<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 1-14142
________________________________________________________________________________
RENAL TREATMENT CENTERS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 23-2518331
(State of incorporation) (I.R.S. Employer Identification No.)
1180 W. Swedesford Road
Building 2, Suite 300
Berwyn, Pennsylvania 19312
(Address of principal executive offices) (Zip Code)
(610) 644-4796
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE
SECURITIES EXCHANGE ACT OF 1934:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ____
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
On March 14, 1997, the aggregate market value (based on the closing sale
price on that date) of the voting stock held by non-affiliates of the Registrant
was approximately $621,470,000.
The number of shares of the Registrant's Common Stock outstanding as of March
14, 1997 was 24,617,217.
<PAGE>
PART II
INTRODUCTORY STATEMENT
Renal Treatment Centers, Inc. ("RTC") was acquired by Total Renal Care
Holdings, Inc. ("TRCH") on February 27, 1998. On April 1, 1998, TRCH announced
(i) that it had undertaken a detailed review of RTC's accounts receivable and
other balance sheet accounts in connection with the completion of the audit of
RTC's financial statements for the fiscal year ended December 31, 1997, and (ii)
that as a result of such review, it expected to recognize between $25 million
and $30 million of non-cash charges related to prior periods which would require
a revision of RTC's previously announced results of operations. On April 30,
1998, TRCH announced that RTC might be required to correct previously audited
financial statements.
The analysis of RTC's financial statements was completed on May 15, 1998.
In order to correct certain errors discovered through such analysis, TRCH has
determined to (i) restate RTC's previously audited financial statements for the
fiscal year ended December 31, 1996 ("Fiscal 1996") and (ii) revise RTC's
previously filed financial statements for the fiscal quarters ended March 31,
1997, June 30, 1997 and September 30, 1997 and RTC's previously announced
results of operations for the fiscal quarters ended March 31, 1996 and 1997,
June 30, 1996 and 1997, September 30, 1996 and 1997 and December 31, 1996 and
1997 and the fiscal years ended December 31, 1996 and 1997.
This Form 10-K/A is being filed to amend the audited financial statements
for Fiscal 1996 included in RTC's Form 10-K for Fiscal 1996 which was filed on
March 29, 1997. RTC is concurrently filing separate Form 10-Q/A's to correct the
financial statements included in the Form 10-Q's previously filed for the first
three fiscal quarters in 1997.
The balance sheet included in the audited financial statements for Fiscal
1996 filed herewith is being corrected to reflect a reduction of accounts
receivable at December 31, 1996 and to reflect the impact of the changes to the
statements of income for Fiscal 1996 described below. The statement of income
included in such audited financial statements is being corrected to reflect a
related reduction of net patient revenue for Fiscal 1996 and a related increase
in the provision for doubtful accounts. The corrected statement of income also
includes a reduction in the provision for income taxes reflecting the reduction
in taxable income resulting from the corrections described above. (See Note 13
of the financial statements filed herewith)
Approximately one half of the charges described above relate to untimely
billing and subsequent requests for information by RTC with governmental payors
(primarily state medicaid programs) and contracted private payors. The remainder
relates primarily to improper contractual allowances related to revenue
recognition at the time of billing and to uncollectible accounts. TRCH believes
that the causes of such problems have been appropriately addressed and that
systems and processes are now in place to ensure accurate contractual
allowances related to revenue recognition and timely account resolution,
including all appropriate collection efforts.
Information included in Item 7 (Management's Discussion and Analysis of
Financial Condition and Results of Operations) under the captions "Results of
Operations" and "Year Ended December 31, 1996 Compared to Year Ended December
31, 1995") of RTC's Form 10-K for Fiscal 1996 was based on RTC's audited
consolidated financial statements prior to the corrections described above.
Consequently, the information included in Item 7 under such captions overstates
both net patient revenue and the provision for income taxes and understates the
provision for doubtful accounts as described above. RTC believes that the
amendment of Item 7 to discuss such corrections would provide no material
additional information not already presented in Item 7 of the Form 10-K as
originally filed or in this Form 10-K/A. Consequently, such Item 7 is not
restated in this Form 10-K/A.
ITEM 6. SELECTED FINANCIAL DATA:
The selected consolidated financial data presented below as of December 31, 1995
and 1996, and for the years ended December 31, 1994, 1995 and 1996, 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. Certain adjustments have been made to
the 1996 financial statements to correct errors in previously reported amounts,
as described in note 13 to the financial statements. The selected consolidated
financial statements presented below as of December 31, 1992, 1993 and 1994, and
for the years ended December 31, 1992 and 1993, have been derived from the
Company's audited financial statements not included herein.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(dollars in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net patient revenue $54,041 $73,043 $115,457 $164,568 $225,077
Operating costs and expenses:
Patient care costs 27,854 37,172 57,096 79,451 114,804
General and administrative 16,083 20,756 32,622 41,382 58,472
Provision for doubtful accounts 967 1,551 3,121 4,761 10,241
Depreciation and amortization 3,123 4,145 7,603 12,066 17,077
Merger expenses - - - 2,088 2,808
Income from operations 6,014 9,419 15,015 24,820 21,675
Interest, net 1,433 1,536 648 2,557 4,384
Income before income taxes 4,581 7,883 14,367 22,263 17,291
Provision for income taxes 1,052 2,102 4,316 7,632 6,609
Net income $3,529 $5,781 $10,051 $14,631 $10,682
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
Basic earnings per share $0.49 $0.67 $0.44
Weighted average common stock 20,412,982 21,868,067 24,230,156
<CAPTION>
As of December 31,
------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $3,960 $13,709 $27,947 $43,380 $85,677
Intangible assets, net 16,892 28,934 79,238 86,362 130,645
Total assets 37,035 60,007 140,523 174,868 293,948
Total long-term debt 12,389 18,070 28,744 42,576 130,574
Total liabilities 25,028 29,349 47,894 64,510 165,814
Cumulative redeemable preferred stock 9,528 - - - -
Total stockholders' equity $2,478 $30,658 $92,628 $110,358 128,134
</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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
See the Index included at "Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) Documents filed as part of this Form 10-K Report
<TABLE>
<CAPTION>
<S> <C>
1. Financial Statements
Report of Independent Accountants.......................................................... F-1
Reports of Other Independent Accountants
Relied Upon by Independent Accountants............................................. F-2 - F-3
Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and 1996............................. F-4
Consolidated Statements of Income for the years ended
December 31, 1994, 1995 and 1996............................................ F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996................................ F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996............................................ F-7
Notes to Consolidated Financial Statements............................................ F-8 - F-18
2. Financial Statement Schedules:
II. Valuation and Qualifying Accounts,
for the years ended December 31, 1996,
1995 and 1994......................................................................... F-19
</TABLE>
Schedules other than those listed above are omitted because they are either
not applicable or not required or because the information required is
contained in the financial statements or notes thereto. The financial
statement schedules are covered by the Report of Independent Accountants on
Page F-1.
3. Exhibits:
Exhibit Description
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit No. 3.1 filed under the Company's
Amendment No. 1 to Quarterly Report on Form 10-Q/A for the quarter
ended March 31, 1996).
3.1.1 Certificate of Amendment dated February 29, 1996 to Restated
Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit No. 3.1.1 filed under the Company's Amendment
No. 1 to Quarterly Report on Form 10-Q/A for the quarter ended
March 31, 1996).
3.2 By-Laws of the Company and Amendment to By-Laws adopted February 9,
1993 (incorporated herein by reference to Exhibit No. 3.2 filed
under the Company's Form S-1 Registration Statement No. 33-59850).
4.1 Specimen Certificate of Common Stock of the Company (incorporated
herein by reference to Exhibit No. 4.1 filed under the Company's
Annual Report on Form 10-K for the year ended December 31, 1995).
<PAGE>
4.2 Indenture dated June 12, 1996 by the Company to PNC Bank, National
Association, Trustee, including form of the Company's 5 5/8%
Convertible Subordinated Notes due 2006 issued under the Indenture
(incorporated herein by reference to Exhibit No. 4.2 filed under
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996).
4.3 Registration Rights Agreement dated as of June 12, 1996 by and
among the Company, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, UBS Securities LLC, J.C. Bradford &
Co. and Wessels, Arnold & Henderson (incorporated herein by
reference to Exhibit No. 4.3 filed under the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
10.1* Renal Treatment Centers, Inc. Amended and Restated 1990 Stock
Plan.+
10.1.1* Form of Stock Option Agreement under the Company's Amended and
Restated 1990 Stock Plan (incorporated herein by reference to
Exhibit No. 10.1.3 filed under the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.2* Renal Treatment Centers, Inc. Equity Incentive Plan for Outside
Directors (incorporated herein by reference to Exhibit No. 10.2
filed under the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.2.1* Form of Stock Option Agreement under the Company's Equity Incentive
Plan for Outside Directors (incorporated herein by reference to
Exhibit No. 10.2.1 filed under the Company's Annual Report on
Form10-K for the year ended December 31, 1995).
10.2.2* Amendment No. 1 to the Company's Equity Incentive Plan for Outside
Directors dated May 2, 1996 (incorporated herein by reference to
Exhibit No. 10.2.2 filed under the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
10.3* Employment Agreement dated as of March 2, 1995 between the Company
and Robert L. Mayer, Jr. (incorporated herein by reference to
Exhibit No. 10.3 filed under the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).
10.3.1* First Amendment to Employment Agreement dated as of May 2, 1996
between the Company and Robert L. Mayer, Jr. (incorporated herein
by reference to Exhibit No. 10.3.1 filed under the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.4* Employment Agreement dated as of March 2, 1995 between the Company
and Frederick C. Jansen (incorporated herein by reference to
Exhibit No. 10.4 filed under the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).
10.4.1* First Amendment to Employment Agreement dated as of May 2, 1996
between the Company and Frederick C. Jansen (incorporated herein by
reference to Exhibit No. 10.4.1 filed under the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
10.5* Employment Agreement dated as of May 2, 1996 between the Company
and Barbara A. Bednar (incorporated herein by reference to Exhibit
No. 10.5 filed under the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996).
10.6* Employment Agreement dated as of August 30, 1993 between the
Company and John Chambers (incorporated herein by reference to
Exhibit No. 10.6 filed under the Company's Form S-1 Registration
Statement No. 33-74994).
10.6.1* First Amendment to Employment Agreement dated as of May 2, 1996
between the Company and John A. Chambers (incorporated herein by
reference to Exhibit No. 10.6.1 filed under the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
10.7* Resignation Agreement and Release dated January 13, 1995 by and
between the Company and Michael C. Duke (incorporated herein by
reference to Exhibit No. 10.7 filed under the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
10.8* Executive Severance Agreement dated as of May 1,1995 between the
Company and Barbara A. Bednar (incorporated herein by reference to
Exhibit No. 10.8 filed under the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.8.1* First Amendment to Executive Severance Agreement dated as of May 2,
1996 between the Company and Barbara A. Bednar (incorporated herein
by reference to Exhibit No. 10.8.1 filed under the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.9* Executive Severance Agreement dated as of May 1, 1995 between the
Company and Ronald H. Rodgers, Jr. (incorporated herein by
reference to Exhibit No. 10.9 filed under the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
10.9.1* First Amendment to Executive Severance Agreement dated as of May 2,
1996 between the Company and Ronald H. Rodgers, Jr. (incorporated
herein by reference to Exhibit No. 10.9.1 filed under the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
<PAGE>
10.10* Executive Severance Agreement dated as of May 1, 1995 between the
Company and John A. Chambers (incorporated herein by reference to
Exhibit No. 10.10 filed under the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.10.1* First Amendment to Executive Severance Agreement dated as of May 2,
1996 between the Company and John A. Chambers (incorporated herein
by reference to Exhibit No. 10.10.1 filed under the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.11 Fourth Amended and Restated Loan Agreement dated as of June 5, 1996
between the Company and First Union National Bank of North Carolina
and the other lenders set forth therein (incorporated herein by
reference to Exhibit No. 99.1 filed under the Company's Current
Report on Form 8-K dated May 29, 1996).
10.12 Lease Agreement dated November 8, 1991 between the Company and
Terramics/Southpoint Associates II Limited Partnership
(incorporated herein by reference to Exhibit No. 10.32 filed under
the Company's Form S-1 Registration Statement No. 33-59850).
10.12.1 First Amendment to Lease Agreement dated January 18, 1993
(incorporated herein by reference to Exhibit No. 10.32 filed under
the Company's Form S-1 Registration Statement No. 33-59850).
10.12.2 Second Amendment to Lease dated September 30, 1993 (incorporated
herein by reference to Exhibit No. 10.36 filed under the Company's
Form S-1 Registration Statement No. 33-74994).
10.12.3 Confirmation of Lease Term dated November 1, 1993 (incorporated
herein by reference to Exhibit No. 10.36 filed under the Company's
Form S-1 Registration Statement No. 33-74994).
10.12.4 Third Amendment to Lease dated March 2, 1995 (incorporated herein
by reference to Exhibit No. 10.12.4 filed under the Company's
Annual Report on Form 10-K for the year ended December 31, 1995).
10.12.5 Fourth Amendment to Lease dated May 30, 1996 (incorporated herein
by reference to Exhibit No. 10.12.5 filed under the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.13 Earnout Note dated June 1, 1994 by and between Renal Treatment
Centers- Colorado, Inc., Renal Treatment Centers - Nebraska, Inc.,
Renal Treatment Centers - Wyoming, Inc. and The Dialysis Centers
Limited Liability Company (incorporated herein by reference to
Exhibit No. 2 filed under the Company's Form 8-K Current Report
dated June 15, 1994).
10.14 Agreement and Plan of Merger dated as of July 25, 1995 among the
Company, Renal Treatment Centers -Kansas, Inc. and the individuals
and their affiliated companies set forth therein (incorporated
herein by reference to Exhibit No. 2.1 filed under the Company's
Form 8-K Current Report dated August 1, 1995).
10.15 Agreement and Plan of Merger dated as of January 11, 1996 among the
Company, Renal Treatment Centers - Hawaii, Inc., Intercontinental
Medical Services, Inc. and Dudley S.J. Seto, M.D. (incorporated
herein by reference to Exhibit No. 2.1 filed under the Company's
Current Report on Form 8-K dated February 20, 1996).
10.16* Employment Agreement dated as of May 2, 1996 between the Company
and Ronald H. Rodgers, Jr. (incorporated herein by reference to
Exhibit No. 10.25 filed under the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
10.17* Employment Agreement dated as of March 11, 1996 between the Company
and Thomas J. Karl (incorporated herein by reference to Exhibit No.
10.26 filed under the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996).
10.18* Executive Severance Agreement dated as of March 11, 1996 between
the Company and Thomas J. Karl (incorporated herein by reference to
Exhibit No. 10.27 filed under the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
10.19 Asset Purchase Agreement dated as of May 29, 1996 between Renal
Treatment Centers - Pennsylvania, Inc. and KCCC Liquidating Trust
(incorporated herein by reference to Exhibit No. 2.1 filed under
the Company's Current Report on Form 8-K dated May 29, 1996).
10.20 Asset Purchase Agreement dated as of May 29, 1996 between Renal
Treatment Centers - Pennsylvania, Inc. and KCDC Liquidating Trust
(incorporated herein by reference to Exhibit No. 2.2 filed under
the Company's Current Report on Form 8-K dated May 29, 1996).
10.21* Employment Agreement dated as of March 1, 1996 between the Company
and Mark A. Zawiski (incorporated herein by reference to Exhibit
No. 10.30 filed under the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996).
10.22* Executive Severance Agreement dated as of March 1, 1996 between the
Company and Mark A. Zawiski (incorporated herein by reference to
Exhibit No. 10.31 filed under the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996).
10.23 Asset Purchase Agreement dated as of September 7, 1996 between
Renal Treatment Centers - Georgia, Inc. and Columbus Regional
Dialysis Center, Inc. (incorporated herein by reference to Exhibit
No. 2.1 filed under the Company's Current Report on Form 8-K dated
September 16, 1996).
10.24 Asset Purchase Agreement dated as of September 7, 1996 between
Renal Treatment Centers - Alabama, Inc. and Phenix City Nephrology
Referral Center, Inc. (incorporated herein by reference to Exhibit
No. 2.2 filed under the Company's Current Report on Form 8-K dated
September 16, 1996).
<PAGE>
21.1 Subsidiaries of the Company.+
27.1 Amended Financial Data Schedule.X
_______________
*Management Contracts and Compensatory Plans or Arrangements.
+Previously filed under the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
XIncluded in this filing.
(b) Reports on Form 8-K
Form 8-K/A Amendment No. 1 to Current Report dated September 16, 1996 filed on
November 27, 1996 to file pursuant to Item 7 (a) historical financial
information for the year ended December 31, 1995 and six months ended June 30,
1995 and 1996 for Columbus Regional Dialysis Center, Inc., Phenix City
Nephrology Referral Center, Inc. and the Group and (b) pro-forma financial
information for the Company for the year ended December 31, 1995 and the six
months ended June 30, 1996 related to the acquisition of Columbus Regional
Dialysis Center, Inc. and Phenix City Nephrology Referral Center, Inc. reported
on Form 8-K dated September 16, 1996.
<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.
By: /s/John E. King
-----------------------------------
Vice President, Finance and Chief
Financial Officer
Date: May 18, 1998
-------------
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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 as of December 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in Item 14(a) of this Form 10-
K/A. 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 did not audit the financial statements of
Wichita Dialysis Group and Healthcare Corporation and Affiliates for the year
ended December 31, 1994. 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 for the Companies reflect 22 percent of
total consolidated net patient revenue for the year ended December 31, 1994.
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 Renal Treatment
Centers, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information required to be included therein.
As discussed in Note 14, the accompanying financial statements as of and for the
year ended December 31, 1996 have been revised.
/S/COOPERS & LYBRAND L.L.P.
- ---------------------------
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
May 14, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Healthcare Corporation and Affiliates
Nashville, Tennessee
We have audited the combined statements of income, stockholder's equity and cash
flows for the year ended December 31, 1994 of Healthcare Corporation and
Affiliates (the "Company"). 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such combined financial statements (not presented separately
herein) present fairly, in all material respects, the results of the Company's
operations and its cash flows for the year 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, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 8,231,421 $ 1,445,798
Investments - 41,202,123
Accounts receivable, net of allowance for
doubtful accounts of $3,503,744 in 1995 and $7,853,350 in 1996 51,996,618 65,198,524
Inventories 2,869,019 4,388,290
Deferred taxes 819,835 2,149,718
Income tax receivable --- 3,782,890
Prepaid expenses and other current assets 1,396,893 2,749,497
- ---------------------------------------------------------------------------------------------------------------
Total current assets 65,313,786 120,916,840
- ---------------------------------------------------------------------------------------------------------------
Property and equipment (net of accumulated depreciation of $10,746,557 in 1995
and $19,691,015 in 1996) 21,442,421 39,578,245
Intangibles (net of accumulated amortization of $22,263,385 in 1995 and
$32,934,871 in 1996) 86,362,275 130,645,378
Deferred taxes, non-current 1,749,754 2,807,064
- ---------------------------------------------------------------------------------------------------------------
Total assets $174,868,236 $293,947,527
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,766,262 $ 12,369,365
Accounts payable 4,495,087 11,341,983
Accrued compensation 2,790,121 3,838,502
Accrued expenses 6,576,600 4,051,614
Accrued income taxes 2,218,692 ---
Accrued interest 1,087,415 3,638,874
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 21,934,177 35,240,338
- ---------------------------------------------------------------------------------------------------------------
Long-term debt, net 42,576,100 130,573,685
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 shares in 1995 and 24,430,256 shares in 1996 222,097 244,303
Additional paid-in capital 83,257,068 87,890,138
Retained earnings 27,272,870 40,393,139
- ---------------------------------------------------------------------------------------------------------------
110,752,035 128,527,580
Less treasury stock, 37,202 shares in 1995 and 1996, at cost (394,076) (394,076)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 110,357,959 128,133,504
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $174,868,236 $293,947,527
===============================================================================================================
</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, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net patient revenue $115,456,744 $164,568,392 $225,076,500
Patient care costs 57,095,740 79,451,490 114,803,209
- -------------------------------------------------------------------------------------------------------------
Operating profit 58,361,004 85,116,902 110,273,291
General and administrative expense 32,621,992 41,381,899 58,471,984
Provision for doubtful accounts 3,121,017 4,760,678 10,240,920
Depreciation and amortization expense 7,602,959 12,066,461 17,076,827
Merger expenses - 2,087,542 2,808,247
- -------------------------------------------------------------------------------------------------------------
Income from operations 15,015,036 24,820,322 21,675,313
Interest expense 1,203,617 2,713,599 6,364,556
Interest income (555,515) (156,150) (1,980,513)
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 14,366,934 22,262,873 17,291,270
Provision for income taxes 4,316,014 7,632,069 6,608,871
- -------------------------------------------------------------------------------------------------------------
Net income $ 10,050,920 $ 14,630,804 $ 10,682,399
=============================================================================================================
Basic earnings per share data:
Earnings per share $0.49 $0.67 $0.44
Weighted average common stock 20,412,982 21,868,067 24,030,156
Diluted earnings per share data:
Diluted earnings per share $0.48 $0.65 $0.43
Weighted average common stock
and dilutive securities 20,726,117 23,095,135 25,646,300
</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, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Additional
COMMON STOCK Paid-in Retained TREASURY STOCK
------------ --------------
Shares Amount Capital Earnings Shares Amount TotaL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 16,128,053 $161,281 $25,143,047 $ 5,563,576 - - $ 30,867,904
Issuance of common stock in
stock offering 4,789,000 47,890 51,053,601 51,101,491
Exercise of common stock options 356,760 3,568 312,230 315,798
Issuance of common stock in
connection with purchase of businesses 175,216 1,752 1,810,748 1,812,500
Acquisition of treasury stock (4,342) $ 47,219) (47,219)
Dividend distribution (1,473,100) (1,473,100)
Net income 10,050,920 10,050,920
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 21,449,029 214,491 78,319,626 14,141,396 (4,342) (47,219) 92,628,294
Exercise of common stock options 458,016 4,580 1,297,692 1,302,272
Issuance of common stock in connection
with purchase of businesses 252,122 2,521 3,117,226 3,119,747
Issuance of common stock to repay debt 50,522 505 522,524 523,029
Acquisition of treasury stock (32,860) (346,857) (346,857)
Dividend distribution (1,499,330) (1,499,330)
Net income 14,630,804 14,630,804
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 22,209,689 222,097 83,257,068 27,272,870 (37,202) (394,076) 110,357,959
Exercise of common stock options 263,531 2,636 3,071,113 3,073,749
Issuance of common stock in connection
with mergers 1,814,632 18,146 89,137 3,096,370 3,203,653
Issuance of common stock to repay debt 142,404 1,424 1,472,820 1,474,244
Dividend distribution (658,500) (658,500)
Net income 10,682,399 10,682,399
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 24,430,256 $244,303 $87,890,138 $40,393,139 (37,202) $(394,076) $128,133,504
===================================================================================================================================
</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, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 10,050,920 $ 14,630,804 $ 10,682,399
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,701,587 12,131,465 17,120,149
Deferred income taxes (497,251) (1,506,643) (1,924,546)
Provision for doubtful accounts 3,121,017 4,760,678 10,240,920
Gain on sale of equipment (2,974) - -
Equity in (earnings) losses from affiliate (96,312) (266,592) 15,910
Changes in operating assets and liabilities,
net of effects of companies acquired:
Accounts receivable (19,065,267) (19,444,635) (19,969,828)
Inventories (260,546) (117,157) (1,054,213)
Prepaid expenses and other current assets (506,876) 99,673 (1,167,162)
Accounts payable and accrued expenses 4,365,037 585,345 4,579,714
Accrued income taxes (475,071) 1,747,000 (6,001,582)
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,334,264 12,619,938 12,521,761
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (5,198,350) (7,899,143) (16,319,461)
Purchase of businesses, net of cash acquired (50,323,267) (11,646,992) (40,791,079)
Purchase of investments (38,500,000) - (55,311,044)
Sale of investments 38,588,696 2,661,944 14,108,921
Other (1,214,875) (1,904,962) (3,254,313)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (56,647,796) (18,789,153) (101,566,976)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt borrowings 18,045,175 19,621,000 30,500,000
Proceeds from issuance of 5 5/8% Convertible
Subordinated Notes due 2006 - - 121,250,000
Repayments of debt (14,032,771) (7,355,102) (70,760,938)
Proceeds from issuance of common stock 51,612,289 1,302,272 3,073,748
Payment of dividend distribution (1,473,295) (1,499,330) (658,500)
Increase in financing fees (282,609) - -
Payments on capital lease obligations (13,846) (450,985) (1,144,718)
Other 581,195 - -
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 54,436,138 11,617,855 82,259,592
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,122,606 5,448,640 (6,785,623)
Cash and cash equivalents at beginning of year 660,175 2,782,781 8,231,421
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,782,781 $ 8,231,421 $ 1,445,798
======================================================================================================
</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 services 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, 1994, 1995 and 1996, approximately 73%, 68% and
62%, 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:
In February 1996, the Company acquired, through two separate transactions,
Intercontinental Medical Services, Inc. ("IMS") and Midwest Dialysis Unit and
its affiliates (collectively "MDU"). Each of the transactions was separately
accounted for as a pooling-of-interests. The consolidated financial statements
of the Company include the results of IMS and MDU as of January 1, 1996. 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.
In July 1996, the Company acquired Panama City Artificial Kidney Center, Inc.
and North Florida Artificial Kidney Center, Inc. (collectively "the Group").
The transaction was accounted for as a pooling-of-interests. Accordingly, the
consolidated financial statements of the Company have been prepared to give
retroactive effect to the merger with the Group, since this transaction, when
combined with the MDU and IMS pooling transactions, was deemed to be a material
transaction.
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 prior year 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 salaries and benefits associated directly with patient care.
Inventories:
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market and consist of dialysis supplies and prescription
drugs, such as EPO.
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 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 the results of
operations.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Intangibles:
Goodwill:
Goodwill, the excess of aggregate purchase price over the fair value of the net
assets of businesses acquired, is amortized on a straight-line basis,
principally over 25 years.
Patient Lists:
Patient lists, arising from the purchase of renal dialysis centers, are stated
at cost and amortized over eight years using the straight-line method.
Non-Compete Agreements:
Non-compete agreements, arising from acquisitions, are stated at cost and
amortized over the terms of the agreements, on a straight-line basis, over
periods from three to 11 years.
Other Intangibles:
Other intangibles consist of debt issuance costs, inpatient dialysis service
agreements, deferred financing costs and organization costs and are stated at
cost and amortized over five to 11 years using the straight-line method.
Management evaluates intangible assets for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. This evaluation is based on certain financial indicators,
such as historical and future ability to generate income from operations.
Income Taxes:
The Company and its subsidiaries file a consolidated federal tax return and
separate company state tax returns. Income taxes are provided for 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 primarily from temporary differences
arising from a difference between the book life and the tax life of certain
assets. 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 HCC and the Wichita
Companies (which are later defined) and IMS, MDU and the Group prior to their
acquisition by the Company were payable personally by the stockholders of IMS,
MDU and the Group pursuant to S corporation elections under the Internal Revenue
Code.
Prepaid Expenses and Other Current Assets:
Prepaid expenses and other current assets consist primarily of prepaid
insurance, rent, various taxes and other current assets.
Accrued Expenses:
Accrued expenses consist principally of uninvoiced inventory, accrued insurance
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 a 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.
Investments:
Investments were comprised of investments in corporate bonds and 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 investments are stated at cost, which approximates fair
market value. All investments were managed by one financial institution.
Subsequent to December 31, 1996, all investments were liquidated, resulting in
an immaterial realized gain.
F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Earnings per Share:
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share" ("SFAS No. 128"). This statement establishes
standards for computing and presenting earnings per share. Basic earnings per
share is calculated using the average shares of common stock outstanding, while
diluted earnings per share reflects the potential dilution that could occur if
stock options and the earn out note were exercised. The Company adopted SFAS No.
128 in the fourth quarter of 1997. Prior period earnings per share amounts have
been restated in accordance with SFAS No. 128. For the year ended December 31,
1996, the Notes are not used in the calculation as the affect is antidilutive,
and as such, is not to be included in the diluted earnings per share
calculation.
3. BUSINESS ACQUISITIONS:
During the fiscal years 1996 and 1995, the Company completed the following five
mergers. There were no mergers in 1994.
Merger with the Group:
On July 23, 1996, the Company acquired the Group. The two dialysis facilities
acquired are located in Florida and serviced a total of approximately 185
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 of the outstanding
stock of the Group. The acquisition was structured as a merger of the Group
into a subsidiary of the Company.
Merger with MDU:
On February 29, 1996, the Company acquired MDU. The 11 dialysis facilities
acquired are located in Oklahoma and serviced approximately 317 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 767,168
shares of its common stock in exchange for all of the outstanding stock of MDU.
The acquisition was structured as a merger of MDU into a subsidiary of the
Company.
Merger with IMS:
On February 20, 1996, the Company acquired IMS. The four dialysis facilities
acquired are located in Hawaii and serviced a total of approximately 444
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 1,047,464 shares of its common stock in exchange for all of the
outstanding stock of IMS. The acquisition was structured as a merger of IMS
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.A., 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 of 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 13 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 of 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 consolidated financial statements include the operations
of IMS and MDU as of January 1, 1996. 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. Pooling
(Prior to Poolings) Companies* Combined
------------------- --------- --------
<S> <C> <C> <C>
For the year ended December 31,
1996
Net patient revenue $217,529 $ 7,548 $225,077
Income from operations 20,495 1,180 21,675
Net income 9,985 697 10,682
1995
Net patient revenue $150,467 $14,101 $164,568
Income from operations 23,319 1,501 24,820
Net income 13,239 1,392 14,631
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
</TABLE>
*Includes pooling transactions only for period prior to acquisition. Activity
subsequent to acquisition dates is included in Renal Treatment Centers, Inc.
(Prior to Poolings).
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. Goodwill, which is the excess of the purchase
price over the fair value of net assets, was approximately $76,058,555 and is
being amortized on a straight line basis over 25 years.
1996 Acquisitions:
During 1996, the Company acquired 10 dialysis centers, including several acute
care contracts, in New Jersey, Georgia, Pennsylvania, Alabama, Oklahoma and the
Republic of Argentina for approximately $40,791,000 in cash and the incurrence
and assumption of approximately $9,201,000 of liabilities. The acquisitions
included substantially all of the non-current assets and certain current assets
and the assumption of certain liabilities and capital leases of the centers.
1995 Acquisitions:
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 $3,642,776 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 and certain current assets and the
assumption of certain liabilities and capital leases of the centers.
1994 Acquisitions:
During 1994, the Company acquired 17 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 and 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.
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 1995 and 1996 as if they had
occurred on January 1, 1995:
<TABLE>
<CAPTION>
(Unaudited)
1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net patient revenue $192,497,000 $242,074,000
Income from operations 27,341,000 25,781,000
Net income 17,164,000 12,375,000
Net income per share $ 0.78 $ 0.51
</TABLE>
The pro forma results do not necessarily represent results that 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, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Furniture, fixtures and equipment $20,775,057 $37,340,616
Leasehold improvements 7,427,458 14,699,276
Capital leases 3,161,693 5,679,063
Building 724,704 1,450,239
Land 100,066 100,066
- --------------------------------------------------------------------------------
32,188,978 59,269,260
Less accumulated depreciation 10,746,557 19,691,015
- --------------------------------------------------------------------------------
$21,442,421 $39,578,245
================================================================================
</TABLE>
Capital leases primarily consist of dialysis equipment. Depreciation expense was
$2,152,110, $3,846,294 and $6,601,223 for the years ended December 31, 1994,
1995 and 1996, respectively.
5. INTANGIBLE ASSETS:
Intangible assets consist of goodwill and other identifiable intangibles. A
summary of intangible assets and related accumulated amortization as of December
31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 59,605,978 $ 92,416,850
Patient lists 33,572,193 45,354,310
Non-compete agreements 10,048,195 16,005,803
Other intangibles, principally debt issuance costs 5,399,294 9,803,286
- --------------------------------------------------------------------------------
108,625,660 163,580,249
- --------------------------------------------------------------------------------
Less accumulated amortization 22,263,385 32,934,871
- --------------------------------------------------------------------------------
$ 86,362,275 $130,645,378
================================================================================
</TABLE>
Intangible assets principally arose from acquisitions. Amortization expense was
$5,450,849, $8,220,167 and $10,475,604 for the years ended December 31, 1994,
1995 and 1996, respectively.
F-12
<PAGE>
6. DEBT:
<TABLE>
<CAPTION>
Debt as of December 31, 1995 and 1996 consists of: 1995 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Term loan payable in quarterly installments of $625,000 $ 3,750,000 $ -
Revolving credit/term facility payable in 16 equal quarterly
installments 33,675,000 -
Note, 6.5% payable to The Dialysis Centers Limited
Liability Company in four annual installments of
variable amounts commencing on June 1, 1995 6,627,690 5,154,870
Note, 5.5% payable to Columbus Regional Dialysis Center, Inc.
in one installment due January 1997 - 3,622,500
Note, 5.5% payable to Phenix City Nephrology Referral Center, Inc.
in one installment due January 1997 - 4,427,500
Term loans payable in monthly installments of $15,912 1,041,576 -
Convertible Subordinated Notes, 5 5/8%, due 2006 - 125,000,000
Other - 1,144,297
Capital lease obligations 2,291,418 3,593,883
Unamortized debt discount (43,322) -
- ------------------------------------------------------------------------------------------------
47,342,362 142,943,050
Less current portion (4,766,262) (12,369,365)
- ------------------------------------------------------------------------------------------------
$42,576,100 $130,573,685
================================================================================================
</TABLE>
The Company's Credit Agreement provides for a $100,000,000 revolving credit/term
facility available to fund acquisitions and general working capital
requirements, of which no amounts and $33,675,000 were outstanding as of
December 31, 1996 and December 31, 1995, respectively. Prior to the amendment of
the Credit Agreement on June 5, 1996, the Credit Agreement also provided for a
term loan payable in quarterly installments, of which $3,750,000 was outstanding
as of December 31, 1995. On June 5, 1996, the Credit Agreement was amended to
increase the amount available under the revolving credit facility 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. In
connection with this amendment, the $3,125,000 principal amount outstanding
under the term loan as of June 5, 1996 was repaid through borrowings under the
revolving credit facility. 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 bear interest, at the Company's
option, at either (i) the agent bank's base rate plus 0.25% if the Applicable
Margin is not less than 2.25 to 1, payable on a quarterly basis or (ii) a one-,
two-, three-, or six-month period LIBOR rate plus 0.75% to 1.75% depending upon
the Applicable Margin, payable at maturity. The weighted average interest rate
of all loans outstanding at December 31, 1995 was 7.4%.
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, 1995 and 1996, there were no letters of credit outstanding.
The loans are collateralized by all stock of the Company's subsidiaries and the
assignment of all intercompany notes. 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 in 1994, 1995 and 1996 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 1996, the Company issued $125,000,000 of 5 5/8% Convertible Subordinated
Notes due 2006 (the "Notes") . The Notes are convertible, at the option of the
holder, at any time after August 12, 1996 through maturity, unless previously
redeemed or repurchased, into Common Stock at a conversion price of $34.20
principal amount per share, subject to certain adjustments. The fair value of
the Notes was approximately $120,625,000 at December 31, 1996. At any time on or
after July 17, 1999, all or any part of the Notes will be redeemable at the
Company's option on at least 15 and not more than 60 days notice as a whole or,
from time to time, in part at redemption prices ranging from 103.94% to 100.00%
of the principal amount thereof, depending on the year of redemption, together
with accrued interest to, but excluding, the date fixed for redemption.
In June 1994, pursuant to a business acquisition, the Company entered into an
agreement to pay the Seller, The Dialysis Centers Limited Liability Company,
$7,364,100, payable 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 principal amount of 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
F-13
<PAGE>
6. DEBT (CONTINUED):
the stock during December, 1994 ($10.3425 per share, outstanding balance
convertible into 498,416 shares of common stock at December 31, 1996). The fair
value of the Company's 6.50% Note was approximately $12,709,608 at December 31,
1996.
The term loans are the result of four separate agreements (the "Group
Agreements") entered into by the Group 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.
In September 1996, pursuant to a business acquisition, the Company entered into
an agreement to pay the Sellers, Columbus Regional Dialysis Center, Inc. and
Phenix City Nephrology Referral Center, Inc., a total of $8,050,000 in one
installment on January 3, 1997. Interest on the principal amount of the note
accrues at an annual rate of 5.5% payable January 3, 1997.
Unless otherwise noted above, the carrying amount of long term debt approximates
its fair value.
Maturities of debt outstanding, excluding capital leases, as of December 31,
1996 for each of the next five years is as follows:
<TABLE>
<CAPTION>
Year
--------------------------
<S> <C>
1997 $11,403,527
1998 2,945,640
1999 -
2000 -
2001 -
</TABLE>
7. INCOME TAXES:
The provision for income taxes for the years ending December 31, 1994, 1995 and
1996 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $4,327,339 $ 8,330,951 $7,852,091
State and local 485,926 807,761 681,326
- --------------------------------------------------------------------------------
4,813,265 9,138,712 8,533,417
- --------------------------------------------------------------------------------
Deferred:
Federal (447,584) (1,372,961) (1,694,959)
State and local (49,667) (133,682) (229,587)
- --------------------------------------------------------------------------------
(497,251) (1,506,643) (1,924,546)
- --------------------------------------------------------------------------------
$4,316,014 $ 7,632,069 $ 6,608,871
================================================================================
</TABLE>
The tax effects of temporary differences which comprise the net deferred tax
asset are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
---- ----
<S> <C> <C>
Deferred tax debits:
Allowance for doubtful accounts $ 780,978 $ 2,136,098
Intangibles, principally patient lists 2,926,430 5,241,100
Property and equipment 178,417 -
Other 38,857 13,620
- --------------------------------------------------------------------------------
3,924,682 7,390,818
- --------------------------------------------------------------------------------
Deferred tax credits:
Property and equipment - (164,806)
Goodwill (1,355,093) (2,269,230)
- --------------------------------------------------------------------------------
(1,355,093) (2,434,036)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 2,569,589 $ 4,956,782
================================================================================
</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, 1994,
1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal income tax rate 34.2% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 2.4% 2.4% 2.5%
Non-tax effected items,
principally intangibles 0.8% 1.8% 1.7%
Federal and state income tax
benefit from S corporation status of HCC,
the Wichita Companies and the Group (6.4%) (3.5%) (0.9%)
Other (1.0%) (1.4%) (0.1%)
- -----------------------------------------------------------------------------
Effective income tax rate 30.0% 34.3% 38.2%
=============================================================================
</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
$388,497, $462,004, and $548,471 for the years ended December 31, 1994, 1995
and 1996, 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. The Company applies APB Opinion No.
25 and related Interpretations in accounting for its stock plan. FASB Statement
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the
FASB in 1995 and, if fully adopted by the Company, changes the method for
recognition of cost on stock plans. Although the Company has elected not to
adopt the cost recognition requirements under SFAS 123, pro-forma disclosures as
if the Company had adopted the requirements beginning in 1995 are presented
below:
<TABLE>
<CAPTION>
1995 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Net earnings - as reported $14,630,804 $10,682,399
Net earnings - pro-forma 14,165,049 8,350,485
Earnings per share - as reported 0.67 0.44
Earnings per share - pro-forma $ 0.65 $ 0.34
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for options granted in 1995 and 1996: expected volatility of 29.3%
regardless of varying expected terms; no dividend payments are made for the
expected terms; expected term of 3 years for options that vest over time and 3
years for options which vest immediately; risk-free interest rate on the date of
grant with the maturity equal to the expected term; exercise price equal to the
fair market value on grant date.
Incentive stock options may be granted at an exercise price not less than the
fair market value of the Company's common stock on the date of grant. 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 on the date of grant. 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 1995 and 1996, the stock plan was amended to increase the number of shares
available for grant to 2,437,000 and 3,237,000 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 the date of grant.
In February 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 equal to the fair market value of the Company's common stock on
the date of grant. These options vest over the next two years.
In May 1995, the Company granted 419,144 incentive stock options to certain
directors, officers and employees of the Company. These options were granted at
an exercise price equal to the fair market value of the Company's common stock
on the date of the grant. These options vest over the next three years.
Certain options totalling 305,000 vest upon the earlier of attainment of
predetermined earnings per share targets or nine years.
F-15
<PAGE>
8. BENEFIT AND COMPENSATION PLANS (CONTINUED):
In March 1996, the Company granted 615,332 incentive stock options to certain
directors, officers and employees of the Company. These options were granted at
an exercise price equal to the fair market value of the Company's common stock
on the date of the grant. These options vest over the next four years. Certain
options aggregating 173,332 vest upon the earlier of attainment of predetermined
earnings per share targets or ten years.
In December 1996, the Company granted 100,000 incentive stock options to an
officer of the Company. These options were granted at an exercise price equal
to the fair market value of the Company's common stock on the date of the grant.
The options are fully vested.
Also in December 1996, the Company granted 30,000 non-qualified stock options in
connection with the release of the Company from certain obligations. The
options were granted at an exercise price equal to the fair market value of the
Company's common stock on the date of grant. The options are fully vested, with
the exceptions of options for 10,000 shares, which vest no later than January
1998.
Approximately $50,000 per year was recorded as compensation expense during 1994
and 1995, 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, 1996, which were issued to certain
officers and employees of the Company, become fully vested upon certain sales of
assets, mergers and consolidations involving the Company, as set forth in the
respective employee and stock option agreements. The remaining options
outstanding at December 31, 1996, 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.
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, 1994 1,281,930 $0.055-$11.25
- ------------------------------------------------------------------------------
Granted 413,144 $11.50-$16.75
Exercised (448,676) $ 0.005-$11.25
Forfeited 4,000 $11.25
Outstanding at December 31, 1995 1,242,398 $ 5.25-$11.50
- ------------------------------------------------------------------------------
Granted 747,098 $21.81-$26.25
Exercised (263,531) $ 5.25-$21.81
Forfeited 8,000 $11.25-$12.44
Outstanding at December 31, 1996 1,717,965 $ 5.25-$26.25
- ------------------------------------------------------------------------------
Exercisable at December 31, 1996 724,272
==============================================================================
</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.
F-16
<PAGE>
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 as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Third-party Operating Leases
Capital Operating with Medical
Leases Leases Directors
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $1,221,616 $ 6,108,929 $ 1,637,146
1998 1,535,510 5,774,992 1,649,447
1999 1,139,521 5,704,805 1,477,600
2000 171,236 5,328,609 1,469,543
2001 and thereafter - 29,460,511 5,771,086
- ------------------------------------------------------------------------------------------------------------------
Total minimum lease payments $4,067,883 $52,377,846 $12,004,822
- ---------------------------------------------------------------- ===============================================
Less amount representing interest 474,001
Present value of net minimum payments under
capital leases $3,593,883
Less current portion 965,838
- ----------------------------------------------------------------
$2,628,045
================================================================
</TABLE>
Rent expense paid to third parties under operating leases was $3,270,066,
$4,921,026 and $5,497,285 for the years ended December 31, 1994, 1995 and
1996, respectively. Rent expense paid to medical directors under facility
operating leases was $832,454, $1,030,208 and $1,350,253 for the years ended
December 31, 1994, 1995 and 1996 respectively.
11. COMMITMENTS AND CONTINGENCIES:
The Company has entered into long-term compensation agreements with the medical
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 total annual compensation as follows:
<TABLE>
<CAPTION>
Physician Director
Year Compensation
- --------------------------------------------------------------------------------
<S> <C>
1996 $ 7,615,205
1997 8,349,101
1998 8,004,982
1999 6,818,381
2000 and thereafter 28,459,671
- --------------------------------------------------------------------------------
Total minimum payments $59,247,340
================================================================================
</TABLE>
The Company has employment agreements with seven officers. These agreements
provide for total annual compensation of $1,265,000 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.
F-17
<PAGE>
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosure of cash flow information for the years ended December
31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Cash paid for:
Interest $1,090,192 $2,177,255 $ 3,609,972
========================================================================================================================
Income taxes $4,857,551 $5,680,430 $17,198,434
========================================================================================================================
Non-cash investing and financing activities:
Capital lease obligations entered into $ 542,032 $2,081,699 $ 2,553,368
========================================================================================================================
Issuance of common stock in connection with purchase
of business $1,812,500 $3,119,747 $ -
========================================================================================================================
Earnout note issued in connection with purchase
of business $7,364,100 $ - $ -
========================================================================================================================
Acquisition of treasury stock in connection with
payroll taxes resulting from exercise of stock
options $ 47,219 $ 346,857 $ -
========================================================================================================================
Liabilities assumed in connection with purchases
of businesses $1,200,000 $ 118,000 -
========================================================================================================================
Issuance of common stock in connection with
earn out note - $ 523,029 $ 1,474,244
========================================================================================================================
Issuance of short term notes in connection
with purchases of businesses $ - $ - $ 9,194,297
========================================================================================================================
Issuance of common stock in connection
with the IMS and MDU mergers $ - $ - $ 3,203,653
========================================================================================================================
Financing fees incurred in the Notes offering $ - $ - $ 3,750,000
========================================================================================================================
</TABLE>
13. EARNINGS PER SHARE
Earnings per share have been restated in accordance with SFAS No. 128. This
restatement resulted in no material change from amounts previously reported.
Earnings per share are computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
<S> <C> <C> <C>
Basic earnings
per share:
Net income
available for
common stock.. $10,050,920 $14,630,804 $10,682,399
=========== =========== ===========
Average common
stock out-
standing...... 20,412,982 21,868,067 24,230,156
=========== =========== ===========
Basic earnings
per share..... $ 0.49 $ 0.67 $ 0.44
=========== =========== ===========
Diluted earnings
per share:
Net income..... 10,050,920 14,630,804 10,682,399
Add back inter-
est on earnout
note, tax ef-
fected........ -- 283,136 232,573
----------- ----------- -----------
Net income
available for
Common Stock
and dilutive
securities.... $10,050,920 $14,913,940 $10,914,972
=========== =========== ===========
Average Common
Stock outstand-
ing............. 20,412,982 21,868,067 24,230,156
Additional common
shares resulting
from dilutive
securities:
Stock options.. 313,135 544,666 837,744
Earnout note... 682,402 578,400
----------- ----------- -----------
Average Common
Stock and
dilutive securi-
ties outstand-
ing............. 20,726,117 23,095,135 25,646,300
=========== =========== ===========
Diluted earnings
per share....... $ 0.48 $ 0.65 $ 0.43
=========== ========== ===========
</TABLE>
14. FINANCIAL STATEMENT REVISIONS:
Certain adjustments have been made to the 1996 financial statements to correct
previously reported amounts.
The balance sheet at December 31, 1996 had previously included, at full value,
approximately $14 million of uncollectible accounts receivable for which no
provision or contractual allowance was established. Previously issued financial
statements for 1996 have been restated to reflect the above matters, as follows
(dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
Restated Previously
Amount Presented
------ ---------
<S> <C> <C>
1996:
Accounts receivable, net $ 65,199 $ 79,138
Total current assets 120,917 129,689
Total assets 293,948 302,720
Total stockholders' equity 128,134 136,741
Total liabilities and stockholders' equity 293,948 302,720
Net patient revenue 225,077 235,397
Net income 10,682 19,290
Primary net income per common share $ 0.43 $ 0.77
Fully diluted net income per common
and common stock equivalent $ 0.43 $ 0.76
Basic earnings per share $ 0.44 $ --
Diluted earnings per share $ 0.43 $ --
</TABLE>
15. Subsequent Event:
On February 26, 1998, the Company's stockholders approved the merger with
Total Renal Care Holdings, Inc. ("TRCH") which became effective on February 27,
1998 (the "Merger"). The Merger is expected to be accounted for as a
pooling-of-interests. In connection with the Merger, each of the Company's
stockholders will receive 1.335 shares of TRCH common stock.
The Merger constituted a "change in control" and resulted in certain
executives terminating their employment for good reason. In connection with the
Merger, these certain executives received severance payments and their 1997
bonuses totaling approximately $2,000,000. Merger bonuses of approximately
$4,600,000; and $8,850,000 for covenants not to compete. In addition, 978,081 of
previously issued stock options to employees, which had an automatic change in
control provision in the option grant, became fully vested on February 27,
1998.
F-18
<PAGE>
Renal Treatment Centers, Inc. and Subsidiaries
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT ADDITIONS
BEGINNING CHARGED TO COSTS BALANCE AT
DESCRIPTION OF YEAR AND EXPENSES DEDUCTIONS END OF YEAR
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
(1)
Allowance for doubtful receivables $3,503,744 $10,240,920 $5,891,314 $7,853,350
- -------------------------------------------------------------------------------------------------------------------------
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 receivables $1,123,211 $ 3,121,017 $1,937,672 $2,306,556
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts represent writeoffs of uncollectible receivables, net of
recoveries.
F-19
<PAGE>
EXHIBIT INDEX
Exhibits Description
- -------- -----------
3.1 Restated Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit No. 3.1 filed under the Company's
Amendment No. 1 to Quarterly Report on Form 10-Q/A for the quarter
ended March 31, 1996).
3.1.1 Certificate of Amendment dated February 29, 1996 to Restated
Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit No. 3.1.1 filed under the Company's Amendment
No. 1 to Quarterly Report on Form 10-Q/A for the quarter ended
March 31, 1996).
3.2 By-Laws of the Company and Amendment to By-Laws adopted February 9,
1993 (incorporated herein by reference to Exhibit No. 3.2 filed
under the Company's Form S-1 Registration Statement No. 33-59850).
4.1 Specimen Certificate of Common Stock of the Company (incorporated
herein by reference to Exhibit No. 4.1 filed under the Company's
Annual Report on Form 10-K for the year ended December 31, 1995).
4.2 Indenture dated June 12, 1996 by the Company to PNC Bank, National
Association, Trustee, including form of the Company's 5 5/8%
Convertible Subordinated Notes due 2006 issued under the Indenture
(incorporated herein by reference to Exhibit No. 4.2 filed under
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996).
4.3 Registration Rights Agreement dated as of June 12, 1996 by and
among the Company, Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, UBS Securities LLC, J.C. Bradford &
Co. and Wessels, Arnold & Henderson (incorporated herein by
reference to Exhibit No. 4.3 filed under the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
10.1* Renal Treatment Centers, Inc. Amended and Restated 1990 Stock
Plan.+
10.1.1* Form of Stock Option Agreement under the Company's Amended and
Restated 1990 Stock Plan (incorporated herein by reference to
Exhibit No. 10.1.3 filed under the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.2* Renal Treatment Centers, Inc. Equity Incentive Plan for Outside
Directors (incorporated herein by reference to Exhibit No. 10.2
filed under the Company's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.2.1* Form of Stock Option Agreement under the Company's Equity Incentive
Plan for Outside Directors (incorporated herein by reference to
Exhibit No. 10.2.1 filed under the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.2.2* Amendment No. 1 to the Company's Equity Incentive Plan for Outside
Directors dated May 2, 1996 (incorporated herein by reference to
Exhibit No. 10.2.2 filed under the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
10.3* Employment Agreement dated as of March 2, 1995 between the Company
and Robert L. Mayer, Jr. (incorporated herein by reference to
Exhibit No. 10.3 filed under the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).
10.3.1* First Amendment to Employment Agreement dated as of May 2, 1996
between the Company and Robert L. Mayer, Jr. (incorporated herein
by reference to Exhibit No. 10.3.1 filed under the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.4* Employment Agreement dated as of March 2, 1995 between the Company
and Frederick C. Jansen (incorporated herein by reference to
Exhibit No. 10.4 filed under the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995).
10.4.1* First Amendment to Employment Agreement dated as of May 2, 1996
between the Company and Frederick C. Jansen (incorporated herein by
reference to Exhibit No. 10.4.1 filed under the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
10.5* Employment Agreement dated as of May 2, 1996 between the Company
and Barbara A. Bednar (incorporated herein by reference to Exhibit
No. 10.5 filed under the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996).
10.6* Employment Agreement dated as of August 30, 1993 between the
Company and John Chambers (incorporated herein by reference to
Exhibit No. 10.6 filed under the Company's Form S-1 Registration
Statement No. 33-74994).
10.6.1* First Amendment to Employment Agreement dated as of May 2, 1996
between the Company and John A. Chambers (incorporated herein by
reference to Exhibit No. 10.6.1 filed under the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
10.7* Resignation Agreement and Release dated January 13, 1995 by and
between the Company and Michael C. Duke (incorporated herein by
reference to Exhibit No. 10.7 filed under the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
<PAGE>
10.8* Executive Severance Agreement dated as of May 1,1995 between the
Company and Barbara A. Bednar (incorporated herein by reference to
Exhibit No. 10.8 filed under the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.8.1* First Amendment to Executive Severance Agreement dated as of May 2,
1996 between the Company and Barbara A. Bednar (incorporated herein
by reference to Exhibit No. 10.8.1 filed under the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.9* Executive Severance Agreement dated as of May 1, 1995 between the
Company and Ronald H. Rodgers, Jr. (incorporated herein by
reference to Exhibit No. 10.9 filed under the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
10.9.1* First Amendment to Executive Severance Agreement dated as of May 2,
1996 between the Company and Ronald H. Rodgers, Jr. (incorporated
herein by reference to Exhibit No. 10.9.1 filed under the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.10* Executive Severance Agreement dated as of May 1, 1995 between the
Company and John A. Chambers (incorporated herein by reference to
Exhibit No. 10.10 filed under the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
10.10.1* First Amendment to Executive Severance Agreement dated as of May 2,
1996 between the Company and John A. Chambers (incorporated herein
by reference to Exhibit No. 10.10.1 filed under the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.11 Fourth Amended and Restated Loan Agreement dated as of June 5, 1996
between the Company and First Union National Bank of North Carolina
and the other lenders set forth therein (incorporated herein by
reference to Exhibit No. 99.1 filed under the Company's Current
Report on Form 8-K dated May 29, 1996).
10.12 Lease Agreement dated November 8, 1991 between the Company and
Terramics/Southpoint Associates II Limited Partnership
(incorporated herein by reference to Exhibit No. 10.32 filed under
the Company's Form S-1 Registration Statement No. 33-59850).
10.12.1 First Amendment to Lease Agreement dated January 18, 1993
(incorporated herein by reference to Exhibit No. 10.32 filed under
the Company's Form S-1 Registration Statement No. 33-59850).
10.12.2 Second Amendment to Lease dated September 30, 1993 (incorporated
herein by reference to Exhibit No. 10.36 filed under the Company's
Form S-1 Registration Statement No. 33-74994).
10.12.3 Confirmation of Lease Term dated November 1, 1993 (incorporated
herein by reference to Exhibit No. 10.36 filed under the Company's
Form S-1 Registration Statement No. 33-74994).
10.12.4 Third Amendment to Lease dated March 2, 1995 (incorporated herein
by reference to Exhibit No. 10.12.4 filed under the Company's
Annual Report on Form 10-K for the year ended December 31, 1995).
10.12.5 Fourth Amendment to Lease dated May 30, 1996 (incorporated herein
by reference to Exhibit No. 10.12.5 filed under the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.13 Earnout Note dated June 1, 1994 by and between Renal Treatment
Centers- Colorado, Inc., Renal Treatment Centers - Nebraska, Inc.,
Renal Treatment Centers - Wyoming, Inc. and The Dialysis Centers
Limited Liability Company (incorporated herein by reference to
Exhibit No. 2 filed under the Company's Form 8-K Current Report
dated June 15, 1994).
10.14 Agreement and Plan of Merger dated as of July 25, 1995 among the
Company, Renal Treatment Centers -Kansas, Inc. and the individuals
and their affiliated companies set forth therein (incorporated
herein by reference to Exhibit No. 2.1 filed under the Company's
Form 8-K Current Report dated August 1, 1995).
10.15 Agreement and Plan of Merger dated as of January 11, 1996 among the
Company, Renal Treatment Centers - Hawaii, Inc., Intercontinental
Medical Services, Inc. and Dudley S.J. Seto, M.D. (incorporated
herein by reference to Exhibit No. 2.1 filed under the Company's
Current Report on Form 8-K dated February 20, 1996).
10.16* Employment Agreement dated as of May 2, 1996 between the Company
and Ronald H. Rodgers, Jr. (incorporated herein by reference to
Exhibit No. 10.25 filed under the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
10.17* Employment Agreement dated as of March 11, 1996 between the Company
and Thomas J. Karl (incorporated herein by reference to Exhibit No.
10.26 filed under the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996).
10.18* Executive Severance Agreement dated as of March 11, 1996 between
the Company and Thomas J. Karl (incorporated herein by reference to
Exhibit No. 10.27 filed under the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
10.19 Asset Purchase Agreement dated as of May 29, 1996 between Renal
Treatment Centers - Pennsylvania, Inc. and KCCC Liquidating Trust
(incorporated herein by reference to Exhibit No. 2.1 filed under
the Company's Current Report on Form 8-K dated May 29, 1996).
<PAGE>
10.20 Asset Purchase Agreement dated as of May 29, 1996 between Renal
Treatment Centers - Pennsylvania, Inc. and KCDC Liquidating Trust
(incorporated herein by reference to Exhibit No. 2.2 filed under the
Company's Current Report on Form 8-K dated May 29, 1996).
10.21* Employment Agreement dated as of March 1, 1996 between the Company and
Mark A. Zawiski (incorporated herein by reference to Exhibit No. 10.30
filed under the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996).
10.22* Executive Severance Agreement dated as of March 1, 1996 between the
Company and Mark A. Zawiski (incorporated herein by reference to
Exhibit No. 10.31 filed under the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996).
10.23 Asset Purchase Agreement dated as of September 7, 1996 between Renal
Treatment Centers - Georgia, Inc. and Columbus Regional Dialysis
Center, Inc. (incorporated herein by reference to Exhibit No. 2.1
filed under the Company's Current Report on Form 8-K dated September
16, 1996).
10.24 Asset Purchase Agreement dated as of September 7, 1996 between Renal
Treatment Centers - Alabama, Inc. and Phenix City Nephrology Referral
Center, Inc. (incorporated herein by reference to Exhibit No. 2.2
filed under the Company's Current Report on Form 8-K dated September
16, 1996).
21.1 Subsidiaries of the Company.+
27.1 Amended Financial Data Schedule.X
_______________
* Management Contracts and Compensatory Plans or Arrangements
+ Previously filed under the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
X Included in this filing.
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