-----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, IlFELNjTeIqGzCN+ZQQI86iLmTHJe9yxnLHRRfT7CdR1eIYRVCE9SPsODsLFGLKO La5tQgqZA/FPYTsAH2cz2g== 0000950144-98-012536.txt : 19981116 0000950144-98-012536.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950144-98-012536 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RENEX CORP CENTRAL INDEX KEY: 0000911953 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 650422087 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23165 FILM NUMBER: 98746699 BUSINESS ADDRESS: STREET 1: 2100 PONCE DE LEON BLVD SUITE 950 CITY: CORAL GABLES STATE: FL ZIP: 33134 BUSINESS PHONE: 3054482044 MAIL ADDRESS: STREET 1: 2100 PONCE DE LEON BLVD STREET 2: #950 CITY: CORAL GABLES STATE: FL ZIP: 33134 10-Q 1 RENEX CORP FORM 10-Q 9-30-98 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended September 30, 1998 OR [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-23165 RENEX CORP. (Exact name of Registrant as specified in its charter) Florida 65-0422087 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2100 Ponce de Leon Boulevard, Suite 950 Coral Gables, Florida 33134 (Address of principal executive offices, including Zip Code) Registrant's telephone number including area code: (305) 448-2044 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. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Title of Each Class Number of Shares Outstanding Common Stock September 30, 1998 6,977,372 2 RENEX CORP. QUARTERLY REPORT ON FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1998 TABLE OF CONTENTS
PAGE ---- PART I--FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets September 30, 1998 (unaudited) and December 31, 1997 1 Condensed Consolidated Statements of Operations (unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 2 Condensed Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 1998 and 1997 3 Notes to Unaudited Condensed Consolidated Financial Statements 4-5 Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations 6-11 PART II--OTHER INFORMATION Item 1. Legal Proceedings. 12 Item 2. Changes in Securities. 12 Item 3. Defaults Upon Senior Securities. 12 Item 4. Submission of Matters to a Vote of Securities Holders. 12 Item 5. Other Information. 12 Item 6. Exhibits and Reports on Form 8-K 12
3 RENEX CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ........................................ $ 8,801,000 $ 9,693,000 Accounts receivable, less allowance for doubtful accounts of $1,690,000 and $1,252,000 at September 30, 1998 and December 31, 1997, respectively ................................ 7,990,000 5,266,000 Securities available for sale .................................... -- 5,057,000 Inventories ...................................................... 547,000 433,000 Prepaids and other ............................................... 565,000 667,000 ------------ ------------ Total current assets ......................................... 17,903,000 21,116,000 Fixed assets, net .................................................. 10,752,000 7,675,000 Intangible assets, net ............................................. 5,596,000 1,637,000 Notes receivable from affiliates, interest rate at 8% .............. 85,000 85,000 Other assets ....................................................... 292,000 167,000 ------------ ------------ Total assets ................................................. $ 34,628,000 $ 30,680,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ................................................. $ 1,251,000 $ 1,436,000 Accrued expenses and other ....................................... 6,531,000 3,606,000 Current portion of capital lease obligations ..................... 637,000 436,000 ------------ ------------ Total current liabilities .................................... 8,419,000 5,478,000 ------------ ------------ Capital lease obligations, less current portion .................... 1,729,000 1,512,000 ------------ ------------ Commitments Shareholders' equity: Common stock, $.001 par value, 30,000,000 shares authorized, 6,977,372 shares - 1998, and 6,974,247 shares - 1997 issued and outstanding ................................................ 7,000 7,000 Additional paid-in capital ....................................... 30,444,000 30,618,000 Accumulated deficit .............................................. (5,971,000) (6,935,000) ------------ ------------ Total shareholders' equity ................................... 24,480,000 23,690,000 ------------ ------------ Total liabilities and shareholders' equity ................... $ 34,628,000 $ 30,680,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 1 4 RENEX CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (UNAUDITED) Net revenues .................................. $ 10,177,000 $ 6,580,000 $ 27,279,000 $ 19,012,000 Operating expenses: Facilities .................................. 7,417,000 5,012,000 20,338,000 14,688,000 General and administrative .................. 1,397,000 851,000 3,681,000 2,158,000 Provision for doubtful accounts ............. 254,000 269,000 748,000 761,000 Depreciation and amortization ............... 658,000 394,000 1,732,000 1,182,000 ------------ ------------ ------------ ------------ Operating income ........................ 451,000 54,000 780,000 223,000 ------------ ------------ ------------ ------------ Other income (expense): Loss on sale of assets ...................... -- -- -- (27,000) Net interest income (expense) ............... 21,000 (278,000) 247,000 (815,000) Amortization of deferred financing costs .... -- (54,000) -- (162,000) ------------ ------------ ------------ ------------ Income (loss) before taxes .................... 472,000 (278,000) 1,027,000 (781,000) Income tax expense ............................ 33,000 -- 63,000 -- ------------ ------------ ------------ ------------ Net income (loss) ....................... $ 439,000 $ (278,000) $ 964,000 $ (781,000) ============ ============ ============ ============ BASIC EARNINGS (LOSS) PER SHARE Net income (loss) ............................. $ .06 $ (.07) $ .14 $ (.20) ============ ============ ============ ============ Weighted average shares outstanding ........... 6,977,372 3,971,128 6,977,372 3,974,006 ============ ============ ============ ============ DILUTED EARNINGS (LOSS) PER SHARE Net income (loss) ............................. $ .06 $ (.07) $ .14 $ (.20) ============ ============ ============ ============ Weighted average shares outstanding ........... 7,030,920 3,971,128 7,037,795 3,974,006 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 2 5 RENEX CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 1998 1997 ----------- ----------- Cash Flows from Operating Activities: Net income (loss) ................................................... $ 964,000 $ (781,000) Adjustments to reconcile net income (loss) to net cash used for operating activities: Provisions for doubtful accounts .................................. 748,000 761,000 Depreciation and amortization ..................................... 1,732,000 1,182,000 Amortization of deferred financing costs/intangibles .............. -- 162,000 Loss on sale of property and equipment ............................ -- 27,000 Changes in operating assets and liabilities, net of effects of acquisition: Accounts receivable ............................................. (3,472,000) (1,367,000) Inventories ..................................................... (84,000) (12,000) Prepaids and other .............................................. 102,000 (136,000) Other assets .................................................... (133,000) (269,000) Accounts payable and accrued expenses ........................... 2,667,000 1,142,000 ----------- ----------- Net cash provided by operating activities ............................. 2,524,000 709,000 ----------- ----------- Cash Flows from Investing Activities: Purchases of property and equipment ................................. (3,130,000) (997,000) Purchase of business assets ......................................... (4,750,000) -- Sales of securities available for sale .............................. 5,057,000 -- Proceeds from the sale of property and equipment .................... -- 36,000 ----------- ----------- Net cash used for investing activities .......................... (2,823,000) (961,000) ----------- ----------- Cash Flows from Financing Activities: Payments on capital lease obligations ............................... (413,000) (530,000) Proceeds from line of credit ........................................ -- 1,500,000 Repayments of long-term debt ........................................ (6,000) (28,000) Payments on line of credit .......................................... -- (500,000) Proceeds from sale of stock ......................................... -- 12,000 Expenditures associated with issuance of stock ...................... (174,000) -- ----------- ----------- Net cash (used for) provided by financing activities ............ (593,000) 454,000 ----------- ----------- Net (decrease) increase in cash and cash equivalents .................. (892,000) 202,000 Cash and cash equivalents, beginning of period ........................ 9,693,000 952,000 ----------- ----------- Cash and cash equivalents, end of period .............................. $ 8,801,000 $ 1,154,000 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash paid for interest .............................................. $ 287,000 $ 809,000 =========== =========== Cash paid for income tax ............................................ $ 81,000 $ -- =========== =========== Non-Cash Investing and Financing Activities: Equipment acquired through capital lease obligations ................ $ -- $ 921,000
See accompanying notes to condensed consolidated financial statements. 3 6 RENEX CORP. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (1) INTERIM FINANCIAL STATEMENTS: In management's opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of September 30, 1998, and the results of its operations for the three and nine months ended September 30, 1998 and 1997. The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The condensed consolidated financial statements have been prepared by the Company in accordance with the accounting policies disclosed in the audited consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 1997 and should be read in conjunction with the consolidated financial statements and notes included in that report. (2) BUSINESS COMBINATIONS: On March 27, 1998, the Company through its wholly-owned subsidiary, Renex Dialysis Clinic of South Georgia, Inc., purchased certain of the assets and the operating business and assumed certain liabilities of South Georgia Dialysis Services, LLC, a Georgia limited liability company ("SGDS") which operated four dialysis facilities. The purchase price of $4,500,000 was paid in cash at closing. The consolidated financial statements reflect the results of operations of the acquired business from the acquisition date. A portion of the purchase price was allocated to the net assets acquired based on their estimated fair values. The balance of the purchase price, $3,311,000, was recorded as goodwill. On June 23, 1998, the Company paid $250,000 for the achievement of certain earnout provisions based on profitability relating to the acquisition in November 1997 of an acute dialysis and hemapheresis services company. Such amount has been added to goodwill. (3) COMPREHENSIVE INCOME: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components. The Company's net income for the three and nine months ended September 30, 1998 equals comprehensive income for the same period. 4 7 (4) RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1997, Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related Information" was issued by the Financial Accounting Standards Board. This statement, which is applicable for fiscal year 1998, establishes standards for reporting information about a Company's operating segments and related disclosures about its products, services, geographic areas of operations and major customers. The implementation of this statement is not expected to impact the Company's result of operations, cash flows or financial position. (5) SUBSEQUENT EVENTS: In October 1998, the Company extended the non-competition agreements for an additional seven and one half years with the physicians who sold to the Company the Orange, New Jersey facility. As consideration for the extension, the Company will issue 445,594 common shares to the physicians pursuant to the terms of their amended non-competition agreements representing $2.2 million which will be allocated to non-compete agreements and goodwill. In November 1998, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase up to 500,000 shares of common stock on the open market from time to time at prices acceptable to the Company. As of the current date, no shares have been repurchased. In November 1998, the Company's Board of Directors approved a Shareholder Rights Plan authorizing a dividend distribution of one Preferred Stock Purchase Right for each outstanding share of the Company's common stock. Under the plan, in specified circumstances when the rights can be exercised, each Right will entitle shareholders to purchase one one-hundredth of a share of the Company's new Series A Junior Participating Preferred Stock at an exercise price of $25. The Rights will be exercisable only under certain circumstances relating to a possible acquisition of or tender offer for the Company. Each Right will allow shareholders to purchase a certain number of shares of the Company's common stock or an acquiring company's common shares depending on the form of the business combination. 5 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The Company, operating through its wholly-owned subsidiaries, is a provider of dialysis and ancillary services to patients with end-stage renal disease, as well as acute dialysis services to patients in hospitals. Since inception, the Company has implemented a growth strategy designed to build its presence in selected regional markets by establishing local clusters of dialysis facilities through new facility ("DE NOVO") development or the acquisition of existing facilities. To date, the Company has grown primarily through DE NOVO development because the Company believes such a strategy minimizes the initial capital outlay. However, DE NOVO facilities achieve profitability only when they reach sufficient utilization, which historically does not occur prior to twelve months following opening. The Company has increased utilization in its existing facilities from an average of 41% at December 31, 1994 to an average of 68% at September 30, 1998 primarily through marketing efforts directed at local nephrologists, patients and managed care organizations. The Company's overall facility utilization of 59% as of September 30, 1998 decreased from 66% as of September 30, 1997 due to the opening of three facilities during the year and the acquisition of four dialysis clinics in March 1998 which had a combined utilization of 39%. As of September 30, 1998, the Company operated 20 outpatient dialysis facilities, of which 11 were opened between 1994 and 1998. In addition, from 1995 through 1998, the Company acquired via the purchase of stock or assets, nine dialysis facilities. In addition to its outpatient dialysis facilities, the Company manages a home hemodialysis program and provides acute dialysis and hemapheresis treatments to 14 hospitals through contractual arrangements with these hospitals. The majority of these hospital contracts were added during the fourth quarter of 1997 when the Company acquired certain assets of an acute dialysis and hemapheresis company. RESULTS OF OPERATIONS The following table sets forth certain income statement items expressed as a percentage of net revenues for the three and nine months ended September 30, 1998 and 1997:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 1998 1997 1998 1997 ------ ------ ------ ------ Net revenues 100.0% 100.0% 100.0% 100.0% Facilities expenses 72.9 76.2 74.6 77.3 General and administrative 13.7 12.9 13.5 11.3 Provision for doubtful accounts 2.5 4.1 2.7 4.0 Depreciation and amortization 6.5 6.0 6.4 6.2 Operating income 4.4 0.8 2.9 1.2 Net interest income (expense) 0.2 (4.2) 0.9 (4.3) Net income (loss) 4.3 (4.2) 3.5 (4.1)
6 9 THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 NET REVENUES. Net revenues for the three months ended September 30, 1998 were $10.2 million compared to $6.6 million for the same period in 1997, representing an increase of 55%. The increase in net revenues was primarily attributable to revenues for four new dialysis facilities acquired in March 1998 and an acute service company acquired in December 1997 totaling $1.5 million; one DE NOVO facility opened in September 1997 and another facility opened in March 1998 totaling $1.1 million and the continued growth at existing facilities of $919,000. FACILITIES EXPENSES. Facilities expenses primarily consist of costs and expenses specifically attributable to the operation of the dialysis facilities, including operating and maintenance costs of such facilities and all labor, supplies and service costs related to patient care. Facilities expenses for the three months ended September 30, 1998 were $7.4 million compared to $5.0 million for the same period in 1997, representing an increase of 48%. The increase in facilities expenses was due to the greater number of facilities in operation in 1998. As a percentage of net revenues, facilities expenses decreased to 72.9% for the three months ended September 30, 1998 from 76.2% for the same period in 1997. The decrease as a percentage of net revenues was attributable to an increase in the commercial insurance payor mix from 20% for the three months ended September 30, 1997 to 23% for the three months ended September 30, 1998 and the increase in acute dialysis services which doubled to 6% of revenues compared to the same period in the prior year. Both of these increases provide higher margins. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist of headquarter expenses including marketing, finance, operations management, legal, quality assurance, information systems, billing and collections and centralized accounting support. General and administrative expenses for the three months ended September 30, 1998 were $1.4 million compared to $851,000 for the same period in 1997, representing an increase of 64%. The increase in general and administrative expenses was due to increased personnel related expenses to support the greater number of facilities in operation, accruals related to management incentive programs and costs associated with being a public company. As a percentage of net revenues, general and administrative expenses increased to 13.7% for the three months ended September 30, 1998 from 12.9% for the same period in 1997. The increase as a percentage of net revenues was due to accruals related to management incentive programs and an increase in costs associated with being a public company. PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts is a function of patient payor mix, collection experience and other factors. The Company reserves for doubtful accounts in the period in which revenue is recognized based on management's estimate of the net collectibility of accounts receivable. The provision for doubtful accounts for the three months ended September 30, 1998 was $254,000 compared to $269,000 for the same period in 1997, representing a decrease of 6%. As a percentage of net revenues, the provision for doubtful accounts decreased to 2.5% for the three months ended September 30, 1998 from 4.1% for the same period in 1997. The decrease was primarily due to an emphasis on collections of aged amounts and an improvement in the aging of the accounts receivable. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses for the three months ended September 30, 1998 were $658,000 compared to $394,000 for the same period in 1997, representing an increase of 67%. The increase was primarily due to the acquisition of four dialysis clinics, the opening of three facilities in 1998, and the acquisition of an acute dialysis and hemapheresis business. As a percentage of net revenues, depreciation and amortization expenses increased to 6.5% for the three months ended September 30, 1998 from 6.0% for the same period in 1997 as a result of the above. NET INTEREST INCOME (EXPENSE). Net interest income for the three months ended September 30, 1998 was $21,000 compared to net interest expense of $278,000 for the same period in 1997, 7 10 representing an income increase of $299,000. The increase was primarily due to the payoff in October 1997 of the Company's subordinated debt and the investment of the remaining proceeds from the Company's initial public offering ("IPO"). NET INCOME (LOSS). The Company had net income of $439,000 for the three months ended September 30, 1998 compared to a net loss of $278,000 for the same period in 1997, an increase of $717,000. NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 NET REVENUES. Net revenues for the nine months ended September 30, 1998 were $27.3 million compared to $19.0 million for the same period in 1997, representing an increase of 44%. The increase in net revenues was primarily attributable to the acquisition of four dialysis clinics and an acute dialysis and hemapheresis services company totaling $3.2 million, a full nine months' net revenue totaling $1.9 million for a new facility opened in September 1997, $600,000 for three facilities opened during 1998 and to the continued growth at existing facilities of $2.5 million. FACILITIES EXPENSES. Facilities expenses for the nine months ended September 30, 1998 were $20.3 million compared to $14.7 million for the same period in 1997, representing an increase of 39%. The increase in facilities expenses was due to the greater number of facilities in operation in 1997. As a percentage of net revenues, facilities expenses decreased to 74.6% for the nine months ended September 30, 1998 from 77.3% for the same period in 1997. The decrease as a percentage of net revenues was attributable to an increase in the commercial insurance payor mix from 18% for the nine months ended September 30, 1997 to 24% for the nine months ended September 30, 1998, and an increase in acute dialysis services, both of which provide higher margins. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the nine months ended September 30, 1998 were $3.7 million compared to $2.2 million for the same period in 1997, representing an increase of 71%. The increase in general and administrative expenses was due to increased personnel and related expenses to support the greater number of facilities in operation, accruals related to management incentive programs and costs associated with being a public company. As a percentage of net revenues, general and administrative expenses increased to 13.5% for the nine months ended September 30, 1998 from 11.3% for the same period in 1997. The increase as a percentage of net revenues was due to accruals related to management incentive programs and an increase in costs associated with being a public company. PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts for the nine months ended September 30, 1998 was $748,000 compared to $761,000 for the same period in 1997 representing a decrease of 2%. As a percentage of net revenues, the provision for doubtful accounts decreased to 2.7% for the nine months ended September 30, 1998 from 4.0% for the same period in 1997. The decrease was primarily due to an increased emphasis upon collection of aged amounts and an improvement in the aging of the accounts receivable. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses for the nine months ended September 30, 1998 were $1.7 million compared to $1.2 million for the same period in 1997, representing an increase of 47%. The increase was primarily due to the acquisition of four dialysis clinics, the opening of three facilities, and the acquisition of an acute dialysis and hemapheresis business. As a percentage of net revenues, depreciation and amortization expenses increased to 6.4% for the nine months ended September 30, 1998 from 6.2% for the same period in 1997 as a result of the above. 8 11 NET INTEREST INCOME (EXPENSE). Net interest income for the nine months ended September 30, 1998 was $247,000 compared to net interest expense of $815,000 for the same period in 1997, representing an income increase of approximately $1.1 million. The increase was primarily due to the payoff in October 1997 of the Company's subordinated debt and the investment of the remaining proceeds from the Company's IPO. NET INCOME (LOSS). The Company had net income of $964,000 for the nine months ended September 30, 1998 compared to a net loss of $781,000 for the same period in 1997, an increase of approximately $1.8 million. LIQUIDITY AND CAPITAL RESOURCES The Company requires capital resources for maintenance, refurbishing and expansion of existing facilities, acquisitions, DE NOVO facilities, working capital and general corporate purposes. The Company intends to finance its growth and working capital requirements, as well as purchases of additional equipment and leasehold improvements, from cash on hand, cash generated from operations and the Company's secured line of credit described below. As of September 30, 1998, the Company had working capital of approximately $9.5 million of which $8.8 million consisted of cash and cash equivalents, compared to working capital of $15.6 million of which $14.8 million consisted of cash and cash equivalents and securities available for sale as of December 31, 1997. The decreases were primarily a result of the cash purchase of four facilities for $4.5 million and purchases of property and equipment primarily for three facilities opened in 1998 for $3.1 million. Net cash provided by operating activities was $2.5 million for the nine months ended September 30, 1998, compared to net cash provided by operating activities of $709,000 for the nine months ended September 30, 1997. Net cash provided by operating activities consists of the Company's net income, increased by non-cash expenses such as depreciation, amortization and the provision for doubtful accounts and adjusted by changes in components of working capital, primarily accounts receivable and accrued expenses. The Company requires substantial working capital to cover the expenses and initial losses of each DE NOVO facility. Once a DE NOVO facility is operational, the Company is unable to bill for services until it receives a Medicare provider number and the Medicare intermediary installs its electronic billing software at the facility. For these reasons, there is generally a 90-day delay before the Company will receive payment on its initial services at such facility. In addition, the dialysis industry is characterized by long collection cycles because Medicaid and private insurance carriers require substantial documentation to support reimbursement claims and often take a substantial amount of time to process claims. As a result, the Company requires significant working capital to cover expenses during the collection process. Net cash used for investing activities was $2.8 million and $961,000 for the nine months ended September 30, 1998 and 1997, respectively. The cash used in 1998 related primarily to the $4.5 million cash purchase of four facilities in March 1998, along with $3.1 million for purchases of fixed assets, offset by the sale of $5.1 million in securities available for sale. The cash used in 1997 consisted primarily of purchases of fixed assets of $997,000. Historically, the Company's principal uses of cash in investing activities have been related to purchases of new equipment and leasehold improvements for the Company's existing facilities, the cost of development of additional facilities and acquisitions. The Company opened a facility in March 1998 and two more facilities during the third quarter. Net cash used for financing activities for the nine months ended September 30, 1998 was $593,000. This consisted primarily of payments on capital lease obligations. Net cash provided by financing 9 12 activities for the nine months ended September 30, 1997 of $454,000 consisted primarily of $1 million of net proceeds from a line of credit offset by $530,000 in payments on capital lease obligations. In April 1998, the Company obtained a $15 million secured line of credit with a financial institution (the "Line of Credit"). Borrowings under the Line of Credit are based on cash flow measurements, and bear interest ranging from the lower of the LIBOR rate, plus 2.25% up to 2.75%, or the prime rate minus .5% up to the prime rate depending on the Company's leverage ratio. The Line of Credit will be utilized primarily for acquisitions and also provides working capital advances via sublimits up to $5 million. The Line of Credit contains certain financial covenants as to minimum net worth, leverage, capitalization and cash flow ratios along with restrictions on new indebtedness and payment of dividends. The Line of Credit replaced the Company's previous $4 million line of credit, and due to restrictions on indebtedness, it also effectively replaced the Company's $6 million lease line for equipment financing. As of September 30, 1998, the Company did not have any borrowings under the Line of Credit. The Company's long-term capital requirements depend on numerous factors, including the rate at which the Company develops or acquires new facilities. In addition, the Company has various on-going needs for capital, including: (i) working capital for operations (including financing receivables as previously described); and (ii) routine capital expenditures for the maintenance of facilities, such as equipment and leasehold improvements. In order to implement the Company's long-term growth strategy, the Company anticipates that capital requirements will increase substantially from historical levels. The Company anticipates that the consideration to be paid for the acquisition of new facilities will consist of cash, promissory notes, assumption of liabilities and/or the issuance of common stock or securities convertible into common stock. Currently, the Company does not have any agreements, commitments or understandings regarding the acquisition of any facilities. The Company believes that cash on hand, together with the Line of Credit, will be sufficient to fund the Company's operations and to finance the Company's growth strategy through the next 12 months. However, there can be no assurance that the Company will not require substantial additional funds prior to such time. INCOME TAX LOSS CARRYFORWARDS As of September 30, 1998, the Company had approximately $6.6 million of net operating loss carryforwards that may be available to offset future taxable income for federal income tax purposes. These net operating loss carryforwards begin to expire in 2008. POTENTIAL IMPACT OF INFLATION A majority of the Company's net 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 Congressional budget limitations, inflation, consumer price indexes and costs incurred in rendering the services. Historically, adjustments to reimbursement rates have had little relation to the actual cost of doing business. The Company is not able to increase the amounts it bills for services provided by its operations that are subject to Medicare and Medicaid reimbursement rates. Operating costs, such as labor and supply costs, are subject to inflation without corresponding increases in reimbursement rates. Such increases may be significant and, as such, have a material adverse effect on the Company's results of operations. 10 13 YEAR 2000 In February 1998, the Company formed a committee to evaluate and develop an action plan for computer systems issues related to the Year 2000 ("Y2K"). The committee is evaluating Y2K issues related to third party internal systems used by the Company. This committee has also begun evaluating the impact of Y2K issues on the Company's payors and operating vendors to determine their current status and plan of action for Y2K readiness. The Company recognizes its reliance on third parties for its operating and financial computer output and processing. Based upon ongoing assessments, it appears that the Company's existing internal software is either Y2K compliant or that third parties are taking appropriate and timely steps to ensure Y2K readiness. Testing, modifications and conversions of these third parties' software are expected to be completed by December 31, 1998. Presently, the Company's management does not foresee any significant costs related to these potential modifications and conversions. The Company has formally communicated with its significant payors and vendors and has requested a written statement regarding their Y2K readiness and proof of their Y2K testing by the first quarter of 1999. In the event that a vendor or payor fails to respond to the Company's request, the Company will then contact alternative payors and vendors who appear to have greater Y2K readiness and can provide the Company with the same supplies, equipment or services. The failure of any of the Company's significant payors or operating vendors to be Y2K compliant could have a material adverse impact on the operations of the Company. SHARE REPURCHASE PROGRAM In November 1998, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase up to 500,000 shares of common stock on the open market from time to time at prices acceptable to the Company. As of the current date, no shares have been repurchased. IMPORTANT FACTORS RELATING TO FORWARD LOOKING STATEMENTS This Form 10-Q contains certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of Renex Corp. and its subsidiaries, including statements under Management's Discussion and Analysis of Financial Condition and Results of Operations. These forward looking statements involve certain risks and uncertainties. No assurance can be given that any of such matters will be realized. Factors that may cause actual results to differ materially for those contemplated by such forward looking statements include, among others, the following: (i) the success of initiatives undertaken by Renex Corp. to increase its revenues and improve its profitability; (ii) competitive pressure in the industry; and (iii) general economic conditions. 11 14 PART II--OTHER INFORMATION Item 1. Legal Proceedings. Not applicable. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits furnished as part of the Report: 11.1 Statement Re: Computation of Per Share Earnings (Loss) 27 Financial Data Schedule (for SEC use only). 12 15 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. RENEX CORP. (Registrant) By: /s/ James P. Shea ----------------------------------------------- James P. Shea President and Chief Executive Officer By: /s/ Orestes L. Lugo ----------------------------------------------- Orestes L. Lugo Vice President--Finance and Chief Financial Officer Date: November 13, 1998 13 EX-11.1 2 COMPUTATION OF EARNINGS 1 EXHIBIT 11.1 RENEX CORP. COMPUTATION OF PER SHARE EARNINGS (LOSS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- --------------------------- 1998 1997 1998 1997 ---------- --------- ---------- --------- Income (loss) applicable to primary common and common equivalent shares $ 439,000 $(278,000) $ 964,000 $ (781,000) ========== ========= ========== ========= BASIC EPS: Common weighted average shares 6,977,372 3,971,128 6,977,372 3,974,006 Basic earnings (loss) per share 0.06 (0.07) 0.14 (0.20) DILUTED EPS: Common weighted average shares 6,977,372 3,971,128 6,977,372 3,974,006 Options and warrants 53,548 -- 60,423 -- ---------- --------- ---------- --------- Diluted weighted average shares 7,030,920 3,971,128 7,037,795 3,974,006 Diluted earnings (loss) per share 0.06 (0.07) 0.14 (0.20)
EX-27 3 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 8,801,000 0 7,990,000 0 547,000 17,903,000 10,752,000 0 34,628,000 8,419,000 0 0 0 7,000 24,473,000 34,628,000 27,279,000 27,279,000 20,338,000 24,019,000 1,732,000 748,000 (247,000) 1,027,000 63,000 964,000 0 0 0 964,000 .14 .14 The values for the tags of (Receivables) and (PP&E) represent net amounts.
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