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 SEPTEMBER 30, 1997
-----------------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
COMMISSION FILE NUMBER 1-14142
Renal Treatment Centers, Inc.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 23-2518331
- -------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1180 W. Swedesford Road
Building 2, Suite 300
Berwyn, PA 19312
- -------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 610-644-4796
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
Class OUTSTANDING AT NOVEMBER 10, 1997
----- ----------------------------------------
Common Stock, Par Value $.01 24,991,807 shares
RENAL TREATMENT CENTERS, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--
September 30, 1997 and December 31, 1996................. 3
Consolidated Statements of Income--
Three and nine months ended September 30, 1997 and 1996.. 4
Consolidated Statements of Cash Flows--
Nine months ended September 30, 1997 and 1996............ 5
Notes to Consolidated Financial Statements............... 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 8-13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES........................................................ 15
EXHIBITS ........................................................ 16-
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Renal Treatment Centers, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash $ 8,767,393 $ 1,445,798
Investments - 41,202,123
Accounts receivable, net of allowance for doubtful accounts of $6,543,817 in
1997 and $4,233,552 in 1996 109,311,160 79,138,388
Inventories 5,308,301 4,388,290
Deferred taxes 765,145 765,145
Prepaid expenses and other current assets 5,313,000 2,749,497
- ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 129,464,999 129,689,241
- ---------------------------------------------------------------------------------------------------------------------------------
Property and equipment (net of accumulated depreciation of $27,214,548 in 1997
and $19,691,015 in 1996) 62,612,801 39,578,245
Intangibles (net of accumulated amortization of $45,607,487 in 1997 and
$32,934,871 in 1996) 232,855,293 130,645,378
Deferred taxes, non-current 2,807,064 2,807,064
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $427,740,157 $302,719,928
=================================================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,295,640 $ 12,369,365
Accounts payable 12,880,222 11,341,983
Accrued compensation 8,169,851 3,838,502
Accrued expenses 8,779,150 4,051,614
Accrued income taxes 2,407,063 164,535
Accrued interest 1,539,304 3,638,874
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 35,071,230 35,404,873
- ---------------------------------------------------------------------------------------------------------------------------------
Long-term debt, net 229,227,781 130,573,685
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 25,028,405 and 24,430,256 shares in 1997 and 1996, respectively 250,284 244,303
Additional paid-in capital 94,152,899 87,890,138
Retained earnings 69,425,641 49,001,005
- ---------------------------------------------------------------------------------------------------------------------------------
163,828,824 137,135,446
- ---------------------------------------------------------------------------------------------------------------------------------
Less treasury stock, 36,598 shares in 1997 and 37,202 shares in 1996, at cost (387,678) (394,076)
- ---------------------------------------------------------------------------------------------------------------------------------
163,441,146 136,741,370
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $427,740,157 $302,719,928
=================================================================================================================================
See accompanying notes to consolidated financial statements.
3
Renal Treatment Centers, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Net patient revenue $86,559,383 $63,114,969 $234,939,886 $169,247,919
Patient care costs 40,486,983 30,942,641 111,485,541 82,425,019
- ----------------------------------------------------------------------------------------------------------------------
Operating profit 46,072,400 32,172,328 123,454,345 86,822,900
General and administrative expense 21,271,978 15,676,053 58,020,440 42,308,770
Provision for doubtful accounts 2,277,653 1,653,055 6,516,327 4,961,562
Depreciation and amortization expense 7,052,940 4,729,964 19,120,594 12,375,082
Merger expenses - 1,100,000 - 2,808,247
- ----------------------------------------------------------------------------------------------------------------------
Income from operations 15,469,829 9,013,256 39,796,984 24,369,239
- ----------------------------------------------------------------------------------------------------------------------
Interest expense, net 3,116,563 1,424,222 7,095,437 2,977,655
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 12,353,266 7,589,034 32,701,547 21,391,584
Provision for income taxes 4,694,079 3,107,943 12,276,911 8,300,236
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 7,659,187 $ 4,481,091 $ 20,424,636 $ 13,091,348
- ----------------------------------------------------------------------------------------------------------------------
Per share data:
Primary earnings per common and common stock
equivalent $0.29 $0.18 $0.79 $0.52
Weighted average number of common and common stock
equivalents outstanding 26,142,647 25,235,303 25,706,465 25,018,475
Fully diluted earnings per common and common stock
equivalent $0.29 $0.18 $0.78 $0.52
Weighted average number of common and common stock
equivalents outstanding 26,280,069 25,825,062 26,137,693 25,759,697
See accompanying notes to consolidated financial statements.
4
Renal Treatment Centers, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1997 1996
-------------------------------------
Cash flows from operating activities:
Net income $ 20,424,636 $ 13,091,348
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 19,401,844 12,423,835
Deferred income taxes - (1,792)
Provision for doubtful accounts 6,516,327 4,961,562
Equity in (earnings) losses from affiliates 8,977 -
Changes in operating assets and liabilities, net of effects of companies
acquired:
Accounts receivable (36,689,099) (20,592,485)
Inventories (202,952) (637,006)
Prepaid expenses and other current assets (2,693,450) 261,609
Accounts payable and accrued expenses 7,375,397 (174,228)
Accrued income taxes 2,137,342 (1,787,243)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 16,279,022 7,545,600
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (17,169,904) (10,584,242)
Purchase of businesses, net of cash acquired (122,018,384) (49,907,502)
Purchase of investments - (40,593,199)
Sale of investments 41,202,123 -
Other (3,920,974) (1,987,420)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (101,907,139) (103,072,363)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt borrowings 102,000,000 38,550,000
Repayments of debt (8,980,635) (71,365,886)
Issuance of 5 5/8% convertible subordinated notes - 125,000,000
Proceeds from issuance of common stock 885,270 4,346,915
Payment of dividends - (658,500)
Debt issuance costs - (3,750,000)
Payments on capital lease obligations (954,923) (2,008,024)
Cash portion of consideration received for common stock - 963,699
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 92,949,712 91,078,204
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 7,321,595 (4,448,559)
Cash and cash equivalents at beginning of period 1,445,798 8,231,421
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,767,393 $ 3,782,862
================================================================================================================================
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 nine
months ended September 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 third quarter of 1997, the Company acquired 18 dialysis centers.
Twelve of the centers are located in the Republic of Argentina, four centers are
located in Texas and one center each is located in Georgia and Illinois.
Combined, these centers provide care to an effective patient base of
approximately 1,100.
During the second quarter of 1997, the Company acquired 13 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 12 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 September 26, 1997, the Company amended and restated its revolving
credit/term facility ("Credit Agreement") to increase the amount available under
the Credit Agreement from $200,000,000 to $350,000,000 and to make certain other
changes to the terms of the Credit Agreement, including amendments to certain
covenants.
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.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------
Basic:
Basic earnings per share $0.31 $0.18 $0.82 $0.54
Weighted average number of
shares 25,027,188 24,300,036 24,835,009 24,164,022
Dilutive:
Dilutive earnings per share $0.29 $0.18 $0.78 $0.52
Weighted average number of
common and common stock
equivalents outstanding 26,280,069 25,825,062 26,137,693 25,759,697
SUBSEQUENT EVENT:
On October 7, 1997, the Company announced that it had entered into definitive
agreements to acquire substantially all of the assets of twelve dialysis
centers. Ten of the centers are located in California and the remaining two are
located in Nevada. The transaction is expected to be completed in November
1997, subject to receipt of required regulatory approvals, including the
approval of the Attorney General of the State of California, and certain other
contingencies.
7
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 November 1, 1997, the Company operated 163 outpatient dialysis centers in
23 states, the District of Columbia and the Republic of Argentina and provided
dialysis services for approximately 11,000 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 Nine Months Ended Period-to-Period
September 30, Percentage Change September 30, Percentage Change
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 vs. 1996 1997 1996 1997 vs. 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net patient revenue 100.0% 100.0% 37.1% 100.0% 100.0% 38.8%
Patient care costs 46.8% 49.0% 30.8% 47.5% 48.7% 35.3%
General and administrative expense 24.6% 24.8% 35.7% 24.7% 25.0% 37.1%
Provision for doubtful accounts 2.6% 2.6% 37.8% 2.8% 2.9% 31.3%
Depreciation and amortization expense 8.1% 7.5% 49.1% 8.1% 7.3% 54.5%
Merger expenses ---- 1.7% ---- ---- 1.7% ----
Income from operations 17.9% 14.3% 71.6% 16.9% 14.4% 63.3%
Interest expense, net 3.6% 2.3% 118.8% 3.0% 1.8% 138.3%
Income before income taxes 14.3% 12.0% 62.8% 13.9% 12.6% 52.9%
Provision for income taxes 5.4% 4.9% 51.0% 5.2% 4.9% 47.9%
Net income 8.8% 7.1% 70.9% 8.7% 7.7% 56.0%
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
NET PATIENT REVENUE. Net patient revenue for the nine months ended September
30, 1997 was $234,939,886 as compared to $169,247,919 for the same period in
1996, representing an increase of 38.8%. Of this increase, $50,470,323 was
attributable to the revenue generated from the operations of 52 centers and
certain acute care agreements acquired in separate purchase transactions and the
development of eleven new dialysis centers ("de novo" developments) from April
1996 through September 1997. Of the remaining increase of $15,221,644,
$10,566,554 was attributable to an increase in same-center treatments and
$4,655,090 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 private payor mix.
PATIENT CARE COSTS. Patient care costs increased 35.3% to $111,485,541 for the
nine months ended September 30, 1997 from $82,425,019 for the same period in
1996. The increase was principally the result of acquisitions that were
completed from April 1996 through September 1997. However, as a percentage of
net patient revenue, patient care costs decreased to 47.5% for the nine months
ended September 30, 1997 from 48.7% for the same period in 1996. This
percentage decrease was primarily related to the increase in same-center net
revenue per treatment and achieving overall cost efficiencies. 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.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $15,711,670, or 37.1%, to $58,020,440 for the nine months ended
September 30, 1997, as compared to $42,308,770 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 September 1997. As a
percentage of net patient revenue, general and administrative expense decreased
to 24.7% for the nine months ended September 30, 1997, as compared to 25.0% for
the nine months ended September 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.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts increased
$1,554,765, or 31.3%, to $6,516,327 for the nine months ended September 30,
1997, as compared to $4,961,562 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 2.8%
for the nine months ended September 30, 1997 and 2.9% for the same period in
1996.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
increased $6,745,512, or 54.5%, for the nine months ended September 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 nine months
ended September 30, 1997, as compared to 7.3% for the nine months ended
September 30, 1996. Both the dollar and percentage increases were attributable
to the purchase acquisitions completed from April 1996 through September 1997.
MERGER EXPENSES. There were no merger expenses for the nine months ended
September 30, 1997, as compared to $2,808,247 for the same period in 1996. For
the nine months ended September 30, 1996, merger expenses were incurred as a
result of the mergers with Intercontinental Medical Services, Inc., Midwest
Dialysis Units and its affiliates and Panama City Artificial Kidney Center
("PCAKC") and North Florida Artificial Kidney Center ("NFAKC") which were
completed on February 20, 1996, February 29, 1996, and July 23, 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 63.3% to $39,796,984
for the nine months ended September 30, 1997 from $24,369,239 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 September 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 nine months
ended September 30, 1997 as compared to $2,808,247 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 $7,095,437 for the nine
months ended September 30, 1997 as compared to interest expense (net) of
$2,977,655 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% Convertible Subordinated Notes due
2006 (the "Notes") on June 12, 1996, as well as outstanding borrowings under the
Credit Agreement ranging from $48,000,000 to $102,000,000 for the three months
ended September 30, 1997 compared to no outstanding borrowings from June 12,
1996 to September 30, 1996. A portion of the proceeds from the issuance of the
Notes was used to repay all amounts outstanding under the Credit Agreement on
June 12, 1996.
PROVISION FOR INCOME TAXES. Provision for income taxes increased 47.9% to
$12,276,911 from $8,300,236 for the nine months ended September 30, 1997 and
1996, respectively. The increase was primarily due to an increase in income
before taxes of 52.9%. For the nine months ended September 30, 1997, the
Company's effective tax rate was 37.5%, compared to an effective tax rate of
38.8% during the same period in 1996. The decrease in the effective rate is
primarily due to a one-time tax charge of $85,350 related to the merger with
Midwest Dialysis Units and its affiliates recorded in the first quarter of 1996,
as well as, a one-time tax charge of $300,000 related to the merger with PCAKC
and NFAKC recorded in the third quarter of 1996, which increased the effective
tax rate for the nine months ended September 30, 1996.
NET INCOME. Net income increased 56.0% to $20,424,636 for the nine months ended
September 30, 1997 from $13,091,348 for the same period in 1996. The increase
was due to each of the items discussed above.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
NET PATIENT REVENUE. Net patient revenue for the three months ended September
30, 1997 was $86,559,383 as compared to $63,114,969 for the same period in 1996,
representing an increase of 37.1%. Of this increase, $19,904,339 was
attributable to the revenue generated from the operations of 47 centers and
certain acute care agreements acquired in separate purchase transactions and 11
de novo developments from September 1996 through September 1997. Of the
remaining increase of $3,540,075, $3,187,425 was attributable to an increase in
same-center treatments and $352,656 was attributable to an increase in the
average same-center revenue per treatment, which, in turn, was due to an
improvement in the Company's private payor mix.
PATIENT CARE COSTS. Patient care costs increased 30.8% to $40,486,983 for the
three months ended September 30, 1997 from $30,942,641 for the same period in
1996. The increase was principally the result of acquisitions that were
completed from September 1996 through September 1997. However, as a percentage
of net patient revenue, patient care costs decreased to 46.8% for the three
months ended September 30, 1997 from 49.0% for the same period in 1996. This
percentage decrease was primarily related to overall operating efficiencies
related to medical supply usage and labor.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $5,595,925, or 35.7%, to $21,271,978 for the three months ended
September 30, 1997, as compared to $15,676,053 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 September 1996 through September 1997. As a
percentage of net patient revenue, general and administrative expense
decreased to 24.6% for the three months ended September 30, 1997, as compared to
24.8% for the three months ended September 30, 1996.
PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts increased
$624,598, or 37.8%, to $2,277,653 for the three months ended September 30, 1997,
as compared to $1,653,055 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 August 1996. As a percentage of net
patient revenue, the provision for doubtful accounts was 2.6% for both the three
months ended September 30, 1997 and 1996.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
increased $2,322,976, or 49.1%, for the three months ended September 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 three months
ended September 30, 1997, as compared to 7.5% for the three months ended
September 30, 1996. Both the dollar and percentage increases were attributable
to the purchase acquisitions completed from September 1996 through September
1997.
MERGER EXPENSES. There were no merger expenses incurred during the three months
ended September 30, 1997, as compared to $1,100,000 for the same period in 1996.
For the three months ended September 30, 1996, merger expenses were incurred as
a result of the merger with PCAKC and NFAKC, which was completed on July 23,
1996, and accounted for under the pooling-of-interests method of accounting.
Merger expenses include, but are not limited to, investment banking, legal and
accounting fees.
INCOME FROM OPERATIONS. Income from operations increased 71.6% to $15,469,829
for the three months ended September 30, 1997 from $9,013,256 for the same
period in 1996. This increase was primarily due to the increase in net revenues
from the centers acquired, from September 1996 through September 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 $3,116,563 for the three
months ended September 30, 1997 as compared to interest expense (net) of
$1,424,222 for the same period in 1996. The increase in interest expense (net)
was associated with the amounts outstanding under the Company's Credit Agreement
during the three months ended September 30, 1997. There were no amounts
outstanding under the Credit Agreement for the same period in 1996, as a result
of the repayment of all outstanding borrowings on June 12, 1996 using a portion
of the proceeds of the Notes.
PROVISION FOR INCOME TAXES. Provision for income taxes increased 51.0% to
$4,694,079 from $3,107,943 for the three months ended
September 30, 1997 and 1996, respectively. The increase was primarily due to an
increase in income before taxes of 62.8%. For the three months ended September
30, 1997, the Company's effective tax rate was 38.0% compared to an effective
tax rate of 41.0% during the same period in 1996. The decrease in the effective
rate is due to a one-time tax charge of $300,000 related to the merger with
PCAKC and NFAKC recorded in the third quarter of 1996.
NET INCOME. Net income increased 70.9% to $7,659,187 for the three months ended
September 30, 1997 from $4,481,091 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 nine months ended September 30, 1997, expenditures for acquisitions
totaled $122,018,384 compared to $49,907,502 for the nine months ended September
30, 1996. The expenditures in 1997 resulted from the acquisition of 42 centers
for the nine months ended September 30, 1997 compared to the acquisition of 11
centers during the same period in 1996. For the nine months ended September 30,
1997 and 1996, capital expenditures were $17,169,904 and $10,584,242,
respectively. Cash from operations before investing and financing activities
was $16,279,022 and $7,545,600 for the nine months ended September 30, 1997 and
1996, respectively. The principal sources of the Company's liquidity during the
first nine months of 1997 were earnings, borrowings under the Credit Agreement
and the remaining proceeds from the issuance of the Notes. The Company had cash
and cash equivalents of $8,767,393 at September 30, 1997.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
The Credit Agreement, as amended and restated on September 26, 1997, provides
for a $350,000,000 revolving credit term facility available to fund acquisitions
and general working capital requirements, of which $102,000,000 and $0 were
outstanding as of September 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
plus .50% to 1.50%, depending on the Company's ratio of consolidated debt to
annualized cash flow, payable at maturity, or, in the case of a six-month period
rate, at three months and at maturity.
The weighted average interest rate of all loans outstanding at September 30,
1997 was 6.9%. 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% of the Company's net patient revenue during the
year ended December 31, 1996 and the nine months ended September 30, 1997, 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 nine months ended September 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% of the Company's net patient revenue during the fiscal year
ended December 31, 1996 and during the nine months ended September 30, 1997, was
from sources other than Medicare and Medicaid. These sources include payments
from third party, non-governmental 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
11
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.
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 $350,000,000 for acquisition and
12
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 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 further 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.
13
Part II. Other Information
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
10.11 Sixth Amended and Restated Loan Agreement dated as of September
26, 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.
27.1 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: November 13, 1997 By: /s/ Ronald H. Rodgers, Jr.
----------------------- ------------------------------
Ronald H. Rodgers, Jr.
Vice President - Finance and
Chief Financial Officer
Date: November 13, 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 Sixth Amended and Restated Loan Agreement dated as of September
26, 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