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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the Quarterly Period Ended March 31, 1995
Commission file number 0-18067
REN CORPORATION-USA
(Exact name of registrant as specified in its charter)
Tennessee 62-1323090
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6820 Charlotte Pike 37209
Nashville, TN (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (615) 353-4200
Common Stock, no par value
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
As of May 8, 1995, 18,921,371 shares of registrant's Common Stock, no
par value, were outstanding.
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REN CORPORATION-USA
FORM 10-Q
TABLE OF CONTENTS
Page Number
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1995
and December 31, 1994 1
Consolidated Statements of Operations for the three
months ended March 31, 1995 and 1994 2
Consolidated Statements of Changes in Shareholders'
Equity for the three months ended March 31, 1995 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1995 and 1994 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit 11(a) Calculation of Earnings per Share 12
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REN CORPORATION-USA
Consolidated Balance Sheets
(in thousands, except per share data)
March 31, December 31,
ASSETS 1995 1994
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 1,751 $ 644
Accounts receivable less allowance for uncollectibles and
contractual adjustments of $13,623 and $12,885 at
March 31, 1995 and December 31, 1994, respectively 20,631 22,252
Estimated third-party settlements, net 355 59
Inventory 3,694 3,382
Prepaid expense 1,182 974
Current deferred taxes, net 3,079 3,079
Other current assets 114 1,385
------------ ------------
Total current assets 30,806 31,775
Property, plant and equipment, net 54,925 51,916
Intangible assets, net 56,249 47,460
Notes receivable 2,687 1,795
Other assets 5,410 1,368
------------ ------------
Total assets $ 150,077 $ 134,314
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital lease obligations $ 87 $ 87
Accounts payable 9,555 6,541
Accrued expenses 3,815 2,939
Accrued wages and benefits 4,652 3,750
Income taxes payable 2,140 1,521
------------ ------------
Total current liabilities 20,249 14,838
------------ ------------
Long-term debt and capital lease obligations less current maturities 7,321 342
Deferred taxes, net 4,301 4,301
Minority interest in consolidated subsidiary 447 89
------------ ------------
Total long-term liabilities 12,069 4,732
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Redeemable common stock; 6,000 and 12,000 shares issued and outstanding
at March 31, 1995 and December 31, 1994, respectively 24 47
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock; no par value, authorized 60,000,000 shares;
18,915,071 and 18,898,546 shares issued and outstanding at
March 31, 1995 and December 31, 1994, respectively 101,989 101,841
Additional paid-in capital 4,224 4,224
Retained earnings 11,523 8,650
Less unearned stock grant compensation (1) (18)
------------ ------------
Total shareholders' equity 117,735 114,697
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Total liabilities and shareholders' equity $ 150,077 $ 134,314
============ ============
See accompanying notes to consolidated financial statements.
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REN CORPORATION-USA
Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
------------------------------------
1995 1994
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Revenue:
Dialysis services $ 35,079 $ 27,437
Laboratory services 3,535 2,850
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38,614 30,287
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Direct operating expense:
Dialysis services 25,654 20,262
Laboratory services 1,483 1,439
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27,137 21,701
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Gross operating profit:
Dialysis services 9,425 7,175
Laboratory services 2,052 1,411
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11,477 8,586
Indirect operating expense:
Corporate office general, administrative, and operations support 2,716 3,131
Depreciation and amortization 2,862 2,594
Bad debt expense 525 516
Equity in loss of investee 45 95
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Income from operations 5,329 2,250
Non-operating (income) expense:
Interest income (88) (67)
Interest expense 293 256
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Income before income tax expense and minority interest 5,124 2,061
Income tax expense 2,101 823
Minority interest in income of consolidated subsidiary, net
of income tax expense of $105 150 -
------------ ------------
Net income $ 2,873 $ 1,238
============ ============
Net income per common share and common share equivalent $ 0.15 $ 0.07
============ ============
Weighted average common shares and common
share equivalents outstanding 19,016,002 18,857,760
============ ============
See accompanying notes to consolidated financial statements.
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REN CORPORATION- USA
Consolidated Statement of Changes in Shareholders' Equity
(in thousands, except per share data)
For the quarter ended March 31, 1995
(Unaudited)
Common Additional Unearned
----------------------- Paid-In Retained Stock Grant
Shares Amount Capital Earnings Compensation Total
---------- --------- ---------- -------- ------------ ---------
December 31, 1994 18,898,546 $ 101,841 $ 4,224 $ 8,650 $ (18) $ 114,697
Net income - - - 2,873 - 2,873
Exercise of stock options 10,525 125 - - - 125
Amortization of unearned stock
grant compensation - - - - 17 17
Expiration of redeemable common stock 6,000 23 - - - 23
---------- --------- ------- -------- -------- ---------
March 31, 1995 18,915,071 $ 101,989 $ 4,224 $ 11,523 $ (1) $ 117,735
========== ========= ======= ======== ======== =========
See accompanying notes to consolidated financial statements.
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REN CORPORATION- USA
Consolidated Statements of Cash Flow
(in thousands)
(Unaudited)
Three Months Ended
March 31
----------------------------
1995 1994
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Cash flows from operating activities:
Net income $ 2,873 1,238
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expense 2,862 2,594
Amortization of unearned stock grant compensation 17 23
Deferred income taxes - 5
Effect on cash of change in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable and estimated third party settlements 1,325 (181)
Inventory (312) (639)
Prepaid expenses and other current assets 1,063 3,928
Notes receivable and other assets (4,935) 299
Accounts payable 3,013 189
Accrued expenses and income taxes 2,757 999
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Net cash provided by operating activities 8,663 8,455
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Cash flows from investing activities:
Acquisitions, net of cash acquired (9,737) -
Purchase of property, plant and equipment (4,205) (3,544)
Intangible assets acquired (718) (144)
--------- -------
Net cash used in investing activities (14,660) (3,688)
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Cash flows from financing activities:
Proceeds from issuance of long-term debt 28,000 3,000
Principal payments on long-term debt and capital lease obligations (21,021) (4,881)
Proceeds from common stock options and warrants exercised 125 390
Redemption of common stock - (159)
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Net cash provided by (used in) financing activities 7,104 (1,650)
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Net increase in cash and cash equivalents 1,107 3,117
Cash and cash equivalents at beginning of period 644 655
--------- -------
Cash and cash equivalents at end of period $ 1,751 3,772
========= =======
See accompanying notes to consolidated financial statements.
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Three Months Ended
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: March 31,
-----------------------------
1995 1994
-------------- ------------
(in thousands)
Cash paid during the period for:
Interest $ 2,254 162
Income taxes $ 13,791 -
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the quarter ended March 31, 1995, the Company acquired certain
assets, principally goodwill and agreements not to compete, of two dialysis
clinics operated by The George Washington University and a 51% ownership in
certain assets, principally goodwill and equipment, of Greater Milwaukee
Dialysis Centers for an aggregate purchase price of $9.7 million.
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REN CORPORATION-USA
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying interim financial statements have been
prepared in conformity with generally accepting accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10.01 of Regulation S-X. 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, the interim consolidated financial
statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results of the
interim periods. The interim financial statements should be read in
conjunction with the 1994 audited consolidated financial statements and
related notes. The results of operations for the interim periods may
not be indicative of the operating results for the year ending December
31, 1995.
(2) Income Taxes
Actual income tax expense for the three months ended March 31,
1995, differs from the "expected" income tax expense (computed by
applying the federal corporate rate of 35%) as follows:
(in thousands)
Computed expected federal income tax expense $1,793
Increase in income tax resulting from:
State income tax expense, net of federal benefit 233
Other 75
------
Income Tax Expense $2,101
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(3) Bank Credit Facility
During 1993, the Company replaced its existing credit
agreement with a new agreement with a consortium of banks. Terms of
the credit agreement provide the Company with a six-year reducing
revolving credit facility in the amount of $60 million. The revolving
facility is available in full until August 30, 1995 when the
availability begins to reduce by $3.75 million each quarter until
fully reduced on May 31, 1999. Borrowings under the facility will
bear interest at either the bank prime rate or, at the Company's
option, at a LIBOR rate plus an increment of 75 basis points to 125
basis points depending on the ratio of debt to equity in accordance
with a predetermined schedule. At March 31, 1995, the Company had
obtained waivers for or was in compliance with all loan covenants.
The Company had $7 million outstanding under the Credit Agreement at
March 31, 1995.
(4) Commitments and Contingencies
The Company has been named a defendant in various legal
actions arising from its normal business activities. In the opinion
of Management after consultation with counsel, any liability that may
arise from such actions will not have a material adverse effect on the
Company.
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On April 24, 1995, the U.S. Health Care Financing
Administration (HCFA) advised Associate Regional Administrators for
Medicare of a contemplated change in the government's interpretation
of the amendment to the Medicare Secondary Payor (MSP) End Stage Renal
Disease (ESRD) provision of the Social Security Act contained in the
Omnibus Budget Reconciliation Act of 1993 (OBRA 93). An upcoming
Program Instruction will officially advise Medicare Intermediaries
that prior guidance by HCFA was erroneous and direct the
Intermediaries to apply the reinterpretation of the law retroactively
and prospective to all ESRD claims after August 10, 1993.
The effect of this reinterpretation of the law is to make
Medicare the primary payor in cases where a Medicare beneficiary is
entitled to Medicare benefits on the basis of either age or disability
and ESRD and where the entitlement other than ESRD precedes the ESRD
diagnosis. According to previous memorandum issued by Medicare
Intermediaries, the MSP provisions would apply irrespective of whether
the ESRD diagnosis was before or after the Medicare entitlement other
than ESRD.
Because commercial rates are normally in excess of the Medicare
allowable rates, the change in the application of the MSP provisions
may result in a reduction of dialysis revenue going forward for those
patients whose Medicare entitlement other than ESRD preceded their
ESRD diagnosis.
Because the reinterpretation of the MSP provisions pursuant to
OBRA 93 is retroactive to August 10, 1993, the Company may be
required to refund amounts paid by commercial payors and bill Medicare
as the primary payor for patients whose Medicare eligibility preceded
their eligibility due to ESRD. It is not possible to predict at this
time the financial consequences of such refund requests, net of any
available reserves.
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REN CORPORATION-USA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995 Compared to Three Months Ended March
31, 1994. Revenues for the first quarter of 1995 increased 27.5% from $30.3
million for the first quarter of 1994 to $38.6 million for the first quarter of
1995. Gross operating profit increased 33.7% from $8.6 million for the first
quarter of 1994 to $11.5 million for the first quarter of 1995. Net income
increased from $1.2 million for the first quarter of 1994 to $2.9 million for
the first quarter of 1995. Earnings per share increased from $.07 per share
for the first quarter of 1994 to $.15 per share for the first quarter of 1995.
Dialysis Services. Dialysis services revenue for the first quarter
increased 27.9% from $27.4 million to $35.1 million. Of this increase,
approximately $3.0 million, or 39.0%, was attributable to increased census at
existing facilities and $4.7 million, or 61.0%, was attributable to revenue
from the addition of sixteen new centers since the first quarter of 1994. Ten
of these new centers were start-up facilities and the remaining six were
acquisitions. Operating expense for dialysis services increased 26.6% from
$20.3 million to $25.7 million. Of this increase, $3.5 million was
attributable to the sixteen new centers and $1.9 million represented increased
cost at existing facilities. Start-up facilities are expected to have lower
operating margins than mature centers, as they open with a lower percentage of
capacity utilization. Gross operating profit from dialysis services increased
31.4% from $7.2 million to $9.4 million.
On April 24, 1995, the U.S. Health Care Financing Administration (HCFA)
advised Associate Regional Administrators for Medicare of a contemplated change
in the government's interpretation of the amendment to the Medicare Secondary
Payor (MSP) End Stage Renal Disease (ESRD) provision of the Social Security Act
contained in the Omnibus Budget Reconciliation Act of 1993 (OBRA 93). An
upcoming Program Instruction will officially advise Medicare Intermediaries
that prior guidance by HCFA was erroneous and direct the Intermediaries to
apply the reinterpretation of the law retroactively and prospective to all ESRD
claims after August 10, 1993.
The effect of this reinterpretation of the law is to make Medicare the
primary payor in cases where a Medicare beneficiary is entitled to Medicare
benefits on the basis of either age or disability and ESRD and where the
entitlement other than ESRD precedes the ESRD diagnosis. According to previous
memorandum issued by Medicare Intermediaries, the MSP provisions would apply
irrespective of whether the ESRD diagnosis was before or after the Medicare
entitlement other than ESRD.
Because commercial rates are normally in excess of the Medicare allowable
rates, the change in the application of the MSP provisions may result in a
reduction of dialysis revenue going forward for those patients whose Medicare
entitlement other than ESRD preceded their ESRD diagnosis.
Because the reinterpretation of the MSP provisions pursuant to OBRA 93
is retroactive to August 10, 1993, the Company may be required to refund
amounts paid by commercial payors and bill Medicare as the primary payor for
patients whose Medicare eligibility preceded their eligibility due to ESRD.
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It is not possible to predict at this time the financial consequences of such
refund requests, net of any available reserves.
Laboratory Services. Laboratory services revenue increased 24.1% from
$2.8 million to $3.5 million for the first quarter of 1995. Operating expense
for laboratory services increased 3.1% from $1.4 million to $1.5 million for
the first quarter of 1995. Gross operating profit from laboratory services
increased 45.5% from $1.4 million to $2.1 million. These increases in
laboratory services revenue and gross operating profit from laboratory services
were primarily the result of the efforts of new laboratory management to
increase controls over operating expenses for laboratory services
Corporate Office, General, Administrative and Operations Support
Expenses. Expenses for corporate office, general, administrative and
operations support decreased 13.2% from $3.1 million to $2.7 million. These
expenses as a percentage of revenue decreased from 10.3% of total revenue for
the quarter ended March 31, 1994 to 7.0% of revenue for the quarter ended March
31, 1995.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 10.4% from $2.6 million during the first quarter of 1994 to
$2.9 million for the first quarter of 1995. The increase in 1995 was due
primarily to the addition of new (or expansion of existing) facilities since
March 31, 1994.
Interest Income. Interest income was essentially unchanged for the
quarter ended March 31, 1995 compared to the quarter ended March 31, 1994.
Interest Expense. Interest expense was essentially unchanged at $0.3
million for the quarters ended March 31, 1994 and 1995.
Pre-Tax Income. Pre-tax income increased 148.5% to $5.1 million in
1995, compared with $2.1 million in 1994.
Income Tax Expense. Income tax expense increased from $0.8 million or
2.7% of total revenue to $2.1 million or 5.4% of total revenue for the first
quarter of 1995. The estimated annual effective income tax rate for 1995 was
41.0% compared with an actual effective rate of 39.6% for 1994. The increase
in the effective tax rate is due primarily to higher effective rates in the
states where the Company operates.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has used a significant portion of its
available funds to acquire and develop new dialysis centers. The development
of such dialysis centers accounts for the majority of funds expended by the
Company for property, plant and equipment. The Company has also invested funds
in computer equipment and software development, and transportation equipment.
During the first quarter of 1995, the Company acquired two dialysis
centers and a controlling interest in four dialysis centers for the aggregate
purchase price (including liabilities assumed) of approximately $8.9 million.
The Company also developed four centers during the period for an aggregate cost
of approximately $3.7 million and acquired for $744,000 the operational assets
and contracts of a Milwaukee, Wisconsin based acute dialysis business which had
at the time of such closing contracts to provide acute dialysis services at
four Milwaukee area hospitals.
In January, 1995, the Company disposed of its interest in a dialysis
facility located in Mexico City for total consideration of approximately
$914,000.
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The development of a dialysis facility involves the establishment of a
new center which does not include the purchase of an existing business.
Developments may require small investments in intangibles, but the majority of
the investments will be in leasehold improvements or land and building, and
property, plant and equipment, all of which are built to REN standards.
Developments also require investments in the working capital of the developed
facility. As developments do not typically begin operation with a high level
of capacity utilization, due to their development nature, they will typically
have negative or nominal cash flow for the first several months of operation.
The Company attempts to develop facilities which are expected to have a rapid
growth rate in patients, thereby expanding operations at a greatly reduced
investment versus a strategy which includes all acquisitions.
The Company's primary source of funds for operations and development
has been cash flow from operations, proceeds of bank borrowings and the
proceeds of private and public sales of equity securities. The Company believes
that cash flow generated from operations will be sufficient to cover its
operational and debt service requirements as well as to fund a limited number
of development projects.
On May 4, 1993, the Company replaced its existing credit agreement with
First Union with a new agreement with First Union as agent and with the First
National Bank of Boston and National Westminster Bank as co-lenders. Terms of
the credit agreement provide the Company with a six year reducing revolving
credit facility in the amount of $60 million. The revolving facility is
available in full until August 30, 1995 when the availability begins to reduce
by $3,750,000 each quarter until fully reduced on May 31, 1999. Borrowings
under the facility will bear interest at either the First Union prime rate or,
at the Company's option, at a LIBOR rate plus an increment of 75 basis points
to 125 basis points depending on the ratio of debt to equity in accordance with
a predetermined schedule. As of March 31, 1995, the Company had $7 million
outstanding under the credit agreement. These amounts bore interest either at
a LIBOR rate plus 75 basis points or at bank prime.
For the quarter ended March 31, 1995, average days revenue outstanding
in accounts receivable decreased to 50 days from 62 days for the year ended
December 31, 1994, primarily as a result of a concentrated effort during the
first quarter of 1995 to address aged balances which existed as of December 31,
1994.
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
11(a) Calculation of Earnings per Share
27 Financial Data Schedule (for SEC use
only)
(b) Reports on Form 8-K
On February 14, 1995, the Company filed a report on
Form 8-K in respect of the Greater Milwaukee Dialysis
Center acquisition.
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SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
REN CORPORATION-USA
May 12, 1995 /s/ Lawrence J. Centella
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Lawrence J. Centella
President and Chief Executive Officer
May 12, 1995 /s/ Bradley S. Wear
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Bradley S. Wear
Senior Vice President, Chief Financial Officer
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