SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
October 6, 1997
---------------------------------------------------
Date of Report (Date of earliest event reported)
Renal Treatment Centers, Inc.
-------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 1-14142 23-2518331
- ---------------------------------------------- ------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification
Number)
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
------------
ITEM 2. Acquisition or Disposition of Assets
- ---------------------------------------------
On October 6, 1997, Renal Treatment Centers, Inc. (the "Company") entered into
definitive agreements to acquire substantially all of the non-current and
certain other assets of California Kidney Centers ("CKC"), California Kidney
Centers, Orange, L.L.C. ("CKC Orange"), Dialysis Systems, L.L.C. ("DS"),
California Kidney Centers, Inpatient Services, L.L.C. ("CKCIS") and Dialysis
Systems, Inpatient Services, L.L.C. ("DSIS"),which together operate twelve
Medicare-certified end-stage renal disease dialysis facilities (collectively
"the Facilities") and provide acute inpatient dialysis services to 29 hospitals
in the service areas of the outpatient dialysis centers. CKC, CKC Orange, DS,
CKCIS and DSIS are hereinafter referred to collectively as the "Sellers". CKC
operates nine facilities located in southern California. CKC Orange operates a
single facility also located in southern California, which commenced operations
in August 1997. DS operates two facilities located in Las Vegas, Nevada. The
Company will acquire all of Sellers' inventory, equipment, patient lists,
goodwill and other non-current assets used in the operation of the Facilities
and provision of acute services.
The foregoing transactions are expected to be completed in November 1997,
subject to receipt of required regulatory approvals, including those required
under the Hart-Scott-Rodino Antitrust Improvements Act and the approval of the
Attorney General of the State of California, and certain other contingencies.
As part of the transactions, the Company will also enter into covenants not to
compete with Sellers and their respective owners. In addition, the Company will
enter into medical director agreements with, or receive assignments of current
medical director agreements from, the current medical directors of the
facilities.
The Company will pay aggregate consideration of $116,800,000 in cash, plus the
assumption of certain liabilities. The Company determined the consideration
based on negotiations with Sellers and the Company's determination of the fair
market value of the assets of Sellers as a going concern, which recognized the
recent growth in Sellers' business and the Company's expectations of future
growth in the business.
The cash consideration will be funded entirely through borrowings under the
Company's revolving credit agreement with a consortium of banks.
ITEM 7. Financial Statements and Exhibits.
- -------------------------------------------
(a) Financial Statements of Businesses Acquired.
The following lists the historical financial statements of California Kidney
Centers, California Kidney Centers, Orange, L.L.C., Dialysis Systems, L.L.C.,
California Kidney Centers, Inpatient Services, L.L.C. and Dialysis Systems,
Inpatient Services, L.L.C., presented on a combined basis.
Report of Independent Accountants
Combined Balance Sheets
at December 31, 1996 and 1995 and June 30, 1997 (unaudited) and
1996 (unaudited)
Combined Statements of Operations
for the years ended December 31, 1996 and 1995 and for the
six months ended June 30, 1997 (unaudited) and 1996 (unaudited)
Combined Statements of Changes in Owners' Equity
for the years ended December 31, 1996 and 1995 and for the
six months ended June 30, 1997 (unaudited) and 1996 (unaudited)
Combined Statements of Cash Flows
for the years ended December 31, 1996 and 1995 and for the
six months ended June 30, 1997 (unaudited) and 1996 (unaudited)
Notes to Financial Statements
(b) Pro Forma Financial Information.
The following lists the pro forma financial information filed herewith:
Pro forma Consolidated Balance Sheets as of June 30, 1997
Pro forma Consolidated Statements of Operations for the
year ended December 31, 1996 and the six months
ended June 30, 1997
Notes to Pro Forma Consolidated Financial Statements
(c) Exhibits.
The following exhibits are filed herewith:
Exhibit No. Document
----------- --------
2.1 Asset Purchase Agreement, dated as of October 6, 1997,
between Renal Treatment Centers - California, Inc. and
California Kidney Centers (the exhibits and schedules to
this agreement have been omitted pursuant to Item 601(b)(2)
of Regulation S-K and will be provided supplementally to the
Commission upon its request).
2.2 Asset Purchase Agreement, dated as of October 6, 1997,
between Renal Treatment Centers - California, Inc. and
California Kidney Centers, Orange, L.L.C. (the exhibits and
schedules to this agreement have been omitted pursuant to
Item 601(b)(2) of Regulation S-K and will be provided
supplementally to the Commission upon its request).
2.3 Asset Purchase Agreement, dated as of October 6, 1997,
between Renal Treatment Centers - California, Inc. and
California Kidney Centers, Inpatient Services, L.L.C. (the
exhibits and schedules to this agreement have been omitted
pursuant to Item 601(b)(2) of Regulation S-K and will be
provided supplementally to the Commission upon its request).
2.4 Asset Purchase Agreement, dated as of October 6, 1997,
between Renal Treatment Centers - West, Inc. and Dialysis
Systems, L.L.C. (the exhibits and schedules to this
agreement have been omitted pursuant to Item 601(b)(2) of
Regulation S-K and will be provided supplementally to the
Commission upon its request).
2.5 Asset Purchase Agreement, dated as of October 6, 1997,
between Renal Treatment Centers - West, Inc. and Dialysis
Systems, Inpatient Services, L.L.C. (the exhibits and
schedules to this agreement have been omitted pursuant to
Item 601(b)(2) of Regulation S-K and will be provided
supplementally to the Commission upon its request).
23.1 Consent of Frank, Rimerman & Co. LLP
99.1 Press Release dated October 7, 1997
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 hereunto duly authorized.
RENAL TREATMENT CENTERS, INC.
Date: October 14, 1997 By: /s/Ronald H. Rodgers, Jr.
---------------------- -------------------------
Ronald H. Rodgers, Jr.
CFO and Vice President - Finance
FRANK, RIMERMAN + CO. LLP
CERTIFIED PUBLIC ACCOUNTANTS
Satellite Dialysis Centers, Inc.
Redwood City, California
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying combined balance sheets of Satellite Affiliated
Companies (Note 1) as of December 31, 1996 and 1995, and the related combined
statements of income, changes in owners' equity, and cash flows for the years
then ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Satellite Affiliated
Companies as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Frank, Rimerman & Co. LLP
September 24, 1997
2882 SAND HILL ROAD MENLO PARK, CA 94025 415.854.3344 FAX 415.854.2234
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINED BALANCE SHEETS
-----------------------
December 31, 1996 and 1995
--------------------------
(in thousands)
ASSETS(Note 7)
------
1996 1995
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 2,138 $ 2,896
Accounts receivable, less allowance for
doubtful accounts of $2,111 in 1996 and
$1,200 in 1995 9,996 10,829
Medical supplies inventory 661 801
Prepaid expenses 146 106
------- -------
Total current assets 12,941 14,632
INVESTMENT IN AFFILIATE 150 --
PROPERTY AND EQUIPMENT, net (Note 4) 4,732 5,844
INTANGIBLE ASSETS, net (Notes 2, 5, and 9) 12,022 14,588
------- -------
$29,845 $35,064
======= =======
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 996 $ 1,303
Accrued expenses (Note 3) 854 699
Refundable service fees (Note 6) 1,983 1,983
Current maturities of long-term debt (Note 7) 965 1,038
------- -------
Total current liabilities 4,798 5,023
LONG-TERM DEBT, less current maturities (Note 7) 4,258 5,222
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8) -- --
OWNERS' EQUITY 20,789 24,819
------- -------
$29,845 $35,064
======= =======
See Notes to Combined Financial Statement
- 2 -
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINED STATEMENTS OF INCOME
-----------------------------
Years Ended December 31, 1996 and 1995
--------------------------------------
(in thousands)
1996 1995
-------- --------
DIALYSIS AND ANCILLARY SERVICES REVENUE, net $ 44,470 $ 38,537
-------- --------
PATIENT CARE COSTS
Medical supplies and pharmaceuticals 14,825 11,867
Dialysis unit staff costs 10,810 10,833
-------- --------
Total patient care costs 25,635 22,700
-------- --------
PATIENT CARE MARGIN 18,835 15,837
-------- --------
OPERATING EXPENSES
Dialysis unit operations 1,039 889
General and administrative (Note 3) 5,234 4,506
Depreciation and amortization 2,163 2,208
Impairment loss (Note 9) 1,688 --
-------- --------
Total operating expenses 10,124 7,603
-------- --------
Income from operations 8,711 8,234
OTHER INCOME (EXPENSE)
Investment income 123 80
Other income 111 1,245
Interest expense (470) (488)
-------- --------
Net income $ 8,475 $ 9,071
======== ========
See Notes to Combined Financial Statement
- 3 -
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY
------------------------------------------------
Years Ended December 31, 1996 and 1995
--------------------------------------
(in thousands)
BALANCE, December 31, 1994 $ 22,551
Capital contributed 19
Net income 9,071
Cash distributions (6,843)
Reduction in equity related note receivable 21
--------
BALANCE, December 31, 1995 24,819
Net income 8,475
Cash distributions (12,543)
Reduction in equity related note receivable 38
--------
BALANCE, December 31, 1996 $ 20,789
========
See Notes to Combined Financial Statement
- 4 -
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINED STATEMENTS OF CASH FLOWS
---------------------------------
Years Ended December 31, 1996 and 1995
--------------------------------------
(in thousands)
1996 1995
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,475 $ 9,071
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization expense 2,163 2,208
Provision for doubtful accounts 911 285
Provision for impairment loss 1,688
Loss on sale of equipment -- 3
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (78) (2,371)
Decrease (increase) in medical supplies inventory 140 (155)
(Increase) decrease in prepaid expenses (40) 31
(Decrease) increase in accounts payable (307) 343
Increase (decrease) in accrued expenses 155 (63)
Increase in refundable service fees -- 1,315
-------- --------
Net cash provided by operating activities 13,107 10,667
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment -- 4
Acquisition of property and equipment (149) (509)
Acquisition of investment in affiliate (150) --
Proceeds from members' notes receivable 38 21
Acquisition of dialysis units -- (5,400)
-------- --------
Net cash used in investing activities (261) (5,884)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash distributions to equity holders (12,543) (6,843)
Payments on long-term debt (1,061) (2,294)
Proceeds from long-term debt -- 5,369
-------- --------
Net cash used in financing activities (13,604) (3,768)
-------- --------
Net (decrease) increase in cash and cash equivalents
(balance carried forward) (758) 1,015
(Continued)
- 5 -
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINED STATEMENTS OF CASH FLOWS
---------------------------------
Years Ended December 31, 1996 and 1995
--------------------------------------
(in thousands)
(Continued)
1996 1995
------- -------
Net (decrease) increase in cash and cash equivalents
(balance brought forward) (758) 1,015
CASH AND CASH EQUIVALENTS, beginning 2,896 1,881
------- -------
CASH AND CASH EQUIVALENTS, ending $ 2,138 $ 2,896
======= =======
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Equipment acquired in connection with capital
lease obligations $ 24 $ 39
======= =======
Net book value of assets distributed to equity holders $ -- $ 376
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 470 $ 488
======= =======
See Notes to Combined Financial Statement
- 6 -
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
1. Basis of Presentation, Nature of Business, and Significant
----------------------------------------------------------
Accounting Policies
-------------------
Basis of Presentation
The combined financial statements of Satellite Affiliated Companies
(Companies) includes the operations of the following entities, all of
which are direct or indirect investees (Affiliates) of Satellite
Dialysis Centers, Inc. (SDC), a California not-for-profit
corporation:
California Kidney Centers (a California Joint Venture) (CKC)
California Kidney Centers Inpatient Services, LLC (CKCIS) California
Kidney Centers, Orange, LLC (CKC Orange) Dialysis Systems, LLC
(DSLLC) Dialysis Systems Inpatient Services, LLC (DSIS)
Subsequent to December 31, 1996, the Board of Directors of SDC
determined that SDC's charitable purpose would best be served if
certain assets of the Affiliates were sold. After this determination
and under the direction of SDC, efforts were initiated to identify
potential buyers and to actively market the identified assets. These
combined financial statements have been prepared to assist SDC in
this activity. The assets expected to be sold are stated at
historical cost, which is less than their expected market value.
Nature of Business
The Companies provide outpatient hemodialysis treatment, continuous
ambulatory peritoneal dialysis, home dialysis treatment support
services, and inpatient dialysis services to hospitals. Although the
Companies' patients are individuals, accounts receivable for services
provided are collected primarily from government agencies,
predominantly Medicare. Additional amounts are collected from private
insurance companies and individual patients.
The Companies' operations are conducted in Southern California and
Nevada.
Significant Accounting Policies
Principles of Combination:
The combined financial statements have been prepared in accordance
with generally accepted accounting principles and include the
accounts of the entities listed above. All significant intercompany
accounts and transactions have been eliminated.
-7-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
1. Basis of Presentation, Nature of Business, and Significant Accounting
---------------------------------------------------------------------
Policies (continued)
--------
Revenue Recognition:
Dialysis and ancillary service revenues include amounts for services
reimbursable by Medicare, Medicaid, MediCal, and other third party
payors under contracted reimbursement formulas. Revenues are
recognized when services are provided. Revenues are reported at the
amounts expected to be realized from governmental, third-party
payors, and patients based on reimbursement contracts in force when
the services are provided.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from
those estimates.
Concentration of Credit Risk:
Financial instruments which potentially subject the Companies to
concentrations of credit risk, consist principally of cash and cash
equivalents and accounts receivable. The Companies invest their
excess cash in a single bank. Deposits with this bank are insured up
to $100,000 per depositor by an agency of the Federal government.
Accounts receivable, which are unsecured, are primarily due from
agencies of the United States Government (62%), the State of
California (8%) and private insurance companies and hospitals (30%).
Receivables from individual patients are not significant. Before
providing services, the Companies perform insurance verification on
all patients to ascertain adequacy of insurance coverage from
government and private sources. An allowance for doubtful accounts is
provided based on management's estimate of amounts which may prove
uncollectible from private insurers or patients.
Income Taxes:
The combining entities are considered partnerships for Federal and
state income tax purposes. Accordingly, the equity owners account for
their pro rata share of the combining entities' income, deductions,
and credits in their separate tax returns. As a result, income tax
expense, assets, and liabilities are not recognized in the combined
financial statements of the Companies.
-8-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
1. Basis of Presentation, Nature of Business, and Significant Accounting
---------------------------------------------------------------------
Policies (continued)
--------
Medical Supplies Inventory:
Medical supplies inventory is stated at the lower of cost, first-in,
first-out method, or market.
Property and Equipment:
Property and equipment is stated at cost. Depreciation is provided
using the straight line method over estimated useful lives of five to
ten years.
Amortization of leasehold improvements is provided using the
straight-line method over the lesser of the lease term or the useful
life of the improvement, generally ten years.
Intangible Assets:
Intangible assets are stated at cost. Amortization is provided using
the straight-line method over the following estimated useful lives:
Years
---------
Intangible assets, including patient lists 4 - 15
Goodwill 15 - 31
Organization costs 10
Cash and Cash Equivalents:
The Companies consider all highly-liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
2. Acquisition of Dialysis Units
-----------------------------
In 1995, substantially all the assets of an operating dialysis
facility located in San Bernardino, California were acquired for
$5,400,000. The purchase price was allocated based on the estimated
fair value of the assets at the date of acquisition as follows:
$958,000 to property and equipment; $25,000 to inventory; $700,000 to
covenant not to compete; and $3,717,000 to goodwill.
-9-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
3. Related Party Transactions
--------------------------
Management fees of $1,738,000 in 1996 and $1,607,000 in 1995 and
directors' fees of $587,000 in 1996 and $572,000 in 1995 paid to SDC
are included in general and administrative expenses. Included in
accrued expenses are management fees due to SDC of $104,000 at
December 31, 1996 and $242,000 at December 31, 1995.
4. Property and Equipment
----------------------
Property and equipment consist of the following at December 31 (in
thousands):
1996 1995
----------- ----------
Leasehold improvements $2,973 $3,266
Medical equipment 3,424 3,344
Office equipment 330 307
Furniture and fixtures 650 643
Computer equipment 38 22
Vehicles 46 22
------ ------
7,461 7,604
Less accumulated depreciation and
amortization 2,729 1,760
------ ------
$4,732 $5,844
====== ======
Depreciation and amortization expense related to property and
equipment was $1,043,000 in 1996 and $949,000 in 1995.
-10-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
5. Intangible Assets
-----------------
Intangible assets consist of the following at December 31 (in
thousands):
1996 1995
------- -------
Intangible assets, including patient lists $ 5,386 $ 5,386
Goodwill 8,753 10,478
Organization costs 85 85
------- -------
14,224 15,949
Less accumulated amortization 2,202 1,361
------- -------
$12,022 $14,588
======= =======
Amortization expense related to intangible assets was $1,120,000 in
1996 and $1,259,000 in 1995.
6. Refundable Service Fees
-----------------------
In August, 1993, the provisions of the Omnibus Budget Reconciliation
Act of 1993 (OBRA 93) became effective. In April, 1995, the Health
Care Financing Administration (HCFA) changed its interpretation of
the OBRA 93 provisions regarding whether Medicare is the primary
payor for certain End Stage Renal Disorder patients who are eligible
for Medicare and also covered by an employer group health insurance
plan. Because HCFA's reinterpretation was made retroactive to August,
1993, the Companies began billing Medicare for amounts previously
billed to private third-party payors under the old guidelines. Before
any amounts were refunded to the private payors, a preliminary
injunction was issued by a Federal court preventing HCFA from
retroactively applying its reinterpretation of OBRA 93. The Companies
have accrued a liability for amounts which it expects to refund to
payors upon the settlement of this issue. The actual amount of the
refunds may change depending on the court's action and any subsequent
HCFA guidance.
-11-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
7. Long-term Debt
--------------
Long-term debt consists of the following at December 31:
1996 1995
(in thousands) (in thousands)
-------------- --------------
Note payable to a bank, due in monthly installments of $22,000 plus
interest at the bank's prime rate (8.25%), balance due October, 1999,
secured by substantially all assets of CKC and guaranteed by equity
holders $ 759 $1,049
Note payable to a bank due in monthly installments of $39,000 plus
interest at the bank's prime rate (8.25%), balance due May, 2005,
secured by substantially all assets of
CKC and guaranteed by equity holders 3,914 4,379
Note payable to a bank, due in monthly installments of $12,000 plus
interest at the bank's prime rate (8.25%), balance due March, 2000,
secured by accounts receivable and
guaranteed by equity holders 455 595
Note payable to a finance company, due in monthly installments of
$9,000 plus interest at 9.25%. Balance due September, 1997
Secured by medical equipment 73 174
Other 22 63
------ ------
5,223 6,260
Less current maturities 965 1,038
------ ------
$4,258 $5,222
====== ======
-12-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
7. Long-term Debt (continued)
--------------
Future minimum payments on long-term debt are as follows:
(in thousands)
1997 $ 965
1998 877
1999 828
2000 501
2001 465
Thereafter 1,587
------------
$ 5,223
============
In addition to its long-term debt, the Companies have two revolving
credit agreements with a bank that provide for borrowings up to a
total of $800,000 for general working capital purposes. Borrowings
under one agreement (up to $500,000) are unsecured and accrue
interest at the bank's prime rate. Borrowings under the second
agreement are secured by receivables, inventory, property and
equipment of DSLLC and accrue interest at the bank's prime rate. The
Companies had no outstanding borrowings against these lines at
December 31, 1996 or 1995. These credit facilities expired in 1997
and have not been renewed.
8. Lease Commitments
-----------------
The Companies lease their dialysis facilities under noncancellable
operating lease agreements which expire between 1999 and 2010. The
leases require the Companies to pay insurance and property taxes on
improvements. Rent expense under such agreements was approximately
$1,165,000 in 1996 and $1,114,000 in 1995.
The following is a schedule of the future minimum lease payments
under all operating leases as of December 31, 1996 (in thousands):
1997 $ 1,347
1998 1,200
1999 1,137
2000 877
2001 726
Thereafter 3,883
$ 9,170
============
-13-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
9. Impairment Loss
---------------
In 1996, a decision was made to close a dialysis facility located in
Anaheim, California in the first quarter of 1997. The Anaheim
facility had been acquired in 1994 and, based on the original
purchase price allocation, had unamortized goodwill of $1,448,000
associated with it at June 30, 1996. In accordance with Statement of
Financial Accounting Standards No. 121, Accounting for Impairment of
Long-Live Assets and for Long-Lived Assets to be Disposed Of, the
Company wrote off this goodwill at June 30, 1996. The Company also
recorded an impairment loss of $240,000, related to the net book
value of leasehold improvements which will be abandoned at the
Anaheim facility.
-14-
FRANK, RIMERMAN + CO. LLP
CERTIFIED PUBLIC ACCOUNTANTS
Satellite Dialysis Centers, Inc.
Redwood City, California
INDEPENDENT AUDITORS' REPORT
----------------------------
ON SUPPLEMENTAL INFORMATION
---------------------------
Our report on our audits of the combined financial statements of Satellite
Affiliated Companies for the years ended December 31, 1996 and 1995 appears on
page one. Those audits were made for the purpose of forming an opinion on the
combined financial statements taken as a whole. The information in Schedules
I-IV is presented for purposes of additional analysis of the combined financial
statements rather than to present the financial position, results of operations,
and cash flows of the individual companies. Such information has been subjected
to the auditing procedures applied in the audits of the combined financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the combined financial statements taken as a whole.
/s/ Frank Rimerman & Co. LLP
September 24, 1997
2882 SAND HILL ROAD MENLO PARK, CA 94025 415.854.3344 FAX 415.854.2234
Schedule I
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINING BALANCE SHEETS
------------------------
December 31, 1996
-----------------
CKC Combined
CKC DS, LLC CKC-IS DS-IS Orange Eliminations (6 entities)
--- ------- ------- ----- ------- ------------ ------------
ASSETS
------
Cash and cash equivalents $ 1,457,000 $ 314,000 $ 209,000 $ 158,000 $ - $ 2,138,000
Accounts receivable, less allowance for
doubtful accounts 7,111,000 2,537,000 241,000 306,000 (199,000) 9,996,000
Medical supplies inventory 402,000 259,000 - - 661,000
Deposits and prepaid expenses 107,000 39,000 - - 146,000
------------- ------------ ---------- ---------- --------- --------------
Total current assets 9,077,000 3,149,000 450,000 464,000 - 12,941,000
Investment in affiliate 150,000 - - - 150,000
Property and equipment, net 2,892,000 1,840,000 - - 4,732,000
Intangible assets 7,738,000 3,935,000 139,000 210,000 12,022,000
------------- ------------ ---------- ---------- --------- --------------
$ 19,857,000 $ 8,924,000 $ 589,000 $ 674,000 $ - $ 29,845,000
============= ============ ========== ========== ========= ==============
LIABILITIES AND OWNERS' EQUITY
------------------------------
Accounts payable $ 836,000 $ 224,000 $ 77,000 $ 58,000 $ - $ (199,000) $ 996,000
Accrued expenses 632,000 222,000 - - 854,000
Refundable service fees 1,723,000 260,000 - - 1,983,000
Current maturities of long-term debt 752,000 213,000 - - 965,000
------------- ------------ ---------- ---------- --------- --------------
Total current liabilities 3,943,000 919,000 77,000 58,000 - 4,798,000
Long-term debt, less current maturities 3,943,000 315,000 - - 4,258,000
Commitments and contingencies - - - - -
Joint ventures' equity/Members equity 11,971,000 7,690,000 512,000 616,000 20,789,000
------------- ------------ ---------- ---------- --------- --------------
$ 19,857,000 $ 8,924,000 $ 589,000 $ 674,000 $ - $ 29,845,000
============= ============ ========== ========== ========= ==============
-16-
Schedule II
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINING BALANCE SHEETS
------------------------
December 31, 1995
-----------------
CKC Combined
CKC DS, LLC CKC-IS DS-IS Orange Eliminations (6 entities)
--- ------- ------- ----- ------- ------------ ------------
ASSETS
------
Cash and cash equivalents $ 2,359,000 $ 332,000 $ 184,000 $ 21,000 $ - $ 2,896,000
Accounts receivable, less allowance for
doubtful accounts 7,501,000 2,966,000 324,000 494,000 (456,000) 10,829,000
Medical supplies inventory 505,000 296,000 - - 801,000
Deposits and prepaid expenses 57,000 49,000 - - 106,000
------------- ------------- ------------ ----------- ---------- -------------
Total current assets 10,422,000 3,643,000 508,000 515,000 - 14,632,000
Investment in affiliate - - - - -
Property and equipment, net 3,768,000 2,076,000 - - 5,844,000
Intangible assets 9,988,000 4,225,000 149,000 226,000 14,588,000
------------- ------------ ------------ ----------- ---------- -------------
$ 24,178,000 $ 9,944,000 $ 657,000 $ 741,000 $ - $ 35,064,000
============= ============ ============ =========== ========== =============
LIABILITIES AND OWNERS' EQUITY
------------------------------
Accounts payable $ 1,070,000 $ 269,000 $ 239,000 $ 181,000 $ - $ (456,000) $ 1,303,000
Accrued expenses 449,000 250,000 - - 699,000
Refundable service fees 1,723,000 260,000 - - 1,983,000
Current maturities of long-term debt 773,000 265,000 - - 1,038,000
------------- ------------- ------------ ----------- ---------- -------------
Total current liabilities 4,015,000 1,044,000 239,000 181,000 - 5,023,000
Long-term debt, less current maturities 4,694,000 528,000 - - 5,222,000
Commitments and contingencies - - - - -
Joint ventures' equity/Members equity 15,469,000 8,372,000 418,000 560,000 24,819,000
------------- ------------- ------------ ----------- ---------- -------------
$ 24,178,000 $ 9,944,000 $ 657,000 $ 741,000 $ - $ 35,064,000
============= ============= ============ =========== ========== =============
-17-
Schedule III
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINING STATEMENTS OF INCOME
------------------------------
December 31, 1996
-----------------
CKC Combined
CKC DS, LLC CKC-IS DS-IS Orange Eliminations (6 entities)
--- ------- ------- ----- ------ ------------ ------------
Dialysis and ancillary services revenue,
net $ 30,876,000 $ 11,096,000 $ 1,348,000 $ 1,173,000 $ - $ (23,000) $ 44,470,000
------------- -------------- ------------ ------------ ------- --------------
Patient Care Costs
- ------------------
Medical supplies and pharmaceuticals 9,788,000 3,498,000 859,000 703,000 - (23,000) 14,825,000
Dialysis unit staff costs 7,945,000 2,865,000 - - - 10,810,000
------------- -------------- ------------ ------------ ------- ---------------
Total patient care costs 17,733,000 6,363,000 859,000 703,000 - 25,635,000
------------- -------------- ------------ ------------ ------- ---------------
Patient Care Margin 13,143,000 4,733,000 489,000 470,000 - 18,835,000
------------- -------------- ------------ ------------ ------- ---------------
Operating Expenses
- ------------------
Dialysis unit operations 728,000 309,000 2,000 - - 1,039,000
General and administrative 3,206,000 2,021,000 3,000 4,000 - 5,234,000
Depreciation and amortization 1,531,000 605,000 11,000 16,000 - 2,163,000
Impairment loss 1,688,000 - - - - 1,688,000
------------- -------------- ------------ ------------ ------- ---------------
Total operating expenses 7,153,000 2,935,000 16,000 20,000 - 10,124,000
------------- -------------- ------------ ------------ ------- ---------------
Income from operations 5,990,000 1,798,000 473,000 450,000 - 8,711,000
OTHER INCOME (EXPENSE)
- ---------------------
Investment income 83,000 20,000 10,000 10,000 - 123,000
Other income 97,000 14,000 - - - 111,000
Interest expense (418,000) (52,000) - - - (470,000)
------------- -------------- ------------ ------------ ------- ---------------
Net income $ 5,752,000 $ 1,780,000 $ 483,000 $ 460,000 $ - $ 8,475,000
============= ============== ============ ============ ======= ===============
-18-
Schedule IV
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINING STATEMENTS OF INCOME
------------------------------
December 31, 1995
-----------------
CKC Combined
CKC DS, LLC CKC-IS DS-IS Orange Eliminations (6 entities)
--- ------- ------- ----- ------- ------------ ------------
Dialysis and ancillary services
revenue, net $ 26,366,000 $ 10,224,000 $ 1,238,000 $ 722,000 $ - $ (13,000) $ 38,537,000
------------ -------------- ------------ ----------- ------------ ---------------
Patient Care Costs
- ------------------
Medical supplies and
pharmaceuticals
Dialysis unit staff costs 7,852,000 2,868,000 771,000 389,000 - (13,000) 11,867,000
Total patient care costs 7,918,000 2,915,000 - - - 10,833,000
------------ -------------- ------------ ----------- ------------ ---------------
15,770,000 5,783,000 771,000 389,000 - 22,700,000
------------ -------------- ------------ ----------- ------------ ---------------
Patient Care Margin
10,596,000 4,441,000 467,000 333,000 - 15,837,000
------------ -------------- ------------ ----------- ------------ ---------------
Operating Expenses
- ------------------
Dialysis unit operations 624,000 265,000 - - - 889,000
General and administrative 2,638,000 1,868,000 - - - 4,506,000
Depreciation and amortization 1,591,000 597,000 11,000 9,000 - 2,208,000
Impairment loss - - - - - -
------------ -------------- ------------ ----------- ------------ ---------------
Total operating expenses 4,853,000 2,730,000 11,000 9,000 - 7,603,000
------------ -------------- ------------ ----------- ------------ ---------------
Income from operations 5,743,000 1,711,000 456,000 324,000 - 8,234,000
OTHER INCOME (EXPENSE)
- ---------------------
Investment income 54,000 23,000 2,000 1,000 - 80,000
Other income 848,000 397,000 - - - 1,245,000
Interest expense (364,000) (124,000) - - - (488,000)
------------ -------------- ------------ ----------- ------------ ---------------
Net income $ 6,281,000 $ 2,007,000 $ 458,000 $ 325,000 $ - $ 9,071,000
============ ============== ============ =========== ============ ===============
-19-
FRANK, RIMERMAN + CO. LLP
CERTIFIED PUBLIC ACCOUNTANTS
Satellite Dialysis Centers, Inc.
Redwood City, California
ACCOUNTANTS' COMPILATION REPORT
-------------------------------
We have compiled the accompanying combined balance sheets of Satellite
Affiliated Companies (Note 1) as of June 30, 1997 and 1996, and the related
combined statements of income, changes in owners' equity, and cash flows for the
six month periods then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
/s/ Frank, Rimerman & Co. L.L.P.
September 24, 1997
2882 SAND HILL ROAD MENLO PARK, CA 94025 415.854.3344 FAX 415.854.2234
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINED BALANCE SHEETS
-----------------------
June 30, 1997 and 1996
----------------------
(in thousands)
ASSETS(Note 6)
------
1997 1996
------- -------
CURRENT ASSETS
Cash and cash equivalents $ 2,663 $ 2,744
Accounts receivable, less allowance for doubtful accounts
of $2,621 in 1997 and $1,668 in 1996 11,816 8,595
Medical supplies inventory 797 877
Prepaid expenses 56 101
------- -------
Total current assets 15,332 12,317
INVESTMENT IN AFFILIATE 150 --
PROPERTY AND EQUIPMENT, net (Note 3) 5,248 5,146
INTANGIBLE ASSETS, net (Notes 4 and 8) 11,503 12,588
------- -------
$32,233 $30,051
======= =======
LIABILITIES AND OWNERS' EQUITY
------------------------------
CURRENT LIABILITIES
Accounts payable $ 3,065 $ 1,114
Accrued expenses (Note 2) 733 782
Refundable service fees (Note 5) 2,306 1,114
Current maturities of long-term debt (Note 6) 942 990
------- -------
Total current liabilities 7,046 4,000
LONG-TERM DEBT, less current maturities (Note 6) 3,819 4,741
COMMITMENTS AND CONTINGENCIES (Notes 5 and 7) -- --
OWNER'S EQUITY 21,368 21,310
------- -------
$32,233 $30,051
======= =======
See Accountants' Compilation Report and
Notes to Combined Financial Statement
- 2 -
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINED STATEMENTS OF INCOME
-----------------------------
Six Months Ended June 30, 1997 and 1996
---------------------------------------
(in thousands)
1997 1996
------- -------
DIALYSIS AND ANCILLARY SERVICES REVENUE, net $ 23,210 $ 21,604
-------- --------
PATIENT CARE COSTS
Medical supplies and pharmaceuticals 8,231 7,206
Dialysis unit staff costs 3,661 3,239
-------- --------
Total patient care costs 11,892 10,445
-------- --------
PATIENT CARE MARGIN 11,318 11,159
-------- --------
OPERATING EXPENSES
Dialysis unit operations 3,677 3,336
General and administrative (Note 2) 1,713 1,460
Depreciation and amortization 1,003 1,082
Impairment loss (Note 8) -- 1,688
-------- --------
Total operating expenses 6,393 7,566
-------- --------
Income from operations 4,925 3,593
OTHER INCOME (EXPENSE)
Investment income 50 65
Other expense (6) (6)
Interest expense (201) (243)
-------- --------
Net income $ 4,768 $ 3,409
======== ========
See Accountants' Compilation Report and
Notes to Combined Financial Statement
- 3 -
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINED STATEMENTS OF CHANGES IN OWNER'S EQUITY
------------------------------------------------
Six Months Ended June 30, 1997 and 1996
---------------------------------------
(in thousands)
1997 1996
-------- --------
BALANCE, beginning of period $ 20,789 $ 24,819
Net income 4,768 3,409
Cash distributions (4,289) (6,939)
Capital contributed 100 --
Proceeds from equity-related notes receivable -- 21
-------- --------
BALANCE, end of period $ 21,368 $ 21,310
======== ========
See Accountants' Compilation Report and
Notes to Combined Financial Statement
-4-
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINED STATEMENTS OF CASH FLOWS
---------------------------------
Six Months Ended June 30, 1997 and 1996
---------------------------------------
(in thousands)
1997 1996
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,768 $ 3,409
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization expense 1,003 1,082
Provision for doubtful accounts 511 468
Provision for impairment loss -- 1,688
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,331) 1,766
(Increase) in medical supplies inventory (136) (76)
Decrease in prepaid expenses 90 5
Increase (decrease) in accounts payable 2,069 (189)
(Decrease) increase in accrued expenses (121) 83
Increase (decrease) in refundable service fees 323 (869)
------- -------
Net cash provided by operating activities 6,176 7,367
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (1,000) (48)
Proceeds from notes receivable from equity holders -- 21
------- -------
Net cash used in investing activities (1,000) (27)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash distributions to equity holders (4,289) (6,939)
Capital contributions 100 --
Payments on long-term debt (462) (553)
------- -------
Net cash used in financing activities (4,651) (7,492)
------- -------
Net increase (decrease) in cash and cash equivalents
(balance carried forward) 525 (152)
(Continued)
-5-
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINED STATEMENTS OF CASH FLOWS
---------------------------------
Six Months Ended June 30, 1997 and 1996
---------------------------------------
(in thousands)
(Continued)
1997 1996
------- --------
Net increase (decrease) in cash and cash equivalents
(balance brought forward) 525 (152)
CASH AND CASH EQUIVALENTS, beginning 2,138 2,896
------ -------
CASH AND CASH EQUIVALENTS, ending $2,663 $ 2,744
====== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Equipment acquired in connection with capital
lease obligations $ -- $ 24
====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest $ 201 $ 243
====== =======
See Accountants' Compilation Report and
Notes to Combined Financial Statement
-6-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
1. Basis of Presentation, Nature of Business, and Significant Accounting
---------------------------------------------------------------------
Policies
--------
Basis of Presentation
The combined financial statements of Satellite Affiliated Companies
(Companies) includes the operations of the following entities, all of
which are direct or indirect investees (Affiliates) of Satellite
Dialysis Centers, Inc. (SDC), a California not-for-profit corporation:
California Kidney Centers (a California Joint Venture) (CKC)
California Kidney Centers Inpatient Services, LLC (CKCIS)
California Kidney Centers, Orange, LLC (CKC Orange) Dialysis
Systems, LLC (DSLLC) Dialysis Systems Inpatient Services, LLC
(DSIS)
During 1997, the Board of Directors of SDC determined that SDC's
charitable purpose would best be served if certain assets of the
Affiliates were sold. After this determination and under the direction
of SDC, efforts were initiated to identify potential buyers and to
actively market the identified assets. These combined financial
statements have been prepared to assist SDC in this activity. The
assets expected to be sold are stated at historical cost, which is less
than their expected market value.
Nature of Business
The Companies provide outpatient hemodialysis treatment, continuous
ambulatory peritoneal dialysis, home dialysis treatment support
services, and inpatient dialysis services to hospitals. Although the
Companies' patients are individuals, accounts receivable for services
provided are collected primarily from government agencies,
predominantly Medicare. Additional amounts are collected from private
insurance companies and individual patients.
The Companies' operations are conducted in Southern California and
Nevada.
Significant Accounting Policies
Principles of Combination:
The combined financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of
the entities listed above. All significant intercompany accounts and
transactions have been eliminated.
See Accountants' Compilation Report
-7-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
1. Basis of Presentation, Nature of Business, and Significant Accounting
---------------------------------------------------------------------
Policies (continued)
--------
Revenue Recognition:
Dialysis and ancillary service revenues include amounts for services
reimbursable by Medicare, Medicaid, MediCal, and other third party
payors under contracted reimbursement formulas. Revenues are recognized
when services are provided. Revenues are reported at the amount
expected to be realized from governmental, third-party payors, and
patients based on reimbursement contracts in force when the services
are provided.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
Concentration of Credit Risk:
Financial instruments which potentially subject the Companies to
concentrations of credit risk, consist principally of cash and cash
equivalents and accounts receivable. The Companies invest their excess
cash in a single bank. Deposits with this bank are insured up to
$100,000 per depositor by an agency of the Federal government. Accounts
receivable, which are unsecured, are primarily due from agencies of the
United States Government (65%), the State of California (9%) and
private insurance companies and hospitals (26%). Receivables from
individual patients are not significant. Before providing services, the
Companies perform insurance verification on all patients to ascertain
adequacy of insurance coverage from government and private sources. An
allowance for doubtful accounts is provided based on management's
estimate of amounts which may prove uncollectible from private insurers
or patients.
Income Taxes:
The combining entities are considered partnerships for Federal and
state income tax purposes. Accordingly, the equity owners account for
their pro rata share of the combining entities' income, deductions, and
credits in their separate tax returns. As a result, income tax expense,
assets, and liabilities are not recognized in the combined financial
statements of the Companies.
See Accountants' Compilation Report
-8-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
1. Basis of Presentation, Nature of Business, and Significant Accounting
---------------------------------------------------------------------
Policies (continued)
--------
Medical Supplies Inventory:
Medical supplies inventory is stated at the lower of cost, first-in,
first-out method, or market.
Property and Equipment:
Property and equipment is stated at cost. Depreciation is provided
using the straight-line method over estimated useful lives of five to
ten years.
Amortization of leasehold improvements is provided using the
straight-line method over the lesser of the lease term or the useful
life of the improvement, generally ten years.
Intangible Assets:
Intangible assets are stated at cost. Amortization is provided using
the straight-line method over the following estimated useful lives:
Years
------
Intangible assets, including patient lists 4 - 15
Goodwill 15 - 31
Organization costs 10
Cash and Cash Equivalents:
The Companies consider all highly-liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
See Accountants' Compilation Report
-9-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
2. Related Party Transactions
--------------------------
Management fees and directors' fees of $920,000 for the six months
ended June 30, 1997 and $861,000 for the six months ended June 30, 1996
paid to SDC are included in general and administrative expenses.
Included in accrued expenses are management fees due to SDC of $170,000
at June 30, 1997 and $206,000 at June 30, 1996.
3. Property and Equipment
----------------------
Property and equipment consist of the following at June 30 (in
thousands):
1997 1996
------- ------
Leasehold improvements $3,375 $2,965
Medical equipment 3,939 3,369
Office equipment 367 315
Furniture and fixtures 686 652
Computer equipment 58 35
Vehicles 46 22
------ ------
8,471 7,358
Less accumulated depreciation and
amortization 3,223 2,212
------ ------
$5,248 $5,146
====== ======
Depreciation and amortization expense related to property and equipment
was $490,000 for the six months ended June 30, 1997 and $518,000 for
the six months ended June 30, 1996.
See Accountants' Compilation Report
-10-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
4. Intangible Assets
-----------------
Intangible assets consist of the following at June 30 (in thousands):
1997 1996
------- -------
Intangible assets, including patient lists $ 7,073 $ 7,003
Goodwill 8,753 8,734
Organization costs 95 85
------- -------
15,921 15,822
Less accumulated amortization 4,418 3,234
------- -------
$11,503 $12,588
======= =======
Amortization expense related to intangible assets was $513,000 for the
six months ended June 30, 1997 and $564,000 for the six months ended
June 30, 1996.
5. Refundable Service Fees
-----------------------
In August, 1993, the provisions of the Omnibus Budget Reconciliation
Act of 1993 (OBRA 93) became effective. In April, 1995, the Health Care
Financing Administration (HCFA) changed its interpretation of the OBRA
93 provisions regarding whether Medicare is the primary payor for
certain End Stage Renal Disorder patients who are eligible for Medicare
and also covered by an employer group health insurance plan. Because
HCFA's reinterpretation was made retroactive to August, 1993, the
Companies began billing Medicare for amounts previously billed to
private third-party payors under the old guidelines. Before any amounts
were refunded to the private payors, a preliminary injunction was
issued by a Federal court preventing HCFA from retroactively applying
its reinterpretation of OBRA 93. The Companies have accrued a liability
for amounts which it expects to refund to payors upon the settlement of
this issue. The actual amount of the refunds may change depending on
the court's action and any subsequent HCFA guidance.
See Accountants' Compilation Report
-11-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
6. Long-term Debt
--------------
Long-term debt consists of the following at June 30:
1997 1996
(in thousands) (in thousands)
----------------- ---------------
Note payable to a bank, due in monthly installments of $22,000 plus
interest at the bank's prime rate (8.50%), balance due October, 1999,
secured by substantially all assets of CKC and guaranteed by equity
holders. $ 623 $ 915
Note payable to a bank, due in monthly installments of $39,000 plus
interest at the bank's prime rate (8.50%), balance due May, 2005,
secured by substantially all assets of CKC and guaranteed by equity
holders. 3,683 4,146
Note payable to a bank, due in monthly installments of $12,000 plus
interest at the bank's prime rate (8.50%). Balance due March, 2000.
Secured by accounts receivable and guaranteed by equity holders. 385 525
Note payable to a finance company due in monthly installments of
$9,000, plus interest at 9.25%. Balance due September, 1997. Secured by 29 135
medical equipment.
41 10
Other 4,761 5,731
942 990
Less current maturities ------------------ ------------------
$ 3,819 $ 4,741
================== ==================
See Accountants' Compilation Report
-12-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
6. Long-term Debt (continued)
--------------
Future minimum payments on long-term debt are as follows:
Twelve months ending June 30:
(in thousands)
--------------
1998 $ 942
1999 950
2000 590
2001 468
2002 468
Thereafter 1,343
--------------
$ 4,761
==============
In addition to its long-term debt, the Companies have two revolving
credit agreements with a bank that provides for borrowings up to a
total of $800,000 for general working capital purposes. Borrowings
under one agreement (up to $500,000) are unsecured and accrue interest
at the bank's prime rate. Borrowings under the second agreement are
secured by receivables, inventory, property and equipment of DSLLC and
accrue interest at the bank's prime rate. The Companies had no
outstanding borrowings against these lines at June 30, 1997 or 1996.
Subsequent to June 30, 1997, these credit facilities expired and were
not renewed.
See Accountants' Compilation Report
-13-
SATELLITE AFFILIATED COMPANIES
------------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
7. Lease Commitments
-----------------
The Companies lease their dialysis facilities under noncancellable
operating lease agreements which expire between 1999 and 2010. The
leases require the Companies to pay insurance and property taxes on
improvements. Rent expense under such agreements was approximately
$652,000 for the six months ended June 30, 1997 and $604,000 for the
six months ended June 30, 1996.
The following is a schedule of the future minimum lease payments under
all operating leases as of June 30, 1997 (in thousands):
Twelve months ending June 30:
1998 $ 1,367
1999 1,255
2000 1,121
2001 893
2002 722
Thereafter 3,560
$ 8,918
=============
8. Impairment Loss
---------------
In 1996, a decision was made to close a dialysis facility in Anaheim,
California in the first quarter of 1997. The Anaheim facility had been
acquired in 1994 and, based on the original purchase price allocation,
had unamortized goodwill of $1,448,000 associated with it at June 30,
1996. In accordance with Statement of Financial Accounting Standards
No. 121, Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, the Company wrote off this
goodwill at June 30, 1996. The Company also recorded an impairment loss
of $240,000, related to the net book value of leasehold improvements
which will be abandoned at the Anaheim facility.
See Accountants' Compilation Report
-14-
FRANK, RIMERMAN + CO. LLP
CERTIFIED PUBLIC ACCOUNTANTS
Satellite Dialysis Centers, Inc.
Redwood City, California
ACCOUNTANTS' COMPILATION REPORT
-------------------------------
ON SUPPLEMENTAL INFORMATION
---------------------------
Our report on our compilation of the combined financial statements of Satellite
Affiliated Companies for the six month periods ended June 30, 1997 and 1996
appears on page one. The information in Schedules I-IV is the representation of
management. We have not audited or reviewed the accompanying supplemental
schedules and, accordingly, do not express an opinion or any other form of
assurance on them.
/s/ Frank Rimerman + Co. LLP
September 24, 1997
2882 SAND HILL ROAD MENLO PARK, CA 94025 415.854.3344 FAX 415.854.2234
Schedule I
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINING BALANCE SHEETS
------------------------
June 30, 1997
-------------
CKC Combined
CKC DS, LLC CKC-IS DS-IS Orange Eliminations (6 entities)
--- ------- ------- ----- ------- ------------ ------------
ASSETS
------
Cash and cash equivalents $ 2,017,000 $ 376,000 $ 128,000 $ 89,000 $ 53,000 $ 2,663,000
Accounts receivable, less allowance
for doubtful accounts 8,392,000 3,035,000 341,000 366,000 - (318,000) 11,816,000
Medical supplies inventory 489,000 308,000 - - - 797,000
Deposits and prepaid expenses 43,000 6,000 - - 7,000 56,000
------------- ------------ ----------- ------------ ----------- -------------
Total current assets 10,941,000 3,725,000 469,000 455,000 60,000 15,332,000
Investment in affiliate 426,000 - - - - (276,000) 150,000
Property and equipment, net 2,991,000 1,894,000 - - 363,000 5,248,000
Intangible assets 7,380,000 3,777,000 133,000 203,000 10,000 11,503,000
------------- ------------ ----------- ------------ ----------- -------------
$ 21,738,000 $ 9,396,000 $ 602,000 $ 658,000 $ 433,000 $ 32,233,000
============= ============ =========== ============ =========== =============
LIABILITIES AND OWNERS' EQUITY
------------------------------
Accounts payable $ 2,286,000 $ 746,000 $ 167,000 $ 151,000 $ 33,000 $ (318,000) $ 3,065,000
Accrued expenses 509,000 224,000 - - - 733,000
Refundable service fees 2,004,000 302,000 - - - 2,306,000
Current maturities of long-term debt 773,000 169,000 - - - 942,000
------------- ------------ ----------- ------------ ----------- -------------
Total current liabilities 5,572,000 1,441,000 167,000 151,000 33,000 7,046,000
Long-term debt, less current maturities 3,574,000 245,000 - - - 3,819,000
Commitments and contingencies - - - - - -
Joint ventures' equity/Members equity 12,592,000 7,710,000 435,000 507,000 400,000 (276,000) 21,368,000
------------- ------------ ----------- ------------ ----------- -------------
$ 21,738,000 $ 9,396,000 $ 602,000 $ 658,000 $ 433,000 $ 32,233,000
============= ============ =========== ============ =========== =============
-16-
Schedule II
SATELLITE AFFILIATED COMPANIES
------------------------------
COMBINING BALANCE SHEETS
------------------------
June 30, 1996
-------------
CKC Combined
CKC DS, LLC CKC-IS DS-IS Orange Eliminations (6 entities)
--- ------- ------- ----- ------- ------------ ------------
ASSETS
------
Cash and cash equivalents $ 1,986,000 $ 259,000 $ 221,000 $ 278,000 $ - $ 2,744,000
Accounts receivable, less allowance
for doubtful accounts 5,645,000 2,651,000 227,000 383,000 - (311,000) 8,595,000
Medical supplies inventory 486,000 391,000 - - - 877,000
Deposits and prepaid expenses 59,000 42,000 - - - 101,000
------------- ------------ ----------- ----------- ----------- -------------
Total current assets 8,176,000 3,343,000 448,000 661,000 - 12,317,000
Property and equipment, net 3,207,000 1,939,000 - - - 5,146,000
Intangible assets 8,149,000 4,077,000 144,000 218,000 - 12,588,000
------------- ------------ ----------- ----------- ----------- -------------
$ 19,532,000 $ 9,359,000 $ 592,000 $ 879,000 $ - $ 30,051,000
============= ============ =========== =========== =========== =============
LIABILITIES AND OWNERS' EQUITY
------------------------------
Accounts payable $ 714,000 $ 430,000 $ 106,000 $ 175,000 $ - $ (311,000) $ 1,114,000
Accrued expenses 571,000 211,000 - - - 782,000
Refundable service fees 854,000 260,000 - - - 1,114,000
Current maturities of long-term debt 742,000 248,000 - - - 990,000
------------- ------------ ----------- ----------- ----------- -------------
Total current liabilities 2,881,000 1,149,000 106,000 175,000 - 4,000,000
Long-term debt, less current maturities 4,329,000 412,000 - - - 4,741,000
Commitments and contingencies - - - - - -
Joint ventures' equity/Members equity 12,322,000 7,798,000 486,000 704,000 - 21,310,000
------------- ------------ ----------- ----------- ----------- -------------
$ 19,532,000 $ 9,359,000 $ 592,000 $ 879,000 $ - $ 30,051,000
============= ============ =========== =========== =========== =============
-17-
Schedule III
SATELLITE AFFILIATED COMPANIES
COMBINING STATEMENTS OF INCOME
June 30, 1997
CKC Combined
CKC DS, LLC CKC-IS DS-IS Orange Eliminations (6 entities)
--- ------- ------- ----- ------- ------------ ------------
Dialysis and ancillary services
revenue, net $ 15,982,000 $ 5,780,000 $ 753,000 $ 709,000 $ - $ (14,000) $ 23,210,000
------------- -------------------------- ----------- ------------ ---------------
Patient Care Costs
Medical supplies and
pharmaceuticals 5,317,000 1,980,000 487,000 461,000 (14,000) 8,231,000
Dialysis unit staff costs 2,663,000 998,000 - - 3,661,000
------------- -------------------------- ----------- ------------ ---------------
Total patient care costs 7,980,000 2,978,000 487,000 461,000 - 11,892,000
------------- -------------------------- ----------- ------------ ---------------
Patient Care Margin 8,002,000 2,802,000 266,000 248,000 - 11,318,000
------------- -------------------------- ----------- ------------ ---------------
Operating Expenses
Dialysis unit operations 2,492,000 1,184,000 1,000 - 3,677,000
General and administrative 1,042,000 666,000 2,000 3,000 1,713,000
Depreciation and amortization 670,000 320,000 5,000 8,000 1,003,000
Impairment loss - - - - -
------------- -------------------------- ----------- ------------ ---------------
Total operating expenses 4,204,000 2,170,000 8,000 11,000 - 6,393,000
------------- -------------------------- ----------- ------------ ---------------
Income from operations 3,798,000 632,000 258,000 237,000 - 4,925,000
OTHER INCOME (EXPENSE)
Investment income 33,000 8,000 5,000 4,000 50,000
Other income (24,000) (6,000) - - 24,000 (6,000)
Interest expense (183,000) (18,000) - - (201,000)
------------- -------------------------- ----------- ------------ ---------------
Net income $ 3,624,000 $ 616,000 $ 263,000 $ 241,000 $ - $ 4,768,000
============= ========================== =========== ============ ===============
-18-
Schedule IV
SATELLITE AFFILIATED COMPANIES
COMBINING STATEMENTS OF INCOME
June 30, 1996
CKC Combined
CKC DS, LLC KC-IS DS-IS Orange Eliminations (6 entities)
--- ------- ------ ----- ------- ------------ ------------
Dialysis and ancillary services
revenue, net $ 15,094,000 $ 5,214,000 $ 651,000 $ 657,000 $ - $ (12,000) $ 21,604,000
------------- ------------- ----------- ------------ ------------ ---------------
Patient Care Costs
Medical supplies and
pharmaceuticals 4,769,000 1,683,000 412,000 354,000 (12,000) 7,206,000
Dialysis unit staff costs 2,519,000 720,000 - - 3,239,000
------------- ------------- ----------- ------------ ------------ ---------------
Total patient care costs 7,288,000 2,403,000 412,000 354,000 - 10,445,000
------------- ------------- ----------- ------------ ------------ ---------------
Patient Care Margin 7,806,000 2,811,000 239,000 303,000 - 11,159,000
------------- ------------- ----------- ------------ ------------ ---------------
Operating Expenses
Dialysis unit operations 2,252,000 1,082,000 2,000 - 3,336,000
General and administrative 892,000 568,000 - - 1,460,000
Depreciation and amortization 768,000 301,000 5,000 8,000 1,082,000
Impairment loss 1,688,000 - - - 1,688,000
------------- ------------- ----------- ------------ ------------ ---------------
Total operating expenses 5,600,000 1,951,000 7,000 8,000 - 7,566,000
------------- ------------- ----------- ------------ ------------ ---------------
Income from operations 2,206,000 860,000 232,000 295,000 - 3,593,000
OTHER INCOME (EXPENSE)
Investment income 44,000 12,000 5,000 4,000 65,000
Other income (1,000) (5,000) - - (6,000)
Interest expense (214,000) (29,000) - - (243,000)
------------- ------------- ----------- ------------ ------------ ---------------
Net income $ 2,035,000 $ 838,000 $ 237,000 $ 299,000 $ - $ 3,409,000
============= ============= =========== ============ ============ ===============
-19-
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
June 30, 1997
Renal Treatment Pro forma
Centers, Inc. Sellers adjustments (1) Pro forma
(unaudited) (unaudited) (unaudited) (unaudited)
-------------- ------------- --------------- --------------
ASSETS
Current assets:
Cash $ 9,129,138 $ 2,663,000 $ (2,663,000) $ 9,129,138
Accounts receivable, net 94,948,837 11,816,000 (11,816,000) 94,948,837
Inventories 5,064,238 797,000 5,861,238
Deferred taxes 765,145 765,145
Prepaid expenses and other current assets 6,943,144 56,000 6,999,144
-------------- ------------- --------------- --------------
Total current assets 116,850,502 15,332,000 (14,479,000) 117,703,502
Property and equipment, net 51,891,707 5,248,000 57,139,707
Intangibles, net 187,097,297 11,503,000 99,196,000 297,796,297
Deferred taxes, non-current 2,807,064 2,807,064
-------------- ------------- --------------- --------------
Total assets $ 358,646,570 $ 32,083,000 $ 84,717,000 $ 475,446,570
============== ============= =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,313,808 $ 942,000 $ (942,000) $ 1,313,808
Accounts payable 10,848,340 3,065,000 (3,065,000) 10,848,340
Accrued compensation 4,464,111 4,464,111
Accrued expenses 5,956,394 3,039,000 (3,039,000) 5,956,394
Accrued income taxes 1,280,317 1,280,317
Accrued interest 3,430,002 3,430,002
-------------- ------------- --------------- --------------
Total current liabilities 27,292,972 7,046,000 (7,046,000) 27,292,972
Long term debt 175,629,792 3,819,000 112,981,000 (2) 292,429,792
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued
Common stock, $.01 par value, 45,000,000 shares
authorized; 25,025,739 shares issued and
outstanding 250,257 250,257
Additional paid-in capital 94,094,774 94,094,774
Retained earnings 61,766,453 21,368,000 (21,368,000) 61,766,453
-------------- ------------- --------------- --------------
Less treasury stock, 36,598 shares at cost (387,678) (387,678)
-------------- ------------- --------------- --------------
Total liabilities and stockholders' equity $ 358,646,570 $ 32,233,000 $ 84,567,000 $ 475,446,570
============== ============= =============== ==============
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 1996 and the six months ended June 30, 1997
For the year ended December 31, 1996
Historical
----------
Renal
Treatment Pro forma
Centers, Inc. Sellers(A) adjustments Pro forma
------------- ------------ ------------- -------------
Net patient revenue $ 235,396,566 $ 45,442,000 (B) $ 280,838,566
Patient care costs 114,803,209 25,635,000 140,438,209
------------- ------------ ------------ ------------
Operating profit 120,593,357 19,807,000 140,400,357
General and administrative expense 58,471,984 7,690,000 (B) (1,738,000)(C) 64,423,984
Provision for doubtful accounts 6,621,122 1,243,000 (B) 7,864,122
Depreciation and amortization expense 17,076,827 2,163,000 5,566,754 (D) 24,806,581
Merger expenses 2,808,247 2,808,247
------------- ------------ ------------ ------------
Income from operations 35,615,177 8,711,000 (3,828,754) 40,497,423
------------- ------------ ------------ ------------
Interest expense, net 4,384,043 236,000 7,356,000 (E) 11,976,043
------------- ------------ ------------ ------------
Income before income taxes 31,231,134 8,475,000 (11,184,754) 28,521,380
Provision for income taxes 11,940,869 (1,002,609)(F) 10,938,260
------------- ------------ ------------ ------------
Net income $ 19,290,265 $8,475,000 $ (10,182,145) $ 17,583,120
============= ============ ============ ============
Pro forma net income per common
and common stock equivalent (G) $ 0.70
============
Pro forma weighted average common
shares used in computing earnings
per share 25,067,900
===========
For the year ended December 31, 1996
Historical
----------
Renal
Treatment Pro forma
Centers, Inc. Sellers(A) adjustments Pro forma
------------- ------------ ------------- -------------
Net patient revenue $ 148,380,503 $ 23,210,000 $ 171,590,503
Patient care costs 70,998,558 11,892,000 82,890,558
------------- ------------ ------------- -------------
Operating profit 77,381,945 11,318,000 88,699,945
General and administrative expense 36,748,462 4,741,000 (B) (690,000)(C) 40,799,462
Provision for doubtful accounts 4,238,674 649,000 (B) 4,887,674
Depreciation and amortization expense 12,067,654 1,003,000 2,861,877 (D) 15,932,531
Merger expenses
------------- ------------ ------------- -------------
Income from operations 24,327,155 4,925,000 (2,171,877) 27,080,278
------------- ------------ ------------- -------------
Interest expense, net 3,978,874 157,000 3,639,000 (E) 7,774,874
------------- ------------ ------------- -------------
Income before income taxes 20,348,281 4,768,000 (5,810,877) 19,305,404
Provision for income taxes 7,582,832 (388,993)(F) 7,193,839
------------- ------------ ------------- -------------
Net income $ 12,765,449 $ 4,768,000 $ (5,421,884) $ 12,111,565
============= ============ ============= =============
Pro forma net income per common
and common stock equivalent (G) $ 0.48
=============
Pro forma weighted average common
shares used in computing earnings per share 25,490,834
=============
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On October 6, 1997, Renal Treatment Centers, Inc. (the "Company") entered into
definitive agreements to acquire substantially all of the non-current and
certain other assets of California Kidney Centers ("CKC"), California Kidney
Centers, Orange, L.L.C. ("CKC Orange"), Dialysis Systems, L.L.C. ("DS"),
California Kidney Centers, Inpatient Services, L.L.C. ("CKCIS") and Dialysis
Systems, Inpatient Services, L.L.C. ("DSIS"),which together operate twelve
Medicare-certified end-stage renal disease dialysis facilities (collectively
"the Facilities") and provide acute inpatient dialysis services to 29 hospitals
in the service areas of the outpatient dialysis centers. CKC, CKC Orange, DS,
CKCIS and DSIS are hereinafter referred to collectively as the "Sellers". CKC
operates nine facilities located in southern California. CKC Orange operates a
single facility also located in southern California, which commenced operations
in August 1997. DS operates two facilities located in Las Vegas, Nevada. The
Company will acquire all of the Sellers' inventory, equipment, patient lists,
goodwill and other non-current assets used in the operation of the Facilities
and provision of acute services.
The foregoing transactions are expected to be completed in November 1997,
subject to receipt of required regulatory approvals, including those required
under the Hart-Scott-Rodino Antitrust Improvements Act and the approval of the
Attorney General of the State of California, and certain other contingencies.
As part of the transactions, the Company will also enter into covenants not to
compete with Sellers and their respective owners. In addition, the Company will
enter into medical director agreements with, or receive assignments of current
medical director agreements from, the current medical directors of the
facilities.
The Company will pay aggregate consideration of $116,800,000 in cash, plus the
assumption of certain liabilities. The Company determined the consideration
based on negotiations with Sellers and the Company's determination of the fair
market value of the assets of the Sellers as a going concern, which recognized
the recent growth in Seller' business and the Company's expectation of future
growth in the business.
The cash consideration will be funded entirely through borrowings under the
Company's revolving credit agreement with a consortium of banks.
Basis of Presentation
The unaudited pro forma financial statements are presented to illustrate (i) the
pro forma effects on the Company's balance sheet as of June 30, 1997 and (ii)
the pro forma effects on the Company's results of operations for the year ended
December 31, 1996 and for the six month period ended June 30, 1997 as if the
foregoing transaction had occurred on January 1, 1996. The unaudited pro forma
financial statements include adjustments resulting from the use of the purchase
method of accounting and are not necessarily indicative of what the combined
financial position or results of operations would have been had the transaction
occurred on January 1, 1996, nor are they necessarily indicative of future
results of the combined entities.
Certain pro forma adjustments are based on preliminary estimates of the fair
values of assets acquired and are thus subject to change.
Adjustments to Pro Forma Consolidated Balance Sheets
- ----------------------------------------------------
(1) Adjusts assets to fair market value and eliminates certain assets and
liabilities of Sellers not assumed by the Company in connection with the
acquisition.
(2) Reflects an increase in long-term debt to account for payment of the
purchase price.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Adjustments to Pro Forma Consolidated Statements of Operations
- --------------------------------------------------------------
(A) CKC Orange did not commence operations until August 1997, therefore no
amounts are included for CKC Orange.
(B) Reflects adjustments to properly classify bad debt expense.
(C) Reflects adjustment to eliminate management fees incurred by Sellers.
(D) Reflects depreciation and amortization expense resulting from the
revaluation required by the purchase method of accounting for fixed assets
and intangible assets of $4,516,514 and $2,258,257, respectively, offset by
Sellers' historical depreciation and amortization of $2,163,000 and
$1,003,000 for the year ended December 31, 1996 and for the six months
ended June 30, 1997, respectively. Also reflects additional amortization
over a 25-year period of the excess cost over net assets acquired of
$3,213,240 and $1,606,620 for the year ended December 31, 1996 and for the
six months ended June 30, 1997, respectively, as if Sellers were acquired
as of January 1, 1996.
(E) Reflects an adjustment to interest expense to account for long-term debt
incurred in connection with the acquisition, as well as the elimination of
interest expense on borrowings not assumed by the Company.
(F) Reflects the adjustments to income taxes which would have been provided on
pro forma income before taxes.
(G) Pro forma net income per common and common stock equivalents is computed by
dividing pro forma net income by the weighted average number of common and
common stock equivalents outstanding during the period.
EXHIBIT INDEX
- -------------
Exhibit No. Document
- ----------- --------
2.1 Asset Purchase Agreement, dated as of October 6, 1997, between
Renal Treatment Centers - California, Inc. and California Kidney
Centers (the exhibits and schedules to this agreement have been
omitted pursuant to Item 601(b)(2) of Regulation S-K and will be
provided supplementally to the Commission upon its request).
2.2 Asset Purchase Agreement, dated as of October 6, 1997, between
Renal Treatment Centers - California, Inc. and California Kidney
Centers, Orange, L.L.C. (the exhibits and schedules to this
agreement have been omitted pursuant to Item 601(b)(2) of
Regulation S-K and will be provided supplementally to the
Commission upon its request).
2.3 Asset Purchase Agreement, dated as of October 6, 1997, between
Renal Treatment Centers - California, Inc. and California Kidney
Centers, Inpatient Services, L.L.C. (the exhibits and schedules
to this agreement have been omitted pursuant to Item 601(b)(2)
of Regulation S-K and will be provided supplementally to the
Commission upon its request).
2.4 Asset Purchase Agreement, dated as of October 6, 1997, between
Renal Treatment Centers - West, Inc. and Dialysis Systems,
L.L.C. (the exhibits and schedules to this agreement have been
omitted pursuant to Item 601(b)(2) of Regulation S-K and will be
provided supplementally to the Commission upon its request).
2.5 Asset Purchase Agreement, dated as of October 6, 1997, between
Renal Treatment Centers - West, Inc. and Dialysis Systems,
Inpatient Services, L.L.C. (the exhibits and schedules to this
agreement have been omitted pursuant to Item 601(b)(2) of
Regulation S-K and will be provided supplementally to the
Commission upon its request).
23.1 Consent of Frank, Rimerman & Co. LLP
99.1 Press Release dated October 7, 1997.