631
Pro forma net income per common
and common stock equivalent (1) $0.36
Pro forma weighted average shares used in
computing net income per common and common
stock equivalents (1) 16,063,639
Primary net income per common and
common stock equivalent $0.47 $0.65
Weighted average common and common stock
equivalents outstanding 21,161,243 22,412,733
(dollars in thousands)
Balance Sheet Data:
Working capital $2,844 $3,960 $13,709 $27,947 $43,380
Intangible assets, net 1,043 16,892 28,934 79,238 86,341
Total assets 32,348 37,035 60,007 140,523 174,868
Total long-term debt, excluding current portion 13,639 12,389 18,070 28,744 42,576
Total liabilities 23,334 25,028 29,349 47,894 64,510
Cumulative redeemable preferred stock 8,545 9,528 0 0 0
Total stockholders' equity $469 $2,478 $30,658 $92,628 $110,358
Other Data:
Ratio of earnings to fixed charges (2) 1.82x 2.16x 4.19x 6.59x 5.74x
</TABLE>
(1) Pro forma net income is computed by adjusting net income to reflect the
reduction in interest expense (net of tax effect) related to the payment of
certain indebtedness with initial public offering proceeds. Pro forma net
income per common share is computed based upon the weighted average number
of shares of common stock and common stock equivalents and including the
number of shares of common stock issued upon the conversion of preferred
stock and exercise of common stock warrants, and 3,700,000 shares issued in
connection with the Company's initial public offering as if such shares
were issued or converted as of January 1, 1993. The proceeds from the
issuance of 3,700,000 shares were utilized to redeem Series A preferred
stock, pay Series B preferred stock dividends, and to pay down certain
indebtedness.
(2) The ratios of earnings to fixed charges were calculated by dividing the sum
of income before taxes and fixed charges by fixed charges. Fixed charges
consist of interest expense, amortization of deferred debt issuance costs
and the portion of rent expense deemed to be representative of an interest
factor. Fixed charges for the years ended December 31, 1991 and 1992 also
include the amount of pre-tax earnings required to cover preferred stock
dividends.
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<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Group.
On July 23, 1996, Renal Treatment Centers, Inc. (the "Company") consummated its
acquisition of two dialysis centers from Panama City Artificial Kidney Center,
Inc. and North Florida Artificial Kidney Center, Inc. (collectively "the
Group"). Both of the dialysis centers are located in Florida. The acquisition
was structured as a merger of the acquired companies with and into a wholly-
owned subsidiary of the Company. For accounting purposes, the acquisition of
the Group has been treated as a pooling-of-interests. Accordingly, the
accompanying consolidated financial statements, management's discussion and
analysis, selected consolidated financial and operating data and consolidated
quarterly data included in this discussion and analysis give retroactive effect
to the merger with the Group and include the combined operations of the Company
and the Group for all periods presented.
The Wichita Companies.
On July 25, 1995, with an effective date of August 1, 1995, the Company
completed the merger of Wichita Dialysis Center, P.A., Southeast Kansas Dialysis
Center, P.A., Garden City Dialysis Center, P.A. and Wichita Dialysis Center,
East, P.A. (collectively "the Wichita Companies") with and into a wholly-owned
subsidiary of the Company. The Wichita Companies operated four dialysis
facilities in Kansas and owned a 50% interest in another dialysis facility in
Kansas. For accounting purposes, the acquisition was treated as a pooling-of-
interests. Accordingly, the accompanying consolidated financial statements,
selected consolidated financial data and consolidated quarterly data included in
this discussion and analysis give retroactive effect to the merger and include
the combined operations of the Company and the Wichita Companies for all periods
presented.
HCC Merger.
On March 6, 1995, the Company completed a series of merger transactions with
Healthcare Corporation and its affiliates (collectively "HCC"). At the time of
the mergers, HCC operated 13 dialysis facilities located in four states and the
District of Columbia. For accounting purposes, the acquisition was treated as a
pooling-of-interests. Accordingly, the accompanying consolidated financial
statements, selected consolidated financial data and consolidated quarterly data
included in this discussion and analysis give retroactive effect to the merger
and include the combined operations of the Company and HCC for all periods
presented.
Net Patient Revenue.
Net patient revenue is derived from two sources: (1) in-center dialysis and
home dialysis services and supplies and (2) dialysis services provided to
hospitalized patients pursuant to agreements with hospitals. The Company's in-
center and home dialysis services are primarily paid for under the Medicare End
Stage Renal Disease ("ESRD") program in accordance with rates established by the
Healthcare Financing Administration ("HCFA"). Additional payments are provided
by other third party payors, particularly during the first 18 months of
treatment, generally at higher rates than the rates reimbursed by Medicare.
Rates paid for services provided to hospitalized patients are negotiated with
individual hospitals and are generally higher than the rates reimbursed by
Medicare. Because dialysis is an ongoing, life-sustaining therapy used to treat
a chronic condition, utilization of the Company's services is generally
predictable. For the year ended December 31, 1995, each of the Company's
chronic dialysis patients received an average of approximately 156 non-
discretionary treatments. Average net revenue per treatment for the Company's
in-center and home patients was approximately $204.16 for the year ended
December 31, 1995, including ancillary items such as Erythropoietin ("EPO") and
other drugs, as compared to $191.02 for the year ended December 31, 1994, an
increase of 6.9%. For the year ended December 31, 1995, the Company's average
net revenue per treatment for all patients, including patients treated pursuant
to acute care agreements with hospitals, was approximately $206.69, as compared
to $194.15 for the year ended December 31, 1994, an increase of 6.5%. Unless the
patient moves to another dialysis facility, receives a kidney transplant or
dies, the revenue generated per patient per year can be estimated with
reasonable accuracy.
Medicare and Medicaid Reimbursement.
The Company derived approximately 73.0%, 73.0% and 69.0% of its net patient
revenue from the Medicare and Medicaid programs in 1993, 1994 and 1995,
respectively. The Company anticipates that it will continue to be substantially
dependent upon revenue derived from Medicare. The reimbursement rate for ESRD
services and ancillary items such as EPO are subject to change from time to
time, and the Company's operations are subject to substantial governmental
regulation.
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<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, selected financial
information expressed as a percentage of net patient revenue and the period-to-
period percentage changes in such information.
<TABLE>
<CAPTION>
Period-to-Period
Percentage of Percentage Change
Net Patient Revenue -----------------
Year ended December 31, Year ended December 31,
----------------------- -----------------------
1993 1994 1995 1994 v 1993 1995 v 1994
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<S> <C> <C> <C> <C> <C>
Net patient revenue 100.0% 100.0% 100.0% 58.1% 42.5%
Patient care costs 50.9% 49.5% 48.3% 53.6% 39.2%
General and administrative expense 28.4% 28.3% 25.1% 57.2% 26.9%
Provision for doubtful accounts 2.1% 2.7% 2.9% 101.3% 52.5%
Depreciation and amortization expense 5.7% 6.6% 7.3% 83.4% 58.7%
Merger expenses - - 1.3% - -
Income from operations 12.9% 13.0% 15.1% 59.4% 65.3%
Interest expense, net 2.1% .6% 1.6% (57.8)% 294.6%
Provision for income taxes 2.9% 3.7% 4.6% 105.3% 76.8%
Net income 7.9% 8.7% 8.9% 73.9% 45.6%
</TABLE>
Year ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Patient Revenue.
Net patient revenue for the year ended December 31, 1995 was $164,568,392 as
compared to $115,456,744 for the same period in 1994, representing an increase
of 42.5%. Of this increase, $6,178,946, or 12.6%, was attributable to the
revenue generated from the operations of eight centers and certain acute care
agreements acquired in three separate purchase transactions from March through
December 1995; and $25,442,934, or 51.8%, was attributable to the revenue
generated from the operations of various centers and acute care agreements
acquired in six separate purchase transactions from June 1994 through December
1994. Of the approximately $17,490,000 remaining, approximately $13,016,000 was
attributable to an increase in same-center treatments and approximately
$4,474,000 was attributable to an increase in the average same-center revenue
per treatment, which, in turn, was due to an increase in the administration of
EPO and other ancillary revenue items and an improvement in the Company's payor
mix.
Patient Care Costs.
Patient care costs increased 39.2% to $79,451,490 for the year ended December
31, 1995 from $57,095,740 for the same period in 1994. This increase was
primarily attributable to the various centers acquired from June 1994 through
October 1995. However, as a percentage of net patient revenue, patient care
costs decreased to 48.3% for the year ended December 31, 1995 from 49.5% for the
same period in 1994. This decrease was primarily related to the increase in net
revenue per treatment while costs remained relatively constant on a per
treatment basis.
General and Administrative Expense.
General and administrative expense for the year ended December 31, 1995
increased 26.9% to $41,381,899 from $32,621,992 for the same period in 1994.
This increase was due to the acquisitions completed from June 1994 through
October 1995. General and administrative expense as a percentage of net patient
revenue decreased to 25.1% for the year ended December 31, 1995 as compared to
28.3% for the same period in 1994. This decrease was primarily due to the
Company's ability to maintain certain costs by improved utilization of the
Company's corporate office to support acquired facilities. In addition, this
decrease was attributable to the increase in net revenue per treatment in 1995.
Provision for Doubtful Accounts.
Provision for doubtful accounts increased $1,639,661, or 52.5%, to $4,760,678
for the year ended December 31, 1995 from $3,121,017 for the same period in
1994. This increase was principally a result of the additional net patient
revenue generated from acquisitions that occurred in 1995. As a percentage of
net patient revenue, the provision for doubtful accounts increased to 2.9% for
the year ended December 31, 1995 from 2.7% for the same period in 1994.
Depreciation and Amortization Expense.
Depreciation and amortization expense increased 58.7% to $12,066,461 for the
year ended December 31, 1995 from $7,602,959 for the same period in 1994. As a
percentage of net patient revenue, depreciation and amortization expense
increased to 7.3% for the year ended December 31, 1995 from 6.6% for the same
period in 1994. The increases were due to the acquisitions noted from June 1994
through December 1995 and $7.9 million of capital expenditures completed during
1995.
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<PAGE>
Merger Expenses.
Merger expenses represent expenses incurred in connection with the mergers with
(i) HCC and (ii) the Wichita Companies which were completed on March 6, 1995 and
August 1, 1995, respectively, and were accounted for under the pooling-of-
interests method of accounting. These expenses included investment banking,
legal, accounting and other fees and expenses.
Income from Operations.
Income from operations increased 65.3% to $24,820,322 for the year ended
December 31, 1995 from $15,015,036 for the same period in 1994. The increase
was due to the increase in net revenues from acquired businesses and same-center
growth, which was greater than the increases in patient care costs, general and
administrative expense and depreciation and amortization expense related to such
acquired businesses.
Interest Expense, Net.
Interest expense (net) increased 294.6% to $2,557,449 for the year ended
December 31, 1995 from $648,102 for the same period in 1994. The increase in
interest expense (net) was attributable to the additional borrowings for the
funding of acquisitions that were completed in 1994 and 1995 that remained
outstanding throughout 1995. Interest expense (net) also increased as a result
of the reduction in interest income from investments during 1995 as compared to
1994. This decrease in interest income from investments resulted from the
decrease in the average value of investments held by the Company during 1995
when compared to 1994, as the Company used its investments to fund certain
acquisitions in 1994. Interest expense in 1995 and 1994 is net of $156,150 and
$555,515 of interest income, respectively.
Provision for Income Taxes.
Provision for income taxes increased to $7,632,069 for the year ended December
31, 1995 from $4,316,014 for the same period in 1994. For the year ended
December 31, 1995, the Company's effective tax rate was 34.3% compared to an
effective tax rate of 30.0% in the same period in 1994. The increase in the
effective rate represents an overall increase in items not deductible for tax
purposes and a decrease in income derived from S corporations in 1995 as
compared to 1994. Refer to notes 2, 3, and 7 to the consolidated financial
statements included herein.
Net Income.
Net income increased 45.6% to $14,630,804 for the year ended December 31, 1995
from $10,050,920 for the same period in 1994. The increase was due to each of
the items discussed above.
Year Ended December 31, 1994 Compared to Year End December 31, 1993
Net Patient Revenue.
Net patient revenue for the year ended December 31, 1994 was $115,456,744 as
compared to $73,043,034 for the same period in 1993, representing an increase of
58.1%. Of this increase, approximately $9,275,300, or 21.9%, was attributable
to the revenue generated from the operations of eight centers and certain acute
care agreements acquired in four separate purchase transactions from July
through September, 1994; approximately $8,199,600, or 19.3%, was attributable to
the revenue generated from the operations of four centers and certain acute care
agreements acquired in June 1994; approximately $4,916,000, or 11.6%, was
attributable to the revenue generated from the operations of four centers
acquired in January 1994; and approximately $9,465,000, or 22.3%, was
attributable to the revenue generated from the operations of various centers and
acute care agreements acquired in three separate transactions from October 1993
through December 1993. Of the approximately $10,558,000 remaining,
approximately $6,586,000 was attributable to an increase in same-center
treatments and approximately $1,682,000 was attributable to an increase in the
average same-center revenue per treatment which, in turn, was due to an increase
in the administration of EPO and other ancillary revenue items. The remaining
$2,290,000 related to revenue generated from certain de novo developments and
additional acute care and management contracts entered into during 1994.
Patient Care Costs.
Patient care costs increased 53.6% to $57,095,740 for the year ended December
31, 1994 from $37,171,556 for the same period in 1993. This increase was
primarily attributable to the various centers acquired from October 1993 through
September 1994. However, as a percentage of net patient revenue, patient care
costs decreased to 49.5% for the year ended December 31, 1994 from 50.9% for the
same period in 1993.
General and Administrative Expense.
General and administrative expense increased 57.2% to $32,621,992 for the year
ended December 31, 1994 from $20,756,081 for the same period in 1993. This
increase was due to the acquisitions completed from October 1993 through
September 1994. General and administrative expense decreased as a percentage of
net patient revenue to 28.3% for the year ended December 31, 1994 as compared to
28.4% in 1993.
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<PAGE>
Provision for Doubtful Accounts.
Provision for doubtful accounts increased 101.3% to $3,121,017 the year ended
December 31, 1994 from $1,550,691 for the same period in 1993. This increase
was a result of the additional net patient revenue generated from the
acquisitions that occurred in 1994.
Depreciation and Amortization Expense.
Depreciation and amortization expense increased 83.4% to $7,602,959 for the year
ended December 31, 1994 from $4,145,390 for the same period in 1993. As a
percentage of net patient revenue, depreciation and amortization expense
increased to 6.6% for the year ended December 31, 1994 from 5.7% for the same
period in 1993. The increases were due to the acquisitions noted from October
1993 through September 1994.
Income from Operations.
Income from operations increased 59.4% to $15,015,036 for the year ended
December 31, 1994 from $9,419,316 for the same period in 1993. The increase was
due to the increase in net revenues from acquired businesses and same-center
growth, which was greater than the increases in patient care costs, general and
administrative expense and depreciation and amortization expense related to such
acquired businesses.
Interest Expense, Net
Interest expense (net) decreased 57.8% to $648,102 for the year ended December
31, 1994 from $1,536,176 for the same period in 1993. The decrease in interest
expense (net) was due to the Company's repayment of amounts outstanding under
its acquisition revolving credit agreement after its completion of a stock
offering in March 1994, from a reduced average amount outstanding under the term
loan agreement, from a lower average interest rate when compared to 1993 and
from interest income earned on funds invested as a result of the March 1994
stock offering. Interest expense in 1994 is net of approximately $555,515 of
interest income from funds invested as a result of the March 1994 stock
offering.
Provision for Income Taxes.
Provision for income taxes increased to $4,316,014 for the years ended December
31, 1994 from $2,102,198 for the same period in 1993. For the year ended
December 31, 1994, the Company's effective tax rate was 30.0% compared to an
effective tax rate of 26.7% in the same period in 1993. The increase in the
effective rate represents an overall increase in items not deductible for tax
purposes and a decrease in income derived from S corporation companies in 1994.
Refer to Notes 2, 3 and 7 to the consolidated financial statements included
herein.
Net Income.
Net income increased 73.9% to $10,050,920 for the year ended December 31, 1994
from $5,780,942 for the same period in 1993. The increase was due to each of the
items discussed above.
Quarterly Results
The following table presents selected unaudited quarterly operating results for
the Company for the eight quarters in the years ended December 31, 1994 and
1995. The Company believes that the following information includes all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation. Although the Company's revenues are not seasonal in nature,
quarterly revenues and profitability may be affected by other factors, including
quarterly variations in treatments performed, due to varying operating days by
quarter.
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<TABLE>
<CAPTION>
1994 1995
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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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(dollars in thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net patient revenue $22,138 $24,842 $32,315 $36,162 $37,749 $40,067 $41,996 $44,756
Operating costs
and expenses 18,032 20,317 25,537 28,953 31,290 30,865 32,090 33,436
Depreciation and
amortization expense 1,427 1,639 2,394 2,142 2,733 2,909 3,033 3,392
Income from operations 2,679 2,885 4,383 5,068 3,726 6,293 6,874 7,927
Net income 1,802 2,186 2,948 3,115 2,503 3,874 3,546 4,708
Net income available to
common stockholders 1,802 2,186 2,948 3,115 2,578 3,946 3,614 4,776
Primary:
Weighted average common
and common stock
equivalents outstanding 18,934 21,865 21,802 21,861 22,014 22,105 22,865 22,836
Net income per share $ 0.10 $ 0.10 $ 0.14 $ 0.14 $ 0.11 $ 0.18 $ 0.16 $ 0.21
Fully diluted:
Weighted average common
and common stock
equivalents outstanding 18,934 21,860 21,828 21,919 22,809 22,805 23,361 23,438
Net income per share $ 0.10 $ 0.10 $ 0.14 $ 0.14 $ 0.11 $ 0.17 $ 0.15 $ 0.20
</TABLE>
Liquidity and Capital Resources
The Company requires capital for the acquisition of dialysis centers, for the
expansion of operations of its existing dialysis centers including the
replacement of equipment and addition of leasehold improvements, for the
integration of new centers into its system of existing dialysis services and for
meeting working capital requirements. Expenditures for acquisitions were
approximately $16.9 million, $50.3 million and $11.6 million for the years ended
December 31, 1993, 1994 and 1995, respectively. Capital expenditures were
approximately $1,110,000, $5,198,000 and $7,899,000 for the years ended December
31, 1993, 1994 and 1995, respectively. The increase in capital expenditures
during 1995 resulted from the expansion of various existing dialysis centers to
support internal growth as well as the normal replacement of equipment. Cash
from operations before investing and financing activities was approximately $2.8
million, $4.3 million and $12.6 million for the years ended December 31, 1993,
1994 and 1995, respectively. The principal sources of the Company's liquidity
have been public sales of equity securities, bank lines of credit and operating
cash flow.
Capital expenditures of approximately $14.0 million, primarily for equipment
replacement and expansion of existing dialysis facilities, are planned in 1996.
The Company expects that such capital expenditures will be funded with cash
provided by operating activities and available lines of credit. The Company
believes that capital resources available to it will be sufficient to meet the
needs of its business, both on a short-and long-term basis.
At December 31, 1995, the Company's loan and revolving credit agreement with a
consortium of banks (the "Credit Agreement") provided for a total facility of
approximately $75 million, of which $68.125 million was a revolving credit/term
facility available to fund acquisitions and general working capital requirements
of which $13.975 million and $33.675 million were outstanding at December 31,
1994 and 1995, respectively, and the remainder was a term loan payable in
quarterly installments of which $6.875 million and $3.75 million were
outstanding as of December 31, 1994 and 1995, respectively. The revolving
credit/term facility converts into a term loan in September 1997 that is payable
in 16 equal quarterly installments commencing December 1997 through September
2001. Borrowings under the Credit Agreement bore interest, at the Company's
option, at either (1) the Agent bank's base rate, adjusted by the applicable
margin, determined by the Company's ratio of senior debt to annualized cash
flow, 8.5% at December 31, 1995, or (2) a one, two, three, or six-month period
LIBOR rate, adjusted by the applicable margin for LIBOR-based loans. The
weighted average interest rate of all loans outstanding at December 31, 1994 and
1995 was 7.36% and 7.32%, respectively. The loans were collateralized by the
pledge of all stock of the Company's subsidiaries, a lien on all of the
Company's assets and the assignment of various acquisition, acute care,
physician director and other agreements. Refer to Note 6 to consolidated
financial statements.
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<PAGE>
The Company has historically expended the majority of its capital resources to
implement its growth strategy and the Company intends to pursue a strategy of
growth through the acquisition and development of dialysis facilities.
Management estimates that the development of a new center, depending on its
size, requires approximately $500,000 to $1,000,000 in construction costs and to
purchase certain furniture and equipment (leasing certain of the assets can
decrease costs) and approximately $75,000 to $150,000 in working capital.
Acquisition of a dialysis center with an existing patient base typically
requires more capital investment, but each investment varies based on relative
size and other factors. No assurance can be given that the Company will be
successful in implementing its growth strategy or that adequate sources of
capital will be available on terms acceptable to the Company to pursue its
growth strategy in the future.
Impact of Inflation
A substantial portion of the Company's revenue is subject to reimbursement rates
which are regulated by the federal government and do not automatically adjust
for inflation. These reimbursement rates are adjusted periodically based on
certain factors, including legislation, executive and congressional budget
reduction and control processes, inflation and costs incurred in rendering the
services, but in the past have had little relationship to the actual cost of
doing business.
The Company can increase the amounts it bills only for those services provided
by its dialysis business that are not subject to the Medicare composite rate.
Increased operating costs that are subject to inflation, such as labor and
supply costs, without a compensating increase in reimbursement rates, may
adversely affect the Company's earnings in the future.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to Be Disposed of" ("SFAS 121"). SFAS 121 will
be effective for the year ending December 31, 1996 and establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. SFAS
121 requires that such assets and intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Management does not expect the adoption of SFAS
121 to have a significant impact on the Company's results of operations,
financial condition or liquidity.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation
("SFAS 123"). SFAS 123 encourages, but does not require, an alternative method
of accounting for employee stock compensation plans from the method currently
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). The new accounting standard will have no
impact on the Company's net income or financial position, as the Company intends
to continue to utilize the accounting guidance set forth in APB No. 25.
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<PAGE>
ITEM 7. (A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE:
Renal Treatment Centers, Inc. and Subsidiaries
Index to Consolidated Financial Statements
and Financial Statement Schedule
<TABLE>
<CAPTION>
Page
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<S> <C>
Report of Independent Accountants F-1
Reports of Other Independent Accountants........................................................... F-2 - F-3
Financial Statements:
Consolidated Balance Sheets at December 31, 1994 and 1995..................................... F-4
Consolidated Statements of Income for the years ended
December 31, 1993, 1994 and 1995........................................................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1993, 1994 and 1995............................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995........................................................... F-7
Notes to Consolidated Financial Statements.................................................... F-8 - F-17
Condensed Consolidated Balance Sheet at December 31, 1995
and June 30, 1996 (Unaudited).............................................................. F-18
Condensed Consolidated Statements of Income for the three months
ended June 30, 1995 and 1996 and six months ended June 30,
1995 and 1996 (Unaudited) F-19
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1995 and 1996 (Unaudited)................................................... F-20
Notes to Condensed Consolidated Financial Statements.......................................... F-21
Financial Statement Schedule:
II. Valuation and Qualifying Accounts,
for the years ended December 31, 1995,
1994 and 1993. ............................................................................... F-22
</TABLE>
-10-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Renal Treatment Centers, Inc.
Berwyn, Pennsylvania
We have audited the accompanying consolidated balance sheets of Renal Treatment
Centers, Inc. and Subsidiaries (the "Company") as of December 31, 1994 and 1995,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. Our
audits also included the financial statement schedule listed in the index on
page 10 of this Form 8-K. The financial statements and financial statement
schedule give retroactive effect to the merger of the Company and Panama City
Artificial Kidney Center, Inc. and North Florida Artificial Kidney Center, Inc.
on July 23, 1996, which has been accounted for as a pooling-of-interests, as
described in Note 2 to the consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We did not audit the financial statements of Wichita Dialysis Group and
Healthcare Corporation and Affiliates (collectively the "Companies") as of
December 31, 1993 and 1994 and for the years then ended. Such Companies were
acquired by the Company in business combinations which have both been accounted
for using the pooling-of-interests method of accounting, as described in Note 3
to the financial statements. The financial statements of the Companies reflect 7
percent of total consolidated assets as of December 31, 1994, and 30 percent and
21 percent of total consolidated net patient revenue for the years ended
December 31, 1993 and 1994, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to the amounts included for Wichita Dialysis Group and Healthcare
Corporation and Affiliates, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1994 and 1995, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles. In addition,
in our opinion, the consolidated financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information required
to be included therein.
/s/Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
600 Lee Road
Wayne, Pennsylvania
March 20,1996, except for the combination described in Note 2,
for which the date is August 19, 1996
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDER
Healthcare Corporation and Affiliates
Nashville, Tennessee
We have audited the accompanying combined balance sheets of Healthcare
Corporation and Affiliates (the "Company") as of December 31, 1993 and 1994, and
the related combined statements of income, stockholder's equity and cash flows
for each of the three years in the period ended December 31, 1994. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1993
and 1994, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
/s/Deloitte & Touche LLP
- --------------------------------
Deloitte & Touche LLP
Nashville, Tennessee
March 31, 1995
F-2
<PAGE>
Independent Accountants' Report
-------------------------------
The Shareholders
Wichita Dialysis Group
Wichita, Kansas
We have audited the accompanying combined balance sheets of WICHITA
DIALYSIS GROUP as of December 31, 1993 and 1994, and the related combined
statements of operations, changes in stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of WICHITA DIALYSIS
GROUP as of December 31, 1993 and 1994 and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
/s/Baird, Kurtz & Dobson
- ------------------------------
Baird, Kurtz & Dobson
July 14, 1995, except for Note 9 as to which the date is July 24, 1995
Wichita, Kansas
F-3
<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1995
<TABLE>
<CAPTION>
1994 1995
- --------------------------------------------------------------------------------
Assets
<S> <C> <C>
Current assets:
Cash $ 2,782,781 $ 8,231,421
Investments 2,661,944 0
Accounts receivable, net of allowance for
doubtful accounts of $2,306,556 in 1994
and $3,503,744 in 1995 37,072,319 51,996,618
Inventories 2,581,992 2,869,019
Deferred taxes 569,153 819,835
Prepaid expenses and other current assets 1,430,081 1,396,893
- --------------------------------------------------------------------------------
Total current assets 47,098,270 65,313,786
- --------------------------------------------------------------------------------
Property and equipment (net of accumulated
depreciation of $6,910,646 in 1994
and $10,746,557 in 1995) 13,660,938 21,442,421
Intangibles (net of accumulated amortization
of $14,171,384 in 1994 and
$22,263,385 in 1995) 79,238,387 86,341,433
Deferred taxes, non-current 493,793 1,749,754
Other assets 31,227 20,842
- --------------------------------------------------------------------------------
Total assets $140,522,615 $174,868,236
================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 4,781,230 $ 4,766,262
Accounts payable 6,687,797 4,495,087
Accrued compensation 2,645,175 2,790,121
Accrued expenses 4,362,716 6,576,600
Accrued income taxes 471,692 2,218,692
Accrued interest 202,103 1,087,415
- --------------------------------------------------------------------------------
Total current liabilities 19,150,713 21,934,177
- --------------------------------------------------------------------------------
Long-term debt, net 28,743,609 42,576,100
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized: none issued
Common stock, $.01 par value, 45,000,000
shares authorized: issued and
outstanding 21,449,029 and 22,209,689
shares in 1994 and 1995, respectively 214,490 222,097
Additional paid-in capital 78,319,626 83,257,068
Retained earnings 14,141,396 27,272,870
- --------------------------------------------------------------------------------
92,675,512 110,752,035
Less treasury stock, 4,342 shares in 1994
and 37,202 shares in 1995, at cost (47,219) (394,076)
- --------------------------------------------------------------------------------
Total stockholders' equity 92,628,293 110,357,959
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $140,522,615 $174,868,236
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Net patient revenue $73,043,034 $115,456,744 $164,568,392
Patient care costs 37,171,556 57,095,740 79,451,490
- --------------------------------------------------------------------------------
Operating profit 35,871,478 58,361,004 85,116,902
General and administrative 20,756,081 32,621,992 41,381,899
Provision for doubtful accounts 1,550,691 3,121,017 4,760,678
Depreciation and amortization 4,145,390 7,602,959 12,066,461
Merger expenses - - 2,087,542
- --------------------------------------------------------------------------------
Income from operations 9,419,316 15,015,036 24,820,322
Interest expense, net of interest income
of $12,892, $555,515 and
$156,150 in 1993
1994 and 1995, respectively 1,536,176 648,102 2,557,449
- --------------------------------------------------------------------------------
Income before income taxes 7,883,140 14,366,934 22,262,873
Provision for income taxes 2,102,198 4,316,014 7,632,069
- --------------------------------------------------------------------------------
Net income $ 5,780,942 $ 10,050,920 $ 14,630,804
================================================================================
Pro forma per share data (unaudited):
Pro forma net income per common
and common stock equivalent $0.36
Pro forma weighted average shares
used in computing net income per
common and common stock
equivalents 16,063,639
Primary per share data:
Net income per common and common
stock equivalent $0.47 $0.65
Weighted average common and
common stock equivalents 21,161,243 22,412,733
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
COMMON STOCK Additional
------------ Paid-in Retained
Shares Amount Capital Earnings
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992 5,470,519 $ 54,705 $ 466,081 $ 2,167,284
Mandatory redeemable
Series B and mandatory redeemable
Series A preferred stock dividends
for the year ended December 31, 1993 (335,939)
Issuance of common stock in Initial
Public Offering 5,251,500 52,515 24,703,996
Exercise of common stock warrants
and subsequent retirement of shares
delivered as payment of exercise price
of common stock warrants 556,750 5,568 (2,783) (2,784)
Conversion of mandatory redeemable
Series B preferred stock and warrants
to common stock 4,849,284 48,493 (24,247)
Dividend distribution (2,045,927)
Net income 5,780,942
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 16,128,053 161,281 25,143,047 5,563,576
Issuance of common stock in
Stock Offering 4,789,000 47,890 51,053,601
Exercise of common stock options 356,760 3,568 312,230
Issuance of common stock in
connection with purchase of businesses 175,216 1,752 1,810,748
Acquisition of treasury stock
Dividend distribution (1,473,100)
Net income 10,050,920
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 21,449,029 214,491 78,319,626 14,141,396
Exercise of common stock options 458,016 4,580 1,297,692
Issuance of common stock in connection
with purchase of businesses 302,644 3,026 3,639,750
Acquisition of treasury stock
Dividend distribution (1,499,331)
Net income 14,630,805
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 22,209,689 $222,097 $83,257,068 $27,272,870
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
--------------
Shares Amount Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1992 - - $ 2,688,070
Mandatory redeemable
Series B and mandatory redeemable
Series A preferred stock dividends
for the year ended December 31, 1993 (335,939)
Issuance of common stock in Initial
Public Offering 24,756,511
Exercise of common stock warrants
and subsequent retirement of shares
delivered as payment of exercise price
of common stock warrants -
Conversion of mandatory redeemable
Series B preferred stock and warrants
to common stock 24,246
Dividend distribution (2,045,927)
Net income 5,780,942
- -----------------------------------------------------------------------------------------------------
Balance, December 31, 1993 - - 30,867,904
Issuance of common stock in
Stock Offering 51,101,491
Exercise of common stock options 315,798
Issuance of common stock in
connection with purchase of businesses 1,812,500
Acquisition of treasury stock (4,342) $ (47,219) (47,219)
Dividend distribution (1,473,100)
Net income 10,050,920
- -----------------------------------------------------------------------------------------------------
Balance, December 31, 1994 (4,342) (47,219) 92,628,294
Exercise of common stock options 1,302,272
Issuance of common stock in connection
with purchase of businesses 3,642,776
Acquisition of treasury stock (32,860) (346,857) (346,857)
Dividend distribution (1,499,331)
Net income 14,630,805
- -----------------------------------------------------------------------------------------------------
Balance at December 31, 1995 (37,202) $ (394,076) $110,357,959
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
1993 1994 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,780,942 $ 10,050,920 $ 14,630,804
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,195,523 7,701,587 12,131,465
Deferred income taxes (565,695) (497,251) (1,506,643)
Provision for doubtful accounts 1,550,691 3,121,017 4,760,678
Loss (gain) on sale of equipment 19,435 (2,974) -
Equity in (earnings) losses from affiliate 43,162 (96,312) (266,592)
Changes in operating assets and liabilities,
net of effects of companies acquired:
Accounts receivable (8,910,472) (19,065,267) (19,444,635)
Inventories (382,316) (260,546) (117,157)
Prepaid expenses and other current assets (32,030) (506,876) 99,673
Accounts payable and accrued expenses 940,771 4,365,037 585,345
Accrued income taxes 175,333 (475,071) 1,747,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,815,344 4,334,264 12,619,938
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (1,110,478) (5,198,350) (7,899,143)
Purchase of businesses, net of cash acquired (16,883,773) (50,323,267) (11,646,992)
Purchase of investments (6,315,000) (38,500,000) -
Sale of investments 3,564,360 38,588,696 2,661,944
Other (291,082) (1,214,875) (1,904,962)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,035,973) (56,647,796) (18,789,153)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt borrowings 17,931,004 18,045,175 19,621,000
Repayments of debt (13,378,542) (14,032,771) (7,355,102)
Redemption of preferred stock (9,114,020) - -
Payment of Series A and Series B mandatory
redeemable preferred stock dividends (476,249) - -
Proceeds from issuance of common stock 24,506,760 51,612,289 1,302,272
Payment of S Corporation dividend - - (1,277,000)
Payment of dividend distribution (2,045,927) (1,473,295) (222,331)
Increase in financing fees (163,732) (282,609) -
Payments on capital lease obligations (162,718) (13,846) (450,984)
Other 6,521 581,195 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 17,103,097 54,436,138 11,617,855
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,117,532) 2,122,606 5,448,640
Cash and cash equivalents at beginning of period 1,777,707 660,175 2,782,781
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 660,175 $ 2,782,781 $ 8,231,421
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Renal Treatment Centers, Inc. (the "Company") was incorporated in Delaware on
August 11, 1988 for the purpose of providing dialysis treatments for End Stage
Renal Disease ("ESRD") patients in an outpatient environment or in the patient's
home. Additionally, the Company has acquired or entered into inpatient dialysis
service agreements with hospitals to provide dialysis treatments on an inpatient
basis.
For the years ended December 31, 1993, 1994 and 1995, approximately 73%, 73% and
69%, respectively, of the Company's net patient revenue was received from
Medicare and Medicaid and other state administered programs. Accordingly, the
Company's operations and cash flows are dependent upon the rate and manner of
payment for patient services from third party payors and, in particular, federal
and state administered programs.
2. Summary of Significant Accounting Policies
Basis of Presentation:
The consolidated financial statements of the Company have been prepared to give
retroactive effect to the acquisition of Panama City Artificial Kidney Center,
Inc. and North Florida Artificial Kidney Center, Inc. (collectively "The Group")
on July 23, 1996, which has been accounted for using the pooling-of-interests
method of accounting.
Certain amounts included in the accompanying consolidated financial statements
and related footnotes reflect the use of estimates based on assumptions made by
management. Actual amounts could differ from these estimates.
Certain amounts in the 1994 financial statements have been reclassified to
conform to the current year presentation.
Principles of Consolidation:
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Patient Revenue and Allowances:
Patient revenue is recorded at established rates on the accrual basis in the
period during which the service is provided. Appropriate allowances to give
recognition to third-party arrangements are also recorded on the accrual basis.
Payments to the Company under Medicare and Medicaid and other state administered
programs are based upon a predetermined specific fee per treatment.
The Company does not believe there are any significant credit risks associated
with receivables from Medicare and Medicaid and other state administered
programs. The allowance for doubtful accounts consists of management's estimate
of amounts that may prove uncollectible from secondary insurers or patients.
Patient Care Costs:
Patient care costs include medical supplies, including Erythropoietin ("EPO")
supplies, and direct patient salaries and benefits.
Inventories:
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market and consist of dialysis supplies.
Property and Equipment and Depreciation and Amortization:
Property and equipment are stated at cost or respective fair market value at the
time of acquisition. Equipment under capital lease is stated at the lower of
the fair market value or net present value of the minimum lease payments at
inception of the lease. Depreciation and amortization are provided by the
straight-line method over the estimated useful lives of the related assets or
lease terms for leasehold improvements and equipment under capital lease. The
estimated useful life is five to seven years for furniture, fixtures and
equipment, 39 years for the buildings, and five to ten years for leasehold
improvements. Costs of maintenance and repairs are charged to expense as
incurred. Sales and retirements of depreciable assets are recorded by removing
the related cost and accumulated depreciation from the accounts. Gains and
losses on sales and retirements of assets are reflected in results of
operations.
F-8
<PAGE>
2. Summary of Significant Accounting Policies (continued):
Intangibles:
Goodwill:
Goodwill arising from acquisitions is being amortized on a straight-line basis
principally over 25 years.
Patient Lists:
Patient lists, arising from the purchase of renal dialysis facilities, are
stated at cost. Amortization is provided by the straight-line method over eight
years.
Non-compete Agreements:
Non-compete agreements, arising from acquisitions, are being amortized on a
straight-line basis over periods from three to 11 years.
Other Intangibles:
Other intangibles consist of inpatient dialysis service agreements, deferred
financing costs and organization costs and are stated at cost. Amortization is
provided on a straight-line basis over five to 11 years.
Management evaluates the recoverability of intangible assets using certain
financial indicators, such as historical and future ability to generate income
from operations. The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to Be Disposed of" ("SFAS 121"). SFAS
121 will be effective for the year ending December 31, 1996 and establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS 121 requires that such assets and intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Management does not expect
the adoption of SFAS 121 to have a significant impact on the Company's results
of operations, financial condition or liquidity.
Income Taxes:
The Company and its subsidiaries file a consolidated federal tax return and
separate company state tax returns. Income taxes are provided under the
liability method in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under the liability
method, deferred income taxes are recognized for the tax consequences of
differences between amounts reported for financial reporting and income tax
purposes by applying enacted statutory tax rates applicable to future years to
such differences. Deferred taxes result from temporary differences in the
market value of assets acquired in business combinations accounted for as
purchases and their tax bases. Under SFAS No. 109, the effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date.
Federal (and state, where applicable) income taxes for the Group prior to their
acquisition by the Company were payable personally by the stockholders of the
Group pursuant to S corporation elections under the Internal Revenue Code.
Prepaid Expenses and Other Current Assets:
Prepaid expenses consist of prepaid insurance, rent, real estate taxes and other
current assets.
Accrued Expenses:
Accrued expenses consist principally of uninvoiced inventory and other
miscellaneous accruals.
Estimated Medical Professional Liability Claims:
The Company is insured for medical professional liability claims through a
commercial insurance policy. It is the Company's policy that provision for
estimated premium adjustments to medical professional liability costs be made
for asserted and unasserted claims and based upon the Company's experience.
Provision for such professional liability claims includes estimates of the
ultimate costs of such claims. To date, the Company's experience with such
claims has not been significant. Accordingly, no such provision has been made.
Cash Equivalents:
For the purpose of reporting cash flows, the Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents. The cash of the Company is principally held by one financial
institution.
F-9
<PAGE>
2. Summary of Significant Accounting Policies (continued):
Investments:
Investments were comprised of investments in municipal bonds and a fixed income
mutual fund which primarily invests in short-term bank deposits and U.S.
government and government agency securities. Investment income is recognized
when earned and realized gains and losses are recognized on a trade date basis,
computed based on original cost. The fair market value of these investments
approximates cost. All investments were held by one financial institution.
Historical Net Income Per Common and Common Stock Equivalent:
Net income per common and common stock equivalent on a historical basis, both
primary and fully diluted, are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Primary: $0.49 $0.47 $0.65
Net income per common and common stock
equivalent
Weighted average common and common 11,072,783 21,161,243 22,412,733
stock equivalents outstanding
Fully diluted: $0.39 $0.47 $0.64
Net income per common and common stock
equivalent
Weighted average common and common
stock equivalents outstanding 13,921,957 21,215,273 23,401,085
</TABLE>
Primary earnings per share for 1993 are computed by dividing net income, reduced
by preferred dividends, by the weighted average number of shares of common stock
and common stock equivalents outstanding during the period. Primary earnings
per share for 1994 and 1995 are computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period.
Fully diluted earnings per share for 1993 assumes the conversion of Series B
preferred stock and the exercise and conversion of Series B preferred stock
warrants into common stock as of January 1, 1993. Fully diluted earnings per
share for 1994 are computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period. Fully diluted earnings per share for 1995 are computed by dividing
net income, increased by the tax effected interest on an earn-out note, by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. Fully diluted earnings per share also reflect
additional dilution related to stock options due to the use of the market price
at the end of the period, when higher than the average price for the period.
3. Business Acquisitions:
Merger with the Group:
On July 23, 1996, the Company acquired the Group. The facilities acquired are
located in Florida and serviced a total of approximately 200 patients as of the
acquisition date. The transaction was accounted for under the pooling-of-
interests method of accounting. In the transaction, the Company issued 482,377
shares of its common stock in exchange for all the outstanding stock of the
Group. The acquisition was structured as a merger of the Group into a
subsidiary of the Company.
Merger with The Wichita Companies:
On July 25, 1995, with an effective date of August 1, 1995, the Company acquired
Wichita Dialysis Center, P.A., Southeast Kansas Dialysis Center, P.E., Garden
City Dialysis Center, P.A. and Wichita Dialysis Center, East, P.A. (the "Wichita
Companies"). All of the facilities acquired are located in Kansas and serviced
approximately 355 patients as of the acquisition date. The transaction was
accounted for under the pooling-of-interests method of accounting. In the
transaction, the Company issued 1,558,920 shares of its common stock in exchange
for all the outstanding stock of the Wichita Companies. The acquisition was
structured as a merger of the Wichita Companies into a subsidiary of the
Company.
Merger with HCC:
On March 6, 1995, the Company completed its acquisition of Healthcare
Corporation and its affiliates (collectively, "HCC"). The facilities acquired
from HCC are located in Missouri, Illinois, North Carolina, Florida and
Washington, D.C. and serviced approximately 720 patients as of the acquisition
date. The transaction was accounted for under the pooling-of-interests method
of accounting. In the transaction, the Company issued 2,292,222 shares of its
common stock in exchange for all the outstanding stock of HCC. The acquisition
was structured as a merger of HCC into several subsidiaries of the Company.
F-10
<PAGE>
3. Business Acquisitions (continued):
The consolidated financial statements give retroactive effect to the mergers
with the Group, the Wichita Companies and HCC and include the combined
operations of the Company, the Group, the Wichita Companies, and HCC for all
periods presented. The following is a summary of the separate and combined
results of operations for periods prior to the mergers (dollars in thousands):
<TABLE>
<CAPTION>
Renal Treatment
Centers, Inc. Acquired
(Prior to Mergers) Companies Combined
------------------ --------- --------
<S> <C> <C> <C>
For the year ended December 31, 1995*
1995*
Net patient revenue $150,467 $14,101 $164,568
Income from operations 23,319 1,501 24,820
Net income 13,238 1,392 14,630
*Includes HCC for the two months ended February 28, 1995,
the Wichita Companies for the seven months ended July 31, 1995
and the Group for the year ended December 31, 1995.
1994
Net patient revenue $ 86,520 $28,937 $115,457
Income from operations 12,343 2,672 15,015
Net income 7,558 2,493 10,051
1993
Net patient revenue $ 46,956 $26,087 $ 73,043
Income from operations 7,050 2,369 9,419
Net income 3,738 2,043 5,781
</TABLE>
The acquisitions described below have been accounted for under the purchase
method. The results of these acquisitions have been included in the results of
operations from the applicable acquisition dates. The purchase price of the
acquisitions has been principally allocated to fixed assets, patient lists, non-
compete agreements and goodwill. The excess of the purchase price over the fair
value of net assets was approximately $49,347,454 and is being amortized on a
straight-line basis over 25 years.
1993 Acquisitions:
During 1993, the Company acquired nine dialysis centers, one dialysis service
agreement and certain acute care contracts in Pennsylvania, New Jersey, Delaware
and California for approximately $16,794,000 in cash and the assumption of
certain liabilities of approximately $231,000. The acquisitions included
substantially all of the non-current assets and the assumption of certain
liabilities and capital leases of the centers.
1994 and 1995 Acquisitions:
During 1994, the Company acquired seventeen dialysis centers, including several
acute care contracts, in Oklahoma, Colorado, Wyoming, New Jersey, Virginia,
Pennsylvania and Texas for approximately $50,300,000 in cash, 175,216 shares of
unregistered common stock, valued at approximately $1,812,500 at the respective
dates of acquisition, and the assumption of approximately $1,200,000 of
liabilities. The acquisitions included substantially all of the non-current
assets, certain current assets and the assumption of various liabilities and
capital lease obligations of the centers. Additionally, certain purchase
agreements included provisions whereby additional purchase price may be required
if the centers attain certain financial results during a specified period. Refer
to note 6 to consolidated financial statements for discussion of a note issued
in connection with an acquisition.
During 1995, the Company acquired nine dialysis centers, including several acute
care contracts, in Indiana, Ohio, Texas, Florida and Nebraska for approximately
$11,600,000 in cash, 302,644 shares of unregistered common stock, valued at
approximately $3,639,750 at the respective dates of acquisition, and the
assumption of approximately $118,000 of liabilities. The acquisitions included
substantially all of the non-current assets, certain current assets and the
assumption of certain liabilities and capital leases of the centers.
F-11
<PAGE>
3. Business Acquisitions (continued):
The following unaudited pro forma information combines the consolidated results
of operations of the Company and the companies acquired in the acquisitions that
were accounted for under the purchase method during 1994 and 1995 as if they had
occurred on January 1, 1994:
<TABLE>
<CAPTION>
(Unaudited)
1994 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net patient revenue $122,431,000 $167,761,000
Income from operations 15,683,000 25,239,000
Net income 10,686,000 15,038,000
Net income per share $0.50 $0.67
</TABLE>
The pro forma results do not necessarily represent results which would have
occurred if these acquisitions had taken place at the beginning of each period,
nor are they indicative of the results of future combined operations.
4. Property and Equipment:
A summary of property and equipment and related accumulated depreciation as of
December 31, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Furniture, fixtures and equipment $14,662,983 $20,775,057
Leasehold improvements 4,102,011 7,427,458
Capital leases 1,013,752 3,161,693
Building 692,772 724,704
Land 100,066 100,066
- --------------------------------------------------------------------------------
20,571,584 32,188,978
Less accumulated depreciation 6,910,646 10,746,557
- --------------------------------------------------------------------------------
$13,660,938 $21,442,421
================================================================================
</TABLE>
Capital leases primarily consist of dialysis equipment. Depreciation expense was
$1,395,230, $2,152,110 and $3,846,294 for the years ended December 31, 1993,
1994 and 1995, respectively.
5. Intangible Assets:
Intangible assets consists of goodwill and other identifiable intangibles. A
summary of intangible assets and related accumulated amortization as of December
31, 1994 and 1995 is as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Goodwill $49,734,578 $59,605,978
Patient lists 30,714,917 33,572,193
Non-compete agreements 8,825,483 10,048,195
Other intangibles 4,134,793 5,111,860
- --------------------------------------------------------------------------------
93,409,771 108,338,226
Less accumulated amortization 14,171,384 22,263,385
- --------------------------------------------------------------------------------
$79,238,387 $86,074,841
================================================================================
</TABLE>
Intangible assets principally arose from acquisitions. Amortization expense was
$2,750,160, $5,450,849 and $8,220,167 for the years ended December 31, 1993,
1994 and 1995, respectively.
F-12
<PAGE>
6. Long-Term Debt:
<TABLE>
<CAPTION>
Long-term debt as of December 31, 1994 and 1995 consists of: 1994 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Term loan payable in quarterly installments of $625,000
through June 1997 $ 6,875,000 $ 3,750,000
Revolving credit/term facility payable in 16 equal quarterly
installments from December 1997 through September 2001 13,975,000 33,675,000
Note, 6 1/2% payable to The Dialysis Centers Limited
Liability Company in four annual installments of
variable amounts commencing on June 1, 1995 7,500,000 6,627,690
Bank term loan payable in quarterly installments of $25,000 325,000 -
Bank revolving line of credit payable in 20 equal installments
commencing in May 1995 2,899,685 -
Term loans payable in monthly installments of $15,912 1,338,270 1,041,576
Other 157,500 -
Capital lease obligations 562,712 2,185,233
Unamortized debt discount (108,326) (43,322)
- ------------------------------------------------------------------------------------------------------------------------------------
33,524,841 47,236,177
Less current portion (4,781,232) (4,660,077)
- ------------------------------------------------------------------------------------------------------------------------------------
$28,743,609 $42,576,100
====================================================================================================================================
</TABLE>
On April 21, 1994, the Company amended its term loan and revolving credit
agreement (the "Credit Agreement") to add a LIBOR interest rate option, change
the note rate, extend the revolving loan conversion date and make certain other
modifications.
On November 3, 1994, the Company amended and restated its Credit Agreement and
increased the amount the Company can borrow under the Credit Agreement to
$75,000,000. The Company must pay an annual commitment fee on the average daily
unutilized commitment in the amount of .25% - .35%, determined by the Company's
ratio of senior debt to annualized cash flow (the "Applicable Margin").
Borrowings under the Credit Agreement are subject to interest at the Company's
option, at either (1) the Agent bank's base rate, adjusted by the Applicable
Margin, payable quarterly, or (2) one, two, three, or six-month period LIBOR
rate, adjusted by the Applicable Margin, payable at contract termination. The
weighted average interest rate was 7.36% and 7.32% at December 31, 1994 and
1995, respectively.
The Credit Agreement also provides for the issuance of letters of credit up to
$5,000,000 provided that the aggregate of all outstanding letters of credit plus
the outstanding aggregate principal amount of all revolving credit/term loans
does not exceed the lesser of the total revolving credit/term commitment or the
patient borrowing base, as defined in the Credit Agreement, at such time. As of
December 31, 1994 and 1995, there were $1,062,500 face amount and no letters of
credit outstanding, respectively.
The loans are collateralized by all stock of the Company's subsidiaries, a lien
on all of the Company's assets and the assignment of certain agreements. The
Credit Agreement limits additional indebtedness, acquisitions, investments and
dividends and requires the Company to comply with certain other covenants and
maintain certain financial ratios. The dividend distributions presented in the
Consolidated Statement of Stockholders' Equity (Deficit) in 1993, 1994 and 1995
were paid to the former stockholders of HCC, the Wichita Companies and the Group
and were not subject to the Credit Agreement limitation on dividend payments.
In June 1994, pursuant to a business acquisition, the Company entered into an
agreement to pay the Seller $7,500,000 in annual installments commencing June
1995 through June 1998. Interest on the unpaid principal amount of the note
accrues at an annual rate of 6.50%, payable in arrears each June 1 from 1995
through 1998. The note allows the Seller to convert the note into that number of
shares of common stock of the Company which shall be equal to the quotient of
the outstanding unpaid principal amount of the note divided by the average daily
closing sale price of the stock during December, 1994 ($20.685 per share,
convertible into 362,582 shares of common stock at December 31, 1994). The fair
value of the Company's 6.50% Note was approximately $5,966,400 at December 31,
1995. The carrying amount of all other long-term debt approximates its fair
value.
The bank term loan and bank revolving line of credit are the result of an
agreement entered into by the Company with a bank (the "HCC Agreement"). The HCC
Agreement provided for a $500,000 term loan, a $2,900,000 revolving line of
credit available for working capital and a $2,100,000 converting line of credit
available to the Company for future expansion. Subsequent to the consummation of
the merger with HCC as described in Notes 2 and 3 to the consolidated financial
statements, the Company refinanced through the Credit Agreement all of the
indebtedness related to the HCC Agreement.
F-13
<PAGE>
6. Long-Term Debt (continued):
The term loans are the result of four separate agreements (the "Group
Agreements") entered into by the Company with two banks. The Group Agreements
provided for a total of $1,350,000 in term loans and a $350,000 revolving line
of credit. Subsequent to the consummation of the merger with the Group as
described in Notes 2 and 3 to the consolidated financial statements, the Company
paid off all of the indebtedness related to the Group Agreements.
Maturities of long-term debt outstanding, excluding capital leases, as of
December 31, 1995 for each of the next five years, is as follows:
<TABLE>
<CAPTION>
Year
------------------------------
<S> <C>
1996 $4,093,262
1997 5,686,874
1998 11,497,361
1999 9,083,957
2000 8,418,750
</TABLE>
7. Income Taxes:
The provision for income taxes for the years ending December 31, 1993, 1994 and
1995 consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $2,294,388 $4,327,339 $ 8,330,951
State and local 373,505 485,926 807,761
- ----------------------------------------------------------------------------------------------------------------------
2,667,893 4,813,265 9,138,712
- ----------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (486,498) (447,584) (1,372,961)
State and local (79,197) (49,667) (133,682)
- ----------------------------------------------------------------------------------------------------------------------
(565,695) (497,251) (1,506,643)
- ----------------------------------------------------------------------------------------------------------------------
$2,102,198 $4,316,014 $ 7,632,069
======================================================================================================================
</TABLE>
The tax effects of temporary differences which comprise the net deferred tax
asset are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1994 1995
<S> <C> <C>
Deferred tax debits:
Allowance for doubtful accounts $535,341 $780,978
Intangibles, principally patient lists 609,674 2,926,430
Property and equipment 189,959 178,417
Other 33,811 38,857
- ----------------------------------------------------------------------------------------------------------------------
1,368,785 3,924,682
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax credits:
Goodwill (305,839) (1,355,093)
- ----------------------------------------------------------------------------------------------------------------------
(305,839) (1,355,093)
- ----------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $1,062,946 $ 2,569,589
======================================================================================================================
</TABLE>
F-14
<PAGE>
7. Income Taxes (continued):
The following is a reconciliation of the statutory federal income tax rates to
the effective rates as a percentage of income before provision for income taxes
as reported in the financial statements for the years ended December 31, 1993,
1994 and 1995:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1993 1994 1995
<S> <C> <C> <C>
U.S. federal income tax rate 34.0% 34.2% 35.0%
State income taxes, net of federal
income tax benefit 2.2% 2.4% 2.4%
Non-tax effected items,
principally intangibles 1.2% 0.8% 1.8%
Federal and state income tax
benefit from S corporation status of HCC,
the Wichita Companies and the Group (9.3%) (6.4%) (3.5%)
Other (1.4%) (1.0%) (1.4%)
- ----------------------------------------------------------------------------------------------------------------------
Effective income tax rate 26.7% 30.0% 34.3%
======================================================================================================================
</TABLE>
8. Benefit and Compensation Plans:
The Company has a defined contribution savings plan covering substantially all
employees. The Company's contributions under the plan were approximately
$209,064, $388,497, and $462,004 for the years ended 1993, 1994 and 1995,
respectively.
In September 1990, the Company established a stock plan, pursuant to which
incentive stock options and non-qualified stock options may be issued to
employees and others through the year 2000. Incentive stock options may be
granted at an exercise price not less than the fair market value of the
Company's common stock. Non-qualified stock options may be granted at an
exercise price not less than the lower of the book value of the Company's common
stock or 50% of the fair market value per share of common stock. Accordingly,
compensation expense for the difference between the fair market value and the
exercise price for non-qualified stock options issued is recorded over the
vesting period of such options.
In 1993 and 1995, the stock plan was amended to increase the number of shares
available for grant to 1,837,000 and 2,437,000 shares, respectively. In
addition, the Company established an option plan for outside directors pursuant
to which non-qualified stock options to purchase up to 60,000 shares may be
issued to non-employee directors of the Company. These options may be granted at
an exercise price not less than the fair market value of the Company's common
stock.
On February 3, 1994, the Company granted 170,000 incentive stock options to
certain officers and employees of the Company. These options were granted at an
exercise price not less than fair market value of the Company's common stock on
the date of grant. These options vest over the next one to three years.
On May 17, 1995, the Company granted 416,000 incentive stock options to certain
officers and employees of the Company. These options were granted at an exercise
price not less than fair market value of the Company's common stock on the date
of the grant. These options vest over the next one to four years. Certain
options totalling 305,000 vest upon the earlier of attainment of predetermined
earnings per share targets or nine to ten years.
Approximately $80,000, $50,000, and $50,000 was recorded as compensation expense
during 1993, 1994, and 1995, respectively, in connection with incentive and non-
qualified options to officers of the Company, which have been amortized over the
remaining vesting period. Certain options outstanding at December 31, 1995,
which are issued to certain officers of the Company, become fully vested upon
certain sales of assets, mergers and consolidations involving the Company, as
set forth in the respective stock option agreements. The remaining options
outstanding at December 31, 1995, which are issued to certain officers and
employees of the Company, become fully vested upon certain sales of assets,
mergers and consolidations involving the Company, at the option of the Stock
Plan Committee.
F-15
<PAGE>
8. Benefit and Compensation Plans (continued):
The following is a summary of option transactions and exercise prices:
<TABLE>
<CAPTION>
Number of Price Per
Shares Share
- -------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993 1,490,032 $0.005 - $9.625
Granted 188,000 $11.25
Exercised (356,762) $ 0.005 - $5.25
Cancelled (20,000) $11.25
Outstanding at December 31, 1994 1,301,270 $0.055 - $11.25
- -------------------------------------------------------------------------
Granted 416,000 $11.50
Exercised (458,016) $0.005 - $11.25
Outstanding at December 31, 1995 1,259,254 $ 5.25 - $11.50
- -------------------------------------------------------------------------
Exercisable at December 31, 1995 338,824
=========================================================================
</TABLE>
9. Capital Stock:
On January 30, 1996, the Board of Directors of the Company declared a dividend
on the Company's common stock of one share of common stock for each share
outstanding, thereby effecting a 2-for-1 stock split. The dividend shares were
issued on March 14, 1996 to stockholders of record as of February 29, 1996.
Additionally, on February 29, 1996, the Company amended its capital structure to
increase the Company's authorized capital to 45,000,000 shares of $0.01 par
value common stock and 5,000,000 shares of $.01 par value Series Preferred
Stock. All references in the financial statements to outstanding and authorized
common shares, average number of shares outstanding and related prices, per
share amounts and stock plan data have been restated to reflect the split
effected by the stock dividend.
10. Leasing Arrangements:
The Company leases certain of its operating facilities, corporate office and
furniture and equipment under non-cancelable leases for terms ranging from four
to ten years with certain renewal options. Certain of these facilities are
leased by the Company from medical directors.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Third-party Operating Leases
Capital Operating with Medical
Leases Leases Directors
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 868,765 $ 4,230,897 $1,015,613
1997 609,862 3,433,229 1,015,613
1998 608,653 2,890,264 766,303
1999 421,666 2,591,912 722,874
2000 and thereafter - 8,100,724 3,117,466
- -------------------------------------------------------------------------------
Total minimum lease payments $2,508,946 $21,247,026 $6,637,869
Less amount representing interest 323,714 ============================
- ---------------------------------------------
Present value of net minimum
payments under
capital leases 2,185,232
Less current portion 566,815
- ---------------------------------------------
$1,618,417
=============================================
</TABLE>
Rent expense paid to third parties under operating leases was $2,216,260,
$3,270,066 and $4,921,026 for the years ended December 31, 1993, 1994 and
1995, respectively. Rent expense paid to medical directors under facility
operating leases was $545,608, $832,454 and $1,030,208 for the years ended
December 31, 1993, 1994 and 1995 respectively.
11. Mandatory Redeemable Preferred Stock:
On July 29, 1993, the Company redeemed all the Series A preferred stock
outstanding at a redemption price of $1,000 per share. In addition, on July 29,
1993, the holders of 257 shares of Series B preferred stock converted their
shares into 4,545,932 shares of Common stock. The Company paid in full all
accrued and unpaid dividends of $476,249 on the Series A and B preferred stock
on the redemption and conversion date.
F-16
<PAGE>
11. Mandatory Redeemable Preferred Stock (continued):
Dividends on preferred stock were set aside from funds legally available for
payment quarterly on the last day of each November, February, May and August
which commenced November 30, 1989. Dividends on preferred stock were payable at
an annual dividend rate per share of 6% for the period October 1, 1992 through
September 30, 1995.
On July 29, 1993, the holders of Series B preferred stock warrants also
exercised their rights to purchase 17.1466 shares of the Company's Series B
preferred stock, exercisable at $1,000 per share. Each share was then converted
into 17,689.72 shares of common stock.
12. Commitments and Contingencies:
The Company has entered into long-term compensation agreements with the
physician directors of each dialysis facility. The agreements range from one to
ten years with certain agreements containing one to ten year options to renew.
The agreements provide for a total annual base compensation as follows:
<TABLE>
<CAPTION>
Physician Director
Year Base Compensation
- -----------------------------------------------------------------------------
<S> <C>
1995 $ 6,270,287
1996 5,462,190
1997 5,204,504
1998 4,066,557
1999 and thereafter 12,958,132
- -----------------------------------------------------------------------------
Total minimum payments $33,961,670
=============================================================================
</TABLE>
Certain of these agreements provide for incentive compensation based on pre-tax
operating profit.
The Company has employment agreements with four officers. These agreements
provide for total annual compensation of $756,000 and provide that in the event
any payment or benefit received by any of them in connection with a change of
control is deemed an "excess parachute payment" under the Internal Revenue Code,
the Company shall pay the officer a cash bonus equal to any additional tax
liability imposed upon him as a result.
The Company is a party to certain legal actions arising in the ordinary course
of business. The Company believes it has adequate legal defenses and/or
insurance coverage for these actions and that the ultimate outcome of these
actions will not have a material adverse impact on the Company's results of
operations, financial condition or liquidity.
13. Supplemental Cash Flow Information:
Supplemental disclosure of cash flow information for the years ended December
31, 1993, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for:
Interest $1,473,220 $1,090,192 $2,177,255
==============================================================================================================================
Income taxes $2,012,701 $4,857,551 $5,680,430
==============================================================================================================================
Non-cash investing and financing activities:
Capital lease obligations entered into $ 326,863 $ 542,032 $2,081,699
==============================================================================================================================
Conversion of Series B preferred stock and Series B
warrants to common stock $ 274,147 $ - $ -
==============================================================================================================================
Issuance of common stock in connection with purchases
of businesses $ - $1,812,500 $3,639,750
==============================================================================================================================
Earnout note issued in connection with purchase of
business $ - $7,364,100 $ -
==============================================================================================================================
Acquisition of treasury in connection with
payroll taxes resulting from exercise of stock
options. $ - $ 47,219 $ 346,857
=============================================================================================================================
</TABLE>
F-17
<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
1995 1996
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------------
Current assets:
Cash $8,231,421 $621,444
Investments - 45,963,081
Accounts receivable, less allowance for doubtful accounts of
$3,503,744 in 1995 and $5,743,830 in 1996 51,996,618 63,386,631
Inventories 2,869,019 3,838,980
Deferred taxes 819,835 1,412,519
Prepaid expenses and other current assets 1,396,893 1,219,708
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 65,313,786 116,442,363
- ----------------------------------------------------------------------------------------------------------------------
Property and equipment, net of accumulated depreciation of
$10,746,557 in 1995 and $16,249,094 in 1996 21,442,421 31,733,870
Intangibles, net of accumulated amortization of $22,263,385
in 1995 and $26,925,574 in 1996 86,341,433 121,718,883
Deferred taxes, non-current 1,749,754 1,749,754
Other assets 20,842 15,649
- ----------------------------------------------------------------------------------------------------------------------
Total assets $174,868,236 $271,660,519
======================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $4,766,262 $3,336,451
Accounts payable 4,495,087 6,305,145
Accrued compensation 2,790,121 2,694,379
Accrued expenses 6,576,600 3,170,103
Accrued income taxes 2,218,692 320,024
Accrued interest 1,087,415 399,015
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 21,934,177 16,225,117
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt, net 42,576,100 131,592,265
Stockholders' equity: - -
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued
Common stock, $.01 par value, 45,000,000 shares authorized; issued
and outstanding 22,209,689 and 24,255,969 shares in 1995 and 1996,
respectively 222,097 242,559
Additional paid-in capital 83,257,068 85,480,900
Retained earnings 27,272,870 38,513,754
- ----------------------------------------------------------------------------------------------------------------------
110,752,035 124,237,213
Less treasury stock, 37,202 shares in 1995 and 1996 (394,076) (394,076)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 110,357,959 123,843,137
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $174,868,236 $271,660,519
======================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-18
<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net patient revenue $55,583,123 $40,066,785 $106,132,950 $77,816,039
Patient care costs 26,997,151 19,645,417 51,482,378 38,216,941
- -----------------------------------------------------------------------------------------------------------------
Operating profit 28,585,972 20,421,368 54,650,572 39,599,098
General and administrative expense 13,479,366 10,069,871 26,632,717 20,330,847
Provision for doubtful accounts 1,737,321 986,919 3,308,507 2,020,088
Depreciation and amortization 4,072,917 2,908,536 7,645,118 5,641,524
Merger expenses - - 1,708,247 1,587,542
- -----------------------------------------------------------------------------------------------------------------
Income from operations 9,296,368 6,456,042 15,355,983 10,019,097
Interest expense, net 856,313 651,621 1,553,433 1,310,325
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 8,440,055 5,804,421 13,802,550 8,708,772
Provision for income taxes 3,009,329 1,767,248 4,999,536 2,332,211
- -----------------------------------------------------------------------------------------------------------------
Net income $ 5,430,726 $ 4,037,173 $ 8,803,014 $ 6,376,561
=================================================================================================================
Net income per common and common $0.22 $0.18 $0.36 $0.29
stock equivalent ===== ===== ===== =====
Weighted average number of common
and common stock equivalents
outstanding 25,828,734 22,105,059 25,284,349 22,057,653
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-19
<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,803,014 $ 6,376,561
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,666,084 5,668,009
Provision for doubtful accounts 3,308,507 2,020,088
Changes in operating assets and liabilities,
net of effects of companies acquired:
Accounts receivable (11,355,559) (8,263,686)
Inventories (673,916) 474,846
Prepaid expenses and other current assets 239,556 176,555
Accounts payable and accrued expenses (5,722,617) (439,306)
Accrued income taxes (1,898,668) (298,908)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities 366,401 5,714,159
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (6,188,493) (3,553,324)
Purchase of businesses, net of cash acquired (37,030,623) (5,144,291)
Sale of investments 9,347,962 2,661,944
Purchase of investments (55,311,043) -
Other (979,804) (1,356,734)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (90,162,001) (7,392,405)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of 5 5/8% convertible subordinated notes 125,000,000 -
Proceeds from long-term debt borrowings 30,500,000 9,000,000
Repayments of debt (70,420,804) (6,369,894)
Net borrowings under line of credit (50,000) (19,001)
Proceeds from issuance of common stock 2,137,012 623,329
Payment of dividends (658,500) (1,082,331)
Debt issuance costs (3,750,000) -
Payments on capital lease obligations (1,535,784) (313,312)
Cash portion of consideration received for common stock 963,699 -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 82,185,623 1,838,791
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7,609,977) 160,545
Cash and cash equivalents at beginning of period 8,231,421 2,782,781
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 621,444 $ 2,943,326
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-20
<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996. The
interim consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included herein.
The condensed consolidated financial statements of Renal Treatment Centers, Inc.
("the Company") have been prepared to give retroactive effect to the
acquisition of Panama City Artificial Kidney Center, Inc. and North Florida
Artificial Kidney Center, Inc. (collectively "the Group") on July 23, 1996
which has been accounted for using the pooling-of-interests method of
accounting.
2. COMMITMENTS AND CONTINGENCIES:
The Company is a party to certain legal actions arising in the ordinary course
of business. The Company believes it has adequate legal defenses and/or
insurance coverage for these actions and that the ultimate outcome of these
actions will not have a material adverse impact on the Company's results of
operations, financial condition or liquidity.
3. SIGNIFICANT EVENTS:
On February 20, 1996, the Company acquired Intercontinental Medical Services,
Inc. ("IMS"), which operated four dialysis facilities in Hawaii. The
transaction was accounted for as a pooling of interests. Accordingly, the
Company's financial statements include the results of IMS as of January 1, 1996.
In total, 1,047,464 shares of the Company's common stock were exchanged for all
outstanding shares of IMS.
On February 29, 1996, the Company acquired Midwest Dialysis Units and its
affiliates (collectively "MDU"), which operated 11 dialysis facilities in
Oklahoma. The transaction was accounted for as a pooling of interests.
Accordingly, the Company's financial statements include the results of MDU as of
January 1, 1996. In total 767,168 shares of the Company's common stock were
exchanged for all outstanding shares of MDU.
Prior year financial statements have not been restated to reflect these
transactions because the impact on the Company's financial statements of such
transactions is not material.
On May 29, 1996, with an effective date of May 31, 1996, the Company acquired
substantially all of the assets of Kidney Center of Delaware County, Ltd.
("KCDC") and Kidney Center of Chester County, Ltd. ("KCCC"). These two
outpatient dialysis centers, located in the Philadelphia, Pennsylvania area,
provide care to approximately 400 patients and perform acute treatments at nine
area hospitals.
On June 5, 1996 the Company amended its Credit Agreement with a consortium of
banks to increase the amount available under the line of credit from $68,125,000
to $100,000,000 and to make certain other changes to the terms of the Credit
Agreement, including amendments to certain covenants, the amortization schedule,
the interest rates and the events of default.
On June 12, 1996 the Company issued $125,000,000 of 5 5/8% Convertible
Subordinated Notes due 2006. The Company is using the proceeds of the offering
for the repayment of indebtedness, acquisitions, development of additional
dialysis centers, capital expenditures and general corporate purposes.
F-21
<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Balance at Additions
Beginning Charged to Balance at
Description of Year Costs Deductions End of Year
and Expenses
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31,
1995: (1)
Allowance for doubtful
receivables $2,306,556 $4,760,678 $3,563,490 $3,503,744
- ----------------------------------------------------------------------------------
Year ended December 31,
1994: (1)
Allowance for doubtful $1,123,211 $3,121,017 $1,937,672 $2,306,556
receivables
- ----------------------------------------------------------------------------------
Year ended December 31,
1993: (1)
Allowance for doubtful
receivables $ 803,204 $1,550,691 $1,230,684 $1,123,211
- ----------------------------------------------------------------------------------
</TABLE>
(1) Amounts represent writeoffs of uncollectible receivables, net of
recoveries.
F-22
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
<TABLE>
<CAPTION>
(c) Exhibits Description
-------- -----------
<S> <C>
11.1 Computation of Primary and Fully Diluted Earnings Per Share
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Baird, Kurtz & Dobson
27 Financial Data Schedule
</TABLE>
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RENAL TREATMENT CENTERS, INC.
Date: February 4, 1997 By: /s/Frederick C. Jansen
---------------------------- -----------------------------------
Frederick C. Jansen
Executive Vice President and
Chief Financial Officer
Date: February 4, 1997 By: /s/Ronald H. Rodgers, Jr.
---------------------------- -----------------------------------
Ronald H. Rodgers, Jr.
Vice President - Finance
(Principal Accounting Officer)
-12-
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibits Description Pages
- -------- ----------- -----
<S> <C> <C>
11.1 Computation of Primary and Fully Diluted Earnings Per Share 14-15
23.1 Consent of Coopers & Lybrand L.L.P. 16
23.2 Consent of Deloitte & Touche LLP 17
23.3 Consent of Baird, Kurtz & Dobson 18
27 Financial Data Schedule 19
</TABLE>
-13-
<PAGE>
Exhibit 11.1 (a)
Renal Treatment Centers, Inc. and Subsidiaries
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
for the year ended December 31, 1994
<TABLE>
<CAPTION>
Primary Fully Diluted
1994 1994
---- ----
<S> <C> <C>
Net income $10,050,920 $10,050,920
- --------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding during year 20,589,003 20,589,003
Weighted average number of maximum shares subject
to exercise under outstanding stock options 1,396,022 1,396,022
- --------------------------------------------------------------------------------------------------------------------
21,985,025 21,985,025
Less treasury shares assumed purchased with proceeds
from assumed exercise of outstanding common stock options 823,782 769,752
- --------------------------------------------------------------------------------------------------------------------
Weighted average number of common and common stock 21,161,243 21,215,273
equivalents outstanding
- --------------------------------------------------------------------------------------------------------------------
Net income per common and common stock equivalent $0.47 $0.47
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-14-
<PAGE>
Exhibit 11.1 (b)
Renal Treatment Centers, Inc. and Subsidiaries
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
for the year ended December 31, 1995
<TABLE>
<CAPTION>
Primary Fully Diluted
1994 1994
---- ----
<S> <C> <C>
Net income $14,630,804 $14,630,804
Add back interest on note, tax effected $ 283,136
- --------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $14,630,804 $14,913,940
- --------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding 21,868,067 21,868,067
Weighted average number of maximum shares subject
to exercise under outstanding stock options 1,444,812 1,444,812
Weighted average shares assumed issued upon conversion of note - 682,402
- --------------------------------------------------------------------------------------------------------------------
23,312,879 23,995,281
Less treasury shares assumed purchased with proceeds
from assumed exercise of outstanding common stock options 900,146 594,196
- --------------------------------------------------------------------------------------------------------------------
Weighted average number of common and common stock
equivalents outstanding 22,412,733 23,401,085
- --------------------------------------------------------------------------------------------------------------------
Net income per common and common stock equivalent $0.65 $0.64
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
-15-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Renal Treatment Centers, Inc. and Subsidiaries (the "Company") on Forms S-8
(File Nos. 33-85750 and 33-94262) and Forms S-3 (File Nos. 33-88418, 33-93060,
33-96828, 333-3716, 333-10839, and 333-10841) of our report dated March 20, 1996
except for the combination described in Note 2, for which the date is August 19,
1996, on our audits of the restated consolidated financial statements and the
financial statement schedule of the Company as of December 31, 1995 and 1994 and
for the years ended December 31, 1995, 1994 and 1993, which includes reference
to information audited by other auditors for which the dates of their reports
are July 14, 1995 and March 31, 1995, respectively, which reports are included
in this Form 8-K.
/s/Coopers & Lybrand L.L.P.
- ---------------------------------------------
Coopers & Lybrand L.L.P.
600 Lee Road
Wayne, Pennsylvania
February 4, 1997
-16-
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Renal Treatment Centers, Inc. and subsidiaries on Form S-8 (Nos. 33-85750 and
33-94262) and Form S-3 (Nos. 33-88418, 33-93060, 33-96828, 333-3716, 333-10839,
and 333-10841) of our report dated March 31, 1995, on our audits of the combined
financial statements of Healthcare Corporation and Affiliates as of December 31,
1994, and for the two years in the period ended December 31, 1994, which report
is included in this Form 8-K.
/s/Deloitte & Touche LLP
- ----------------------------------------------------
Deloitte & Touche LLP
Nashville, Tennessee
February 4, 1997
-17-
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Renal Treatment Centers, Inc. on Form S-3 (File Nos. 33-88418, 33-93060, 33-
96828, 333-3716, 333-10839, and 333-10841) and S-8 (File Nos. 33-85750, 33-
94262) of our report dated July 14, 1995, except for Note 9 as to which the date
is July 24, 1995, relating to the financial statements of the Wichita Dialysis
Group, which report is included in this Form 8-K.
/s/Baird, Kurtz & Dobson
- ------------------------------------------------
Baird, Kurtz & Dobson
Wichita, Kansas
February 4, 1997
-18-
