Form 10-Q/A Amendment No. 1 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 June 30, 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 August 7, 1997 ----- ----------------------------------------- Common Stock, Par Value $.01 24,989,141 shares INTRODUCTORY STATEMENT Renal Treatment Centers, Inc. ("RTC") was acquired by Total Renal Care Holdings, Inc. ("TRCH") on February 27, 1998. On April 1, 1998, TRCH announced (i) that it had undertaken a detailed review of RTC's accounts receivable and other balance sheet accounts in connection with the completion of the audit of RTC's financial statements for the fiscal year ended December 31, 1997, and (ii) that as a result of such review, it expected to recognize between $25 million and $30 million of non-cash charges related to prior periods which would require a revision of RTC's previously announced results of operations. On April 30, 1998, TRCH announced that RTC might be required to correct previously audited financial statements. The analysis of RTC's financial statements was completed on May 15, 1998. In order to correct certain errors discovered through such analysis, TRCH has determined to (i) restate RTC's financial statements for the fiscal year ended December 31, 1996, (ii) revise RTC's financial statements for the quarterly periods ended March 31, 1997, June 30, 1997 and September 30, 1997 and (iii) revise RTC's previously announced results of operations for the fiscal quarters ended March 31, 1996 and 1997, June 30, 1996 and 1997, September 30, 1996 and 1997 and December 31, 1996 and 1997 and the fiscal years ended December 31, 1996 and 1997. This Form 10-Q/A is being filed to correct the financial statements included in the Form 10-Q for the quarterly period ended June 30, 1997 which was filed on August 14, 1997 (the "Second Quarter 10-Q"). RTC is concurrently filing (i) separate Form 10-Q/A's to correct the financial statements included in its Form 10-Q's previously filed for the quarterly periods ended March 31, 1997 and September 30, 1997 and (ii) a Form 10-K/A to correct the financial statements included in the Form 10-K for the year ended December 31, 1996 which was filed on March 29, 1997. The balance sheets included in the Second Quarter 10-Q are being amended hereby to reflect a reduction of accounts receivable at June 30, 1997 and at December 31, 1996 and to reflect the balance sheet impact of (i) the restatement of RTC's financial statements for the year ended December 31, 1996 and (ii) the revision of the statement of income for the six months ended June 30, 1997. The statements of income included in the Second Quarter 10-Q are being amended hereby to reflect related reductions of net patient revenue, related increases in the provision for doubtful accounts and related reductions in the provision for income taxes. For the interim periods ended June 30, 1997, the reduction in the provision for income taxes was offset, in part, by an increase in the provision for income taxes primarily related to RTC's foreign operations. (See Note 2 of the financial statements filed herewith.) Approximately one half of the charges described above relate to untimely billing and subsequent requests for information by RTC with governmental payors (primarily state medicaid programs) and contracted private payors. The remainder relates primarily to improper contractual allowances related to revenue recognition at the time of billing and to uncollectible accounts. TRCH believes that the causes of such problems have been appropriately addressed and that systems and processes are now in place to ensure accurate contractual allowances related to revenue recognition and timely account resolution, including all appropriate collection efforts. Information included in Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) under the captions "Results of Operations" and "Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996" of the Second Quarter 10-Q was based on RTC's unaudited consolidated financial statements prior to the amendments described above. Consequently, the information included in Item 2 under such captions overstates both net patient revenue and the provision for income taxes and understates the provision for doubtful accounts as described above. RTC believes that the amendment of Item 2 to reflect such changes would provide no material additional information not already presented in Item 2 of the Second Quarter 10-Q or in this Form 10-Q/A. Consequently, such Item 2 is not restated in this Form 10- Q/A. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Renal Treatment Centers, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, 1997 1996 - ---------------------------------------------------------------------------------------------------------- Assets Current Assets: Cash $ 9,129,138 $ 1,445,798 Investments - 41,202,123 Accounts Receivable, net of allowance for doubtful accounts of $9,109,321 in 1997 and $7,853,350 in 1996 75,222,707 65,198,524 Inventories 5,064,238 4,388,290 Deferred Taxes 2,014,742 2,149,718 Prepaid expenses and other current assets 6,943,144 2,749,497 Income tax receivable 4,392,107 3,782,890 - ---------------------------------------------------------------------------------------------------------- Total current assets 102,766,076 120,916,840 - ---------------------------------------------------------------------------------------------------------- Property and equipment (net of accumulated depreciation of $24,832,100 in 1997 and $19,691,015 in 1996) 51,891,707 39,578,245 Intangibles (net of accumulated amortization of $40,523,648 in 1997 and $32,934,871 in 1996) 187,097,297 130,645,378 Deferred Taxes, non-current 2,807,064 2,807,064 - ---------------------------------------------------------------------------------------------------------- Total assets $344,562,144 $293,947,527 - ---------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 1,313,808 $ 12,369,365 Accounts payable 10,848,340 11,341,983 Accrued compensation 4,464,111 3,838,502 Accrued expenses 5,956,394 4,051,614 Accrued income taxes - - Accrued interest 3,430,002 3,638,874 - ---------------------------------------------------------------------------------------------------------- Total current liabilities 26,012,655 35,240,338 - ---------------------------------------------------------------------------------------------------------- Long-term debt, net 175,629,792 130,573,685 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 25,025,739 and 24,430,256 shares in 1997 and 1996, respectively 250,257 244,303 Additional paid-in capital 94,094,774 87,890,138 Retained earnings 48,962,344 40,393,139 - ---------------------------------------------------------------------------------------------------------- 143,307,375 128,527,580 - ---------------------------------------------------------------------------------------------------------- Less treasury stock, 36,598 shares in 1997 and 37,202 shares in 1996, at cost (387,678) (394,076) - ---------------------------------------------------------------------------------------------------------- 142,919,697 128,133,504 - ---------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $344,562,144 $293,947,527 - ---------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 2 Renal Treatment Centers, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Net patient revenue $74,963,047 $53,136,553 $143,870,701 $101,392,035 Patient care costs 36,672,989 26,997,151 70,998,558 51,482,378 - ------------------------------------------------------------------------------------------------------------------ Operating profit 38,290,058 26,139,402 72,872,143 49,909,657 General and administrative expense 19,270,596 13,479,366 36,748,462 26,632,717 Provision for doubtful accounts 2,701,091 2,595,464 5,515,138 4,971,399 Depreciation and amortization expense 6,333,987 4,072,917 12,067,654 7,645,118 Merger expenses - - - 1,708,247 - ------------------------------------------------------------------------------------------------------------------ Income from operations 9,984,384 5,991,655 18,540,889 8,952,176 - ------------------------------------------------------------------------------------------------------------------ Interest expense, net 2,154,831 856,313 3,978,874 1,553,433 - ------------------------------------------------------------------------------------------------------------------ Income before income taxes 7,829,553 5,135,342 14,562,015 7,398,743 Provision for income taxes 3,223,464 1,745,276 5,992,810 2,550,080 - ------------------------------------------------------------------------------------------------------------------ Net income $ 4,606,089 $ 3,390,066 $ 8,569,205 $ 4,848,663 - ------------------------------------------------------------------------------------------------------------------ Net income per common share $0.18 $0.13 $0.35 $0.19 Weighted average number of common shares outstanding 24,962,389 25,828,734 24,737,326 25,284,349 Net income per common share-- assuming dilution $0.18 $0.13 $0.33 $0.19 Weighted average number of common shares and equivalents outstanding-- assuming dilution 25,844,770 27,256,337 25,789,820 26,711,952 See accompanying notes to consolidated financial statements. 3 Renal Treatment Centers, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 8,569,205 $ 4,848,663 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,255,154 7,666,084 Deferred income taxes - - Provision for doubtful accounts 5,515,138 4,971,399 Equity in (earnings) losses from affiliates (74,377) - Changes in operating assets and liabilities, net of effects of companies acquired: Accounts receivable (15,539,321) (6,614,644) Inventories (238,434) (673,916) Prepaid expenses and other current assets (4,096,908) 239,556 Accounts payable and accrued expenses 1,298,221 (5,722,617) Accrued income taxes (579,426) (4,348,124) - ------------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by operating activities 7,109,252 366,401 - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (9,939,392) (6,188,493) Purchase of businesses, net of cash acquired (71,138,095) (37,030,623) Purchase of investments - (55,311,043) Sale of investments 41,202,123 9,347,962 Other 1,137,712 (979,804) - ------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (38,737,652) (90,162,001) - ------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from long-term debt borrowings 48,000,000 30,500,000 Repayments of debt (8,910,952) (70,420,804) Issuance of 5 5/8% convertible subordinated notes - 125,000,000 Net borrowings under line of credit - (50,000) Proceeds from issuance of common stock 827,118 2,137,012 Payment of dividends - (658,500) Debt issuance costs - (3,750,000) Increase in financing fees - - Payments on capital lease obligations (604,426) (1,535,784) Cash portion of consideration received for common stock - 963,699 - ------------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by financing activities 39,311,740 82,185,623 - ------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 7,683,340 (7,609,977) Cash and cash equivalents at beginning of period 1,445,798 8,231,421 - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 9,129,138 $ 621,444 ============================================================================================================================== See accompanying notes to consolidated financial statements. 4 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 six months ended June 30, 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. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued the Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 establishes standards for computing and presenting earnings per share. Basic earnings per share is calculated by dividing net income before extraordinary items and net income by the weighted average number of shares of common stock outstanding. Accordingly, earnings per common share--assuming dilution includes the dilutive effects of stock options and warrants using the treasury stock method, in determining the weighted average number of shares of common stock outstanding. Earnings per share for all periods presented have been restated following the provisions of SFAS 128. 3. SELECTED QUARTERLY FINANCIAL DATA The financial information as previously presented for the three months ended June 30, 1997 and 1996 and the six months ended June 30, 1997 and 1996 in the Registrant's Form 10-Q as filed August 14, 1997 and August 5, 1996 has been restated to correct net patient revenue and the provision for doubtful accounts receivable and to correct the 1997 provision for income taxes primarily related to the Company's foreign operations with the following effect (in thousands, except per share amounts): For the three months ended June 30, 1997 1996 ----------------------- ----------------------- As As Originally As Originally As Reported Restated Reported Restated --------- -------- --------- -------- Net patient revenue 77,273 74,963 55,583 53,137 Operating expenses 64,325 64,979 46,287 47,145 Income from operations 12,948 9,984 9,296 5,992 Provision for income taxes 4,048 3,223 3,009 1,745 Net income 6,746 4,606 5,431 3,390 Net income per common share 0.27 0.18 0.21 0.13 Net income per common share--assuming dilution 0.26 0.18 0.21 0.13 For the six months ended June 30, 1997 1996 ----------------------- ----------------------- As As Originally As Originally As Reported Restated Reported Restated --------- -------- --------- -------- Net patient revenue 148,381 143,871 106,133 101,392 Operating expenses 124,054 125,330 90,777 92,440 Income from operations 24,327 18,541 15,356 8,952 Provision for income taxes 7,583 5,993 5,000 2,550 Net income 12,765 8,569 8,803 4,849 Net income per common share 0.52 0.35 0.35 0.19 Net income per common share--assuming dilution 0.49 0.33 0.33 0.19 4. 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 effect on the Company's results of operations, financial condition or liquidity. 5. SIGNIFICANT EVENTS: Business Acquisitions: During the second quarter of 1997, the Company acquired thirteen dialysis centers. Ten of the centers are located in the Republic of Argentina, two centers are located in Texas and one center is located in Pennsylvania. Combined, these centers provide care to an effective patient base of approximately 800. During the first quarter of 1997, the Company acquired twelve dialysis centers, including 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. Other Events: 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. 5 Part II. Other Information - ------- ----------------- Item 6. Exhibits and Reports on Form 8-K: Exhibits 10.11 Fifth Amended and Restated Loan Agreement dated as of May 2, 1997 between the Company and First Union National Bank of North Carolina and the other lenders set forth therein (previously filed under the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997). 11.1 Computation of net income per common share and net income per common share -- assuming dilution. 27.1 Amended Financial Data Schedule. 27.2 Amended Financial Data Schedule. (b) Reports on Form 8-K None. 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. By: /s/ John E. King -------------------------- John E. King Vice President Finance and Chief Financial Officer Date: May 18, 1998 7 RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.11 Fifth Amended and Restated Loan Agreement dated as of May 2, 1997 between the Company and First Union National Bank of North Carolina and the other lenders set forth therein (previously filed under the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997). 11.1 Computation of net income per common share and net income per common share--assuming dilution. 27.1 Amended Financial Data Schedule. 27.2 Amended Financial Data Schedule.