-----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, Jq4NR3v5cscfgPTER6jMH2Ruo1vGpULYHT71N3EgVzZKWLKklimQt8Rd+J2dfWJ6 a5iVd+E9U/LcIMCmD4XxbA== 0000950109-97-004061.txt : 19970515 0000950109-97-004061.hdr.sgml : 19970515 ACCESSION NUMBER: 0000950109-97-004061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14142 FILM NUMBER: 97604519 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 10-Q 1 FORM 10-Q Form 10-Q SECURITIES AND EXCHANGE COMMISSION (Mark One) Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 ---------------------- ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 1-14142 Renal Treatment Centers, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 23-2518331 - --------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at May 8, 1997 ----- -------------------------- Common Stock, Par Value $.01 24,973,035 shares RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets-- March 31, 1997 and December 31, 1996 .................... 3 Consolidated Statements of Income- Three months ended March 31, 1997 and 1996 .............. 4 Consolidated Statements of Cash Flows-- Three months ended March 31, 1997 and 1996 .............. 5 Notes to Consolidated Financial Statements .............. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........... 7 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ....................... 10 - 11 SIGNATURES ........................................................... 12 EXHIBITS .............................................................. 13
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Renal Treatment Centers, Inc. and Subsidiaries Consolidated Balance Sheets (Unaudited)
March 31, December 31, 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash $9,487,839 $ 1,445,798 Investments - 41,202,123 Accounts receivable, net of allowance for doubtful accounts of $4,135,749 in 1997 and $4,233,552 in 1996 87,061,674 79,138,388 Inventories 4,099,362 4,388,290 Deferred taxes 765,145 765,145 Prepaid expenses and other current assets 3,727,563 2,749,497 - --------------------------------------------------------------------------------------------------------------------------------- Total current assets 105,141,583 129,689,241 - --------------------------------------------------------------------------------------------------------------------------------- Property and equipment (net of accumulated depreciation of $21,698,808 in 1997 and $19,691,015 in 1996.) 47,031,379 39,578,245 Intangibles (net of accumulated amortization of $36,447,541 in 1997 and $32,934,871 in 1996.) 167,439,151 130,645,378 Deferred taxes, non-current 2,807,064 2,807,064 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $322,419,177 $302,719,928 ================================================================================================================================= Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $5,084,239 $ 12,369,365 Accounts payable 9,598,457 11,341,983 Accrued compensation 4,711,800 3,838,502 Accrued expenses 3,367,363 4,051,614 Accrued income taxes 2,794,415 164,535 Accrued interest 1,661,394 3,638,874 - --------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 27,217,669 35,404,873 - --------------------------------------------------------------------------------------------------------------------------------- Long-term debt, net 150,267,999 130,573,685 Commitments and contingencies 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 24,654,419 and 24,430,256 shares in 1997 and 1996, respectively. 246,544 244,303 Additional paid-in capital 90,060,639 87,890,138 Retained earnings 55,020,402 49,001,005 - --------------------------------------------------------------------------------------------------------------------------------- 145,327,585 137,135,446 - --------------------------------------------------------------------------------------------------------------------------------- Less treasury stock, 37,202 shares in 1997 and 1996, at cost (394,076) (394,076) - --------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 144,933,509 136,741,370 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $322,419,177 $302,719,928 =================================================================================================================================
See accompanying notes to consolidated financial statements. Renal Treatment Centers, Inc. and Subsidiaries Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Net patient revenue $71,107,221 $50,549,827 Patient care costs 34,325,569 24,485,227 - ------------------------------------------------------------------------------------------------------------------------------------ Operating profit 36,781,652 26,064,600 General and administrative expense 17,477,866 13,153,351 Provision for doubtful accounts 2,191,477 1,571,186 Depreciation and amortization expense 5,733,667 3,572,201 Merger expenses - 1,708,247 - ------------------------------------------------------------------------------------------------------------------------------------ Income from operations 11,378,642 6,059,615 Interest expense, net 1,824,043 697,120 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 9,554,599 5,362,495 Provision for income taxes 3,535,202 1,990,207 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $6,019,397 $3,372,288 - ------------------------------------------------------------------------------------------------------------------------------------ Per Share Data: Primary earnings per common and common stock equivalent $ 0.24 $ 0.14 Weighted average number of common and common stock equivalents outstanding 25,261,187 24,760,812 Fully diluted earnings per common and common stock equivalent $ 0.24 $ 0.14 Weighted average number of common and common stock equivalents outstanding 25,702,611 25,464,145
See accompanying notes to consolidated financial statements. Renal Treatment Centers, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $6,019,397 $3,372,288 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,827,417 3,583,036 Provision for doubtful accounts 2,191,477 1,571,186 Equity in (earnings) losses from affiliates (82,865) 242,372 Changes in operating assets and liabilities, net of effects of companies acquired: Accounts receivable (10,114,763) (2,931,954) Inventories 636,284 (813,448) Prepaid expenses and other current assets (926,864) 431,081 Accounts payable and accrued expenses (3,768,643) (3,960,540) Accrued income taxes 2,524,694 102,085 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 2,306,134 1,596,106 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (5,824,001) (2,005,302) Purchase of businesses, net of cash acquired (42,841,882) (2,010,241) Sale of investments 41,202,123 - Other (711,465) (613,125) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (8,175,226) (4,628,668) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from long-term debt borrowings 23,000,000 1,500,000 Repayments of debt (9,296,614) (3,587,473) Proceeds from issuance of common stock 454,453 524,581 Payments on capital lease obligations (246,706) (793,671) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities 13,911,133 (2,356,563) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 8,042,041 (5,389,125) Cash and cash equivalents at beginning of period 1,445,798 8,231,421 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $9,487,839 $2,842,296 ====================================================================================================================================
See accompanying notes to consolidated financial statements. Renal Treatment Centers, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION: The accompanying unaudited 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 three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Form 10-K filed with the Securities and Exchange Commission on March 28, 1997. 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: Purchase Transactions: During the first quarter of 1997, the Company acquired substantially all of the assets of twelve dialysis centers, inclusive of one center operating under a management agreement. Eight of the centers are located in Texas, two centers are located in the Republic of Argentina and one center each is located in Nevada, Florida and Pennsylvania. Combined, these centers provide care to an effective patient base of approximately 830, including patients covered under inpatient dialysis service agreements with eight hospitals. Other Events: In March 1997, the Financial Accounting Standard Board issued Statement of Financial Accounts Standards (SFAS) No. 128, "Earnings Per Share." This statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. In addition, this statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. This statement requires restatement of all prior-period EPS data presented. Although the Company is not permitted to adopt this statement in an earlier period, pro-forma disclosures as if the Company had adopted the requirements beginning in 1996 are presented below:
Three Months Ended 1997 1996 - -------------------------------------------------------------------------------- Basic: Basis earnings per share $0.25 $0.14 Weighted average number of shares 24,509,763 24,036,542 Dilutive: Dilutive earnings per share $0.24 $0.14 Weighted average number of common and common stock equivalents outstanding 25,702,611 25,464,145
Subsequent Event: On May 2, 1997, the Company amended its revolving credit/term facility ("Credit Agreement") to increase the amount available under the Credit Agreement from $100,000,000 to $200,000,000 and to make certain other changes to the terms of the Credit Agreement, including amendments to certain covenants, the amortization schedule and the interest rates. Item 2. Renal Treatment Centers, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Renal Treatment Centers, Inc. provides dialysis treatments to patients suffering from chronic kidney failure, primarily in its freestanding outpatient dialysis treatment centers or in patients' homes. The Company also provides acute inpatient dialysis services to hospitals. As of May 1, 1997, the Company operated 128 outpatient dialysis centers in 23 states, the District of Columbia and the Republic of Argentina and provided dialysis services to approximately 9,300 patients. In addition, the Company provided inpatient dialysis services at 95 hospitals located in the Company's service areas. 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 Net Patient Revenue Three Months Ended Period-to-Period March 31, Percentage Change - -------------------------------------------------------------------------------- 1997 1996 1997 vs. 1996 - -------------------------------------------------------------------------------- 100.0% 100.0% 40.7% Net patient revenue 48.3% 48.4% 40.2% Patient care costs 24.6% 26.0% 32.9% General and administrative expense 3.1% 3.1% 39.5% Provision for doubtful accounts 8.1% 7.1% 60.5% Depreciation and amortization expense - 3.4% - Merger expenses 16.0% 12.0% 87.8% Income from operations 2.6% 1.4% 161.7% Interest expense, net 13.4% 10.6% 78.2% Income before income taxes 5.0% 3.9% 77.6% Provision for income taxes 8.5% 6.7% 78.5% Net income
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996 Net Patient Revenue. Net patient revenue for the three months ended March 31, 1997 was $71,107,221 as compared to $50,549,827 for the same period in 1996, representing an increase of 40.7%. Of this increase, $14,769,264 was attributable to the revenue generated from the operations of 22 centers and certain acute care agreements acquired in 14 separate purchase transactions from April 1996 through March 1997. Of the remaining increase of $5,788,130, $3,193,302 was attributable to an increase in same-center treatments and $2,594,828 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 Erythropoietin ("EPO") and other ancillary revenue items and an improvement in the Company's third party payor mix. Patient Care Costs. Patient care costs increased 40.2% to $34,325,569 for the three months ended March 31, 1997 from $24,485,227 for the same period in 1996. The increase was principally the result of the acquisitions that were completed from April 1996 through March 1997. However, as a percentage of net patient revenue, patient care costs decreased to 48.3% for the three months ended March 31, 1997 from 48.4% for the same period in 1996. This percentage decrease was primarily related to the increase in same-center net revenue per treatment. The increase in same-center net revenue per treatment was partially offset by the additional costs related to the increased administration of EPO and other ancillary revenue items. General and Administrative Expense. General and administrative expense increased $4,324,515, or 32.9%, to $17,477,866 for the three months ended March 31, 1997, as compared to $13,153,351 for the same period in 1996. This increase was primarily the result of additional facility operating costs as well as additional corporate and facility personnel required to support the centers acquired and opened from April 1996 through March 1997. As a percentage of net patient revenue, general and administrative expense decreased to 24.6% for the three months ended March 31, 1997, as compared to 26.0% for the three months ended March 31, 1996. The decrease as a Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) percentage of net patient revenue was attributable to the Company's ability to maintain certain costs, while increasing net revenues through acquisitions, internal growth and start up operations. Provision for doubtful accounts. Provision for doubtful accounts increased $620,291, or 39.5%, to $2,191,477 for the three months ended March 31, 1997, as compared to $1,571,186 for the same period in 1996. This increase was principally a result of the additional net patient revenue generated from acquisitions that occurred subsequent to the first quarter of 1996. As a percentage of net patient revenue, the provision for doubtful accounts was 3.1% for the three months ended March 31, 1997 and 1996. Depreciation and Amortization Expense. Depreciation and amortization expense increased $2,161,466, or 60.5%, for the three months ended March 31, 1997 when compared to the same period in 1996. As a percentage of net patient revenue, depreciation and amortization expense was 8.1% for the three months ended March 31, 1997, as compared to 7.1% for the three months ended March 31, 1996. Both the dollar and percentage increases were attributable to the purchase acquisitions completed from April 1996 through March 1997. Merger Expenses. There were no merger expenses for the three months ended March 31, 1997, as compared to $1,708,247 for the same period in 1996. For the three months ended March 31, 1996, merger expenses were incurred as a result of the mergers with Intercontinental Medical Services, Inc. and Midwest Dialysis Units and its affiliates which were completed on February 20, 1996 and February 29, 1996, respectively, and were accounted for under the pooling-of-interests method of accounting. Merger expenses include investment banking, legal, accounting and other fees and expenses. Income from Operations. Income from operations increased 87.8% to $11,378,642 for the three months ended March 31, 1997 from $6,059,615 for the same period in 1996. This increase was primarily due to the increase in net revenues from the centers acquired, from April 1996 through March 1997, which exceeded the increase in patient care costs, general and administrative expense and depreciation and amortization expense related to such acquired businesses. In addition, the Company did not incur any merger expenses during the three months ended March 31, 1997 as compared to $1,708,247 incurred in the same period last year. Additionally, same-center treatment and revenue per treatment growth contributed to the increase in income from operations. Interest Expense, net. Interest expense, net, was $1,824,043 for the three months ended March 31, 1997 as compared to interest expense, net, of $697,120 for the same period in 1996. The increase in interest expense, net, was attributable to the interest expense associated with the Company's issuance of $125,000,000 principal amount of 5 5/8% Convertible Subordinated Notes due 2006 (the "Notes") on June 12, 1996. Provision for Income Taxes. Provision for income taxes increased 77.6% to $3,535,202 from $1,990,207 for the three months ended March 31, 1997 and 1996, respectively. For the three months ended March 31, 1997, the Company's effective tax rate was 37.0% compared to an effective tax rate of 37.1% during the same period in 1996. The increase was primarily due to an increase in income before taxes of 78.2%. Net Income. Net income increased 78.5% to $6,019,397 for the three months ended March 31, 1997 from $3,372,288 for the same period in 1996. The increase was due to each of the items discussed above. 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 network of existing dialysis services and for meeting working capital requirements. During the three months ended March 31, 1997, expenditures for acquisitions totalled $42,841,882, compared to $2,010,241 for the three months ended March 31, 1996. The expenditures in 1997 resulted from the acquisition of ten centers in January 1997, one center in February 1997 and one center in March 1997, as compared to the expenditures in 1996, which resulted from the acquisition of one center in March 1996. For the three months ended March 31, 1997 and 1996 capital expenditures were $5,824,001 and $2,005,302, respectively. Cash from operations before investing and financing activities was $2,306,134 and $1,596,106 for the three months ended March 31, 1997 and 1996, respectively. The principal sources of the Company's liquidity during the first three months of 1997 were earnings, borrowings under the Credit Agreement and remaining proceeds from the issuance of the Notes. The Company had cash and cash equivalents of $9,487,839 at March 31, 1997. The Credit Agreement, as amended on May 2, 1997, provides for a $200,000,000 revolving credit/term facility available to fund acquisitions and general working capital requirements, of which $23,000,000 and $0 were outstanding as of March 31, 1997 and December 31, 1996, respectively. The revolving credit/term facility converts into a term loan March 31, 2000 that is payable in 16 equal quarterly installments commencing June, 2000 through March, 2004. Borrowings under the Credit Agreement bear interest, at the Company's option, at either (i) the agent bank's base rate payable on a quarterly basis or (ii) a one-, two-, three-, or six-month period LIBOR rate plus .50% to 1.50%, depending on the Company's ratio of consolidated debt to annualized cash flow, payable at maturity. The weighted Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) average interest rate of all loans outstanding at March 31, 1997 was 6.7%. Loans under the Credit Agreement are collateralized by the pledge of all stock of the Company's subsidiaries and the assignment of all intercompany notes. 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 centers. Management estimates that the development of a new center, depending on its size, requires approximately $500,000 to $1,000,000 for construction costs and the purchase of certain furniture and equipment (leasing certain of the assets can decrease initial cash outflow) 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. 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. Risk Factors In evaluating the Company, its business and its financial position, the following risk factors should be carefully considered in addition to the other information contained herein. The following factors, among others, could affect the Company's future results and cause them to differ materially from any forward-looking statements made by or on behalf of the Company, including, without limitation, the statements under "Liquidity and Capital Resources" relating to the costs of developing dialysis centers. Dependence on Medicare, Medicaid and Other Sources of Reimbursement. The Company is reimbursed for dialysis services primarily at fixed rates as established in advance under the Medicare End Stage Renal Disease ("ESRD") program. Under this program, once a patient becomes eligible for Medicare reimbursement, Medicare is responsible for payment of approximately 80% of the composite rate for dialysis treatment. The composite rate is determined by the Health Care Financing Administration ("HCFA") for reimbursement of Medicare patients. Approximately 58% and 59% of the Company's net patient revenue during the year ended December 31, 1996 and the three months ended March 31, 1997, respectively, was funded by Medicare. Since 1983, numerous Congressional actions have resulted in changes in the Medicare composite reimbursement rate from a national average of $138 per treatment in 1983 to a low of $125 per treatment on average in 1986 and to approximately $126 per treatment on average at present. The Company is not able to predict whether future rate changes will be made. Reductions in composite rates could have a material adverse effect on the Company's revenues and net earnings. Furthermore, increases in operating costs that are subject to inflation, such as labor and supply costs, without a compensating increase in prescribed rates, may adversely affect the Company's earnings in the future. The Company is also unable to predict whether certain services, as to which the Company is currently separately reimbursed, may in the future be included in the Medicare composite rate. Since June 1, 1989, the Medicare ESRD program has provided reimbursement for the administration to dialysis patients of EPO. Most of the Company's dialysis patients receive EPO. Revenues associated with the administration of EPO are significant to the Company and the Company cannot predict future changes in the reimbursement rate, the typical dosage per administration or the cost of EPO. EPO is produced by only one manufacturer, and any interruption of supply could adversely affect the Company's operations. All of the states in which the Company currently operates dialysis centers provide Medicaid (or comparable) benefits to qualified recipients to supplement their Medicare entitlement. The Company estimates that approximately 4% of its net patient revenue during the fiscal year ended December 31, 1996 and during the three months ended March 31, 1997 was funded by Medicaid or comparable state programs. The Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy and governmental funding restrictions, all of which may have the effect of decreasing program payments, increasing costs or modifying the way the Company operates its dialysis business. Approximately 38% and 37% of the Company's net patient revenue during the fiscal year ended December 31, 1996 and during the three months ended March 31, 1997, respectively, was from sources other than Medicare and Medicaid. These sources include payments from third-party, non-government payors and payments from hospitals with which the Company has agreements for the provision of inpatient acute dialysis treatments, in each case at rates that generally exceed the Medicare and Medicaid rates. Any restriction or reduction of the Company's ability to charge for such services at rates in excess of those paid by Medicare would adversely affect the Company's net patient revenue and net income. The Company is unable to quantify or predict the degree, if any, of the risk of reductions in payments under these various payment plans. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) HCFA is conducting a four-year demonstration project, in which four managed care companies have been awarded contracts to develop and implement capitated reimbursement systems for ESRD patients in their respective markets. The project is intended to assist HCFA in determining whether to allow open enrollment of ESRD patients into managed care plans serving Medicare beneficiaries. Currently, managed care companies are permitted to arrange for the provision of dialysis services only to existing members in their programs who develop ESRD. The Company is unable to predict whether the demonstration project will result in large numbers of ESRD patients enrolling in managed care programs, or the impact of the enrollment of ESRD patients in managed care programs on the Company. The widespread introduction of managed care to dialysis services could result in a reduction in the rates of reimbursement for the Company's services, which could have a material adverse effect on the Company's revenues and net earnings. Operations Subject to, and Potential Effects of, Governmental Regulation. The Company is subject to extensive regulation by both the Federal government and the states in which it conducts its business, including the illegal remuneration provisions of the Social Security Act and similar state laws, which impose civil and criminal sanctions on persons who solicit, offer, receive or pay any remuneration, directly or indirectly, in consideration for referring a patient for treatment that is paid for in whole or in part by Medicare, Medicaid or similar state programs. The Federal government has published regulations that provide exceptions or safe harbors for certain business transactions. Transactions that are structured within the safe harbors are deemed not to violate the illegal remuneration provisions. Transactions that do not satisfy all elements of a relevant safe harbor do not necessarily violate the illegal remuneration statute, but may be subject to greater scrutiny by enforcement agencies. The arrangements between the Company and the physician directors of its dialysis centers ("Physician Directors") have been structured to satisfy the elements of the applicable safe harbors, but there can be no assurance that they will not be found to violate the illegal remuneration provisions. In addition, certain of the Company's Physician Directors from whom the Company has acquired dialysis centers have received shares of the Company's Common Stock in full or partial consideration for such acquisitions, and other Physician Directors may have purchased shares of the Company's Common Stock in the open market. The Company believes that such security ownership falls within one of the safe harbors, but there can be no assurance that such security ownership will not be found to violate the illegal remuneration provisions. Although the Company has never been challenged under these statutes and believes it complies in all material respects with these and all other applicable laws and regulations, there can be no assurance that the Company will not be required to change its practices or relationships with its Physician Directors or that the Company will not experience material adverse effects as a result of any such challenge. The Omnibus Budget Reconciliation Act of 1989 includes certain provisions ("Stark I") that restrict physician referrals for clinical laboratory services to entities with which a physician or an immediate family member has a financial relationship. HCFA has published regulations interpreting Stark I, which specifically provide that services furnished in an ESRD facility that are included in the composite billing rate are excluded from the coverage of Stark I. The Company believes that the language and legislative history of Stark I indicate that Congress did not intend to include laboratory services provided incidental to dialysis services within the Stark I prohibition; however, laboratory services not included in the Medicare composite rate could be included within the coverage of Stark I. The Omnibus Budget Reconciliation Act of 1993 includes certain provisions ("Stark II") that restrict physician referrals for certain designated health services to entities with which a physician or an immediate family member has a financial relationship. The Company believes that the language and legislative history of Stark II indicate that Congress did not intend to include dialysis services and the services and items provided incident to dialysis services within the Stark II prohibitions; however, certain services, including the provision of, or arrangement and assumption of financial responsibility for, outpatient prescription drugs, including EPO, and clinical laboratory services, could be construed as designated health services within the meaning of Stark II. Violations of Stark I or Stark II are punishable by civil penalties, which may include exclusion or suspension of the provider from future participation in Medicare and Medicaid programs and substantial fines. Due to the breadth of the statutory provisions and the absence of regulations or court decisions addressing laboratory services not included in the Medicare composite rate and the specific arrangements by which the Company conducts its business, it is possible that the Company's practices might be challenged under these laws. The Clinton administration's health care reform proposals, and other health care reform proposals in general, have not addressed the Medicare ESRD program. Nevertheless, health care reform in general, and Medicare reform in particular, could bring radical change in the financing and regulation of the health care business, and the Company is unable to predict the effect of such changes on its future operations. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs will not have a material adverse effect on the results of operations of the Company. Risks Inherent in Growth Strategy. The Company's business strategy depends in significant part on its ability to acquire or develop additional dialysis centers. This strategy is dependent on the continued availability of suitable acquisition candidates at acceptable prices and subjects the Company to the risks inherent in assessing the value, strengths and weaknesses of acquisition candidates, integrating and managing the operations of acquired companies and identifying suitable locations for additional centers. The Company's growth is expected to place significant demands on the Company's financial resources. The Company plans to borrow a significant portion of the funds needed to acquire or develop centers Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) in the future. Although the Company's Credit Agreement with a consortium of bank lenders includes up to $200,000,000 for acquisition and development activities and general working capital requirements, additional equity or debt financings are expected to be required in order for the Company to fund its expansion plans. There can be no assurance that the Company will continue to be able to obtain necessary financing on acceptable terms for the acquisition or development of centers or that the Company will otherwise be successful in acquiring or developing new centers. No assurance can be given that the Company will make any additional acquisitions or develop any additional centers. Dependence on Physician Referrals. The Company's centers are dependent upon referrals of ESRD patients for treatment by physicians specializing in nephrology and practicing in the communities served by the Company's dialysis centers. As is customary in the dialysis industry, at each center one or a few physicians account for all or a significant portion of the patient referral base. The loss of one or more key referring physicians at a particular center could have a material adverse impact on the operations of that center and could adversely affect the Company's overall operations. Financial relationships with physicians and other referral sources are highly regulated. The illegal remuneration provisions of the Social Security Act and similar state laws prohibit contracts for referrals. Competition. The dialysis industry is fragmented and highly competitive, particularly from the standpoint of competition for acquisition of existing dialysis centers and developing relationships with referring physicians. Competition for qualified physicians to act as Physician Directors is also high. Also, a number of health care providers have entered or may decide to enter the dialysis business. Certain of the Company's competitors have substantially greater financial resources than the Company and may compete with the Company for acquisitions and for development of centers in markets targeted by the Company. There can be no assurance that the Company can continue to compete effectively with such providers. In addition, competition has increased the cost of acquiring existing dialysis centers and there can be no assurance that these costs will not continue to increase as a result of future industry consolidation. Furthermore, some of the Company's centers are in urban areas where there are many competing centers in close proximity. The Company has also experienced competition from the establishment of centers by former Physician Directors and referring physicians. Dependence on Key Personnel. The Company is dependent on certain key management personnel, particularly its President and Chief Executive Officer, Robert L. Mayer, Jr., the loss of whom could have an adverse effect on the Company's business. Moreover, the Company believes that its future success will be significantly dependent on its ability to attract and retain qualified physicians to serve as Physician Directors of its dialysis centers. In addition, the Company will need to continue to attract and retain highly skilled nurses, competition for whom is intense. Part II. Other Information - -------------------------- Item 2. Changes in Securities: (c) On March 1, 1997, the Company issued 166,139 shares of the Company's Common Stock upon conversion of a portion of the outstanding principal amount of a convertible note originally issued to the seller in an acquisition in June 1994. The note is convertible at the rate of $10.3425 principal amount per share of Common Stock. The shares were issued in a private placement pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933. Pursuant to an agreement between the Company and the seller entered into in February 1997, the Company is prepaying the note, and the seller has elected to convert the amounts prepaid into Common Stock, in three installments of 166,139 shares each, on March 1, April 1, and May 1, 1997. Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits The following exhibits are filed herewith: Exhibit No. Document ----------- -------- 10.1 Renal Treatment Centers, Inc. Amended and Restated 1990 Stock Plan (incorporated herein by reference to Exhibit No. 10.1 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.12.6 Fifth Amendment to Lease dated November 26, 1996. 11.1 Computation of Primary and Fully Diluted Earnings per Share. 27 Financial Data Schedule ---------- *Management contract or compensatory plan or arrangement (b) Reports on Form 8-K Form 8-K dated February 5, 1997 filed to report under Item 5 consolidated selected financial data, management's discussion and analysis and consolidated financial statements and financial statement schedule as of December 31, 1993, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 giving retroactive effect to the merger with Panama City Artificial Kidney Center, Inc. and North Florida Artificial Kidney Center, Inc. (collectively, the "Group"). The Company previously filed this information as supplemental financial statements in a Current Report on Form 8-K dated August 23, 1996. After that time, the Company filed post- combination results of operations including the Group. Accordingly, the financial statements in the Form 8-K dated February 5, 1997 were filed as the historical financial statements of the Company. SIGNATURES Pursuant to the requirements 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: May 14, 1997 By: /s/Ronald H. Rodgers, Jr. ---------------------------- ------------------------- Ronald H. Rodgers, Jr. Vice President - Finance and Chief Financial Officer Date: May 14, 1997 By: /s/Keith W. Jones ---------------------------- ----------------- Keith W. Jones Chief Accounting Officer Renal Treatment Centers, Inc. and Subsidiaries Exhibit Index
Located at Exhibit No. Description Page - ----------- ----------- ---- 10.1 Renal Treatment Centers, Inc. Amended and Restated 1990 Stock Plan (incorporated herein by reference to Exhibit No. 10.1 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.12.6 Fifth Amendment to Lease dated November 26, 1996. 11.1 Computation of Primary and Fully Diluted Earnings per Share. 27 Financial Data Schedule
- ---------------- * Management contract or compensatory plan or arrangement. EX-10.12 2 ADMENDMENT TO LEASE Exhibit 10.12.6 FIFTH AMENDMENT TO LEASE ------------------------ THIS FIFTH AMENDMENT TO LEASE is made this 26th day of November, 1996, between TERRAMICS/SOUTHPOINT ASSOCIATES II LIMITED PARTNERSHIP (the "Landlord") and RENAL TREATMENT CENTERS, INC. (the "Tenant"). BACKGROUND ---------- A. Landlord and Tenant entered into a lease dated November 8, 1991, as amended by a First Amendment to Lease dated January 18, 1993, a Second Amendment to Lease dated September 30, 1993, a Third Amendment to Lease dated March 2, 1995, and a Fourth Amendment to Lease dated May 30, 1996 (the "Existing Lease"), covering office space consisting of approximately 41,536 rentable square feet (the "Existing Space") on the second and third floors of the building (the "Building") known as Southpoint TWO located at 1180 West Swedesford Road in the Southpoint Office Complex, Berwyn, Pennsylvania. B. Landlord and Tenant desire to amend the Existing Lease, under the terms and conditions set forth below, to expand the premises covered under the Existing Lease to include approximately 1,384 rentable square feet of additional space (the "Additional Space") on the first floor of the building. The Additional Space is depicted on Exhibit "A" attached to this Amendment. NOW, THEREFORE, the parties hereto, for good and valuable consideration and intending to be legally bound, agree as follows: 1. Additional Space. Effective as of the Additional Space Commencement ---------------- Date (as defined in Section 3(a) below), Landlord hereby leases to Tenant, and Tenant leases from Landlord, the Additional Space, under the same terms and conditions as are set forth in the Existing Lease except as amended by the provisions set forth in this Amendment. All capitalized terms not otherwise defined herein shall have the same meanings ascribed to them in the Existing Lease. The Existing Lease as hereby amended shall be referred to herein as the "Lease". 2. Completion by Landlord. ---------------------- (a) Plans; Time. The Additional Space shall be completed in ----------- accordance with the space plan (SK-2) dated November 11, 1996, prepared by Polek Schwartz Architects and the related scope of work letter, both of which are attached hereto as Exhibit "B" (hereinafter called the "Plans"). All necessary construction as set forth in the Plans shall be commenced promptly and the Additional Space shall be substantially completed and ready for use and occupancy by Tenant on the date set forth in Section 3 of this Amendment; provided, however, that the time for substantial completion of the Additional Space shall be extended for additional periods of time equal to the time lost by Landlord or Landlord's contractors, subcontractors or suppliers due to strikes or other labor troubles, government restrictions and limitations, scarcity, unavailability or delays in obtaining fuel, labor or materials, war or other national emergency, accidents, floods, defective materials, fire damages or other casualties, weather conditions, or any cause similar or dissimilar to the foregoing. All construction shall be done in a good and workmanlike manner. Tenant and its authorized agents, employees and contractors shall have the right, at Tenant's own risk, expense and responsibility, at all reasonable times prior to the Additional Space Commencement Date (as hereinafter defined), to enter the Additional Space for the purpose of taking measurements and installing its furnishings and equipment; provided that Tenant, in so doing, shall not interfere with or delay the work to be performed hereunder by Landlord, and Tenant shall use contractors and workmen compatible with the contractors and workmen engaged in the work to be performed hereunder by Landlord, and Tenant shall have obtained Landlord's written consent prior to installing any furnishings or equipment in the Additional Space. b. Costs. Landlord shall pay for the cost of constructing the ----- improvements as set forth in the Plans and for all necessary space planning and production of construction documents in connection therewith. Any additional or different improvements desired by Tenant shall be performed by Landlord only after Landlord and Tenant have reached a written agreement regarding any charges to Tenant therefor. 3. Term. ---- (a) Additional Space Commencement; Duration. The "Additional Space --------------------------------------- Commencement Date" shall be the later of May 1, 1997 or the date when the Additional Space shall have been substantially completed (meaning such state of completion, exclusive of improvements to be performed by Tenant or Tenant's contractors, as will allow Tenant to utilize the Additional Space for its intended purpose, without material interference by reason of final completion); provided that if Tenant should take possession of the Additional Space or any portion thereof prior to either of the foregoing dates, then the Additional Space Commencement Date shall be the date on which Tenant takes such possession. If substantial completion with respect to the Additional Space shall occur after the estimated Additional Space Commencement Date set forth above, Landlord shall endeavor to furnish to Tenant at least ten (10) days prior written notice of such substantial completion. If there are delays in substantial completion as a result of changes or delays caused by Tenant, including without limitation, any failure of Tenant to submit plans or other required construction information by a required date, the rent with respect to the Additional Space shall commence to accrue without regard to work that is incomplete. The term of the Lease with respect to the Additional Space shall be coterminous with the term of the Lease with respect to the Existing Space. (b) Memoranda. When the Additional Space Commencement Date is --------- established, Landlord and Tenant shall promptly execute and acknowledge a memorandum in form substantially as set forth in Exhibit "C" attached hereto. (c) Acceptance of Work. On the Additional Space Commencement Date it ------------------ shall be presumed that all work theretofore performed by or on behalf of Landlord with respect to the Plans was satisfactorily performed in accordance with and in meeting the requirements of, the Lease, unless within thirty (30) days thereafter Tenant shall notify Landlord, in writing, of the specific deficiencies. The foregoing presumption shall not apply, however: (i) to required work not actually completed by Landlord, which Landlord agrees it shall complete with reasonable speed and diligence (and as to such work, said thirty (30) day period shall be measured from the date of completion), or (ii) to latent defects in the work to be performed in accordance with the Plans which could not reasonable have been discovered within said thirty (30) day period, provided Tenant notifies Landlord thereof within thirty (30) days after discovery. Landlord will promptly undertake and diligently prosecute the correction of any defects or deficiencies of which it is notified within the required period. 4. Minimum Annual Rent. ------------------- (a) For and during the period beginning on the Additional Space Commencement Date and ending December 31, 1998, Tenant shall pay a minimum annual rent for the Additional Space of Twenty-One and 25/100 Dollars ($21.25) per rentable square foot, or, Twenty Nine Thousand Four Hundred Ten Dollars ($29,410.00) per annum, payable in equal monthly installments of Two Thousand Four Hundred Fifty and 84/100 Dollars ($2,450.84). (b) For and during the period beginning January 1, 1999 and for the remainder of the term, Tenant shall pay a minimum annual rent for the Additional Space of Twenty-One Dollars ($21.00) per rentable square foot, or, Twenty Nine Thousand Sixty-Four Dollars ($29,064.00) per annum, payable in equal monthly installments of Two Thousand Four Hundred Twenty-Two Dollars ($2,422.00). Such rent shall be payable in advance on the first day of each month during the term of the Lease, without notice or demand, and without setoff in the manner set forth in the Lease. 5. Definition of Premises. Effective on the Additional Space ----------------------- Commencement Date, the term "Premises" as used in the Lease shall be deemed to include the Additional Space. 6. Proportionate Share. Effective as of the Additional Space ------------------- Commencement Date, Tenant's Proportionate Share shall be increased to Seventy- One and 06/100 percent (71.06%). 7. Broker. Tenant represents and warrants that it has not dealt with any ------ broker or agent in the negotiation or the obtaining of this Amendment, and agrees to indemnify and hold Landlord harmless from any and all costs or liability for compensation claimed by any such broker or agent employed by Tenant or claiming to have been engaged by Tenant in connection with this Amendment. 8. Concessions. Tenant shall not be entitled to any improvement ----------- allowances or any other leasing concessions with respect to the Additional Space, except as expressly provided for in this Amendment. 9. Binding Agreement. Except as expressly modified by this Amendment, ----------------- the terms and conditions of the Lease shall remain in full force and effect, without change. This Amendment shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized representatives. TENANT: RENAL TREATMENT CENTERS, INC., a Delaware corporation Date Signed: By: -------------------- ------------------------------- Attest: --------------------------- (corporate seal) LANDLORD: TERRAMICS/SOUTHPOINT ASSOCIATES II LIMITED PARTNERSHIP, a Pennsylvania limited partnership Date Signed: By: -------------------- ------------------------------- (Authorized Representative) EX-11.1A 3 COMPUTATION OF PRIMARY EARNINGS PER SHARE Exhibit 11.1(a) Renal Treatment Centers, Inc. and Subsidiaries COMPUTATION OF PRIMARY EARNINGS PER SHARE for the quarter ended March 31, 1997 and 1996
Three Months Ended March 31, 1997 1996 - ----------------------------------------------------------------------------------------------------- Net income $ 6,019,397 $ 3,372,288 - ----------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 24,509,763 24,036,542 Weighted average number of maximum shares subject to exercise under outstanding stock options 1,721,920 1,349,743 - ----------------------------------------------------------------------------------------------------- 26,231,683 25,386,285 Less treasury shares assumed purchased with proceeds from assumed exercise of outstanding common stock options 970,496 625,473 - ----------------------------------------------------------------------------------------------------- Weighted average number of common and common stock equivalents outstanding 25,261,187 24,760,812 ===================================================================================================== Net income per common and common stock equivalent $ 0.24 $ 0.14 =====================================================================================================
EX-11.1B 4 COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE Exhibit 11.1(b) Renal Treatment Centers, Inc. and Subsidiaries COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE for the quarter ended March 31, 1997 and 1996
Three Months Ended March 31, 1997 1997 1996 - -------------------------------------------------------------------------------------------------------- Net income $ 6,019,397 $ 3,372,288 Add back interest on note,tax effected 34,122 67,665 - -------------------------------------------------------------------------------------------------------- Net income available to common stockholders $ 6,053,519 $ 3,439,953 - -------------------------------------------------------------------------------------------------------- Weighted average number of shares outstanding 24,509,763 24,036,542 Weighted average number of maximum shares subject to exercise under outstanding stock options 1,721,920 1,349,743 Weighted average shares assumed issued upon conversion of note 441,191 661,501 - -------------------------------------------------------------------------------------------------------- 26,672,874 26,047,786 Less treasury shares assumed purchased with proceeds from assumed exercise of outstanding common stock options 970,263 583, 641 - -------------------------------------------------------------------------------------------------------- Weighted average number of common and common stock equivalents outstanding 25,702,611 25,464,145 ======================================================================================================== Net income per common and common stock outstanding $ 0.24 $ 0.14 ========================================================================================================
EX-27 5 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 9,487,839 0 91,197,423 4,135,749 4,099,362 105,141,583 68,730,187 21,698,808 322,419,177 27,217,669 150,267,999 0 0 246,544 144,686,965 322,419,177 0 71,107,221 0 34,325,569 0 2,191,477 1,824,043 9,554,599 3,535,202 6,019,397 0 0 0 6,019,397 .24 .24
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