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 June 30, 1997
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-14142
Renal Treatment Centers, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 23-2518331
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(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
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(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
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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
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Common Stock, Par Value $.01 24,989,141 shares
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--
June 30, 1997 and December 31, 1996.................................3
Consolidated Statements of Income--
Three and six months ended June 30, 1997 and 1996...................4
Consolidated Statements of Cash Flows--
Six months ended June 30, 1997 and 1996.............................5
Notes to Consolidated Financial Statements..........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................7-12
PART II. OTHER INFORMATION
Item 2. Changes in Securities..............................................13
Item 4. Submission of Matters to a Vote of Security Holders................13
Item 6. Exhibits and Reports on Form 8-K...................................13
SIGNATURES...................................................................15
EXHIBITS....................................................................16-
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Renal Treatment Centers, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
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Assets
Current Assets:
Cash $ 9,129,138 $ 1,445,798
Investments - 41,202,123
Accounts Receivable, net of allowance for doubtful accounts of
$4,213,059 in 1997 and $4,233,552 in 1996 94,948,837 79,138,388
Inventories 5,064,238 4,388,290
Deferred Taxes 765,145 765,145
Prepaid expenses and other current assets 6,943,142 2,749,497
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Total current assets 116,850,502 129,689,241
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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
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Total assets $358,646,570 $302,719,928
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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 1,280,317 164,535
Accrued interest 3,430,002 3,638,874
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Total current liabilities 27,292,972 35,404,873
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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 61,766,453 49,001,005
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156,111,484 137,135,446
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Less treasury stock, 36,598 shares in 1997 and 37,202 shares in
1996, at cost (387,678) (394,076)
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155,723,806 136,741,370
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Total liabilities and stockholders' equity $358,646,570 $302,719,928
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See accompanying notes to consolidated financial statements.
3
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
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Net patient revenue $77,273,282 $55,583,123 $148,380,503 $106,132,950
Patient care costs 36,672,989 26,997,151 70,998,558 51,482,378
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Operating profit 40,600,293 28,585,972 77,381,945 54,650,572
General and administrative expense 19,270,596 13,479,366 36,748,462 26,632,717
Provision for doubtful accounts 2,047,197 1,737,321 4,238,674 3,308,507
Depreciation and amortization expense 6,333,987 4,072,917 12,067,654 7,645,118
Merger expenses - - - 1,708,247
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Income from operations 12,948,513 9,296,368 24,327,155 15,355,983
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Interest expense, net 2,154,831 856,313 3,978,874 1,553,433
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Income before income taxes 10,793,682 8,440,055 20,348,281 13,802,550
Provision for income taxes 4,047,631 3,009,329 7,582,832 4,999,536
- ------------------------------------------------------------------------------------------------------------------
Net income $ 6,746,051 $ 5,430,726 $ 12,765,449 $ 8,803,014
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Per share data:
Primary earnings per common and common
stock equivalent $0.26 $0.20 $0.50 $0.34
Weighted average number of common and
common stock equivalents outstanding 25,714,787 26,740,469 25,490,834 26,211,155
Fully diluted earnings per common and
common stock equivalent $0.26 $0.20 $0.50 $0.33
Weighted average number of common and
common stock equivalents outstanding 25,844,770 27,256,337 25,789,820 26,711,952
See accompanying notes to consolidated financial statements.
4
Renal Treatment Centers, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1997 1996
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Cash flows from operating activities:
Net income $ 12,765,449 $ 8,803,014
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 4,238,674 3,308,507
Equity in (earnings) losses from affiliates (74,377) -
Changes in operating assets and liabilities, net of effects of companies acquired:
Accounts receivable (20,049,123) (11,355,559)
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 1,010,596 (1,898,668)
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Net cash (used in) provided by operating activities 7,109,252 366,401
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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)
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Net cash used in investing activities (38,737,652) (90,162,001)
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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
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Net cash (used in) provided by financing activities 39,311,740 82,185,623
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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
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Cash and cash equivalents at end of period $ 9,129,138 $ 621,444
==============================================================================================================================
See accompanying notes to consolidated financial statements.
5
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. 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.
3. 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.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (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 for 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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
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Basic:
Basic earnings per share $0.27 $0.21 $0.52 $0.35
Weighted average number of shares 24,962,389 25,828,734 24,737,326 25,284,349
Dilutive:
Dilutive earnings per share $0.26 $0.20 $0.50 $0.33
Weighted average number of common and
common stock equivalents outstanding 25,884,770 25,464,145 25,789,820 26,711,952
6
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. (the "Company") provides dialysis treatments and
ancillary services to patients suffering from chronic kidney failure, primarily
in its freestanding outpatient dialysis treatment centers or in the patient's
home. The Company also provides acute inpatient dialysis services to hospitals.
As of August 1, 1997, the Company operated 150 outpatient dialysis centers in 23
states, the District of Columbia and the Republic of Argentina and provided
dialysis services for approximately 10,400 patients. In addition, the Company
provided inpatient dialysis services to over 100 hospitals.
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 Percentage of
Net Patient Revenue Net Patient Revenue
Three Months Ended Period-to-Period Six Months Ended Period-to-Period
June 30, Percentage Change June 30, Percentage Change
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1997 1996 1997 vs. 1996 1997 1996 1997 vs. 1996
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Net patient revenue 100.0% 100.0% 39.0% 100.0% 100.0% 39.8%
Patient care costs 47.5% 48.6% 35.8% 47.8% 48.5% 37.9%
General and administrative expense 24.9% 24.3% 43.0% 24.8% 25.1% 38.0%
Provision for doubtful accounts 2.6% 3.1% 17.8% 2.9% 3.1% 28.1%
Depreciation and amortization expense 8.2% 7.3% 55.5% 8.1% 7.2% 57.8%
Merger expenses ---- ---- ---- ---- 1.6% ----
Income from operations 16.8% 16.7% 39.3% 16.4% 14.5% 58.4%
Interest expense, net 2.8% 1.5% 151.6% 2.7% 1.5% 156.1%
Income before income taxes 14.0% 15.2% 27.9% 13.7% 13.0% 47.4%
Provision for income taxes 5.2% 5.4% 34.5% 5.1% 4.7% 51.7%
Net income 8.7% 9.8% 24.2% 8.6% 8.3% 45.0%
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net Patient Revenue. Net patient revenue for the six months ended June 30, 1997
was $148,380,503 as compared to $106,132,950 for the same period in 1996,
representing an increase of 39.8%. Of this increase, $30,956,229 was
attributable to the revenue generated from the operations of 35 centers and
certain acute care agreements acquired in separate purchase transactions and the
development of six new dialysis centers ("de novo" developments) from April 1996
through June 1997. Of the remaining increase of $11,291,324, $6,945,424 was
attributable to an increase in same-center treatments and $4,345,900 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 37.9% to $70,998,558 for the
six months ended June 30, 1997 from $51,482,378 for the same period in 1996.
The increase was principally the result of acquisitions that were completed from
April 1996 through June 1997. However, as a percentage of net patient revenue,
patient care costs decreased to 47.8% for the six months ended June 30, 1997
from 48.5% 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.
7
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
General and Administrative Expense. General and administrative expense increased
$10,115,745, or 38.0%, to $36,748,462 for the six months ended June 30, 1997, as
compared to $26,632,717 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 June 1997. As a percentage of net patient
revenue, general and administrative expense decreased to 24.8% for the six
months ended June 30, 1997, as compared to 25.1% for the six months ended June
30, 1996. The decrease as a percentage of net patient revenue was attributable
to the Company's ability to maintain certain support costs, while increasing net
revenues through acquisitions, internal growth and de novo developments.
Provision for doubtful accounts. Provision for doubtful accounts increased
$930,167, or 28.1%, to $4,238,674 for the six months ended June 30, 1997, as
compared to $3,308,507 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 2.9%
for the six months ended June 30, 1997 and 3.1% for the same period in 1996.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $4,422,536, or 57.8%, for the six months ended June 30, 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 six months ended June 30,
1997, as compared to 7.2% for the six months ended June 30, 1996. Both the
dollar and percentage increases were attributable to the purchase acquisitions
completed from April 1996 through June 1997.
Merger Expenses. There were no merger expenses for the six months ended June 30,
1997, as compared to $1,708,247 for the same period in 1996. For the six months
ended June 30, 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 58.4% to $24,327,155
for the six months ended June 30, 1997 from $15,355,983 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 June 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 six months ended June 30,
1997 as compared to $1,708,247 incurred in the same period last year. Same-
center treatment and revenue per treatment growth also contributed to the
increase in income from operations.
Interest Expense, net. Interest expense (net) was $3,978,874 for the six months
ended June 30, 1997 as compared to interest expense (net) of $1,553,433 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% in Convertible Subordinated Notes due 2006 ("the
Notes") on June 12, 1996.
Provision for Income Taxes. Provision for income taxes increased 51.7% to
$7,582,832 from $4,999,536 for the six months ended June 30, 1997 and 1996,
respectively. The increase was primarily due to an increase in income before
taxes of 47.4%. For the six months ended June 30, 1997, the Company's effective
tax rate was 37.3%, compared to an effective tax rate of 36.2% during the same
period in 1996. The increase in the effective rate is primarily due to the
acquisition the Company completed in July 1996 with Panama City Artificial
Kidney Center ("PCAKC") and North Florida Artificial Kidney Center ("NFAKC").
This acquisition was accounted for as a pooling-of-interests and thus given
retroactive effect as if the acquisition occurred on January 1, 1994. Since
PCAKC and NFAKC were S Corporations, no income taxes were recorded with respect
to PCAKC and NFAKC for the six months ended June 30, 1996.
Net Income. Net income increased 45.0% to $12,765,449 for the six months ended
June 30, 1997 from $8,803,014 for the same period in 1996. The increase was due
to each of the items discussed above.
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Net Patient Revenue. Net patient revenue for the three months ended June 30,
1997 was $77,273,282 as compared to $55,583,123 for the same period in 1996,
representing an increase of 39.0%. Of this increase, $16,570,594 was
attributable to the revenue generated from the operations of 34 centers and
certain acute care agreements acquired in separate purchase transactions and six
de novo developments from May 1996 through June 1997. Of the remaining increase
of $5,119,555, $3,818,494 was attributable to an increase in same-center
treatments and $1,301,061 was attributable to an increase in the average same-
center revenue per treatment, which, in turn, was due to an increase in the
administration of EPO and other ancillary revenue items and an improvement in
the Company's third party payor mix.
Patient Care Costs. Patient care costs increased 35.8% to $36,672,989 for the
three months ended June 30, 1997 from $26,997,151 for the same period in 1996.
The increase was principally the result of acquisitions that were completed from
May 1996 through June 1997. However, as a percentage of net patient revenue,
patient care costs decreased to 47.5% for the three months ended June 30, 1997
from 48.6% 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.
8
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
General and Administrative Expense. General and administrative expense
increased $5,791,230, or 43.0%, to $19,270,596 for the three months ended June
30, 1997, as compared to $13,479,366 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 May 1996 through June 1997. As a percentage of net
patient revenue, general and administrative expense increased to 24.9% for the
three months ended June 30, 1997, as compared to 24.3% for the three months
ended June 30, 1996.
Provision for doubtful accounts. Provision for doubtful accounts increased
$309,876, or 17.8%, to $2,047,197 for the three months ended June 30, 1997, as
compared to $1,737,321 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 2.6%
for the three months ended June 30, 1997 and 3.1% for the same period in 1996.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $2,261,070, or 55.5%, for the three months ended June 30, 1997, when
compared to the same period in 1996. As a percentage of net patient revenue,
depreciation and amortization expense was 8.2% for the three months ended June
30, 1997, as compared to 7.3% for the three months ended June 30, 1996. Both
the dollar and percentage increases were attributable to the purchase
acquisitions completed from May 1996 through June 1997.
Income from Operations. Income from operations increased 39.3% to $12,948,513
for the three months ended June 30, 1997 from $9,296,368 for the same period in
1996. This increase was primarily due to the increase in net revenues from the
centers acquired, from May 1996 through April 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, same-
center treatment and revenue per treatment growth contributed to the increase in
income from operations.
Interest Expense, net. Interest expense (net) was $2,154,831 for the three
months ended June 30, 1997 as compared to interest expense (net) of $856,313 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 the Notes on June 12, 1996.
Provision for Income Taxes. Provision for income taxes increased 34.5% to
$4,047,631 from $3,009,329 for the three months ended June 30, 1997 and 1996,
respectively. The increase was primarily due to an increase in income before
taxes of 27.9%. For the three months ended June 30, 1997, the Company's
effective tax rate was 37.5% compared to an effective tax rate of 35.7% during
the same period in 1996. The increase in the effective rate is primarily due to
the acquisition the Company completed in July 1996 with PCAKC and NFAKC. This
acquisition was accounted for as a pooling-of-interests and thus given
retroactive effect as if the acquisition occurred on January 1, 1994. Since
PCAKC and NFAKC were S Corporations, no income taxes were recorded with respect
to PCAKC and NFAKC for the three months ended June 30, 1996.
Net Income. Net income increased 24.2% to $6,746,051 for the three months ended
June 30, 1997 from $5,430,726 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 and development 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 six months ended June 30, 1997, expenditures for acquisitions totaled
$71,138,095 compared to $37,030,623 for the six months ended June 30, 1996. The
expenditures in 1997 resulted from the acquisition of ten centers in January,
one center in February, one center in March, two centers in April, seven centers
in May and four centers in June, as compared to the expenditures in 1996, which
resulted from the acquisition of one center in March, one center in April, three
centers in May and one center in June. For the six months ended June 30, 1997
and 1996, capital expenditures were $9,939,392 and $6,188,493, respectively.
Cash from operations before investing and financing activities was $7,109,252
and $366,401 for the six months ended June 30, 1997 and 1996, respectively. The
principal sources of the Company's liquidity during the first six 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
$9,129,138 at June 30, 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 $48,000,000 and $0 were outstanding as of
June 30, 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 and continuing 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
9
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
plus .50% to 1.50%, depending on the Company's ratio of consolidated debt to
annualized cash flow, payable at maturity. The weighted average interest rate of
all loans outstanding at June 30, 1997 was 6.8%. 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 flow) 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 six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 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.
10
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.
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 in the
future. Although the Company's Credit Agreement with a consortium of bank
lenders includes up to $200,000,000 for acquisition and
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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.
12
Part II. Other Information
- ------- -----------------
Item 2. Changes in Securities.
(c) The Company issued 166,139 shares of the Company's Common Stock on
April 1, 1997 and an additional 166,139 shares of Common Stock on May
1, 1997, upon conversion of the remaining outstanding principal amount
of a convertible note originally issued to the seller in an
acquisition completed in June 1994. The note was convertible at a 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 prepaid the note, and the seller
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 4. Submission of Matters to a Vote of Security Holders.
(a) The Company's Annual Meeting of Stockholders was held on May 7, 1997.
(c) 1. The stockholders elected the following persons as Class I
directors of the Company:
Name For Withheld
---- --- --------
Patrick T. Ryan 20,711,917 82,710
Michael R. Walker 20,701,517 93,110
There were no broker non-votes with respect to the election of
directors.
2. The stockholders approved amendments to the Company's Amended and
Restated 1990 Stock Plan to increase the number of shares of
Common Stock covered thereby from 3,237,000 shares to 3,987,000
shares and to change the provisions regarding submission of
amendments to the plan to the Company's stockholders.
For: 17,628,186 Against: 3,160,866 Abstain: 5,575
---------- --------- -----
There were no broker non-votes in connection with the approval of the
amendments to the Company's Amended and Restated 1990 Stock Plan.
3. The stockholders approved amendments to the Company's Equity
Incentive Plan for Outside Directors to increase the number of
shares subject to options granted to outside directors from 1,000
shares per year of the director's term to 3,000 shares per year.
For: 20,154,952 Against: 635,975 Abstain: 3,700
---------- ------- -----
There were no broker non-votes in connection with the approval of the
amendments to the Company's Equity Incentive Plan for Outside
Directors.
4. The stockholders ratified the appointment of Coopers & Lybrand,
L.L.P. as independent public accountants for the Company for its
1997 fiscal year.
For: 20,781,114 Against: 2,948 Abstain: 10,565
---------- ----- ------
There were no broker non-votes in connection with the ratification
of the appointment of the Company's independent public
accountants.
Item 6. Exhibits and Reports on Form 8-K:
(a) 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.
13
Part II. Item 6(a) continued:
11.1 Computation of Primary and Fully Diluted Earnings Per Share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
14
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: August 14, 1997 By: /s/ Ronald H. Rodgers, Jr.
--------------------------- -----------------------------
Ronald H. Rodgers, Jr.
Vice President - Finance and
Chief Financial Officer
Date: August 14, 1997 By: /s/ Keith W. Jones
---------------------------- -----------------------------
Keith W. Jones
Chief Accounting Officer
15
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
11.1 Computation of Primary and Fully Diluted Earnings Per Share
27 Financial Data Schedule
16