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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27640
RENAL CARE GROUP, INC.
(Exact Name of Company as Specified in its Charter)
DELAWARE 62-1622383
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2100 WEST END AVENUE, SUITE 800,
NASHVILLE, TENNESSEE 37203
(Address, Including Zip Code, of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (615) 345-5500
Securities Registered Pursuant to Section 12(B) of the Act: None
Securities Registered Pursuant to Section 12(G) of the Act:
Common Stock, $0.01 Par Value
(TITLE OF CLASS)
Indicate by check mark whether the Company (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 Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Company was $1,147,822,032 as of March 16, 2001, based upon the closing
price of such stock as reported on the Nasdaq National Market System ("Nasdaq
Stock Market") on that day (assuming for purposes of this calculation, without
conceding, that all executive officers and directors are affiliates). There were
47,100,256 shares of common stock, $0.01 par value, issued and outstanding at
March 16, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2001 Annual
Meeting of Stockholders are incorporated by reference in Part III of this Annual
Report.
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PART I
ITEM 1. BUSINESS
GENERAL
Renal Care Group, Inc. provides dialysis services to patients with
chronic kidney failure, also known as end-stage renal disease ("ESRD"). As of
December 31, 2000, Renal Care Group provided dialysis and ancillary services to
approximately 16,500 patients through 201 outpatient dialysis centers in 24
states. In addition to outpatient dialysis center operations as of December 31,
2000, Renal Care Group provided acute dialysis services through contractual
relationships with 112 hospitals. Renal Care Group was formed in 1996 by leading
nephrologists with the objective of creating a company with the clinical and
financial capability to manage the full range of care for ESRD patients on a
cost-effective basis. As of December 31, 2000, there were 269 nephrologists with
privileges to practice at the Company's outpatient dialysis centers. The Company
also provides limited wound and diabetic care services; however, as announced on
September 20, 2000, the Company has determined to exit the wound care business
by June 30, 2001.
In Renal Care Group's dialysis facilities, ESRD patients receive
dialysis treatments, generally three times a week, in a technologically advanced
outpatient setting. According to the Health Care Financing Administration
("HCFA"), there were more than 3,800 facilities providing dialysis in the United
States at the end of 1999. In the past many outpatient dialysis facilities have
been owned by practicing nephrologists and comprised an integral component of
their practice because of the critical role that dialysis plays in the treatment
of ESRD patients. Over the last several years, however, the dialysis services
industry has been consolidating. As a result, Renal Care Group believes that
approximately 65% of outpatient dialysis centers are now owned by multi-center
dialysis companies, between 20% and 25% are owned by independent physicians and
other small operators, and between 20% and 25% are hospital-based centers.
Renal Care Group is a Delaware corporation; its principal executive
offices are located at 2100 West End Avenue, Suite 800, Nashville, Tennessee
37203; and its telephone number is (615) 345-5500.
FORWARD LOOKING STATEMENTS
Some of the information in this annual report on Form 10-K contains
forward-looking statements that involve substantial risks and uncertainties. In
many instances you can identify these statements by forward-looking words such
as "may," "will," "expect," "anticipate," "believe," "intend," "estimate" and
"continue" or similar words. You should read these statements carefully for the
following reasons:
- the statements discuss our future expectations;
- the statements contain projections of our future earnings or
of our financial condition; and
- the statements state other "forward-looking" information.
We believe it is important to communicate our expectations to our
investors. There may be events in the future, however, that we are not
accurately able to predict or over which we have no control. The risk factors
discussed on pages 18 to 23 of this annual report on Form 10-K, as well as any
cautionary language in or incorporated by reference into this annual report on
Form 10-K, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements. The SEC allows us to "incorporate by reference" the
information we file with them, which means we can disclose important information
to you by referring you to those documents. Before you invest in our common
stock, you should be aware that the occurrence of any of the events described in
the above risk factors, elsewhere in or incorporated by reference into this
annual report on Form 10-K and other events that we have not predicted or
assessed could have a material adverse effect on our earnings, financial
condition and business. If the events
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described above or other unpredicted events occur, then the trading price of our
common stock could decline and you may lose all or part of your investment.
INDUSTRY OVERVIEW
END-STAGE RENAL DISEASE
ESRD is a state of advanced kidney failure. ESRD is irreversible and
ultimately lethal. It is most commonly a result of complications associated with
diabetes, hypertension, certain renal and hereditary diseases, aging and other
factors. In order to sustain life, ESRD patients require either dialysis for the
remainder of their lives or a successful kidney transplant. By the end of 1998,
dialysis was the primary treatment for approximately 71% of all ESRD patients,
and the remaining 29% of ESRD patients had a functioning kidney transplant.
According to United States Renal Data System Coordinating Center
("USRDS") estimates, the total direct medical payments for ESRD exceeded $16.7
billion during 1998. Of the total direct medical payments for ESRD,
approximately $12.0 billion was paid by the federal government through the
Medicare program. As a result of legislation enacted in 1972, the federal
government provides Medicare benefits to patients who are diagnosed with ESRD
regardless of their age or financial circumstances, if they are eligible for
Social Security.
According to HCFA data, the number of ESRD patients in the United
States who need dialysis grew from approximately 66,000 in 1982 to approximately
233,000 in 1998. Based on USRDS data, the ESRD incidence rate among
Medicare-eligible patients was approximately 308 patients per million in 1998 as
compared to 111 patients per million in 1984.
Based on these historical trends, USRDS forecasts indicate that the
total number of ESRD patients, including those with functioning transplants,
will grow from approximately 324,000 in 1998 to 660,000 in 2010. The growth in
the number of ESRD patients results principally from the aging of the population
along with better treatment of, and better survival rates for, diabetes and
other illnesses that lead to chronic kidney disease, reduced somewhat by
declines in incidence among patients with high blood pressure as a result of
better treatments for high blood pressure. In addition, as a result of improved
technology, older patients and patients who could not previously tolerate
dialysis due to other illnesses can now receive life-sustaining dialysis
treatment.
TREATMENT OPTIONS FOR END-STAGE RENAL DISEASE
Currently, there are three treatment options for ESRD:
- hemodialysis, which is performed either in a hospital setting,
an outpatient facility or a patient's home,
- peritoneal dialysis, which is generally performed in the
patient's home, and
- kidney transplant surgery.
According to HCFA data, in 1998 approximately 90% of patients on
dialysis in the United States received hemodialysis in an outpatient setting,
and approximately 10% received hemodialysis or peritoneal dialysis in their
homes.
Hemodialysis is the most common form of ESRD treatment. It is generally
performed either in a freestanding center or in a hospital. The process of
hemodialysis uses a dialyzer, essentially an artificial kidney, to remove
certain toxins, fluid and chemicals from the patient's blood and another device
that controls external blood flow and monitors the patient's vital signs. The
dialysis process occurs across a semi-permeable membrane that divides the
dialyzer into two chambers. While the blood is circulated through one chamber, a
pre-mixed dialysis fluid is circulated through the adjacent chamber. The toxins
and excess
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fluid contained in the patient's blood cross the membrane into the dialysis
fluid. Hemodialysis usually takes approximately four hours and is generally
administered three times per week for the life of the patient or until the
patient receives a transplant.
Peritoneal dialysis is typically performed by the patient at home and
uses the patient's peritoneal (abdominal) cavity to eliminate fluids and toxins
in the patient's blood. There are several forms of peritoneal dialysis.
Continuous ambulatory peritoneal dialysis and continuous cyclic peritoneal
dialysis are the most common. Under each method, the patient's blood is
circulated across the peritoneal membrane into the dialysis solution, which
removes toxins and excess fluid from the patient's blood. Patients treated at
home are monitored monthly either by a visit from a staff person from a
designated outpatient dialysis center or by a visit by the patient to a dialysis
center.
Kidney transplants, when successful, are the most desirable form of
ESRD therapy. However, the shortage of suitable donors severely limits the
availability of this surgical procedure as a treatment option. Only about 6% of
ESRD patients receive kidney transplants annually.
ANCILLARY SERVICES
Renal Care Group provides a variety of ancillary services to treat ESRD
patients. The most significant ancillary service is the administration of
erythropoietin (also known as Epogen(R) or EPO). EPO is a bio-engineered protein
that stimulates the production of red blood cells. It is used in connection with
all forms of dialysis to treat anemia, a complication experienced by almost all
ESRD patients. EPO is manufactured by a single supplier, Amgen Inc., and there
are no substitute products available to dialysis providers in the United States.
Other ancillary services offered by Renal Care Group, depending on medical
appropriateness, include tests for bone deterioration, electrocardiograms, nerve
conduction studies to test for deterioration of a patient's nerves, Doppler flow
testing for the effectiveness of the patient's vascular access for dialysis, and
blood transfusions. Renal Care Group, through its RenaLab subsidiary, also
provides clinical laboratory services for its dialysis operations.
NEPHROLOGY PRACTICE
Caring for ESRD patients is typically the primary clinical activity of
a nephrologist. Other clinical activities of a nephrologist include the
post-surgical care of kidney transplant patients, the diagnosis and treatment of
kidney diseases in patients who are at risk for developing ESRD, and the
diagnosis, treatment and management of clinical disorders including
hypertension, kidney stones and autoimmune diseases. Because of the complexity
involved in treating patients with chronic kidney disease, the nephrologist
typically assumes the role of primary care physician for the ESRD patient. While
some nephrologists practice independently or are members of multi-specialty
groups, most nephrologists practice in small single-specialty groups. A
nephrology group's practice often covers a relatively large geographic service
area. Outside metropolitan areas, a large geographic area may be served by only
one nephrology group. Most nephrologists also have a significant office
practice, consult on numerous hospitalized patients who are not on dialysis and
follow the clinical outcomes of kidney transplant patients.
OPERATIONS
LOCATION, CAPACITY AND USE OF FACILITIES
As of December 31, 2000, Renal Care Group operated 201 outpatient
dialysis centers in 24 states with 3,714 certified dialysis stations and
provided inpatient dialysis services to 112 acute care hospitals. During 2000,
Renal Care Group provided 2,418,619 hemodialysis treatments. Renal Care Group
estimates that on average its centers were operating at approximately 70% of
capacity as of December 31, 2000, based on the assumption that a dialysis center
is able to provide up to three treatments a day per station, six days a week.
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OPERATION OF FACILITIES
Renal Care Group's dialysis centers provide outpatient hemodialysis and
related services to ESRD patients. Most of Renal Care Group's centers use
technologically advanced dialysis equipment to provide effective and efficient
dialysis. The Company's centers generally contain between 10 and 30 dialysis
stations, a nurses' station, a patient waiting area, examination rooms, a supply
room, a water treatment space to purify water used in hemodialysis treatments, a
dialyzer reprocessing room, staff work areas, offices and a staff lounge. Many
of Renal Care Group's centers also have designated areas for training patients
in home dialysis.
For Renal Care Group to be eligible to participate in the Medicare ESRD
program, a qualified physician or group of physicians must act as medical
director for each of Renal Care Group's centers and must supervise medical
aspects of the center's operations. An administrator or manager manages each
center. The administrator or manager is typically a registered nurse and is
responsible for the day-to-day operations of the center and oversight of the
staff. The staff of each center typically includes registered nurses, licensed
practical or vocational nurses, patient care technicians, social workers,
registered dietitians, a unit clerk and biomedical equipment technicians. Renal
Care Group works to staff each center in a manner that allows the scheduling of
personnel to be adjusted according to the number of patients receiving
treatments.
HOME DIALYSIS
All of Renal Care Group's centers offer home dialysis, either home
hemodialysis, peritoneal dialysis or both. As of December 31, 2000,
approximately 11% of Renal Care Group's patients received home dialysis. Renal
Care Group's home dialysis services consist of providing equipment and supplies,
training, patient monitoring and follow-up assistance to patients who receive
dialysis treatments in their homes. The Company believes that home dialysis is
important to providing a full range of dialysis care and intends to work to
expand its home dialysis program.
INPATIENT CARE
Some of Renal Care Group's centers provide inpatient dialysis services
to hospitals in their service areas. As of December 31, 2000, Renal Care Group
provided inpatient services to 112 hospitals. Under these arrangements, Renal
Care Group typically provides equipment, supplies and personnel to perform
hemodialysis and peritoneal dialysis in connection with the hospital's inpatient
services. These inpatient dialysis services are typically required for patients
with acute renal failure resulting from accidents, medical and surgical
complications, patients in the early stage of renal failure and ESRD patients
who need to be in the hospital for other reasons. Most of Renal Care Group's
hospital contracts specify predetermined fees per dialysis treatment. The
Company believes that such fees may be subject to re-negotiation in the future
as competition increases among dialysis providers and as the health care
industry becomes more influenced by managed care and subject to capitated
arrangements.
UNIVERSITY DIVISION
Renal Care Group currently manages the dialysis programs at Vanderbilt
University Medical Center, and is the owner or managing partner of programs at
the Cleveland Clinic Foundation, MetroHealth (a hospital affiliated with Case
Western Reserve University), St. Louis University Hospital, the University of
Arkansas, Froedtert Hospital (a hospital affiliated with Medical College of
Wisconsin), and Northwestern Memorial Hospital of Chicago. The Company also
provides home dialysis services for a group of patients at the University of
Arkansas. Renal Care Group expects these affiliations will expand its patient
base and provide opportunities for the development of new centers. Furthermore,
Renal Care Group expects these affiliations to provide access to outcomes
research and highly trained nephrologists who may become medical directors at
Renal Care Group's centers.
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NEPHROLOGISTS
A key factor in the success of a dialysis center is the local
nephrologist. An ESRD patient generally seeks treatment at a center where his or
her nephrologist has practice privileges. Consequently, the Company relies on
its ability to satisfy the needs of referring nephrologists in order to gain new
patients and to retain existing patients. As of December 31, 2000, there were
269 nephrologists with privileges to practice at the Company's outpatient
dialysis centers.
MEDICAL DIRECTORS
To satisfy the requirements of the Medicare ESRD program, Renal Care
Group generally engages practicing, board-certified or board-eligible
nephrologists to serve as medical directors for its centers. Each medical
director provides services pursuant to an independent contractor agreement with
the Company. Medical directors are responsible for the administration and
monitoring of the Company's patient care policies, including patient education,
administration of dialysis treatment, development and training programs and
assessment of all patients. Medical directors play an important role in quality
assurance activities and in coordinating the delivery of care to maintain ESRD
patients' general level of health and to avoid medical complications that might
require hospitalization.
Renal Care Group's typical medical director agreement has a term of
seven years with three-year renewal options. Renal Care Group pays medical
directors fees that approximate the fair market value of the required
supervisory services. These medical director fees are the result of arms-length
negotiations. Most of the Company's medical director agreements also include
non-competition clauses with specific limitations on the medical director's
ability to compete with Renal Care Group for certain periods of time and in
certain geographic areas.
QUALITY ASSURANCE
Integral to Renal Care Group's operating philosophy is the
understanding that providing superior care is in the best interests not only of
patients but also of the Company's stockholders. Better patient care results in
improved mortality and morbidity and a greater number of treatments, as
patients' life spans increase and the number of days patients spend in hospitals
declines. In order to optimize therapy and improve outcomes, Renal Care Group
maintains a quality assurance program. Renal Care Group establishes, maintains
and monitors quality criteria for its clinical operations and monitors patient
outcomes in all of its centers.
MEDICAL ADVISORY BOARD
Renal Care Group's Medical Advisory Board oversees the development and
implementation of clinical protocols and the review of patient outcomes. The
Medical Advisory Board is chaired by Renal Care Group's Chief Medical Officer
and is composed of 12 nephrologists who are medical directors of one or more of
the Company's centers. The Medical Advisory Board is responsible for
establishing, implementing and monitoring the Company's quality assurance
policies and procedures. The Medical Advisory Board also works to identify
therapy deficiencies and to evaluate technological changes. The Medical Advisory
Board's ultimate objective is to assist Renal Care Group in developing and
communicating a protocol-driven clinical management model that will enable the
Company to provide optimal care to its patients and, ultimately, to manage
effectively the financial risk associated with providing ESRD services on a
capitated basis.
QUALITY CRITERIA
Continuous quality improvement is Renal Care Group's primary clinical
objective. Working to achieve this objective, Renal Care Group regularly
evaluates the prescribed dialysis treatments and patients' key physiological
parameters. The Company's corporate Quality Assurance Coordinator is a
registered nurse who oversees Renal Care Group's quality assurance program. In
addition, each center has a quality assurance committee that typically includes
the medical director, the center
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administrator and nurses, as well as other technical personnel. These committees
monitor the quality of care in the centers and oversee compliance with
applicable regulations.
OUTCOMES DATA
Renal Care Group believes that an important factor in managing ESRD
successfully is the development of clinical pathways and treatment protocols. To
develop, review and maintain these pathways and protocols, Renal Care Group
maintains a broad database of treatment-specific outcomes information. The
Company's Quality Assurance Coordinator oversees the collection of patient
outcomes and cost data in the Company's centers. Renal Care Group makes these
data available to the Medical Advisory Board and affiliated physicians to assist
in developing, implementing and evaluating clinical pathways to enhance patient
outcomes while working to control the cost of care. The Company believes that
the implementation of such clinical pathways will assist in improving the
overall quality and operating efficiencies of its dialysis centers.
PATIENT INVOLVEMENT
Renal Care Group also works to improve the quality of care by providing
training to ESRD patients both before and after they begin a course of dialysis.
The Company works to train patients to participate in their own care to the
fullest extent possible. In addition, in some of its centers, Renal Care Group,
affiliated physicians and patients form "self-care" units in which self-reliance
is fostered through instruction and support.
CORPORATE COMPLIANCE PROGRAM
Renal Care Group has developed and maintains a company-wide corporate
compliance program as part of its commitment to comply fully with all applicable
laws and regulations and to maintain high standards of conduct by Renal Care
Group's associates. A purpose of the program is to heighten associates' and
affiliated professionals' awareness of the importance of complying with all
applicable laws and regulations in an increasingly complicated regulatory
environment and to take steps promptly to identify and resolve instances of
non-compliance.
The compliance program has been authorized and mandated by Renal Care
Group's Board of Directors. It addresses general compliance issues and areas of
particular sensitivity. As part of the program Renal Care Group has published a
code of conduct setting forth standards of conduct and principles of business
ethics to be followed by the Company and each employee and affiliated
professional. A Compliance Committee comprised of officers and senior managers
of Renal Care Group and a full-time Compliance Officer administer the corporate
compliance program. The Compliance Committee and Compliance Officer report to
the Audit and Compliance Committee of the Company's Board of Directors.
REIMBURSEMENT
SOURCES OF NET PATIENT REVENUE
The following table sets forth information regarding the sources of
Renal Care Group's net patient revenue:
YEAR ENDED DECEMBER 31,
----------------------------
1998 1999 2000
---- ---- ----
Medicare ............................................... 59% 57% 53%
Medicaid ............................................... 5 4 5
Commercial and other payors ............................ 30 33 36
Hospital inpatient dialysis services ................... 6 6 6
---- ---- ----
Total ......................................... 100% 100% 100%
==== ==== ====
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MEDICARE
The Social Security Act provides that most U.S. citizens and resident
aliens with ESRD are entitled to Medicare coverage. If a physician finds that an
eligible person has ESRD, then he or she will be entitled to Medicare coverage
(i) beginning the third month after the month in which a regular course of
dialysis is initiated; or (ii) as early as the month in which a kidney
transplant candidate is hospitalized for the transplant if certain conditions
are met.
For Medicare purposes, ESRD is defined as kidney impairment that
appears irreversible and permanent and that requires a regular course of
dialysis or a kidney transplant to maintain life. For a period of 30 months,
Medicare coverage is generally secondary for patients who have qualifying health
insurance. After this 30-month period, Medicare becomes the primary coverage for
patients, and the patient's other health insurance generally pays applicable
Medicare coinsurance payments and deductibles.
Under the Medicare ESRD program, Medicare reimbursement rates per
outpatient dialysis treatment are fixed under a composite rate structure. The
Medicare ESRD composite rate may be changed by legislation or rulemaking.
Effective on both January 1, 2000 and January 1, 2001, the Medicare composite
rate was increased by 1.2% each year. An additional increase of 1.2% is
scheduled to take effect April 1, 2001. The April 1, 2001 increase also includes
an adjustment factor that makes that 1.2% increase effective for all of calendar
year 2001. Accordingly, the net result of the 1.2% increases on January 1, 2001
and April 1, 2001, plus the April adjustment factor, is a 2.4% effective
increase for 2001. Although Medicare reimbursement limits the allowable charge
per treatment, it provides Renal Care Group with predictable and recurring
treatment revenue for its outpatient dialysis services that are covered by the
composite rate.
The Medicare ESRD composite rate for outpatient dialysis services
averaged $128 per treatment in freestanding facilities during 2000. The Medicare
ESRD composite rate is subject to regional differences based on certain factors,
including labor costs. HCFA or Congress may periodically adjust Medicare
reimbursement rates, including the ESRD composite rate, based on certain
factors, including legislation, executive and congressional budget reduction and
control processes, inflation and costs incurred in rendering the services.
Historically, adjustments in the Medicare ESRD composite rate have had little
relationship to the cost of conducting business.
The Medicare ESRD composite rate applies to a designated group of
outpatient dialysis services, including the dialysis treatment, supplies used
for such treatment, certain laboratory tests and certain medications, and most
of the home dialysis services provided by Renal Care Group. Some other services,
laboratory tests and drugs are eligible for separate reimbursement under
Medicare and are not part of the composite rate. These separately reimbursed
items include specific drugs such as EPO, some physician-ordered tests provided
to dialysis patients and some home dialysis services. Renal Care Group usually
submits Medicare claims monthly and is usually paid within 30 days of the
submission.
CHANGES IN THE MEDICARE ESRD COMPOSITE RATE
Effective January 1, 2000 and January 1, 2001, Congress increased the
Medicare ESRD composite rate by 1.2% each year. An additional increase of 1.2%
is scheduled to take effect April 1, 2001. The April 1, 2001 increase also
includes an adjustment factor that makes that 1.2% increase effective for all of
calendar year 2001. Accordingly, the net result of the 1.2% increases on January
1, 2001 and April 1, 2001, plus the April adjustment factor, is a 2.4% effective
increase for 2001. Previously, the Medicare ESRD composite rate was unchanged
from commencement of the program in 1972 until 1983. From 1983 through December
1990, numerous congressional actions resulted in net reductions of the average
Medicate ESRD composite rate from approximately $138 per treatment in 1983 to
approximately $125 per treatment in 1986. As a result of the January 2000
increase in the Medicare ESRD composite rate the Company's average rate per
dialysis treatment was $128 during 2000.
The Medicare ESRD composite rate has been the subject of a number of
reports and studies, and in 2000 Congress directed a study of the ESRD composite
rate structure, which study is due in June 2002. This study will review items
included in
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the composite rate and items that are currently separately billable (such as EPO
and certain laboratory services) and will analyze whether the composite rate
should be subject to an annual inflationary update. In light of this pending
study and the recent increases in the composite rate, the Prospective Payment
Assessment Commission, also known as PROPAC, has recommended that the ESRD
composite rate remain steady in 2002. PROPAC is a body that makes
recommendations to Congress concerning Medicare reimbursement rates. Congress is
not required to implement any of these recommendations and could either raise or
lower the reimbursement rate or change the items covered by the composite rate.
During recent congressional sessions, there have been various proposals
for the reform of numerous aspects of Medicare. Renal Care Group is unable to
predict what, if any, future changes may occur in the Medicare ESRD composite
rate. Any reductions in the Medicare ESRD composite rate or change in the items
covered by the composite rate (such as EPO or certain laboratory services) could
have a material adverse effect on Renal Care Group's earnings, financial
condition and business.
MEDICARE REIMBURSEMENT FOR EPO
Renal Care Group also derives a significant portion of its revenue and
earnings from the administration of erythropoietin. Medicare reimbursement for
EPO has been fixed at $10 per 1,000 units since 1994. The Secretary of the
Department of Health and Human Services has the authority to determine the
Medicare reimbursement rate for EPO. In 1997 the Department for Health and Human
Services Office of Inspector General conducted a review of EPO reimbursement and
recommended a $1 reduction per 1,000 units in Medicare reimbursement for EPO.
The Clinton Administration's proposed budgets for fiscal years 1998, 1999 and
2000 proposed a $1 reduction. None of these proposals passed. The Clinton
Administration's recently proposed budget for fiscal year 2001 again included a
proposal to reduce EPO reimbursement by $1 per 1,000 units. Renal Care Group is
unable to predict whether any changes in EPO reimbursement will occur.
Approximately 26% of Renal Care Group's revenue in 2000 was generated from the
administration of EPO; therefore, any reduction in Medicare reimbursement for
EPO could have a material adverse effect on Renal Care Group's earnings,
financial condition and business.
HCFA also places limits on EPO reimbursement based on patients'
hematocrit levels. Hematocrit is a measure of a patient's anemia. Currently, if
a patient's hematocrit is below 36%, HCFA approves Medicare reimbursement for
EPO without specific documentation of medical necessity. If a patient's average
hematocrit over a three-month period is higher than 36%, Medicare reimbursement
is contingent on medical necessity, and Medicare's contractors may review claims
in these instances. Renal Care Group is unable to predict whether any changes in
EPO reimbursement based on hematocrit levels will occur. Any reduction in
Medicare reimbursement for EPO could have a material adverse effect on Renal
Care Group's earnings, financial condition and business.
MEDICAID REIMBURSEMENT
Medicaid programs are health care programs partially funded by the
federal government that are administered by the states. These programs generally
provide coverage for uninsured patients whose income and assets fall below
levels determined by the states. The programs also serve as supplemental
insurance programs for the Medicare co-insurance portion and provide coverage
for certain items (for example, oral medications) that are not covered by
Medicare. State regulations generally follow Medicare reimbursement levels and
coverage without any coinsurance amounts. Some states, however, require
beneficiaries to pay a share of the cost based upon their income or assets.
Renal Care Group is a licensed ESRD Medicaid provider in all of the states in
which it does business.
PRIVATE REIMBURSEMENT/ACUTE CARE CONTRACTS
Before Medicare becomes a patient's primary payor, the patient's own
insurance plan or other health care coverage, if any, pays for his or her ESRD
treatments. Reimbursement rates from these private payors are generally
significantly higher than the rate set by Medicare. Renal Care Group has also
negotiated managed care contracts with certain payors at rates that are
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higher than the Medicare ESRD composite rate. Rates under these managed care
contracts are, however, generally lower than those Renal Care Group charges
other private payors. After Medicare becomes a patient's primary payor, private
secondary payors generally reimburse Renal Care Group for the patient's
copayment of 20% of the applicable Medicare rate. Renal Care Group also receives
payments from hospitals under 112 acute care contracts at rates generally higher
than the Medicare ESRD composite rate. Rates under these acute care contracts
are the result of arms-length negotiations between the hospital and Renal Care
Group and approximate fair market value of the services provided by the Company.
GOVERNMENT REGULATION
GENERAL
Federal, state, and local governments extensively regulate Renal Care
Group's operations, including the operation of the dialysis centers and
laboratory owned by Renal Care Group. Applicable federal and state statutes and
regulations require Renal Care Group to meet various standards relating, among
other things, to licensure, billing and reimbursement, management of dialysis
centers, patient care personnel, maintenance of proper records, confidentiality
of medical records, equipment and quality assurance programs, and the treatment
and disposal of biomedical waste. In addition, Renal Care Group's laboratory
operations are subject, among other laws, to the federal Clinical Laboratory
Improvement Amendments of 1988, also known as CLIA. Renal Care Group's dialysis
centers and laboratory are subject to periodic inspection by state and federal
agencies to determine if they satisfy applicable requirements. In addition,
through certificate of need, or CON, programs, some states regulate the
development or expansion of health care facilities and services, including
dialysis centers. Renal Care Group's operations also are subject to regulations
of the Occupational Safety and Health Administration, also known as OSHA,
concerning workplace safety and employee exposure to blood and other potentially
infectious materials.
Renal Care Group is subject to federal and state laws governing, among
other things, the relationships between Renal Care Group and physicians and
other health care providers, patient referrals, and false claims. See
"Government Regulation--Anti-Kickback Statute," "Government Regulation--Stark
Law" and "Government Regulation--Civil Monetary Penalties." The federal
government, many states, and private third-party payors have made combating
fraud and abuse in the health care industry a high priority. As a result,
scrutiny and investigation of health care providers and their relationships with
physicians and other referral sources has increased significantly.
Renal Care Group believes it substantially complies with applicable
federal and state laws. However, if a state or the federal government finds that
Renal Care Group has not complied with these laws, then Renal Care Group could
be required to change its way of operating. Any changes could have a negative
impact on the Company. To date, the dialysis centers owned by Renal Care Group
have maintained their licenses and Medicare and Medicaid certifications. Any
loss of certification to participate in the Medicare and Medicaid programs or
loss of any required state or federal licenses or certifications would have a
negative effect on Renal Care Group. Renal Care Group believes that the health
care services industry will continue to be subject to extensive regulation at
the federal, state, and local levels. Renal Care Group cannot predict the scope
and effect of future regulation of its business and cannot predict whether
health care reform will require Renal Care Group to change its operations or
whether such reform will have a negative impact on Renal Care Group.
The Company cannot predict whether it will be held responsible for
actions previously taken by acquired companies or facilities before Renal Care
Group purchased them. Renal Care Group also cannot predict whether its
operations, or the previous operations of acquired companies or facilities, will
be reviewed or challenged by the government. Any review or challenge of its
operations could have a negative impact on Renal Care Group.
MEDICARE AND MEDICAID CERTIFICATION AND REIMBURSEMENT
To receive reimbursement from federal health care programs for dialysis
and laboratory services, the dialysis centers and laboratory operated by Renal
Care Group must be certified as meeting certain requirements. For example, to
receive Medicare reimbursement, Renal Care Group's dialysis centers and
laboratory must be certified by the Health Care Financing
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Administration. All of the dialysis centers operated by Renal Care Group and its
laboratory operations are certified under the Medicare program and many state
Medicaid programs. In connection with its participation in Medicare, Renal Care
Group must comply with conditions of coverage, including requirements concerning
personnel, management, patient care, patient rights, medical records and
physical environment. Renal Care Group must also comply with extensive billing
rules governing, among other things, medical necessity and documentation. See
"Government Regulation--False Claims Act" and "Government Regulation--Civil
Monetary Penalties."
HCFA has announced that it is in the process of revising the current
Medicare conditions of coverage for ESRD services. Proposed revisions have not
been published. Renal Care Group cannot predict when proposed rules will be
published or finalized or what, if any, changes HCFA might make to the current
conditions of coverage. Renal Care Group also cannot predict whether it will be
able to meet any new or revised conditions of coverage. Any changes to the
Medicare conditions of coverage for ESRD facilities could require Renal Care
Group to change its operations and could have a negative effect on the business
and profitability of Renal Care Group. Any reduction in governmental payments
for dialysis services or any reduction or elimination of coverage of dialysis
services by a governmental party would have a negative impact on Renal Care
Group's business.
The HHS Office of Inspector General, also known as the OIG, issued
reports in the summer of 2000 recommending greater oversight of the quality of
care in dialysis facilities. Any increased oversight could lead to increased
requirements and greater scrutiny of dialysis facilities, including those owned
by Renal Care Group.
THE ANTI-KICKBACK STATUTE
Under Medicare, Medicaid, and other government-funded health care
programs such as the CHAMPUS program, federal and state governments enforce a
federal law called the Anti-Kickback Statute. The Anti-Kickback Statute
prohibits any person from offering, paying, soliciting or receiving any type of
benefit (1) in exchange for the referral of a patient covered by Medicare,
Medicaid or other federally-subsidized program or (2) for the leasing,
purchasing, ordering or arranging for or recommending the lease, purchase or
order of any item, good, facility or service covered by the programs.
Remuneration prohibited by the Anti-Kickback Statute includes the payment or
transfer of anything of value. Many states have similar anti-kickback statutes
that are not necessarily limited to items or services for which payment is made
by a federal or state health care program.
Any person or entity that violates the Anti-Kickback Statute may be
penalized. These penalties include criminal fines of up to $25,000 per violation
and imprisonment. In addition, the government may impose civil penalties of up
to $50,000 per violation, plus three times total remuneration offered, paid,
solicited or received. Further, the Secretary of the Department of Health and
Human Services, HHS, has the authority to exclude or bar individuals or entities
who violate the Anti-Kickback Statute from participating in Medicare and
Medicaid.
The Anti-Kickback Statute is a broad law. Courts have stated that,
under certain circumstances, the Anti-Kickback Statute is violated when just one
purpose, as opposed to the primary purpose, of a payment is to induce referrals.
To clarify what acts or arrangements will not be subject to prosecution by the
Office of Inspector General of HHS or the United States Attorney, HHS adopted a
set of safe harbor regulations and continues to publish clarifications to these
safe harbors. If an arrangement meets all of the requirements of a safe harbor,
it will not be considered to violate the Anti-Kickback Statute.
The types of arrangements covered by safe harbors include certain
investments in companies whose stock is traded on a national exchange, certain
small company investments in which physician ownership is limited, rental of
space, rental of equipment, personal services and management contracts, sales of
physician practices, physician referral services, warranties, discounts,
payments to employees, group purchasing organizations, and waivers of
beneficiary deductibles and co-payments. Each type of arrangement must meet a
number of specific requirements in order to enjoy the benefits of the applicable
safe harbor. Meeting the requirements of a safe harbor will
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protect an arrangement from enforcement action by the government. However, the
fact that an arrangement does not meet the requirements of a safe harbor does
not mean that the arrangement is necessarily illegal or will be prosecuted under
the Anti-Kickback Statute.
The OIG has issued a Special Fraud Alert concerning the pricing of
laboratory testing at ESRD centers. Medicare pays for laboratory tests provided
to ESRD patients in two different ways. Some laboratory tests are considered
routine, and Medicare includes payment for those tests in the ESRD composite
rate paid to the dialysis center. Some laboratory testing is not included in the
composite rate, and these tests are billed by the laboratory directly to
Medicare. In the Special Fraud Alert, the OIG stated it is aware of cases where
a laboratory offers to perform tests included in the composite rate at a price
below fair market value. In exchange, the ESRD facility agrees to refer all or
most of its non-composite rate tests to the laboratory. The OIG identified such
an arrangement as raising issues under the Anti-Kickback Statute. Renal Care
Group believes that its arrangements with laboratories reflect fair market value
and comply with the Anti-Kickback Statute.
Renal Care Group seeks to satisfy as many safe harbor requirements as
possible when it is structuring its business arrangements. However, not all of
Renal Care Group's arrangements satisfy all elements of a safe harbor.
Management believes that Renal Care Group has a reasonable basis for concluding
that it substantially complies with the Anti-Kickback Statute and other
applicable related federal and state laws and regulations. The Company believes
that its current arrangements with physicians including nephrologists owning
Renal Care Group's common stock, medical directors, laboratories, suppliers,
hospitals, and other sources of referrals to its dialysis centers and its acute
dialysis services agreements with hospitals materially comply with the
Anti-Kickback Statute. However, a government agency might take a position
contrary to the interpretations made by Renal Care Group or may require the
Company to change its practices. If an agency were to take such a position, it
could adversely affect Renal Care Group.
THE STARK LAW
Congress has also passed significant prohibitions against certain
physician referrals of patients for health care services. These prohibitions are
commonly known as the Stark Law. The Stark Law prohibits a physician from making
referrals for particular health care services (called designated health
services) to entities with which the physician, or an immediate family member of
the physician, has a financial relationship. If an arrangement is covered by the
Stark Law, the requirements of a Stark Law exception must be met for the
physician to be able to make referrals to the entity for designated health
services.
The term "financial relationship" is defined very broadly to include
most types of ownership or compensation relationships. The Stark Law also
prohibits the entity receiving the referral from seeking payment under the
Medicare and Medicaid programs for services rendered pursuant to a prohibited
referral. If an entity is paid for services rendered pursuant to a prohibited
referral, it may incur civil penalties and could be excluded from participating
in Medicare or Medicaid.
As originally enacted, the Stark Law restricted referrals for clinical
laboratory services. This version of the Stark Law is also called Stark I.
Effective January 1, 1995, the Stark Law was expanded to include physical
therapy services; occupational therapy services; radiology services, including
magnetic resonance imaging (MRI), computerized axial tomography (CAT) scans, and
ultrasound services; radiation therapy services and supplies; durable medical
equipment and supplies; parenteral and enteral nutrients, equipment, and
supplies; prosthetics, orthotics, and prosthetic devices and supplies; home
health services; outpatient prescription drugs; and inpatient and outpatient
hospital services. This version of the Stark Law is also known as Stark II.
The Stark Law defines a financial relationship to include (1) a
physician's ownership or investment interest in an entity and (2) a compensation
relationship between a physician and an entity. Under the Stark Law, financial
relationships include both direct and indirect relationships. Renal Care Group
has compensation arrangements with its medical directors or the professional
practices of the medical directors. The medical directors or their practices may
also own shares, and options to purchase shares, of common stock of Renal Care
Group. In addition, other physicians who refer patients to Renal Care Group's
centers may own stock of Renal Care Group. If so, the medical directors and
other physicians would have a financial relationship with Renal Care
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Group. Accordingly, these physicians would not be able to refer patients to
Renal Care Group's dialysis centers for designated health services unless a
Stark Law exception applies.
Dialysis is not listed as a designated health service under the Stark
Law. However, the definition of "designated health services" includes some items
and services that are components of dialysis or which may be provided to
patients by Renal Care Group in connection with their dialysis services. On
January 4, 2001, HHS issued final regulations to the Stark II provisions of the
Stark Law. These regulations become effective on January 4, 2002. The final
regulations exclude from the definition of covered designated health services
those services that are reimbursed by Medicare as part of a composite rate. The
final regulations also contain an exception under the Stark Law for clinical
laboratory services that are included in the Medicare ESRD composite rate.
Therefore, services that are included in the Medicare ESRD composite rate are
not covered by the Stark Law.
Further, the Stark II final regulations exclude from the referral
prohibition EPO and other drugs required as part of dialysis if certain
requirements are met. If the requirements are met, this exception applies
whether or not these drugs are included in the Medicare ESRD composite rate.
The final regulations also exclude from the definition of "inpatient
hospital services" any dialysis services provided by a hospital that is not
certified by HCFA to provide outpatient dialysis services. This rule would have
the effect of excluding from the Stark Law prohibition, any dialysis services
provided by Renal Care Group under an acute dialysis contract with a hospital,
if that hospital is not certified to provide outpatient dialysis. The final
Stark II regulations exclude from the definition of "durable medical equipment"
all equipment and supplies used in connection with home dialysis. These Stark II
regulations exclude most of the items and services connected with dialysis from
the Stark Law prohibitions.
HHS has accepted comments to the recently published final rules and has
stated that it will issue further regulations to the Stark Law in the future.
Renal Care Group cannot predict whether HHS will revise the final regulations or
will adopt additional regulations that affect Renal Care Group's business.
If the Stark Law applies to the relationships between Renal Care Group
and its referring physicians, there are exceptions to the Stark Law which, if
certain requirements are met, would permit such physicians to refer patients to
Renal Care Group for designated health services. The Stark Law contains
exceptions for certain physician ownership or investment interests in entities
and certain physician compensation arrangements with entities. The exceptions
for compensation arrangements include employment relationships, personal
services contracts, and space and equipment leases. If a compensation
arrangement between a physician, or immediate family member, and an entity
satisfies all requirements for a Stark Law exception, then the Stark Law will
not prohibit the physician from referring patients to the entity for designated
health services. Renal Care Group believes its compensation arrangements with
physicians who refer to Renal Care Group meet the requirements for an exception
under the Stark Law. For example, the Company believes that its agreements with
medical directors or their professional practices materially satisfy the Stark
Law exception for personal services agreements.
The Stark Law also includes an exception for a physician's ownership or
investment interest in certain entities through the ownership of stock. If a
physician owns stock in an entity, and the stock is listed on a national
exchange or is quoted on the Nasdaq Stock Market and the ownership meets certain
other requirements, then the Stark Law will not apply to prohibit the physician
from referring to the entity for designated health services. The requirements
for this Stark Law exception include a requirement that the entity issuing the
stock have at least $75.0 million in stockholders' equity at the end of its most
recent fiscal year or on average during the previous three fiscal years. As of
March 16, 2001, Renal Care Group had stockholders' equity of more than $394
million. Renal Care Group believes that physician ownership of Renal Care Group
stock satisfies this Stark Law exception.
If an entity violates the Stark Law, it could be subject to civil
penalties of up to $15,000 per prohibited claim and may be excluded from
Medicare and Medicaid. If the Stark Law applies to the relationships between
Renal Care Group and its referring physicians and no exceptions under the Stark
Law are available, then Renal Care Group will be required to restructure
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these relationships or refuse to accept referrals for designated health services
from these physicians. If Renal Care Group is found to have submitted claims to
Medicare for services provided pursuant to a referral prohibited by the Stark
Law, then Renal Care Group will be required to repay amounts it received from
Medicare for those services and could be subject to civil monetary penalties. If
Renal Care Group is required to repay amounts to Medicare or is subject to
fines, the Company could be harmed.
Many states have physician relationship and referral statutes that are
similar to the Stark Law. Renal Care Group believes it is in substantial
compliance with applicable state laws on physician relationships and referrals.
However, any finding that Renal Care Group is not in compliance with these state
laws could require the Company to change its operations and could have a
negative impact on Renal Care Group.
THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
In an effort to combat health care fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act
of 1996, also called HIPAA. Among other things, HIPAA broadened the scope of
certain fraud and abuse laws, extended criminal penalties for Medicare and
Medicaid fraud to other federal health care programs, and expanded the authority
of the Office of the Inspector General to exclude persons and entities from
participating in the Medicare and Medicaid programs. HIPAA also extended the
Medicare and Medicaid civil monetary penalty provisions to other federal health
care programs, increased the amounts of civil monetary penalties, and
established a criminal health care fraud statute.
Federal health care offenses under HIPAA include health care fraud and
making false statements relating to health care matters. Under HIPAA, among
other things, any person or entity that knowingly and willfully defrauds or
attempts to defraud a health care benefit program is subject to a fine,
imprisonment or both. Also under HIPAA, any person or entity that knowingly and
willfully falsifies or conceals or covers up a material fact or makes any
materially false or fraudulent statements in connection with the delivery of or
payment of health care services by a health care benefit plan is subject to a
fine, imprisonment or both.
HIPAA also required the Office of Inspector General of HHS, known as
the OIG, to issue advisory opinions to outside parties regarding the
interpretation and applicability of the Anti-Kickback Statute and other OIG
health care fraud and abuse sanctions. An OIG advisory opinion only applies to
the people or entities that requested it. However, advisory opinions are
published and made available to the public, and they provide guidance on those
practices the OIG believes may violate federal law. Renal Care Group has not
requested any advisory opinions from the OIG. However, the OIG has issued
several advisory opinions addressing practices of companies owning ESRD centers.
In advisory opinions addressing practices of companies owning ESRD
centers, the OIG has advised ESRD companies that they may not pay policy
premiums for Medicare supplemental insurance for patients, even patients with
proven financial hardship. Prior to the adoption of HIPAA and the issuance of
these opinions, Renal Care Group had paid premiums for Medicare supplemental
insurance for some patients with demonstrated financial need. The Company
stopped making such payments following the adoption of HIPAA. Consistent with
the advisory opinions, the Company has made grants to charitable foundations
that may, but are not required to, make premium payments on behalf of ESRD
patients. Renal Care Group believes, but cannot promise, that its current
practices regarding supplemental insurance substantially comply with the general
principles expressed by the OIG in these advisory opinions. Last year, HHS
issued proposed regulations that would permit dialysis facilities to pay for
supplemental insurance premiums on behalf of ESRD patients if certain
requirements are satisfied. Final regulations have not been issued. Renal Care
Group cannot predict when final regulations will be published or whether it will
be able to meet the requirements of the regulations when issued.
On August 17, 2000, HHS published final regulations governing
electronic transactions involving health information. These regulations are part
of the administrative simplification provisions of HIPAA. These regulations are
commonly referred to as the Transaction Standards rule. The rule establishes
standards for eight of the most common health care transactions by reference to
technical standards promulgated by recognized standards publishing
organizations. Under the new standards, any party transmitting or receiving
health transactions electronically must send and receive data in a
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single format, rather than the large number of different data formats currently
used. Health care providers, health care clearinghouses and large health plans
must comply with this requirement by October 16, 2002. Small health plans are
given an additional year to comply. The Transaction Standards rule applies to
Renal Care Group in connection with submitting and processing health claims. The
Transaction Standards rule also applies to many of our payors and to our
relationships with those payors. Renal Care Group intends to comply with the
Transaction Standards rule by the required compliance date.
On December 28, 2000, HHS published regulations implementing HIPAA that
adopted standards for privacy of individually identifiable health information.
The regulations cover health care providers, health care clearinghouses and
health plans, as well as their business associates. The regulations, among other
things, require companies:
- to obtain patient consent before using or disclosing protected
health information for treatment, payment and health care
operations,
- to obtain patient authorization prior to other uses or
disclosures,
- to respond to requests from patients for access to their
information,
- to respond to patient requests for amendments of their
information,
- to designate a privacy officer, to use and disclose only the
minimum necessary information to accomplish a particular
purpose, and
- to establish policies and procedures with respect to uses and
disclosures of protected health information.
These regulatory requirements impose significant administrative and
financial obligations on companies that use or disclose individually
identifiable information relating to the health of a patient. Renal Care Group
currently receives, stores, uses and discloses patient health information and
has designed its operations to comply with the regulations. However, Renal Care
Group continues to study these new regulations and may be required to change
some of its practices to comply fully with them.
The effective date of these privacy regulations is April 14, 2001, and
most covered entities are required to comply with the regulatory requirements by
April 14, 2003. However, on February 28, 2001, the new Secretary of HHS
published a notice opening up an additional comment period on the HIPAA privacy
regulations through March 30, 2001. It is unclear whether HHS will make any
significant changes in the regulations as a result of additional public
comments. Any changes to the HIPAA privacy regulations could require Renal Care
Group to spend additional time, money, and other resources to comply with the
requirements.
THE FALSE CLAIMS ACT
The federal False Claims Act gives the federal government an additional
way to police false bills or requests for payment for health care services.
Under the False Claims Act, the government may fine any person who knowingly
submits, or participates in submitting, claims for payment to the federal
government that are false or fraudulent, or that contain false or misleading
information. Any person who knowingly makes or uses a false record or statement
to avoid paying the federal government may also be subject to fines under the
False Claims Act. Under the False Claims Act, the term "person" means an
individual, company, or corporation. The federal government has used the False
Claims Act widely to prosecute fraud against Medicare and other governmental
programs in areas such as coding errors, billing for services not provided and
submitting false cost reports. The False Claims Act has also been used to
prosecute people or entities that bill services at a higher reimbursement rate
than is allowed and billing for care that is not medically necessary.
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The penalty for violation of the False Claims Act ranges from $5,000 to
$10,000 for each fraudulent claim plus three times the amount of damages caused
to the government as a result of each fraudulent claim. In addition to the False
Claims Act, the federal government may use several criminal statutes to
prosecute the submission of false or fraudulent claims for payment to the
federal government. Many states have similar false claims statutes that impose
liability for the types of acts prohibited by the False Claims Act.
CIVIL MONETARY PENALTIES
The Secretary of HHS may impose civil monetary penalties on any person
or entity that presents or causes to be presented certain ineligible claims for
medical items or services. The amount of penalties varies, depending on the
offense, from $1,000 to $50,000 per violation. HHS can impose penalties for
false or fraudulent claims and those that include services not provided as
claimed. In addition, HHS may impose penalties on claims:
- for physician services the person or entity knew or should
have known were rendered by a person who was unlicensed, or
misrepresented either (1) his or her qualifications in
obtaining his or her license or (2) his or her certification
in a medical specialty;
- were furnished by a person who was, at the time the claim was
made, excluded from the program to which the claim was made;
or
- that show a pattern of medically unnecessary items or
services.
Penalties also may be imposed on a person or entity that violates rules
regarding the assignment of payments, that knowingly gives false or misleading
information that could reasonably influence the discharge of patients from a
hospital, or that offers inducements to beneficiaries for program services.
Persons who have been excluded from the program and who retain ownership in a
participating entity, or who contract with excluded persons, may be penalized.
Penalties also are applicable in certain other cases, including violations of
the federal Anti-Kickback Statute, payments to limit certain patient services
and improper execution of statements of medical necessity.
GOVERNMENT INVESTIGATIONS
Last year, the federal government continued to investigate practices of
health care providers, including providers of dialysis. Renal Care Group expects
that the number of government investigations of dialysis providers will continue
to increase in 2001. The OIG has indicated in its 2001 Work Plan that it will be
focusing this year on a number of areas of ESRD services, including medical
necessity, accuracy of coding for services outside the ESRD composite rate,
payments for EPO, and home dialysis billing, among others.
Renal Care Group has developed and implemented a compliance program
that is designed to prevent violations of the law. The existence of an effective
compliance program may reduce the severity of civil and criminal penalties for
certain offenses. Renal Care Group believes its compliance program is effective.
HEALTH CARE LEGISLATION
Congress may enact legislation in the future which may significantly
change the Medicare ESRD program or reduce the amount that Medicare and Medicaid
will pay for services offered by Renal Care Group. Federal and state statutes or
regulations may be enacted to impose additional requirements on Renal Care Group
to continue to provide services to ESRD patients, to provide new services, or to
maintain eligibility to participate in federal and state payment programs. Any
new legislation or regulations, or new interpretations of existing statutes and
regulations, governing reimbursement to Renal Care Group or the manner in which
Renal Care Group provides services to patients could have a material impact on
Renal Care Group and could adversely affect its profitability.
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COMPETITION
The dialysis industry is highly competitive. Competition for qualified
physicians to act as medical directors is also significant. According to HCFA,
there were more than 3,800 outpatient facilities providing dialysis in the
United States at the end of 1999. Renal Care Group believes that approximately
65% are currently owned by multi-center dialysis companies, approximately 15%
are owned by independent physicians and other small operators, and approximately
20% are hospital-affiliated centers. The largest multi-center dialysis company
is Fresenius Medical Care, Inc. A.G. Other large competitors include DaVita,
Inc. and Gambro Healthcare, Inc. In addition, Fresenius and Gambro are both
vertically integrated providers that manufacture and sell dialysis equipment and
supplies, which gives them certain competitive advantages. There are also a
number of health care providers that have entered or may decide to enter the
dialysis business. Some of Renal Care Group's competitors have substantially
greater financial resources than Renal Care Group and may compete with the
Company for acquisitions, development and/or management of dialysis centers and
nephrology practices. Renal Care Group believes that competition for
acquisitions has, over time, increased the cost of acquiring dialysis centers.
Renal Care Group may also experience competition from centers established by
former medical directors or other referring physicians. There can be no
assurance that Renal Care Group will compete effectively with any such
competitors.
INSURANCE
Renal Care Group maintains professional liability insurance and general
liability insurance policies for all of its operations. Renal Care Group also
maintains insurance in amounts it deems adequate to cover property and casualty
risks, workers' compensation, and directors and officers liability. However,
there can be no assurance that the aggregate amount and types of Renal Care
Group's insurance are adequate to cover all risks it may incur or that insurance
will be available in the future.
EMPLOYEES
At December 31, 2000 Renal Care Group employed 4,815 full-time
employees and 281 part-time employees. Of the total employees, 116 were employed
at the Company's headquarters and 4,980 were employed at the Company's
facilities or regional business offices. In management's opinion, employee
relations are good.
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RISK FACTORS
You should carefully consider the risks described below before
investing in Renal Care Group. The risks and uncertainties described below ARE
NOT the only ones facing Renal Care Group. Other risks and uncertainties that we
have not predicted or assessed may also adversely affect our company.
If any of the following risks occur, our earnings, financial condition
or business could be materially harmed, and the trading price of our common
stock could decline, resulting in the loss of all or part of your investment.
IF MEDICARE OR MEDICAID CHANGES ITS PROGRAMS FOR DIALYSIS, OUR REVENUE AND
EARNINGS COULD DECREASE
If the government changes the Medicare, Medicaid or similar government
programs or the rates paid by those programs for our services, then our revenue
and earnings may decline. We estimate that approximately 59% of our net revenue
for 1998, 57% of our net revenue for 1999 and 53% of our net revenue for 2000
consisted of reimbursements from Medicare, including the administration of EPO
to treat anemia. We also estimate that approximately 5% of our net revenue for
1998, 4% of our net revenue for 1999 and 5% of our net revenue for 2000
consisted of reimbursements from Medicaid or comparable state programs. Any of
the following actions in connection with government programs could cause our
revenue and earnings to decline:
- a reduction of the amount paid to us under government
programs;
- an increase in the costs associated with performing our
services that are subject to inflation, such as labor and
supply costs, without a corresponding increase in
reimbursement rates;
- the inclusion of some or all ancillary services, for which we
are now reimbursed separately, in the flat composite rate for
a standard dialysis treatment; or
- changes in laws, or the interpretations of laws, which could
cause us to modify our operations.
Specifically, Congress and the Health Care Financing Administration, or
HCFA, have proposed reviewing and potentially recalculating the average
wholesale prices of certain drugs, including some drugs that we bill for outside
of the flat composite rate. HCFA has indicated that it believes the average
wholesale prices on which it currently bases reimbursement are too high and that
Medicare reimbursement for these drugs is, therefore, too high. Because we are
unable to predict accurately whether reimbursement will be changed and, if so,
by how much, we are unable to quantify what the net effect of changes in
reimbursement for these drugs would have on our revenue and earnings.
IF REIMBURSEMENT FOR EPO DECREASES, THEN WE COULD BE LESS PROFITABLE
If government or private payors decrease reimbursement rates for EPO,
for which we are currently reimbursed separately outside of the flat composite
rate, our revenue and earnings will decline. EPO is a bio-engineered hormone
that is used to treat anemia. Revenues from the administration of EPO were
approximately 23% of our net revenue for 1998 and approximately 26% of our net
revenue for both 1999 and 2000. Most of our payments for EPO come from
government programs. The Clinton Administration included a proposal to decrease
the reimbursement for EPO by $1 per thousand units in its fiscal year 2001
budget, which would represent a 10% reduction from the current government
reimbursement rate. For the year ended December 31, 2000, government
reimbursement represented approximately 58% of the total revenue we derived from
EPO. Because we are unable to predict accurately the possible effect that the
proposed reduction would have on the cost of EPO or private reimbursement rates,
we cannot quantify what the net effect would be on our revenue and earnings. A
reduction in the reimbursement rate for EPO could materially and aversely affect
our revenue and earnings.
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IF AMGEN RAISES THE PRICE FOR EPO OR IF EPO BECOMES IN SHORT SUPPLY, THEN WE
COULD BE LESS PROFITABLE
EPO is produced by a single manufacturer, Amgen Inc., and there are no
substitute products available in the United States. Amgen implemented a 3.9%
increase in the price of EPO in February 2000, its first price increase since
before Renal Care Group was formed in February 1996. This price increase
adversely affected our earnings in 2000. If Amgen imposes additional EPO price
increases or if Amgen or other factors interrupt the supply of EPO, then our
revenue and earnings will decline. Amgen is also developing a new product that
may replace EPO or reduce its use. The Food and Drug Administration has not yet
approved this new drug. We cannot predict when, or whether, Amgen will seek to
introduce this product into the dialysis market or how it will impact our
revenue or earnings if it is introduced.
IF PAYMENTS BY PRIVATE INSURERS, HOSPITALS OR MANAGED CARE ORGANIZATIONS
DECREASE, THEN OUR REVENUE AND EARNINGS COULD DECREASE
If private insurers, hospitals or managed care organizations reduce
their rates or we experience a significant shift in our revenue mix toward
additional Medicare or Medicaid reimbursement, then our revenue and earnings
will decline. We estimate that approximately 36% of our net revenue for 1998,
39% of our net revenue for 1999 and 42% of our net revenue for 2000, were
derived from sources other than Medicare and Medicaid. In general, payments we
receive from private insurers and hospitals for our services are at rates
significantly higher than the Medicare or Medicaid rates. Additionally, payments
we receive from managed care organizations are at rates higher than Medicare and
Medicaid rates but lower than those paid by private insurers. As a result, any
of the following events could have a material adverse effect on our revenue and
earnings:
- any number of economic or demographic factors could cause
private insurers, hospitals or managed care companies to
reduce the rates they pay us;
- a portion of our business that is currently reimbursed by
private insurers or hospitals may become reimbursed by managed
care organizations, which currently have lower rates for our
services; or
- the scope of coverage by Medicare or Medicaid under the flat
composite rate could expand and, as a result, reduce the
extent of our services being reimbursed at the higher
private-insurance rates.
IF WE ARE UNABLE TO MAKE ACQUISITIONS IN THE FUTURE, OUR RATE OF GROWTH WILL
SLOW
Much of our historical growth has come from acquisitions. Although we
intend to continue to pursue growth through the acquisition of dialysis centers,
we may be unable to continue to identify and complete suitable acquisitions at
prices we are willing to pay or we may be unable to obtain the necessary
financing. Further, due to the increased size of our Company since its
formation, the amount that acquired businesses contribute to our revenue and
profits will likely be smaller on a percentage basis. Also, as a result of
consolidation in the dialysis industry, the four largest providers of outpatient
dialysis services own approximately 59% of the total outpatient dialysis
facilities in the United States. We compete with these other companies to
identify and complete suitable acquisitions. We expect this competition to
intensify in light of the smaller pool of available acquisition candidates and
other market forces. As a result, we believe it will be more difficult for us to
acquire suitable companies on favorable terms. Further, the businesses we
acquire may not perform well enough to justify our investment. If we are unable
to make additional acquisitions on suitable terms, we may not meet our growth
expectations.
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IF WE FAIL TO INTEGRATE ACQUIRED COMPANIES, WE WILL BE LESS PROFITABLE
We have grown significantly by acquisitions of other dialysis providers
since our formation in February 1996. We have completed some of our acquisitions
as recently as January 2001. We intend to pursue acquisitions of more dialysis
businesses in the future. We are unable to predict the number and size of any
future acquisitions. We face significant challenges in integrating an acquired
company's management and other personnel, clinical operations, and financial and
operating systems with ours, often without the benefit of continued services
from key personnel of the acquired company. We may be unable to integrate the
businesses we acquire successfully or to achieve anticipated benefits from an
acquisition in a timely manner, which could lead to substantial costs and delays
or other operational, technical or financial problems, including diverting
management's attention from our existing business. Any of these results could
damage our profitability and our prospects for future growth.
IF WE COMPLETE FUTURE ACQUISITIONS, WE MAY DILUTE EXISTING STOCKHOLDERS BY
ISSUING MORE OF OUR COMMON STOCK OR WE MAY INCUR ADDITIONAL EXPENSES RELATED TO
DEBT AND GOODWILL, WHICH COULD REDUCE OUR EARNINGS
We may issue equity securities in future acquisitions that could be
dilutive to our shareholders. We also may incur additional debt and amortization
expense related to goodwill and other intangible assets in future acquisitions.
We have used the pooling-of-interests accounting method for many of our
acquisitions, and as a result we have not recorded goodwill (the excess of
acquisition cost over identifiable tangible assets) in these acquisitions. In
those instances where we have used the purchase accounting method in
acquisitions, we have recorded goodwill and other intangible assets, which are
then amortized yearly against our earnings at a blended average life of 35
years. We had approximately $223.6 million of goodwill and other intangibles,
net, as of December 31, 2000. The SEC and accounting policy makers have
announced that they are considering policy and rule changes that will eliminate
the pooling-of-interests method. The elimination of the pooling-of-interests
method would likely result in the recording of additional goodwill for our
future acquisitions. Under the proposed rule and policy changes, we would be
required to review all goodwill at regular intervals and to charge an
appropriate amount to expense when we identify goodwill impairment. Interest
expense on additional debt incurred to fund acquisitions and amortization
expense from acquisitions may significantly reduce our profitability.
IF ACQUIRED BUSINESSES HAVE UNKNOWN LIABILITIES, THEN WE COULD BE EXPOSED TO
LIABILITIES THAT COULD HARM OUR BUSINESS AND PROFITABILITY
Businesses we acquire may have unknown or contingent liabilities,
including liabilities for failure to comply with health care laws. Although we
generally attempt to identify practices that may give rise to unknown or
contingent liabilities and conform them to our standards after the acquisition,
private plaintiffs or governmental agencies may still assert claims. Even though
we generally seek to obtain indemnification from prospective sellers, unknown
and contingent liabilities may not be covered by indemnification or may exceed
contractual limits or the financial capacity of the indemnifying party.
IF OUR REFERRING PHYSICIANS CEASE REFERRING TO OUR CENTERS OR WERE PROHIBITED
FROM REFERRING FOR REGULATORY REASONS, OUR REVENUE AND EARNINGS WOULD DECLINE
Our dialysis centers depend on referrals from local nephrologists.
Typically, one or a few physicians' patients make up all or a significant
portion of the patient base at each of our dialysis centers, and the loss of the
patient base of one or more referring physicians could have a material adverse
effect on the operations of that center. The loss of the patient base of a
significant number of referring physicians could cause our revenue and earnings
to decline. In many instances, the primary referral sources for our centers are
physicians who are also stockholders and serve as medical directors of our
centers. If stock ownership or the medical director relationship were deemed to
violate applicable federal or state law, including fraud and abuse laws and laws
prohibiting self-referrals, the physicians owning our stock or acting as medical
directors may be forced to stop referring patients to our centers. Further, we
may not be able to renew or renegotiate our
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medical director agreements successfully, which could result in a loss of
patients since dialysis patients are typically treated at a center where their
physician serves as a medical director.
IF OUR BUSINESS IS ALLEGED OR FOUND TO VIOLATE HEATH CARE OR OTHER APPLICABLE
LAWS, OUR REVENUE AND EARNINGS COULD DECREASE
We are subject to extensive federal, state and local regulation
regarding the following:
- fraud and abuse prohibitions under health care reimbursement
laws;
- prohibitions and limitations on patient referrals;
- billing and reimbursement, including false claims prohibitions
under health care reimbursement laws;
- collection, use, storage and disclosure of patient health
information;
- facility licensure;
- health and safety requirements;
- environmental compliance; and
- medical and toxic waste disposal.
Much of this regulation, particularly in the areas of fraud and abuse
and patient referral, is complex and open to differing interpretations. Due to
the broad application of the statutory provisions and the absence in many
instances of regulations or court decisions addressing the specific arrangements
by which we conduct our business, including our arrangements with medical
directors, physician stockholders and physician joint venture partners,
governmental agencies could challenge some of our practices under these laws.
New regulations governing electronic transactions and the collection,
use, storage, and disclosure of health information will impose significant
administrative and financial obligations on our business. If, after the required
compliance date, we are found to have violated these restrictions, we could be
subject to:
- criminal or civil penalties;
- claims by persons who believe their health information has
been improperly used or disclosed; and
- administrative penalties by payors.
Government investigations of health care providers, including dialysis
providers, have continued to increase. We have been the subject of
investigations in the past, and the government may investigate our business in
the future. For example, the OIG has indicated that it is focusing on a number
of areas related to ESRD in its 2001 work plan, and one of our competitors,
DaVita, Inc., recently announced that it is the subject of an investigation by
the U.S. Attorney for the Eastern District of Pennsylvania. If any of our
operations are found to violate these laws, we may be subject to severe
sanctions or be required to alter or discontinue the challenged conduct or both.
If we are required to alter our practices, we may not be able to do so
successfully. If any of these events occur, our revenue and earnings could
decline.
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CHANGES IN THE HEALTH CARE DELIVERY, FINANCING OR REIMBURSEMENT SYSTEMS COULD
ADVERSELY AFFECT OUR BUSINESS
The health care industry in the United States remains in a period of
rapid change and uncertainty. Health care organizations, public or private, may
dramatically change the way they operate and pay for services. Our business is
designed to function within the current health care financing and reimbursement
system. During the past several years, the health care industry has been subject
to increasing levels of government regulation of, among other things,
reimbursement rates and capital expenditures. In addition, proposals to reform
the health care system have been considered by Congress. These proposals, if
enacted, may further increase government regulation of or other involvement in
health care, lower reimbursement rates and otherwise change the operating
environment for health care companies. We cannot predict the likelihood of those
events or what impact they may have on our business.
THE DIALYSIS BUSINESS IS HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE
EFFECTIVELY IN OUR MARKETS, WE COULD LOSE MARKET SHARE AND OUR RATE OF GROWTH
COULD SLOW
The dialysis industry is rapidly consolidating. There is a small number
of large dialysis companies that compete for the acquisition of outpatient
dialysis centers and the development of relationships with referring physicians.
Several of our competitors are part of larger companies that also manufacture
dialysis equipment, which allows them to lower equipment costs. Several of our
competitors, including these equipment manufacturers, are much larger than we
are and have substantially greater financial resources and more established
operations and infrastructure than us. We also experience competition from
nephrologists who open their own dialysis centers. There can be no assurance
that we will be able to compete effectively with any of our competitors.
IF WE LOSE ANY OF OUR EXECUTIVE OFFICERS, OR ARE UNABLE TO ATTRACT AND RETAIN
QUALIFIED MANAGEMENT PERSONNEL AND MEDICAL DIRECTORS, OUR ABILITY TO RUN OUR
BUSINESS COULD BE ADVERSELY AFFECTED, AND OUR REVENUE AND EARNINGS COULD DECLINE
We are dependent upon the services of our executive officers Sam A.
Brooks, Jr., our Chairman, Chief Executive Officer and President, and Raymond
Hakim, M.D., Ph.D., R. Dirk Allison and Gary Brukardt, each an Executive Vice
President. Mr. Brooks, Dr. Hakim and Mr. Brukardt have each been with Renal Care
Group since its formation. The services of these individuals would be very
difficult to replace. We do not carry key-man life insurance on any of our
officers. Further, our growth will depend in part upon our ability to attract
and retain skilled employees, for whom competition is intense. We also believe
that our future success will depend on our ability to attract and retain
qualified physicians to serve as medical directors of our dialysis centers. We
have entered into medical director agreements with the physicians serving as
medical directors of our dialysis centers, most of which contain noncompetition
covenants of varying durations.
IF WE ARE LIABLE FOR DAMAGES IN LITIGATION, OUR INSURANCE MAY NOT BE SUFFICIENT
TO COVER SUCH POTENTIAL DAMAGES
On August 30, 2000, nineteen patients were hospitalized and one patient
died shortly after becoming ill while receiving treatment at one of our dialysis
centers in Youngstown, Ohio. One of the nineteen hospitalized patients also died
some time later. While no litigation was pending against us as of December 31,
2000 relating to these illnesses, three lawsuits had been filed against us as of
March 26, 2001, and other suits could be brought in the future. While management
believes Renal Care Group's insurance should be adequate to cover these events,
if we are found liable for damages in litigation stemming from these illnesses,
our present insurance coverage may not be sufficient to cover such damages.
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IF OUR BOARD OF DIRECTORS DOES NOT APPROVE AN ACQUISITION OR CHANGE IN CONTROL
OF RENAL CARE GROUP, OUR STOCKHOLDERS MAY NOT REALIZE THE FULL VALUE OF THEIR
STOCK
Our certificate of incorporation and bylaws contain a number of
provisions that may delay, deter or inhibit a future acquisition or change in
control of Renal Care Group that is not first approved by our board of
directors. This could occur even if our stockholders receive an attractive offer
for their shares or if a substantial number or even a majority of our
stockholders believe the takeover may be in their best interest. These
provisions are intended to encourage any person interested in acquiring Renal
Care Group to negotiate with and obtain approval from our board of directors
prior to pursuing the transaction. Provisions that could delay, deter or inhibit
a future acquisition or change in control of Renal Care Group include the
following:
- a staggered board of directors that would require two annual
meetings to replace a majority of the board of directors;
- restrictions on calling special meetings at which an
acquisition or change in control might be brought to a vote of
the stockholders;
- blank check preferred stock that may be issued by our board of
directors without stockholder approval and that may be
substantially dilutive or contain preferences or rights
objectionable to an acquiror; and
- a poison pill that would substantially dilute the interest
sought by an acquiror.
These provisions could also discourage bids for our common stock at a
premium and cause the market price of our common stock to decline.
OUR STOCK PRICE IS VOLATILE AND AS A RESULT, THE VALUE OF YOUR INVESTMENT MAY GO
DOWN FOR REASONS UNRELATED TO THE PERFORMANCE OF OUR BUSINESS
Our common stock is traded on the Nasdaq National Market. The market
price of our common stock has been volatile, ranging from a low of $14.50 per
share to a high of $28.625 per share during the year ended December 31, 2000.
The market price for our common stock could fluctuate substantially based on a
variety of factors, including the following:
- future announcements concerning us, our competitors or the
health care market;
- the threat of litigation;
- changes in government regulations; and
- changes in earnings estimates by analysts.
Furthermore, stock prices for many companies fluctuate widely for
reasons that may be unrelated to their operating results. These fluctuations,
coupled with changes in demand or reimbursement levels for our services and
general economic, political and market conditions, could cause the market price
of our common stock to decline.
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ITEM 2. PROPERTIES
PROPERTIES
As of December 31, 2000, Renal Care Group operated dialysis centers in
24 states, of which 179 are located in leased facilities and 22 are owned. The
following is a summary of Renal Care Group's outpatient dialysis centers by
state.
OUTPATIENT FACILITIES BY STATE
Alabama................................................................ 5
Alaska................................................................. 2
Arizona................................................................ 25
Arkansas............................................................... 9
Florida................................................................ 5
Idaho.................................................................. 1
Illinois............................................................... 14
Indiana................................................................ 18
Kansas................................................................. 11
Kentucky............................................................... 1
Louisiana.............................................................. 1
Michigan............................................................... 4
Mississippi............................................................ 23
Missouri............................................................... 7
Nebraska............................................................... 1
New Jersey............................................................. 2
Ohio .................................................................. 13
Oklahoma............................................................... 3
Oregon................................................................. 8
Pennsylvania........................................................... 7
Tennessee.............................................................. 1
Texas.................................................................. 33
Washington............................................................. 5
Wisconsin.............................................................. 2
TOTAL.................................................................. 201
Certain of Renal Care Group's centers are leased from physicians who
practice at the center and who are stockholders of the Company. Renal Care
Group's leases generally have terms ranging from one to 15 years and typically
contain renewal options. The size of Renal Care Group's centers ranges from
approximately 1,000 to 22,500 square feet. Renal Care Group leases office space
in Nashville, Tennessee for its corporate headquarters under a lease that
expires in 2002. The Company leases other office space in and around Nashville,
Tennessee for its University Division and for certain billing and computer
operations. Renal Care Group considers its physical properties to be in good
operating condition and suitable for the purposes for which they are being used.
Expansion or relocation of Renal Care Group's dialysis centers is
subject to compliance with conditions relating to participation in the Medicare
ESRD program. In states that require a certificate of need, approval of an
application submitted by the Company is necessary for expansion of an existing
dialysis center or development of a new center.
Renal Care Group generally owns the equipment used in its outpatient
centers. Renal Care Group considers its equipment generally to be in good
operating condition and suitable for the purposes for which it is being used.
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ITEM 3. LEGAL PROCEEDINGS
On August 30, 2000, nineteen patients were hospitalized and one patient
died shortly after becoming ill while receiving treatment at one of our dialysis
centers in Youngstown, Ohio. One of the nineteen hospitalized patients also died
some time later. While no litigation was pending against us as of December 31,
2000 relating to these illnesses, three lawsuits had been brought as of March
26, 2001, and other suits could be brought in the future.
On December 12, 2000, the Company reached an agreement in principle
with the U.S. Attorney for the Southern District of Mississippi to settle claims
arising out of alleged inadequacies in physician documentation related to lab
tests performed by its laboratory subsidiary, RenaLab, Inc. The terms of such
agreement provide that the Company will pay $1.98 million to the Medicare
program. The Company expects to pay this amount during the second quarter of
2001 when the terms of a corporate integrity agreement are finalized.
In addition, the Company is subject to claims and suits in the ordinary
course of business, including those arising from patient treatment, which claims
and suits the Company believes will be covered by its liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's common stock has been traded on the Nasdaq National
Market System under the symbol "RCGI" since February 7, 1996. The following
table sets forth the quarterly high and low closing sales prices as reported on
the Nasdaq National Market System for the last two fiscal years.
1999 HIGH LOW
---- ---- ---
First Quarter.................................... $ 34.375 $ 14.875
Second Quarter................................... $ 28.000 $ 16.750
Third Quarter.................................... $ 26.375 $ 18.062
Fourth Quarter................................... $ 24.000 $ 14.250
2000 HIGH LOW
---- ---- ---
First Quarter.................................... $ 27.875 $ 16.375
Second Quarter .................................. $ 25.375 $ 19.750
Third Quarter.................................... $ 28.250 $ 14.500
Fourth Quarter................................... $ 28.625 $ 17.125
HOLDERS
As of March 16, 2001, the approximate number of registered stockholders
was 205 and approximately 8,500 beneficial owners.
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DIVIDEND POLICY
Renal Care Group has never paid any cash dividend on its capital stock.
Renal Care Group currently anticipates that all of its earnings will be retained
to finance the growth and development of its business and, therefore, does not
anticipate that any cash dividend will be declared or paid on the common stock
in the foreseeable future. Any future declaration of dividends will be subject
to the discretion of Renal Care Group's Board of Directors and its review of
Renal Care Group's earnings, financial condition, capital requirements and
surplus, contractual restrictions to pay such dividends and other factors it
deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the years ended December 31, 1996,
1997, 1998, 1999 and 2000 are derived from the audited consolidated financial
statements of the Company and its subsidiaries. The consolidated financial
statements and related notes to Consolidated Financial Statements for the years
ended December 31, 1998, 1999 and 2000, together with the related Report of
Independent Auditors are included elsewhere in this annual report on Form 10-K.
The following data should be read in conjunction with the financial statements
and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that appear elsewhere in this annual report
on Form 10-K.
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SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
1996(1) 1997 1998 1999 2000
------- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net revenue........................................ $ 165,690 $ 274,518 $ 441,063 $ 541,895 $ 622,575
Patient care costs................................. 115,375 189,284 292,113 351,367 402,009
General and administrative expenses................ 17,404 27,827 43,894 51,315 57,104
Provision for doubtful accounts.................... 3,454 8,072 13,484 14,632 16,949
Depreciation and amortization...................... 6,125 12,070 22,241 27,835 32,321
Restructuring charge............................... --- --- --- --- 9,235
Merger expenses.................................... 1,960 300 1,000 4,300 3,766
------------ ----------- ---------- ---------- ----------
Total operating costs and expenses................. 144,318 237,553 372,732 449,449 521,384
------------ ----------- ---------- ---------- ----------
Income from operations............................. 21,372 36,965 68,331 92,446 101,191
Interest expense, net.............................. 1,091 1,976 6,558 6,224 5,015
------------ ----------- ---------- ---------- ----------
Income before income taxes and minority interest... 20,281 34,989 61,773 86,222 96,176
Minority interest.................................. -- 955 3,492 7,768 10,011
------------ ----------- ---------- ---------- ----------
Income before income taxes......................... 20,281 34,034 58,281 78,454 86,165
Provision for income taxes......................... 8,003 12,736 21,601 31,367 34,706
------------ ----------- ---------- ---------- ----------
Net income......................................... $ 12,278 $ 21,298 $ 36,680 $ 47,087 $ 51,459
============ =========== ========== ========== ==========
Basic net income per share......................... $ 0.41 $ 0.57 $ 0.84 $ 1.05 $ 1.12
============ =========== ========== ========== ==========
Basic weighted average shares outstanding.......... 30,162 37,398 43,740 45,015 46,048
============ =========== ========== ========== ==========
Diluted net income per share....................... $ 0.38 $ 0.54 $ 0.79 $ 1.00 $ 1.07
============ =========== ========== ========== ==========
Diluted weighted average shares outstanding........ 32,523 39,496 46,367 47,052 47,948
============ =========== ========== ========== ==========
DECEMBER 31,(1)
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital ................................... $ 52,436 $ 22,045 $ 47,851 $ 73,651 $ 115,745
Total assets....................................... 194,647 311,661 433,687 500,906 584,884
Long-term debt..................................... 26,705 49,844 90,928 79,690 58,316
Stockholders' equity............................... 116,758 191,720 248,180 311,839 394,122
(1) The financial information for the year ended December 31, 1996 includes
the results of operations for certain companies (the "Founding
Companies") that were combined when the Company was formed. The
results of the Founding Companies are included only for periods after
February 1996 when they were acquired by the Company in a combination
(the "Combination") accounted for under Securities and Exchange
Commission Staff Accounting Bulletin No. 48 simultaneously with the
Company's initial public offering.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements, including the notes thereto,
contained elsewhere in this Annual Report on Form 10-K.
OVERVIEW
Renal Care Group provides dialysis services to patients with chronic
kidney failure. As of December 31, 2000, the Company provided dialysis and
ancillary services to approximately 16,500 patients through 201 outpatient
dialysis centers in 24 states, in addition to providing acute dialysis services
in 112 hospitals. The Company also provides limited wound care and diabetic care
services; however, as announced on September 20, 2000, the Company has
determined to exit the wound care business by June 30, 2001.
For the comparison discussion that follows, the selected financial data
include the financial information of some companies acquired in previously
reported transactions accounted for as poolings-of-interests. On April 11, 2000,
the Company merged with Renal Disease Management by Physicians, Inc. in a
transaction accounted for as a pooling-of-interests. Consistent with other
pooling-of-interests transactions, the comparison discussion that follows
includes financial information that include the combined results of Renal Care
Group and Renal Disease Management by Physicians, Inc. Because the companies
added in pooling transactions were independent and not operated by Renal Care
Group's management before the dates of acquisition, the historical results of
such companies before such times may not be indicative of future performance.
Renal Care Group's net revenue has been derived primarily from the
following sources:
- outpatient hemodialysis services;
- ancillary services associated with outpatient dialysis,
primarily the administration of EPO;
- home dialysis services;
- inpatient hemodialysis services provided to acute care
hospitals and skilled nursing facilities;
- management contracts with hospital-based and medical
university dialysis programs; and
- laboratory services.
Patients with end-stage renal disease typically receive three dialysis
treatments each week in an outpatient setting, with reimbursement for these
services provided primarily by the Medicare ESRD program based on rates
established by the Health Care Financing Administration. For the year ended
December 31, 2000, approximately 58% of the Company's net revenue was derived
from reimbursement under the Medicare and Medicaid programs. Medicare
reimbursement is subject to rate and other legislative changes by Congress and
periodic changes in regulations, including changes that may reduce payments
under the ESRD program. Effective on both January 1, 2000 and January 1, 2001,
Congress increased the Medicare composite rate by 1.2% each year. An additional
increase of 1.2% is scheduled to take effect April 1, 2001. The April 1, 2001
increase includes an adjustment factor that makes that 1.2% increase effective
for all of 2001. Accordingly, the net result of the 1.2% increases on January 1,
2001 and April 1, 2001, plus the April adjustment factor, is a 2.4% effective
increase for calendar year 2001. In light of the recommendations of PROPAC,
management believes that an increase in the composite rate for 2002 is unlikely.
The Medicare composite rate applies to a designated group of
outpatient dialysis services, including the dialysis treatment, supplies used
for such treatment, certain laboratory tests and medications, and most of the
home dialysis services provided by Renal Care Group. Certain other services,
laboratory tests, and drugs are eligible for separate reimbursement under
Medicare and
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are not part of the composite rate, including specific drugs such as EPO and
certain physician-ordered tests provided to dialysis patients.
For patients with private health insurance, dialysis is typically
reimbursed at rates higher than Medicare during the first 30 months of
treatment. After that period Medicare becomes the primary payor. Reimbursement
for dialysis services provided pursuant to a hospital contract is negotiated
with the individual hospital and generally is higher on a per treatment
equivalent basis than the Medicare composite rate. Because dialysis is a
life-sustaining therapy used to treat a chronic disease, utilization is
predictable and is not subject to seasonal fluctuations.
Renal Care Group derives a significant portion of its net revenue and
net income from the administration of EPO. EPO is manufactured by a single
company. In February 2000, this manufacturer implemented a 3.9% increase in its
price for EPO. Renal Care Group estimates that this price increase reduced its
earnings per share by approximately $0.035 for the year ended December 31, 2000.
RESULTS OF OPERATIONS
On April 11, 2000, the Company merged with Renal Disease Management by
Physicians, Inc. in a transaction accounted for as a pooling-of-interests, and
on January 29, 1999 the Company merged with Dialysis Centers of America, Inc. in
a transaction accounted for as a pooling-of-interests. The results of operations
for all periods in the table below and in the period comparisons that follow
reflect the historical operations of the Company combined with the operations of
some companies acquired in transactions accounted for as poolings-of-interests,
all as if they had occurred for all periods presented.
During the third quarter of 2000, the Company recorded a one-time
restructuring charge of $9.2 million as a result of its plans to exit the wound
care business. This charge consisted of early contract termination costs of $1.4
million, goodwill and property and equipment impairment charges of $6.0 million,
severance costs of $1.2 million and other administrative charges of $600,000.
Management made the decision to exit this business as part of a long-term
strategy to focus on its core dialysis business. Currently, management expects
to cease operations of the wound care business no later than the end of second
quarter 2001. Current estimates indicate that the $9.2 million restructuring
charge recorded during the third quarter was accurate and no subsequent
adjustments have been made to the initial charge. As of December 31, 2000, the
Company has $1.5 million of restructuring charge accruals remaining. Such
amounts represent severance accruals of $860,000 and other accruals of $685,000,
and are expected to be utilized as the Company completes its exit of the
business. Expected future cash outlays represent severance costs for specific
employees, certain contract termination costs and other related items.
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The following table sets forth, results of operations (in thousands)
for the periods indicated and the percentage of net revenue represented by the
respective financial line items:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
---- ---- ----
Net Revenue............................. $ 441,063 100.0% $ 541,895 100.0% $ 622,575 100.0%
Patient care costs...................... 292,113 66.2 351,367 64.8 402,009 64.6
General and administrative expenses..... 43,894 10.0 51,315 9.5 57,104 9.2
Provision for doubtful accounts......... 13,484 3.1 14,632 2.7 16,949 2.7
Depreciation and amortization........... 22,241 5.0 27,835 5.1 32,321 5.2
Restructuring charge.................... --- --- --- --- 9,235 1.5
Merger expenses......................... 1,000 0.2 4,300 0.8 3,766 0.6
---------- ------- ---------- -------- --------- --------
Total operating costs and expenses...... 372,732 84.5 449,449 82.9 521,384 83.7
---------- ------- ---------- -------- --------- --------
Income from operations.................. 68,331 15.5 92,446 17.1 101,191 16.3
Interest expense, net................... 6,558 1.5 6,224 1.1 5,015 0.8
Minority interest....................... 3,492 0.8 7,768 1.4 10,011 1.6
---------- ------- ---------- -------- --------- --------
Income before income taxes.............. 58,281 13.2 78,454 14.5 86,165 13.8
---------- ------- ---------- -------- --------- --------
Income tax expense...................... 21,601 4.9 31,367 5.8 34,706 5.6
---------- ------- ---------- -------- --------- --------
Net income.............................. $ 36,680 8.3% $ 47,087 8.7% $ 51,459 8.3%
========== ======= ========== ======== ========= ========
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31
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Revenue. Net revenue increased from $541.9 million for the year
ended December 31, 1999 to $622.6 million for the year ended December 31, 2000,
an increase of $80.7 million, or 14.9%. This increase resulted primarily from a
9.2% increase in the number of treatments from 2,215,728 in 1999 to 2,418,619 in
2000. This growth in treatments was the result of the acquisition and
development of various dialysis facilities and a 7.1% increase in same-center
treatments for 2000 over 1999. In addition, average net revenue per dialysis
treatment increased 5.9% from $237 in 1999 to $251 in 2000. The increase in
revenue per treatment was due to an improvement in the Company's payor mix, the
1.2% increase in the Medicare ESRD composite rate, increases in the utilization
of some drugs, and increases in acute hospital services.
Patient Care Costs. Patient care costs consist of costs directly
related to the care of patients, including direct labor, drugs, and other
medical supplies and operational costs of facilities. Patient care costs
increased from $351.4 million for the year ended December 31, 1999 to $402.0
million for the year ended December 31, 2000, an increase of 14.4%. This
increase was due to the increase in the number of treatments performed during
the period, which was reflected in corresponding increases in the use of labor,
drugs and supplies. Patient care costs as a percentage of net revenue decreased
from 64.8% in 1999 to 64.6% in 2000. Patient care costs per treatment increased
4.4% from $159 in 1999 to $166 in 2000. This increase was due to Amgen's 3.9%
increase in the price of EPO, increased labor costs to address wage pressures in
many of the Company's markets, the cost of providing in-house laboratory
services and other health care inflation.
General and Administrative Expenses. General and administrative
expenses include corporate office costs and facility costs not directly related
to the care of patients, including facility administration, accounting, billing
and information systems. General and administrative expenses increased from
$51.3 million for the year ended December 31, 1999 to $57.1 million for the year
ended December 31, 2000, an increase of 11.3%. General and administrative
expenses as a percentage of revenue decreased from 9.5% in 1999 to 9.2% in 2000,
primarily as the result of the increase in net revenue for 2000.
Provision for Doubtful Accounts. The provision for doubtful accounts is
determined as a function of payor mix, billing practices, and other factors.
Renal Care Group reserves for doubtful accounts in the period in which the
revenue is recognized based on management's estimate of the net collectibility
of the accounts receivable. Management estimates the net collectibility of
accounts receivable based upon a variety of factors. These factors include, but
are not limited to, analyzing revenues generated from payor sources, performing
subsequent collection testing and continually reviewing detailed accounts
receivable agings. The provision for doubtful accounts increased from $14.6
million in 1999 to $16.9 million in 2000, an increase of $2.3 million, or 15.8%.
The provision for doubtful accounts as a percentage of net revenue remained
consistent at 2.7% in both 1999 and 2000.
Depreciation and Amortization. Depreciation and amortization increased
from $27.8 million for the year ended December 31, 1999 to $32.3 million for the
year ended December 31, 2000, an increase of 16.2%. This increase was due to the
start-up of dialysis facilities, the normal replacement costs of dialysis
facilities and equipment, the purchase of information systems and the
amortization of the goodwill and other intangible assets associated with
acquisitions accounted for as purchases.
Restructuring Charge. The Company recorded a restructuring charge of
$9.2 million during 2000. The charge results from the Company's decision to
cease providing wound care services on or before June 30, 2001, and to focus on
its core dialysis business. The restructuring charge principally represents
impairment charges for goodwill and property and equipment associated with the
wound care business along with anticipated severance costs, contract termination
costs and other associated charges.
Merger Expenses. Merger expenses of $3.8 million for the year ended
December 31, 2000, represent legal, accounting and employee severance costs and
related benefits and other costs associated with the assimilation and transition
of the merger with Renal Disease Management by Physicians, Inc.
Income from Operations. Income from operations increased from $92.4
million for the year ended December 31, 1999 to $101.2 million for the year
ended December 31, 2000, an increase of 9.5%. Income from operations as a
percentage of net
31
32
revenue decreased from 17.1% in 1999 to 16.3% in 2000 largely as a result of the
restructuring charge and other factors discussed above.
Interest Expense, Net. Interest expense of $5.0 million for the
year-ended December 31, 2000 decreased $1.2 compared to $6.2 million for the
year ended December 31, 1999. The decrease was principally the result of lower
average borrowings during 2000.
Minority Interest. Minority interest represents the proportionate
equity interest of other partners in the Company's consolidated entities that
are not wholly owned; whose financial results are included in the Company's
consolidated results. Minority Interest as a percentage of net revenue increased
to 1.6% in 2000 from 1.4% in 1999. This increase was the result of continued
operational improvements in the operations of Renal Care Group's joint ventures,
primarily those in Ohio and Oregon.
Income Tax Expense. Income tax expense increased from $31.4 million in
1999 to $34.7 million in 2000, an increase of 10.5%. The increase is a result of
pre-tax earnings increasing by approximately 9.8%. In addition, the effective
income tax rate of the Company increased from 40.0% to 40.3% in the current year
largely as a result of non-deductible merger costs incurred during 2000.
Net Income. Net income increased from $47.1 million in 1999 to $51.5
million in 2000, an increase of 9.3%. This increase is a result of the items
discussed above.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Revenue. Net revenue increased from $441.1 million for the year
ended December 31, 1998 to $541.9 million for the year ended December 31, 1999,
an increase of $100.8 million, or 22.9%. This increase resulted primarily from a
15.3% increase in the number of treatments from 1,921,996 in 1998 to 2,215,728
in 1999. This growth in treatments is a result of the acquisition and
development of various dialysis facilities and an 8.6% increase in same-center
treatments for 1999 over 1998. In addition, average net revenue per dialysis
treatment increased 6.3% from $223 in 1998 to $237 in 1999. The remaining
revenue increase is a result of wound care and diabetes revenues and higher
management fees. The increase in revenue per treatment was due to an improvement
in the Company's payor mix, increases in the utilization of EPO and other drugs,
and increases in acute hospital services.
Patient Care Costs. Patient care costs consist of costs directly
related to the care of patients, including direct labor, drugs, and other
medical supplies and operational costs of facilities. Patient care costs
increased from $292.1 million for the year ended December 31, 1998 to $351.4
million for the year ended December 31, 1999, an increase of 20.3%. This
increase was due to the increase in the number of treatments performed during
the period, which was reflected in corresponding increases in the use of labor,
drugs and supplies. Patient care costs as a percentage of net revenue decreased
from 66.2% in 1998 to 64.8% in 1999. Patient care costs per treatment increased
4.6% from $152 in 1998 to $159 in 1999. This increase was due to greater EPO and
other drug utilization costs, the cost of providing in-house laboratory services
and normal health care inflation.
General and Administrative Expenses. General and administrative
expenses include corporate office costs and facility costs not directly related
to the care of patients, including facility administration, accounting, billing
and information systems. General and administrative expenses increased from
$43.9 million for the year ended December 31, 1998 to $51.3 million for the year
ended December 31, 1999, an increase of 16.9%. General and administrative
expenses as a percentage of revenue decreased from 10.0% in 1998 to 9.5% in
1999, primarily as the result of the increase in net revenue for 1999.
Provision for Doubtful Accounts. The provision for doubtful accounts is
determined as a function of payor mix, billing practices, and other factors.
Renal Care Group reserves for doubtful accounts in the period in which the
revenue is recognized based on management's estimate of the net collectibility
of the accounts receivable. Management estimates the net collectibility of
accounts receivable based upon a variety of factors. These factors include, but
are not limited to, analyzing revenues generated from payor sources, performing
subsequent collection testing and continually reviewing detailed accounts
receivable agings. The
32
33
provision for doubtful accounts increased from $13.5 million in 1998 to $14.6
million in 1999, an increase of $1.1 million, or 8.1%. The provision for
doubtful accounts as a percentage of net revenue decreased from 3.1% in 1998 to
2.7% in 1999. The decrease in provision for doubtful accounts as a percentage of
net revenue resulted primarily from improved collections of accounts receivable
that were assumed in the Company's merger with Dialysis Centers of America, Inc.
in January 1999.
Depreciation and Amortization. Depreciation and amortization increased
from $22.2 million for the year ended December 31, 1998 to $27.8 million for the
year ended December 31, 1999, an increase of 25.2%. This increase was due to the
start-up of dialysis facilities, the normal replacement costs of dialysis
facilities and equipment, the purchase of information systems and the
amortization of the goodwill and other intangible assets associated with
acquisitions accounted for as purchases.
Merger Expenses. Merger expenses of $4.3 million for the year ended
December 31, 1999, represent legal, accounting and employee severance costs and
related benefits and other costs associated with the assimilation and transition
of the merger with Dialysis Centers of America.
Income from Operations. Income from operations increased from $68.3
million for the year ended December 31, 1998 to $92.4 million for the year ended
December 31, 1999, an increase of 35.3%. Income from operations as a percentage
of net revenue increased from 15.5% in 1998 to 17.1% in 1999 as a result of the
factors discussed above.
Interest Expense, Net. Interest expense of $6.2 million for the
year-ended December 31, 1999 decreased $400,000 compared to $6.6 million for the
year ended December 31, 1998. The decrease was the result of both lower average
borrowings and lower effective interest rates during 1999. The lower effective
interest rates were the result of replacing debt assumed in the Dialysis Centers
of America transaction with proceeds from Renal Care Group's credit facility
combined with generally lower market interest rates in much of 1999.
Minority Interest. Minority interest represents the proportionate
equity interest of other partners in the Company's consolidated entities that
are not wholly owned; whose financial results are included in the Company's
consolidated results. Minority Interest as a percentage of net revenue increased
to 1.4% in 1999 from 0.8% in 1998. This increase was the result of continued
operational improvements in the operations of Renal Care Group's joint ventures,
primarily those in Ohio and Oregon.
Income Tax Expense. Income tax expense increased from $21.6 million in
1998 to $31.4 million in 1999, an increase of 45.4%. The increase is a result of
pre-tax earnings increasing by approximately 34.6%. In addition, the effective
income tax rate of the Company increased from 37.1% to 40.0% in the current year
as a result of non-deductible merger costs incurred during 1999.
Net Income. Net income increased from $36.7 million in 1998 to $47.1
million in 1999, an increase of 28.3%. This increase is a result of the above
mentioned items.
LIQUIDITY AND CAPITAL RESOURCES
Renal Care Group requires capital primarily to acquire and develop
dialysis centers, to purchase property and equipment for existing centers, and
to finance working capital needs. At December 31, 2000, the Company's working
capital was $115.7 million, cash and cash equivalents were $29.9 million, and
the Company's current ratio was 2.2 to 1.0. Renal Care Group's working capital
increased during the year primarily as a result of acquisitions and the increase
in operating cash flows.
Net cash provided by operating activities was $89.7 million for the
year ended December 31, 2000. Cash provided by operating activities consists of
net income before depreciation and amortization expense, adjusted for changes in
components of working capital, primarily accounts receivable. Net cash used in
investing activities was $69.7 million for the year ended December 31, 2000.
Cash used in investing activities consisted primarily of $28.1 million of cash
paid for acquisitions, net of cash acquired, and $45.7 million of purchases of
property and equipment, partially offset by $4.4 million in proceeds from the
sale of property and equipment. Cash used in financing activities was $6.2
million for the year ended December 31, 2000. Cash
33
34
provided by financing activities primarily reflects $20.2 million in net
payments under Renal Care Group's line of credit, $2.9 million in proceeds
from the issuance of long-term debt, $24.4 million in net proceeds from the
issuance of common stock and payments of $13.2 million on the Company's
long-term debt.
On June 23, 1999, the Company executed a Second Amendment to its First
Amended and Restated Loan Agreement with a group of banks. The Second Amendment
provided for an increase in the credit facility from $125.0 million to $185.0
million through August 2000 at which point the lender commitments were reduced
to $157.3 million. Borrowings under the credit facility may be used for
acquisitions, capital expenditures, working capital and general corporate
purposes. No more than $25.0 million of the credit facility may be used for
working capital purposes. Within the working capital sublimit, Renal Care Group
may borrow up to $5.0 million in swing line loans.
The Company has negotiated loan pricing based on a LIBO rate margin
pursuant to leverage tiers. These leverage tiers extend from 0.75 to 2.25 times
and are priced at a LIBO rate margin of 0.60% to 1.35%. Commitment fees are also
priced pursuant to leverage ratio tiers. Commitment fees range from 0.20% to
0.30% pursuant to leverage ratios ranging between 0.75 and 2.25. Under the loan
agreement, commitments range in amounts and dates from the closing date through
August 2003. Renal Care Group obtained lender commitments of $185.0 million that
were reduced to $157.3 million in August 2000. Lender commitments will remain at
$157.3 million through August 2001, and will then be reduced to $129.5 million
through August 2002 and $101.8 million through August 2003. All loans under the
loan agreement are due and payable on August 4, 2003. As December 31, 2000,
there was $54.0 million outstanding under this agreement. These variable rate
debt instruments of the Company carry a degree of interest rate risk.
Specifically variable rate debt may result in higher costs to the Company if
interest rates rise.
Each of Renal Care Group's subsidiaries has guaranteed all of Renal
Care Group's obligations under the loan agreement. Further, Renal Care Group's
obligations under the loan agreement, and the obligations of each of its
subsidiaries under its guaranty, are secured by a pledge of the equity interests
held by Renal Care Group in each of the subsidiaries. Financial covenants are
customary based on the amount and duration of this commitment.
A significant component of Renal Care Group's growth strategy is the
acquisition and development of dialysis facilities. There can be no assurance
that Renal Care Group will be able to identify suitable acquisition candidates
or to close acquisition transactions with them on acceptable terms. Management
of Renal Care Group believes that existing cash and funds from operations,
together with funds available under the line of credit, will be sufficient to
meet Renal Care Group's acquisition, expansion, capital expenditure and working
capital needs for the foreseeable future. However, in order to finance certain
large strategic acquisition opportunities, Renal Care Group may incur additional
short and long-term bank indebtedness and may issue equity or debt securities.
The availability and terms of any future indebtedness or securities will depend
on market and other conditions. There can be no assurance that any additional
financing, if required, will be available on terms acceptable to Renal Care
Group.
Capital expenditures of approximately $40.0 million to $45.0 million,
primarily for equipment replacement, expansion of existing dialysis facilities
and construction of de novo facilities are planned in 2001. The Company expects
that these capital expenditures will be funded with cash provided by operating
activities and the Company's existing credit facility. Management believes that
capital resources available to Renal Care Group will be sufficient to meet the
needs of its business, both on a short- and long-term basis.
NEWLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25" in March 2000. This Interpretation was effective July
1, 2000, and covers specific events that occur after either December 15, 1998 or
January 12, 2000. The Interpretation addresses and further clarifies certain
aspects of APB 25 such as: the definition of an employee, criteria for
determining whether a plan qualifies as non-compensatory, the accounting
consequences of various modifications to the terms of previously granted stock
options, or
34
35
awards, and the accounting for an exchange of stock compensation awards in a
business combination. Renal Care Group, Inc. has adopted this interpretation,
and management believes it is in compliance with such requirements.
IMPACT OF INFLATION
A substantial portion of Renal Care Group's net revenue is subject to
reimbursement rates that are regulated by the federal government and do not
automatically adjust for inflation. Renal Care Group is unable to increase the
amount it receives for the services provided by its dialysis business that are
reimbursed under the Medicare composite rate. Increased operating costs due to
inflation, such as labor and supply costs, without a corresponding increase in
reimbursement rates, may adversely affect Renal Care Group's results of
operations, financial condition and business.
FORWARD-LOOKING INFORMATION
Certain of the matters discussed in the preceding pages of this annual
report on Form 10-K, particularly regarding implementation of the Company's
strategy, development of the dialysis and nephrology industries, anticipated
growth and revenues, anticipated working capital and sources of funding for
growth opportunities and construction, expenditures, interest, costs and income
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RCG maintains all cash in United States dollars in highly liquid,
interest-bearing, investment grade instruments with maturities of less than
three months, which RCG considers cash equivalents; therefore, RCG has no
"market risk sensitive instruments," and no disclosure is required under this
Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and financial statement schedule
in Part IV, Item 14(a) (1) and (2) of the report are incorporated by reference
into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item will appear in, and is
incorporated by reference from, the sections entitled "Proposals for Stockholder
Action - Proposal 1. Election of Directors" and "Management - Directors and
Executive Officers" included in the Company's definitive Proxy Statement
relating to the 2001 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the section
entitled "Executive Compensation" included in the Company's definitive Proxy
Statement relating to the 2001 Annual Meeting of Stockholders, which
information, other than the Compensation Committee Report and Performance Graph
required by Items 402(k) and (l) of Regulation S-K, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in, and is
incorporated by reference from, the section entitled "Security Ownership of
Directors, Officers and Principal Stockholders" included in the Company's
definitive Proxy Statement relating to the 2001 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will appear in, and is
incorporated by reference from, the sections entitled "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions" included in the Company's definitive Proxy Statement relating to
the 2001 Annual Meeting of Stockholders.
36
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
PAGE
----
(1) Index To Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors............................................. F-1
Consolidated Balance Sheets at December 31, 1999
and 2000...................................................................................... F-2
Consolidated Income Statements for the years
ended December 31, 1998, 1999, and 2000....................................................... F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1999, and 2000......................................... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1999, and 2000....................................................... F-6
Notes to Consolidated Financial Statements.................................................... F-8
(2) Index to Consolidated Financial Statement Schedules.
Report of Ernst & Young LLP, Independent Auditors............................................. F-25
Schedule II - Consolidated Schedule-Valuation
and Qualifying Accounts....................................................................... F-26
(3) The Exhibits are listed in the Index of Exhibits Required by
Item 601 of Regulation S-K included herewith, which is
incorporated herein by reference.
(b) The Company filed a current report on Form 8-K on October 3, 2000.
The Company filed a current report on Form 8-K on October 10, 2000.
The Company filed a current report on Form 8-K on December 14, 2000.
37
38
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Renal Care Group, Inc.
We have audited the accompanying consolidated balance sheets of Renal Care
Group, Inc. as of December 31, 1999 and 2000, and the related consolidated
income statements, statements of stockholders' equity, and statements of cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Renal Care Group,
Inc. at December 31, 1999 and 2000 and the consolidated results of operations
and cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 23, 2001
F-1
39
RENAL CARE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------
1999 2000
---- ----
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 16,104 $ 29,902
Accounts receivable, less allowance for doubtful accounts of
$40,876 in 1999 and $47,392 in 2000............................................... 103,230 122,816
Inventories.......................................................................... 12,654 12,881
Prepaid expenses and other current assets............................................ 13,431 19,188
Income taxes receivable.............................................................. 1,511 5,425
Deferred income taxes................................................................ 17,531 26,125
------------- ----------
Total current assets............................................................ 164,461 216,337
Property, plant and equipment, net...................................................... 123,963 139,573
Goodwill and other intangibles, net..................................................... 207,374 223,609
Other assets............................................................................ 5,108 5,365
------------- ----------
Total assets.................................................................... $ 500,906 $ 584,884
============= ==========
See accompanying notes to consolidated financial statements.
F-2
40
RENAL CARE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------
1999 2000
---- ----
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 22,451 $ 25,951
Accrued compensation................................................................. 18,816 28,714
Due to third-party payors............................................................ 22,277 27,050
Accrued expenses and other current liabilities....................................... 17,607 18,401
Current portion of long-term debt.................................................... 9,659 476
------------- ----------
Total current liabilities....................................................... 90,810 100,592
Long-term debt, net of current portion.................................................. 79,690 58,316
Deferred income taxes................................................................... 9,861 20,470
Minority interest....................................................................... 8,706 11,384
------------- ----------
Total liabilities............................................................... 189,067 190,762
------------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.01 par value, 10,000 shares authorized, none issued.............. -- --
Common Stock, $0.01 par value, 90,000 shares authorized,
45,320 and 47,087 shares issued and outstanding at
December 31, 1999 and 2000, respectively.......................................... 453 471
Additional paid-in capital........................................................... 203,932 234,738
Retained earnings.................................................................... 107,454 158,913
------------- ----------
Total stockholders' equity........................................................ 311,839 394,122
------------- ----------
Total liabilities and stockholders' equity........................................ $ 500,906 $ 584,884
============= ==========
See accompanying notes to consolidated financial statements.
F-3
41
RENAL CARE GROUP, INC.
CONSOLIDATED INCOME STATEMENTS
YEAR ENDED DECEMBER 31
----------------------
1998 1999 2000
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue.................................................................... $ 441,063 $ 541,895 $ 622,575
Operating costs and expenses:
Patient care costs.......................................................... 292,113 351,367 402,009
General and administrative expenses......................................... 43,894 51,315 57,104
Provision for doubtful accounts............................................. 13,484 14,632 16,949
Depreciation and amortization............................................... 22,241 27,835 32,321
Restructuring charge........................................................ -- -- 9,235
Merger expenses............................................................. 1,000 4,300 3,766
---------- ---------- ----------
Total operating costs and expenses..................................... 372,732 449,449 521,384
---------- ---------- ----------
Income from operations......................................................... 68,331 92,446 101,191
Interest expense, net.......................................................... 6,558 6,224 5,015
---------- ---------- ----------
Income before income taxes and minority interest......................... 61,773 86,222 96,176
Minority interest.............................................................. 3,492 7,768 10,011
---------- ---------- ----------
Income before income taxes............................................... 58,281 78,454 86,165
Provision for income taxes..................................................... 21,601 31,367 34,706
---------- ---------- ----------
Net income............................................................... $ 36,680 $ 47,087 $ 51,459
========== ========== ==========
Net income per share:
Basic...................................................................... $ 0.84 $ 1.05 $ 1.12
========== ========= ==========
Diluted..................................................................... $ 0.79 $ 1.00 $ 1.07
========== ========== ==========
Weighted average shares outstanding:
Basic....................................................................... 43,740 45,015 46,048
========== ========== ==========
Diluted..................................................................... 46,367 47,052 47,948
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
42
RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- ------
Balance at December 31, 1997......................... 40,853 $ 408 $ 167,625 $ 23,687 $ 191,720
Issuance of common stock in acquisitions.......... 56 1 1,126 -- 1,127
Net income........................................ -- -- -- 36,680 36,680
Common stock issued and
related income tax benefit..................... 1,247 13 17,354 -- 17,367
Equity acquired in business combination........... 2,335 23 843 -- 866
--------- ----------- ---------- ---------- ---------
Balance at December 31, 1998......................... 44,491 445 186,948 60,367 247,760
Issuance of common stock in acquisitions.......... 99 1 2,999 -- 3,000
Net income........................................ -- -- -- 47,087 47,087
Common stock issued and
related income tax benefit..................... 730 7 13,985 -- 13,992
--------- ----------- ---------- ---------- ---------
Balance at December 31, 1999......................... 45,320 453 203,932 107,454 311,839
--------- ----------- ---------- ---------- ---------
Net income........................................ -- -- -- 51,459 51,459
Common stock issued and
related income tax benefit..................... 1,767 18 30,806 -- 30,824
--------- ----------- ---------- ---------- ----------
Balance at December 31, 2000...................... 47,087 $ 471 $ 234,738 $ 158,913 $ 394,122
========= =========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
43
RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------
1998 1999 2000
---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income............................................................... $ 36,680 $ 47,087 $ 51,459
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization......................................... 22,241 27,835 32,321
Loss on sale of property and equipment................................ 328 362 567
Income applicable to minority interest................................ 3,492 7,768 10,011
Distributions to minority shareholders................................ -- (4,231) (7,333)
Deferred income taxes................................................. (38) (6,793) 2,015
Loss from restructuring............................................... -- -- 9,235
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable.............................................. (26,004) (16,237) (20,863)
Inventories...................................................... (2,107) (3,480) 113
Prepaid expenses and other current assets........................ (3,418) (3,698) (5,757)
Accounts payable................................................. 3,688 1,551 3,500
Accrued compensation............................................. 1,913 3,433 9,898
Due to third-party payors........................................ 6,307 5,209 4,773
Accrued expenses and other current liabilities................... 680 842 (2,749)
Income taxes..................................................... 6,555 4,190 2,511
------------ ------------ ------------
Net cash provided by operating activities....................... 50,317 63,838 89,701
INVESTING ACTIVITIES
Proceeds from sale of property and equipment............................. 162 336 4,390
Purchases of property and equipment...................................... (30,550) (45,963) (45,741)
Cash paid for acquisitions, net of cash acquired......................... (57,806) (17,158) (28,063)
Advances to investees.................................................... (1,614) -- --
Maturity of investments, net............................................. 3,625 -- --
Increase (decrease) in other assets...................................... (2,138) 1,968 (331)
------------- ------------ -------------
Net cash used in investing activities........................... (88,321) (60,817) (69,745)
FINANCING ACTIVITIES
Net borrowings (payments) under line of credit........................... 48,653 11,728 (20,229)
Payments on long-term debt............................................... (12,000) (27,975) (13,207)
Proceeds from issuance of long-term debt................................. 468 1,872 2,879
Net proceeds from issuance of common stock............................... 11,288 6,372 24,399
------------ ------------ ------------
Net cash provided by (used in) financing activities.............. 48,409 (8,003) (6,158)
Increase (decrease) in cash and cash equivalents......................... 10,405 (4,982) 13,798
Cash and cash equivalents, at beginning of year.......................... 10,681 21,086 16,104
------------ ------------ ------------
Cash and cash equivalents, at end of year................................ $ 21,086 $ 16,104 $ 29,902
============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
44
RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1998 1999 2000
---- ---- ----
(IN THOUSANDS)
DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................................... $ 6,452 $ 6,603 $ 5,237
============ ============ ============
Income taxes....................................................... $ 15,362 $ 30,497 $ 32,768
============ ============ ============
DISCLOSURES OF BUSINESS ACQUISITIONS:
Fair value of assets acquired......................................... $ 70,370 $ 20,428 $ 29,721
Liabilities assumed................................................... 11,437 270 1,658
Common stock issued................................................... 1,127 3,000 --
------------ ------------ ------------
Cash paid for acquisitions, net of cash acquired................... $ 57,806 $ 17,158 $ 28,063
============ ============ ============
See accompanying notes to consolidated financial statements.
F-7
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ORGANIZATION
Renal Care Group, Inc. (the "Company") provides dialysis services to patients
with chronic kidney failure, also known as end-stage renal disease ("ESRD"). As
of December 31, 2000, the Company provided dialysis and ancillary services to
approximately 16,500 patients through 201 outpatient dialysis centers in 24
states. In addition to its outpatient dialysis center operations as of December
31, 2000, the Company provided acute dialysis services through contractual
relationships with 112 hospitals.
As discussed in Note 3, on April 11, 2000, the Company merged with Renal Disease
Management by Physicians, Inc. ("RDM") in a business combination accounted for
as a pooling-of-interests. RDM became a wholly-owned subsidiary of the Company
through the exchange of approximately 556,000 shares of the Company's common
stock for all of the outstanding common stock of RDM. The Company's consolidated
financial statements included herein give retroactive effect to this transaction
and include the combined operations of the Company and RDM for all periods
presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, and majority-owned subsidiaries over which the
Company exercises control, and for which control is other than temporary. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United States.
Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with original maturities of
three months or less to be cash equivalents. The Company places its cash in
financial institutions that are federally insured and limits the amount of
credit exposure with any one financial institution.
F-8
46
ACCOUNTS RECEIVABLE
The Company's primary concentration of credit risk exists within accounts
receivable, which consist of amounts owed by various governmental agencies,
insurance companies and private patients. The Company manages its accounts
receivable by regularly reviewing its accounts and contracts and by providing
appropriate allowances for uncollectible amounts. Receivables from Medicare and
Medicaid represented 53% and 57% of gross accounts receivable at December 31,
1999 and 2000, respectively. Concentration of credit risk relating to accounts
receivable is limited to some extent by the diversity of the number of patients
and payors and the geographic dispersion of the Company's operations. Laws and
regulations governing the Medicare and Medicaid programs are complex and subject
to interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and, except as referenced in Note 12, is not
aware of any pending or threatened investigations involving allegations of
potential wrongdoing. While no such regulatory inquiries have been made,
compliance with such laws and regulations can be subject to future government
review and interpretation as well as significant regulatory action including
fines, penalties, and exclusion from the Medicare and Medicaid programs.
INVENTORIES
Inventories consist of drugs, supplies and parts consumed in dialysis treatments
and are stated at the lower of cost or market. Cost is determined using either
the first-in, first-out method, or average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the useful lives of the related assets, ranging
from 3 to 40 years. Leasehold improvements are amortized using the straight-line
method over the shorter of related lease terms or the useful lives.
GOODWILL AND OTHER INTANGIBLES (IN THOUSANDS)
Goodwill represents the excess of purchase price over the fair value of net
assets acquired. Goodwill net of accumulated amortization was $198,265 and
$221,699 at December 31, 1999 and 2000, respectively. The Company allocates a
portion of the purchase price to non-competition agreements based on the
estimated fair value of such agreements. Goodwill and non-competition agreements
are amortized on a straight-line basis over a period of 40 years and the life of
the agreements, respectively. These amortization periods equate to a blended
average of 35 years. Accumulated amortization of goodwill and other intangibles
was $20,339 and $26,299 at December 31, 1999 and 2000, respectively.
MINORITY INTEREST
Minority interest represents the proportionate equity interest of other partners
and stockholders in the Company's consolidated entities, which are not wholly
owned. As of December 31, 2000, the Company was the majority partner in 19 joint
venture partnerships.
NET REVENUE
Net revenue is recorded at the estimated net realizable amount from Medicare,
Medicaid, commercial insurers and other third-party payors for services
rendered. The Medicare and Medicaid programs reimburse the Company at amounts
that are different from the Company's established rates. Contractual adjustments
under these programs represent the difference between the amounts billed for
these services and the amounts that are reimbursable by third-party payors. A
summary of the basis for reimbursement with these payors follows:
F-9
47
Medicare
The Company is reimbursed by the Medicare program predominantly on a prospective
payment system for dialysis services. Under the prospective payment system, each
facility receives a composite rate per treatment. The composite rate differs
among facilities to account for geographic differences in the cost of labor.
Drugs and other ancillary services are reimbursed on a fee for service basis.
Medicaid
Medicaid is a state-administered program with reimbursements varying by state.
The Medicaid programs are separately administered in each state in which the
Company operates, and they reimburse the Company predominantly on a prospective
payment system for dialysis services rendered.
Other
Other payments from patients, commercial insurers and other third-party payors
are received pursuant to a variety of reimbursement arrangements, which
generally provide for higher payments than those received from the Medicare and
Medicaid programs.
Reimbursements from Medicare and Medicaid at established rates approximated 64%,
61% and 58% of net revenue for the years ended December 31, 1998, 1999 and 2000,
respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment
date.
ESTIMATED MEDICAL PROFESSIONAL LIABILITY CLAIMS
The Company is insured for medical professional liability claims through
commercial insurance policies. It is the Company's policy that provision for
estimated premium adjustments to medical professional liability costs be made
for asserted and unasserted claims based on its experiences. Provision for such
professional liability claims includes estimates of the ultimate costs of such
claims.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents approximate fair value.
Accounts Receivable, Accounts Payable and Accrued Liabilities
The carrying amounts reported in the consolidated balance sheets for accounts
receivable, accounts payable and accrued liabilities approximate fair value.
Accounts receivable are usually unsecured.
F-10
48
Long-Term Debt
Based upon the borrowing rates currently available to the Company, the carrying
amounts reported in the consolidated balance sheets for long-term debt
approximate fair value.
CONCENTRATION OF CREDIT RISKS
The administration of erythropoietin ("EPO") is beneficial in the treatment of
anemia, a medical complication frequently experienced by dialysis patients.
Revenue from the administration of EPO was 23%, 26% and 26% of the net revenue
of the Company for the years ended December 31, 1998, 1999, and 2000
respectively. EPO is produced by a single manufacturer.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Except for goodwill and property and
equipment impairment discussed in Note 4, as of December 31, 2000, in the
opinion of management, there has been no other impairment.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation. Such reclassifications had no effect on the net results of
operations as previously reported.
3. BUSINESS ACQUISITIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
POOLING-OF-INTEREST TRANSACTION
On January 27, 2000, the Company entered into a definitive agreement to merge
with RDM. The transaction was consummated on April 11, 2000. In connection with
the merger, each share of RDM common stock was converted on a tax-deferred basis
into approximately 0.10 shares of the Company's common stock. Prior to
conversion at December 31, 1999, approximately 5,386 shares of RDM common stock
were outstanding. As a result, the Company issued approximately 556 shares of
common stock in the merger. RDM owned and operated six dialysis centers and
provided acute dialysis services through contractual relationships with six
hospitals. RDM conducted its business in the Youngstown, Ohio market. The RDM
merger has been accounted for as a pooling-of-interests, and as such, the
Company's consolidated financial statements included herein give retroactive
effect to the RDM merger for all periods presented.
F-11
49
The following is a summary of the results of operations of the separate
entities:
RCG
(PRIOR TO
POOLING-OF-INTEREST
TRANSACTION) RDM COMBINED
------------- --- --------
2000
Net revenue .................... $617,215 $ 5,360 $622,575
======== =========== ========
Income (loss) from operations .. $101,230 $ (39) $101,191
======== =========== ========
Net income (loss) .............. $ 51,665 $ (206) $ 51,459
======== =========== ========
1999
Net revenue .................... $520,607 $ 21,288 $541,895
======== =========== ========
Income from operations ......... $ 92,308 $ 138 $ 92,446
======== =========== ========
Net income (loss) .............. $ 48,461 $ (1,374) $ 47,087
======== =========== ========
1998
Net revenue .................... $420,694 $ 20,369 $441,063
======== =========== ========
Income (loss) from operations .. $ 68,479 $ (148) $ 68,331
======== =========== ========
Net income (loss) .............. $ 37,402 $ (722) $ 36,680
======== =========== ========
2000 ACQUISITIONS
During 2000, the Company completed three acquisitions accounted for under the
purchase method of accounting. All such transactions involved the acquisition of
entities that provided care to ESRD patients through owned hemodialysis
facilities or acute in-patient dialysis services.
The Company's three acquisitions that were accounted for under the purchase
method of accounting in 2000 resulted in goodwill and other intangibles of
approximately $27,832. Goodwill and other intangibles are being amortized on a
straight-line basis over an average of 35 years. The Company began recording the
results of operations from these acquired companies beginning with the effective
date of each transaction.
2000
----
Number of shares issued............................ --
-----------
Estimated value of shares issued................... $ --
Cash consideration................................. 28,063
-----------
Aggregate purchase price........................... $ 28,063
===========
1999 ACQUISITIONS
During 1999, the Company completed four acquisitions accounted for under the
purchase method of accounting. All such transactions involved the acquisition of
entities that provided care to ESRD patients through owned hemodialysis
facilities or acute in-patient dialysis services.
F-12
50
The Company's four acquisitions that were accounted for under the purchase
method in 1999 resulted in goodwill and other intangibles of approximately
$18,841. Goodwill and other intangibles are being amortized on a straight-line
basis over an average of 35 years. The Company began recording the results of
operations from these acquired companies beginning with the effective date of
each transaction.
1999
----
Number of shares issued......................... 99
---------------
Estimated value of shares issued................ $ 3,000
Cash consideration.............................. 17,158
---------------
Aggregate purchase price........................ $ 20,158
===============
1998 ACQUISITIONS
During 1998, the Company completed multiple acquisitions of companies that owned
hemodialysis facilities providing care to ESRD patients as well as providing
acute hospital in-patient dialysis services. The Company also acquired a wound
care and diabetic services business during this period. The majority of the 1998
acquisitions were accounted for under the purchase method of accounting;
however, two of these transactions were accounted for using the
pooling-of-interests method.
Effective January 1, 1998, the Company merged with companies that owned nine
dialysis facilities located in Arkansas, Oklahoma and Missouri. In addition to
the services provided to patients in these facilities, the merged entities
provided acute, in-patient dialysis treatment to six hospitals. Additionally,
effective April 1, 1998, the Company merged with companies that owned four
dialysis facilities in Missouri. These facilities also provided acute,
in-patient dialysis treatment to three hospitals. Consideration provided by the
Company in these transactions was 2,335 shares of the Company's common stock.
Both transactions were accounted for as pooling-of-interests transactions. The
consolidated financial statements have not been restated for these transactions
as the effects are not considered material. Accordingly, the results of the
combined operations of these entities, reported in the accompanying consolidated
financial statements, commence on the effective date of each transaction.
Effective February 1, 1998, the Company formed a joint venture in Portland,
Oregon, for purposes of operating six dialysis facilities and a home dialysis
program. The Company acquired an 80% interest in the joint venture, with an
equivalent share of voting rights for cash.
As previously indicated, during 1998, the Company completed several other
acquisitions. These transactions were accounted for under the purchase method,
and the Company recorded goodwill other intangibles of approximately $58,496.
Goodwill and other intangibles are being amortized on a straight-line basis over
an average of 35 years. The Company began recording the results of operations
from these acquired companies beginning with the effective date of each
transaction.
The purchase price of 1998 acquisitions is summarized as follows:
1998
----
Number of shares issued........................ 56
---------------
Estimated value of shares issued............... $ 1,127
Cash consideration............................. 57,806
---------------
Aggregate purchase price....................... $ 58,933
===============
F-13
51
PRO FORMA DATA (UNAUDITED)
The following summary, prepared on a pro forma basis, combines the results of
operations of the Company and the acquired entities, as if each of the
acquisitions had been consummated as of the beginning of the period, giving
effect to adjustments such as amortization of intangibles, interest expense and
related income taxes.
1998 1999 2000
---- ---- ----
Pro forma net revenue............................ $ 475,782 $ 574,294 $ 640,699
=============== ================ ===============
Pro forma net income............................. $ 39,926 $ 48,267 $ 51,974
=============== ================ ===============
Pro forma net income per share
Basic......................................... $ 0.91 $ 1.07 $ 1.13
=============== ================ ===============
Diluted....................................... $ 0.86 $ 1.02 $ 1.08
=============== ================ ===============
The unaudited pro forma results of operations are not necessarily indicative of
what actually would have occurred if the acquisitions had been completed prior
to the beginning of the periods presented.
4. RESTRUCTURING CHARGE (IN THOUSANDS)
During the third quarter of 2000, the Company recorded a one-time
restructuring charge of $9,235 as a result of its plans to exit the wound
care business. This charge consisted of early contract termination costs of
$1,377, goodwill and property and equipment impairment charges of $5,973,
severance costs of $1,200 and other administrative charges of $685.
Management made the decision to exit this business as part of a long-term
strategy to focus on its core dialysis business. Currently, management
expects to cease operations of the wound care business no later than the
end of second quarter 2001. Current estimates indicate that the $9,235
restructuring charge recorded during the third quarter was accurate and no
subsequent adjustments have been made to the initial charge. The following
summarizes this restructuring charge:
BALANCE IN ACCRUED EXPENSES
AMOUNT OF RESTRUCTURING AS OF
CHARGE DECEMBER 31, 2000
----------------------- ---------------------------
Early contract termination costs $ 1,377 $ --
Goodwill and property and equipment impairment 5,973 --
Accrued severance costs 1,200 860
Other accrued costs 685 685
------- -------
$ 9,235 $ 1,545
======= =======
F-14
52
5. PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS)
Property, plant and equipment consist of the following:
DECEMBER 31,
------------
1999 2000
---- ----
Medical equipment............................................. $ 70,040 $ 83,069
Computer software and equipment............................... 31,510 38,998
Furniture and fixtures........................................ 15,313 19,195
Leasehold improvements........................................ 39,659 49,407
Buildings..................................................... 14,801 16,118
Construction-in-progress...................................... 3,422 6,101
------------------- ------------------
174,745 212,888
Less accumulated depreciation................................. (50,782) (73,315)
------------------- ------------------
$ 123,963 $ 139,573
=================== ==================
Depreciation expense was $15,151, $19,459, and $24,673 for the years ended
December 31, 1998, 1999 and 2000, respectively.
6. LONG-TERM DEBT (IN THOUSANDS)
Long-term debt consists of the following:
DECEMBER 31,
------------
1999 2000
------- -------
Line of credit, bearing interest at LIBO rate
(6.98% and 7.48% at December 31, 1999
and 2000, respectively) ................................. $74,228 $54,000
Note payable - bank, bearing interest at variable rates
(8.75% at December 31, 1999) ............................ 7,833 --
Subordinated notes, bearing interest at 7.0% ............... 4,129 --
Equipment note payable ..................................... 2,120 1,874
Other ...................................................... 1,039 2,918
------- -------
89,349 58,792
Less current portion ....................................... 9,659 476
------- -------
$79,690 $58,316
======= =======
LINE OF CREDIT
On June 23, 1999, the Company executed a Second Amendment to its First Amended
and Restated Loan Agreement effectively raising its credit facility to $185,000.
In accordance with the loan agreement, in August 2000 lender commitments were
reduced to $157,300. Borrowings under the credit facility may be used for
acquisitions, capital expenditures, working capital, and general corporate
purposes. No more than $25,000 of the credit facility may be used for working
capital purposes. Within the working capital sublimit, the Company may borrow up
to $5,000 in swing line loans. The Company has negotiated loan pricing based on
a LIBO rate margin pursuant to leverage tiers. These leverage tiers extend from
0.75 to 2.25 times and are priced at a LIBO rate margin of 0.60% to 1.35%.
Commitment fees range from 0.20% to 0.30% pursuant to leverage ratio tiers.
F-15
53
Under the loan agreement, commitments range in amounts and dates from the
closing date through August 2003. The Company originally obtained lender
commitments of $185,000 that were reduced to $157,300 in August 2000. The lender
commitments remain at $157,300 through August 2001, and are then reduced to
$129,500 through August 2002 and $101,800 through August 2003. All loans under
the loan agreement are due and payable on August 4, 2003. At December 31, 2000,
there was $54,000 outstanding under this agreement. The Company had $103,000
available under this agreement at December 31, 2000
The Company's obligations under the loan agreement, and the obligations of each
of the subsidiaries under its guaranty, are secured by a pledge of the equity
interests held by the Company in each of its subsidiaries. Financial covenants
are customary for the amount and duration of this commitment. The Company was in
compliance with all such covenants at December 31, 2000.
NOTE PAYABLE - BANK
On November 30, 1997, the Company entered into a financing agreement (the "Bank
Agreement") with a bank. The Bank Agreement provides for a line of credit
facility, a term loan facility and a revolver advance facility. Borrowings under
the Bank Agreement are collateralized by the Company's assets. The term loan
provided an initial borrowing of $10,000 and bears interest, payable monthly, at
a floating rate, based upon the bank's prime lending rate or LIBOR. The rate is
adjusted further by the results of certain financial ratios as defined in the
Bank Agreement. The term loan proceeds are restricted by the Bank Agreement for
the repurchase of common stock from certain investors.
The Revolver advance facility provides for borrowings up to $7,500 and bears
interest consistent with the rate of the Term Loan. The use of proceeds is
restricted for acquisitions, as defined in the Bank Agreement. The bank must
approve any borrowings that increase the total amount outstanding under the
facility in excess of $1,000. The Revolver, which expires October 31, 2002, had
no amounts outstanding as of December 31, 2000.
Effective August 19, 1999, the Company entered into a First Amendment to the
Bank Agreement that extended the expiration of the line of credit to January 31,
2000. Effective October 5, 1999, the Company entered into a Second Amendment to
the Bank Agreement. The Second Amendment, which eliminates any additional
borrowings previously available under the Bank Agreement, adjusted the payment
terms of the term note facility to monthly principal payments of $83, with a
final balloon payment of $7,833 due January 31, 2000. This due date was
subsequently extended to March 31, 2000.
SUBORDINATED NOTES PAYABLE
Subordinated notes include five separate debt instruments totaling $3,593 issued
in conjunction with certain dialysis center acquisitions and $536 issued in 1998
as payment of contingent purchase price relating to past acquisitions. The
subordinated notes totaling $3,593 are due in five equal annual installments
commencing three years after the date of the acquisitions through 2004. Such
amounts are subordinated to other debt of the Company. Each of the notes bears
interest, payable annually at 7.0%. The subordinated notes issued in 1998 as
payment of the contingent purchase price also bear interest at 7.0%, payable
annually. These notes are due in five equal annual installments through 2005 and
are subordinated to other debt of the Company.
EQUIPMENT NOTE PAYABLE
The equipment note payable is to a vendor for certain equipment and software
purchased by the Company. The note is payable in monthly installments through
2005.
F-16
54
OTHER
The other long-term debt consists of notes maturing at various times through
April 2015.
The aggregate maturities of long-term debt at December 31, 2000 are as follows:
2001............... $ 476
2002............... 725
2003............... 54,438
2004............... 359
2005............... 363
Thereafter......... 2,431
--------
$ 58,792
========
Subsequent to the RDM merger, borrowings under the Company's $185,000 credit
facility were used to repay the $7,833 note payable to bank, $4,129 of
subordinated notes and $918 of other debt, all of which was assumed in the RDM
merger.
7. INCOME TAXES (IN THOUSANDS)
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
-------- -------- -------
Current:
Federal ........................ $ 19,969 $ 35,265 $30,012
State and local ................ 1,670 2,895 2,679
-------- -------- -------
21,639 38,160 32,691
-------- -------- -------
Deferred:
Federal ........................ 72 (6,477) 1,781
State and local ................ (110) (316) 234
-------- -------- -------
(38) (6,793) 2,015
-------- -------- -------
Provision for income taxes .... $ 21,601 $ 31,367 $34,706
======== ======== =======
At December 31, 2000, the Company has net operating loss carryforwards of
approximately $79,397 for state income tax purposes that expire in years 2001
through 2016. The utilization of the state net operating loss carryforwards may
be limited in future years due to the profitability of certain subsidiary
corporations. Therefore, the Company has recorded a valuation allowance of
$2,894 against the deferred tax asset attributable to the state net operating
loss carryforwards. This represents an increase in the valuation allowance of
$862.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-17
55
Components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31,
------------
1999 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards ................. $ 2,032 $ 2,894
Allowance for doubtful accounts .................. 14,733 14,695
Accrued vacation and other accrued liabilities ... 4,976 8,288
Other ............................................ 230 249
Less: Valuation allowance ........................ (2,032) (2,894)
-------- --------
19,939 23,232
-------- --------
Deferred tax liabilities:
Depreciation ..................................... 5,098 6,626
Cash to accrual adjustments (Section 481) ........ 434 216
Amortization ..................................... 6,170 8,662
Investments in partnerships ...................... 567 2,073
-------- --------
12,269 17,577
-------- --------
Net deferred tax asset .............................. $ 7,670 $ 5,655
======== ========
The following is a reconciliation of the statutory federal and state income tax
rates to the effective rates as a percentage of income before provision for
income taxes as reported in the consolidated financial statements:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
---- ---- ----
U.S. federal income tax rate............ 35.0% 35.0% 35.0%
State income tax, net of federal
income tax benefit.................... 0.1 2.5 3.0
Increase in valuation allowances........ 1.6 0.3 1.0
Other................................... 0.4 2.2 1.3
---- ---- ----
Effective income tax rate............... 37.1% 40.0% 40.3%
==== ==== ====
F-18
56
8. STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
STOCK OPTION PLANS
As of December 31, 2000, the Company had six stock option plans. The Company
also issues options outside of these plans known as Free Standing Options.
Options issued as Free Standing are for employees, officers, directors, and
other key persons. Free Standing Options vest over various periods up to five
years and have a term of ten years from the date of issuance.
Options issued under the 1999 and 1996 Plans have similar terms and purposes.
Specifically, options under each of these plans are available for grant to
eligible employees and other key persons, the options vest over four to five
years and have a term of ten years from the date of issuance. These plans were
adopted in 1999 and 1996, respectively, and have 2,500 and 6,000 shares of
common stock reserved for issuance, respectively.
Options issued under the Equity Compensation Plan ("Equity Plan") are for
eligible employees and other key persons. The options vest over periods up to
three years and have a term of ten years from the date of issuance. This plan
was adopted by Dialysis Centers of America, Inc. in 1995 and there are 350
shares of common stock reserved for issuance.
Options issued under the 1994 Stock Option Plan (the "1994 Plan") are for
directors, officers and other key persons, these options vest over four years
and the options have a term of ten years from the date of issuance. This plan
was adopted in 1994 and there are 720 shares of common stock reserved for
issuance.
Options issued under the Directors Plan are for non-management directors. These
options vest immediately and have a term of ten years from the date of issuance.
The plan was adopted in 1996 and there are 225 shares of common stock reserved
for issuance.
Options issued under the RDM Plan are for directors, offices, and other key
persons. These options vest immediately upon grant and have a term of 5 to 10
years from the date of issuance. The plan was adopted by RDM in 1997 and there
are 109 shares of common stock reserved for issuance
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans. Therefore, compensation expense would generally be
recorded only if on the date of grant the then current market price of the
underlying stock exceeded the exercise price.
F-19
57
The following is a summary of option transactions during the period from January
1, 1997 through December 31, 2000:
WEIGHTED
1999 1996 AVERAGE
FREE EMPLOYEE EMPLOYEE EQUITY 1994 DIRECTORS RDM EXERCISE EXERCISE
STANDING PLAN PLAN PLAN PLAN PLAN PLAM PRICE RANGE PRICE
Balance at
December 31, 1997 .... 1,843 -- 3,667 69 164 6 48 $ 0.11 - 25.58 $ 10.38
Granted .............. -- -- 2,128 -- -- 11 10 20.00 - 29.50 22.05
Exercised ............ (383) -- (617) -- (139) (6) -- 0.89 - 22.75 8.93
Forfeited ............ (10) -- (165) (5) (2) -- -- 3.33 - 25.58 15.71
------ ----- ------ --- ---- ---- ---
Balance at
December 31, 1998 .... 1,450 -- 5,013 64 23 11 58 0.11 - 29.50 14.30
Granted .............. 536 939 235 -- -- 23 7 16.63 - 28.50 18.12
Exercised ............ (82) -- (305) (36) -- -- -- 0.11 - 22.00 11.99
Forfeited ............ -- -- (142) (10) -- -- -- 3.33 - 24.67 17.85
------ ----- ------ --- ---- ---- ---
Balance at
December 31, 1999 .... 1,904 939 4,801 18 23 34 65 3.33 - 29.50 15.17
Granted .............. -- 1,538 350 -- -- 22 -- 15.94 - 29.03 16.08
Exercised ............ (419) (82) (1,092) -- (6) -- (39) 3.33 - 23.25 13.66
Forfeited ............ (19) (20) (202) -- -- -- -- 8.00 - 29.03 19.11
------ ----- ------ --- ---- ---- ---
Balance at
December 31, 2000 .... 1,466 2,375 3,857 18 17 56 26 $ 3.33 - 29.50 $ 15.65
====== ===== ====== === ==== ==== ===
Available for Grant at
December 31, 2000 .... 296 43 14 10 463 163 44
====== ===== ====== === ==== ==== ===
Exercisable at
December 31, 2000 .... 1,065 417 2,149 18 16 56 20 $ 13.95
====== ===== ====== === ==== ==== === =========
Exercisable at
December 31, 1999 .... 1,295 188 2,165 12 23 34 35
====== ===== ====== === ==== ==== ===
Exercisable at
December 31, 1998 .... 995 -- 1,368 55 8 11 22
====== ===== ====== === ==== ==== ===
The weighted-average fair value of options granted during 1998, 1999, and 2000
is $8.93, $7.88 and $7.71 respectively.
F-20
58
The following table summarizes information about fixed stock options outstanding
at December 31, 2000.
NUMBER WEIGHTED NUMBER
OUTSTANDING AS AVERAGE WEIGHTED EXERCISABLE AS WEIGHTED
RANGE OF OF DECEMBER 31, REMAINING AVERAGE OF DECEMBER 31, AVERAGE
EXERCISE PRICES 2000 CONTRACTUAL LIFE EXERCISE PRICE 2000 EXERCISE PRICE
----------------------------------------------------------------------------------------------------------------------
$ 3.33 - $ 8.00 1,377 4.97 $ 5.67 1,237 $ 5.45
$10.16 - $15.94 2,983 8.28 $15.13 917 $ 14.07
$16.09 - $22.00 3,212 7.90 $19.70 1,432 $ 20.18
$22.75 - $29.50 243 7.77 $24.98 155 $ 24.80
----------------------------------------------------------------------------------------------------------------------
$ 3.33 - $29.50 7,815 7.52 $15.65 3,741 $ 13.95
======================================================================================================================
Pro forma information regarding net income and net income per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
---- ---- ----
Expected volatility........................... 33.0% 40.0% 45.0%
Expected dividend yield....................... None None None
Risk-free interest rate....................... 5.5% 5.5% 6.25%
Expected life of options............................... 5 years 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-21
59
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the option's vesting period. The Company's pro forma
information follows:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
---- ---- ----
Net income.......................................... $ 36,680 $ 47,087 $ 51,459
Pro forma compensation expense from
stock options, net of taxes...................... 4,469 5,979 6,304
-------------- ------------- -------------
Pro forma net income................................ $ 32,211 $ 41,108 $ 45,155
============== ============= =============
Pro forma net income per share
Basic............................................ $ 0.74 $ 0.91 $ 0.98
============== ============= =============
Diluted.......................................... $ 0.69 $ 0.87 $ 0.94
============== ============= =============
WARRANTS
At December 31, 2000, the Company has outstanding warrants to purchase an
aggregate of 468 shares of common stock that were issued in 1994 and 1995. These
warrants have a term of ten years from the date of issuance and an exercise
price of $4.44 per warrant.
9. OPERATING LEASES (IN THOUSANDS)
The Company rents office and medical facilities under lease agreements that are
classified as operating leases for financial statement purposes. At December 31,
2000, future minimum rental payments under noncancelable operating leases with
terms of one year or more consist of the following:
2001................... $ 16,840
2002................... 15,222
2003................... 13,703
2004................... 12,898
2005................... 11,012
Thereafter............. 33,921
------------
$ 103,596
============
Rent expense was $13,012, $17,189, and $19,164 for the years ending December 31,
1998, 1999 and 2000, respectively.
10. EMPLOYEE BENEFIT PLANS (IN THOUSANDS)
DEFINED CONTRIBUTION PLANS
The Company has qualified defined contribution plans covering substantially all
employees that permit participants to make voluntary contributions. The Company
pays all general and administrative expenses of the plans and makes matching
contributions on behalf of the employees. The Company made contributions
relating to these plans totaling $1,216, $1,532, and $1,734 for the years ended
December 31, 1998, 1999 and 2000, respectively.
F-22
60
EMPLOYEE STOCK PURCHASE PLAN
Effective April 1996, the Company adopted an Employee Stock Purchase Plan
("Stock Purchase Plan") to provide substantially all employees an opportunity to
purchase shares of its common stock in amounts not to exceed 10% of eligible
compensation or $25 of common stock each calendar year. Annually, on December
31, participant account balances are used to purchase shares of stock at the
lesser of 85% of the fair market value of shares at the beginning of the year
(grant date) or December 31 (exercise date). A total of 675 shares are available
for purchase under the plan. At December 31, 1999 and 2000, $1,377 and $1,331,
respectively, were included in accrued wages and benefits relating to the Stock
Purchase Plan.
11. EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
In accordance with SFAS No. 128, basic net income per share is based on the
weighted average number of common shares outstanding during the periods. Diluted
net income per share is based on the weighted average number of common shares
outstanding during the periods plus the effect of dilutive stock options using
the treasury stock method.
The following table sets forth the computation of basic and diluted net income
per share.
1998 1999 2000
---- ---- ----
Numerator:
Numerator for basic and diluted net income per share..................... $ 36,680 $ 47,087 $ 51,459
Denominator:
Denominator for basic net income per share-weighted-average shares....... 43,740 45,015 46,048
Effect of dilutive securities:
Stock options......................................................... 2,065 1,529 1,498
Warrants.............................................................. 562 508 402
----------- ---------- -----------
Denominator for diluted net income
per share-adjusted weighted-average shares and assumed conversions.... 46,367 47,052 47,948
=========== ========== ===========
Basic net income per share.................................................. $ 0.84 $ 1.05 $ 1.12
=========== ========== ===========
Diluted net income per share................................................ $ 0.79 $ 1.00 $ 1.07
=========== ========== ===========
12. CONTINGENCIES (in Thousands)
On August 30, 2000, nineteen patients were hospitalized and one patient died
shortly after becoming ill while receiving treatment at one of the Company's
dialysis centers in Youngstown, Ohio. One of the nineteen hospitalized patients
also died some time later. While no litigation was pending against the Company
as of December 31, 2000 relating to these illnesses, three lawsuits were brought
subsequent to December 31, 2000, and other suits could be brought in the future.
Management believes Renal Care Group's insurance should be adequate to cover
these events.
On December 12, 2000, the Company reached an agreement in principle with the
U.S. Attorney for the Southern District of Mississippi to settle claims arising
out of alleged inadequacies in physician documentation related to lab tests
performed by its laboratory subsidiary, RenaLab, Inc. The terms of such
agreement provide that the Company will pay $1,980 to the Medicare program. This
amount was recorded during the fourth quarter of 2000 and remains accrued for as
of December 31, 2000. The Company expects to pay this amount during the second
quarter of 2001 when such terms of a corporate integrity agreement are
finalized.
The Company is involved in other litigation and regulatory investigations
arising in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, these matters will be resolved without material
adverse effect on the Company's consolidated financial position or results of
operations.
F-23
61
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER
SHARE DATA)
The following tables set forth, for 1999 and 2000, certain selected quarterly
financial data. In the opinion of the Company's management this unaudited
information has been prepared on the same basis as the audited information and
includes all adjustments necessary to present fairly the information set forth
therein. The operating results for any quarter are not necessarily indicative of
results for any future period.
1999
----
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net revenue...................................................... $ 126,528 $ 134,013 $ 138,780 $ 142,574
Operating expenses............................................... 97,512 103,171 106,449 110,182
Depreciation and amortization.................................... 6,375 6,781 7,201 7,478
Merger expenses.................................................. 4,300 -- -- --
---------- ---------- ---------- -----------
Income from operations........................................... 18,341 24,061 25,130 24,914
Interest expense, net............................................ 1,662 1,545 1,573 1,444
Minority interest................................................ 1,500 1,744 2,350 2,174
---------- ---------- ---------- -----------
Income before income taxes....................................... 15,179 20,772 21,207 21,296
Income taxes..................................................... 6,811 7,792 7,953 8,811
---------- ---------- ---------- -----------
Net income....................................................... $ 8,368 $ 12,980 $ 13,254 $ 12,485
========== ========== ========== ===========
Net income per share:
Basic......................................................... $ 0.19 $ 0.29 $ 0.28 $ 0.28
========== ========== ========== ===========
Diluted....................................................... $ 0.18 $ 0.28 $ 0.28 $ 0.27
========== ========== ========== ===========
2000
----
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net revenue...................................................... $ 149,657 $ 154,152 $ 156,505 $ 162,261
Operating expenses............................................... 114,281 117,521 119,311 124,949
Depreciation and amortization.................................... 7,772 7,808 8,154 8,587
Restructuring Charge............................................. -- -- 9,235 --
Merger expenses.................................................. -- 3,766 -- --
---------- ---------- ---------- -----------
Income from operations........................................... 27,604 25,057 19,805 28,725
Interest expense, net............................................ 1,496 1,366 1,126 1,027
Minority interest................................................ 2,169 2,258 2,428 3,156
---------- ---------- ---------- -----------
Income before income taxes....................................... 23,939 21,433 16,251 24,542
Income taxes..................................................... 9,091 9,484 6,449 9,682
---------- ---------- ---------- -----------
Net income....................................................... $ 14,848 $ 11,949 $ 9,802 $ 14,860
========== ========== ========== ===========
Net income per share:
Basic......................................................... $ 0.33 $ 0.26 $ 0.21 $ 0.32
========== ========== ========== ===========
Diluted....................................................... $ 0.31 $ 0.25 $ 0.20 $ 0.31
========== ========== ========== ===========
F-24
62
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors Renal Care Group, Inc.
We have audited the consolidated financial statements of Renal Care Group, Inc.
as of December 31, 1999 and 2000, and for each of the three years in the period
ended December 31, 2000, and have issued our report thereon dated February 23,
2001. Our audits also included the financial statement schedule listed in item
14(a) of this Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 23, 2001
F-25
63
SCHEDULE II
RENAL CARE GROUP, INC.
CONSOLIDATED SCHEDULE - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AMOUNT BALANCE
BEGINNING ALLOWANCES CHARGED TO AT END OF
OF PERIOD ACQUIRED EXPENSE WRITE-OFFS PERIOD
--------- -------- ------- ---------- ------
Allowances for doubtful accounts:
Year ended
December 31, 1998............................. $ 19,144 $ 2,321 $ 13,484 $ (3,723) $ 31,226
========== ========= ========== ============ ==========
Year ended
December 31, 1999............................. $ 31,226 $ 283 $ 14,632 $ (5,265) $ 40,876
========== ========= ========== ============ ==========
Year ended
December 31, 2000............................. $ 40,876 $ -- $ 16,949 $ (10,433) $ 47,392
========== ========= ========== ============= ==========
F-26
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Nashville, State of Tennessee, on the 30th day of March, 2001.
RENAL CARE GROUP, INC.
By: SAM A. BROOKS, JR.
-----------------------------------------
Sam A. Brooks, Jr.
Chairman of the Board, President and
Chief Executive Officer
65
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Sam A. Brooks, Jr. and R. Dirk Allison
and either of them (with full power in each to act alone) as true and lawful
attorneys-in-fact with full power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
/s/ SAM A. BROOKS, JR. Chairman of the Board, March 30, 2001
- -------------------------------------------- President, Chief Executive
Sam A. Brooks, Jr. Officer and Director
(Principal Executive Officer)
/s/ R. DIRK ALLISON Executive Vice President, March 30, 2001
- -------------------------------------------- Chief Financial Officer
R. Dirk Allison Treasurer (Principal Financial
and Accounting Officer)
/s/ JOSEPH C. HUTTS Director March 30, 2001
- --------------------------------------------
Joseph C. Hutts
/s/ HARRY R. JACOBSON, M.D. Director March 30, 2001
- --------------------------------------------
Harry R. Jacobson, M.D.
/s/ THOMAS A. LOWERY, M.D. Director March 30, 2001
- --------------------------------------------
Thomas A. Lowery, M.D.
/s/ JOHN D. BOWER, M.D. Director March 30, 2001
- --------------------------------------------
John D. Bower, M.D.
/s/ STEPHEN D. MCMURRAY, M.D. Director March 30, 2001
- --------------------------------------------
Stephen D. McMurray, M.D.
/s/ W. TOM MEREDITH, M.D. Director March 30, 2001
- --------------------------------------------
W. Tom Meredith, M.D.
/s/ KENNETH E. JOHNSON, JR., M.D. Director March 30, 2001
- --------------------------------------------
Kenneth E. Johnson, Jr., M.D.
/s/ WILLIAM V. LAPHAM Director March 30, 2001
- --------------------------------------------
William V. Lapham
66
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of the
Company (1)
3.1.2 Certificate of Amendment of Certificate of Incorporation of
the Company (2)
3.1.3 Certificate of Designation, Preferences, and Rights of
Series A Junior Participating Preferred Stock of the Company
(2)
3.1.4 Certificate of Amendment of Amended and Restated Certificate
of Incorporation of the Company (12)
3.2 Amended and Restated Bylaws of the Company (1)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Certificate of Incorporation and Bylaws of the
Company defining rights of holders of Common Stock of the
Company (1)
4.2 Specimen stock certificate for the Common Stock of the
Company (1)
4.3 Shareholder Rights Protection Agreement, dated May 2, 1997
between the Company and First Union National Bank of North
Carolina, as Rights Agent (3)
10.1 Employment Agreement, dated July 13, 2000, between the
Company and Sam A. Brooks (16)*
10.2 Employment Agreement, dated October 15, 1999, between the
Company and R. Dirk Allison(14)*
10.3 Employment Agreement, dated July 13, 2000, between the
Company and Raymond Hakim, M.D. (16)*
10.4 Medical Director Services Agreement, dated February 12,
1996, between the Company and Kansas Nephrology Physicians,
P.A. (5)
10.5 Medical Director Services Agreement, dated February 12,
1996, between the Company and Indiana Dialysis Management,
P.C. (5)
10.6 Medical Director Services Agreement, dated February 12,
1996, between the Company and Tyler Dialysis & Transplant
Associates, P.A. (5)
10.7 Lease Agreement, dated February 5, 1996, between the Company
and MEL, Inc. relating to approximately 20,000 square feet
of space (5)
10.8 Lease Agreement, dated February 12, 1996, among the Company
and Thomas A. Lowery, M.D., James R. Cotton, M.D., Roy D.
Gerard, M.D. and Kevin A. Curran, M.D., relating to property
in Carthage, Texas (5)
10.9 Lease Agreement, dated February 12, 1996, among the Company
and Thomas A. Lowery, M.D., James R. Cotton, M.D., Roy D.
Gerard, M.D., and Kevin A. Curran, M.D., relating to
property in Tyler, Texas (5)
10.10 Sublease Agreement between M-W-R Investment and Kansas
Nephrology Associates, P.A. dated February 1, 1990, to be
assumed by the Company, and related Lease Agreement between
Dodge City Medical Center Building, Inc. and M-W-R
Investment (1)
67
10.11 Sublease Agreement, dated February 12, 1996, with Tyler
Nephrology Associates, Inc. (5)
10.12 Dialysis Center Management Agreement, dated May 11, 1994,
between Renal Care Group, Inc. (of Tennessee) and Vanderbilt
University (1)
10.13 1996 Stock Option Plan for Outside Directors (1)*
10.14 Fourth Amended and Restated 1996 Stock Incentive Plan (6)*
10.15 Amended and Restated Employee Stock Purchase Plan (2)*
10.16 Medical Director Services Agreement, dated September 30,
1996, between the Company and a group of individual
physicians (7)
10.17 Employment Agreement, dated July 13, 2000, between the
Company and Gary Brukardt (19)*
10.18 First Amended and Restated Loan Agreement, dated as of
August 4, 1997, among the Company, its subsidiaries and
NationsBank of Tennessee, N.A. (2)
10.18.1 Second Amendment to First Amended and Restated Loan
Agreement, dated as of June 23, 1999, among the Company,
First American National Bank, First Union National Bank, and
NationsBank, N.A., SunTrust Bank, Nashville, N.A., AmSouth
Bank, and NorWest Bank Arizona, N.A. (12)
10.18.2 Third Amendment to First Amended and Restated Loan Agreement
dated September 29, 2000 (16)
10.19 Stock Option Agreement, dated April 30, 1997, between the
Company and Sam A. Brooks (2)*
10.20 Stock Option Agreement, dated April 30, 1997, between the
Company and Gary Brukardt (2)*
10.21 Asset Purchase Agreement with an effective date of February
1, 1997 among the Company, RCG Indiana, LLC, Eastern Indiana
Kidney Center, Indiana Kidney Center, Indiana Kidney Center
South, LLC, St. Vincent Dialysis Center, Saint Joseph
Dialysis Center and Indiana Dialysis Services PC and
Community Hospitals of Indiana, Inc., Seton Health
Corporation of Central Indiana, Inc., Reid Hospital & Health
Care Services, Inc., and Saint Joseph Hospital and Health
Care Center of Kokomo, Indiana, Inc. and Indiana Dialysis
Services, PC, Reid Hospital Physicians, Greenwood Dialysis
Services, PC and certain individuals named on the signature
pages thereto and Indiana Nephrology & Internal Medicine,
P.C. (8)
10.22 Restricted Stock Award Agreement, dated December 23, 1997,
between the Company and Harry R. Jacobson, M.D. (4)*
10.23 Restricted Stock Award Agreement, dated December 23, 1997,
between the Company and Sam A. Brooks (4)*
68
10.24 Restricted Stock Award Agreement, dated December 23, 1997,
between the Company and Gary Brukardt (4)*
10.25 Restricted Stock Award Agreement, dated December 23, 1997,
between the Company and Raymond Hakim, M.D. (4)*
10.26 Restricted Stock Award Agreement, dated December 23, 1997,
between the Company and Thomas Lowery, M.D. (4)*
10.27 Restricted Stock Award Agreement, dated December 23, 1997,
between the Company and Stephen D. McMurray, M.D. (4)*
10.28 Stock Option Agreement, dated May 22, 1998, between the
Company and Sam A. Brooks (9)*
10.29 Stock Option Agreement, dated May 22, 1998, between the
Company and Gary A. Brukardt (9)*
10.30 Stock Option Agreement, dated May 22, 1998, between the
Company and Raymond Hakim, M.D. (9)*
10.31 Stock Option Agreement, dated June 5, 1998, between the
Company and Joseph C. Hutts (9)*
10.32 Stock Option Agreement, dated June 5, 1998, between the
Company and Harry R. Jacobson, M.D. (9)*
10.33 Amendment #3 dated February 22, 2001 to Agreement No.
980202, between Renal Care Group, Inc. and Amgen Inc. (The
Company has requested confidential treatment of certain
portions of this Exhibit.)
10.34 Restricted Stock Award Agreement, dated January 25, 1999,
between the Company and Sam A. Brooks (10)*
10.35 Restricted Stock Award Agreement, dated January 25, 1999,
between the Company and Harry R. Jacobson (10)*
10.36 Restricted Stock Award Agreement, dated January 25, 1999,
between the Company and Stephen D. McMurray (10)*
10.37 Renal Care Group, Inc. 1999 Long-Term Incentive Plan (11)*
10.37.1 Amendment to the Renal Care Group, Inc. 1999 Long-Term
Incentive Plan (15)*
10.38 Stock Option Agreement, dated August 30, 1999, between the
Company and Sam A. Brooks (13)*
10.39 Stock Option Agreement, dated August 30, 1999, between the
Company and Gary A. Brukardt (13)*
10.40 Stock Option Agreement, dated August 30, 1999, between the
Company and Raymond Hakim, M.D. (13)*
69
10.41 Stock Option Agreement, dated June 2, 1999, between the
Company and Joseph C. Hutts (13)*
10.42 Stock Option Agreement, dated June 2, 1999, between the
Company and Harry R. Jacobson, M.D. (13)*
10.43 Stock Option Agreement, dated July 22, 1999, between the
Company and William V. Lapham (13)*
10.44 Stock Option Agreement, dated October 27, 1999, between the
Company and R. Dirk Allison(14)*
10.45 Stock Option Agreement, dated June 8, 2000, between the
Company and Joseph C. Hutts *
10.46 Stock Option Agreement, dated June 8, 2000, between the
Company and Harry R. Jacobson, M.D.*
10.47 Stock Option Agreement, dated June 8, 2000, between the
Company and William V. Lapham *
10.48 Stock Option Agreement, dated June 8, 2000, between the
Company and W. Thomas Meredith*
10.49 Stock Option Agreement, dated September 19, 2000, between
the Company and Sam A. Brooks *
10.50 Stock Option Agreement, dated September 19, 2000, between
the Company and Gary A. Brukardt *
10.51 Stock Option Agreement, dated September 19, 2000, between
the Company and Raymond Hakim, M.D. *
10.52 Stock Option Agreement, dated September 19, 2000, between
the Company and R. Dirk Allison *
21.1 List of subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (contained on the signature page of this
report)
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 333-80221) effective February 6, 1996.
(2) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1997 (Commission File No. 0-27640).
(3) Incorporated by reference to the Company's Current Report on Form 8-K
filed May 5, 1997 (Commission File No. 0-27640).
(4) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1997 (Commission File No. 0-27640).
(5) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1996 (Commission File No. 0-27640).
70
(6) Incorporated by reference to Appendix A to the Company's definitive
Proxy Statement filed April 27, 1998 relating to the 1998 Annual
Meeting of Stockholders (Commission File No. 0-27640).
(7) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 333-13813) effective October 30, 1996.
(8) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996 (Commission File No. 0-27640).
(9) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1998 (Commission File No. 0-27640).
(10) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1999 (Commission File No. 0-27640).
(11) Incorporated by reference to Appendix A to the Company's definitive
Proxy Statement filed April 27, 1999 relating to the 1999 Annual
Meeting of Stockholders (Commission File No. 0-27640).
(12) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1999 (Commission File No. 0-27640).
(13) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1999 (Commission File No. 0-27640).
(14) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1999 (Commission File No. 0-27640).
(15) Incorporated by reference to Appendix A to the Company's definitive
Proxy Statement filed April 28, 2000 relating to the 2001 Annual
Meeting of Stockholders (Commission File No. 0-27640).
(16) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 2000 (Commission File No. 0-27640).
* Management contract or executive compensation plan or arrangement.