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1
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, 1998
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) 345-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.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 $708,361,318 as of March 18, 1999, 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
44,246,534 shares of common stock, $.01 par value, outstanding at March 18,
1999.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Proxy Statement for its 1999 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Annual Report.
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PART I
ITEM 1. BUSINESS
GENERAL
Renal Care Group, Inc. provides dialysis services to patients with
chronic kidney failure, also known as end-stage renal disease ("ESRD"). As of
December 31, 1998, RCG provided dialysis and ancillary services to approximately
11,400 patients through 160 outpatient dialysis centers in 19 states. In
addition to outpatient dialysis center operations, RCG provided acute dialysis
services through contractual relationships with 94 hospitals. RCG was formed in
1996 by leading nephrologists with the objective of creating a company with the
clinical and financial capability to manage the full range of care for ESRD
patients on a cost-effective basis.
Nephrology is the specialized practice of medicine dedicated to
providing care to patients with ESRD and other kidney conditions. A key
component of the nephrologist's practice is the dialysis facility, where ESRD
patients receive dialysis treatments, generally three times a week, in a
technologically advanced outpatient setting. Outpatient dialysis facilities are
often owned by groups of nephrologists and comprise an integral component of the
nephrologists' practice because of the critical role that dialysis plays in the
treatment of ESRD patients. According to the Health Care Financing
Administration (HCFA), there were more than 3,000 dialysis centers in the
United States at the end of 1996. RCG believes that approximately 50% of these
centers were owned by multi-center dialysis companies, 25% were owned by
independent physicians and other small operators, and 25% were hospital-based
centers.
As an adjunct to its dialysis business, RCG provides certain practice
management and administrative services to physician practices with a total of 66
physicians, including 63 of the 190 nephrologists affiliated with the Company's
outpatient dialysis centers. In addition, the Company operates a business
providing wound care and diabetic services. Because of the chronic nature of
ESRD and the fact that many ESRD patients also have diabetes, many of RCG's
dialysis patients also have needs for wound care services.
RCG is a Delaware corporation that commenced business in February 1996,
with the simultaneous acquisition (the "Combination") of Kidney Care, Inc. and
Medical Enterprises Ltd., D.M.N. Professional Corporation, Tyler Nephrology
Associates, Kansas Nephrology Association, and Renal Care Group, Inc., a
Tennessee corporation (collectively, the "Founding Companies"). RCG's principal
executive offices are located at 2100 West End Avenue, Suite 800, Nashville,
Tennessee 37203, and its telephone number is (615) 345-5500.
INDUSTRY OVERVIEW
End-Stage Renal Disease
ESRD is the state of advanced kidney failure, which is irreversible and
ultimately lethal. It is most commonly a result of complications associated with
diabetes, hypertension, certain renal and
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hereditary diseases, aging and other factors. In order to sustain life, ESRD
patients require either dialysis for the remainder of their lives or a
successful kidney transplant. In 1996 dialysis was the primary treatment for
approximately 72% of all ESRD patients, and transplantation was the method of
treatment for the remaining 28% of ESRD patients.
According to United States Renal Data System ("USRDS") estimates, the
total direct medical payments for ESRD exceeded $14.6 billion during 1996. Of
the total direct medical payments for ESRD, approximately $11.0 billion was paid
by the federal government through the Medicare program. As a result of
legislation enacted in 1972, the federal government provides Medicare benefits
to patients who are diagnosed with ESRD regardless of their age or financial
circumstances, if they are eligible for Social Security.
According to HCFA data, the number of ESRD patients in the United
States requiring dialysis grew from approximately 66,000 in 1982 to
approximately 216,000 in 1996. Based on USRDS data, the ESRD incidence rate
among Medicare-eligible patients was approximately 268 patients per million in
1996 as compared to 111 patients per million in 1984.
USRDS data also indicate that the ESRD incidence rate increased by
78.7% from 1987 to 1996, with an increase of 90.7% in patients ages 65 to 74 and
234% in patients ages 75 and older. The growth in the number of ESRD patients
has resulted principally from the aging of the population along with better
treatment of, and better survival rates for, patients with high blood pressure,
diabetes and other illnesses that lead to chronic kidney disease. In addition,
as a result of improved technology, older patients and patients who could not
previously tolerate dialysis due to other illnesses can now receive
life-sustaining dialysis treatment.
Treatment Options for End-Stage Renal Disease
Currently, there are three treatment options for ESRD:
- hemodialysis, which is performed either in a hospital setting,
an outpatient facility or a patient's home,
- peritoneal dialysis, which is generally performed in the
patient's home, and
- kidney transplant surgery.
According to HCFA data, in 1996 approximately 84% of patients on
dialysis in the United States received outpatient hemodialysis and approximately
16% received hemodialysis or peritoneal dialysis in their homes.
Hemodialysis is the most common form of ESRD treatment. It is generally
performed either in a freestanding center or in a hospital. The process of
hemodialysis uses a dialyzer, essentially an artificial kidney, to remove
certain toxins, fluid and chemicals from the patient's blood and another device
that controls external blood flow and monitors 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
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circulated through the adjacent chamber. The toxins and excess fluid contained
in the patient's blood cross the membrane into the dialysis fluid. Hemodialysis
usually takes approximately four hours and is generally administered three times
per week for the life of the patient.
Peritoneal dialysis is typically performed by the patient at home and
uses the patient's peritoneal (abdominal) cavity to eliminate fluids and toxins
in the patient's blood. There are several forms of peritoneal dialysis.
Continuous ambulatory peritoneal dialysis ("CAPD") and continuous cyclic
peritoneal dialysis ("CCPD") are the most common. CAPD uses a sterile dialysis
solution introduced through a catheter that is surgically implanted in 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 similar to
CAPD but uses 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 by a visit from a staff person from a
designated outpatient center or by a visit by the patient to a center.
Kidney transplants, when successful, are the most desirable form of
ESRD therapy. However, the shortage of suitable donors severely limits the
availability of this surgical procedure as a treatment option. Only about 6% of
ESRD patients receive kidney transplants annually. Typically, transplant surgery
is performed by transplant surgeons and not nephrologists.
Ancillary Services
RCG provides a variety of ancillary services to treat ESRD patients.
The most significant ancillary service is the administration of erythropoietin
(also known as epogen(R) or EPO). EPO is a bio-engineered protein that
stimulates the production of red blood cells. It is used in connection with all
forms of dialysis to treat anemia, a complication experienced by almost all ESRD
patients. Other ancillary services offered by RCG, depending on medical
appropriateness, include tests for bone deterioration, electrocardiograms, nerve
conduction studies to test for deterioration of a patient's nerves, Doppler flow
testing for the effectiveness of the patient's vascular access for dialysis, and
blood transfusions.
Nephrology Practice
Caring for ESRD patients is typically the primary clinical activity of
a nephrologist. Other clinical activities of a nephrologist include the
post-surgical care of kidney transplant patients, the diagnosis and treatment of
kidney diseases in patients who are at risk for developing ESRD, and the
diagnosis, treatment and management of clinical disorders including
hypertension, kidney stones and autoimmune diseases. Because of the complexity
involved in treating patients with chronic kidney disease, the nephrologist
typically assumes the role of primary care physician for the ESRD patient. While
some nephrologists practice independently or are members of multi-specialty
groups, most nephrologists practice in small single-specialty groups. A
nephrology group's practice often covers a relatively large geographic service
area, but, outside metropolitan areas, a large geographic area may be served by
only one nephrology group. Most nephrologists also have a significant office
practice, consult on numerous hospitalized patients who are not on dialysis and
follow the clinical outcomes of kidney transplant patients.
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RECENT ACQUISITION AND DEVELOPMENT ACTIVITIES
In January 1998, RCG acquired nine dialysis facilities in Arkansas,
Oklahoma and Missouri in a series of merger transactions. The facilities also
provide in-patient dialysis treatment services to six area hospitals. RCG issued
1,947,351 shares of common stock in these transactions.
In February 1998, RCG formed a joint venture with Oregon Health
Sciences University, Legacy Health System and Comprehensive Kidney Center to
operate six dialysis facilities and a home dialysis program in the greater
Portland, Oregon area. RCG acquired an 80% interest in the joint venture for
cash.
In February 1998, RCG formed a joint venture with Saint Luke's Hospital
of Kansas City to provide outpatient dialysis services.
In April 1998, RCG completed a merger with companies that operated four
dialysis facilities in Missouri. The facilities also provide acute, in-patient
treatment services to three hospitals. RCG issued approximately 387,984 shares
of common stock in this transaction.
In April 1998, the Company also completed the acquisition of a dialysis
center in Corpus Christi, Texas.
In August 1998, RCG acquired the assets of two hospital-based
outpatient dialysis programs located in the Kalamazoo, Michigan area.
In August 1998, RCG acquired a dialysis facility located in Anniston,
Alabama.
In September 1998, RCG formed a joint venture with Columbus Regional
Hospital and a local physician to own and operate a dialysis center in Columbus,
Indiana.
In October 1998, RCG purchased the assets of two dialysis facilities in
Port Arthur, Texas. In October 1998, RCG also acquired the assets of Vivra
Health Advantage, the wound and diabetes treatment care division of Vivra
Specialty Partners. Vivra Health Advantage became part of the Company's
wholly-owned subsidiary, Integrated Wound Care Systems, Inc.
In December 1998, RCG formed a joint venture with Froedtert Hospital in
Milwaukee, Wisconsin to provide outpatient dialysis services in conjunction with
the Medical College of Wisconsin. Initially, the joint venture will operate two
existing dialysis facilities and begin construction of a new clinic. The joint
venture will also provide acute dialysis services to three area hospitals.
In January 1999, RCG completed a merger with Dialysis Centers of
America, Inc., the operator of 12 dialysis facilities located in metropolitan
Chicago. The facilities also provide acute, in-patient dialysis treatment
services to six area hospitals. RCG issued approximately 3,226,546 shares of
common stock in the merger.
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OPERATIONS
Location, Capacity and Use of Facilities
As of December 31, 1998, RCG operated 160 outpatient dialysis centers
in 19 states with 2,646 certified dialysis stations. RCG leased 139 centers and
owned 21 centers. The Company also provided inpatient dialysis services to 94
acute care hospitals. During 1998, 1,600,077 hemodialysis treatments were
provided at RCG's facilities.
RCG estimates that on average its centers were operating at
approximately 65% of capacity as of December 31, 1998, based on the assumption
that a dialysis center is able to provide up to three treatments a day per
station, six days a week. Management believes RCG can increase the number of
dialysis treatments at its existing centers without making significant
additional capital expenditures.
Operation of Facilities
RCG's dialysis centers provide outpatient hemodialysis and related
services to ESRD patients in a convenient setting. Most of RCG's centers use
technologically advanced dialysis equipment to provide effective and efficient
dialysis. The Company's centers generally contain between 10 and 30 dialysis
stations, a nurses' station, a patient waiting area, examination rooms, a supply
room, a water treatment space to purify water used in hemodialysis treatments, a
dialyzer reprocessing room, staff work areas, offices and a staff lounge. Many
of RCG's centers also have a designated area for training patients in home
dialysis.
For RCG to be eligible to participate in the Medicare ESRD program, a
qualified physician or group of physicians must act as Medical Director for each
of RCG's centers and must supervise medical aspects of the center's operations.
An administrator, typically a registered nurse, who is responsible for the
day-to-day operations of the center and oversight of the staff, manages each
center. 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 scheduling of personnel to be
adjusted according to the number of patients receiving treatments.
Home Dialysis
All of RCG's centers offer home dialysis and various forms of
peritoneal dialysis, primarily CAPD or CCPD. As of December 31, 1998,
approximately 12% of RCG's patients received home dialysis. RCG's home dialysis
services consist of providing equipment and supplies, training, patient
monitoring and follow-up assistance to patients who receive dialysis treatments
in their homes. The Company believes that home dialysis is important to the
development of a full range of dialysis care and intends to expand its home
dialysis program.
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Hospital and Skilled Nursing Facility Care
Some of RCG's centers provide in-patient dialysis services to hospitals
in their service areas. As of December 31, 1998, RCG had contracts to provide
inpatient services to 94 hospitals. Under these contracts, RCG typically
provides equipment, supplies and personnel to perform hemodialysis and
peritoneal dialysis in connection with the hospital's inpatient services. These
inpatient dialysis services are typically required for patients with acute renal
failure resulting from accidents, medical and surgical complications, patients
in the early stage of renal failure and ESRD patients who require
hospitalization for other reasons. Most of RCG's hospital contracts specify
predetermined fees per dialysis treatment. The Company believes that such fees
may be subject to re-negotiation in the future as the health care industry
becomes more influenced by managed care and subject to capitated arrangements.
RCG also provides staff-assisted dialysis services to skilled nursing
facilities in the Phoenix, Arizona metropolitan area. A central office
dispatches personnel, equipment and supplies required to perform dialysis
treatments at skilled nursing facilities.
University Division
RCG currently manages the dialysis programs at Vanderbilt University
Medical Center, and is the managing partner of programs at the Cleveland Clinic
Foundation, MetroHealth (a hospital affiliated with Case Western Reserve
University), St. Louis University Hospital, the University of Arkansas and
Froedtert Hospital (a hospital affiliated with Medical College of Wisconsin).
The Company also provides home dialysis services for a group of patients at the
University of Arkansas. RCG expects these affiliations will expand its patient
base and provide opportunities for the development of new centers. Furthermore,
RCG expects these affiliations to provide access to outcomes research and highly
trained nephrologists who may become Medical Directors at RCG's centers.
Relationships with Nephrologists
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 his or her nephrologist has practice privileges. Consequently, RCG relies
on its ability to attract and meet the needs of referring nephrologists in order
to gain new patients and to retain existing patients.
Medical Directors
RCG generally engages practicing, board-eligible or board-certified
nephrologists to serve as Medical Directors for its centers. Each Medical
Director provides services pursuant to an independent contractor agreement
between the Company and the physician or his or her professional practice group.
Medical Directors are responsible for the administration and monitoring of the
Company's patient care policies, including patient education, administration of
dialysis treatment, development and training programs, and assessment of all
patients. Medical Directors play an important role in coordinating the delivery
of care to maintain ESRD patients' general level of health and to avoid medical
complications that might require hospitalization.
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RCG's typical Medical Director agreement has a term of seven years with
three-year renewal options. RCG pays the Medical Directors fees that approximate
the fair market value of the required supervisory services. These medical
director fees are the result of arms-length negotiations. Most of RCG's Medical
Director Agreements also include non-competition clauses with specific
limitations on the Medical Director's ability to compete with RCG for certain
periods of time and in certain geographic areas.
Administrative and Management Services
As an adjunct to dialysis center operations and as an additional
service to affiliated nephrologists, RCG currently offers certain administrative
and management services for physician practices. RCG currently provides such
services to practices affiliated with 66 physicians, including 63 of the 190
nephrologists affiliated with the Company's outpatient dialysis centers. Under
these arrangements, in exchange for a fair market value management fee, RCG
typically provides operations management and administrative services, including
billing, collection, accounting, human resources and information systems, and
may provide certain equipment and supplies to the practice. The physicians
generally retain ownership of their practices and the related assets. Each
physician is exclusively responsible for providing medical services to his or
her patients.
QUALITY ASSURANCE
In order to optimize therapy and improve outcomes, RCG maintains a
quality assurance program. RCG establishes, maintains and monitors quality
criteria for its clinical operations and monitors patient outcomes in all of its
centers. The Company has a Medical Advisory Board that oversees the development
of a protocol-driven clinical management model. A key component of RCG's quality
assurance program is involving patients in their own care.
Medical Advisory Board
RCG's Medical Advisory Board oversees the development and
implementation of clinical protocols and the review of patient outcomes. The
Medical Advisory Board is chaired by RCG's Chief Medical Officer and is composed
of 12 affiliated nephrologists. The Medical Advisory Board is responsible for
establishing, implementing and monitoring the Company's quality assurance
policies and procedures. The Medical Advisory Board also works to identify
therapy deficiencies and to evaluate technological changes. The Medical Advisory
Board's ultimate objective is for RCG to develop a protocol-driven clinical
management model that will enable the Company to manage effectively the
financial risk associated with ESRD capitation.
Quality Criteria
Continuous quality improvement is RCG's primary clinical objective.
Working to achieve this objective, RCG regularly evaluates the prescribed
dialysis treatments and patients' key physiological parameters. The Company's
corporate Quality Assurance Coordinator is a registered nurse who oversees RCG's
quality assurance program. In addition, each center has a quality assurance
committee that typically includes the Medical Director, the center administrator
and
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nurses, as well as other technical personnel. These committees monitor the
quality of care in the centers and oversee compliance with applicable
regulations.
Outcomes Data
RCG believes that an important factor in managing ESRD successfully is
the development of clinical pathways and treatment protocols. To develop, review
and maintain these pathways and protocols, RCG has access to a broad database of
treatment-specific outcomes information. RCG's Quality Assurance Coordinator
oversees the collection of patient outcomes and cost data in the Company's
centers. RCG makes these data available to the Medical Advisory Board and
affiliated physicians to assist in developing, implementing and evaluating
clinical pathways to enhance patient outcomes while reducing the cost of care.
RCG believes that the implementation of such clinical pathways will assist in
improving the overall quality and operating efficiencies of its dialysis
centers.
Patient Involvement
RCG also works to improve the quality of care by providing training to
ESRD patients both before and after they begin a course of dialysis. The Company
works to train patients to participate in their own care to the fullest extent
possible. In addition, in some of its centers, RCG, affiliated physicians and
patients form "self-care" units in which self-reliance is fostered through
instruction and support.
CORPORATE COMPLIANCE PROGRAM
RCG has developed and is implementing a system-wide corporate
compliance program as part of its commitment to comply fully with all applicable
laws and regulations and to maintain high standards of conduct by employees
throughout the Company. A purpose of the program is to heighten the awareness of
employees and affiliated professionals of the importance of complying with all
applicable laws and regulations in an increasingly complicated regulatory
environment and to ensure that steps are taken promptly to resolve instances of
non-compliance as they are identified.
The compliance program has been authorized and mandated by RCG's Board
of Directors. It addresses general compliance issues and areas of particular
sensitivity. As part of the program RCG has published a code of conduct setting
forth standards of conduct and principles of business ethics to be followed by
the Company and each employee and affiliated professional. A Compliance
Committee comprised of officers and senior managers of RCG and a Compliance
Officer administer the corporate compliance program. The Compliance Committee
and Compliance Officer report to the Board of Directors.
There can be no assurance that governmental authorities will not
challenge RCG's practices or that RCG will not be subject to sanctions or
required to alter or discontinue certain of its practices.
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REIMBURSEMENT
Sources of Net Patient Revenue
The following table sets forth information regarding the sources of
RCG's net patient revenue:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
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Medicare 68% 64% 60%
Medicaid 6 7 5
Commercial and other payors 21 24 29
Hospital inpatient dialysis services 5 5 6
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Total 100% 100% 100%
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Medicare
The Social Security Act provides that most U.S. citizens and resident
aliens with ESRD are entitled to Medicare coverage. If a physician finds that an
eligible person has ESRD, then he or she will be entitled to Medicare coverage
if (i) a regular course of dialysis has begun, or (ii) he or she has received a
kidney transplant. The Medicare entitlement begins the third month after the
month in which a regular course of dialysis is initiated.
For Medicare purposes, ESRD is defined as kidney impairment that
appears irreversible and permanent and that requires a regular course of
dialysis or a kidney transplant to maintain life. For a period of time, Medicare
coverage is generally secondary for patients who have qualifying employer group
health insurance. The Balanced Budget Act of 1997 extended the period during
which Medicare is secondary to a patient's group health plan from 18 months to
30 months effective for items and services provided on or after August 5, 1997.
After this 30-month period, Medicare becomes the primary coverage for patients,
and the patient's group health coverage generally pays applicable coinsurance
payments and deductibles.
Under the Medicare ESRD program, Medicare reimbursement rates per
treatment are fixed under a composite rate structure. The Medicare ESRD
composite rate may be changed by legislation or rulemaking, but it has not been
changed since 1991. Although Medicare reimbursement limits the allowable charge
per treatment, it provides RCG with predictable and recurring treatment revenue.
The Medicare ESRD composite rate for outpatient dialysis services
currently averages $126 per treatment in freestanding facilities. The Medicare
ESRD composite rate is subject to regional differences based on certain factors,
including labor costs. HCFA or Congress may periodically adjust Medicare
reimbursement rates, including the ESRD composite rate, based on certain
factors, including legislation, executive and congressional budget reduction and
control processes, inflation
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and costs incurred in rendering the services. Historically, adjustments in the
Medicare ESRD composite rate have had little relationship to the cost of
conducting business.
The Medicare ESRD composite rate applies to a designated group of
dialysis services, including the dialysis treatment, supplies used for such
treatment, certain laboratory tests and medications, and most of the home
dialysis services provided by RCG. 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, some physician-ordered tests
provided to dialysis patients and some home dialysis services. RCG usually
submits Medicare claims monthly and is usually paid within 30 days of the
submission.
Changes in the Medicare ESRD Composite Rate
The Medicare ESRD composite rate was unchanged from commencement of the
program in 1972 until 1983. From 1983 through December 1990, numerous
congressional actions resulted in net reductions of the average Medicate ESRD
composite rate from approximately $138 per treatment in 1983 to approximately
$125 per treatment in 1986. Congress increased the Medicare ESRD composite rate,
effective January 1991, resulting in the current average rate of $126 per
treatment.
The Medicare ESRD composite 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 Medicare ESRD composite rate
be adjusted for the effects of inflation. In March 1996, the Prospective Payment
Assessment Commission ("PROPAC") recommended that the Medicare ESRD composite
rate be increased by 2.0% for freestanding facilities for fiscal year 1997.
In response to PROPAC's March 1996 report, HCFA announced in August
1996 that an increase in the Medicare ESRD composite rate might be appropriate
within the next few years. In making this announcement, HCFA also stated that
any rate increase would be considered in the context of Medicare budgetary
concerns. Nevertheless, HCFA stated that it may recommend an update to the
Medicare ESRD 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 most recent congressional session, there were various
proposals for the reform of numerous aspects of Medicare. RCG is unable to
predict what, if any, future changes may occur in the Medicare ESRD composite
rate. Any reductions in the Medicare
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ESRD composite rate could have a material adverse effect on RCG's earnings,
financial condition and business.
Medicare Reimbursement for EPO
RCG also derives a significant portion of its revenue and earnings from
the administration of erythropoietin. Medicare reimbursement for EPO has been
fixed at $10 per 1,000 units since 1994. The Secretary of the Department of
Health and Human Services has the authority to determine the Medicare
reimbursement rate for EPO. In 1997 the Department for Health and Human Services
Office of Inspector General conducted a review of EPO reimbursement and
recommended a $1 reduction per 1,000 units in Medicare reimbursement for EPO.
Last year the President's budget for Fiscal Year 1999 proposed a $1 reduction,
but the proposal did not pass. The President's recently proposed budget for
Fiscal Year 2000 again includes a proposal to reduce EPO reimbursement by $1 per
1,000 units. RCG is unable to predict whether any changes in EPO reimbursement
will occur. Any reduction in Medicare reimbursement for EPO could have a
material adverse effect on RCG's earnings, financial condition and business.
HCFA also places limits on EPO reimbursement based on patients'
hematocrit levels. Hematocrit is a measure of anemia. Currently, if a patient's
hematocrit is below 36%, HCFA approves Medicare reimbursement for EPO without
specific documentation of medical necessity. If a patient's average hematocrit
over a three-month period is higher than 36%, then the provider must either
reduce the amount of EPO being administered by at least 20% or Medicare
reimbursement will be reduced and calculated as if the provider had reduced the
amount of EPO administered by 20%. Prior to 1998, no Medicare reimbursement was
available for patients with average hematocrits higher than 36.5%. RCG is unable
to predict whether any changes in EPO reimbursement based on hematocrit levels
will occur. Any reduction in Medicare reimbursement for EPO could have a
material adverse effect on RCG's earnings, financial condition and business.
Medicaid Reimbursement
Medicaid programs are health care programs partially funded by the
federal government that are administered by the states. These programs generally
provide coverage for uninsured patients whose income and assets fall below
levels determined by the states. The programs also serve as supplemental
insurance programs for the Medicare co-insurance portion and provide coverage
for certain items (for example, oral medications) that are not covered by
Medicare. State regulations generally follow Medicare reimbursement levels and
coverage without any coinsurance amounts. Some states, however, require
beneficiaries to pay a share of the cost based upon their income or assets. RCG
is a licensed ESRD Medicaid provider in all of the states in which it does
business.
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Private Reimbursement/Acute Care Contracts
Before Medicare becomes a patient's primary payor, the patient's own
insurance plan or other health care coverage, if any, pays for his or her ESRD
treatments. Reimbursement rates from these private payors are generally
significantly higher than the rate set by Medicare. RCG has also negotiated
managed care contracts with certain payors at rates that are higher than the
Medicare ESRD composite rate, but rates under these managed care contracts are
generally lower than those RCG charges other private payors. After Medicare
becomes a patient's primary payor, private secondary payors generally reimburse
RCG for the patient's copayment of 20% of the Medicare per treatment rate. RCG
also receives payments from hospitals under 94 acute care contracts at rates
significantly higher than the Medicare ESRD composite rate. Rates under these
acute care contracts are the result of arms-length negotiations between the
hospital and RCG and approximate fair market value of the services provided by
RCG.
GOVERNMENT REGULATION
General
Federal, state, and local governments regulate the operation of
dialysis centers by RCG. Applicable federal and state statutes and regulations
require RCG to meet various standards relating, among other things, to
licensure, management of dialysis centers, patient care personnel, maintenance
of proper records, equipment and quality assurance programs, and the treatment
and disposal of biomedical waste. In addition, through certificate of need, or
CON, programs, some states regulate the development or expansion of health care
facilities and services, including dialysis centers. Further, RCG is subject to
federal and state laws governing, among other things, the relationships between
RCG and physicians, patient referrals, and false claims. To date, the dialysis
centers owned by RCG have maintained their licenses and Medicare and Medicaid
certifications.
RCG believes it substantially complies with applicable federal and
state laws. However, if a state or the federal government finds that RCG has not
complied with these laws, then RCG could be required to change its way of
operating, and any changes could have a negative impact on RCG. RCG believes
that the health care services industry will continue to be subject to extensive
regulation at the federal, state, and local levels. RCG cannot predict the scope
and effect of future regulation of its business and cannot predict whether
health care reform will require RCG to change its operations or whether such
reform will have a negative impact on RCG.
To receive Medicare reimbursement for dialysis services, dialysis
centers operated by RCG must be certified by the Health Care Financing
Administration as meeting certain requirements. All of the dialysis centers
operated by RCG are certified under the Medicare program. HCFA recently
announced that it is in the process of revising the current Medicare conditions
of coverage for ESRD services. RCG cannot predict what, if any, changes HCFA
might make to the current conditions of coverage and whether RCG will be able to
meet new or revised conditions of coverage. Any changes to the Medicare
conditions of coverage for ESRD facilities could require RCG to change its
operations and could have a negative effect on the business and profitability of
RCG. A loss of certification to participate in the Medicare and
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Medicaid programs, loss of licenses under the laws of any state or other
government authorizations could have a negative effect on RCG. In addition, any
reduction in governmental payments for dialysis services or any reduction or
elimination of coverage of dialysis services by a governmental party would have
a negative impact on RCG's business.
RCG cannot predict whether it will be held responsible for actions
previously taken by acquired companies before RCG purchased them. RCG also
cannot predict whether its operations, or the previous operations of acquired
companies, will be reviewed or challenged by the government. Any review or
challenge of its operations could have a negative impact on RCG.
The Anti-Kickback Statute
Under Medicare, Medicaid, and other government-funded health care
programs such as the CHAMPUS program, federal and state governments enforce a
federal law called the Anti-Kickback Statute. The Anti-Kickback Statute
prohibits any person from offering or paying any type of benefit to another
person in exchange for the referral of a patient covered by Medicare, Medicaid
or other federally-subsidized program. Remuneration prohibited by the
Anti-Kickback Statute includes the payment or transfer of anything of value.
Many states have similar anti-kickback statutes.
Any person or entity which violates the Anti-Kickback Statute may be
penalized. These penalties include criminal fines of up to $25,000 per violation
and imprisonment. In addition, the government may impose civil penalties of up
to $50,000 per violation, plus three times the actual damages to the government
resulting from the Anti-Kickback Statute violation. Further, the Secretary of
the Department of Health and Human Services, HHS, has the authority to exclude
or bar individuals or entities who violate the Anti-Kickback Statute from
participating in Medicare and Medicaid.
The Anti-Kickback Statute is a broad law, and courts have not been
consistent in their interpretations of it. Courts have stated that, under
certain circumstances, the Anti-Kickback Statute is violated when just one
purpose, as opposed to the primary purpose, of a payment is to induce referrals.
To clarify what acts or arrangements will not be subject to prosecution by the
Office of Inspector General of HHS or the United States Attorney, HHS adopted a
set of safe harbor regulations and has proposed additional safe harbor
regulations. HHS continues to publish clarifications to these safe harbors. If
an arrangement meets all of the requirements of a safe harbor, it will not be
considered to violate the Anti-Kickback Statute. The types of arrangements
covered by safe harbors which are not subject to enforcement actions by the
government include, but are not limited to, certain investments in companies
whose stock is traded on a national exchange, certain small company investments
in which physician ownership is limited, rental of space, rental of equipment,
personal services contracts, management contracts, sales of physician practices,
physician referral services, warranties, discounts, payments to employees, group
purchasing organizations, and waivers of beneficiary deductibles and
co-payments. Each type of arrangement must meet a number of specific
requirements in order to enjoy the benefits of the applicable safe harbor.
Meeting the requirements of a safe
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harbor will protect an arrangement from enforcement action by the government.
However, the fact that an arrangement does not meet the requirements of a safe
harbor does not mean that the arrangement is necessarily illegal or will be
prosecuted under the Anti-Kickback Statute.
RCG seeks to satisfy as many safe harbor requirements as possible when
it is structuring its business arrangements. However, not all of RCG's
arrangements satisfy all elements of a safe harbor. Management believes RCG has
a reasonable basis for concluding that it substantially complies with the
Anti-Kickback Statute and other applicable related federal and state laws and
regulations. RCG believes that its current arrangements with nephrologist
owners, Medical Directors, laboratories, suppliers, hospitals, and other sources
of referrals to its dialysis centers materially comply with the Anti-Kickback
Statute. However, a government agency might take a position contrary to the
interpretations made by RCG or may require RCG to change its practices. If an
agency were to take such a position, it could adversely affect RCG.
The Stark Law
Congress has passed significant prohibitions against certain physician
referrals of patients for health care services. These prohibitions are commonly
known as the Stark Law. The Stark Law prohibits a physician from making
referrals for certain designated health services to entities with which the
physician, or an immediate family member of the physician, has a financial
relationship. The term "financial relationship" is defined very broadly to
include most types of ownership or compensation relationships. The Stark Law
also prohibits the entity receiving the referral from seeking payment under the
Medicare and Medicaid programs for services rendered pursuant to a prohibited
referral. If an entity is paid for services rendered pursuant to a prohibited
referral, it may incur civil penalties and could be excluded from participating
in Medicare or Medicaid.
As originally enacted, the Stark Law restricted referrals for clinical
laboratory services. This version of the Stark Law is also called Stark I.
Effective January 1, 1995, the Stark Law was expanded to include, in addition to
clinical laboratory services, a list of designated health services, including
physical therapy services; occupational therapy services; radiology services,
including magnetic resonance imaging (MRI), computerized axial tomography (CAT)
scans, and ultrasound services; radiation therapy services and supplies; durable
medical equipment and supplies; parenteral and enteral nutrients, equipment, and
supplies; prosthetics, orthotics, and prosthetic devices and supplies; home
health services; outpatient prescription drugs; and inpatient and outpatient
hospital services. This version of the Stark Law is also known as Stark II.
These listed services are called "designated health services" under the Stark
Law.
The Stark Law defines a financial relationship broadly to include (i) a
physician's ownership or investment interest in an entity and (ii) a
compensation relationship between a physician and an entity. RCG has
compensation arrangements with its Medical Directors or the professional
practices of the Medical Directors. The Medical Directors or their practices may
also own shares, and options to purchase shares, of common stock of RCG; and, if
so, the Medical Directors would have a direct or indirect investment interest in
RCG. Therefore, the Medical Directors may have financial relationships with RCG
for purposes of the Stark Law and
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they would not be able to refer patients to RCG dialysis centers for designated
health services unless a Stark Law exception applies.
Dialysis is not listed as a designated health service under the Stark
Law. However, the definition of "designated health services" includes some items
and services that are components of dialysis or which may be provided to
patients by RCG in connection with their dialysis services. Final regulations
adopted by HHS under Stark I contain an exception under the Stark Law for
clinical laboratory services that are included in the Medicare ESRD composite
rate. HHS has proposed regulations for Stark II that exclude from the Stark Law
prohibition all services furnished in a dialysis facility which are included in
the Medicare ESRD composite rate. The Stark II proposed regulations also exclude
from the definition of outpatient prescription drugs, a designated health
service, EPO and other drugs furnished as part of dialysis treatment, whether or
not they are included in the Medicare ESRD composite rate. Further, the proposed
regulations would exclude from the definition of "inpatient hospital services"
any dialysis services provided by a hospital which is not certified by HCFA to
provide dialysis services. This would have the effect of excluding from the
Stark Law prohibition, any dialysis services provided by an RCG facility under
an acute dialysis contract with a hospital if that hospital is not certified to
provide dialysis directly. Finally, the proposed Stark II regulations would
exclude from the definition of "durable medical equipment" all equipment and
supplies used in connection with home dialysis. These proposed Stark II
regulations, if adopted, would exclude most of the items and services connected
with dialysis from the Stark Law prohibitions. However, the proposed Stark II
regulations have elicited significant comments from the public, and HHS has not
finalized the regulations. RCG cannot predict when HHS will finalize the Stark
II proposed regulations or whether HHS will finalize these regulations in their
proposed form.
Until the Stark II proposed regulations are final, designated health
services, other than clinical laboratory services included in the ESRD composite
payment rate, provided in an ESRD center are technically subject to the Stark
Law. In addition, all clinical laboratory services billed by RCG outside of the
Medicare ESRD composite rate technically fall under the Stark Law's referral
prohibition.
If the Stark Law applies to the relationships between RCG and its
referring physicians, there are exceptions to the Stark Law which, if certain
requirements are met, would permit such a physician to refer patients to RCG for
designated health services. The Stark Law contains exceptions for certain
physician ownership or investment interests in entities and certain physician
compensation arrangements with entities. The exceptions for compensation
arrangements include the following: (i) employment relationships; (ii) personal
services contracts; and (iii) space and equipment leases. If a compensation
arrangement between a physician, or immediate family member, and an entity
satisfies all requirements for a Stark Law exception, then the Stark Law will
not prohibit the physician from referring patients to the entity for designated
health services. RCG believes its compensation arrangements with physicians who
refer to RCG meet the requirements for an exception under the Stark Law. For
example,
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RCG believes that its agreements with Medical Directors or their professional
practices materially satisfy the Stark Law exception for personal services
agreements.
The Stark Law also includes an exception for a physician's ownership or
investment interest in certain entities through the ownership of stock. If a
physician owns stock in an entity, and the stock is listed on a national
exchange or is quoted on the NASDAQ System and the ownership meets certain other
requirements, then the Stark Law will not apply to prohibit the physician from
referring to the entity for designated health services. The requirements for
this Stark Law exception include a requirement that the entity issuing the stock
have at least $75.0 million in stockholders' equity at the end of its most
recent fiscal year or on average during the previous three fiscal years. As of
March 1, 1999, RCG had stockholders' equity of more than $75.0 million. RCG
believes that physician ownership of RCG stock satisfies this Stark Law
exception.
If an entity violates the Stark Law, it could be responsible for civil
penalties of up to $15,000 per prohibited claim and may be subject to exclusion
from Medicare and Medicaid. If the Stark Law applies to the relationships
between RCG and its referring physicians and no exceptions under the Stark Law
are available, then RCG may be required to restructure these relationships or
refuse to accept referrals for designated health services from these physicians.
If RCG is found to have submitted claims to Medicare for services provided
pursuant to a referral prohibited by the Stark Law, then RCG could be required
to repay amounts it received from Medicare for those services and could be
subject to civil monetary penalties. If RCG is required to repay amounts to
Medicare or is subject to fines, RCG could be harmed.
Many states have physician ownership and referral statutes that are
similar to the Stark Law. RCG believes it is in substantial compliance with
applicable state laws on physician relationships and referrals. However, any
finding that RCG is not in compliance with these state laws could require RCG to
change its operations and could have a negative impact on RCG.
The Health Insurance Portability and Accountability Act of 1996
In an effort to combat health care fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act
of 1996, also called HIPAA. Among other things, HIPAA broadened the scope of
certain fraud and abuse laws, extended criminal penalties for Medicare and
Medicaid fraud to other federal health care programs, and expanded the authority
of the Office of the Inspector General to exclude persons and entities from
participating in the Medicare and Medicaid programs. HIPAA also extended the
Medicare and Medicaid civil monetary penalty provisions to other federal health
care programs, increased the amounts of civil monetary penalties, and
established a criminal health care fraud statute.
Federal health care offenses under HIPAA include health care fraud and
making false statements relating to health care matters. Under HIPAA, among
other things, any person or entity which knowingly and willfully defrauds or
attempts to defraud a health care benefit program is subject to a fine,
imprisonment or both. Also under HIPAA, any person or entity which knowingly and
willfully falsifies or conceals or covers up a material fact or makes any
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materially false or fraudulent statements in connection with the delivery of or
payment of health care services by a health care benefit plan is subject to a
fine, imprisonment or both.
HIPAA also required the Office of the Inspector General of HHS, known
as the OIG, to issue advisory opinions to outside parties regarding the
interpretation and applicability of the Anti-Kickback Statute and other OIG
health care fraud and abuse sanctions. An OIG advisory opinion only applies to
the people or entities which requested it. However, advisory opinions are
published and made available to the public, and they provide guidance on those
practices the OIG believes may violate federal law. RCG has not requested any
advisory opinions from the OIG. However, the OIG has issued several advisory
opinions addressing practices of companies owning ESRD centers. RCG believes,
but cannot promise, that its business practices substantially comply with the
general principles expressed by the OIG in these advisory opinions.
In advisory opinions addressing practices of companies owning ESRD
centers, the OIG has advised ESRD companies that they may not pay policy
premiums for Medicare supplemental insurance for patients, even patients with
proven financial hardship. Prior to the adoption of HIPAA and the issuance of
such opinions, RCG had paid premiums for Medicare supplemental insurance for
some patients with demonstrated financial need. RCG stopped making such payments
following the adoption of HIPAA. Consistent with the advisory opinions, the
Company has made grants to certain charitable foundations that may, but are not
required to, provide for such premium payments on behalf of ESRD patients. RCG
believes, but cannot promise, that its current practices regarding supplemental
insurance substantially comply with HIPAA and these advisory opinions.
The False Claims Act
The federal False Claims Act gives the federal government an additional
way to police false bills or requests for payment for health care services.
Under the False Claims Act, the government may fine any person who knowingly
submits, or participates in submitting, claims for payment to the federal
government that are false or fraudulent, or that contain false or misleading
information. Any person who knowingly makes or uses a false record or statement
to avoid paying the federal government may also be subject to fines under the
False Claims Act. Under the False Claims Act, the term "person" means an
individual, company, or corporation. The federal government has used the False
Claims Act widely to prosecute fraud against Medicare and other governmental
programs in areas such as coding errors, billing for services not provided and
submitting false cost reports. The False Claims Act has also been used to
prosecute people or entities which bill services at a higher reimbursement rate
than is allowed and billing for care that is not medically necessary.
The penalty for violation of the False Claims Act ranges from $5,000 to
$10,000 for each fraudulent claim plus three times the amount of damages caused
to the government as a result of each fraudulent claim. In addition to the False
Claims Act, the federal government may use several criminal statutes to
prosecute the submission of false or fraudulent claims for payment to
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the federal government. Many states have similar false claims statutes that
impose liability for the types of acts prohibited by the False Claims Act.
Civil Monetary Penalties
The Secretary of HHS may impose civil monetary penalties on any person
or entity that presents or causes to be presented certain ineligible claims for
medical items or services. The amount of penalties varies, depending on the
offense, from $2,000 to $50,000 per violation. HHS can impose penalties for
false or fraudulent claims and those that include services not provided as
claimed. In addition, HHS may impose penalties on claims:
- for physician services the person or entity knew or should
have known were rendered by a person who was unlicensed, or
misrepresented either his qualifications in obtaining his or
her license or his or her certification in a medical
specialty;
- were furnished by a person who was then-excluded from the
program to which the claim was made; or
- that show a pattern of medically unnecessary items or
services.
Penalties also may be imposed on a person or entity which violates
rules regarding the assignment of payments, that knowingly gives false or
misleading information that could reasonably influence the discharge of patients
from a hospital, or which offers inducements to beneficiaries for program
services. Persons who have been excluded from the program and who retain
ownership in a participating entity, or who contract with excluded persons, may
be penalized. Penalties also are applicable in certain other cases, including
violations of the federal Anti-Kickback law, payments to limit certain patient
services and improper execution of statements of medical necessity.
Health Care Legislation
Congress may enact legislation in the future which may significantly
change the Medicare ESRD program or reduce the amount that Medicare and Medicaid
will pay for services offered by RCG. In addition, a Congressional conference
report to a previous reconciliation bill called for the Department of Health and
Human Services to report to Congress no later than December 31, 1999 with
recommendations on expanding the definition of individuals eligible to enroll in
the bill's proposed MedicarePlus managed care plan to include ESRD patients.
Federal and state statutes or regulations may be enacted to impose
additional requirements on RCG to continue to provide services to ESRD patients,
to provide new services, or to maintain eligibility to participate in federal
and state payment programs. Any new legislation or regulations, or new
interpretations of existing statutes and regulations, governing reimbursement to
RCG or the manner in which RCG provides services to patients could have a
material impact on RCG and could adversely affect its profitability.
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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 more than 3,000 dialysis centers in the United
States at the end of 1996. RCG believes that approximately 50% were owned by
multi-center dialysis companies, 25% were owned by independent physicians and
other small operators and 25% were hospital-affiliated centers. The largest
multi-center dialysis company is Fresenius Medical Care, Inc. A.G. Other large
competitors of the Company include Total Renal Care Holdings, Inc., which
acquired Renal Treatment Centers, Inc. during 1998, and Gambro Healthcare, Inc.,
which acquired VIVRA Incorporated during 1997. In addition, Fresenius and Gambro
are both vertically integrated providers that sell dialysis equipment and
supplies, as well as operating dialysis centers. There are also a number of
health care providers that have entered or may decide to enter the dialysis
business. Some of RCG's competitors have substantially greater financial
resources than RCG and may compete with the Company for acquisitions,
development and/or management of dialysis centers and nephrology practices. RCG
believes that competition for acquisitions has, over time, increased the cost of
acquiring dialysis centers. RCG may also experience competition from centers
established by former Medical Directors or other referring physicians. There can
be no assurance that RCG will compete effectively with any such competitors.
INSURANCE
RCG maintains professional liability insurance and general liability
insurance policies for all of its operations. RCG also maintains insurance in
amounts it deems adequate to cover property and casualty risks, workers'
compensation, and directors and officers liability. However, there can be no
assurance that the aggregate amount and kinds of RCG's insurance are adequate to
cover all risks it may incur or that insurance will be available in the future.
EMPLOYEES
At December 31, 1998 RCG employed 3,312 full-time employees and 142
part-time employees. Of the total employees 125 were employed at the Company's
headquarters and 3,329 were employed at the Company's facilities. In
management's opinion, employee relations are good.
RISK FACTORS
You should carefully consider the risks described below before
investing in RCG. The risks and uncertainties described below ARE NOT the only
ones facing RCG. Other risks and uncertainties that we have not predicted or
assessed may also adversely affect our company.
If any of the following risks occur, our earnings, financial condition
or business could be materially harmed, and the trading price of our common
stock could decline, resulting in the loss of all or part of your investment.
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FAILURE TO INTEGRATE ACQUIRED COMPANIES WILL ADVERSELY AFFECT OUR PROFITABILITY
RCG has been in business only since February 1996 and has grown
significantly by acquisitions since then. Some of our acquisitions have occurred
within the past few weeks or months. We also intend to acquire more companies in
the future. We may be unable to integrate the acquired businesses successfully
or achieve anticipated economic, operational and other benefits in a timely
manner, which could lead to substantial costs and delays or other operational,
technical or financial problems, including diverting management's attention from
our existing business. The failure to integrate acquisitions successfully will
damage our earnings, financial condition or business.
CHANGES IN THE MEDICARE OR MEDICAID PROGRAMS COULD ADVERSELY AFFECT OUR BUSINESS
Changes in the Medicare, Medicaid or similar government programs or the
rates paid by those programs for our services may adversely affect our earnings.
We estimate that approximately 68% of our net revenue for 1996, 64% of our net
revenue for 1997 and 60% of our net revenue for 1998 consisted of reimbursements
from Medicare, including the administration of EPO to treat anemia. We also
estimate that approximately 6% of our net revenue for 1996, 7% of our net
revenue for 1997, and 5% of our net revenue for 1998, consisted of
reimbursements from Medicaid or comparable state programs. Any of the following
actions in connection with these programs could adversely affect our earnings,
financial condition or business:
- the amount paid to us under government programs for our
services could be reduced;
- the costs associated with performing our services that are
subject to inflation, such as labor and supply costs, could
increase without a corresponding increase in reimbursement
rates;
- certain ancillary services, for which we are reimbursed
separately, may become included in the flat composite rate,
thereby reducing our revenue; or
- changes in laws, or the interpretations of laws, could cause
us to modify our operations.
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ERYTHROPOIETIN REIMBURSEMENT DECREASES, COST INCREASES OR SUPPLY SHORTAGES WILL
ADVERSELY AFFECT OUR EARNINGS
Any decrease in the reimbursement of Erythropietin could significantly
affect our revenue and earnings. Erythropoietin is a bio-engineered hormone that
is used to treat anemia. Our revenues from EPO, much of which are reimbursed
through government programs, were approximately 19% of net revenue for 1996, 21%
of net revenue for 1997, and 23% of net revenue for 1998. President Clinton has
included a proposal to decrease the reimbursement for EPO by $1 per thousand
units in his fiscal year 2000 budget. Further, EPO is produced by a single
manufacturer, and any interruption of supply or cost increases could adversely
affect our earnings, financial condition or business.
PRIVATE INSURERS, HOSPITALS OR MANAGED CARE ORGANIZATIONS PAYMENT DECREASES
COULD ADVERSELY AFFECT OUR EARNINGS
Any reduction in the rates paid by private insurers, hospitals or
managed care organizations or a significant shift in our revenue mix toward
additional Medicare or Medicaid reimbursement could have a material adverse
effect on our earnings, financial condition or business. We estimate that
approximately 26% of our net revenue for 1996, 29% of our net revenue for 1997,
and 35% of our net revenue for 1998, were derived from sources other than
Medicare and Medicaid. In general, payments by private insurers and hospitals
for our services are at rates significantly higher than the Medicare or Medicaid
rates. As a result, any of the following events could have a material adverse
effect on our earnings, financial condition or business:
- an increase in the dialysis procedures reimbursed by private
insurers, hospitals or managed care companies could cause such
organizations to reduce the rates they pay us;
- a portion of our business that is currently reimbursed by
private insurers or hospitals may become reimbursed by managed
care organizations, which currently have lower rates for our
services; or
- the scope of coverage by Medicare or Medicaid under the flat
composite rate could expand and, as a result, reduce the
extent of our services being reimbursed at the higher
private-insurance rates.
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OUR RATE OF GROWTH IS SUBJECT TO OUR ABILITY TO MAKE FUTURE ACQUISITIONS
Much of our historical growth has come from acquisitions, and we expect
to continue to pursue growth through the acquisition and development of dialysis
centers. However, we may be unable to continue to identify and complete suitable
acquisitions or obtain the necessary financing. We also compete with other
companies to identify and complete suitable acquisitions. We expect this
competition to intensify, making it more difficult to acquire suitable
companies on favorable terms. Further, the businesses that we acquire may not
perform sufficiently to justify our investment or may not be integrated
successfully into our existing business. If we are unable to make additional
acquisitions on suitable terms, we may not meet our revenue growth expectations.
ACQUISITIONS MAY DILUTE OWNERSHIP AND REQUIRE ADDITIONAL DEBT
We may issue equity securities in future acquisitions that could be
dilutive to our shareholders. We also may incur additional debt and amortization
expense related to goodwill and other intangible assets in future acquisitions.
Further, amortization and other expenses may arise from previous acquisitions
due to changes in accounting requirements. This additional debt and amortization
expense may significantly reduce our profitability and materially and adversely
affect our earnings, financial condition or business.
LIABILITIES MAY ARISE FROM ACQUIRED BUSINESSES
We have acquired and intend to continue to pursue acquiring businesses
that may have unknown or contingent liabilities, including liabilities for
failure to comply with health care laws. Although we generally attempt to
identify any practices that may give rise to unknown or contingent liabilities
and thereafter conform them to our standards, private plaintiffs or governmental
agencies may still assert claims. Even though we generally seek to obtain
indemnification from prospective sellers, unknown and contingent liabilities may
not be covered by indemnification or may exceed contractual limits or the
financial capacity of the indemnifying party.
REDUCTIONS IN PHYSICIAN REFERRALS MAY ADVERSELY AFFECT OUR EARNINGS
Our dialysis centers depend on local nephrologist referrals. Typically,
one or a few physicians account for all or a significant portion of the patient
base at a center, and the loss of one or more referring physicians could have a
material adverse effect on the operations of that center. The loss of a
significant number of referring physicians could have a material adverse effect
on our earnings, financial condition and business. In many instances, the
primary referral sources for our centers are physicians who are also
stockholders and serve as medical directors of our centers. If stock ownership
or the medical director relationship were deemed to violate applicable federal
or state law, including fraud and abuse laws and laws prohibiting
self-referrals, such physicians may be forced to stop referring to our centers.
Further, we may not be able to renew or renegotiate our medical director
agreements successfully, which could result in a loss of patients.
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GOVERNMENT REGULATION CAN HAVE A LARGE IMPACT ON OUR BUSINESS
If our business is alleged or found to violate heath care or other
applicable laws, our earnings, financial condition or business may be adversely
affected. We are subject to extensive federal, state and local regulation
regarding the following:
- fraud and abuse prohibitions under health care reimbursement
laws,
- patient referrals prohibitions and limitations,
- false claims prohibitions under health care reimbursement
laws,
- facility licensure,
- health and safety requirements,
- environmental compliance, and
- medical and toxic waste disposal.
Much of this regulation, particularly in the areas of fraud and abuse and
patient referral, is complex and open to differing interpretations. Due to the
broad application of the statutory provisions and the absence in many instances
of regulations or court decisions addressing the specific arrangements by which
we conduct our business, it is possible that some of our practices might be
challenged under these laws. If any of our operations are found to violate these
laws, we may be subject to severe sanctions or be required to alter or
discontinue the challenged conduct. If we are required to alter our practices,
we may not be able to do so successfully. The occurrence of any of these events
could result in a material adverse effect on our earnings, financial condition
or business. These matters are discussed in more detail under the subheading of
"Government Regulation" within the "Business" section of this annual report.
INDUSTRY CHANGES COULD ADVERSELY AFFECT OUR BUSINESS
The health care industry in the United States is in a period of rapid
change and uncertainty. Health care organizations, public or private, may
dramatically change the way they operate and pay for services. Our business is
designed to function within the current health care financing and reimbursement
system. During the past several years, the health care industry has been subject
to increasing levels of government regulation of, among other things,
reimbursement rates and capital expenditures. In addition, proposals to reform
the health care system have been considered by Congress. These proposals, if
enacted, may further increase government regulation of or other involvement in
health care, lower reimbursement rates and otherwise change the operating
environment for health care companies. We cannot predict the likelihood of those
events or what impact they may have on our earnings, financial condition or
business.
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OUR BUSINESS IS SUBJECT TO SUBSTANTIAL COMPETITION
The dialysis industry is fragmented and rapidly consolidating. There
are several large dialysis companies that compete for the acquisition of
existing dialysis centers and the development of relationships with referring
physicians. Several of our competitors are part of larger companies that also
manufacture dialysis equipment. Several of our competitors, including these
equipment manufacturers, have substantially greater financial resources and more
established operations and infrastructure than RCG. We also experience
competition from referring physicians who open their own dialysis centers. There
can be no assurance that we will be able to compete effectively with any of our
competitors.
WE ARE DEPENDENT ON A FEW KEY PEOPLE
We are dependent upon the services of our executive officers Sam A.
Brooks, Jr., our Chairman, Chief Executive Officer and President, Raymond Hakim,
M.D., Ph.D., Ronald Hinds and Gary Brukhardt, each an Executive Vice President.
Further, our growth will depend in part upon our ability to attract and retain
skilled employees, for whom competition is intense. We also believe that our
future success will depend on our ability to attract and retain qualified
physicians to serve as medical directors of our dialysis centers. We do not
carry key-man life insurance on any of our officers. The loss by us of any of
our executive officers, or the inability to attract and retain qualified
management personnel and medical directors, could have a material adverse effect
on our earnings, financial condition or business.
BUSINESS RELATIONSHIPS WITH DIRECTORS COULD CREATE CONFLICTS OF INTEREST
We are a party to medical director agreements with the following
members of our Board of Directors or their physician practices: Stephen D.
McMurray, M.D., W. Tom Meredith, M.D., Thomas A. Lowery, M.D., John D. Bower,
M.D. and Kenneth E. Johnson, M.D., each of whom is also a stockholder of the
Company. In addition, we lease space from Dr. Bower, Dr. Lowery and an entity in
which Dr. Meredith owns an interest. Another of our directors, Harry R.
Jacobson, M.D., serves as the Chancellor of Health Affairs at Vanderbilt
University, with which we have an agreement to manage its Medical Center's
outpatient dialysis facility. These interests of our directors may give rise to
conflicts of interest concerning the fulfillment of their responsibilities as
directors, and could result in decisions that may not reflect the interests of
all stockholders equally.
INHIBITIONS AGAINST A TAKEOVER
Our Certificate of Incorporation and Bylaws contain a number of
provisions that may delay, deter or inhibit a future acquisition or change in
control of RCG that is not first approved by our Board of Directors. This could
occur even if our stockholders are offered an attractive value for their shares
or if a substantial number or even a majority of our stockholders believe the
takeover may be in their best interest. These provisions are intended to
encourage any person interested in acquiring RCG to negotiate with and obtain
approval from our Board of Directors
25
26
prior to pursuing the transaction. Provisions that could delay, deter or inhibit
a future acquisition or change in control of RCG include the following:
- a staggered Board of Directors that would require two annual
meetings to replace a majority of the Board of Directors;
- restrictions on calling special meetings at which an
acquisition or change in control of RCG might be brought to a
vote of the stockholders;
- blank check preferred stock that may be issued by our Board of
Directors without stockholder approval and that may be
substantially dilutive or contain preferences or rights
objectionable to an acquiror; and
- a poison pill that would substantially dilute the interest
sought by an acquiror.
These provisions could also discourage bids for our common stock at a premium
and have a material adverse effect on the market price of our common stock.
VOLATILITY OF STOCK PRICE
Our common stock is traded on the Nasdaq National Market. The market
price of our common stock has been volatile and could fluctuate substantially
based on a variety of factors, including the following:
- future announcements concerning us, our competitors or the
health care market;
- changes in government regulations; and
- changes in earnings estimates by analysts.
Furthermore, stock prices for many companies fluctuate widely for
reasons that may be unrelated to their operating results. These fluctuations,
coupled with changes in demand or reimbursement levels for our services and
general economic, political and market conditions, may adversely affect the
market price of our common stock.
YEAR 2000 ISSUES MAY RESULT IN LOSS OF REVENUE OR INCREASE IN COSTS
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century and, if not
corrected, could fail or create erroneous results by or at the year 2000. We
have undertaken, but not completed, an assessment of our year 2000 issues. Until
we have completed our assessment, we cannot be sure that our efforts to address
our year
26
27
2000 issues are appropriate, adequate or complete. Our year 2000 issues could
reside in our own systems and in the systems of third parties with whom we have
relationships that are material to our operations, such as reimbursement to us
from fiscal intermediaries and governmental agencies and the provision of
significant utilities and supplies to our centers. Year 2000 issues could cause
significant disruptions in our cash flow and operations, which could have a
material adverse effect on our earnings, financial condition and business.
Matters related to our year 2000 issues are discussed in further detail under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Impact of Year 2000."
FORWARD LOOKING STATEMENTS
Some of the information in this annual report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "intend," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully for the following
reasons:
- the statements discuss our future expectations;
- the statements contain projections of our future earnings or
of our financial condition; and
- the statements state other "forward-looking" information.
We believe it is important to communicate our expectations to our
investors. There may be events in the future, however, that we are not
accurately able to predict or over which we have no control. The risk factors
listed above, as well as any cautionary language in this annual report, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of any of the events described in the above risk factors, elsewhere
in this annual report and other events that we have not predicted or assessed
could have a material adverse effect on our earnings, financial condition and
business. In such case, the trading price of our common stock could decline and
you may lose all or part of your investment.
27
28
ITEM 2. PROPERTIES
PROPERTIES
As of December 31, 1998, RCG operated dialysis centers in 19 states, of
which 139 are located in leased facilities and 21 are owned. The following is a
summary of RCG's outpatient dialysis centers by state.
-------------------------------------------------------
OUTPATIENT FACILITIES BY STATE
-------------------------------------------------------
Alabama 5
-------------------------------------------------------
Arkansas 9
-------------------------------------------------------
Arizona 24
-------------------------------------------------------
Florida 5
-------------------------------------------------------
Indiana 15
-------------------------------------------------------
Kansas 12
-------------------------------------------------------
Kentucky 1
-------------------------------------------------------
Louisiana 1
-------------------------------------------------------
Michigan 4
-------------------------------------------------------
Mississippi 23
-------------------------------------------------------
Missouri 6
-------------------------------------------------------
New Jersey 2
-------------------------------------------------------
Ohio 6
-------------------------------------------------------
Oklahoma 3
-------------------------------------------------------
Oregon 6
-------------------------------------------------------
Pennsylvania 6
-------------------------------------------------------
Tennessee 1
-------------------------------------------------------
Texas 30
-------------------------------------------------------
Washington 1
-------------------------------------------------------
TOTAL 160
-------------------------------------------------------
Certain of RCG's centers are leased from physicians who practice at the
center and who are stockholders of RCG. RCG's leases generally have terms
ranging from one to 15 years and typically contain renewal options. The size of
RCG's centers ranges from approximately 400 to 17,000 square feet. RCG leases
office space in Nashville, Tennessee for its corporate headquarters under a
lease that expires in 2002. The Company leases other office space in and around
Nashville, Tennessee for its University division, for certain billing and
computer operations and for its wound care and diabetic division. RCG 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 RCG's dialysis centers is subject to
compliance with conditions relating to participation in the Medicare ESRD
program. In states that require a certificate of need, approval of an
application submitted by the Company is necessary for expansion of an existing
dialysis center or development of a new center.
28
29
RCG generally owns the equipment used in its outpatient centers. RCG
considers its equipment to generally be in good operating condition and suitable
for the purposes for which it is being used.
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 its professional liability 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 1998.
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,
1998.
On June 13, 1997, the Board of Directors approved a three-for-two stock
split to be effected in the form of a 50% stock dividend. One additional share
of common stock was issued for every two shares held by shareholders of record
at the close of business on July 7, 1997. The additional shares were distributed
on July 25, 1997. In addition, on July 23, 1998, the Board of Directors approved
a three-for-two stock split to be effected in the form of a 50% stock dividend.
One additional share of common stock was issued for every two shares held by
shareholders of record at the close of business on August 7, 1998. The
additional shares were distributed on August 24, 1998. All financial and share
data included in this report have been adjusted for the stock splits.
---------------------------------------------------------------------
1996 HIGH LOW
---------------------------------------------------------------------
First Quarter $ 12.563 $ 10.438
---------------------------------------------------------------------
Second Quarter $ 15.891 $ 13.000
---------------------------------------------------------------------
Third Quarter $ 16.891 $ 11.672
---------------------------------------------------------------------
Fourth Quarter $ 16.672 $ 13.609
---------------------------------------------------------------------
29
30
---------------------------------------------------------------------
1997 HIGH LOW
---------------------------------------------------------------------
First Quarter $ 16.328 $ 14.000
---------------------------------------------------------------------
Second Quarter $ 18.531 $ 13.219
---------------------------------------------------------------------
Third Quarter $ 24.172 $ 17.000
---------------------------------------------------------------------
Fourth Quarter $ 24.078 $ 17.422
---------------------------------------------------------------------
---------------------------------------------------------------------
1998 HIGH LOW
---------------------------------------------------------------------
First Quarter $ 26.750 $ 18.672
---------------------------------------------------------------------
Second Quarter $ 29.375 $ 22.500
---------------------------------------------------------------------
Third Quarter $ 30.203 $ 19.750
---------------------------------------------------------------------
Fourth Quarter $ 29.563 $ 23.188
---------------------------------------------------------------------
HOLDERS
As of March 18, 1999, the approximate number of registered stockholders
was 3,593 including 243 stockholders of record and approximately 3,350 persons
or entities holding common stock in nominee name.
DIVIDEND POLICY
RCG has never paid any cash dividend on its capital stock. RCG
currently anticipates that all of its earnings will be retained to finance the
growth and development of its business, and therefore, does not anticipate that
any cash dividend will be declared or paid on the common stock in the
foreseeable future. Any future declaration of dividends will be subject to the
discretion of RCG's Board of Directors and its review of RCG's earnings,
financial condition, capital requirements and surplus, contractual restrictions
to pay such dividends and other factors it deems relevant.
SALES OF UNREGISTERED SECURITIES
RCG issued the following securities during the fourth quarter of 1998
in transactions that were not registered under the Securities Act of 1933, as
amended (the "Securities Act"):
In October 1998, the Company issued 55,787 shares of common stock to
the former owners of H.H. Hiner, P.C. and Southeast Texas Nephrology
Associates, P.A. and Hervy Hiner, M.D. in a private placement pursuant
to the exemption from registration set forth in Section 4(2) of the
Securities Act.
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31
ITEM 6. SELECTED FINANCIAL DATA
The Selected Historical Financial Data - Renal Care Group, Inc. on page
32 represent the historical results of operations of the Company and include
the results of operations of certain businesses that 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 RCG's initial public offering in February 1996.
The Selected Combined and Pro Forma Financial Data - Renal Care Group,
Inc. and Founding Companies on page 33 represent 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.
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 RCG as of the closing of RCG'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 earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion of earnings per share and the impact
of Statement No. 128, see the notes to the consolidated financial statements
beginning on page F-8.
The Selected Historical Financial Data - Renal Care Group, Inc. for the
years ended December 31, 1996, 1997 and 1998 are derived from audited data
included elsewhere in the Form 10-K. The unaudited combined financial data have
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.
31
32
SELECTED HISTORICAL FINANCIAL DATA -- RENAL CARE GROUP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,(1)
---------------------------------------------------------------
1994(2) 1995(2) 1996 1997 1998
-------- -------- -------- -------- ---------
INCOME STATEMENT DATA:
Net revenue..................................... $ 41,627 $ 42,971 $129,518 $214,009 $ 369,372
Patient care costs.............................. 25,003 26,908 90,122 145,922 242,426
General and administrative expenses............. 8,721 8,701 13,364 21,806 35,132
Provision for doubtful accounts................. 1,418 2,355 2,446 4,824 9,986
Depreciation and amortization................... 1,484 1,580 4,541 9,016 18,418
Merger expenses................................. -- -- 1,960 300 1,000
-------- -------- -------- -------- ---------
Total operating costs and expenses.............. 36,626 39,544 112,433 181,868 306,962
-------- -------- -------- -------- ---------
Income from operations.......................... 5,001 3,427 17,085 32,141 62,410
Interest income (expense), net.................. (363) (452) 619 583 (3,076)
-------- -------- -------- -------- ---------
Income before income taxes and minority interest 4,638 2,975 17,704 32,724 59,334
Minority interest............................... -- -- -- 955 3,492
-------- -------- -------- -------- ---------
Income before income taxes...................... $ 4,638 $ 2,975 17,704 31,769 55,842
======== ========
Provision for income taxes...................... 6,958 11,791 20,631
-------- -------- ---------
Net income...................................... $ 10,746 $ 19,978 $ 35,211
======== ======== =========
Basic net income per share...................... $ 0.41 $ 0.59 $ 0.88
======== ======== =========
Basic weighted average shares outstanding....... 26,481 33,675 40,201
======== ======== =========
Diluted net income per share.................... $ 0.37 $ 0.56 $ 0.83
======== ======== =========
Diluted weighted average shares outstanding..... 28,664 35,595 42,650
======== ======== =========
DECEMBER 31,(1)
---------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- ---------
BALANCE SHEET DATA:
Working capital (deficit)......................... $ 3,171 $ (1,418) $ 49,462 $ 24,469 $ 52,864
Total assets...................................... 17,318 20,765 131,812 248,083 376,845
Long-term debt.................................... 5,420 7,340 -- 15,470 62,588
Stockholders' equity.............................. 5,919 4,566 93,325 174,759 229,276
- ---------
(1) The financial information for the years ended December 31, 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 after February 1996 when they were acquired by RCG in
the Combination simultaneously with its initial public offering.
(2) Net income per share amounts are not presented for the years ended December
31, 1994 and 1995 as the historical results of operations of the Company
for these years consisted of non-taxed net income from Main Line and
RenalWest which were S corporations; therefore, all taxes were payable
personally by the stockholders of the respective entities. Additionally,
the entities had materially different equity structures than the Company,
and net income per share is not meaningful.
32
33
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)
-----------------------------------------------------------------
1994 1995(2) 1996(3) 1997 1998
--------- --------- -------- -------- ---------
INCOME STATEMENT DATA:
Net revenue .................................... $ 110,670 $ 115,329 $135,894 $214,009 $ 369,372
Patient care costs ............................. 75,366 80,417 94,849 145,922 242,426
General and administrative expenses ............ 12,616 12,866 13,797 21,806 35,132
Provision for doubtful accounts ................ 2,914 3,995 2,571 4,824 9,986
Depreciation and amortization .................. 3,414 3,661 4,715 9,016 18,418
Merger expenses ................................ -- -- 1,960 300 1,000
--------- --------- -------- -------- ---------
Total operating costs and expenses ............. 94,310 100,939 117,892 181,868 306,962
--------- --------- -------- -------- ---------
Income from operations ......................... 16,360 14,390 18,002 32,141 62,410
Interest income (expense), net ................. (646) (1,013) 525 583 (3,076)
--------- --------- -------- -------- ---------
Income before income taxes and minority interest 15,714 13,377 18,527 32,724 59,334
Minority interest .............................. -- -- -- 955 3,492
--------- --------- -------- -------- ---------
Income before income taxes ..................... $ 15,714 $ 13,377 18,527 31,769 55,842
========= =========
Provision for income taxes ..................... 7,025 11,791 20,631
-------- -------- ---------
Net income ..................................... $ 11,502 $ 19,978 $ 35,211
======== ======== =========
Basic net income per share ..................... $ 0.41 $ 0.59 $ 0.88
======== ======== =========
Basic weighted average shares outstanding ...... 28,184 33,675 40,201
======== ======== =========
Diluted net income per share ................... $ 0.38 $ 0.56 $ 0.83
======== ======== =========
Diluted weighted average shares outstanding .... 30,366 35,595 42,650
======== ======== =========
DECEMBER 31,(1)
-----------------------------------------------------------------
1994 1995 1996(1) 1997 1998
--------- --------- -------- -------- ---------
BALANCE SHEET DATA:
Working capital ................................ $ 18,158 $ 12,237 $ 49,462 $ 24,469 $ 52,864
Total assets ................................... 49,918 60,899 131,812 248,083 376,845
Long-term debt ................................. 8,630 15,915 -- 15,470 62,588
Stockholders' equity ........................... 26,825 25,358 93,325 174,759 229,276
- ----------
(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 $2,600 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 diluted net income per share before merger expenses for the year ended
December 31, 1996 would have been $12,738 and $0.42, respectively.
33
34
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, Inc. provides dialysis services to patients with
chronic kidney failure. RCG began operating in February 1996 when it acquired
the Founding Companies in the Combination simultaneous with its initial public
offering. As of December 31, 1998, the Company provided dialysis and ancillary
services to approximately 11,400 patients through 160 outpatient dialysis
centers in 19 states, in addition to providing acute dialysis services in 94
hospitals.
For the comparison discussion that follows, the Selected Combined and
Pro Forma Data include the financial information of the Founding Companies, and
previously reported transactions accounted for as poolings of interests. Because
the Founding Companies and Companies added in pooling transactions were
independent and not operated by RCG's management before the dates of
acquisition, the historical results of such companies before such times may not
be indicative of future performance.
RCG's net revenue has been derived primarily from the following
sources:
- outpatient hemodialysis services;
- ancillary services associated with dialysis, primarily the
administration of erythopoietin (EPO);
- home dialysis services;
- inpatient hemodialysis services provided pursuant to contracts
with acute care hospitals and skilled nursing facilities;
- management contracts with hospital-based and medical
university dialysis programs;
- laboratory services; and
- wound care and diabetic services.
ESRD patients typically receive three dialysis treatments each week,
with reimbursement for services provided primarily by the Medicare ESRD program
based on rates established by HCFA. For the year ended December 31, 1998,
approximately 65% of the Company's net revenue
34
35
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.
The Medicare composite rate applies to a designated group of dialysis
services, including the dialysis treatment, supplies used for such treatment,
certain laboratory tests and medications, and most of the home dialysis services
provided by RCG. 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.
For patients with private health insurance, dialysis was historically
reimbursed at rates higher than Medicare during the first 18 months of
treatment, and after that time Medicare became the primary payor. Effective
August 5, 1997, however, the health insurance coordination period during which
private insurance must pay for dialysis was extended to 30 months of treatment,
and after that period Medicare becomes the primary payor. Reimbursement for
dialysis services provided pursuant to a hospital contract is negotiated with
the individual hospital and generally is higher on a per treatment equivalent
basis than the Medicare composite rate. Because dialysis is a life-sustaining
therapy used to treat this chronic disease, utilization is predictable and is
not subject to seasonal fluctuations.
RESULTS OF OPERATIONS
As indicated elsewhere, in February 1996 RCG commenced its business
with the simultaneous acquisition of the five Founding Companies in the
Combination. As a result of the Combination, a comparison of the current
operations of RCG to its historical operations prior to the Combination 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
on a pro-forma basis as if the Combination had occurred for all periods
presented. In addition, after December 31, 1998, RCG merged with Dialysis
Centers of America, Inc. in a transaction that will be accounted for as a
pooling of interests. As a result, RCG's Financial Statements will be restated,
and the results of operations reflected in the table below may not be comparable
to those giving effect to the restatement.
35
36
The following table sets forth, results of operations (in thousands)
for the periods indicated and the percentage of net revenue represented by the
respective financial line items:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1997 1998
------------------- ------------------- ---------------------
Net Revenue ...................... $135,894 100.0% $214,009 100.0% $ 369,372 100.0%
Patient care costs ............... 94,849 69.8 145,922 68.2 242,426 65.6
General and administrative
expenses ...................... 13,797 10.2 21,806 10.2 35,132 9.5
Provision for doubtful accounts... 2,571 1.9 4,824 2.3 9,986 2.7
Depreciation and amortization .... 4,715 3.5 9,016 4.2 18,418 5.0
Merger expenses .................. 1,960 1.4 300 0.1 1,000 0.3
-------- ------ -------- ------ --------- ------
Total operating costs and
expenses ..................... 117,892 86.8 181,868 85.0 306,962 83.1
-------- ------ -------- ------ --------- ------
Income from operations ........... 18,002 13.2 32,141 15.0 62,410 16.9
Interest income (expense) net .... 525 0.4 583 0.2 (3,076) (0.9)
Minority interest ................ -- -- (955) (0.4) (3,492) (0.9)
-------- ------ -------- ------ --------- ------
Income before income taxes ....... $ 18,527 13.6% $ 31,769 14.8% $ 55,842 15.1%
======== ====== ======== ====== ========= ======
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Revenue. Net revenue increased from $214.0 million for the year
ended December 31, 1997 to $369.4 million for the year ended December 31, 1998,
an increase of $155.4 million, or 72.6%. This increase resulted primarily from a
55.1% increase in the number of treatments from 1,031,507 in 1997 to 1,600,077
in 1998. This growth in treatments is a result of the acquisition and
development of various dialysis facilities and a 10.0% increase in same-center
treatments for 1998 over 1997. In addition, average net revenue per dialysis
treatment increased 8.7% from $206 in 1997 to $224 in 1998. The remaining
revenue increase is a result of wound care and diabetes revenues following RCG's
entrance into that business with the December 1997 acquisition of Integrated
Wound Care, Inc. (formerly known as STAT Management, Inc.), higher management
fees and increased earnings of unconsolidated partnerships in 1998 compared to
1997. The increase in revenue per treatment was due to an improvement in the
Company's payor mix, increases in EPO and other drug utilization, increases in
acute hospital services, the implementation of RCG's in-house laboratory
services and the positive impact on commercial payments of the Medicare
secondary payor provisions of the Balanced Budget Act.
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 $145.9 million for the year ended December 31, 1997 to $242.4
million for the year ended December 31, 1998, an increase of $96.5 million, or
66.1%. This increase resulted primarily from an increase in the number of
treatments performed during the period, which caused a corresponding increase in
the cost of labor, drugs and supplies. Patient care costs as a percentage of net
revenue decreased from 68.2% in 1997 to 65.6% in 1998 primarily due to the
increase in net revenue per treatment. Patient care cost per treatment increased
from $141 in 1997 to $152 in 1998, or 7.8%. This increase is due to costs
associated with the utilization of EPO and other drugs, the cost of providing
acute hospital services, the cost of providing in-house laboratory services and
normal health care inflation.
36
37
General and Administrative Expenses. General and administrative
expenses include corporate office costs and facility costs not directly related
to the care of patients, including facility administration, accounting, billing
and information systems. General and administrative expenses increased from
$21.8 million for the year ended December 31, 1997 to $35.1 million for the year
ended December 31, 1998, an increase of $13.3 million, or 61.0%. General and
administrative expenses as a percentage of revenue decreased from 10.2% in 1997
to 9.5% in 1998, primarily as the result of the increase in net revenue for
1998.
Provision for Doubtful Accounts. The provision for doubtful accounts is
a function of payor mix, billing practices, and other factors. RCG reserves for
doubtful accounts in the period in which the revenue is recognized based on
management's estimate of the net collectibility of the accounts receivable.
Management estimates the net collectibility of accounts receivable based upon an
analysis of payor mix, billing practices and other factors. The provision for
doubtful accounts increased from $4.8 million in 1997 to $10.0 million in 1998.
The provision for doubtful accounts as a percentage of net revenue increased
from 2.3% in 1997 to 2.7% in 1998. This increase in the provision for doubtful
accounts was influenced by the amount of net operating revenues generated from
non-governmental payor sources, the temporary degradation of accounts receivable
collections associated with the transition of certain acquisitions and the
conversion of patient billing systems.
Depreciation and Amortization. Depreciation and amortization increased
from $9.0 million for the year ended December 31, 1997 to $18.4 million for the
year ended December 31, 1998, an increase of $9.4 million, or 104.4%. This
increase was due to the start-up of dialysis facilities, the normal replacement
costs of dialysis facilities and equipment, the purchase of information systems,
and the amortization of the goodwill associated with the acquisitions accounted
for as purchases.
Merger Expenses. Merger expenses of $1.0 million for the year ended
December 31, 1998, represent legal, accounting and employee severance costs and
related benefits and other costs associated with the assimilation and transition
of the mergers in Arkansas, Missouri and Oklahoma during January and April 1998.
Interest Income (Expense), Net. Interest expense of $3.1 million for
the year-ended December 31, 1998 increased $3.7 million compared to RCG's
interest income of $583,000 for the year-ended December 31, 1997. The 1998
interest expense is attributable to increased borrowings under RCG's $125.0
million credit facility. Such borrowings were used for a combination of
acquisitions, capital expenditures and working capital requirements.
Income from Operations. Income from operations increased from $32.1
million for the year ended December 31, 1997 to $62.4 million for the year ended
December 31, 1998, an increase of $30.3 million, or 94.4%. Income from
operations as a percentage of net revenue increased from 15.0% in 1997 to 16.9%
in 1998 as a result of the factors discussed above.
Minority Interest. Minority interest represents the proportionate
equity interest of other partners in RCG's consolidated entities that are not
wholly-owned. As of December 31, 1998, this was primarily comprised of three
joint venture partnerships.
37
38
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Revenue. Net revenue increased from $135.9 million for the year
ended December 31, 1996 to $214.0 million for the year ended December 31, 1997,
an increase of $78.1 million, or 57.5%. This increase resulted primarily from a
46.6% increase in the number of treatments from 703,549 in 1996 to 1,031,507 in
1997. This growth in treatments is a result of the acquisition and development
of various dialysis facilities and an 8.1% increase in same-center treatments
for 1997 over 1996. In addition, average revenue per dialysis treatment
increased 7.9% from $191 in 1996 to $206 in 1997. The remaining revenue increase
is a result of higher management fees and earnings of unconsolidated
partnerships in 1997 compared to 1996. The revenue per treatment increase is due
to an improvement in RCG's payor mix, increases in EPO and other drug
utilization, and the implementation of RCG's in-house laboratory services.
Patient Care Costs. Patient care costs consist of costs directly
related to the care of patients, including direct labor, drugs, and other
medical supplies and operational costs of facilities. Patient care costs
increased from $94.8 million for the year ended December 31, 1996 to $145.9
million for the year ended December 31, 1997, an increase of $51.1 million, or
53.9%. This increase resulted primarily from an increase in the number of
treatments performed during the period, which caused a corresponding increase in
the use of drugs, supplies and labor. Patient care costs as a percentage of net
revenue decreased from 69.8% in 1996 to 68.2% in 1997 primarily due to the
increase in net revenue per treatment. Patient care cost per treatment increased
from $135 in 1996 to $141 in 1997, or 4.4%. This increase is due to EPO and
other drug utilization costs, the cost of providing in-house laboratory
services, and normal health care inflation.
General and Administrative Expenses. General and administrative
expenses include corporate office costs and facility costs not directly related
to the care of patients, including facility administration, accounting, billing
and information systems. General and administrative expenses increased from
$13.8 million for the year ended December 31, 1996 to $21.8 million for the year
ended December 31, 1997, an increase of $8.0 million, or 58%. General and
administrative expenses as a percentage of revenue remained constant at 10.2% in
1996 and 1997.
Provision for Doubtful Accounts. The provision for doubtful accounts is
a function of payor mix, billing practices, and other factors. RCG reserves for
doubtful accounts in the period in which the revenue is recognized based on
management's estimate of the net collectibility of the accounts receivable. The
provision for doubtful accounts increased from $2.6 million in 1996 to $4.8
million in 1997. The provision for doubtful accounts as a percentage of net
revenue increased from 1.9% in 1996 to 2.3% in 1997. This increase in provision
for doubtful accounts was influenced by the amount of net operating revenues
generated from non-governmental payor sources.
Depreciation and Amortization. Depreciation and amortization increased
from $4.7 million for the year ended December 31, 1996 to $9.0 million for the
year ended December 31, 1997, an increase of $4.3 million, or 91.5%. This
increase was due to the start-up of dialysis facilities, the
38
39
normal replacement costs of dialysis facilities and equipment, the purchase of
information systems, and the amortization of the goodwill associated with the
acquisitions accounted for as purchases.
Merger Expenses. Merger expenses of $300,000 represented legal,
accounting and employee severance and related benefits in connection with the
Corpus Christi acquisition.
Income from Operations. Income from operations increased from $18.0
million for the year ended December 31, 1996 to $32.1 million for the year ended
December 31, 1997, an increase of $14.1 million, or 78.3%. Income from
operations as a percentage of net revenue increased from 13.2% in 1996 to 15.0%
in 1997 as a result of the factors discussed above.
Minority Interest. Minority interest represents the proportionate
equity interest of other partners in the Company's consolidated entities which
are not wholly-owned. As of December 31, 1997, this was primarily comprised of
three joint venture partnerships.
LIQUIDITY AND CAPITAL RESOURCES
RCG requires capital primarily to acquire and develop dialysis centers,
to purchase property and equipment for existing centers, and to finance working
capital needs. At December 31, 1998, RCG's working capital was $52.9 million,
cash and cash equivalents were $19.9 million, and the Company's current ratio
was 1.9 to 1.0. RCG's working capital increased during the year primarily due to
acquisitions, the increase in long-term debt primarily to fund those
acquisitions and the increase in net income.
Net cash provided by operating activities was $35.9 million for the
year ended December 31, 1998. Cash provided by operating activities consists of
net income before depreciation and amortization expense, partially offset by
increases in accounts receivable and other current assets net of liabilities.
Net cash used in investing activities was $86.2 million for the year ended
December 31, 1998. Cash used in investing activities consisted primarily of
$57.7 million of cash paid for acquisitions, net of cash acquired, and $28.8
million of capital expenditures. Cash provided by financing activities was $61.1
million for the year ended December 31, 1998. Cash provided by financing
activities resulted primarily from $48.7 million in net borrowings under RCG's
line of credit to fund certain acquisitions and an aggregate of $17.3 million
from the proceeds, and the related income tax benefit, of stock option
exercises.
RCG is a party to a First Amended and Restated Loan Agreement for a
$125.0 million credit facility. Borrowings under the credit facility may be used
for acquisitions, capital expenditures, working capital and general corporate
purposes. No more than $25.0 million of the credit facility may be used for
working capital purposes. Within the working capital sublimit, RCG may borrow up
to $5.0 million in swing line loans.
RCG has negotiated loan pricing based on a LIBO rate margin pursuant to
leverage tiers. These leverage tiers extend from 0.75 to 2.25 times and are
priced at a LIBO rate margin of 0.60% to 1.35%. Commitment fees are also priced
pursuant to leverage ratio tiers. Commitment fees range from 0.20% to 0.30%
pursuant to leverage ratios ranging between 0.75 and 2.25.
39
40
Under the loan agreement, commitments range in amounts and dates from
the closing date through August 2003. RCG has obtained total lender commitments
of $125.0 million through August 2000. Lender commitments are then reduced to
$106.3 million through August 2001, $87.5 million through August 2002 and $68.8
million through August 2003. All loans under the loan agreement are due and
payable on August 4, 2003. On December 31, 1998, there was $62.5 million
outstanding under this agreement. In connection with the merger with Dialysis
Centers of America, Inc. in January 1999, RCG incurred approximately $32.7
million in additional indebtedness under this agreement to repay certain DCA
indebtedness and fund DCA's working capital needs.
Under the loan agreement, each of RCG's subsidiaries has guaranteed of
all of RCG's obligations under the loan agreement. Further, RCG's obligations
under the loan agreement, and the obligations of each of its subsidiaries under
its guaranty, are secured by a pledge of the equity interests held by RCG in
each of the subsidiaries. Financial covenants are customary based on the amount
and duration of this commitment.
A significant component of RCG's growth strategy is the acquisition and
development of dialysis facilities. RCG believes that existing cash and funds
from operations, together with funds available under the line of credit, will be
sufficient to meet RCG's acquisition, expansion, capital expenditure and working
capital needs for the next 12 months. However, to finance certain large
strategic acquisition opportunities, RCG may need to incur additional short- and
long-term bank indebtedness and may issue equity or debt securities. The
availability and terms of any additional financing will depend on market and
other conditions. There can be no assurance that such additional financing, if
required, will be available on acceptable terms.
Capital expenditures of approximately $30.0 million, primarily for
equipment replacement, expansion of existing dialysis facilities and
construction of new de novo facilities are planned in 1999. RCG expects that
such capital expenditures will be funded with cash provided by operating
activities and available lines of credit. RCG believes that capital resources
available to it will be sufficient to meet the needs of its business, both on a
short- and long-term basis.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" ("Statement 130"). Statement 130 establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. Statement 130 is effective for interim
and annual periods in 1998. Comprehensive income encompasses all changes in
stockholders' equity (except those arising from transactions with owners) and
includes net income, net unrealized capital gains or losses on available for
sale securities and foreign currency translation adjustments. RCG adopted
Statement 130 on January 1, 1998, and the adoption of such statement did not
impact the presentation of the accompanying financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("Statement 131"). Statement
131 establishes standards for
40
41
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Statement 131
is effective for the fiscal years beginning after December 15, 1997. Management
of the Company has reviewed the impact of Statement 131 and the Company adopted
such Statement on January 1, 1998. The adoption of Statement 131 did not
impact the presentations of the accompanying consolidated financial statements
as management concludes that multiple operating segments do not exist within the
Company.
IMPACT OF YEAR 2000
Introduction. The term "year 2000 issue" is a general term used to
describe various problems that may result from the improper processing of dates
and date-sensitive calculations by computers and other machinery as the year
2000 is approached and reached. These problems arise from hardware and software
unable to distinguish dates in the "2000's" from dates in the "1900's" and from
other sources such as the use of special codes and conventions in software that
make use of a date field.
RCG's State of Readiness. RCG's efforts in addressing the year 2000
issue are focused in the following four areas:
- developing awareness and educating employees regarding the
year 2000 issue;
- implementing procedures to determine whether RCG's software
systems and hardware platforms are year 2000 compliant and
communicating with suppliers and third party payors to
determine whether there will be any interruption in their
systems that could affect RCG's ability to receive timely
shipments of inventory or payment for services as a result of
the year 2000 issue;
- evaluating and making necessary modifications to RCG's
software and hardware systems and other systems that contain
imbedded chips, such as phone systems, which process dates and
date sensitive materials; and
- testing of systems for year 2000 compliance.
The Company has completed its initial assessment of key computer
systems and electronic devices and expects to complete a more detailed inventory
of each facility by April 15, 1999. The Company is developing and implementing
plans to remediate year 2000 issues identified in the assessment phase. RCG
expects to complete the remediation phase by June 30, 1999 and the testing phase
by August 31, 1999. The education phase will be an on-going process throughout
1999.
RCG is in the process of obtaining written confirmation from vendors
that RCG's software applications and hardware platforms acquired from such
vendors will correctly
41
42
manipulate dates and date-related data as the year 2000 is approached and
reached. Based on an initial assessment of its core clinical and financial
systems, the Company has determined the following: (1) over 90% of RCG's core
systems are packaged applications licensed from third-party vendors, thus less
than 10% were developed internally; and (2) substantially all of such
third-party applications have been certified to RCG by their manufacturers as
fully Year 2000 compliant, or as upgradable to become compliant with minor
upgrades.
Furthermore, to improve its operating performance and efficiency, RCG
has undertaken a number of significant information system initiatives. These
initiatives include the selection and implementation of a new laboratory system,
a new human resources and payroll system, a new universal patient index and
registration system, and a new practice management system. RCG expects these
systems to be put into use in 1999. The manufacturers of these new systems have
certified that these systems are year 2000 compliant. The Company currently
believes that with upgrades or replacements of certain software and hardware,
RCG's internal systems will be substantially year 2000 compliant. Nevertheless,
there can be no assurance that the software applications and hardware platforms
on which RCG's business relies will correctly manipulate dates and date-related
data as the year 2000 is approached and reached. Such failures could have a
material adverse effect on RCG's financial condition, results of operations and
business.
RCG's business relies heavily upon its ability to obtain reimbursement
from third party payors, including Medicare, Medicaid and private insurers, and
to obtain water, power and other supplies from vendors. RCG is in the process of
obtaining written verification from its major suppliers, and certain significant
third party payors, to determine whether there will be any interruption in the
provision of supplies or reimbursement for services performed resulting from the
year 2000 issue. RCG expects to complete this process by May 15, 1999. At this
time, HCFA has testified to a committee of the U.S. House of Representatives
that it is far behind in remedying year 2000 problems. The failure of HCFA,
Medicare intermediaries, Medicaid payors or any of RCG's other significant third
party payors to remedy year 2000 related problems could result in a delay in
RCG's receipt of payments for services which could have a material adverse
impact on the Company's earnings, financial condition and business. Furthermore,
a delay in receiving supplies from certain vendors could hinder RCG's ability to
provide services to patients which could have a material adverse impact on RCG's
earnings, financial condition and business.
RCG is aware that certain of its systems, such as dialysis and other
medical equipment, phone systems, facsimile machines, heating and air
conditioning, security systems and other non-data processing oriented systems
may include imbedded chips that process dates and date-sensitive material. These
imbedded chips are both difficult to identify in all instances and difficult to
repair; often, total replacement of the chips is necessary. RCG intends to
perform an evaluation of its systems to determine whether RCG needs to repair or
replace any chips to avoid year 2000 problems. If RCG fails to identify or
remediate any imbedded chips (either on an individual or an aggregate basis) on
which significant business operations depend, such as phone systems, there could
be a material adverse impact on RCG's earnings, financial condition and
business.
42
43
Costs to Address RCG's Year 2000 Issues. RCG will utilize both internal
and external resources to complete its year 2000 project. RCG estimates that the
cost to remediate year 2000 issues that have been identified and to test systems
to verify year 2000 compliance will be between $250,000 and $500,000 and will be
incurred primarily in the first and second quarters of 1999. The total cost of
the year 2000 effort is not known at this time, but will be determined when the
assessment phase of the plan is completed.
Risks Presented by Year 2000 Issues. RCG is still in the process of
evaluating potential disruptions or complications that might result from year
2000-related problems. At this time, RCG has not identified any specific
business functions that will suffer material disruption as a result of year
2000-related events. The Company may, however, identify business functions in
the future that are specifically at risk of year 2000 disruption. RCG's failure
at this point to identify year 2000 risks should not be construed to mean that
there is no risk of year 2000-related disruption. Moreover, due to the unique
and pervasive nature of the year 2000 issue, RCG cannot anticipate each of the
wide variety of year 2000 events, particularly outside of the Company, that
might arise in a worst case scenario and might have a material adverse effect on
RCG's results of operations and business.
RCG's Contingency Plans. Since RCG has not identified any specific
business function that will be materially at risk of significant year 2000
related disruptions, and because a full assessment of the Company's risk from
potential year 2000 failures is still in process, RCG has not yet developed
detailed contingency plans specific to year 2000 problems. RCG has scheduled an
evaluation of the status of completion of its year 2000 initiatives in March
1999 and will determine at that time whether a contingency plan will be
developed.
IMPACT OF INFLATION
A substantial portion of RCG's net revenue is subject to reimbursement
rates that are regulated by the federal government and do not automatically
adjust for inflation. RCG 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 RCG's results of operations, financial condition and
business.
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, and
the effects of year 2000 issues constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (See "Risk
Factors").
43
44
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RCG maintains all cash in United States dollars in highly liquid,
interest-bearing, investment grade instruments with maturities of less than
three months, which RCG considers cash equivalents; therefore, RCG has no
"market risk sensitive instruments," and no disclosure is required under this
Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and financial statement schedule
in Part IV, Item 14(a) (1) and (2) of the report are incorporated by reference
into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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45
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 1999 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 1999 Annual Meeting of Stockholders, which
information, other than the Compensation Committee Report and Performance Graph
required by Items 402(k) and (l) of Regulation S-K, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in, and is
incorporated by reference from, the section entitled "Security Ownership of
Directors, Officers and Principal Stockholders" included in the Company's
definitive Proxy Statement relating to the 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will appear in, and is
incorporated by reference from, the sections entitled "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions" included in the Company's definitive Proxy Statement relating to
the 1999 Annual Meeting of Stockholders.
45
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
Page
----
(1) Index To Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1997
and 1998 F-2
Consolidated Income Statements for the years
ended December 31, 1996, 1997, and 1998 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1997, and 1998 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1997, and 1998 F-6
Notes to Consolidated Financial Statements F-8
(2) Index to Financial Statement Schedules.
Report of Independent Auditors F-28
Schedule II - Consolidated Schedule -- Valuation and
Qualifying Accounts F-29
(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 by the Company during the fiscal
quarter ended December 31, 1998.
46
47
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, 1997 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Renal
Care Group, Inc. at December 31, 1997 and 1998 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
March 2, 1999
F-1
48
Renal Care Group, Inc.
Consolidated Balance Sheets
DECEMBER 31
1997 1998
------------------------------------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 9,138 $ 19,943
Investments 3,625 --
Accounts receivable, less allowance for doubtful accounts of
$14,318 in 1997 and $24,255 in 1998 43,467 74,265
Inventories 4,516 7,550
Prepaid expenses and other current assets 5,059 7,849
------------------------------------------
Total current assets 65,805 109,607
Property, plant and equipment, net 60,974 86,949
Goodwill and other intangibles, net 116,721 175,341
Other assets 4,583 4,948
------------------------------------------
Total assets $248,083 $376,845
==========================================
See accompanying notes to consolidated financial statements.
F-2
49
Renal Care Group, Inc.
Consolidated Balance Sheets
DECEMBER 31
1997 1998
------------------------------------------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,580 $ 14,342
Accrued compensation 10,314 14,005
Due to third-party payors 9,285 13,892
Accrued expenses and other current liabilities 9,712 11,914
Income taxes payable 1,653 2,023
Current portion of long-term debt 792 567
------------------------------------------
Total current liabilities 41,336 56,743
Long-term debt, net of current portion 15,470 62,588
Deferred income taxes 1,921 2,721
Minority interest 14,597 25,517
------------------------------------------
Total liabilities 73,324 147,569
------------------------------------------
Stockholders' equity:
Preferred Stock, $0.01 par value, 10,000 shares authorized,
none issued -- --
Common stock, $0.01 par value, 60,000 shares authorized;
37,345 and 40,922 shares issued and outstanding at
December 31, 1997 and 1998, respectively 373 409
Additional paid-in capital 150,624 169,894
Retained earnings 23,762 58,973
------------------------------------------
Total stockholders' equity 174,759 229,276
------------------------------------------
Total liabilities and stockholders' equity $248,083 $376,845
==========================================
See accompanying notes to consolidated financial statements.
F-3
50
Renal Care Group, Inc.
Consolidated Income Statements
YEAR ENDED DECEMBER 31
1996 1997 1998
----------------------------------------------------------------
(In thousands, except per share data)
Net revenue $129,518 $214,009 $ 369,372
Operating costs and expenses:
Patient care costs 90,122 145,922 242,426
General and administrative expenses 13,364 21,806 35,132
Provision for doubtful accounts 2,446 4,824 9,986
Depreciation and amortization 4,541 9,016 18,418
Merger expenses 1,960 300 1,000
----------------------------------------------------------------
Total operating costs and expenses 112,433 181,868 306,962
----------------------------------------------------------------
Income from operations 17,085 32,141 62,410
Interest income (expense), net 619 583 (3,076)
----------------------------------------------------------------
Income before income taxes and minority
interest 17,704 32,724 59,334
Minority interest -- 955 3,492
----------------------------------------------------------------
Income before income taxes 17,704 31,769 55,842
Provision for income taxes 6,958 11,791 20,631
----------------------------------------------------------------
Net income $ 10,746 $ 19,978 $ 35,211
================================================================
Net income per share:
Basic $ 0.41 $ 0.59 $ 0.88
================================================================
Diluted $ 0.37 $ 0.56 $ 0.83
================================================================
Weighted average shares outstanding:
Basic 26,481 33,675 40,201
================================================================
Diluted 28,664 35,595 42,650
================================================================
See accompanying notes to consolidated financial statements.
F-4
51
Renal Care Group, Inc.
Consolidated Statements of Stockholders' Equity
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
----------------------------------------------------------------------------
(In thousands)
Balance at December 31, 1995 6,588 $ 66 $ 5,217 $ (717) $ 4,566
Issuance of common stock in
initial public offering 10,092 101 71,696 -- 71,797
Issuance of common stock to
founders 10,877 109 14,756 -- 14,865
Issuance of common stock in
acquisitions 831 8 2,320 -- 2,328
Issuance of common stock in
secondary offering 3,025 30 40,304 -- 40,334
Conversion of subordinated notes 444 4 1,473 -- 1,477
Exercise of stock options 52 1 155 -- 156
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 31,909 319 89,222 3,784 93,325
Issuance of common stock in
acquisitions 3,727 37 58,309 -- 58,346
Net income -- -- -- 19,978 19,978
Exercise of stock options 495 5 2,601 -- 2,606
Equity acquired in business
combination 1,214 12 492 -- 504
----------------------------------------------------------------------------
Balance at December 31, 1997 37,345 373 150,624 23,762 174,759
Issuance of common stock in
acquisitions 56 1 1,126 -- 1,127
Net income -- -- -- 35,211 35,211
Exercise of stock options 1,186 12 10,801 -- 10,813
Income tax benefit from
exercise of stock options -- -- 6,500 -- 6,500
Equity acquired in business
combination 2,335 23 843 -- 866
----------------------------------------------------------------------------
Balance at December 31, 1998 40,922 $ 409 $ 169,894 $ 58,973 $ 229,276
============================================================================
See accompanying notes to consolidated financial statements.
F-5
52
Renal Care Group, Inc.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31
1996 1997 1998
--------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net income $ 10,746 $ 19,978 $ 35,211
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,541 9,016 18,418
Loss (gain) on sale of property and equipment (118) (37) 326
Income applicable to minority interest -- 955 3,492
Equity in (earnings) loss of investees (311) -- 242
Deferred income taxes 310 154 800
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (8,127) (10,097) (29,356)
Inventories (8) (1,277) (2,214)
Prepaid expenses and other current assets 1,190 (3,059) (2,534)
Accounts payable 1,773 (83) 3,511
Accrued compensation 3,042 3,124 2,159
Due to third-party payors -- 1,710 4,607
Accrued expenses and other current liabilities 2,591 311 866
Income taxes payable 2,588 (1,089) 369
--------------------------------------------
Net cash provided by operating activities 18,217 19,606 35,897
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 395 147 162
Purchases of property and equipment (11,365) (27,360) (28,816)
Cash paid for acquisitions, net of cash acquired (8,201) (38,569) (57,694)
Advances to investees -- (1,111) (1,614)
Distributions received from affiliate 325 -- --
(Purchase) maturity of investments, net (5,814) 2,189 3,625
Cash distribution to founders, net of cash contributions (37,852) (5,625) --
Increase in other assets (1,133) (1,359) (1,840)
--------------------------------------------
Net cash used in investing activities (63,645) (71,688) (86,177)
FINANCING ACTIVITIES
Net borrowings under line of credit (157) 13,848 48,652
Payments on long-term debt (14,713) (2,568) (5,348)
Proceeds from issuance of long-term debt 540 -- 468
Net proceeds from issuance of common stock 112,286 2,606 10,813
Income tax benefit from exercise of stock options -- -- 6,500
Distributions to owners (6,245) -- --
Distributions to minority shareholders -- (290) --
--------------------------------------------
Net cash provided by financing activities 91,711 13,596 61,085
--------------------------------------------
Increase (decrease) in cash and cash equivalents 46,283 (38,486) 10,805
Cash and cash equivalents, at beginning of year 1,341 47,624 9,138
--------------------------------------------
Cash and cash equivalents, at end of year $ 47,624 $ 9,138 $ 19,943
============================================
See accompanying notes to consolidated financial statements.
F-6
53
Renal Care Group, Inc.
Consolidated Statements of Cash Flows (continued)
YEAR ENDED DECEMBER 31
1996 1997 1998
--------------------------------------------
(In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 673 $ 316 $ 3,559
============================================
Income taxes $ 4,697 $ 12,726 $ 13,761
============================================
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Common stock to Founders $ 14,865 $ -- $ --
============================================
Conversion of subordinated notes $ 1,477 $ -- $ --
============================================
Issuance of common stock in acquisitions $ 2,328 $ 58,346 $ 1,127
============================================
SUPPLEMENTAL DISCLOSURES OF BUSINESS ACQUISITIONS:
Fair value of assets acquired $ 11,552 $107,946 $ 70,258
Liabilities assumed 1,023 11,031 11,437
Common stock issued 2,328 58,346 1,127
--------------------------------------------
Cash paid for acquisitions, net of cash acquired $ 8,201 $ 38,569 $ 57,694
============================================
See accompanying notes to consolidated financial statements.
F-7
54
Renal Care Group, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
December 31, 1998
1. ORGANIZATION
Renal Care Group, Inc. (of Delaware) (the "Company") commenced operations in
February 1996, with the acquisition of 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"). On February 6, 1996, the
Company completed an initial public offering of 10,092 shares of its common
stock and simultaneously consummated the Combination.
The Company provides dialysis services to patients with chronic kidney failure,
also known as end-stage renal disease ("ESRD"). As of December 31, 1998, the
Company provided dialysis and ancillary services to approximately 11,400
patients through 160 outpatient dialysis centers in 19 states. In addition to
its outpatient dialysis center operations, the Company provides acute dialysis
services through contractual relationships with 94 hospitals. The Company also
operates a business providing diabetic and wound care services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, its
wholly-owned and majority-owned corporate subsidiaries and partnership
interests. All significant intercompany transactions and accounts have been
eliminated in consolidation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
F-8
55
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
CASH EQUIVALENTS
The Company considers all highly-liquid investments with original maturities of
three months or less to be cash equivalents. The Company places its cash in
financial institutions that are federally insured and limits the amount of
credit exposure with any one financial institution.
INVESTMENTS
The Company's investments consist primarily of debt securities and are
classified as held-to-maturity. The Company has both the positive intent and
ability to hold these investments to maturity; therefore, they are carried at
amortized cost.
ACCOUNTS RECEIVABLE
The Company's primary concentration of credit risk exists within accounts
receivable, which consist of amounts owed by various governmental agencies,
insurance companies and private patients. The Company manages its accounts
receivable by regularly reviewing its accounts and contracts and by providing
appropriate allowances for uncollectible amounts. Significant concentrations of
gross accounts receivable at December 31, 1997 and 1998, consist of receivables
from Medicare and Medicaid of 62% and 59%, respectively. Concentration of credit
risk relating to accounts receivable is limited to some extent by the diversity
of the number of patients and payors and the geographic dispersion of the
Company's operations. Laws and regulations governing the Medicare and Medicaid
programs are complex and subject to interpretation. The Company believes that
it is in compliance with all applicable laws and regulations and is not aware
of any pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
INVENTORIES
Inventories consist of drugs, supplies and parts consumed in dialysis treatments
and are stated at the lower of cost or market. Cost is determined using either
the first-in, first-out method, or average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the useful lives of the related assets, ranging
from 3 to 40 years. Leasehold improvements are amortized using the straight-line
method over the related lease terms. Maintenance and repair costs are charged to
operations as incurred.
F-9
56
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of purchase price over the fair value of net
assets acquired. The Company allocates a portion of the purchase price to
non-competition agreements based on the estimated fair value of such agreements.
Goodwill and non-competition agreements are amortized on a straight-line basis
over a period of 40 years and the life of the agreements, respectively. These
amortization periods equate to a blended average of 35 years. Accumulated
amortization of these intangibles was approximately $2,727 and $6,525 at
December 31, 1997 and 1998, respectively.
The Company reviews these intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. The
measurement of possible impairment is based upon determining whether projected
undiscounted future cash flows of the acquired business or from the use of the
asset over the remaining amortization period is less than the carrying amount of
the asset. The amount of impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate reflecting the
Company's average cost of funds. As of December 31, 1998, in the opinion of
management, there has been no such impairment.
MINORITY INTEREST
Minority interest represents the proportionate equity interest of other partners
and stockholders in the Company's consolidated entities which are not wholly
owned. As of December 31, 1998, this was primarily comprised of three joint
venture partnerships.
NET REVENUE
Net revenue is recorded at the estimated net realizable amount from Medicare,
Medicaid, commercial insurers and other third-party payors for services
rendered. The Medicare and Medicaid programs reimburse the Company at amounts
that are different from the Company's established rates. Contractual adjustments
under these programs represent the difference between the amounts billed for
these services and the amounts that are reimbursable by third-party payors. A
summary of the basis for reimbursement with these payors follows:
Medicare
The Company is reimbursed by the Medicare program predominantly on a prospective
payment system for dialysis services. Under the prospective payment system, each
facility receives a composite rate per treatment that is adjusted to account for
geographic differences in the cost of labor. Drugs and other ancillary services
are reimbursed on a fee for service basis.
F-10
57
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
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 predominantly on a prospective payment system for dialysis
services rendered.
Other
Other payments from patients, commercial insurers and other third-party payors
are received pursuant to a variety of reimbursement arrangements, which are
generally higher than those payments received from the Medicare and Medicaid
programs.
Reimbursements from Medicare and Medicaid at established rates approximated 74%,
71% and 65% of net revenue for the years ended December 31, 1996, 1997 and 1998,
respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment
date.
ESTIMATED MEDICAL PROFESSIONAL LIABILITY CLAIMS
The Company is insured for medical professional liability claims through
commercial insurance policies. It is the Company's policy that provision for
estimated premium adjustments to medical professional liability costs be made
for asserted and unasserted claims based on its experiences. Provision for such
professional liability claims includes estimates of the ultimate costs of such
claims. To date, the Company's experience with such claims has not been
significant; accordingly, no such provision has been made.
F-11
58
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents approximate fair value.
Accounts Receivable, Accounts Payable and Accrued Liabilities
The carrying amounts reported in the consolidated balance sheets for accounts
receivable, accounts payable, and accrued liabilities approximate fair value.
Accounts receivable are usually unsecured.
Long-Term Debt
Based upon the borrowing rates currently available to the Company, the carrying
amounts reported in the consolidated balance sheets for long-term debt
approximate fair value.
CONCENTRATION OF CREDIT RISKS
The administration of erythropoietin ("EPO") is beneficial in the treatment of
anemia, a medical complication frequently experienced by dialysis patients.
Revenue from the administration of EPO was 19%, 21%, and 23% of the net revenue
of the Company for the years ended December 31, 1996, 1997, and 1998,
respectively. EPO is produced by a single manufacturer.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount of fair value less costs to sell.
F-12
59
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the current
year presentation. Such reclassifications had no effect on the net results of
operations as previously reported.
3. BUSINESS ACQUISITIONS
1998 ACQUISITIONS
During 1998, the Company completed multiple acquisitions of companies that owned
hemodialysis facilities providing care to ESRD patients as well as providing
acute hospital in-patient dialysis services. The Company also acquired a wound
care and diabetic business during this period. The majority of the 1998
acquisitions were accounted for under the purchase method of accounting, however
two such transactions represent mergers and were accounted for using the
pooling-of-interests method.
Effective January 1, 1998, the Company merged with companies that owned nine
dialysis facilities located in Arkansas, Oklahoma and Missouri. In addition to
the services provided to patients in these facilities, the merged entities
provide acute, in-patient dialysis treatment to six hospitals. Additionally,
effective April 1, 1998, the Company merged with companies that owned four
dialysis facilities in Missouri. These facilities also provide acute, in-patient
dialysis treatment to three hospitals. Consideration provided by the Company in
these transactions was 2,335 shares of the Company's common stock. Both
transactions were accounted for as pooling-of-interests. The consolidated
financial statements have not been restated for these transactions as the
effects are not considered material. Accordingly, the results of the combined
operations of these entities, reported in the accompanying consolidated
financial statements, commence on the effective date of each transaction.
Effective February 1, 1998, the Company formed a joint venture in Portland,
Oregon, for purposes of operating six dialysis facilities and a home dialysis
program. The Company acquired an 80% interest in the joint venture, with an
equivalent share of voting rights for cash.
Also during 1998, the Company completed several other acquisitions. These
transactions were accounted for under the purchase method with goodwill and
other intangibles of approximately $58,384 recorded. Goodwill and other
intangibles are being amortized on a straight-line basis over an average of 35
years. The Company began recording the results of operations from these acquired
companies beginning with the effective date of each transaction.
F-13
60
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
The purchase price of 1998 acquisitions is summarized as follows:
1998
-------
Number of shares issued 56
Estimated value of shares issued $ 1,127
Cash consideration 57,694
-------
Aggregate purchase price $58,821
=======
1997 ACQUISITIONS
In 1997, the Company acquired and developed 42 facilities providing care to ESRD
patients, 19 programs providing acute hospital in-patient dialysis services and
a laboratory.
The following is a summary of acquisition activity:
1997
-------
Number of shares issued 3,727
Estimated value of shares issued $58,346
Cash consideration 38,569
-------
Aggregate purchase price $96,915
=======
The majority of these acquisitions were accounted for under the purchase method
and, accordingly, the assets and liabilities of the acquired entities were
recorded at their estimated fair values at the dates of acquisition. The
allocation of the purchase price resulted in goodwill and intangible assets of
$89,086. The results of operations of the acquisitions have been included in the
Company's financial statements from their respective acquisition dates.
The results of operations have not been restated for a 1997 pooling transaction
as the effect of the pooling on prior periods was not considered material to the
Company. In 1997, the Company formed two joint ventures that resulted in
goodwill and intangible assets of $14,188. The Company's contribution to these
joint ventures will be used for working capital and to construct dialysis
facilities.
F-14
61
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
1996 ACQUISITIONS
In 1996, the Company completed the mergers with Main Line Suburban Dialysis
Centers, Inc. ("Main Line") and Renal West, L.C. ("Renal West") in exchange for
4,407 shares of common stock. The mergers were 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.
PRO FORMA DATA (UNAUDITED)
The following summary, prepared on a pro forma basis, combines the results of
operations as if each of the acquisitions had been consummated as of the
beginning of the period, giving effect to adjustments such as amortization of
intangibles, interest expense and related income taxes.
1996 1997 1998
---------------------------------------------------------
Pro forma net revenue $ 169,955 $ 283,336 $ 384,040
=========== =========== ===========
Pro forma net income $ 12,826 $ 26,148 $ 36,652
=========== =========== ===========
Pro forma net income per share
Basic $ 0.41 $ 0.66 $ 0.91
=========== =========== ===========
Diluted $ 0.39 $ 0.63 $ 0.86
=========== =========== ===========
The unaudited pro forma results of operations are not necessarily indicative of
what actually would have occurred if the acquisitions had been completed prior
to the beginning of the periods presented.
F-15
62
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
4. INVESTMENTS
The amortized cost and estimated fair value of the investments are as follows:
DECEMBER 31, 1997
----------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
----------------------------------------------------------
U.S. Government agencies $ 75 $ -- $ -- $ 75
Corporate bonds and notes 3,550 -- 3 3,547
----------------------------------------------------------
Total $3,625 $ -- $ 3 $3,622
==========================================================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31
1997 1998
-----------------------------------------
Medical equipment $34,543 $51,384
Computer equipment 6,195 16,846
Furniture and fixtures 8,941 12,177
Leasehold improvements 11,579 18,482
Buildings 9,984 13,926
Construction-in-progress 3,948 3,002
-----------------------------------------
75,190 115,817
Less accumulated depreciation (14,216) (28,868)
-----------------------------------------
$60,974 $86,949
=========================================
Depreciation expense is $4,163, $7,163 and $13,167 for the years ended December
31, 1996, 1997 and 1998, respectively.
F-16
63
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31
1997 1998
-----------------------------------------
Line of credit, bearing interest at LIBO rate
(6.60% and 6.32% at December 31, 1997 and 1998, respectively) $13,848 $62,500
Other 2,414 655
-----------------------------------------
16,262 63,155
Less current portion (792) (567)
=========================================
$15,470 $62,588
=========================================
LINE OF CREDIT
On August 4, 1997, the Company executed the First Amended and Restated Loan
Agreement for a $125,000 credit facility. Borrowings under the loan agreement
may be used for acquisitions, capital expenditures, working capital, and general
corporate purposes.
Under the loan agreement, loan availability ranges in amounts and dates from the
closing date through August 2003. The loan availability is reduced to $106,250
through August 2001, $87,500 through August 2002 and $68,750 through August
2003. All loans under the loan agreement are due and payable on August 4, 2003.
At December 31, 1998, there was $62,500 outstanding under this agreement. The
Company had $62,500 available under this agreement at December 31, 1998.
The Company's obligations under the loan agreement, and the obligations of each
of the subsidiaries under its guaranty, are secured by a pledge of the equity
interests held by the Company in each of its subsidiaries. Financial covenants
are customary for the amount and duration of this commitment. The Company was in
compliance with all such covenants at December 31, 1998.
F-17
64
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
OTHER
The other long-term debt consist of three term notes maturing in various stages
through April 2000.
The aggregate maturities of long-term debt at December 31, 1998 are as follows:
1999 $ 567
2000 88
2001 --
2002 --
2003 62,500
-------
$63,155
=======
7. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31
1996 1997 1998
----------------------------------------------------
Current:
Federal $5,542 $10,915 $18,500
State and local 1,106 722 1,331
----------------------------------------------------
$6,648 $11,637 $19,831
----------------------------------------------------
Deferred:
Federal $ 261 $ 144 $ 746
State and local 49 10 54
----------------------------------------------------
$ 310 $ 154 $ 800
----------------------------------------------------
Provision for income taxes $6,958 $11,791 $20,631
====================================================
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $50,000 for state income tax purposes that expire in years 2001
through 2013. The utilization of the state net operating loss carryforwards may
be limited in future years due to the profitability of certain subsidiary
corporations.
F-18
65
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
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.
Components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31
1997 1998
-----------------------------------------
Deferred tax assets:
Net operating loss carryforwards $1,214 $ 1,824
Allowance for doubtful accounts - 2,021
Accrued vacation and other accrued liabilities 2,481 2,482
Other 21 -
Less: Valuation allowance (1,214) (1,824)
-----------------------------------------
2,502 4,503
-----------------------------------------
Deferred tax liabilities:
Allowance for doubtful accounts 480 -
Depreciation 936 3,477
Cash to accrual adjustments (Section 481) 1,303 616
Amortization 1,704 2,689
Investments in partnerships - 442
-----------------------------------------
4,423 7,224
-----------------------------------------
Net deferred tax liability $1,921 $ 2,721
=========================================
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:
YEAR ENDED DECEMBER 31
1996 1997 1998
--------------------------------------------
U.S. federal income tax rate 35.0% 35.0% 35.0%
State income tax, net of federal income tax benefit 5.5 1.5 1.5
Cash to accrual adjustments 6.8 - -
Federal and state income tax benefit from S corporations (8.8) - -
Other 0.8 0.6 0.4
--------------------------------------------
Effective income tax rate 39.3% 37.1% 36.9%
============================================
F-19
66
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
8. STOCKHOLDERS' EQUITY
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
October 1997. Under the 1996 Employee Plan, options to purchase a total of 6,000
shares of common stock were reserved for grant to eligible employees 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. The
options vest over various periods up to five years and have a term of ten years
from the date of issuance. In 1994, the Company adopted the 1994 Stock Option
Plan (the "1994 Plan") which provided for the grant of options to purchase up to
720 shares of common stock to directors, officers and other key persons.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans. Therefore, no compensation expense has been
recognized for stock options granted at fair market value under its plans.
F-20
67
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
The following is a summary of option transactions during the period from January
1, 1996 through December 31, 1998:
1996 EXERCISE WEIGHTED
EMPLOYEE 1994 FREE PRICE AVERAGE
PLAN PLAN STANDING RANGE PRICE
-----------------------------------------------------------------------------
Balance at
January 1, 1996 -- 261 1,529 $ 0.89 - $ 3.33 $ 3.85
Granted 1,971 -- 473 3.33 - 13.55 11.33
Exercised (9) -- (23) 3.33 - 8.00 4.70
Forfeited -- -- -- -- --
--------------------------------------------
Balance at
December 31, 1996 1,962 261 1,979 0.89 - 13.55 7.94
Granted 1,886 -- -- 13.33 - 21.75 14.90
Exercised (95) (95) (117) 3.33 - 15.33 5.81
Forfeited (80) (2) (19) 3.33 - 17.42 14.06
--------------------------------------------
Balance at
December 31, 1997 3,673 164 1,843 0.89 - 21.75 10.36
Granted 2,140 -- -- 20.00 - 29.50 22.06
Exercised (664) (139) (383) 0.89 - 22.75 8.93
Forfeited (125) (2) (10) 3.33 - 22.75 15.34
--------------------------------------------
Balance at
December 31, 1998 5,024 23 1,450 $ 3.33 - $29.50 $ 14.36
============================================
Available for grant at
December 31, 1998 208 -- --
============================================
Exercisable at
December 31, 1998 1,379 8 995 $ 10.93
============================================ =============
The weighted-average fair value of options granted during 1996, 1997 and 1998 is
$3.82, $5.72 and $8.89, respectively.
The following table summarizes information about fixed stock options outstanding
at December 31, 1998.
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AS AVERAGE AVERAGE EXERCISABLE AS AVERAGE
RANGE OF OF DECEMBER 31, REMAINING EXERCISE OF DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
- ------------------------------------------------------------------------------------------------------------
$ 3.33 - $ 8.00 1,875 6.94 $ 5.66 1,202 $ 5.03
$10.67 - $14.00 1,399 8.04 13.09 496 13.03
$14.06 - $29.50 3,223 9.00 19.97 684 19.76
- ------------------------------------------------------------------------------------------------------------
$ 3.33 - $29.50 6,497 8.20 $14.36 2,382 $10.93
============================================================================================================
F-21
68
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
Pro forma information regarding net income and net income per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for:
YEAR ENDED DECEMBER 31
1996 1997 1998
------------------------------------------------------
Expected volatility 33.0% 30.0% 33.0%
Expected dividend yield None None None
Risk-free interest rate 5.5% 5.5% 5.5%
Expected life of options 4 yrs. 5 yrs. 5 yrs.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the option's vesting period. The Company's pro forma
information follows:
YEAR ENDED DECEMBER 31
1996 1997 1998
----------------------------------------------------------------
Net income $10,746 $19,978 $35,211
Pro forma compensation expense from stock options,
net of taxes 1,241 1,619 4,364
----------------------------------------------------------------
Pro forma net income $ 9,505 $18,359 $30,847
================================================================
Pro forma net income per share
Basic $ 0.36 $ 0.55 $ 0.77
================================================================
Diluted $ 0.33 $ 0.51 $ 0.72
================================================================
F-22
69
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
WARRANTS
Effective February 14, 1994, the Company issued warrants to purchase an
aggregate of 495 shares of common stock. The warrants have a term of ten years
from the date of issuance.
STOCK SPLIT
Since its inception, the Company has approved two stock splits. Each stock split
was a three-for-two split effected in the form of a 50% dividend. The first was
distributed on July 25, 1997, to shareholders of record on July 7, 1997. The
second was distributed on August 24, 1998, to shareholders of record on August
7, 1998. The Company's par value remained unchanged at $0.01. In addition, all
references in the financial statements to number of shares, per share amounts,
and stock option data have been adjusted for these stock splits.
9. OPERATING LEASES
The Company rents office and medical facilities under lease agreements that are
classified as operating leases for financial statement purposes. At December 31,
1998, future minimum rental payments under noncancelable operating leases with
terms of one year or more consist of the following:
1999 $10,238
2000 8,497
2001 7,707
2002 6,758
2003 5,384
Thereafter 19,782
-------------
$58,366
=============
Rent expense related to operating leases amounted to $3,692, $6,089 and $10,485
for the years ending December 31, 1996, 1997 and 1998, respectively.
F-23
70
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
10. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
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 $599, $837 and $965 for the years ended
December 31, 1996, 1997 and 1998, 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 in amounts not to exceed 10% of eligible
compensation or $25 of common stock each calendar year. Annually, on December
31, participant account balances are used to purchase shares of stock at the
lesser of 85% of the fair market value of shares at the beginning of the year
(grant date) or December 31 (exercise date). A total of 675 shares are available
for purchase under the plan. At December 31, 1997 and 1998, approximately $915
and $1,274, respectively, were included in accrued wages and benefits relating
to the Stock Purchase Plan.
11. EARNINGS PER SHARE
In accordance with SFAS No. 128, basic net income per share is based on the
weighted average number of common shares outstanding during the periods. Diluted
net income per share is based on the weighted average number of common shares
outstanding during the periods plus the effect of dilutive stock options using
the treasury stock method.
F-24
71
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
The following table sets forth the computation of basic and diluted net income
per share.
1996 1997 1998
-----------------------------------------------
Numerator:
Numerator for basic and diluted net income per share $10,746 $19,978 $35,211
Denominator:
Denominator for basic net income per
share-weighted-average shares 26,481 33,675 40,201
Effect of dilutive securities:
Stock options 1,806 1,516 2,018
Warrants 377 404 431
-----------------------------------------------
Denominator for diluted net income
per share-adjusted weighted-average shares and
assumed conversions 28,664 35,595 42,650
===============================================
Basic net income per share $ 0.41 $ 0.59 $ 0.88
===============================================
Diluted net income per share $ 0.37 $ 0.56 $ 0.83
===============================================
12. CONTINGENCIES
The Company is involved in litigation and regulatory investigations arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, these matters will be resolved without material
adverse effect on the Company's consolidated financial position or results of
operations.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth, for 1998 and 1997, certain selected quarterly
financial data. In the opinion of the Company's management this unaudited
information has been prepared on the same basis as the audited information and
includes all adjustments necessary to present fairly the information set forth
therein. The operating results for any quarter are not necessarily indicative of
results for any future period.
F-25
72
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
1998
------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------------------------------------------------------------
Net operating revenue $80,463 $89,510 $96,807 $102,592
Operating expenses 63,490 70,081 75,100 78,873
Depreciation and amortization 3,937 4,538 4,811 5,132
Merger expenses 700 300 -- --
------------------------------------------------------------------
Income from operations 12,336 14,591 16,896 18,587
Minority interest 547 608 1,045 1,292
Interest expense, net 562 780 906 828
------------------------------------------------------------------
Income before income taxes 11,227 13,203 14,945 16,467
Income taxes 4,154 4,885 5,530 6,062
------------------------------------------------------------------
Net income $ 7,073 $ 8,318 $ 9,415 $ 10,405
==================================================================
Net income per share:
Basic $ 0.18 $ 0.21 $ 0.23 $ 0.26
==================================================================
Diluted $ 0.17 $ 0.19 $ 0.22 $ 0.24
==================================================================
1997
------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------------------------------------------------------------
Net operating revenue $46,109 $51,666 $54,038 $ 62,196
Operating expenses 37,678 42,071 43,323 49,480
Depreciation and amortization 1,964 2,141 2,238 2,673
Merger expenses -- 300 -- --
------------------------------------------------------------------
Income from operations 6,467 7,154 8,477 10,043
Minority interest -- 218 290 447
Interest (income) expense, net (404) (99) (88) 8
------------------------------------------------------------------
Income before income taxes 6,871 7,035 8,275 9,588
Income taxes 2,577 2,603 3,062 3,549
------------------------------------------------------------------
Net income $ 4,294 $ 4,432 $ 5,213 $ 6,039
==================================================================
Net income per share:
Basic $ 0.13 $ 0.13 $ 0.15 $ 0.17
==================================================================
Diluted $ 0.13 $ 0.13 $ 0.14 $ 0.16
==================================================================
F-26
73
Renal Care Group, Inc.
Notes to Consolidated Financial Statements (continued)
(In thousands, except per share data)
14. SUBSEQUENT EVENT
On January 29, 1999, the Company merged with Dialysis Centers of America, Inc.
(DCA). DCA owns and operates 12 dialysis centers and is affiliated with
approximately 25 nephrologists in the metropolitan Chicago area. In addition,
DCA provides acute dialysis services to six hospitals. In connection with the
merger, the Company issued approximately 3,227 shares of common stock. The
transaction will be accounted for as a pooling-of-interests, and as such, the
Company's consolidated financial statements, presented in future reports, will
be restated to include the accounts and results of operations of DCA.
The following unaudited supplemental data reflects the results of operations as
if the combination had been consummated as of the date of the consolidated
financial statements. This unaudited supplemental data may not be representative
of future results and do not reflect any changes in the operations of either the
Company or DCA which may result from the combination of their operations.
1996 1997 1998
--------------------------------------------------------------
Net Revenue $163,377 $257,866 $420,694
======== ======== ========
Net Income $ 12,277 $ 20,157 $ 37,402
======== ======== ========
Net Income per Share
Basic $ 0.41 $ 0.55 $ 0.86
======== ======== ========
Diluted $ 0.38 $ 0.52 $ 0.82
======== ======== ========
F-27
74
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, 1997 and 1998, and for each of the three years in the period
ended December 31, 1998, and have issued our report thereon dated March 2, 1999
(included elsewhere in this Form 10-K). Our audits also included the financial
statement schedule listed in Item 14(a) of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
March 2, 1999
F-28
75
Schedule II
Renal Care Group, Inc.
Consolidated Schedule - Valuation and Qualifying Accounts
(In thousands)
Balance Amount Balance
Beginning Allowances Charged to At End of
Of Period Acquired Expense Write-Offs Period
--------- -------- ------- ---------- ------
Allowances for doubtful accounts:
Year ended
December 31, 1996 $ 3,981 $4,344 $2,446 $(4,068) $ 6,703
-====== ====== ====== ======== =======
Year ended
December 31, 1997 $ 6,703 $3,949 $4,824 $(1,158) $14,318
======= ====== ====== ======== =======
Year ended
December 31, 1998 $14,318 $2,321 $9,986 $(2,370) $24,255
======= ====== ====== ======== =======
F-29
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Nashville, State of Tennessee, on the 30th day of March, 1999.
RENAL CARE GROUP, INC.
By: /s/ Sam A. Brooks, Jr.
------------------------------------
Sam A. Brooks, Jr.
Chairman of the Board, President and
Chief Executive Officer
77
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Sam A. Brooks, Jr. and Ronald Hinds and
either of them (with full power in each to act alone) as true and lawful
attorneys-in-fact with full power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Sam A. Brooks, Jr. Chairman of the Board, March 30, 1999
- ------------------------------------------ President, Chief Executive
Sam A. Brooks, Jr. Officer and Director
(Principal Executive Officer)
/s/ Ronald Hinds Executive Vice President, March 30, 1999
- ------------------------------------------ Chief Financial Officer
Ronald Hinds Treasurer (Principal
Financial and Accounting
Officer)
/s/ Joseph C. Hutts Director March 30, 1999
- ------------------------------------------
Joseph C. Hutts
/s/ Harry R. Jacobson, M.D. Director March 30, 1999
- ------------------------------------------
Harry R. Jacobson, M.D.
/s/ Thomas A. Lowery, M.D. Director March 30, 1999
- ------------------------------------------
Thomas A. Lowery, M.D.
Director March 30, 1999
- ------------------------------------------
John D. Bower, M.D.
/s/ Stephen D. McMurray, M.D. Director March 30, 1999
- ------------------------------------------
Stephen D. McMurray, M.D.
/s/ W. Tom Meredith, M.D. Director March 30, 1999
- ------------------------------------------
W. Tom Meredith, M.D.
Director March 30, 1999
- ------------------------------------------
Kenneth E. Johnson, Jr., M.D.
78
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of the Company(1)
3.1.2 Certificate of Amendment of Certificate of Incorporation of the
Company(2)
3.1.3 Certificate of Designation, Preferences, and Rights of Series A Junior
Participating Preferred Stock of the Company(2)
3.2 Amended and Restated Bylaws of the Company(1)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Bylaws of the Company defining rights
of holders of Common Stock of the Company(1)
4.2 Specimen stock certificate for the Common Stock of the Company(1)
4.3 Shareholder Rights Protection Agreement, dated May 2, 1997 between the
Company and First Union National Bank of North Carolina, as Rights
Agent(3)
10.1 Employment Agreement, dated January 15, 1998, between the Company and
Sam A. Brooks(4)
10.2 Employment Agreement, dated January 15, 1998, between the Company and
Ron Hinds(4)
10.3 Employment Agreement, dated January 15, 1998, between the Company and
Raymond Hakim, M.D.(5)
10.4 Employment Agreement, dated February 12, 1996, between the Company and
Anne N. Bower(6)*
10.5 Medical Director Services Agreement, dated February 12, 1996, between
the Company and Kansas Nephrology Physicians, P.A.(6)
10.6 Medical Director Services Agreement, dated February 12, 1996, between
the Company and Indiana Dialysis Management, P.C.(6)
10.7 Medical Director Services Agreement, dated February 12, 1996, between
the Company and Tyler Dialysis & Transplant Associates, P.A.(6)
10.8 Lease Agreement, dated February 5, 1996, between the Company and MEL,
Inc. relating to approximately 20,000 square feet of space(6)
10.9 Lease Agreement, dated February 12, 1996, among the Company and Thomas
A. Lowery, M.D., James R. Cotton, M.D., Roy D. Gerard, M.D. and Kevin
A. Curran, M.D., relating to property in Carthage, Texas(6)
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 Tyler, Texas(6)
10.11 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)
10.12 Sublease Agreement, dated February 12, 1996, with Tyler Nephrology
Associates, Inc.(6)
10.13 Dialysis Center Management Agreement, dated May 11, 1994, between Renal
Care Group, Inc. (of Tennessee) and Vanderbilt University(1)
10.14 1996 Stock Option Plan for Outside Directors(1)*
79
10.15 Fourth Amended and Restated 1996 Stock Incentive Plan(7)*
10.16 Amended and Restated Employee Stock Purchase Plan(2)*
10.17 Agreement between the Company and Healthcare Suppliers, Inc. dated
December 7, 1995(1)
10.18 Chief Medical Officer Agreement, dated February 12, 1996, between the
Company and John D. Bower, M.D.(8)
10.19 Medical Director Services Agreement, dated September 30, 1996, between
the Company and a group of individual physicians(8)
10.20 Employment Agreement, dated January 15, 1998, between the Company and
Gary Brukardt(4)
10.21 First Amended and Restated Loan Agreement, dated as of August 4, 1997,
among the Company, its subsidiaries and NationsBank of Tennessee,
N.A.(2)
10.22 Stock Option Agreement between the Company and Sam A. Brooks(2)
10.23 Stock Option Agreement between the Company and Ronald Hinds(2)
10.24 Stock Option Agreement between the Company and Gary Brukardt(2)
10.25 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.(9)
10.26 Stock Purchase Agreement, dated November 4, 1997 by and among the
Company, Laidlaw, Inc., and STAT Healthcare, Inc.(10)
10.27 Restricted Stock Award Agreement between the Company and Harry R.
Jacobson, M.D.(4)
10.28 Restricted Stock Award Agreement between the Company and Sam A.
Brooks(4)
10.29 Restricted Stock Award Agreement between the Company and Ronald
Hinds(4)
10.30 Restricted Stock Award Agreement between the Company and Gary
Brukardt(4)
10.31 Restricted Stock Award Agreement between the Company and Raymond Hakim,
M.D.(4)
10.32 Restricted Stock Award Agreement between the Company and Thomas Lowery,
M.D.(4)
10.33 Restricted Stock Award Agreement between the Company and Stephen D.
McMurray, M.D.(4)
10.34 Stock Option Agreement between the Company and Sam A. Brooks(11)
10.35 Stock Option Agreement between the Company and Gary A. Brukardt(11)
10.36 Stock Option Agreement between the Company and Raymond Hakim, M.D.(11)
10.37 Stock Option Agreement between the Company and Ronald Hinds(11)
10.38 Stock Option Agreement between the Company and Joseph C. Hutts(11)
10.39 Stock Option Agreement between the Company and Harry R. Jacobson,
M.D.(11)
10.40 Agreement and Plan of Merger, dated as of January 12, 1999, by and
among Renal Care Group, Inc., DCA Merger Corporation, Dialysis Centers
of America, Inc. and the Owners described therein.(12)
10.41 Agreement No. 980202, dated as of February 10, 1999, between Renal Care
Group, Inc. and Amgen, Inc. (The Company has requested confidential
treatment of certain portions of this Exhibit.)
21.1 List of subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (contained on the signature page of this report)
27.1 Financial Data Schedule for the year ended December 31, 1998
80
- ------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 333-80221) effective February 6, 1996.
(2) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1997 (Commission File No. 0-27640).
(3) Incorporated by reference to the Company's Current Report on Form 8-K
filed May 5, 1997 (Commission File No. 0-27640).
(4) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1997 (Commission File No. 0-27640).
(5) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1998 (Commission File No. 0-27640).
(6) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1996 (Commission File No. 0-27640).
(7) Incorporated by reference to Appendix A to the Company's definitive
Proxy Statement filed April 27, 1998 relating to the 1998 Annual
Meeting of Stockholders (Commission File No. 0-27640).
(8) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 333-13813) effective October 30, 1996.
(9) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996 (Commission File No. 0-27640).
(10) Incorporated by reference to the Company's Current Report on Form 8-K
filed December 16, 1997 (Commission File No. 0-27640).
(11) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1998 (Commission File No. 0-27640).
(12) Incorporated by reference to the Company's Current Report on Form 8-K
filed February 10, 1999 (Commission File No. 0-27640).
*Management contract or executive compensation plan or arrangement.