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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, 1996
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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) 321-2333
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.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
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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 $404,927,582 as of March 19, 1997, 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 14,273,393 shares of common stock, $.01 par value, outstanding at
March 19, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Proxy Statement for its 1997 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 is a specialized provider of nephrology services that was
founded in June 1995 to focus on the provision of care to patients with kidney
disease, including patients suffering from chronic kidney failure also known as
end-stage renal disease ("ESRD"). As of December 31, 1996, the Company provided
dialysis and ancillary services to approximately 5,200 patients through 81
outpatient dialysis centers in 12 states and managed an additional 10 dialysis
centers in 4 states, 7 of which are in affiliation with leading medical centers
such as Vanderbilt University Medical Center and The Cleveland Clinic
Foundation. In addition to its outpatient dialysis center operations, Renal Care
Group provided acute dialysis services through contractual relationships with 45
hospitals, staff-assisted dialysis services to 37 skilled nursing facilities and
physician practice management services to 23 of the 64 nephrologists who are
affiliated with the Company's outpatient dialysis centers.
Renal Care Group was formed by leading nephrologists with the objective
of creating an entity with the clinical and financial capability to manage the
full range of care for ESRD patients on a cost-effective basis. The Company is
working in partnership with its affiliated physicians to develop fully
integrated nephrology networks that will implement clinical protocols designed
to improve outcomes and reduce costly medical complications associated with
ESRD.
Nephrology is the specialized practice of medicine dedicated to providing
care to patients with ESRD and other kidney-specific ailments. An essential
component of the nephrologist's practice is the dialysis facility, where ESRD
patients receive their dialysis treatments three times per week in a
technologically advanced outpatient setting. Outpatient dialysis facilities
generally are owned by nephrology groups and comprise an integral component of
the nephrologist's practice due to the critical role that dialysis plays in the
treatment of ESRD patients. According to the Health Care Financing
Administration ("HCFA"), there were approximately 2,800 dialysis centers in the
United States at the end of 1995. The Company believes that approximately 45%
were owned by multi-center dialysis companies, 25% were owned by independent
physicians and other companies and 30% were hospital-affiliated centers.
Although nephrology groups have in the past sold their dialysis centers to
entities focused on owning and operating such facilities, the Company believes
that many nephrology groups recognize the benefits of affiliation with an entity
having broader clinical, financial and business capability to help them manage
the increasingly complex and time-consuming aspects of both their dialysis
center operations and their nephrology practices. In addition, many hospitals
are increasingly motivated to sell or outsource management of their dialysis
facilities as they refocus their resources on their core business in response to
increasing competitive pressures.
ESRD is the state of advanced renal impairment that is irreversible and
imminently lethal. Patients with ESRD eventually require dialysis or kidney
transplantation to sustain life; transplants constituting approximately 6% of
ESRD patients annually. Since 1972, individuals with ESRD
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who are eligible for Social Security have been entitled to Medicare benefits
regardless of age or financial circumstances. According to data published by
HCFA, the number of patients receiving chronic dialysis services in the United
States has grown at a compound annual rate of 8.9%, from 66,000 patients in
1982 to approximately 200,000 in 1995. According to the United States Renal
Data System ("USRDS"), the ESRD incidence rate among Medicare-eligible patients
increased by 97.3% from 1984 to 1993. The USRDS estimates that the total
direct medical payments for ESRD were approximately $11.1 billion in 1994. The
Company attributes the growth in the number of ESRD patients principally to
the aging of the general population and better treatment and survival of
patients with hypertension, diabetes and other illnesses that lead to chronic
kidney disease. In addition, improved technology has enabled older patients and
those who previously could not tolerate dialysis due to other illnesses to
benefit from this life-sustaining treatment. The Company believes these trends
will result in continued growth in the number of ESRD patients and increased
demand for dialysis and associated nephrology services.
INDUSTRY OVERVIEW
End-Stage Renal Disease
ESRD is the state of advanced renal impairment that is irreversible and
lethal unless treated. This condition is most commonly a result of complications
associated with diabetes, hypertension, certain renal and hereditary diseases,
old age and other factors. In order to sustain life, individuals with ESRD
require either dialysis for the remainder of their lives or successful kidney
transplantation.
According to the USRDS, the total estimated direct medical payments for
ESRD exceeded $11.1 billion during 1994. Of the total direct medical payments
for ESRD, approximately $8.3 billion was paid by the federal government through
the Medicare program. As a result of legislation enacted in 1972, the federal
government provides Medicare funding for patients who are diagnosed with ESRD
regardless of their age or financial circumstances if eligible for Social
Security.
Based on Medicare ESRD enrollment data published by HCFA, the number of
ESRD patients in the United States requiring dialysis treatments has grown from
approximately 66,000 at the end of 1982 to approximately 200,000 at the end of
1995. Based on USRDS data, the ESRD incidence rate among Medicare-eligible
patients for all age groups was approximately 219 patients per million in 1993
as compared to 111 patients per million in 1984. Furthermore, USRDS data
indicates that the incidence rate in patients ages 65 to 74 increased 130% from
1984 to 1993, and in patients ages 75 and older the incidence rate increased
189% over the same period.
The Company attributes the growth in the number of ESRD patients
principally to the aging of the general population and the improved treatment
and increased survival rate of patients with diabetes, hypertension and other
illnesses that lead to ESRD. Moreover, improved dialysis technology has enabled
older patients and those who previously could not tolerate dialysis due to other
illnesses to benefit from this treatment.
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Treatment Options for End-Stage Renal Disease
Currently, the three treatment options for ESRD are (i) hemodialysis, which
is performed either in a hospital setting, an outpatient facility or a patient's
home, (ii) peritoneal dialysis, which is generally performed in the patient's
home, and (iii) kidney transplant surgery. According to HCFA data, in 1995
approximately 83% of patients on dialysis in the United States received
outpatient hemodialysis treatment and approximately 17% received hemodialysis or
peritoneal dialysis in their homes.
- Hemodialysis is the most common form of ESRD treatment and 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 a device to control external blood flow and to
monitor certain vital signs of the patient. 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 fluid contained in the blood cross the membrane
into the dialysis fluid. Hemodialysis treatment usually requires
approximately four hours and is administered three times per week for
the life of the patient pursuant to a nephrologist's plan of care.
- Peritoneal dialysis is generally performed by the patient at home and
uses the patient's peritoneal, or abdominal, cavity to eliminate
fluids and toxins in the patient's blood. Although there are several
variations of peritoneal dialysis, continuous ambulatory peritoneal
dialysis ("CAPD") and continuous cyclic peritoneal dialysis ("CCPD")
are the most common. CAPD uses a sterile dialysis solution which is
introduced through a surgically implanted catheter into the patient's
peritoneal cavity. Toxins in the blood continuously cross the
peritoneal membrane into the dialysis solution. After several hours,
the patient drains the used solution and replaces it with fresh
solution. CCPD is performed in a manner similar to CAPD, but utilizes
a mechanical device to cycle dialysis solution through the peritoneal
membrane while the patient is sleeping or at rest. Patients treated at
home are monitored monthly either through a visit from a staff person
from a designated outpatient center or by the patient visiting the
center.
- Kidney transplantation, when successful, is the most desirable form of
therapeutic intervention. However, the shortage of suitable donors
severely limits the availability of this surgical procedure as a
treatment option. Approximately 6% of patients with ESRD undergo
kidney transplantation annually. Typically, transplant surgery is
performed by transplant surgeons and not nephrologists.
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Ancillary Services
Nephrologists provide ancillary services to ESRD patients, the most
significant of which is the administration of erythropoietin ("EPO"). EPO is a
bio-engineered protein that mimics a hormone produced in a normal kidney by
stimulating the production of red blood cells. EPO is utilized in connection
with all forms of dialysis to treat anemia, a medical complication experienced
by almost all ESRD patients. EPO reduces or eliminates the need for blood
transfusions in these patients. Other ancillary services provided by
nephrologists to or in connection with ESRD patients may include but are not
limited to (i) certain laboratory tests required by Medicare to determine the
effectiveness of dialysis treatments, (ii) intradialytic parenteral nutrition
("IDPN"), which are nutrients added to a patient's blood during hemodialysis,
(iii) studies to test the degree of a patient's bone deterioration, an ESRD
complication, (iv) electrocardiograms, (v) nerve conduction studies to test for
deterioration of a patient's nerves, another ESRD complication, (vi) Doppler
flow testing for the effectiveness of the patient's vascular access for
dialysis, and (vii) blood transfusions.
Nephrology Practice
Caring for ESRD patients is the primary clinical activity of nephrologists.
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. The Company believes that while
some nephrologists practice independently or are members of multi-specialty
groups, most nephrologists practice in small single-specialty groups. Nephrology
groups typically provide services in relatively large geographic areas, and it
is common for a large geographic area to be served by a single nephrology group.
Most nephrologists also have a significant office practice and consult on
numerous hospitalized patients who are not on dialysis. A nephrologist typically
derives income from services rendered (i) during office visits, (ii) for the
treatment of patients in acute care hospitals and (iii) for the treatment of
patients receiving dialysis services. Medicare reimburses nephrologists based on
a fixed fee per month for outpatient services rendered in treating ESRD patients
and based on designated rate schedules for services to ESRD patients who are
hospitalized.
BUSINESS STRATEGY
Renal Care Group's objective is to develop fully integrated nephrology
provider networks to assume and manage the clinical and financial risk
associated with providing renal disease management services on a capitated
basis. The Company seeks to achieve this objective by (i) acquiring, developing
and managing outpatient and medical center-based dialysis centers, (ii)
integrating its dialysis centers with affiliated nephrology practices, (iii)
developing a protocol-driven ESRD management model to enhance clinical outcomes
and (iv) providing appropriate ancillary services to ESRD patients. The Company
believes an integrated network of nephrologists and dialysis centers, combined
with the Company's clinical expertise, management experience and access to
capital, will provide significant advantages to patients and third-party
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payors by improving the quality of care while reducing the overall costs
associated with treating patients with all forms of kidney disease, including
those with ESRD. Following is a discussion of the key components of the
Company's growth strategy.
ACQUISITION AND DEVELOPMENT ACTIVITIES
In February 1996, the Company commenced its business with the simultaneous
acquisition of the five Founding Companies: Kidney Care, Inc. and Medical
Enterprises Ltd. ("MEL" and collectively "Kidney Care"); D.M.N. Professional
Corporation ("DMN"); Tyler Nephrology Associates ("Tyler"); Kansas Nephrology
Association ("Kansas"); and Renal Care Group, Inc., a Tennessee corporation
("Tennessee") (the "Combination"). At the time of the Combination, the Founding
Companies had an aggregate of 41 dialysis centers serving approximately 2,663
patients in eight states. The aggregate consideration paid by the Company in the
Combination was approximately 4,834,000 shares of Common Stock with an aggregate
value at the time of the Combination of approximately $87.0 million, $32.8
million in cash, $7.3 million in notes payable and $13.8 million of assumed
debt.
In April 1996, the Company entered into an agreement to operate and
manage the outpatient dialysis activities of The Cleveland Clinic Foundation
located in Cleveland, Ohio. The Cleveland Clinic Foundation operates two
dialysis facilities staffed by 11 nephrologists serving approximately 370
patients.
In April 1996, the Company completed a merger with Main Line Suburban
Dialysis Centers, Inc. ("Main Line") based in Wynnewood, Pennsylvania, which
currently operates five dialysis centers serving approximately 350 patients in
the suburban Philadelphia area. The Company acquired Main Line in exchange for
shares of Common Stock with an aggregate value of approximately $18.2 million
at the time the Company and Main Line entered into the merger agreement. The
merger was accounted for as a pooling of interests.
In September 1996, the Company completed a merger with RenalWest, L.C.
("RenalWest") which has 18 affiliated nephrologists and operates 19 freestanding
hemodialysis centers and three home peritoneal dialysis centers serving
approximately 1,260 patients in the state of Arizona. RenalWest also provides
inpatient dialysis services to 16 acute care hospitals and staff-assisted
dialysis services to 37 skilled nursing facilities. The Company acquired
RenalWest in exchange for shares of Common Stock with an aggregate value of
approximately $72.0 million at the time the Company and RenalWest entered into
the merger agreement. The merger was accounted for as a pooling of interests.
In October 1996, the Company acquired a dialysis company in Anniston,
Alabama consisting of two facilities, and began managing, with the right to
develop and own, a dialysis facility in Bay City, Texas, which together serve an
aggregate of approximately 200 patients.
In November 1996, the Company acquired substantially all of the assets of
the Watson Wise Dialysis Center of St. Joseph's Hospital and Health Center of
Paris, Texas, which serves
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approximately 100 patients. In addition, acute in-patient dialysis services will
be provided to St. Joseph's Hospital by the Company.
In December 1996, the Company formed a joint venture with The Cleveland
Foundation and MetroHealth Systems, Cleveland Ohio to operate four outpatient
facilities which expects to serve approximately 450 patients in the Cleveland
metropolitan area.
In January 1997, the Company exercised an option to acquire the assets
of a laboratory from Kidney Care, Inc.
In March 1997, the Company announced that it had acquired substantially
all of the assets of seven federated dialysis facilities in Central Indiana:
Eastern Indiana Kidney Center, Richmond Indiana; Southeastern Indiana Kidney
Center, Greensburg, Indiana; Saint Joseph Dialysis Center, Kokomo, Indiana; and
Indiana Kidney Center, Indiana Kidney Center South, St. Vincent Dialysis Center
and St. Vincent Dialysis Center West, all in Indianapolis, Indiana. The
facilities combined currently provide treatment to approximately 600 patients
as well as acute, inpatient dialysis treatment services to four local
hospitals. The consideration for the purchase transaction; excluding working
capital acquired consisted of cash of approximately $24,800,000 and $7,200,000
of restricted common stock.
OPERATIONS
Location, Capacity and Use of Facilities
Renal Care Group operates 81 outpatient dialysis centers in 12 states with
64 affiliated nephrologists and 1,294 certified dialysis stations, excluding 10
centers managed by the Company. The Company leases 61 centers and owns 20
centers. The Company also provides inpatient dialysis services to 45 acute care
hospitals and 37 skilled nursing facilities. Excluding managed centers, 703,549
hemodialysis treatments were provided at the Company's facilities during the
year ended December 31, 1996.
The Company estimates that on average its centers were operating at
approximately 60% of capacity as of December 31, 1996, based on the assumption
that a dialysis center is able to provide up to three treatments a day per
station, six days a week. The Company believes it may increase the number of
dialysis treatments at its centers without making additional capital
expenditures.
Operation of Facilities
Renal Care Group's dialysis centers provide outpatient hemodialysis and
related services to ESRD patients in a convenient setting. A majority of the
Company's centers utilize volumetric dialysis equipment that accommodates high
flux and high efficiency dialysis treatments. In addition to dialysis stations,
the Company's centers generally contain 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.
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Many of the Company's centers also have a designated area for training
patients in home dialysis and also offer certain amenities for the patients.
In accordance with conditions for participation in the Medicare ESRD
program, each of the Company's centers is supervised by a qualified Medical
Director. Each center is managed by an administrator, typically a registered
nurse, who is responsible for the day-to-day operations of the center and its
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. Each
center is staffed in a manner that allows the number of personnel to be adjusted
according to the number of patients receiving treatments.
Home Dialysis
All of Renal Care Group's centers offer various forms of peritoneal
dialysis, primarily CAPD or CCPD, and home hemodialysis. As of December 31,
1996, approximately 11% of the patients treated by the Company received home
dialysis. The Company's home dialysis services consist of providing equipment
and supplies, training, patient monitoring and follow-up assistance to patients
who prefer and are able to receive dialysis treatments in their homes. The
Company intends to expand its home dialysis program, which the Company believes
is important to the development of a fully integrated nephrology services
company.
Hospital and Skilled Nursing Facility Care
Certain of Renal Care Group's centers provide in-patient dialysis services
through contracts with 45 hospitals located within their respective service
areas. Under these contracts, the Company's centers typically provide equipment,
supplies and personnel required to perform hemodialysis and peritoneal dialysis
in connection with the hospital's inpatient services. Such inpatient dialysis
services are 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 require hospitalization for other reasons.
The terms of these contracts are individually negotiated and vary by contract.
Most of the Company's hospital contracts specify predetermined fees per dialysis
treatment, although the Company believes that such fees may be subject to
negotiation in the future as the provision of health care services becomes
increasingly influenced by managed care and subject to capitated arrangements.
The Company also provides staff-assisted dialysis services to 37 skilled
nursing facilities in the Phoenix, Arizona metropolitan area. A central office
dispatches equipment, supplies and personnel required to perform dialysis
treatments in connection with the extended care services of skilled nursing
facilities.
University Division
Renal Care Group currently manages the dialysis programs at Vanderbilt
University Medical Center, The Cleveland Clinic Foundation and Case Western
Reserve University, provides home dialysis services to a group of patients at
the University of Arkansas, provides consulting
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services to the University of Michigan Medical Center regarding its dialysis
program and is developing a dialysis center for the University of Louisville.
The Company entered in a partnership agreement with Saint Louis University
effective in October 1996, to operate outpatient dialysis facilities in
the Saint Louis area. The Company intends to expand its university and medical
center management program and is currently in various stages of discussions
concerning a number of such programs. In addition, the Company also intends to
acquire or develop university and medical center dialysis centers. The Company
believes that its affiliation with leading nephrology groups will enhance its
ability to attract and maintain agreements to manage the dialysis programs of
universities and medical centers. Furthermore, the Company expects these
affiliations will expand the Company's patient base, provide opportunities for
the development of new centers and access to highly qualified physicians to act
as Medical Directors. Furthermore, as a result of these affiliations, the
Company will have access to outcomes research which, will support the Company's
quality initiative.
Relationships with Nephrologists; Medical Directors
A key factor in the success of a dialysis center is its relationship with
local nephrologists. An ESRD patient generally seeks treatment at a center where
the patient's nephrologist has practice privileges. Consequently, Renal Care
Group relies on its ability to attract and to meet the needs of referring
nephrologists in order to receive and gain new patients.
The Company has engaged practicing, board-eligible or board-certified
nephrologists to serve as Medical Directors for each of its centers. Each of the
Company's Medical Directors provides services pursuant to an independent
contractor agreement between the Company and the physician or his or her
professional practice group. Medical Directors' responsibilities primarily
consist of 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. Coordination
of the delivery of care is important in maintaining ESRD patients' general level
of health and in avoiding medical complications that might necessitate
hospitalization.
The Company typically enters into Medical Director agreements with
nephrologists at each of its centers containing terms of seven years with
three-year renewal options. The Company's Medical Director agreements typically
provide for its Medical Directors to be paid fees for their supervisory services
and include non-competition clauses with specific limitations on their ability
to compete with the Company for certain periods of time and in certain
geographic areas. In certain instances, in consideration for such
non-competition agreements, the Company has granted options to purchase shares
of Common Stock to the physicians serving as Medical Directors or their
professional practice groups.
Nephrology Practice Management
Renal Care Group currently provides certain practice management services to
the practices of 23 of the Company's nephrologists. Under these arrangements,
the Company typically provides to the physicians, in exchange for a management
fee, certain equipment, supplies and
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administrative services, including billing, collection, accounting, human
resources and information systems. Each physician retains exclusive control of
the provision of medical services to his or her patients.
QUALITY ASSURANCE
In order to optimize therapy and improve outcomes, Renal Care Group
established a Medical Advisory Board to maintain quality criteria for its
clinical operations, monitor patient outcomes in all of its centers, and to
develop a protocol-driven clinical management model and involves its patients
in their own care.
Medical Advisory Board
The Company's Medical Advisory Board meets quarterly to monitor the
development and implementation of clinical protocols and to review patient
outcomes. The Medical Advisory Board is chaired by Raymond Hakim, M.D., Ph.D.,
the Company's Chief Medical Officer, and is composed of affiliated
nephrologists. In addition, the Medical Advisory Board is responsible for
establishing, implementing and monitoring the Company's quality assurance
policies and procedures, identifying therapy deficiencies, and evaluating
technological changes. The Medical Advisory Board's principal task is the
development of a protocol-driven clinical management model that will enable the
Company to manage effectively the financial risk associated with ESRD
capitation.
Quality Criteria
The Company actively involves its Medical Advisory Board in the
oversight of quality criteria for both owned centers and its acquisition
candidates. Regular evaluation of the prescribed dialysis treatments and the key
physiological parameters of patients constitutes part of the continuous quality
improvement that is the Company's primary clinical objective. The Company
employs a registered nurse as a corporate Quality Assurance Coordinator to
oversee the Company's continuous quality assurance program. In addition, each
center has a quality assurance committee that typically includes the Medical
Director, the center administrator and nurses, as well as other technical
personnel. This committee meets regularly to monitor the quality of care in the
center and to assure compliance with applicable regulations.
Outcomes Data
The Company believes that an important factor in the successful management
of ESRD is access to a broad database of treatment-specific outcomes information
from which clinical pathways may be defined. The Quality Assurance Coordinator
oversees the collection of patient outcomes and cost data in the Company's
centers to assist in implementing clinical pathways to enhance patient outcomes
while reducing the cost of care. The Company believes that the implementation of
such clinical pathways is necessary to improve the overall quality and operating
efficiencies of its dialysis centers and to contract more effectively with
payors in a health care environment increasingly influenced by managed care.
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Patient Involvement
The Company also attempts to ensure quality care by instructing all ESRD
patients before and after the initiation of dialytic therapy on methods for
participating in their own care to the fullest extent possible. In addition, in
some of the Company's centers, "self-care" units are formed in which
self-reliance is fostered through instruction and support.
REIMBURSEMENT
Sources of Net Patient Revenue
The following table sets forth information regarding the percentages of
Company net patient revenues:
YEAR ENDED DECEMBER 31,
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1994 1995 1996
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Medicare 68% 68% 68%
Medicaid 8 7 6
Private and other payors 18 20 21
Hospital inpatient dialysis services 6 5 5
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Total 100% 100% 100%
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The Social Security Act provides for Medicare coverage for certain
individuals who are medically determined to have ESRD. Once an individual is
medically determined to have ESRD, the Social Security Act specifies that one of
two conditions must be met before entitlement begins: (i) a regular course of
dialysis must begin, or (ii) a kidney transplant must be performed. The Social
Security Act provides that entitlement begins the third month after the month in
which a regular course of renal dialysis is initiated. ESRD is currently defined
in federal regulations as that stage of kidney impairment that appears
irreversible and permanent and requires a regular course of dialysis or kidney
transplantation to maintain life.
Under the Medicare ESRD program, the reimbursement rates per treatment are
fixed but have been adjusted from time to time by legislation. Although this
form of reimbursement limits the allowable charge per treatment, it provides the
Company with predictable and recurring per treatment revenue. The Medicare
composite rate, set by HCFA, governs the Medicare reimbursement available for a
designated group of dialysis services, including the dialysis treatment,
supplies used for such treatment, certain laboratory tests and medications. The
Medicare composite rate is subject to regional differences based on certain
factors, including labor costs. Certain other services and drugs are eligible
for separate reimbursement under Medicare and are not part of the composite
rate, including specific drugs such as EPO and some physician ordered tests
provided to dialysis patients. The Company generally submits Medicare claims
monthly and is usually paid within 30 days of the submission.
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Medicare Reimbursement Rates
The Medicare composite rate for outpatient dialysis services currently
averages $126 per treatment in free standing facilities and may vary depending
on regional wage differences. Medicare reimbursement rates are adjusted
periodically based on certain factors, including legislation, executive and
congressional budget reduction and control processes, inflation and costs
incurred in rendering the services. In the past, adjustments in the composite
rate have had little relationship to the cost of conducting business.
The Medicare ESRD composite reimbursement 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
composite reimbursement rate from a fixed fee of $138 per treatment in 1983 to
approximately $125 per treatment in 1986. Congress increased the ESRD composite
reimbursement rate, effective January 1991, resulting in an average rate of $126
per treatment.
The Medicare ESRD composite reimbursement rate has been the subject of a
number of reports and studies. In April 1991, the Institute of Medicine, an
organization chartered by the National Academy of Sciences and an advisor to the
federal government, released a report recommending that the composite rate be
adjusted for the effects of inflation. In March 1996, the Prospective Payment
Assessment Commission ("PROPAC") recommended that the ESRD composite
reimbursement rate be increased by 2.0% for freestanding facilities for fiscal
year 1997. In August 1996, and in response to the March 1996 report of PROPAC,
HCFA announced that an increase in the composite rate may be appropriate within
the next few years. In making this announcement HCFA also stated that any rate
increase must be considered in the context of Medicare budgetary concerns.
Nevertheless, HCFA stated that it may recommend an update to the composite rate
for fiscal year 1998. In January 1996, HCFA announced a three-year demonstration
project involving the enrollment of ESRD patients in managed care organizations.
The demonstration project would adjust payment rates based upon treatment
status, age groups, and the cause of renal failure. Based upon the results of
the demonstration project, HCFA has stated it would make recommendations to
Congress concerning the appropriateness of paying for ESRD services on a
capitated basis. Congress is not required to implement these recommendations and
could either raise or lower the reimbursement rate. During the last
congressional session, there were various proposals for the reform of numerous
aspects of Medicare. The Company is unable to predict what, if any, future
changes may occur in the Medicare composite reimbursement rate. Any reductions
in the Medicare composite reimbursement rate could have a material adverse
effect on the Company's results of operations, financial condition and business.
From June 1989 through December 1990, the Medicare ESRD program added $40
per administration of EPO to the dialysis center's allowable composite rate for
dosages of up to 9,999 units per administration. For higher dosages, an
additional $30 per treatment was allowed. Effective January 1991, the Medicare
allowable prescribed rate for EPO was changed to $11 per 1,000 units, rounded to
the nearest 100 units. Subsequently, legislation was enacted to reduce the
Medicare prescribed rate for EPO by $1 to $10 per 1,000 units for administration
of EPO in 1994.
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For subsequent periods, the Secretary of the Department of Health and Human
Services ("HHS") is authorized to determine an appropriate rate, which currently
is $10 per 1,000 units administered.
Medicaid Reimbursement
Medicaid programs are state administered programs partially funded by the
federal government. These programs are intended to provide coverage for patients
whose income and assets fall below state defined levels and who are otherwise
uninsured. The programs also serve as supplemental insurance programs for the
Medicare co-insurance portion and provide certain coverages (e.g., oral
medications) that are not covered by Medicare. State regulations generally
follow Medicare reimbursement levels and coverages without any coinsurance
amounts. Certain states, however, require beneficiaries to pay a monthly share
of the cost based upon levels of income or assets. The Company is a licensed
ESRD Medicaid provider in all states in which it does business.
Private Reimbursement/Acute Care Contracts
The Company receives reimbursement from private payors for ESRD treatments
prior to Medicare becoming a patient's primary payor at rates significantly
higher than the per treatment rate set by Medicare. After Medicare becomes a
patient's primary payor, private secondary payors generally reimburse the
Company for 20% of the Medicare per treatment rate. The Company has negotiated
managed care contracts with certain payors at rates that are higher than the
Medicare rate. The Company also receives payments from hospitals under 45 acute
care contracts at rates significantly higher than the Medicare composite rate.
GOVERNMENT REGULATION
General
The Company's dialysis center operations are subject to extensive
governmental regulation at the federal, state and local levels. These
regulations require the Company to meet various standards relating to, among
other things, the management of centers, personnel, maintenance of proper
records, equipment and quality assurance programs. The dialysis centers are
subject to periodic inspection by state agencies and other governmental
authorities to determine if the premises, equipment, personnel and patient care
meet applicable standards. To receive Medicare reimbursement, the Company's
dialysis centers must be certified by HCFA as meeting certain Medicare
conditions of coverage. All of the Company's dialysis centers are so certified.
HCFA has announced that it is in the process of revising the current Medicare
Conditions of Coverage for ESRD services. The Company is unable to predict what,
if any, future changes may occur in the Medicare Conditions of Coverage for ESRD
facilities.
Any changes to the Medicare Conditions of Coverage, or any loss by the
Company of its federal certifications, its authorization to participate in the
Medicare or Medicaid programs or its licenses under the laws of any state or
other governmental authority from which a substantial portion of its revenues is
derived or a change resulting from health care reform reducing dialysis
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reimbursement or reducing or eliminating coverage for dialysis services would
have a material adverse effect on the Company's operations, revenues and net
earnings. To date, the Company and its subsidiaries have maintained their
licenses and their Medicare and Medicaid authorizations. The Company believes
that the health care services industry will continue to be subject to intense
regulation at the federal, state and local levels, the scope and effect of which
cannot be predicted. No assurance can be given that the activities of the
Company will not be reviewed and challenged by government regulators or that
health care reform will not result in a material adverse change to the Company.
Furthermore, the Company potentially could be held responsible for actions
previously taken by entities it has acquired. As part of its announced
regulatory agenda for 1996, HHS intends to issue a proposed rule that would
automatically assign to the new owner of a Medicare provider or supplier
liability for any Medicare overpayments, violations, or sanctions incurred by or
imposed on, the previous owner. There can be no assurance that previous
operating practices of the Company's acquisitions will not be reviewed and
challenged by government regulators or that the Company will not be liable for
such practices.
Fraud and Abuse
The Company's operations are subject to the illegal remuneration provisions
of the Social Security Act (sometimes referred to as the "anti-kickback"
statute) and similar state laws that impose criminal and civil sanctions on
persons who knowingly and willfully solicit, offer, receive or pay any
remuneration, whether directly or indirectly, in return for, or to induce, the
referral of a patient for treatment, or, among other things, the ordering,
purchasing, or leasing, of items or services that may be paid for in whole or in
part by Medicare, Medicaid or similar state programs.
Federal enforcement officials may attempt to impose civil false claims
liability with respect to claims resulting from an anti-kickback violation.
Violations of the federal anti-kickback statute are punishable by criminal
penalties, including imprisonment, civil penalties, fines and exclusion of the
provider from future participation in the Medicare or Medicaid programs. Civil
suspension from participation in Medicare or Medicaid for anti-kickback
violations also can be imposed through an administrative process, without the
imposition of civil monetary penalties. Some state statutes also include
criminal penalties. While the federal anti-kickback statute expressly prohibits
transactions that have traditionally had criminal implications, such as
kickbacks, rebates or bribes for patient referrals, its language has been
construed broadly and has not been limited to such obviously wrongful
transactions. Court decisions state that, under certain circumstances, the
statute is also violated when one purpose (as opposed to the "primary" or a
"material" purpose) of a payment is to induce referrals. Congress has
frequently considered federal legislation that would expand the federal
anti-kickback statute to include the same broad prohibitions regardless of
payer source. In fact, effective January 1, 1997, the Health Insurance
Portability and Accountability Act of 1996 expands the anti-kickback statute to
certain other "Federal Health Care Programs," such as CHAMPUS.
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In July 1991 and in November 1992, the Secretary of HHS published
regulations that create exceptions or "safe harbors" for certain business
transactions. Transactions that satisfy the criteria under applicable safe
harbors will be deemed not to violate the federal anti-kickback statute.
Transactions that do not satisfy all elements of a relevant safe harbor do not
necessarily violate the statute, although such transactions may be subject to
scrutiny by enforcement agencies. The Company seeks to structure its various
business arrangements to satisfy as many safe harbor elements as possible under
the circumstances, although not all of the Company's arrangements satisfy all of
the elements of a safe harbor. Although the Company has never been challenged
under any anti-kickback statute and the Company believes it has a reasonable
basis for concluding that it complies in all material respects with the federal
anti-kickback statute and all other applicable related laws and regulations,
there can be no assurance that the Office of the Inspector General (the "OIG")
within HHS or other governmental agency will not take a contrary position or
that the Company will not be required to change its practices in a manner which
will cause, or will not otherwise experience, a material adverse effect as a
result of any such challenge or any sanction which might be imposed.
In July 1994, the Secretary of HHS proposed a rule that would modify the
original set of safe harbor provisions to give greater clarity to the rule
making's original intent. The proposed rule would make changes to the safe
harbors on personal services and management contracts, small entity investment
interests and space rentals, among others. The Company does not believe that its
current operations, as set forth above, would change if the proposed rule were
adopted in the form proposed. However, the Company cannot predict the outcome of
the rule making process or whether changes in the safe harbors rule will affect
the Company's position with respect to the federal anti-kickback statute.
The Company believes that the current arrangements of the Company with
nephrologist owners, Medical Directors, laboratories, IDPN suppliers, hospitals,
and other persons or entities who either refer patients to the Company's
dialysis centers or from whom the Company purchases items or services generally
are in material compliance with the federal anti-kickback statute. Specifically,
the Company believes that such arrangements now generally provide, and will
provide for reasonable compensation to or by the Company for the items and
services it buys from or furnishes to such persons or entities. Moreover, the
Company intends that IDPN therapy will be furnished in accordance with specified
utilization protocols consistent with Medicare coverage guidelines, and only to
patients for whom it is deemed medically necessary, as demonstrated by
physician-authorized Certificates of Medical Necessity. However, there can be no
assurance that the Company's future arrangements will not be challenged or
subject to sanctions for any of the Founding Companies' past arrangements. Any
such challenge or change, including any related sanctions which might be
assessed, could have a material adverse effect on the Company's operations, net
revenue and earnings.
Stark II
Provisions enacted as part of the Omnibus Reconciliation Act of 1989 and
the Omnibus Reconciliation Act of 1993 ("Stark I" and "Stark II," respectively)
restrict physician referrals for certain designated health services to entities
with which a physician or an immediate family
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member has a "financial relationship." The entity is prohibited from claiming
payment under the Medicare or Medicaid programs for services rendered pursuant
to a prohibited referral and is liable for the refund of amounts received
pursuant to prohibited claims. The entity also can incur civil penalties of up
to $15,000 per improper claim and can be excluded from participation in the
Medicare or Medicaid programs. Provisions enacted as part of Stark I imposing
restrictions to clinical laboratory services became effective in 1992. Stark II
provisions applicable to "designated health services" that may be relevant to
the Company became effective in January 1995.
A "financial relationship" under Stark II is defined as an ownership or
investment interest in, or a compensation arrangement between, the physician (or
an immediate family member) and the entity. The Company has entered into
compensation agreements with its Medical Directors or their respective
professional practices. The Medical Directors or their professional practices
also will own shares, and options to purchase shares, of Common Stock.
Accordingly, the Medical Directors will have a "financial relationship" with the
Company for purposes of Stark II.
For purposes of Stark II, "designated health services" include, among other
things: clinical laboratory services; parenteral and enteral nutrients,
equipment and supplies, including IDPN; prosthetics; orthotics; prosthetic
devices; physical and occupational therapy services; outpatient prescription
drugs; durable medical equipment; and inpatient and outpatient hospital
services. Dialysis is not a designated health service under Stark II. However,
the Stark II definition of "designated health services" includes items and
services that are components of dialysis or that may be provided to a patient in
connection with dialysis, if such items and services are considered separately
rather than collectively as dialysis. Under the final Stark I regulations
published in August 1995, HCFA provided an exception from Stark I for clinical
laboratory services reimbursed under the Medicare "composite rate" for dialysis.
The Company believes it likely that, when final Stark II regulations are
published, they will contain a similar exception for "designated health
services" reimbursed under the composite rate. However, there can be no
assurance that HCFA will adopt such a position. Even if the final Stark II
regulations contain such an exception, the Company's provision of, or
arrangement and assumption of financial responsibility for, services and items
including, but not limited to, outpatient prescription drugs, including
EPO, enteral and parenteral nutrients, such as IDPN, clinical laboratory
services,in-center dialysis services and supplies, home dialysis supplies and
equipment, and services to hospital inpatients and outpatients, are reimbursed
separate from the Medicare composite rate and therefore may be construed as
"designated health services" within the meaning of Stark II.
Although the Company has learned that HCFA officials responsible for
drafting implementing regulations for Stark II have tentatively taken the
informal position that administration of certain prescription drugs that would
not be needed but for a patient's need for dialysis (e.g., EPO) will not be
treated as outpatient prescription drugs subject to the Stark II prohibition on
self-referral, this informal position is not binding on HCFA, and there can be
no assurance that final Stark II regulations will adopt such a position. With
respect to the other items and services provided by the Company that are likely
to be deemed to be "designated health services" subject to the Stark II
prohibition, the language of Stark II and of the Stark I final regulation
suggest that the Company will not be permitted to offer such services in the
absence of a Stark II exception.
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Stark II contains exceptions for ownership or compensation arrangements
that meet certain specific criteria set forth in the statute or in forthcoming
regulations. With respect to ownership, certain qualifying in-office physician
or ancillary services provided by or under the supervision of physicians in a
single group practice are exempt from both ownership and compensation
arrangement restrictions. With respect to compensation arrangements, exceptions
are available for certain qualifying arrangements in the following areas: (i)
bona fide employment relationships; (ii) personal services contracts; (iii)
space and equipment leasing arrangements; (iv) certain group practice
arrangements with a hospital that were in existence prior to December 1989; and
(v) purchases by physicians of laboratory services, or of other items and
services at fair market value. In order to be exempt from the Stark II
self-referral prohibition, it is necessary to meet all of the criteria of a
particular exception for each financial relationship existing between an entity
and a referring physician. The Company believes that several of its financial
relationships with referring physicians will meet the criteria for an exception.
For example, the Company believes, based on the language of Stark II, that its
agreements with Medical Directors or their professional practices materially
satisfy the exception for compensation pursuant to a personal services contract.
Similarly, the Company believes, based in part on the legislative history to
Stark II, that it has a reasonable basis for concluding that its contractual
relationships with hospitals for acute inpatient dialysis services should be
deemed to satisfy the criteria for the exceptions for personal services or
leased equipment arrangements. In the case of certain other financial
arrangements, however, there may be no exception available.
Stark II also includes an exception for a physician's ownership or
investment interest in securities listed on an exchange or quoted on the Nasdaq
Stock Market which, in either case, meet certain criteria. Such criteria include
a requirement that the issuer of such securities have at least $75.0 million in
stockholder equity at the end of the issuer's most recent fiscal year or on
average during the previous three fiscal years. Upon closing of the secondary
offering on November 22, 1996, the Company exceeded stockholders' equity of
$75.0 million.
Because physicians under contract with the Company may refer patients to
hospitals with which the Company has an acute inpatient dialysis service
arrangement, Stark II may be interpreted by HHS to apply to the Company's acute
dialysis arrangements with hospitals. However, Stark II contains exceptions for
certain equipment rental and personal services arrangements, and the Company
believes it has a reasonable basis for concluding that its contractual
arrangements with hospitals for acute inpatient dialysis services are in
material compliance with the requirements of such exceptions to Stark II.
Consequently, if it were to apply, Stark II may require the Company to
restructure certain existing compensation agreements with its Medical Directors
or, in the alternative, to refuse to accept referrals for designated health
services from such physicians. Moreover, since Stark II prohibits Medicare or
Medicaid reimbursement of items or services provided pursuant to a prohibited
referral, and imposes substantial civil monetary penalties on entities which
present or cause to be presented claims for reimbursement in such cases, the
Company could be required to repay amounts reimbursed for items and services
that HCFA determines to have been furnished in
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violation of Stark II, and could be subject to substantial civil monetary
penalties, either or both of which could have a material adverse effect on the
Company's operations, net revenue or earnings. The Company believes that if
Stark II is interpreted to apply to the Company's operations, the Company will
be able on a prospective basis to bring its financial relationships with
referring physicians into material compliance with the provisions of Stark II,
including relevant exceptions, although prospective compliance would not affect
amounts or penalties determined to be owed for past conduct, and there can be no
assurance that such prospective compliance, if possible, will not have a
material adverse effect on the Company's operations, net revenue or earnings. If
Stark II is interpreted by HHS to apply to the Company and the Company is
determined to be liable for past violations of Stark II by itself or one or more
of the entities it has acquired, the application of Stark II could have a
material adverse effect on the Company.
Health Care Legislation
Because the Medicare program represents a substantial portion of the
federal budget, Congress takes action in almost every legislative session to
modify the Medicare program for the purpose of reducing the amounts otherwise
payable by the program to health care providers for a number of reasons,
including deficit reduction. Legislation or regulations may be enacted in the
future that may significantly modify the Medicare ESRD program or substantially
reduce the amount paid for the Company's services. For example, the 1995 budget
reconciliation bill sent by Congress to the President (and subsequently vetoed
by the President) proposed extending the period during which Medicare payment
for ESRD would be secondary to a patient's employer group health plan from 18
to 30 months. In addition, the conference report to the reconciliation bill
called for HHS to report to Congress not later than December 31, 1999 with
recommendations on expanding the definition of individuals eligible to enroll
in the bill's proposed MedicarePlus managed care plans to include ESRD
patients, and the President's response would have immediately made such persons
eligible for participation in such plans.
The Health Insurance Portability and Accountability Act of 1996
("Kennedy-Kassebaum legislation"), signed into law in August 1996, will, among
other things, provide for insurance portability for individuals who lose or
change jobs, limit exclusions for preexisting conditions, and establish a pilot
program for medical savings accounts. In addition, this legislation also greatly
expands federal efforts at combating health care fraud and abuse by making
numerous amendments to the Social Security Act and the federal criminal code.
Among other things, the new legislation creates a new "Health Care Fraud and
Abuse Control Account," provides for the issuance of "advisory opinions" by the
OIG regarding the application of the anti-kickback statute, extends certain
criminal penalties for Medicare and Medicaid fraud to other federal health care
programs, expands the exclusion authority of the OIG, extends Medicare and
Medicaid civil monetary penalty provisions to other federal health care
programs, increases the amounts of civil monetary penalties, and establishes a
criminal health care fraud statute.
From time to time, the Company pays Medicare supplemental insurance
premiums for patients with financial need. The provisions of the
Kennedy-Kassebaum legislation issued January 1, 1997 may limit the Company's
ability to pay for policy premiums for patients even with proven financial
hardship. However, the Company believes that the bill did not intend to limit
the
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Company's ability to pay premiums for insurance coverage to third-party or
governmental payors. Furthermore, the Company believes that the bill may be
amended to include provisions for the payment of premiums on behalf of ESRD
patients or allow the Company to make grants to a foundation that may provide
for such premium payments on behalf of ESRD patients.
Furthermore, statutes or regulations may be enacted which impose additional
requirements on the Company to maintain eligibility to participate in the
federal and state payment programs. Such new legislation or regulations may have
a material adverse effect on the Company's operations, revenue or earnings.
COMPETITION
The dialysis industry is fragmented and highly competitive. Competition for
qualified physicians to act as Medical Directors is also significant. According
to HCFA, there were in excess of 2,800 dialysis centers in the United States at
the end of 1995. The Company believes that approximately 45% were owned by
multi-center dialysis companies, 25% were owned by independent physicians and
other companies and 30% were hospital-affiliated centers. Certain of the
Company's competitors have substantially greater financial resources than the
Company and may compete with the Company for acquisitions, development and/or
management of dialysis centers and nephrology practices. The Company believes
that competition for acquisitions has increased the cost of acquiring dialysis
centers and will likely increase the cost of acquiring nephrology practices. The
Company may also experience competition from centers established by former
Medical Directors or other referring physicians. There can be no assurance that
the Company will be able to compete effectively with any such competitors.
INSURANCE
The Company maintains a $1,000,000 per occurrence general liability
insurance policy for all of its operations. To date no payments have been made
under the Company's general liability insurance policies because of any action
brought as a result of the operations of any of its facilities. The Company also
maintains insurance in amounts it deems adequate to cover professional
liability, property and casualty risks, workers' compensation and directors and
officers liability. There can be no assurance that the aggregate amount and
kinds of the Company's insurance are adequate to cover all risks it may incur or
that insurance will be available in the future.
EMPLOYEES
At December 31, 1996 the Company employed 1,640 full-time employees and 212
part-time employees. Of such full-time employees 26 were employed at the
Company's headquarters and 1,826 were employed at the Company's facilities. In
the opinion of management, employee relations are considered good.
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ITEM 2. PROPERTIES
PROPERTIES
Excluding the 10 managed centers, the Company operates 81 dialysis centers
in 12 states, of which 61 are located in leased facilities and 20 are owned. The
following is a summary of the Company's outpatient dialysis centers.
Centers
Acquired Company States Owned Managed
- ---------------- ------ ----- -------
Kidney Care Mississippi, Arkansas
Louisiana, Florida 26 -
DMN Indiana, Ohio 6 1
Tyler Texas 6 2
Kansas Kansas, Oklahoma 10 -
Tennessee Tennessee, Ohio, Kentucky
Missouri - 7
Main Line Pennsylvania 5 -
The Nephrology Center Florida, Alabama 6 -
RenalWest Arizona 22 -
-- --
81 10
Certain of the premises are leased from physicians who practice at the
center and who are stockholders of the Company. The Company's leases generally
have terms ranging from one to 15 years and typically contain renewal options.
The sizes of the Company's centers range from approximately 400 to 17,000
square feet. The Company leases office space in Nashville, Tennessee for its
corporate headquarters and university division under leases that expire in 2002
and 1999. The Company 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 the Company's dialysis centers would be 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 would be necessary for expansion or
development of a new dialysis center. The Company generally owns the equipment
used in its outpatient centers. The Company considers its equipment to generally
be in good operating condition and suitable for the purposes for which it is
being used.
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ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business, including those arising from patient treatment, which the Company
believes will be covered by malpractice insurance. The Company is not currently
a party to any material legal actions.
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 1996.
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 from February 7, 1996 through December 31, 1996.
Price Range
1996 High Low
---- ------ ------
First Quarter(1) $28.75 $23.25
Second Quarter 36.00 27.75
Third Quarter 38.00 26.50
Fourth Quarter 37.50 30.63
(1) Represents trading of the Common Stock from February 7, 1996 through March
31, 1996.
HOLDERS
As of March 17, 1997, the approximate number of registered stockholders was
3,442, including 142 stockholders of record and approximately 3,300 persons or
entities holding Common Stock in nominee name.
DIVIDEND POLICY
The Company has never paid any cash dividend on its capital stock. The
Company 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
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dividends will be subject to the discretion of the Company's Board of
Directors and its review of the Company's results of operations, financial
condition, capital requirements and surplus, contractual restrictions to pay
such dividends and other factors it deems relevant.
SALES OF UNREGISTERED SECURITIES
The Company issued the following securities during the 1996 calendar year
in transactions that were not registered under the Securities Act of 1933:
(A) On February 12, 1996, the Company issued 4,834,000 shares of Common
Stock to the former owners of the Founding Companies in a private
placement pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act.
(B) On April 26, 1996, the Company issued 528,000 shares of Common Stock
to the former owners of Main Line in private placement
pursuant to the exemption from registration set forth in Section 4(2)
of the Securities Act.
(C) On July 1, 1996, the Company issued 298,775 shares of Common Stock to
the former owners of The Nephrology Centers, Inc. in a private
placement pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act.
(D) On September 30, 1996, the Company issued 2,400,000 shares of Common
Stock to the former owners of RenalWest, L.C. in a private placement
pursuant to the exemption from registration set forth in Section 4(2)
of the Securities Act.
(E) On September 30, 1996, the Company issued 70,000 shares of Common
Stock to the former owner of Northeast Alabama Kidney Center, Inc. in
a private placement pursuant to the exemption from registration set
forth in Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Historical Financial Data -- Renal Care Group, Inc. on page 24
represents the historical results of operations of the Company and includes the
results of operations of Main Line and RenalWest, which were acquired during
1996 in pooling-of-interests transactions. This information does not include the
results of operations for the Founding Companies for any periods prior to the
date of the initial public offering.
The Selected Combined and Pro Forma Financial Data -- Renal Care Group,
Inc. and Founding Companies on page 25 represents the results of operations had
the Founding Companies and the Company been combined for all periods presented
without giving effect to the initial public offering for periods prior to
February 1, 1996 except on a pro forma basis.
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The Combination was accounted for using historical cost, in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 48, because no
single owner group from any of the Founding Companies held more than 50% equity
interest in the Company as of the closing of the Company's initial public
offering. Accordingly, the Company has recorded the net assets acquired at the
Founding Companies' historical cost basis, as determined by generally accepted
accounting principles.
The Selected Historical Financial Data -- Renal Care Group, Inc. for the
years ended December 31, 1994, 1995, and 1996, is derived from audited data
included elsewhere in the Form 10-K. The unaudited combined financial data has
been prepared on the same basis as the audited consolidated financial statements
and, in the opinion of management, contain all adjustments consisting of normal,
recurring accruals necessary for a fair presentation of the combined
financial position and the combined results of operations for the periods
presented. 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
Form 10-K.
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SELECTED HISTORICAL FINANCIAL DATA -- RENAL CARE GROUP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,(1)
---------------------------
1992 1993 1994 1995 1996
------ ------- ------- ------- --------
INCOME STATEMENT DATA:
Net revenue......................................... $8,713 $18,126 $41,627 $42,971 $129,518
Patient care costs.................................. 6,309 13,034 25,003 26,908 90,122
General and administrative expenses................. 1,626 3,649 8,721 8,701 13,364
Provision for doubtful accounts..................... 170 584 1,418 2,355 2,446
Depreciation and amortization....................... 153 601 1,484 1,580 4,541
Merger expenses..................................... -- -- -- -- 1,960
------ ------- ------- ------- --------
Total operating costs and expenses.................. 8,258 17,868 36,626 39,544 112,433
------ ------- ------- ------- --------
Income from operations.............................. 455 258 5,001 3,427 17,085
Interest income (expense), net...................... (44) (128) (363) (452) 619
------ ------- ------- ------- --------
Income (loss) before income taxes................... $ 411 $ 130 $ 4,638 $ 2,975 17,704
====== ======= ======= =======
Provision for income taxes.......................... 6,958
--------
Net income.......................................... $ 10,746
========
Earnings per share.................................. $ 0.84
========
Weighted average shares outstanding................. 12,739
========
DECEMBER 31,(1)
---------------
1992 1993 1994 1995 1996
------ ------- ------- ------- --------
BALANCE SHEET DATA:
Working capital..................................... $ 774 $ 3,519 $ 3,171 $(1,418) $ 49,462
Total assets........................................ 2,613 14,393 17,318 20,765 131,812
Total debt.......................................... 367 5,248 5,420 7,340 --
Stockholders' equity................................ 1,468 4,901 5,919 4,566 93,325
- ----------
(1) The financial information for the years ended December 31, 1992, 1993, 1994
and 1995 does not include the Founding Companies. The financial information
for the year ended December 31, 1996 includes the results of operations for
the Founding Companies since February 1996 when they were acquired by the
Company simultaneously with its initial public offering.
(2) Earnings per share amounts are not presented for the years ended December
31, 1992, 1993, 1994 and 1995 as the historical results of operations of
the Company for these years consisted of non-taxed earnings from Main Line
and RenalWest which were S corporations and therefore all taxes were
payable personally by the stockholders of the respective entities.
Additionally, the entities had different equity structure from the Company
and earnings per share is not considered meaningful.
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25
SELECTED COMBINED AND PRO FORMA FINANCIAL DATA --
RENAL CARE GROUP, INC. AND FOUNDING COMPANIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,(1)
---------------------------
1992 1993 1994 1995(2) 1996(3)
------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Net revenue......................................... $64,309 $80,442 $110,670 $115,329 $135,894
Patient care costs.................................. 46,752 58,314 75,366 80,417 94,849
General and administrative expenses................. 4,423 6,799 12,616 12,866 13,797
Provision for doubtful accounts..................... 1,309 2,010 2,914 3,995 2,571
Depreciation and amortization....................... 1,895 2,416 3,414 3,661 4,715
Merger expenses..................................... -- -- -- -- 1,960
------- ------- -------- -------- --------
Total operating costs and expenses.................. 54,379 69,539 94,310 100,939 117,892
------- ------- -------- -------- --------
Income from operations.............................. 9,930 10,903 16,360 14,390 18,002
Interest income (expense), net...................... (570) (460) (646) 1,013 525
------- ------- -------- -------- --------
Income before income taxes.......................... $ 9,360 $10,443 $ 15,714 $13,377 18,527
======= ======= ======== ========
Provision for income taxes.......................... 7,025
--------
Net income (loss)................................... $ 11,502
========
Earnings per share.................................. $ 0.85
========
Weighted average shares outstanding................. 13,496
========
DECEMBER 31, (1)
----------------
1992 1993 1994 1995 1996
------- -------- ------- ------- --------
BALANCE SHEET DATA:
Working capital..................................... $ 9,638 $14,761 $18,158 $12,237 $ 49,462
Total assets........................................ 28,670 42,770 49,918 60,899 131,812
Total debt.......................................... 4,037 8,265 8,620 15,915 --
Stockholders' equity................................ 18,506 24,211 26,825 25,358 93,325
- ----------
(1) The financial information for each of the years presented represents the
results of operations of Renal Care Group and Founding Companies combined
without giving effect to the Company's initial public offering for periods
prior to February 1996.
(2) Pro forma information for the year ended December 31, 1995 excludes the
following adjustments: (a) the provision for federal and state income taxes
as if not-for-profit and S-corporations had been subject to such taxes;
(b) additional estimated corporate overhead of approximately $2.6 million
that would have been incurred had the Combination occurred at the beginning
of 1995; and (c) certain other adjustments to reflect the Combination and
the initial public offering.
(3) Pro forma information for the year ended December 31, 1996 gives effect to
the provision for federal and state income taxes as if not-for-profit and
S-corporations had been subject to such taxes and includes the results of
operations for the Founding Companies for the month of January. Net
income and earnings per share before merger expenses for the year ended
December 31, 1996 would have been $12,738,000 and $0.94, respectively.
25
26
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 is a specialized provider of nephrology services to
patients with kidney disease, including patients suffering from chronic kidney
failure. The Company commenced operations in February 1996 when it acquired the
Founding Companies simultaneous with the completion of its initial public
offering. At the time of the Combination, the Founding Companies were
established businesses engaged in the operation of outpatient dialysis centers
as separate, independent entities for an average of 14 years. For the
comparative discussion that follows, the selected Combined Financial and Pro
Forma Statements include the financial information of the Founding Companies,
Main Line, a merger which was completed in April 1996, and RenalWest, a merger
which was completed in September 1996. Both the Main Line and RenalWest mergers
were accounted for as poolings of interests. RenalWest was organized in
September 1993; consequently, the Selected Combined Financial and Pro Forma
Statements do not include a full year of operating results for that period.
Because the Founding Companies, Main Line and RenalWest were independent
entities that had not been operated by the Company's management prior to their
respective dates of acquisition, the historical results prior to such times may
not be indicative of future performance. In addition, the Selected Combined and
Pro Forma Financial Statements do not give effect to any operating efficiencies
prior to such dates of acquisition that the Company believes typically would be
attainable in an integrated organization.
The Company's net revenue has been derived primarily from the following
sources: (i) outpatient hemodialysis services; (ii) ancillary services
associated with dialysis, primarily the administration of EPO; (iii) home
dialysis services; (iv) inpatient hemodialysis services provided pursuant to
contracts with acute care hospitals and skilled nursing facilities; (v)
management contracts with hospital-based and medical university dialysis
programs; and (vi) laboratory services. ESRD patients typically receive 156
dialysis treatments per year, with reimbursement for services provided
primarily by the Medicare ESRD program based on rates that are established by
HCFA. For the year ended December 31, 1996, approximately 74% 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. For patients with
health insurance, dialysis generally is reimbursed at rates higher than
Medicare during the first 18 months of treatment, after which time 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 rate.
Because dialysis is a life-sustaining therapy used to treat this chronic
disease, utilization is predictable and is not subject to seasonal
fluctuations.
26
27
RESULTS OF OPERATIONS
As indicated elsewhere, in February 1996 the Company commenced its business
with the simultaneous acquisition of the five Founding Companies. As a result of
this Combination, a comparison of the current operations of the Company to its
historical operations is not considered meaningful. Therefore, 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 the Founding Companies had the Combination occurred for all
periods presented.
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 items:
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ----
Net Revenue $110,670 100.0% $115,329 100.0% $135,894 100.0%
Patient care costs 75,366 68.1 80,417 69.7 94,849 69.8
General and administrative
expenses 12,616 11.4 12,866 11.1 13,797 10.2
Provision for doubtful accounts 2,914 2.6 3,995 3.5 2,571 1.9
Depreciation and amortization 3,414 3.1 3,661 3.2 4,715 3.5
Merger expenses -- -- -- -- 1,960 1.4
-------- ----- -------- ----- -------- -----
Total operating costs and
expenses 94,310 85.2 100,939 87.5 117,892 86.8
-------- ----- -------- ----- -------- -----
Income from operations $ 16,360 14.8% $ 14,390 12.5% $ 18,002 13.2%
======== ===== ======== ===== ======== =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Revenue. Net revenue increased from $115,329,000 for the year ended
December 31, 1995 to $135,894,000 for the year ended December 31, 1996, an
increase of $20,565,000, or 17.8%. This increase resulted primarily from a 12.6%
increase in the number of treatments from 624,988 in the 1995 period to 703,549
in the 1996 period and a 4.3% increase in the average revenue per treatment from
$185 in the 1995 period to $193 in the 1996 period. The revenue per treatment
increase was due to an increase in EPO utilization and higher-revenue generating
acute treatments. The remaining revenue increase resulted from management fee
income.
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 $80,417,000 for the year ended December 31, 1995 to $94,849,000
for the year ended December 31, 1996, an increase of $14,432,000, or 17.9%.
This increase was due to the increase in the number of treatments, which caused
a corresponding increase in the use of drugs, supplies and labor. Patient
care costs as a percentage of net revenue increased from 69.7% in the 1995
period to 69.8% in the 1996 period. Average patient care cost per treatment
increased from $129 in the 1995 period to $135 in the 1996 period. This
increase was due to normal health care inflation, increased EPO utilization and
the increase in higher cost acute treatments.
27
28
General and Administrative Expenses. General and administrative expenses
include corporate office costs and clinic costs not directly related to the care
of patients, including clinic administration, accounting, billing and
information systems. General and administrative expenses increased from
$12,866,000 for the year ended December 31, 1995 to $13,797,000 for the year
ended December 31, 1996, an increase of $931,000, or 7.2%. The net increase was
a result of increased corporate overhead expenses partially offset by reduced
compensation to prior physician owners. General and administrative expenses as a
percentage of revenue decreased from 11.1% in the 1995 period to 10.2% in the
1996 period.
Provision for Doubtful Accounts. The provision for doubtful accounts
decreased from $3,995,000 for the year ended December 31, 1995 to $2,571,000 for
the year ended December 31, 1996. The provision for doubtful accounts as a
percentage of net revenue decreased from 3.5% in the 1995 period to 1.9% in the
1996 period. This decrease represented a return to a normal level of provision
for doubtful accounts in the 1996 period from the 1995 period when additional
expense was recorded due to a deterioration in the aging of certain accounts
receivable. The provision for doubtful accounts is a function of patient mix,
billing practices and other factors. It is the Company's practice to reserve for
doubtful accounts in the period in which revenue is recognized based on
management's estimate of the net collectibility of accounts receivable.
Depreciation and Amortization. Depreciation and amortization increased from
$3,661,000 for the year ended December 31, 1995 to $4,715,000 for the year ended
December 31, 1996, an increase of $1,054,000, or 28.8%. This increase was due to
the purchase of patient care facilities previously leased, higher than normal
replacement cost of dialysis machines and the purchase of a clinical computer
system.
Merger Expenses. Merger expenses of $1,960,000 represented legal,
accounting and employee severance and related benefits in connection with the
Main Line, RenalWest and other acquisitions.
Income from Operations. Income from operations increased from $14,390,000
for the year ended December 31, 1995 to $18,002,000 for the year ended December
31, 1996, an increase of $3,612,000, or 25.1%. Income from operations as a
percentage of net revenue increased from 12.5% in the 1995 period to 13.2% in
the 1996 period.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Revenue. Net revenue increased from $110,670,000 for the year ended
December 31, 1994 to $115,329,000 for the year ended December 31, 1995, an
increase of $4,659,000, or 4.2%. This increase resulted primarily from a 4.5%
increase in the number of treatments from 598,274 in the 1994 period to 624,988
in the 1995 period. Average revenue per treatment remained constant for the 1994
and 1995 periods at $185.
28
29
Patient Care Costs. Patient care costs increased from $75,366,000 for the
year ended December 31, 1994 to $80,417,000 for the year ended December 31,
1995, an increase of $5,051,000, or 6.7%. This increase was due to the increase
in the number of treatments, which caused a corresponding increase in the use of
drugs, supplies and labor. Patient care costs as a percentage of net revenue
increased from 68.1% in the 1994 period to 69.7% in the 1995 period. Average
patient care costs per treatment increased from $126 in the 1994 period to $129
in the 1995 period. This increase was the net result of normal health care
inflation and lower EPO utilization costs.
General and Administrative Expenses. General and administrative expenses
increased from $12,616,000 for the year ended December 31, 1994 to $12,866,000
for the year ended December 31, 1995, an increase of $250,000, or 2.0%. General
and administrative expenses as a percentage of net revenue decreased from 11.4%
in the 1994 period to 11.1% in the 1995 period. General and administrative
expenses as a percentage of net revenue decreased in the 1995 period due to
the growth in revenue.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased from $2,914,000 for the year ended December 31, 1994 to $3,995,000 for
the year ended December 31, 1995. The provision for doubtful accounts as a
percentage of net revenue increased from 2.6% in the 1994 period to 3.5% in the
1995 period. This increase was due to additional bad debt expense recorded as a
result of a revision in the estimated collectibility of accounts receivable for
RenalWest to reflect the Company's accounts receivable valuation policy.
Depreciation and Amortization. Depreciation and amortization increased from
$3,414,000 for the year ended December 31, 1994 to $3,661,000 for the year ended
December 31, 1995, an increase of $247,000, or 7.2%. Depreciation and
amortization as a percentage of net revenue increased from 3.1% in the 1994
period to 3.2% in the 1995 period.
Income from Operations. Income from operations decreased from $16,360,000
for the year ended December 31, 1994 to $14,390,000 for the year ended December
31, 1995, a decrease of $1,970,000, or 12.0%. Income from operations as a
percentage of net revenue decreased from 14.8% in the 1994 period to 12.5% in
the 1995 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the acquisition and the
development of dialysis centers, the purchase of property and equipment for
existing centers and to finance working capital requirements. At December 31,
1996, the Company's working capital was $49,462,000, cash and cash equivalents
were $47,624,000 and the Company's current ratio was 2.3:1.
The Company's net cash provided by operating activities was $17,085,000
in the year ended December 31, 1996. Generally, cash provided by operating
activities resulted from net income before depreciation and amortization
expense, partially offset by increases in accounts receivable. The Company's
net cash used in investing activities was $62,513,000 in the year ended
December 31, 1996. Cash used in investing activities included $37,853,000 of
cash, working capital and
29
30
certain other distributions made at the closing of the Combination, net of
cash acquired. Additional uses of cash for investing activities have been
related to acquisitions, purchases of equipment and leasehold improvements for
the Company's facilities and purchases of investments. Cash provided by
financing activities was $91,711,000 for the year ended December 31, 1996. The
Company's initial public offering in February 1996 and stock offering in
November 1996 resulted in the sale of 5,830,000 shares from which the Company
received $112,131,000 after offering costs. Long-term debt repayments totaled
$14,713,000, and pre-closing distributions of $6,245,000 were made to former
shareholders of acquired companies after the Combination.
Under its agreement with Kidney Care in connection with the Combination,
the Company has certain contingent payments payable on each of April 30, 1997
and 1998 based on a formula applied to the amount by which pre-tax earnings of
the operations acquired from Kidney Care for the 12 months ended December 31,
1996 and 1997, respectively, exceed the pre-tax earnings of such operations for
the 12 months ended December 31, 1994. The maximum aggregate amount of the
contingent payments is $7,000,000. The Company expects to satisfy this
obligation through working capital.
The Company's line of credit allows for borrowings of up to $35,000,000 to
be used for acquisitions, working capital and capital expenditures. The line of
credit requires payments of interest only until May 1998 with the balance
outstanding at that time amortized quarterly over the next three years. The
credit facility bears interest at one of two floating rates selected by the
Company: (i) the base rate plus a margin ranging from 0.00% to 1.00% or (ii)
LIBOR plus a margin of 0.95% to 2.70%.
A significant component of the Company's growth strategy is the acquisition
and development of dialysis centers. The Company believes that existing cash and
funds from operations, together with funds available under the line of credit,
will be sufficient to meet the Company's acquisition, expansion, capital
expenditure and working capital needs through the end of 1997. In order to
finance certain large strategic acquisition opportunities, the Company may incur
from time to time additional short- and long-term bank indebtedness and may
issue equity or debt securities, the availability and terms of which will depend
on market and other conditions. There can be no assurance that such additional
financing, if required, will be available on terms acceptable to the Company.
FORWARD-LOOKING INFORMATION
Certain of the matters discussed in the preceding pages of this 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. Actual results or developments are subject
to a number of substantial risks and uncertainties, including general economic
market and business conditions; opportunities (or the lack thereof) that may be
presented to and pursued by the Company; competitive actions by other
companies; changes in laws or regulations; and other factors discussed from
time to time in the Company's
30
31
SEC reports and other filings. Many of the foregoing factors are beyond
the control of the Company. Accordingly, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date made and which the Company undertakes no obligation to revise to reflect
events after the date made.
IMPACT OF INFLATION
A substantial portion of the Company's net revenue is subject to
reimbursement rates that are regulated by the federal government and do not
automatically adjust for inflation. The Company 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 the Company's earnings in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and financial statement schedules 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.
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
1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the sections entitled
"Executive Compensation", included in the Company's definitive Proxy Statement
relating to the 1997 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.
31
32
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 1997 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 "Certain Relationships and Related
Transactions" included in the Company's definitive Proxy Statement relating to
the 1997 Annual Meeting of Stockholders.
32
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) Index To Financial Statements Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets at December 31, 1995
and 1996 F-2
Consolidated Statements of Operations for the years
ended December 31, 1994, 1995, and 1996 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1994, 1995, and 1996 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995, and 1996 F-6
Notes to Consolidated Financial Statements F-8
(2) Index to Financial Statement Schedules.
Report of Independent Accountants F-18
Schedule II - Valuation and Qualifying Accounts F-19
(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) No reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
33
34
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of the Company (1)
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)
10.1 Employment Agreement, dated February 6, 1996, between the Company and Sam A.
Brooks (2)*
10.2 Employment Agreement, dated February 6, 1996, between the Company and Ron
Hinds(1)*
10.3 Employment Agreement between the Company and Raymond Hakim, M.D. (1)*
10.4 Employment Agreement, dated April 1, 1994, between the Company and Joseph A.
Cashia (2)*
10.5 Employment Agreement, dated February 12, 1996, between the Company and Anne
N. Bower (2)*
10.6 Medical Director Services Agreement, dated February 12, 1996, between the
Company and Kansas Nephrology Physicians, P.A. (2)
10.7 Medical Director Services Agreement, dated February 12, 1996, between the
Company and Indiana Dialysis Management, P.C. (2)
10.8 Medical Director Services Agreement, dated February 12, 1996, between the
Company and Tyler Dialysis & Transplant Associates, P.A. (2)
10.9 Lease Agreement, dated February 5, 1996, between the Company and MEL, Inc.
relating to approximately 20,000 square feet of space. (2)
10.10 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. (2)
10.11 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. (2)
10.12 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)
35
Exhibit
Number Description of Exhibits
- ------- -----------------------
10.13 Sublease Agreement, dated February 12, 1996, with Tyler Nephrology Associates,
Inc. (2)
10.14 Dialysis Center Management Agreement, dated May 11, 1994, between Renal Care
Group, Inc. (of Tennessee) and Vanderbilt University (1)*
10.15 1996 Stock Option Plan for Outside Directors (1)*
10.16 Amended and Restated 1996 Stock Option Plan(3)*
10.17 Employee Stock Purchase Plan (1)*
10.18 Agreement between the Company and Healthcare Suppliers, Inc. dated December 7,
1995 (1)
10.19 Amendment No. 1 to the Company's Employee Stock Purchase Plan(3)*
10.21 Chief Medical Officer Agreement, dated February 12, 1996, between the Company
and John D. Bower, M.D.(3)
10.22 Medical Director Services Agreement, dated September 30, 1996, between the
Company and a group of individual physicians(3)
10.23 Employment Agreement, dated June 30, 1996, between the Company and Gary
Brukardt(3) *
10.24 Management Agreement, dated March 1, 1996, between the Company and The
Cleveland Clinic Foundation(3) *
10.25 Loan Agreement, dated May 30, 1996, among the Company, its subsidiaries and
NationsBank of Tennessee, N.A.(3)
10.26 Revolving/Term Note, dated May 30, 1996, made by the Company and its
subsidiaries to the order of NationsBank of Tennessee, N.A.(3)
10.27 Stock Pledge Agreement, dated May 30, 1996, between the Company and
NationsBank of Tennessee, N.A.(3)
10.28 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.
10.29 Asset Purchase Agreement and Bill of Sale, dated effective as of January 1, 1997,
among the Company, RCG Laboratory, Inc., and Kidney Care, Inc.
11.1 Statement regarding computation of per share earnings
21.1 List of subsidiaries of the Company
36
23.2 Consent of Ernst & Young LLP
24.1 Power of Attorney (contained on the signature page of this report)
27 Financial Data Schedule (for SEC use only)
- ------------
(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
March 31, 1996 (Commission File No. 0-27640).
(3) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Reg. No. 333-13813) effective October 30, 1996.
* Management contract or executive compensation plan or arrangement.
37
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 28th day of March, 1997.
RENAL CARE GROUP, INC.
By: /s/ Sam A. Brooks, Jr.
-----------------------------
Sam A. Brooks, Jr., President
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Sam A. Brooks, Jr. and Ronald Hinds and each of
them his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, 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, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his 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. President, Chief Executive March 28, 1997
- ---------------------------- Officer and Director
Sam A. Brooks, Jr. (Principal Executive Officer)
/s/ Ronald Hinds Executive Vice President, March 28, 1997
- ---------------------------- Chief Financial Officer
Ronald Hinds Secretary/Treasurer (Principal
Financial Officer and Principal
Accounting Officer)
/s/ Joseph C. Hutts Director March 26, 1997
- ----------------------------
Joseph C. Hutts
38
/s/ Harry R. Jacobson Director and Chairman March 28, 1997
- ---------------------------- of the Board
Harry R. Jacobson, M.D.
/s/ Thomas A. Lowery Director March 20, 1997
- ----------------------------
Thomas A. Lowery
/s/ John D. Bower Director March 20, 1997
- ----------------------------
John D. Bower, M.D.
/s/ Stephen D. McMurray Director March 24, 1997
- ----------------------------
Stephen D. McMurray, M.D.
/s/ W. Tom Meredith Director March 22, 1997
- ----------------------------
W. Tom Meredith, M.D.
/s/ Kenneth Johnson Director March 28, 1997
- ----------------------------
Kenneth Johnson, M.D.
39
REPORT OF 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, 1995 and 1996, and the related consolidated
income statements, statements of changes in stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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. as of December 31, 1995 and 1996 and the consolidated results of
operations and cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Nashville, Tennessee
February 28, 1997
F-1
40
RENAL CARE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
1995 1996
------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,341 $ 47,624
Investments, held to maturity............................. -- 5,814
Accounts receivable, net.................................. 8,557 28,842
Inventories............................................... 727 2,658
Prepaid expenses and other current assets................. 493 1,540
------- --------
Total current assets.............................. 11,118 86,478
Property and equipment, net................................. 9,225 30,739
Goodwill, net............................................... -- 11,066
Intangible assets, net...................................... 53 2,749
Other long-term assets...................................... 369 780
------- --------
Total assets...................................... $20,765 $131,812
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,175 $ 7,984
Accrued wages and benefits................................ 1,420 6,263
Due to third party payors................................. 4,265 6,593
Due to related parties.................................... 270 7,000
Accrued expenses and other current liabilities............ 729 6,588
Income taxes payable...................................... -- 2,588
Current portion of long-term debt......................... 3,677 --
------- --------
Total current liabilities......................... 12,536 37,016
Long-term debt, net of current portion...................... 3,663 --
Deferred income taxes....................................... -- 1,471
------- --------
Total liabilities................................. 16,199 38,487
======= ========
Stockholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized,
none issued............................................ -- --
Common stock, $.01 par value, 22,000 shares authorized
2,938 and 14,182 shares issued and outstanding at
December 31, 1995 and 1996, respectively............... 29 142
Additional paid-in capital................................ 5,254 89,399
Retained (deficit) earnings............................... (717) 3,784
------- --------
Total stockholders' equity........................ 4,566 93,325
------- --------
Total liabilities and stockholders' equity........ $20,765 $131,812
======= ========
See accompanying notes to consolidated financial statements.
F-2
41
RENAL CARE GROUP, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE)
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -------
Net revenue................................................. $41,627 $42,971 $129,518
Operating costs and expenses:
Patient care costs........................................ 25,003 26,908 90,122
General and administrative expenses....................... 8,721 8,701 13,364
Provision for doubtful accounts........................... 1,418 2,355 2,446
Depreciation and amortization............................. 1,484 1,580 4,541
Merger expenses........................................... -- -- 1,960
------- ------- --------
Total operating costs and expenses..................... 36,626 39,544 112,433
------- ------- --------
Income from operations...................................... 5,001 3,427 17,085
Interest, net............................................... (363) (452) 619
------- ------- --------
Income before taxes......................................... 4,638 2,975 17,704
Provision for income taxes.................................. -- -- 6,958
------- ------- --------
Net income.................................................. $ 4,638 $ 2,975 $ 10,746
======= ======= ========
Earnings per share.......................................... $ 0.84
========
Weighted average shares outstanding......................... 12,739
========
See accompanying notes to consolidated financial statements.
F-3
42
RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED STOCKHOLDERS
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
Balance at December 31, 1993................... 2,928 $ 29 $ 4,075 $ 797 $ 4,901
Capital contributions........................ -- -- 411 -- 411
Net income................................... -- -- -- 4,638 4,638
Distributions to owners...................... -- -- -- (4,031) (4,031)
------ ---- -------- ------- --------
Balance at December 31, 1994................... 2,928 29 4,486 1,404 5,919
Capital contributions........................ -- -- 768 -- 768
Net income................................... -- -- -- 2,975 2,975
Distributions to owners...................... -- -- -- (5,096) (5,096)
------ ---- -------- ------- --------
Balance at December 31, 1995................... 2,928 29 5,254 (717) 4,566
Issuance of common stock in Initial Public
Offering................................... 4,485 45 71,752 -- 71,797
Issuance of common stock to Founders......... 4,834 49 14,817 -- 14,866
Issuance of common stock in acquisitions..... 369 4 2,324 -- 2,328
Issuance of common stock in Secondary
Offering................................... 1,345 13 40,321 -- 40,334
Conversion of subordinated notes............. 197 2 1,475 -- 1,477
Exercise of stock options.................... 24 -- 155 -- 155
Net income................................... -- -- -- 10,746 10,746
Distributions to owners...................... -- -- -- (6,245) (6,245)
Dividends to Founders........................ -- -- (46,699) -- (46,699)
------ ---- -------- ------- --------
Balance at December 31, 1996................... 14,182 $142 $ 89,399 $ 3,784 $ 93,325
====== ==== ======== ======= ========
See accompanying notes to consolidated financial statements.
F-4
43
RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
------- ------- --------
OPERATING ACTIVITIES
Net income.................................................. $ 4,638 $ 2,975 $ 10,746
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,484 1,580 4,541
Loss (gain) on sale of property and equipment............. -- 20 (118)
Equity in earnings of subsidiary.......................... -- -- (311)
Deferred income taxes..................................... -- -- 310
Changes in assets and liabilities:
Accounts receivable..................................... (3,284) 781 (8,127)
Inventories............................................. (72) 40 (8)
Prepaid expenses and other assets....................... 111 185 1,190
Intangibles and other assets............................ 15 (277) (1,133)
Accounts payable........................................ 1,646 2,639 1,773
Accrued wages and benefits.............................. 235 38 3,042
Due to related parties.................................. 250 20 (1,392)
Accrued expenses and other liabilities.................. 2 184 3,983
Income taxes payable.................................... -- -- 2,588
------- ------- --------
Net cash provided by operating activities................... 5,025 8,185 17,084
INVESTING ACTIVITIES
Proceeds from sale of property and equipment................ -- 171 395
Purchases of property and equipment......................... (2,428) (4,804) (11,365)
Cash paid for acquisitions, net of cash acquired............ -- -- (8,201)
Distributions received from affiliate....................... -- -- 325
Purchases of investments, held-to-maturity.................. -- -- (14,975)
Proceeds from sale of investments, held-to-maturity......... -- -- 9,161
Cash distribution to founders, net of cash contributions.... -- -- (37,852)
------- ------- --------
Net cash used in investing activities....................... (2,428) (4,633) (62,512)
FINANCING ACTIVITIES
Payments on line of credit.................................. (9,642) (8,414) (15,163)
Proceeds from line of credit................................ 9,603 9,155 15,006
Payments on long-term....................................... (1,830) (1,765) (14,713)
Proceeds from long-term debt................................ 1,960 2,844 540
Capital contributions....................................... 411 767 --
Proceeds from exercise of stock options..................... -- -- 155
Net proceeds from issuance of common stock.................. -- -- 112,131
Distributions to owners..................................... (4,031) (5,096) (6,245)
------- ------- --------
Net cash (used in) provided by financing activities......... (3,529) (2,509) 91,711
------- ------- --------
Increase (decrease) in cash and cash equivalents............ (932) 1,043 46,283
Cash and cash equivalents, at beginning of year............. 1,230 298 1,341
------- ------- --------
Cash and cash equivalents, at end of year................... $ 298 $ 1,341 $ 47,624
======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................... $ 386 $ 469 $ 673
======= ======= ========
Income taxes................................................ $ -- $ -- $ 4,697
======= ======= ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Common Stock to Founders.................................... $ -- $ -- $ 14,866
======= ======= ========
Conversion of subordinated notes............................ $ -- $ -- $ 1,477
======= ======= ========
Issuance of Common Stock in acquisitions.................... $ -- $ -- $ 2,328
======= ======= ========
See accompanying notes to consolidated financial statements.
F-5
44
RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1996
1. ORGANIZATION
Renal Care Group, Inc. (of Delaware) (the "Company") was formed in June
1995, primarily for the purpose of acquiring four dialysis businesses and Renal
Care Group, Inc. (of Tennessee) ("Tennessee"), collectively, known as the
"Founding Companies," in exchange for shares of its Common Stock, cash, notes
payable and the assumption of certain debt (the "Combination"). As described
more fully in Note 8, on February 6, 1996, the Company closed an initial public
offering of 4,485 shares of its Common Stock and simultaneously consummated the
Combination. The four unrelated businesses acquired in the Combination, which
are comprised of numerous legal entities, conduct business as Kidney Care, Inc.
and certain operating divisions of Medical Enterprises, Ltd. and Health Care
Suppliers, Inc. ("KCI"), DMN Professional Corporation ("DMN"), Tyler Nephrology
Associates, P.A. ("Tyler"), and Kansas Nephrology Associates, P.A. ("KNA") and
Kansas Dialysis Supply, Inc. ("KDS," combined, "Kansas"). Tennessee and the four
unrelated businesses acquired are based in Tennessee, Mississippi, Indiana,
Texas, and Kansas.
The Combination was accounted for utilizing the historical cost basis in
accordance with Securities and Exchange Commission Staff Accounting Bulletin No.
48 with the stock being valued at the historical cost of the net assets
exchanged. Cash consideration given in the Combination is treated for accounting
purposes as a dividend from the Company to Tennessee, KCI, DMN, Tyler, Kansas,
and their owners.
As described more fully in Note 10, the completed mergers with Main Line
Suburban Dialysis Centers, Inc. ("Main Line") and RenalWest, L.C., et al
("RenalWest") were accounted for as pooling of interests. These financial
statements reflect the restated consolidated financial statements of the Company
effecting these pooling of interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority owned corporate subsidiaries and partnership
interests. Significant intercompany transactions and accounts have been
eliminated in consolidation. Investments in affiliates less than 50% owned are
generally recorded on the equity method.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with original
maturities of three months or less to be cash equivalents.
INVESTMENTS
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), the
Company's debt securities are classified as held-to-maturity. The Company has
both the positive intent and ability to hold to maturity and therefore the
securities are carried at amortized cost.
F-6
45
INVENTORIES
Inventories consist of drugs, supplies and parts consumed in dialysis
treatments and are stated at the lower of cost (using the average cost method
and the first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided by 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 related lease terms. Maintenance and repair costs are charged to
operations as incurred.
INTANGIBLE ASSETS
The excess of aggregate purchase price over the fair value of net assets of
businesses acquired is recorded as goodwill. Goodwill is amortized over 40 years
using the straight-line method. Other acquired intangibles are allocated to
patient lists and non-compete agreements and are amortized over the life of the
asset, typically seven to ten years, using the straight-line method.
Accumulated amortization on intangible assets is approximately $5 and $378 at
December 31, 1995 and 1996, respectively.
The carrying value of intangible assets is assessed for any permanent
impairment by evaluating the operating performance and future undiscounted cash
flows of the underlying businesses. Adjustments are made if the sum of the
expected future net cash flows is less than book value. Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of (SFAS 121), requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. SFAS 121 was
implemented by the Company in 1996 and did not have an impact on the Company's
financial statements.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal tax return and
separate company state tax returns. Income taxes are provided under the
liability method in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under the liability
method, deferred income taxes are recognized for the tax consequences of
differences between amounts reported for financial reporting and income tax
purposes by applying enacted statutory tax rates applicable to future years to
such differences. Deferred taxes result from temporary differences in the market
value of assets acquired in business combinations accounted for as purchases and
their tax bases. Under SFAS No. 109, the effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Federal and State income taxes for Main Line and RenalWest prior to their
acquisition by the Company were payable personally by the stockholders of Main
Line and RenalWest pursuant to S Corporation elections under the Internal
Revenue Code.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NET REVENUE
Accounts receivable and net revenue are recorded at the estimated net
realizable amount from Medicare, Medicaid, patients, 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.
F-7
46
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:
Medicare
The Company is paid by the Medicare program on a prospective payment system
for dialysis services. Each facility receives a composite rate that is adjusted
to account for geographic differences in the cost of labor.
Medicaid
Medicaid is a state administered program with reimbursements varying by
state. The Medicaid programs administered in each state in which the Company
operates reimburse the Company 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
are generally higher than those payments received from the Medicare and Medicaid
programs.
The allowance for doubtful accounts represent management's estimate of
potential credit losses associated with amounts due from patients, commercial
insurers and other third party payors. Management of the Company does not
believe that receivables from the Medicare and Medicaid programs represent any
credit risk.
Reimbursements from Medicare and Medicaid at established rates approximated
78%, 71% and 74% of net patient revenue for the years ended December 31, 1994,
1995 and 1996, respectively.
ESTIMATED MEDICAL PROFESSIONAL LIABILITY CLAIMS
The Company is insured for medical professional liability claims through
retrospectively rated commercial insurance policies. It is its 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. To date, the Company's experience with such
claims has not been significant; accordingly, no such provision has been made.
EARNINGS PER SHARE
Earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding including the dilutive
effect of options and warrants. Earnings per share amounts are not presented for
1994 and 1995 as the historical results of operations of the Company for these
years consisted of non-taxed earnings from Main Line and RenalWest which were S
Corporations. Additionally, the capital structure of the Company during 1996
was significantly different from that of prior years and an earnings per share
presentation is not considered meaningful.
MARKET VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
investments, accounts receivable, long-term debt and capital lease obligations.
The market values for these financial instruments approximates their carrying
value at December 31, 1995 and 1996.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current
year presentation.
F-8
47
3. INVESTMENTS
The amortized cost and estimated fair value of the investments are as
follows:
DECEMBER 31, 1996
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ------
U.S. Government Agencies................................ $ 100 $ 2 $ -- $ 102
Corporate Bonds and Notes............................... 5,714 9 (19) 5,704
------ --- ---- ------
Total................................................... $5,814 $11 $(19) $5,806
====== === ==== ======
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
DECEMBER 31
-----------------
1995 1996
------- -------
Patient accounts receivable................................. $12,185 $31,645
Other receivables........................................... 353 3,900
Allowance for doubtful accounts............................. (3,981) (6,703)
------- -------
Net accounts receivable..................................... $ 8,557 $28,842
======= =======
Percent of patient accounts receivable related to patients
participating in the Medicare and Medicaid programs....... 60% 68%
Other receivables consist primarily of management fees and reimbursable
expenses incurred pursuant to certain management agreements.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31
-----------------
1995 1996
------- -------
Medical equipment........................................... $ 8,551 $20,763
Furniture and nonmedical equipment.......................... 2,591 5,693
Leasehold improvements...................................... 2,836 6,298
Buildings................................................... 961 5,322
Construction in progress.................................... -- 714
------- -------
14,939 38,790
Less accumulated depreciation............................... (5,714) (8,051)
------- -------
Net property and equipment.................................. $ 9,225 $30,739
======= =======
F-9
48
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31
---------------
1995 1996
------ ------
Equipment line of credit, advances made through December 31,
1995, bearing interest at the variable bank base rate plus
3/8% (8.88% at December 31, 1995), paid in 1996............ $1,460 --
Convertible senior subordinated promissory notes............. 1,380 --
Term note, bearing interest at the prime rate plus 1/2%
(9.0% at December 31, 1995), collateralized by inventory,
accounts receivable, property and equipment, paid in 1996.. 1,263 --
Term note, bearing interest at the prime rate plus 3/8%
(8.88% at December 31, 1995), collateralized by inventory,
accounts receivable, property and equipment, paid in 1996.. 1,200 --
Line of credit, interest at variable Bank Base Rate plus 3/8%
(8.88% at December 31, 1995), collateralized by accounts
receivable, inventory, equipment, furniture and general
intangibles, expired and paid in June 1996................. 785 --
Other........................................................ 1,252 --
------ ------
Total long-term debt......................................... 7,340 --
Less current portion......................................... 3,677 --
------ ------
Long-term debt, net of current portion....................... $3,663 $ --
====== ======
In May, 1996 the Company entered into a line of credit which allows for
borrowings of up to $35,000 to be used for acquisitions, working capital and
capital expenditures. The line of credit requires payments of interest only
until May, 1998 with the balance outstanding at that time amortized quarterly
over the next three years. The credit facility bears interest at one of two
floating rates selected by the Company: (i) the base rate plus a margin ranging
from 0.00% to 1.00% or (ii) LIBOR plus a margin of 0.95% to 2.70%. The Company
has pledged the stock of its subsidiaries as collateral and would be obligated
to pledge its assets and the assets of its subsidiaries if the Company should
become in default under the line of credit. At December 31, 1996, no amounts
were outstanding relative to this line of credit.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1994, 1995,
and 1996 consists of the following:
YEAR ENDED DECEMBER 31
1994 1995 1996
------ ------ ------
Current:
Federal................................................... -- -- $5,542
State and local........................................... -- -- 1,106
------ ------ ------
-- -- 6,648
====== ====== ======
Deferred:
Federal................................................... -- -- $ 261
State and local........................................... -- -- 49
------ ------ ------
-- -- 310
====== ====== ======
Provision for income taxes.................................. -- -- $6,958
====== ====== ======
At December 31, 1996, the Company has net operating loss carryforwards of
$2,000 for federal income tax purposes and $1,300 for state income tax purposes
that expire in years 2009 through 2011. The utilization of the federal net
operating loss may be limited in future years due to changes in Company
ownership.
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-10
49
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1996, are as follows:
YEAR ENDED
DECEMBER 31
---------------
1995 1996
----- -------
Deferred Tax Assets:
Net Operating Loss Carryforwards....................... $ 620 $ 765
Allowance for Doubtful Accounts........................ -- 2,281
Accrued Vacation....................................... -- 861
Other.................................................. 2 5
Less: Valuation Allowance.............................. (607) (1,214)
----- -------
15 2,698
----- -------
Deferred Tax Liabilities:
Depreciation........................................... 15 913
Cash to Accrual Adjustments............................ -- 3,247
Other.................................................. -- 9
----- -------
15 4,169
----- -------
Net Deferred Tax liability.................................. $ -- $ 1,471
===== =======
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 financial statements for the years ended
December 31, 1994, 1995, and 1996:
YEAR ENDED DECEMBER 31
----------------------
1994 1995 1996
----- ----- ----
U.S. federal income tax rate................................ 34.0% 34.0% 35.0%
State income tax, net of federal income tax benefit......... 6.1 6.1 5.5
Cash to accrual adjustments................................. -- -- 6.8
Federal and State income tax benefit from S Corporation
status of Main Line and RenalWest......................... (40.1) (40.1) (8.8)
Other....................................................... -- -- .8
----- ----- ----
Effective Income Tax Rate................................... --% --% 39.3%
===== ===== ====
8. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On February 6, 1996, the Company completed an initial public offering of
3,900 shares of Common Stock and on February 20, 1996, the underwriters of the
offering fully exercised their over allotment option for an additional 585
shares, all of which were issued at $18 per share. Simultaneously the Company
exchanged 4,834 shares of Common Stock, plus cash, notes payable, contingent
payments and the assumption of certain debt for either stock or selected assets
and liabilities of KCI, NEI, Tyler, Kansas and Tennessee in accordance with
executed combination agreements. The exchange was accounted for utilizing the
historical cost basis in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 48 with the stock being valued at the historical
cost of the net assets exchanged. The Company received net proceeds of $71,797
after the deduction of underwriting discounts, commissions and other expenses.
F-11
50
SECONDARY STOCK OFFERING
On November 22, 1996 the Company completed a secondary offering of 2,500
shares at a price of $32. The Company offered 1,064 of the shares with the
remaining shares being offered by certain stockholders of the Company. On
December 19, 1996 the underwriters of the offering exercised their over
allotment option for an additional 375 shares of which 281 were offered by the
Company and the balance offered by certain stockholders.
CONVERSION OF SUBORDINATED NOTES
In December 1995, the Company sold an aggregate principal amount of $1,380
of Convertible Senior Subordinated Promissory Notes (the "Convertible Notes")
bearing interest at a rate of 7.0% to provide funds to complete the Offering. On
December 7, 1996, the principal and accrued interest thereof was converted into
197 shares of Common Stock.
DIVIDENDS TO FOUNDERS
The Company used net proceeds from the initial public offering of $39,699
as the cash portion of the consideration paid to the owners of Tennessee and the
four unrelated businesses to be acquired. These amounts were paid in accordance
with Staff Accounting Bulletin No. 48 and has been treated as a dividend to
Founders for accounting purposes.
In addition, the Company has accrued $7,000 pursuant to its agreement
with KCI in connection with the Combination. The amount of the contingent
payment is based on a formula applied to the amount by which pre-tax earnings
of the operations acquired from Kidney Care for the years ended December 31,
1996 and 1997, respectively, exceed pre-tax earnings of such operations for the
year ended December 31, 1994. The amount is included as Due to Related Parties
in the accompanying financial statement and accounted for as a dividend to
Founders.
WARRANTS
Tennessee issued warrants to two of its officers, effective
February 14, 1994, to purchase an aggregate of 160 shares of Common Stock of
Tennessee at $7.50 per share. Also effective February 14, 1994, Tennessee
issued to Equitable Securities Corporation, as compensation for its investment
banking services and for nominal additional consideration, warrants to purchase
60 shares of Common Stock of Tennessee at $7.50 per share. The warrants have a
term of ten years from the date of issuance.
STOCK OPTION PLANS
In January 1996, the Company adopted the Renal Care Group, Inc. 1996 Stock
Option Plan (the "1996 Employee Plan"), which was amended and restated effective
September 1996. Under the 1996 Employee Plan, Options to purchase a total of
1,000 shares of Common Stock were reserved for grant to eligible employees and
other key persons. Subsequent to year end, the Board increased the number of
shares for issuance under the 1996 Plan from 1,000 to 2,000 subject to
stockholder approval. In 1994, Tennessee adopted the 1994 Stock Option Plan (the
"1994 Plan") which provided for the grant of options to purchase up to 320
shares of Common Stock to directors, officers and other key persons. In 1995 the
Company issued options outside of a plan ("Free Standing") to key employees,
officers, directors and other key persons.
F-12
51
The following is a summary of option transactions during the period from
January 1, 1994 through December 31, 1996:
1996
WEIGHTED
AVERAGE
EXERCISE
1996 EMPLOYEE PLAN 1994 PLAN FREE STANDING PRICE
--------------------- --------------------- --------------------- --------
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS PRICE RANGE
------- ----------- ------- ----------- ------- -----------
Balance, at January 1, 1994.................. -- -- --
Granted.................................... -- 85 $2-$7.50 --
Exercised.................................. -- -- --
Forfeited.................................. -- -- --
---- ---- ----
Balance, at December 31, 1994................ -- 85 --
Granted.................................... -- 31 $7.50 679 $7.50
Exercised.................................. -- -- --
Forfeited.................................. -- -- --
---- ---- ----
Balance, at December 31, 1995................ -- 116 $2-$7.50 679 $7.50 $ 8.86
Granted.................................... 876 $18-$37 -- 228 $7.50 $25.50
Exercised.................................. (4) $18 -- (10) $7.50 $10.65
Forfeited.................................. -- -- -- $7.50 --
---- ---- ----
Balance, at December 31, 1996................ 872 $18-$37 116 $2-$7.50 897 $7.50 $19.30
=== === === ======
Exercisable at December 31, 1996............. 97 63 412 $10.55
=== === === ======
Available for Grant at December 31, 1996..... 128 204 --
=== === ===
The weighted-average fair value of options granted during 1996 is $8.60.
The weighted average remaining contractual life of all options is approximately
10 years.
The Company has elected to follow Accounting Principals Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting for provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company employee stock options equals the market price of the underlying stock
on the date of grant no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 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 a the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively; risk-free interest rates of 5.50%
and 5.50%; dividend yields of 0% and 0%; volatility factor of the expected
market price of the Company's common stock of .33 for 1996; and a weighted
average expected life of the option of approximately 4 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,
F-13
52
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
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:
1995 1996
------ -------
Net income.................................................. $2,975 $10,746
Pro forma compensation expense from stock options, net of
taxes..................................................... 596 1,241
------ -------
Pro forma net income........................................ $2,379 $ 9,505
====== =======
Pro forma earnings per share................................ $ .75
=======
9. OPERATING LEASES
The Company rents office and medical facilities under lease agreements
which are classified as operating leases for financial statement purposes. At
December 31, 1996, future minimum rental payments under noncancelable operating
leases are:
1997 $ 4,230
1998 3,800
1999 3,117
2000 2,379
2001 2,006
Thereafter 4,420
-------
$19,952
=======
Rent expense related to operating leases amounted to $1,428, $1,648, and
$3,692 for the years ending December 31, 1994, 1995 and 1996, respectively.
10. BUSINESS ACQUISITIONS
POOLING OF INTERESTS
On April 26, 1996, the Company completed a merger with Main Line through
the exchange of shares of the Company's Common Stock. Renal Care Group, Inc.
exchanged 538 shares of its common stock for the outstanding stock of Main Line.
On August 7, 1996, the Company entered into a definitive agreement to merge
with RenalWest, L.C. et al. This transaction was completed on September 30,
1996. Each share of RenalWest common stock then issued and outstanding was
exchanged for 2,400 shares of company common stock.
The Main Line and RenalWest mergers have been accounted for as
pooling of interests, and accordingly, the consolidated financial statements
give retroactive effect to the combined operations of Renal Care Group, Inc. for
all periods presented. The following is a summary of the results of operations
of the separate entities for periods prior to the Main Line and RenalWest
mergers:
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RCG MAIN LINE RENALWEST COMBINED
------- --------- --------- --------
1994
Net revenue.......................................... $ -- $10,933 $30,694 $ 41,627
Income from operations............................... -- (807) 5,807 5,000
Net income........................................... -- (841) 5,478 4,637
1995
Net revenue.......................................... -- 10,934 32,037 42,971
Income from operations............................... -- 12 3,415 3,427
Net income........................................... (6) (25) 3,006 2,975
1996
Net revenue.......................................... 81,390 12,276 35,852 129,518
Income from operations............................... 9,902 1,590 5,593 17,085
Net income........................................... 3,954 1,577 5,215 10,746
PURCHASES
During 1996, the Company acquired four dialysis centers, including three
acute care contracts, in Alabama, Texas, and Oklahoma for approximately $8,423
in cash, 70 shares of Common Stock, valued at approximately $1,960 which were
accounted for under the purchase method. The excess of the purchase price over
the fair value of net assets was approximately $9,615 and is being amortized on
a straight line basis over 40 years. For the above acquisitions, the results of
operations prior to the date of acquisition were not material to the
consolidated financial statements.
11. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
The Company has qualified defined contribution plans covering substantially
all employees which 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 $284, $157 and $599 for the years
ended December 31, 1994, 1995 and 1996, respectively.
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 to the extent of 10% of eligible
compensation limited to $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 300 shares are
available for purchase under the plan. At December 31, 1996, approximately
$1,100 was included in accrued wages and benefits relating to the Stock Purchase
Plan.
12. RELATED PARTY TRANSACTIONS
PHYSICIAN SERVICES, MEDICAL DIRECTOR FEES AND MANAGEMENT FEE REVENUE
Physician services are provided to the Company by stockholders or legal
entities owned by stockholders of the Company. Physician and medical director
services are provided to the Company by shareholders, partners or legal
entities owned by shareholders or partners of the Company. Physician and
medical director fees included in patient care costs were $2,332, $787, and
$1,581 for the years ended December 31, 1994, 1995 and 1996, respectively.
Management fee revenues were $902 for the year ended December 31, 1996. Such
fees are included in net revenue.
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54
OTHER RELATED PARTY BALANCES AND TRANSACTIONS
Expenses for leases and other services provided through entities owned by
shareholders or other related parties aggregated $168, $116 and $613 for the
years ended December 31, 1994, 1995 and 1996, respectively.
SUPPLY RELATIONSHIP
The Company entered into an agreement dated February 12, 1996, with
Healthcare Suppliers, Inc. ("HSI"), a former affiliate of Kidney Care, pursuant
to which the Company is obligated, for a period of 18 months, to purchase most
of the dialysis and related supplies required for its Kidney Care centers at
pre-determined prices no greater than the best prices available to any other
Founding Company as of November 1995. Purchases through December 31, 1996
amounted to $3,596.
LABORATORY MANAGEMENT AND SERVICES CONTRACT
The Company entered into a lab agreement with Kidney Care Foundation dated
February 12, 1996, pursuant to which the Company provided certain business,
management, administrative and equipment maintenance services to the
Foundation's clinical laboratory located in Jackson, Mississippi. The laboratory
in turn provided clinical testing for certain Company patients on a fee for
service basis. In consideration for the management services provided by the
Company, the Foundation paid the Company management fees of $221 and reimbursed
the Company for its expenses in providing services under the agreement of
approximately $1,246. Fees paid by the Company to the Foundation for clinical
laboratory testing on its patients amounted to $192 in 1996. The Company
obtained an option from the Foundation to purchase the assets of the laboratory
for an exercise price of $147. Effective January 1, 1997, the Company exercised
the option and acquired the assets of the laboratory.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary unaudited quarterly data for the year ended December 31, 1996
has been restated from the Company's filings on Form 10-Q to reflect the
mergers accounted for as a pooling-of-interests transaction. The Company
believes that the following information includes all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation.
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
Net Operating Revenues...................... $24,533 $31,827 $34,627 $38,531
Operating Expenses.......................... 19,967 26,244 28,323 31,398
Depreciation and Amortization............... 873 1,111 1,212 1,345
Merger Expenses............................. -- 680 1,280 --
------- ------- ------- -------
Income from Operations...................... 3,693 3,792 3,812 5,788
------- ------- ------- -------
Interest Income, net........................ 39 202 153 225
------- ------- ------- -------
Income before Income Taxes.................. 3,732 3,994 3,965 6,013
------- ------- ------- -------
Income Taxes................................ 998 1,096 2,517 2,347
------- ------- ------- -------
Net Income.................................. $ 2,734 $ 2,898 $ 1,448 $ 3,666
======= ======= ======= =======
Net Income Per Share........................ $ 0.26 $ 0.21 $ 0.11 $ 0.26
======= ======= ======= ========
Pro forma summary results of quarterly operations before nonrecurring merger
expenses, had both the Founding Companies and the Company been combined for all
of 1996 are as follows:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
Net revenue $30,909 $31,826 $34,627 $ 38,531
Operating expenses:
Patient care costs 21,581 22,302 24.251 26,725
General and administrative expenses 3,061 3,354 3,433 3,937
Provision for doubtful accounts 610 587 639 736
Depreciation and amortization 1,046 1,112 1,212 1,345
------- ------- ------- -------
Total operating costs and expenses 26,298 27,355 29,535 32,743
------- ------- ------- -------
Income form operations 4,611 4,471 5,092 5,788
Interest, net (55) 202 153 225
------- ------- ------- -------
Income before income taxes 4,556 4,673 5,245 6,013
Provison for income taxes 1,731 1,729 1,942 2,347
------- ------- ------- -------
Net Income $ 2,825 $ 2,944 $ 3,303 $ 3,666
======= ======= ======= =======
Net income per share $ 0.22 $ 0.22 $ 0.24 $ 0.26
======= ======= ======= =======
14. SUBSEQUENT EVENTS
ACQUISITIONS
Subsequent to year end, the Company announced that it had acquired
substantially all of the assets of seven federated dialysis facilities in
Central Indiana: Eastern Indiana Kidney Center, Richmond Indiana; Southern
Indiana Kidney Center, Greensburg, Indiana; Saint Joseph Dialysis Center,
Kokomo, Indiana; and Indiana Kidney Center, Indiana Kidney Center South, St.
Vincent Dialysis Center and St. Vincent Dialysis Center West, all in
Indianapolis, Indiana. The facilities currently provide treatment to
approximately 600 patients as well as acute, inpatient dialysis treatment
services to four local hospitals. The consideration for the purchase
transaction, excluding working capital acquired, consisted of cash of
approximately $24,800 and $7,200 of restricted common stock.
F-16
55
15. SUPPLEMENTAL COMBINING FINANCIAL INFORMATION (UNAUDITED)
The following unaudited supplemental financial information presents
separately the results of operations of the Company and the Founders, and the
results of operations had the Founding Companies and the Company been combined
for all periods presented.
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1995
----------------------------- ------------------------------
COMPANY FOUNDERS COMBINED COMPANY FOUNDERS COMBINED
------- -------- -------- -------- -------- --------
Net revenue.............................. $42,971 $72,358 $115,329 $129,518 $ 6,376 $135,894
Operating costs and expenses:
Patient care costs..................... 26,908 53,509 80,417 90,122 4,727 94,849
General and administrative expenses.... 8,701 4,165 12,866 13,364 433 13,797
Provision for doubtful accounts........ 2,355 1,640 3,995 2,446 125 2,571
Depreciation and amortization.......... 1,580 2,081 3,661 4,541 174 4,715
Merger expenses........................ -- -- -- 1,960 -- 1,960
------- ------- -------- -------- ------- --------
Total operating costs and expenses.. 39,544 61,395 100,939 112,433 5,459 117,892
------- ------- -------- -------- ------- --------
Income from operations.................... $ 3,427 $10,963 $ 14,390 $ 17,085 $ 917 $ 18,002
======= ======= ======== ======== ======= ========
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56
REPORT OF 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, 1995 and 1996, and for each of the three years in the
period ended December 31, 1996, and have issued our report thereon dated
February 28, 1997 (included elsewhere in this Form 10-K). Our audit also
included the consolidated financial statement schedule listed in Item 14(a) of
this Form 10-K. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the consolidated 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.
Nashville, Tennessee ERNST & YOUNG LLP
February 28, 1997
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57
SCHEDULE II
RENAL CARE GROUP, INC.
CONSOLIDATED SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT ----------------------- BALANCE AT
BEGINNING ALLOWANCES CHARGED TO CHARGED TO END OF
OF PERIOD ACQUIRED EXPENSE REVENUE WRITE-OFFS PERIOD
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Allowance for doubtful accounts:
Year ended December 31, 1994..... $ 954 $ -- $1,418 $-- $ (543) $1,829
====== ====== ====== === ======= ======
Year ended December 31, 1995..... $1,829 $ -- $2,355 $-- $ (204) $3,980
====== ====== ====== === ======= ======
Year ended December 31, 1996..... $3,980 $4,344 $2,446 $-- $(4,067) $6,703
====== ====== ====== === ======= ======
F-19