-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KBzEqWQDpVS+sTxk8s2zNI3qWYW1g6patQRfob6TbfcJZT15ybog1Pr2SNcir0VE ahXUd8xD4gWQh585dUV69A== 0000950109-96-005510.txt : 19960827 0000950109-96-005510.hdr.sgml : 19960827 ACCESSION NUMBER: 0000950109-96-005510 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960823 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960826 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RENAL TREATMENT CENTERS INC /DE/ CENTRAL INDEX KEY: 0000899169 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 232518331 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14142 FILM NUMBER: 96620220 BUSINESS ADDRESS: STREET 1: 1180 WEST SWEDESFORD RD STREET 2: BLDG 2, STE 300 CITY: BERWYN STATE: PA ZIP: 19312 BUSINESS PHONE: 2156444796 MAIL ADDRESS: STREET 1: 1180 WEST SWEDESFORD ROAD BLDG 2 STREET 2: SUITE 300 CITY: BERWYN STATE: PA ZIP: 19312 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 August 23, 1996 ---------------------------------------------------------- Date of Report (Date of earliest event reported) Renal Treatment Centers, Inc. -------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 1-14142 23-2518331 - ---------------------------- ------------- -------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification Number) 1180 W. Swedesford Road, Building 2, Suite 300, Berwyn, PA 19312 - -------------------------------------------------------------------------------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: 610-644-4796 ------------ ITEM 5. OTHER EVENTS On July 23, 1996, Renal Treatment Centers, Inc. (the "Company") consummated its acquisition of two dialysis centers from Panama City Artificial Kidney Center, Inc. and North Florida Artificial Kidney Center, Inc. (collectively the "Group"). Both of the dialysis centers are located in Florida. The acquisition was structured as a merger of the acquired companies with and into a wholly- owned subsidiary of the Company. For accounting purposes, the acquisition of the Group has been treated as a pooling-of-interests. Accordingly, the accompanying supplemental consolidated selected financial data, management's discussion and analysis and supplemental consolidated financial statements and financial statement schedule as of December 31, 1993, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 have been restated to give retroactive effect to the merger with the Group and include the combined operations of the Company and the Group for all periods presented. -2- Renal Treatment Centers, Inc. and Subsidiaries Selected Supplemental Consolidated Financial Data The selected supplemental consolidated financial data presented below as of December 31, 1994 and 1995, and for the years ended December 31, 1993, 1994 and 1995, have been derived from the Company's audited supplemental consolidated financial statements and should be read in conjunction with such audited supplemental consolidated financial statements and notes thereto, which are included herein. The selected supplemental consolidated financial data presented below as of December 31, 1991, 1992 and 1993, and for the years ended December 31, 1991 and 1992 have been derived from the Company's audited consolidated financial statements not included herein.
Year Ended December 31, ----------------------- 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- (dollars in thousands, except for per share data) Statement of Income Data: Net patient revenue $36,651 $54,041 $73,043 $115,457 $164,568 Operating costs and expenses: Patient care costs 15,233 27,854 37,172 57,096 79,451 General and administrative 14,574 17,050 22,307 35,743 46,143 Depreciation and amortization 2,488 3,123 4,145 7,603 12,066 Merger expenses 0 0 0 0 2,088 Income from operations 4,356 6,014 9,419 15,015 24,820 Interest, net 1,796 1,433 1,536 648 2,557 Income before income taxes 2,560 4,581 7,883 14,367 22,263 Provision for income taxes 542 1,052 2,102 4,316 7,632 Net income $2,018 $3,529 $5,781 $10,051 $14,631 Pro forma net income per common and common stock equivalent (1) $0.36 Pro forma weighted average shares used in computing net income per common and common stock equivalents (1) 16,063,639 Primary net income per common and common stock equivalent $0.47 $0.65 Weighted average common and common stock equivalents outstanding 21,161,243 22,412,733 (dollars in thousands) Balance Sheet Data: Working capital $2,844 $3,960 $13,709 $27,947 $43,380 Intangible assets, net 1,043 16,892 28,934 79,238 86,341 Total assets 32,348 37,035 60,007 140,523 174,868 Total long-term debt, excluding current portion 13,639 12,389 18,070 28,744 42,576 Total liabilities 23,334 25,028 29,349 47,894 64,510 Cumulative redeemable preferred stock 8,545 9,528 0 0 0 Total stockholders' equity $469 $2,478 $30,658 $92,628 $110,358 Other Data: Ratio of earnings to fixed charges (2) 1.82x 2.16x 4.19x 6.59x 5.74x
(1) Pro forma net income is computed by adjusting net income to reflect the reduction in interest expense (net of tax effect) related to the payment of certain indebtedness with initial public offering proceeds. Pro forma net income per common share is computed based upon the weighted average number of shares of common stock and common stock equivalents and including the number of shares of common stock issued upon the conversion of preferred stock and exercise of common stock warrants, and 3,700,000 shares issued in connection with the Company's initial public offering as if such shares were issued or converted as of January 1, 1993. The proceeds from the issuance of 3,700,000 shares were utilized to redeem Series A preferred stock, pay Series B preferred stock dividends, and to pay down certain indebtedness. (2) The ratios of earnings to fixed charges were calculated by dividing the sum of income before taxes and fixed charges by fixed charges. Fixed charges consist of interest expense, amortization of deferred debt issuance costs and the portion of rent expense deemed to be representative of an interest factor. Fixed charges for the years ended December 31, 1991 and 1992 also include the amount of pre-tax earnings required to cover preferred stock dividends. -3- Renal Treatment Centers, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations General The Group. On July 23, 1996, Renal Treatment Centers, Inc. (the "Company") consummated its acquisition of two dialysis centers from Panama City Artificial Kidney Center, Inc. and North Florida Artificial Kidney Center, Inc. (collectively "the Group"). Both of the dialysis centers are located in Florida. The acquisition was structured as a merger of the acquired companies with and into a wholly- owned subsidiary of the Company. For accounting purposes, the acquisition of the Group has been treated as a pooling-of-interests. Accordingly, the accompanying supplemental consolidated financial statements, management's discussion and analysis, selected supplemental consolidated financial and operating data and supplemental consolidated quarterly data included in this discussion and analysis give retroactive effect to the merger with the Group and include the combined operations of the Company and the Group for all periods presented. The Wichita Companies. On July 25, 1995, with an effective date of August 1, 1995, the Company completed the merger of Wichita Dialysis Center, P.A., Southeast Kansas Dialysis Center, P.A., Garden City Dialysis Center, P.A. and Wichita Dialysis Center, East, P.A. (collectively "the Wichita Companies") with and into a wholly-owned subsidiary of the Company. The Wichita Companies operated four dialysis facilities in Kansas and owned a 50% interest in another dialysis facility in Kansas. For accounting purposes, the acquisition was treated as a pooling-of- interests. Accordingly, the accompanying supplemental consolidated financial statements, selected supplemental consolidated financial data and supplemental consolidated quarterly data included in this discussion and analysis give retroactive effect to the merger and include the combined operations of the Company and the Wichita Companies for all periods presented. HCC Merger. On March 6, 1995, the Company completed a series of merger transactions with Healthcare Corporation and its affiliates (collectively "HCC"). At the time of the mergers, HCC operated 13 dialysis facilities located in four states and the District of Columbia. For accounting purposes, the acquisition was treated as a pooling-of-interests. Accordingly, the accompanying supplemental consolidated financial statements, selected supplemental consolidated financial data and supplemental consolidated quarterly data included in this discussion and analysis give retroactive effect to the merger and include the combined operations of the Company and HCC for all periods presented. Net Patient Revenue. Net patient revenue is derived from two sources: (1) in-center dialysis and home dialysis services and supplies and (2) dialysis services provided to hospitalized patients pursuant to agreements with hospitals. The Company's in- center and home dialysis services are primarily paid for under the Medicare End Stage Renal Disease ("ESRD") program in accordance with rates established by the Healthcare Financing Administration ("HCFA"). Additional payments are provided by other third party payors, particularly during the first 18 months of treatment, generally at higher rates than the rates reimbursed by Medicare. Rates paid for services provided to hospitalized patients are negotiated with individual hospitals and are generally higher than the rates reimbursed by Medicare. Because dialysis is an ongoing, life-sustaining therapy used to treat a chronic condition, utilization of the Company's services is generally predictable. For the year ended December 31, 1995, each of the Company's chronic dialysis patients received an average of approximately 156 non- discretionary treatments. Average net revenue per treatment for the Company's in-center and home patients was approximately $204.16 for the year ended December 31, 1995, including ancillary items such as Erythropoietin ("EPO") and other drugs, as compared to $191.02 for the year ended December 31, 1994, an increase of 6.9%. For the year ended December 31, 1995, the Company's average net revenue per treatment for all patients, including patients treated pursuant to acute care agreements with hospitals, was approximately $206.69, as compared to $194.15 for the year ended December 31, 1994, an increase of 6.5%. Unless the patient moves to another dialysis facility, receives a kidney transplant or dies, the revenue generated per patient per year can be estimated with reasonable accuracy. Medicare and Medicaid Reimbursement. The Company derived approximately 73.0%, 73.0% and 69.0% of its net patient revenue from the Medicare and Medicaid programs in 1993, 1994 and 1995, respectively. The Company anticipates that it will continue to be substantially dependent upon revenue derived from Medicare. The reimbursement rate for ESRD services and ancillary items such as EPO are subject to change from time to time, and the Company's operations are subject to substantial governmental regulation. -4- Results of Operations The following table sets forth, for the periods indicated, selected financial information expressed as a percentage of net patient revenue and the period-to- period percentage changes in such information.
Percentage of Period-to-Period Net Patient Revenue Percentage Change ----------------- Year ended December 31, Year ended December 31, ----------------------- ----------------------- 1993 1994 1995 1994 v 1993 1995 v 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Net patient revenue 100.0% 100.0% 100.0% 58.1% 42.5% Patient care costs 50.9% 49.5% 48.3% 53.6% 39.2% General and administrative expense 28.4% 28.3% 25.1% 57.2% 26.9% Provision for doubtful accounts 2.1% 2.7% 2.9% 101.3% 52.5% Depreciation and amortization expense 5.7% 6.6% 7.3% 83.4% 58.7% Merger expenses - - 1.3% - - Income from operations 12.9% 13.0% 15.1% 59.4% 65.3% Interest expense, net 2.1% .6% 1.6% (57.8)% 294.6% Provision for income taxes 2.9% 3.7% 4.6% 105.3% 76.8% Net income 7.9% 8.7% 8.9% 73.9% 45.6%
Year ended December 31, 1995 Compared to Year Ended December 31, 1994 Net Patient Revenue. Net patient revenue for the year ended December 31, 1995 was $164,568,392 as compared to $115,456,744 for the same period in 1994, representing an increase of 42.5%. Of this increase, $6,178,946, or 12.6%, was attributable to the revenue generated from the operations of eight centers and certain acute care agreements acquired in three separate purchase transactions from March through December 1995; and $25,442,934, or 51.8%, was attributable to the revenue generated from the operations of various centers and acute care agreements acquired in six separate purchase transactions from June 1994 through December 1994. Of the approximately $17,490,000 remaining, approximately $13,016,000 was attributable to an increase in same-center treatments and approximately $4,474,000 was attributable to an increase in the average same-center revenue per treatment, which, in turn, was due to an increase in the administration of EPO and other ancillary revenue items and an improvement in the Company's payor mix. Patient Care Costs. Patient care costs increased 39.2% to $79,451,490 for the year ended December 31, 1995 from $57,095,740 for the same period in 1994. This increase was primarily attributable to the various centers acquired from June 1994 through October 1995. However, as a percentage of net patient revenue, patient care costs decreased to 48.3% for the year ended December 31, 1995 from 49.5% for the same period in 1994. This decrease was primarily related to the increase in net revenue per treatment while costs remained relatively constant on a per treatment basis. General and Administrative Expense. General and administrative expense for the year ended December 31, 1995 increased 26.9% to $41,381,899 from $32,621,992 for the same period in 1994. This increase was due to the acquisitions completed from June 1994 through October 1995. General and administrative expense as a percentage of net patient revenue decreased to 25.1% for the year ended December 31, 1995 as compared to 28.3% for the same period in 1994. This decrease was primarily due to the Company's ability to maintain certain costs by improved utilization of the Company's corporate office to support acquired facilities. In addition, this decrease was attributable to the increase in net revenue per treatment in 1995. Provision for Doubtful Accounts. Provision for doubtful accounts increased $1,639,661, or 52.5%, to $4,760,678 for the year ended December 31, 1995 from $3,121,017 for the same period in 1994. This increase was principally a result of the additional net patient revenue generated from acquisitions that occurred in 1995. As a percentage of net patient revenue, the provision for doubtful accounts increased to 2.9% for the year ended December 31, 1995 from 2.7% for the same period in 1994. Depreciation and Amortization Expense. Depreciation and amortization expense increased 58.7% to $12,066,461 for the year ended December 31, 1995 from $7,602,959 for the same period in 1994. As a percentage of net patient revenue, depreciation and amortization expense increased to 7.3% for the year ended December 31, 1995 from 6.6% for the same period in 1994. The increases were due to the acquisitions noted from June 1994 through December 1995 and $7.9 million of capital expenditures completed during 1995. -5- Merger Expenses. Merger expenses represent expenses incurred in connection with the mergers with (i) HCC and (ii) the Wichita Companies which were completed on March 6, 1995 and August 1, 1995, respectively, and were accounted for under the pooling-of- interests method of accounting. These expenses included investment banking, legal, accounting and other fees and expenses. Income from Operations. Income from operations increased 65.3% to $24,820,322 for the year ended December 31, 1995 from $15,015,036 for the same period in 1994. The increase was due to the increase in net revenues from acquired businesses and same-center growth, which was greater than the increases in patient care costs, general and administrative expense and depreciation and amortization expense related to such acquired businesses. Interest Expense, Net. Interest expense (net) increased 294.6% to $2,557,449 for the year ended December 31, 1995 from $648,102 for the same period in 1994. The increase in interest expense (net) was attributable to the additional borrowings for the funding of acquisitions that were completed in 1994 and 1995 that remained outstanding throughout 1995. Interest expense (net) also increased as a result of the reduction in interest income from investments during 1995 as compared to 1994. This decrease in interest income from investments resulted from the decrease in the average value of investments held by the Company during 1995 when compared to 1994, as the Company used its investments to fund certain acquisitions in 1994. Interest expense in 1995 and 1994 is net of $156,150 and $555,515 of interest income, respectively. Provision for Income Taxes. Provision for income taxes increased to $7,632,069 for the year ended December 31, 1995 from $4,316,014 for the same period in 1994. For the year ended December 31, 1995, the Company's effective tax rate was 34.3% compared to an effective tax rate of 30.0% in the same period in 1994. The increase in the effective rate represents an overall increase in items not deductible for tax purposes and a decrease in income derived from S corporations in 1995 as compared to 1994. Refer to notes 2, 3, and 7 to the supplemental consolidated financial statements included herein. Net Income. Net income increased 45.6% to $14,630,804 for the year ended December 31, 1995 from $10,050,920 for the same period in 1994. The increase was due to each of the items discussed above. Year Ended December 31, 1994 Compared to Year End December 31, 1993 Net Patient Revenue. Net patient revenue for the year ended December 31, 1994 was $115,456,744 as compared to $73,043,034 for the same period in 1993, representing an increase of 58.1%. Of this increase, approximately $9,275,300, or 21.9%, was attributable to the revenue generated from the operations of eight centers and certain acute care agreements acquired in four separate purchase transactions from July through September, 1994; approximately $8,199,600, or 19.3%, was attributable to the revenue generated from the operations of four centers and certain acute care agreements acquired in June 1994; approximately $4,916,000, or 11.6%, was attributable to the revenue generated from the operations of four centers acquired in January 1994; and approximately $9,465,000, or 22.3%, was attributable to the revenue generated from the operations of various centers and acute care agreements acquired in three separate transactions from October 1993 through December 1993. Of the approximately $10,558,000 remaining, approximately $6,586,000 was attributable to an increase in same-center treatments and approximately $1,682,000 was attributable to an increase in the average same- center revenue per treatment which, in turn, was due to an increase in the administration of EPO and other ancillary revenue items. The remaining $2,290,000 related to revenue generated from certain de novo developments and additional acute care and management contracts entered into during 1994. Patient Care Costs. Patient care costs increased 53.6% to $57,095,740 for the year ended December 31, 1994 from $37,171,556 for the same period in 1993. This increase was primarily attributable to the various centers acquired from October 1993 through September 1994. However, as a percentage of net patient revenue, patient care costs decreased to 49.5% for the year ended December 31, 1994 from 50.9% for the same period in 1993. General and Administrative Expense. General and administrative expense increased 57.2% to $32,621,992 for the year ended December 31, 1994 from $20,756,081 for the same period in 1993. This increase was due to the acquisitions completed from October 1993 through September 1994. General and administrative expense decreased as a percentage of net patient revenue to 28.3% for the year ended December 31, 1994 as compared to 28.4% in 1993. -6- Provision for Doubtful Accounts. Provision for doubtful accounts increased 101.3% to $3,121,017 the year ended December 31, 1994 from $1,550,691 for the same period in 1993. This increase was a result of the additional net patient revenue generated from the acquisitions that occurred in 1994. Depreciation and Amortization Expense. Depreciation and amortization expense increased 83.4% to $7,602,959 for the year ended December 31, 1994 from $4,145,390 for the same period in 1993. As a percentage of net patient revenue, depreciation and amortization expense increased to 6.6% for the year ended December 31, 1994 from 5.7% for the same period in 1993. The increases were due to the acquisitions noted from October 1993 through September 1994. Income from Operations. Income from operations increased 59.4% to $15,015,036 for the year ended December 31, 1994 from $9,419,316 for the same period in 1993. The increase was due to the increase in net revenues from acquired businesses and same-center growth, which was greater than the increases in patient care costs, general and administrative expense and depreciation and amortization expense related to such acquired businesses. Interest Expense, Net Interest expense (net) decreased 57.8% to $648,102 for the year ended December 31, 1994 from $1,536,176 for the same period in 1993. The decrease in interest expense (net) was due to the Company's repayment of amounts outstanding under its acquisition revolving credit agreement after its completion of a stock offering in March 1994, from a reduced average amount outstanding under the term loan agreement, from a lower average interest rate when compared to 1993 and from interest income earned on funds invested as a result of the March 1994 stock offering. Interest expense in 1994 is net of approximately $555,515 of interest income from funds invested as a result of the March 1994 stock offering. Provision for Income Taxes. Provision for income taxes increased to $4,316,014 for the years ended December 31, 1994 from $2,102,198 for the same period in 1993. For the year ended December 31, 1994, the Company's effective tax rate was 30.0% compared to an effective tax rate of 26.7% in the same period in 1993. The increase in the effective rate represents an overall increase in items not deductible for tax purposes and a decrease in income derived from S corporation companies in 1994. Refer to Notes 2, 3 and 7 to the supplemental consolidated financial statements included herein. Net Income. Net income increased 73.9% to $10,050,920 for the year ended December 31, 1994 from $5,780,942 for the same period in 1993. The increase was due to each of the items discussed above. Quarterly Results The following table presents selected unaudited quarterly operating results for the Company for the eight quarters in the years ended December 31, 1994 and 1995. The Company believes that the following information includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation. Although the Company's revenues are not seasonal in nature, quarterly revenues and profitability may be affected by other factors, including quarterly variations in treatments performed, due to varying of operating days by quarter. -7-
1994 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 - ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands, except for per share data) Net patient revenue $22,138 $24,842 $32,315 $36,162 $37,749 $40,067 $41,996 $44,756 Operating costs and expenses 18,032 20,317 25,537 28,953 31,290 30,865 32,090 33,436 Depreciation and amortization expense 1,427 1,639 2,394 2,142 2,733 2,909 3,033 3,392 Income from operations 2,679 2,885 4,383 5,068 3,726 6,293 6,874 7,927 Net income 1,802 2,186 2,948 3,115 2,503 3,874 3,546 4,708 Net income available to common stockholders 1,802 2,186 2,948 3,115 2,578 3,946 3,614 4,776 Primary: Weighted average common and common stock equivalents outstanding 18,934 21,865 21,802 21,861 22,014 22,105 22,865 22,836 Net income per share $0.10 $0.10 $0.14 $0.14 $0.11 $0.18 $0.16 $0.21 Fully diluted: Weighted average common and common stock equivalents outstanding 18,934 21,860 21,828 21,919 22,809 22,805 23,361 23,438 Net income per share $0.10 $0.10 $0.14 $0.14 $0.11 $0.17 $0.15 $0.20
Liquidity and Capital Resources The Company requires capital for the acquisition of dialysis centers, for the expansion of operations of its existing dialysis centers including the replacement of equipment and addition of leasehold improvements, for the integration of new centers into its system of existing dialysis services and for meeting working capital requirements. Expenditures for acquisitions were approximately $16.9 million, $50.3 million and $11.6 million for the years ended December 31, 1993, 1994 and 1995, respectively. Capital expenditures were approximately $1,110,000, $5,198,000 and $7,899,000 for the years ended December 31, 1993, 1994 and 1995, respectively. The increase in capital expenditures during 1995 resulted from the expansion of various existing dialysis centers to support internal growth as well as the normal replacement of equipment. Cash from operations before investing and financing activities was approximately $2.8 million, $4.3 million and $12.6 million for the years ended December 31, 1993, 1994 and 1995, respectively. The principal sources of the Company's liquidity have been public sales of equity securities, bank lines of credit and operating cash flow. Capital expenditures of approximately $14.0 million, primarily for equipment replacement and expansion of existing dialysis facilities, are planned in 1996. The Company expects that such capital expenditures will be funded with cash provided by operating activities and available lines of credit. The Company believes that capital resources available to it will be sufficient to meet the needs of its business, both on a short and long-term basis. At December 31, 1995, the Company's loan and revolving credit agreement with a consortium of banks (the "Credit Agreement") provided for a total facility of approximately $75 million, of which $68.125 million was a revolving credit/term facility available to fund acquisitions and general working capital requirements of which $13.975 million and $33.675 million were outstanding at December 31, 1994 and 1995, respectively, and the remainder was a term loan payable in quarterly installments of which $6.875 million and $3.75 million were outstanding as of December 31, 1994 and 1995, respectively. The revolving credit/term facility converts into a term loan in September 1997 that is payable in 16 equal quarterly installments commencing December 1997 through September 2001. Borrowings under the Credit Agreement bore interest, at the Company's option, at either (1) the Agent bank's base rate, adjusted by the applicable margin, determined by the Company's ratio of senior debt to annualized cash flow, 8.5% at December 31, 1995, or (2) a one, two, three, or six-month period LIBOR rate, adjusted by the applicable margin for LIBOR-based loans. The weighted average interest rate of all loans outstanding at December 31, 1994 and 1995 was 7.36% and 7.32%, respectively. The loans were collateralized by the pledge of all stock of the Company's subsidiaries, a lien on all of the Company's assets and the assignment of various acquisition, acute care, physician director and other agreements. Refer to Note 6 to supplemental consolidated financial statements. -8- The Company has historically expended the majority of its capital resources to implement its growth strategy and the Company intends to pursue a strategy of growth through the acquisition and development of dialysis facilities. Management estimates that the development of a new center, depending on its size, requires approximately $500,000 to $1,000,000 in construction costs and to purchase certain furniture and equipment (leasing certain of the assets can decrease costs) and approximately $75,000 to $150,000 in working capital. Acquisition of a dialysis center with an existing patient base typically requires more capital investment, but each investment varies based on relative size and other factors. No assurance can be given that the Company will be successful in implementing its growth strategy or that adequate sources of capital will be available on terms acceptable to the Company to pursue its growth strategy in the future. Impact of Inflation A substantial portion of the Company's revenue is subject to reimbursement rates which are regulated by the federal government and do not automatically adjust for inflation. These reimbursement rates are adjusted periodically based on certain factors, including legislation, executive and congressional budget reduction and control processes, inflation and costs incurred in rendering the services, but in the past have had little relationship to the actual cost of doing business. The Company can increase the amounts it bills only for those services provided by its dialysis business that are not subject to the Medicare composite rate. Increased operating costs that are subject to inflation, such as labor and supply costs, without a compensating increase in reimbursement rates, may adversely affect the Company's earnings in the future. New Accounting Pronouncements The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of" ("SFAS 121"). SFAS 121 will be effective for the year ending December 31, 1996 and establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. SFAS 121 requires that such assets and intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management does not expect the adoption of SFAS 121 to have a significant impact on the Company's results of operations, financial condition or liquidity. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 encourages, but does not require, an alternative method of accounting for employee stock compensation plans from the method currently prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). The new accounting standard will have no impact on the Company's net income or financial position, as the Company intends to continue to utilize the accounting guidance set forth in APB No. 25. -9- ITEM 7. (A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE: Renal Treatment Centers, Inc. and Subsidiaries Index to Supplemental Consolidated Financial Statements and Financial Statement Schedule
Page ---- Report of Independent Accountants............................................................................... F-1 Reports of Other Independent Accountants........................................................................ F-2 - F-3 Financial Statements: Supplemental Consolidated Balance Sheets at December 31, 1994 and 1995................................. F-4 Supplemental Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995................................................................. F-5 Supplemental Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995..................................................... F-6 Supplemental Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995................................................................. F-7 Notes to Supplemental Consolidated Financial Statements................................................ F-8 - F-17 Condensed Supplemental Consolidated Balance Sheet at December 31, 1995 and June 30, 1996 (Unaudited).................................................................... F-18 Condensed Supplemental Consolidated Statements of Income for the three months ended June 30, 1995 and 1996 and six months ended June 30, 1995 and 1996 (Unaudited)................... F-19 Condensed Supplemental Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and 1996 (Unaudited)............................................................... F-20 Notes to Condensed Supplemental Consolidated Financial Statements...................................... F-22 Financial Statement Schedule: II. Valuation and Qualifying Accounts, for the years ended December 31, 1995, 1994 and 1993.......................................................................................... F-22
-10- INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholder Healthcare Corporation and Affiliates Nashville, Tennessee We have audited the combined balance sheet of Healthcare Corporation and Affiliates (the "Company") as of December 31, 1994, and the related combined statements of income, stockholder's equity and cash flows for the years ended December 31, 1993 and 1994. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements (not presented separately herein) present fairly, in all material respects, the financial position of the Company as of December 31, 1994, and the results of its operations and its cash flows for each of the years ended December 31, 1993 and 1994 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Nashville, Tennessee March 31, 1995 F-2 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 July 14, 1995, except for Note 9 as to which the date is July 24, 1995 Wichita, Kansas F-3 Renal Treatment Centers, Inc. and Subsidiaries SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS December 31, 1994 and 1995
1994 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash $ 2,782,781 $ 8,231,421 Investments 2,661,944 0 Accounts receivable, net of allowance for doubtful accounts of $2,306,556 in 1994 and $3,503,744 in 1995 37,072,319 51,996,618 Inventories 2,581,992 2,869,019 Deferred taxes 569,153 819,835 Prepaid expenses and other current assets 1,430,081 1,396,893 - ----------------------------------------------------------------------------------------------------------------------------------- Total current assets 47,098,270 65,313,786 - ----------------------------------------------------------------------------------------------------------------------------------- Property and equipment (net of accumulated depreciation of $6,910,646 in 1994 and $10,746,557 in 1995) 13,660,938 21,442,421 Intangibles (net of accumulated amortization of $14,171,384 in 1994 and $22,263,385 in 1995) 79,238,387 86,341,433 Deferred taxes, non-current 493,793 1,749,754 Other assets 31,227 20,842 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $140,522,615 $174,868,236 =================================================================================================================================== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 4,781,230 $ 4,766,262 Accounts payable 6,687,797 4,495,087 Accrued compensation 2,645,175 2,790,121 Accrued expenses 4,362,716 6,576,600 Accrued income taxes 471,692 2,218,692 Accrued interest 202,103 1,087,415 - ----------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 19,150,713 21,934,177 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term debt, net 28,743,609 42,576,100 Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized: none issued Common stock, $.01 par value, 45,000,000 shares authorized: issued and outstanding 21,449,029 and 22,209,689 shares in 1994 and 1995, respectively 214,490 222,097 Additional paid-in capital 78,319,626 83,257,068 Retained earnings 14,141,396 27,272,870 - ----------------------------------------------------------------------------------------------------------------------------------- 92,675,512 110,752,035 Less treasury stock, 4,342 shares in 1994 and 37,202 shares in 1995, at cost (47,219) (394,076) - ----------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 92,628,293 110,357,959 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $140,522,615 $174,868,236 ===================================================================================================================================
See accompanying notes to supplemental consolidated financial statements. F-4 Renal Treatment Centers, Inc. and Subsidiaries SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME for the years ended December 31, 1993, 1994 and 1995
1993 1994 1995 - -------------------------------------------------------------------------------- Net patient revenue $73,043,034 $115,456,744 $164,568,392 Patient care costs 37,171,556 57,095,740 79,451,490 - -------------------------------------------------------------------------------- Operating profit 35,871,478 58,361,004 85,116,902 General and administrative 20,756,081 32,621,992 41,381,899 Provision for doubtful accounts 1,550,691 3,121,017 4,760,678 Depreciation and amortization 4,145,390 7,602,959 12,066,461 Merger expenses - - 2,087,542 - -------------------------------------------------------------------------------- Income from operations 9,419,316 15,015,036 24,820,322 Interest expense, net of interest income of $12,892, $555,515 and $156,150 in 1993 1994 and 1995, respectively 1,536,176 648,102 2,557,449 - -------------------------------------------------------------------------------- Income before income taxes 7,883,140 14,366,934 22,262,873 Provision for income taxes 2,102,198 4,316,014 7,632,069 - -------------------------------------------------------------------------------- Net income $ 5,780,942 $ 10,050,920 $ 14,630,804 ================================================================================ Pro forma per share data (unaudited): Pro forma net income per common and common stock equivalent $0.36 Pro forma weighted average shares used in computing net income per common and common stock equivalent 16,063,639 Primary per share data: Net income per common and common stock equivalent $0.47 $0.65 Weighted average common and common stock equivalents 21,161,243 22,412,733
See accompanying notes to supplemental consolidated financial statements. F-5 Renal Treatment Centers, Inc. and Subsidiaries SUPPLEMENTAL CONSOLIDATED OF STOCKHOLDERS' EQUITY for the years ended December 31, 1993, 1994 and 1995
Additional COMMON STOCK Paid-in Retained TREASURY STOCK ------------ ------------- Shares Amount Capital Earnings Shares Amount Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1992 5,470,519 $ 54,705 $ 466,081 $ 2,167,284 - - $ 2,688,070 Mandatory redeemable Series B and mandatory redeemable Series A preferred stock dividends for the year ended December 31, 1993 (335,939) (335,939) Issuance of common stock in Initial Public Offering 5,251,500 52,515 24,703,996 24,756,511 Exercise of common stock warrants and subsequent retirement of shares delivered as payment of exercise price of common stock warrants 556,750 5,568 (2,783) (2,784) - Conversion of mandatory redeemable Series B preferred stock and warrants to common stock 4,849,284 48,493 (24,247) 24,246 Dividend distribution (2,045,927) (2,045,927) Net income 5,780,942 5,780,942 - ------------------------------------------------------------------------------------------------------------------------------------ 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 302,644 3,026 3,639,750 3,642,776 Acquisition of treasury stock (32,860) (346,857) (346,857) Dividend distribution (1,499,331) (1,499,331) Net income 14,630,805 14,630,805 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1995 22,209,689 $222,097 $83,257,068 $27,272,870 (37,202) $(394,076) $110,357,959 ====================================================================================================================================
See accompanying notes to supplemental consolidated financial statements. F-6 Renal Treatment Centers, Inc. and Subsidiaries SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1993, 1994 and 1995
1993 1994 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 5,780,942 $ 10,050,920 $ 14,630,804 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,195,523 7,701,587 12,131,465 Deferred income taxes (565,695) (497,251) (1,506,643) Provision for doubtful accounts 1,550,691 3,121,017 4,760,678 Loss (gain) on sale of equipment 19,435 (2,974) - Equity in (earnings) losses from affiliate 43,162 (96,312) (266,592) Changes in operating assets and liabilities, net of effects of companies acquired: Accounts receivable (8,910,472) (19,065,267) (19,444,635) Inventories (382,316) (260,546) (117,157) Prepaid expenses and other current assets (32,030) (506,876) 99,673 Accounts payable and accrued expenses 940,771 4,365,037 585,345 Accrued income taxes 175,333 (475,071) 1,747,000 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 2,815,344 4,334,264 12,619,938 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (1,110,478) (5,198,350) (7,899,143) Purchase of businesses, net of cash acquired (16,883,773) (50,323,267) (11,646,992) Purchase of investments (6,315,000) (38,500,000) - Sale of investments 3,564,360 38,588,696 2,661,944 Other (291,082) (1,214,875) (1,904,962) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (21,035,973) (56,647,796) (18,789,153) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from long-term debt borrowings 17,931,004 18,045,175 19,621,000 Repayments of debt (13,378,542) (14,032,771) (7,355,102) Redemption of preferred stock (9,114,020) - - Payment of Series A and Series B mandatory redeemable preferred stock dividends (476,249) - - Proceeds from issuance of common stock 24,506,760 51,612,289 1,302,272 Payment of S Corporation dividend - - (1,277,000) Payment of dividend distribution (2,045,927) (1,473,295) (222,331) Increase in financing fees (163,732) (282,609) - Payments on capital lease obligations (162,718) (13,846) (450,984) Other 6,521 581,195 - - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 17,103,097 54,436,138 11,617,855 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (1,117,532) 2,122,606 5,448,640 Cash and cash equivalents at beginning of period 1,777,707 660,175 2,782,781 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 660,175 $ 2,782,781 $ 8,231,421 ===================================================================================================================================
See accompanying notes to supplemental consolidated financial statements. F-7 Renal Treatment Centers, Inc. and Subsidiaries NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business Renal Treatment Centers, Inc. (the "Company") was incorporated in Delaware on August 11, 1988 for the purpose of providing dialysis treatments for End Stage Renal Disease ("ESRD") patients in an outpatient environment or in the patient's home. Additionally, the Company has acquired or entered into inpatient dialysis service agreements with hospitals to provide dialysis treatments on an inpatient basis. For the years ended December 31, 1993, 1994 and 1995, approximately 73%, 73% and 69%, respectively, of the Company's net patient revenue was received from Medicare and Medicaid and other state administered programs. Accordingly, the Company's operations and cash flows are dependent upon the rate and manner of payment for patient services from third party payors and, in particular, federal and state administered programs. 2. Summary of Significant Accounting Policies Basis of Presentation: The supplemental consolidated financial statements of the Company have been prepared to give retroactive effect to the acquisition of Panama City Artificial Kidney Center, Inc. and North Florida Artificial Kidney Center, Inc. (collectively "The Group") on July 23, 1996, which has been accounted for using the pooling-of-interests method of accounting. Certain amounts included in the accompanying supplemental consolidated financial statements and related footnotes reflect the use of estimates based on assumptions made by management. Actual amounts could differ from these estimates. Certain amounts in the 1994 financial statements have been reclassified to conform to the current year presentation. Principles of Consolidation: The supplemental consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Patient Revenue and Allowances: Patient revenue is recorded at established rates on the accrual basis in the period during which the service is provided. Appropriate allowances to give recognition to third-party arrangements are also recorded on the accrual basis. Payments to the Company under Medicare and Medicaid and other state administered programs are based upon a predetermined specific fee per treatment. The Company does not believe there are any significant credit risks associated with receivables from Medicare and Medicaid and other state administered programs. The allowance for doubtful accounts consists of management's estimate of amounts that may prove uncollectible from secondary insurers or patients. Patient Care Costs: Patient care costs include medical supplies, including Erythropoietin ("EPO") supplies, and direct patient salaries and benefits. Inventories: Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market and consist of dialysis supplies. Property and Equipment and Depreciation and Amortization: Property and equipment are stated at cost or respective fair market value at the time of acquisition. Equipment under capital lease is stated at the lower of the fair market value or net present value of the minimum lease payments at inception of the lease. Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the related assets or lease terms for leasehold improvements and equipment under capital lease. The estimated useful life is five to seven years for furniture, fixtures and equipment, 39 years for the buildings, and five to ten years for leasehold improvements. Costs of maintenance and repairs are charged to expense as incurred. Sales and retirements of depreciable assets are recorded by removing the related cost and accumulated depreciation from the accounts. Gains and losses on sales and retirements of assets are reflected in results of operations. F-8 2. Summary of Significant Accounting Policies (continued): Intangibles: Goodwill: Goodwill arising from acquisitions is being amortized on a straight-line basis principally over 25 years. Patient Lists: Patient lists, arising from the purchase of renal dialysis facilities, are stated at cost. Amortization is provided by the straight-line method over eight years. Non-compete Agreements: Non-compete agreements, arising from acquisitions, are being amortized on a straight-line basis over periods from three to 11 years. Other Intangibles: Other intangibles consist of inpatient dialysis service agreements, deferred financing costs and organization costs and are stated at cost. Amortization is provided on a straight-line basis over five to 11 years. Management evaluates the recoverability of intangible assets using certain financial indicators, such as historical and future ability to generate income from operations. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- lived Assets and for Long-lived Assets to Be Disposed of" ("SFAS 121"). SFAS 121 will be effective for the year ending December 31, 1996 and establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. SFAS 121 requires that such assets and intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management does not expect the adoption of SFAS 121 to have a significant impact on the Company's results of operations, financial condition or liquidity. Income Taxes: The Company and its subsidiaries file a consolidated federal tax return and separate company state tax returns. Income taxes are provided under the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under the liability method, deferred income taxes are recognized for the tax consequences of differences between amounts reported for financial reporting and income tax purposes by applying enacted statutory tax rates applicable to future years to such differences. Deferred taxes result from temporary differences in the market value of assets acquired in business combinations accounted for as purchases and their tax bases. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Federal (and state, where applicable) income taxes for the Group prior to their acquisition by the Company were payable personally by the stockholders of the Group pursuant to S corporation elections under the Internal Revenue Code. Prepaid Expenses and Other Current Assets: Prepaid expenses consist of prepaid insurance, rent, real estate taxes and other current assets. Accrued Expenses: Accrued expenses consist principally of uninvoiced inventory and other miscellaneous accruals. Estimated Medical Professional Liability Claims: The Company is insured for medical professional liability claims through a commercial insurance policy. It is the Company's policy that provision for estimated premium adjustments to medical professional liability costs be made for asserted and unasserted claims and based upon the Company's experience. Provision for such professional liability claims includes estimates of the ultimate costs of such claims. To date, the Company's experience with such claims has not been significant. Accordingly, no such provision has been made. Cash Equivalents: For the purpose of reporting cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The cash of the Company is principally held by one financial institution. F-9 2. Summary of Significant Accounting Policies (continued): Investments: Investments were comprised of investments in municipal bonds and a fixed income mutual fund which primarily invests in short-term bank deposits and U.S. government and government agency securities. Investment income is recognized when earned and realized gains and losses are recognized on a trade date basis, computed based on original cost. The fair market value of these investments approximates cost. All investments were held by one financial institution. Historical Net Income Per Common and Common Stock Equivalent: Net income per common and common stock equivalent on a historical basis, both primary and fully diluted, are as follows:
1993 1994 1995 - --------------------------------------------------------------------------------------------------- Primary: Net income per common and common stock $0.49 $0.47 $0.65 equivalent Weighted average common and common stock equivalents outstanding 11,072,783 21,161,243 22,412,733 Fully diluted: Net income per common and common stock equivalent $0.39 $0.47 $0.64 Weighted average common and common stock equivalents outstanding 13,921,957 21,215,273 23,401,085
Primary earnings per share for 1993 are computed by dividing net income, reduced by preferred dividends, by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Primary earnings per share for 1994 and 1995 are computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Fully diluted earnings per share for 1993 assumes the conversion of Series B preferred stock and the exercise and conversion of Series B preferred stock warrants into common stock as of January 1, 1993. Fully diluted earnings per share for 1994 are computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Fully diluted earnings per share for 1995 are computed by dividing net income, increased by the tax effected interest on an earn-out note, by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Fully diluted earnings per share also reflect additional dilution related to stock options due to the use of the market price at the end of the period, when higher than the average price for the period. 3. Business Acquisitions: Merger with the Group: On July 23, 1996, the Company acquired the Group. The facilities acquired are located in Florida and serviced a total of approximately 200 patients as of the acquisition date. The transaction was accounted for under the pooling-of- interests method of accounting. In the transaction, the Company issued 482,377 shares of its common stock in exchange for all the outstanding stock of the Group. The acquisition was structured as a merger of the Group into a subsidiary of the Company. Merger with The Wichita Companies: On July 25, 1995, with an effective date of August 1, 1995, the Company acquired Wichita Dialysis Center, P.A., Southeast Kansas Dialysis Center, P.E., Garden City Dialysis Center, P.A. and Wichita Dialysis Center, East, P.A. (the "Wichita Companies"). All of the facilities acquired are located in Kansas and serviced approximately 355 patients as of the acquisition date. The transaction was accounted for under the pooling-of-interests method of accounting. In the transaction, the Company issued 1,558,920 shares of its common stock in exchange for all the outstanding stock of the Wichita Companies. The acquisition was structured as a merger of the Wichita Companies into a subsidiary of the Company. Merger with HCC: On March 6, 1995, the Company completed its acquisition of Healthcare Corporation and its affiliates (collectively, "HCC"). The facilities acquired from HCC are located in Missouri, Illinois, North Carolina, Florida and Washington, D.C. and serviced approximately 720 patients as of the acquisition date. The transaction was accounted for under the pooling-of-interests method of accounting. In the transaction, the Company issued 2,292,222 shares of its common stock in exchange for all the outstanding stock of HCC. The acquisition was structured as a merger of HCC into several subsidiaries of the Company. F-10 3. Business Acquisitions (continued): The supplemental consolidated financial statements give retroactive effect to the mergers with the Group, the Wichita Companies and HCC and include the combined operations of the Company, the Group, the Wichita Companies, and HCC for all periods presented. The following is a summary of the separate and combined results of operations for periods prior to the mergers (dollars in thousands):
Renal Treatment Centers, Inc. Acquired (Prior to Mergers) Companies Combined ------------------ --------- -------- For the year ended December 31, 1995 Net patient revenue $150,467 $14,101 $164,568 Income from operations 23,319 1,501 24,820 Net income 13,238 1,392 14,630 *Includes HCC for the two months ended February 28, 1995, the Wichita Companies for the seven months ended July 31, 1995 and the Group for the year ended December 31, 1995. 1994 Net patient revenue $86,520 $28,937 $115,457 Income from operations 12,343 2,672 15,015 Net income 7,558 2,493 10,051 1993 Net patient revenue $46,956 $26,087 $73,043 Income from operations 7,050 2,369 9,419 Net income 3,738 2,043 5,781
The acquisitions described below have been accounted for under the purchase method. The results of these acquisitions have been included in the results of operations from the applicable acquisition dates. The purchase price of the acquisitions has been principally allocated to fixed assets, patient lists, non- compete agreements and goodwill. The excess of the purchase price over the fair value of net assets was approximately $49,347,454 and is being amortized on a straight-line basis over 25 years. 1993 Acquisitions: During 1993, the Company acquired nine dialysis centers, one dialysis service agreement and certain acute care contracts in Pennsylvania, New Jersey, Delaware and California for approximately $16,794,000 in cash and the assumption of certain liabilities of approximately $231,000. The acquisitions included substantially all of the non-current assets and the assumption of certain liabilities and capital leases of the centers. 1994 and 1995 Acquisitions: During 1994, the Company acquired seventeen dialysis centers, including several acute care contracts, in Oklahoma, Colorado, Wyoming, New Jersey, Virginia, Pennsylvania and Texas for approximately $50,300,000 in cash, 175,216 shares of unregistered common stock, valued at approximately $1,812,500 at the respective dates of acquisition, and the assumption of approximately $1,200,000 of liabilities. The acquisitions included substantially all of the non-current assets, certain current assets and the assumption of various liabilities and capital lease obligations of the centers. Additionally, certain purchase agreements included provisions whereby additional purchase price may be required if the centers attain certain financial results during a specified period. Refer to note 6 to supplemental consolidated financial statements for discussion of a note issued in connection with an acquisition. During 1995, the Company acquired nine dialysis centers, including several acute care contracts, in Indiana, Ohio, Texas, Florida and Nebraska for approximately $11,600,000 in cash, 302,644 shares of unregistered common stock, valued at approximately $3,639,750 at the respective dates of acquisition, and the assumption of approximately $118,000 of liabilities. The acquisitions included substantially all of the non-current assets, certain current assets and the assumption of certain liabilities and capital leases of the centers. F-11 3. Business Acquisitions (continued): The following unaudited pro forma information combines the supplemental consolidated results of operations of the Company and the companies acquired in the acquisitions that were accounted for under the purchase method during 1994 and 1995 as if they had occurred on January 1, 1994:
(Unaudited) 1994 1995 - -------------------------------------------------------------------------------- Net patient revenue $122,431,000 $167,761,000 Income from operations 15,683,000 25,239,000 Net income 10,686,000 15,038,000 Net income per share $0.50 $0.67
The pro forma results do not necessarily represent results which would have occurred if these acquisitions had taken place at the beginning of each period, nor are they indicative of the results of future combined operations. 4. Property and Equipment: A summary of property and equipment and related accumulated depreciation as of December 31, 1994 and 1995 is as follows:
1994 1995 - -------------------------------------------------------------------------------- Furniture, fixtures and equipment $14,662,983 $20,775,057 Leasehold improvements 4,102,011 7,427,458 Capital leases 1,013,752 3,161,693 Building 692,772 724,704 Land 100,066 100,066 - -------------------------------------------------------------------------------- 20,571,584 32,188,978 Less accumulated depreciation 6,910,646 10,746,557 - -------------------------------------------------------------------------------- $13,660,938 $21,442,421 ================================================================================
Capital leases primarily consist of dialysis equipment. Depreciation expense was $1,395,230, $2,152,110 and $3,846,294 for the years ended December 31, 1993, 1994 and 1995, respectively. 5. Intangible Assets: Intangible assets consists of goodwill and other identifiable intangibles. A summary of intangible assets and related accumulated amortization as of December 31, 1994 and 1995 is as follows:
1994 1995 - -------------------------------------------------------------------------------- Goodwill $49,734,578 $59,605,978 Patient lists 30,714,917 33,572,193 Non-compete agreements 8,825,483 10,048,195 Other intangibles 4,134,793 5,111,860 - -------------------------------------------------------------------------------- 93,409,771 108,338,226 Less accumulated amortization 14,171,384 22,263,385 - -------------------------------------------------------------------------------- $79,238,387 $86,074,841 ================================================================================
Intangible assets principally arose from acquisitions. Amortization expense was $2,750,160, $5,450,849 and $8,220,167 for the years ended December 31, 1993, 1994 and 1995, respectively. F-12 6. Long-Term Debt:
Long-term debt as of December 31, 1994 and 1995 consists of: 1994 1995 - ----------------------------------------------------------------------------------------------------------------------- Term loan payable in quarterly installments of $625,000 through June 1997 $6,875,000 $3,750,000 Revolving credit/term facility payable in 16 equal quarterly installments from December 1997 through September 2001 13,975,000 33,675,000 Note, 6 1/2% payable to The Dialysis Centers Limited Liability Company in four annual installments of variable amounts commencing on June 1, 1995 7,500,000 6,627,690 Bank term loan payable in quarterly installments of $25,000 325,000 - Bank revolving line of credit payable in 20 equal quarterly installments commencing in May 1995 2,899,685 - Term loans payable in monthly installments of $15,912 1,338,270 1,041,576 Other 157,500 - Capital lease obligations 562,712 2,185,233 Unamortized debt discount (108,326) (43,322) - ----------------------------------------------------------------------------------------------------------------------- 33,524,841 47,236,177 Less current portion (4,781,232) (4,660,077) - ----------------------------------------------------------------------------------------------------------------------- $28,743,609 $42,576,100 =======================================================================================================================
On April 21, 1994, the Company amended its term loan and revolving credit agreement (the "Credit Agreement") to add a LIBOR interest rate option, change the note rate, extend the revolving loan conversion date and make certain other modifications. On November 3, 1994, the Company amended and restated its Credit Agreement and increased the amount the Company can borrow under the Credit Agreement to $75,000,000. The Company must pay an annual commitment fee on the average daily unutilized commitment in the amount of .25% - .35%, determined by the Company's ratio of senior debt to annualized cash flow (the "Applicable Margin"). Borrowings under the Credit Agreement are subject to interest at the Company's option, at either (1) the Agent bank's base rate, adjusted by the Applicable Margin, payable quarterly, or (2) one, two, three, or six-month period LIBOR rate, adjusted by the Applicable Margin, payable at contract termination. The weighted average interest rate was 7.36% and 7.32% at December 31, 1994 and 1995, respectively. The Credit Agreement also provides for the issuance of letters of credit up to $5,000,000 provided that the aggregate of all outstanding letters of credit plus the outstanding aggregate principal amount of all revolving credit/term loans does not exceed the lesser of the total revolving credit/term commitment or the patient borrowing base, as defined in the Credit Agreement, at such time. As of December 31, 1994 and 1995, there were $1,062,500 face amount and no letters of credit outstanding, respectively. The loans are collateralized by all stock of the Company's subsidiaries, a lien on all of the Company's assets and the assignment of certain agreements. The Credit Agreement limits additional indebtedness, acquisitions, investments and dividends and requires the Company to comply with certain other covenants and maintain certain financial ratios. The dividend distributions presented in the Supplemental Consolidated Statement of Stockholders' Equity (Deficit) in 1993, 1994 and 1995 were paid to the former stockholders of HCC, the Wichita Companies and the Group and were not subject to the Credit Agreement limitation on dividend payments. In June 1994, pursuant to a business acquisition, the Company entered into an agreement to pay the Seller $7,500,000 in annual installments commencing June 1995 through June 1998. Interest on the unpaid principal amount of the note accrues at an annual rate of 6.50%, payable in arrears each June 1 from 1995 through 1998. The note allows the Seller to convert the note into that number of shares of common stock of the Company which shall be equal to the quotient of the outstanding unpaid principal amount of the note divided by the average daily closing sale price of the stock during December, 1994 ($20.685 per share, convertible into 362,582 shares of common stock at December 31, 1994). The fair value of the Company's 6.50% Note was approximately $5,966,400 at December 31, 1995. The carrying amount of all other long-term debt approximates its fair value. The bank term loan and bank revolving line of credit are the result of an agreement entered into by the Company with a bank (the "HCC Agreement"). The HCC Agreement provided for a $500,000 term loan, a $2,900,000 revolving line of credit available for working capital and a $2,100,000 converting line of credit available to the Company for future expansion. Subsequent to the consummation of the merger with HCC as described in Notes 2 and 3 to the supplemental consolidated financial statements, the Company refinanced through the Credit Agreement all of the indebtedness related to the HCC Agreement. F-13 6. Long-Term Debt (continued): The term loans are the result of four separate agreements (the "Group Agreements") entered into by the Company with two banks. The Group Agreements provided for a total of $1,350,000 in term loans and a $350,000 revolving line of credit. Subsequent to the consummation of the merger with the Group as described in Notes 2 and 3 to the supplemental consolidated financial statements, the Company paid off all of the indebtedness related to the Group Agreements. Maturities of long-term debt outstanding, excluding capital leases, as of December 31, 1995 for each of the next five years, is as follows:
Year ------------------------------ 1996 $4,093,262 1997 5,686,874 1998 11,497,361 1999 9,083,957 2000 8,418,750
7. Income Taxes: The provision for income taxes for the years December 31, 1993, 1994 and 1995 consists of the following:
1993 1994 1995 - -------------------------------------------------------------------------------- Current: Federal $2,294,388 $4,327,339 $ 8,330,951 State and local 373,505 485,926 807,761 - -------------------------------------------------------------------------------- 2,667,893 4,813,265 9,138,712 - -------------------------------------------------------------------------------- Deferred: Federal (486,498) (447,584) (1,372,961) State and local (79,197) (49,667) (133,682) - -------------------------------------------------------------------------------- (565,695) (497,251) (1,506,643) - -------------------------------------------------------------------------------- $2,102,198 $4,316,014 $ 7,632,069 ================================================================================
The tax effects of temporary differences which comprise the net deferred tax asset are as follows:
December 31, ----------- 1994 1995 Deferred tax debits: Allowance for doubtful accounts $535,341 $780,978 Intangibles, principally patient lists 609,674 2,926,430 Property and equipment 189,959 178,417 Other 33,811 38,857 - -------------------------------------------------------------------------------- 1,368,785 3,924,682 - -------------------------------------------------------------------------------- Deferred tax credits: Goodwill (305,839) (1,355,093) - -------------------------------------------------------------------------------- (305,839) (1,355,093) - -------------------------------------------------------------------------------- Net deferred tax asset $1,062,946 $2,569,589 ================================================================================
F-14 7. Income Taxes (continued): The following is a reconciliation of the statutory federal income tax rates to the effective rates as a percentage of income before provision for income taxes as reported in the financial statements for the years ended December 31, 1993, 1994 and 1995:
1993 1994 1995 - -------------------------------------------------------------------------------- U.S. federal income tax rate 34.0% 34.2% 35.0% State income taxes, net of federal income tax benefit 2.2% 2.4% 2.4% Non-tax effected items, principally intangibles 1.2% 0.8% 1.8% Federal and state income tax benefit from S corporation status of HCC, the Wichita Companies and the Group (9.3%) (6.4%) (3.5%) Other (1.4%) (1.0%) (1.4%) - -------------------------------------------------------------------------------- Effective income tax rate 26.7% 30.0% 34.3% ================================================================================
8. Benefit and Compensation Plans: The Company has a defined contribution savings plan covering substantially all employees. The Company's contributions under the plan were approximately $209,064, $388,497, and $462,004 for the years ended 1993, 1994 and 1995, respectively. In September 1990, the Company established a stock plan, pursuant to which incentive stock options and non-qualified stock options may be issued to employees and others through the year 2000. Incentive stock options may be granted at an exercise price not less than the fair market value of the Company's common stock. Non-qualified stock options may be granted at an exercise price not less than the lower of the book value of the Company's common stock or 50% of the fair market value per share of common stock. Accordingly, compensation expense for the difference between the fair market value and the exercise price for non-qualified stock options issued is recorded over the vesting period of such options. In 1993 and 1995, the stock plan was amended to increase the number of shares available for grant to 1,837,000 and 2,437,000 shares, respectively. In addition, the Company established an option plan for outside directors pursuant to which non-qualified stock options to purchase up to 60,000 shares may be issued to non-employee directors of the Company. These options may be granted at an exercise price not less than the fair market value of the Company's common stock. On February 3, 1994, the Company granted 170,000 incentive stock options to certain officers and employees of the Company. These options were granted at an exercise price not less than fair market value of the Company's common stock on the date of grant. These options vest over the next one to three years. On May 17, 1995, the Company granted 416,000 incentive stock options to certain officers and employees of the Company. These options were granted at an exercise price not less than fair market value of the Company's common stock on the date of the grant. These options vest over the next one to four years. Certain options totalling 305,000 vest upon the earlier of attainment of predetermined earnings per share targets or nine to ten years. Approximately $80,000, $50,000, and $50,000 was recorded as compensation expense during 1993, 1994, and 1995, respectively, in connection with incentive and non- qualified options to officers of the Company, which have been amortized over the remaining vesting period. Certain options outstanding at December 31, 1995, which are issued to certain officers of the Company, become fully vested upon certain sales of assets, mergers and consolidations involving the Company, as set forth in the respective stock option agreements. The remaining options outstanding at December 31, 1995, which are issued to certain officers and employees of the Company, become fully vested upon certain sales of assets, mergers and consolidations involving the Company, at the option of the Stock Plan Committee. F-15 8. Benefit and Compensation Plans (continued): The following is a summary of option transactions and exercise prices:
Number of Price Per Shares Share - -------------------------------------------------------------------------------- Outstanding at December 31, 1993 1,490,032 $0.005 - $9.625 Granted 188,000 $11.25 Exercised (356,762) $0.005 - $5.25 Cancelled (20,000) $11.25 Outstanding at December 31, 1994 1,301,270 $0.055 - $11.25 - -------------------------------------------------------------------------------- Granted 416,000 $11.50 Exercised (458,016) $0.005 - $11.25 Outstanding at December 31, 1995 1,259,254 $5.25 - $11.50 - -------------------------------------------------------------------------------- Exercisable at December 31, 1995 338,824 ================================================================================
9. Capital Stock: On January 30, 1996, the Board of Directors of the Company declared a dividend on the Company's common stock of one share of common stock for each share outstanding, thereby effecting a 2-for-1 stock split. The dividend shares were issued on March 14, 1996 to stockholders of record as of February 29, 1996. Additionally, on February 29, 1996, the Company amended its capital structure to increase the Company's authorized capital to 45,000,000 shares of $0.01 par value common stock and 5,000,000 shares of $.01 par value Series Preferred Stock. All references in the financial statements to outstanding and authorized common shares, average number of shares outstanding and related prices, per share amounts and stock plan data have been restated to reflect the split effected by the stock dividend. 10. Leasing Arrangements: The Company leases certain of its operating facilities, corporate office and furniture and equipment under non-cancelable leases for terms ranging from four to ten years with certain renewal options. Certain of these facilities are leased by the Company from medical directors. Future minimum lease payments are as follows:
Third-party Operating Leases Capital Operating with Medical Leases Leases Directors - ------------------------------------------------------------------------------------ 1996 $868,765 $4,230,897 $1,015,613 1997 609,862 3,433,229 1,015,613 1998 608,653 2,890,264 766,303 1999 421,666 2,591,912 722,874 2000 and thereafter - 8,100,724 3,117,466 - ------------------------------------------------------------------------------------ Total minimum lease payments $2,508,946 $21,247,026 $6,637,869 Less amount representing interest 323,714 ================================== - ------------------------------------------------ Present value of net minimum payments under capital leases 2,185,232 Less current portion 566,815 - ------------------------------------------------ $1,618,417 ================================================
Rent expense paid to third parties under operating leases was $2,216,260, $3,270,066 and $4,921,026 for the years ended December 31, 1993, 1994 and 1995, respectively. Rent expense paid to medical directors under facility operating leases was $545,608, $832,454 and $1,030,208 for the years ended December 31, 1993, 1994 and 1995 respectively. 11. Mandatory Redeemable Preferred Stock: On July 29, 1993, the Company redeemed all the Series A preferred stock outstanding at a redemption price of $1,000 per share. In addition, on July 29, 1993, the holders of 257 shares of Series B preferred stock converted their shares into 4,545,932 shares of Common stock. The Company paid in full all accrued and unpaid dividends of $476,249 on the Series A and B preferred stock on the redemption and conversion date. F-16 11. Mandatory Redeemable Preferred Stock (continued): Dividends on preferred stock were set aside from funds legally available for payment quarterly on the last day of each November, February, May and August which commenced November 30, 1989. Dividends on preferred stock were payable at an annual dividend rate per share of 6% for the period October 1, 1992 through September 30, 1995. On July 29, 1993, the holders of Series B preferred stock warrants also exercised their rights to purchase 17.1466 shares of the Company's Series B preferred stock, exercisable at $1,000 per share. Each share was then converted into 17,689.72 shares of common stock. 12. Commitments and Contingencies: The Company has entered into long-term compensation agreements with the physician directors of each dialysis facility. The agreements range from one to ten years with certain agreements containing one to ten year options to renew. The agreements provide for a total annual base compensation as follows:
Physician Director Year Base Compensation - -------------------------------------------------------------------------------- 1995 $6,270,287 1996 5,462,190 1997 5,204,504 1998 4,066,557 1999 and thereafter 12,958,132 - -------------------------------------------------------------------------------- Total minimum payments $33,961,670 ================================================================================
Certain of these agreements provide for incentive compensation based on pre-tax operating profit. The Company has employment agreements with four officers. These agreements provide for total annual compensation of $756,000 and provide that in the event any payment or benefit received by any of them in connection with a change of control is deemed an "excess parachute payment" under the Internal Revenue Code, the Company shall pay the officer a cash bonus equal to any additional tax liability imposed upon him as a result. The Company is a party to certain legal actions arising in the ordinary course of business. The Company believes it has adequate legal defenses and/or insurance coverage for these actions and that the ultimate outcome of these actions will not have a material adverse impact on the Company's results of operations, financial condition or liquidity. 13. Supplemental Cash Flow Information: Supplemental disclosure of cash flow information for the years ended December 31, 1993, 1994 and 1995 is as follows:
1993 1994 1995 - -------------------------------------------------------------------------------- Cash paid for: Interest $1,473,220 $1,090,192 $2,177,255 ================================================================================ Income taxes $2,012,701 $4,857,551 $5,680,430 ================================================================================ Non-cash investing and financing activities: Capital lease obligations entered into $ 326,863 $ 542,032 $2,081,699 ================================================================================ Conversion of Series B preferred stock and Series B warrants to common stock $ 274,147 $ - $ - ================================================================================ Issuance of common stock in connection with purchases of businesses $ - $1,812,500 $3,639,750 ================================================================================ Earnout note issued in connection with purchase of business $ - $7,364,100 $ - ================================================================================ Acquisition of treasury stock in connection with payroll taxes resulting from exercise of stock options. $ - $ 47,219 $ 346,857 ================================================================================
F-17 Renal Treatment Centers, Inc. and Subsidiaries CONDENSED SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(Unaudited) December 31, June 30, 1995 1996 - -------------------------------------------------------------------------------- Assets Current assets: Cash $ 8,231,421 $ 621,444 Investments - 45,963,081 Accounts receivable, less allowance for doubtful accounts of $3,503,744 in 1995 and $5,743,830 in 1996 51,996,618 63,386,631 Inventories 2,869,019 3,838,980 Deferred taxes 819,835 1,412,519 Prepaid expenses and other current assets 1,396,893 1,219,708 - -------------------------------------------------------------------------------- Total current assets 65,313,786 116,442,363 - -------------------------------------------------------------------------------- Property and equipment, net of accumulated depreciation of $10,746,557 in 1995 and $16,249,094 in 1996 21,442,421 31,733,870 Intangibles, net of accumulated amortization of $22,263,385 in 1995 and $26,925,574 in 1996 86,341,433 121,718,883 Deferred taxes, non-current 1,749,754 1,749,754 Other assets 20,842 15,649 - -------------------------------------------------------------------------------- Total assets $174,868,236 $271,660,519 ================================================================================ Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $4,766,262 $3,336,451 Accounts payable 4,495,087 6,305,145 Accrued compensation 2,790,121 2,694,379 Accrued expenses 6,576,600 3,170,103 Accrued income taxes 2,218,692 320,024 Accrued interest 1,087,415 399,015 - -------------------------------------------------------------------------------- Total current liabilities 21,934,177 16,225,117 - -------------------------------------------------------------------------------- Long-term debt, net 42,576,100 131,592,265 Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued Common stock, $.01 par value, 45,000,000 shares authorized; issued and outstanding 22,209,689 and 24,255,969 shares in 1995 and 1996, respectively 222,097 242,559 Additional paid-in capital 83,257,068 85,480,900 - -------------------------------------------------------------------------------- Retained earnings 27,272,870 38,513,754 - -------------------------------------------------------------------------------- 110,752,035 124,237,213 Less treasury stock, 37,202 shares in 1995 and 1996 (394,076) (394,076) - -------------------------------------------------------------------------------- Total stockholders' equity 110,357,959 123,843,137 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $174,868,236 $271,660,519 ================================================================================
See accompanying notes to condensed supplemental consolidated financial statements F-18 Renal Treatment Centers, Inc. and Subsidiaries CONDENSED SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended June 30, Six Months Ended June 30, 1996 1995 1996 1995 - ------------------------------------------------------------------------------------ Net patient revenue $55,583,123 $40,066,785 $106,132,950 $77,816,039 Patient care costs 26,997,151 19,645,417 51,482,378 38,216,941 - ------------------------------------------------------------------------------------ Operating profit 28,585,972 20,421,368 54,650,572 39,599,098 General and administrative expense 13,479,366 10,069,871 26,632,717 20,330,847 Provision for doubtful accounts 1,737,321 986,919 3,308,507 2,020,088 Depreciation and amortization 4,072,917 2,908,536 7,645,118 5,641,524 Merger expenses - - 1,708,247 1,587,542 - ------------------------------------------------------------------------------------ Income from operations 9,296,368 6,456,042 15,355,983 10,019,097 Interest expense, net 856,313 651,621 1,553,433 1,310,325 - ------------------------------------------------------------------------------------ Income before income taxes 8,440,055 5,804,421 13,802,550 8,708,772 Provision for income taxes 3,009,329 1,767,248 4,999,536 2,332,211 - ------------------------------------------------------------------------------------ Net income $ 5,430,726 $ 4,037,173 $ 8,803,014 $ 6,376,561 ==================================================================================== Net income per common and common stock equivalent $ 0.22 $ 0.18 $ 0.36 $ 0.29 ==================================================================================== Weighted average number of common and common stock equivalents outstanding 25,828,734 22,105,059 15,284,349 22,057,653
See accompanying notes to condensed supplemental consolidated financial statements F-19 Renal Treatment Centers, Inc. and Subsidiaries CONDENSED SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended June 30, 1995 and 1996 (Unaudited)
June 30, June 30, 1996 1995 - --------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $8,803,014 $6,376,561 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,666,084 5,668,009 Provision for doubtful accounts 3,308,507 2,020,088 Changes in operating assets and liabilities, net of effects of companies acquired: Accounts receivable (11,355,559) (8,263,686) Inventories (673,916) 474,846 Prepaid expenses and other current assets 239,556 176,555 Accounts payable and accrued expenses (5,722,617) (439,306) Accrued income taxes (1,898,668) (298,908) - --------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities 366,401 5,714,159 - --------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (6,188,493) (3,553,324) Purchase of businesses, net of cash acquired (37,030,623) (5,144,291) Sale of investments 9,347,962 2,661,944 Purchase of investments (55,311,043) - Other (979,804) (1,356,734) - --------------------------------------------------------------------------------------- Net cash used in investing activities (90,162,001) (7,392,405) - --------------------------------------------------------------------------------------- Cash flows from financing activities: Issuance of 5 5/8% convertible subordinated notes 125,000,000 - Proceeds from long-term debt borrowings 30,500,000 9,000,000 Repayments of debt (70,420,804) (6,369,894) Net borrowings under line of credit (50,000) (19,001) Proceeds from issuance of common stock 2,137,012 623,329 Payment of dividends (658,500) (1,082,331) Debt issuance costs (3,750,000) - Payments on capital lease obligations (1,535,784) (313,312) Cash portion of consideration received for common stock $963,699 - - --------------------------------------------------------------------------------------- Net cash provided by financing activities 82,185,623 1,838,791 - --------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (7,609,977) 160,545 Cash and cash equivalents at beginning of period 8,231,421 2,782,781 - --------------------------------------------------------------------------------------- Cash and cash equivalents at end of period 621,444 $ 2,943,326 =======================================================================================
See accompanying notes to supplemental consolidated financial statements F-20 Renal Treatment Centers, Inc. and Subsidiaries Notes to Condensed Supplemental Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION: The accompanying unaudited condensed supplemental consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. The interim supplemental consolidated financial statements should be read in conjunction with the supplemental consolidated financial statements and footnotes thereto included herein. The condensed supplemental consolidated financial statements of Renal Treatment Centers, Inc. ("the Company") have been prepared to give retroactive effect to the acquisition of Panama City Artificial Kidney Center, Inc. and North Florida Artificial Kidney Center, Inc. (collectively "the Group") on July 23, 1996 which has been accounted for using the pooling-of-interests method of accounting. 2. COMMITMENTS AND CONTINGENCIES: The Company is a party to certain legal actions arising in the ordinary course of business. The Company believes it has adequate legal defenses and/or insurance coverage for these actions and that the ultimate outcome of these actions will not have a material adverse impact on the Company's results of operations, financial condition or liquidity. 3. SIGNIFICANT EVENTS: On February 20, 1996, the Company acquired Intercontinental Medical Services, Inc. ("IMS"), which operated four dialysis facilities in Hawaii. The transaction was accounted for as a pooling of interests. Accordingly, the Company's financial statements include the results of IMS as of January 1, 1996. In total, 1,047,464 shares of the Company's common stock were exchanged for all outstanding shares of IMS. On February 29, 1996, the Company acquired Midwest Dialysis Units and its affiliates (collectively "MDU"), which operated 11 dialysis facilities in Oklahoma. The transaction was accounted for as a pooling of interests. Accordingly, the Company's financial statements include the results of MDU as of January 1, 1996. In total 767,168 shares of the Company's common stock were exchanged for all outstanding shares of MDU. Prior year financial statements have not been restated to reflect these transactions because the impact on the Company's financial statements of such transactions is not material. On May 29, 1996, with an effective date of May 31, 1996, the Company acquired substantially all of the assets of Kidney Center of Delaware County, Ltd. ("KCDC") and Kidney Center of Chester County, Ltd. ("KCCC"). These two outpatient dialysis centers, located in the Philadelphia, Pennsylvania area, provide care to approximately 400 patients and perform acute treatments at nine area hospitals. On June 5, 1996 the Company amended its Credit Agreement with a consortium of banks to increase the amount available under the line of credit from $68,125,000 to $100,000,000 and to make certain other changes to the terms of the Credit Agreement, including amendments to certain covenants, the amortization schedule, the interest rates and the events of default. On June 12, 1996 the Company issued $125,000,000 of 5 5/8% Convertible Subordinated Notes due 2006. The Company is using the proceeds of the offering for the repayment of indebtedness, acquisitions, development of additional dialysis centers, capital expenditures and general corporate purposes. F-21 Renal Treatment Centers, Inc. and Subsidiaries SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS for the years ended December 31, 1995, 1994 and 1993
- -------------------------------------------------------------------------------- Additions Balance at Charged to Beginning Costs Balance at Description of Year and Expenses Deductions End of Year - ------------------------------------------------------------------------------------ Year ended December 31, 1995: Allowance for doubtful receivables $2,306,556 $4,760,678 $3,563,490/(1)/ $3,503,744 - ---------------------------------------------------------------------------------- Year ended December 31, 1994: Allowance for doubtful receivables $1,123,211 $3,121,017 $1,937,672/(1)/ $2,306,556 - ---------------------------------------------------------------------------------- Year ended December 31, 1993: Allowance for doubtful receivables $803,204 $1,550,691 $1,230,684/(1)/ $1,123,211 - ----------------------------------------------------------------------------------
(1) Amounts represent writeoffs of uncollectible receivables, of net recoveries. F-22 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits Description -------- ----------- 11.1 Computation of Primary and Fully Diluted Earnings Per Share 23.1 Consent of Coopers & Lybrand, L.L.P. 23.2 Consent of Deloitte & Touche, L.L.P. 23.3 Consent of Baird, Kurtz & Dobson 27 Financial Data Schedule
-11- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RENAL TREATMENT CENTERS, INC. Date: August 23, 1996 ------------------------- By:/s/Frederick C. Jansen ------------------------------------ Frederick C. Jansen Executive Vice President and Chief Financial Officer Date: August 23, 1996 ------------------------- By:/s/Ronald H. Rodgers, Jr. ------------------------------------ Ronald H. Rodgers, Jr. Vice President - Finance (Principal Accounting Officer) -12- Exhibit Index
Exhibits Description Pages - -------- ----------- ----- 11.1 Computation of Primary and Fully Diluted Earnings Per Share 14-15 23.1 Consent of Coopers & Lybrand, L.L.P. 16 23.2 Consent of Deloitte & Touche, L.L.P. 17 23.3 Consent of Baird, Kurtz & Dobson 18 27 Financial Data Schedule 19
-13- EX-11.1.A 2 COMPUTATION OF PRIMARY AND FULLY DILUTED EPS Exhibit 11.1 (a) Renal Treatment Centers, Inc. and Subsidiaries COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE for the year ended December 31, 1994
Primary Fully Diluted 1994 1994 ---- ---- Net income $10,050,920 $10,050,920 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average number of shares outstanding during year 20,589,003 20,589,003 Weighted average number of maximum shares subject to exercise under outstanding stock options 1,396,022 1,396,022 - ------------------------------------------------------------------------------------------------------------------------------------ 21,985,025 21,985,025 Less treasury shares assumed purchased with proceeds from assumed exercise of outstanding common stock options 823,782 769,752 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average number of common and common stock equivalents outstanding 21,161,243 21,215,273 - ------------------------------------------------------------------------------------------------------------------------------------ Net income per common and common stock equivalent $0.47 $0.47 - ------------------------------------------------------------------------------------------------------------------------------------
-14- EX-11.1.B 3 COMPUTATION OF PRIMARY AND FULLY DILUTED EPS Exhibit 11.1 (b) Renal Treatment Centers, Inc. and Subsidiaries COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE for the year ended December 31, 1995
Primary Fully Diluted 1995 1995 ---- ---- Net income $14,630,804 $14,630,804 Add back interest on note, tax effected $ 283,136 - ----------------------------------------------------------------------------------------------------------------------------------- Net income available to common stockholders $14,630,804 $14,913,940 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 21,868,067 21,868,067 Weighted average number of maximum shares subject to exercise under outstanding stock options 1,444,812 1,444,812 Weighted average shares assumed issued upon conversion of note - 682,402 - ----------------------------------------------------------------------------------------------------------------------------------- 23,312,879 23,995,281 Less treasury shares assumed purchased with proceeds from assumed exercise of outstanding common stock options 900,146 594,196 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average number of common and common stock equivalents outstanding 22,412,733 23,401,085 - ------------------------------------------------------------------------------------------------------------------------------------ Net income per common and common stock equivalent $0.65 $0.64 - -----------------------------------------------------------------------------------------------------------------------------------
-15- EX-23.1 4 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Renal Treatment Centers, Inc. and Subsidiaries (the "Company") on Forms S-8 (File Nos. 33-85750 and 33-94262) and Forms S-3 (File Nos. 33-88418, 33-93060, 33-96828 and 333-3716) of our report dated March 20, 1996 except for the combination described in Note 2, for which the date is August 19, 1996, on our audits of the consolidated financial statements and the financial statement schedule of the Company as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993, which includes reference to information audited by other auditors for which the dates of their reports are July 14, 1995 and March 31, 1995, respectively, which reports are included in this Form 8-K /s/Coopers & Lybrand, L.L.P. - ---------------------------- Coopers & Lybrand L.L.P. 600 Lee Road Wayne, Pennsylvania August 22, 1996 -16- EX-23.2 5 INDEPENDENT AUDITORS' CONSENT Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements of Renal Treatment Centers, Inc. and subsidiaries on Form S-8 (Nos. 33-85750 and 33-94262) and Form S-3 (Nos. 33-88418, 33-93060, 33-96828 and 333-3716) of our report dated March 31, 1995, on our audits of the combined financial statements of Healthcare Corporation and Affiliates as of December 31, 1994, and for the two years in the period ended December 31, 1994, appearing in the Annual Report on Form 10-K of Renal Treatment Centers, Inc. and subsidiaries for the year ended December 31, 1995. /s/Deloitte & Touche LLP - ------------------------ Deloitte & Touche LLP Nashville, Tennessee August 20, 1996 -17- EX-23.3 6 INDEPENDENT AUDITORS' CONSENT Exhibit 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the registration statements of Renal Treatment Centers, Inc. on Form S-3 (File Nos. 33-88418, 33-93060, 33- 96828, 333-3716) and S-8 (File Nos. 33-85750, 33-94262) of our report dated July 14, 1995, except for Note 9 as to which the date is July 24, 1995, relating to the financial statements of the Wichita Dialysis Group, which report is included in the Form 8-K. /s/Baird, Kurtz & Dobson - ------------------------ Baird, Kurtz & Dobson Wichita, Kansas August 23, 1996 -18- EX-27 7 FINANCIAL DATA SCHEDULE
5 12-MOS 6-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 JUN-30-1996 8,231,421 621,444 0 0 55,500,362 69,130,461 3,503,744 5,743,830 2,869,019 3,838,960 65,313,786 116,442,363 32,188,978 42,982,964 10,746,557 16,249,094 174,868,236 271,660,519 21,934,177 16,225,117 42,576,100 131,592,265 0 0 0 0 222,097 242,559 110,135,862 123,600,578 174,868,236 271,160,519 0 0 164,568,392 106,132,950 0 0 79,451,490 51,482,375 0 0 4,760,678 3,308,507 2,557,449 1,553,433 22,262,873 13,802,550 7,632,069 4,999,536 14,630,804 8,803,104 0 0 0 0 0 0 14,630,804 8,803,104 .65 .36 .64 .35
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