<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-27640
RENAL CARE GROUP, INC.
(Exact name of registrant 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 Ave., Suite 800, Nashville, Tennessee 37203
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (615) 345-5500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days).
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class Outstanding at November 9, 1998
- - --------------------------------------------------------------------------------
Common Stock, $.01 par value 40,543,204
<PAGE> 2
RENAL CARE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1997 and September 30, 1998 (unaudited) 1
Consolidated Income Statements - (unaudited)
For the three months and nine months ended
September 30, 1997 and 1998 2
Consolidated Statements of Cash Flows - (unaudited)
For the nine months ended September 30, 1997 and 1998 3
Notes to the Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II - OTHER INFORMATION
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
Note: Item 3 of Part I, and items 1, 3, 4, and 5 of Part II are omitted because
they are not applicable
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RENAL CARE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,138 $ 19,466
Investments 3,625 --
Accounts receivable, net 45,199 72,023
Inventories 4,516 6,488
Prepaid expenses and other current assets 3,327 8,234
-------- --------
Total current assets 65,805 106,211
Property and equipment, net 60,974 76,261
Goodwill, net 116,721 167,189
Intangible assets, net 1,266 1,647
Other assets 3,317 3,801
-------- --------
Total assets $248,083 $355,109
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,580 $ 15,071
Income taxes payable 1,653 7,747
Other current liabilities 30,103 41,537
-------- --------
Total current liabilities 41,336 64,355
Long-term debt, net of current portion 15,470 56,552
Minority interest 14,597 22,934
Deferred income taxes 1,921 2,721
-------- --------
Total liabilities 73,324 146,562
Stockholders' equity:
Preferred stock, $.01 par value, 10,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 90,000 shares authorized,
37,345 and 40,507 shares issued and outstanding at
December 31, 1997 and September 30, 1998, respectively 373 405
Additional paid-in capital 150,624 159,574
Retained earnings 23,762 48,568
-------- --------
Total stockholders' equity 174,759 208,547
-------- --------
Total liabilities and stockholders' equity $248,083 $355,109
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 4
RENAL CARE GROUP, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net revenue $54,038 $ 96,807 $151,813 $ 266,780
Operating costs and expenses:
Patient care costs 36,468 63,432 104,037 176,155
General and administrative expenses 5,591 9,175 15,599 25,603
Provision for doubtful accounts 1,264 2,493 3,436 6,913
Depreciation and amortization 2,238 4,811 6,343 13,286
Merger expenses -- -- 300 1,000
------- -------- -------- ---------
Total operating costs and expenses 45,561 79,911 129,715 222,957
------- -------- -------- ---------
Income from operations 8,477 16,896 22,098 43,823
Interest income (expense), net 88 (906) 591 (2,248)
------- -------- -------- ---------
Income before minority interest and income taxes 8,565 15,990 22,689 41,575
Minority interest 290 1,045 508 2,200
------- -------- -------- ---------
Income before income taxes 8,275 14,945 22,181 39,375
Provision for income taxes 3,062 5,530 8,242 14,569
------- -------- -------- ---------
Net income $ 5,213 $ 9,415 $ 13,939 $ 24,806
======= ======== ======== =========
Net income per share:
Basic $ 0.15 $ 0.23 $ 0.42 $ 0.62
======= ======== ======== =========
Diluted $ 0.14 $ 0.22 $ 0.40 $ 0.58
======= ======== ======== =========
Weighted average shares outstanding:
Basic 34,015 40,393 33,155 40,058
======= ======== ======== =========
Diluted 36,172 42,850 34,965 42,500
======= ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1998
-------- --------
<S> <C> <C>
Operating activities
Net income $ 13,939 $ 24,806
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,343 13,286
Equity in earnings of subsidiaries 508 2,200
Change in assets and liabilities net of effects from acquisitions (6,612) (18,821)
-------- --------
Net cash provided by operating activities 14,178 21,471
INVESTING ACTIVITIES
Purchases of property and equipment (14,721) (17,334)
Cash paid for acquisitions, net of cash acquired (44,078) (41,535)
Investments, net (193) 3,625
-------- --------
Net cash used in investing activities (58,992) (55,244)
FINANCING ACTIVITIES
Net borrowings under line of credit 6,000 41,082
Payments on long-term debt (2,528) (3,068)
Proceeds from exercise of stock options 1,729 6,487
Distributions to minority shareholders -- (400)
-------- --------
Net cash provided by financing activities 5,201 44,101
-------- --------
Increase (decrease) in cash and cash equivalents (39,613) 10,328
Cash and cash equivalents, at beginning of period 47,624 9,138
-------- --------
Cash and cash equivalents, at end of period $ 8,011 $ 19,466
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 145 $ 2,285
======== ========
Income taxes $ 9,558 $ 8,656
======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Issuance of common stock in acquisition $ 6,008 $ 1,846
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 6
RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
(in thousands, except per share data)
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Overview
Renal Care Group, Inc. (the "Company") is a specialized provider of
nephrology services to patients with kidney disease, including patients
suffering from chronic kidney failure also known as end-stage renal disease
("ESRD"). As of September 30, 1998, the Company provided dialysis and ancillary
services to approximately 10,900 patients through 156 outpatient dialysis
centers in 19 states, and acute dialysis services in 93 hospitals.
The Company's net revenue has been derived primarily from the following
sources: (i) outpatient hemodialysis services; (ii) ancillary services
associated with dialysis, primarily the administration of erythropoietin
("EPO"), a bio-engineered hormone used to treat anemia; (iii) home dialysis
services; (iv) inpatient hemodialysis services provided pursuant to contracts
with acute care hospitals and skilled nursing facilities; (v) management
contracts with hospital-based and medical university dialysis programs; and (vi)
laboratory services. ESRD patients typically receive 156 dialysis treatments per
year, with reimbursement for services provided primarily through the Medicare
ESRD program based on rates that are established by the Health Care Financing
Administration ("HCFA"). For the nine months ended September 30, 1998,
approximately 66% of the Company's net revenue was derived from reimbursement
under the Medicare and Medicaid programs. Medicare reimbursement is subject to
rate and other legislative changes by Congress and periodic changes in
regulations, including changes that may reduce payments under the ESRD program.
For patients with private health insurance, effective September 1, 1997, the
health insurance coordination period was extended to 30 months of treatment,
after which time Medicare becomes the primary payor. Reimbursement for dialysis
services provided pursuant to a hospital contract is negotiated with the
individual hospital and generally is greater on a per treatment equivalent basis
than the Medicare rate. Because dialysis is a life-sustaining therapy used to
treat this chronic disease, utilization is predictable and is not subject to
seasonal fluctuations.
Interim Financial Statements
In the opinion of management, the information contained herein reflects
all adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations. All such adjustments are of a
normal recurring nature. Operating results for interim periods are not
necessarily indicative of results which may be expected for the year as a whole.
It is suggested that these financial statements be read in conjunction with the
consolidated financial statements and the related notes thereto included in the
Company's Form 10-K as filed with the Securities and Exchange Commission on
March 31, 1998.
<PAGE> 7
RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 - SIGNIFICANT EVENTS
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. Financial data included in this filing has been
retroactively adjusted for this stock split.
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
income per share in accordance with SFAS 128.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted income per share $ 5,213 $ 9,415 $13,939 $24,806
Denominator:
Denominator for basic net income per share -
weighted-average shares 34,015 40,393 33,155 40,058
Effect of dilutive securities:
Warrants 417 436 399 440
Stock Options 1,740 2,021 1,411 2,002
------- ------- ------- -------
Denominator for diluted net income per share -
adjusted weighted-average shares and assumed
conversions 36,172 42,850 34,965 42,500
======= ======= ======= =======
Net income per share:
Basic $ 0.15 $ 0.23 $ 0.42 $ 0.62
======= ======= ======= =======
Diluted $ 0.14 $ 0.22 $ 0.40 $ 0.58
======= ======= ======= =======
</TABLE>
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
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 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 is currently
reviewing the impact of Statement 131. The Company will adopt Statement 131 on
December 31, 1998 and will report interim information effective in the first
quarter of 1999.
<PAGE> 8
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net revenue. Net revenue increased from $54,038,000 for the three
months ended September 30, 1997 to $96,807,000 for the three months ended
September 30, 1998, an increase of $42,769,000, or 79.2%. This increase resulted
primarily from a 57.2% increase in the number of treatments from 264,420 in the
1997 period to 415,732 in the 1998 period. This growth in treatments is the
result of the acquisition and development of various dialysis facilities and a
10.5% increase in same-center treatments for the 1998 period over the 1997
period. In addition, average patient revenue per treatment increased 11.3% from
$203 in the 1997 period to $226 in the 1998 period. The remaining increase is a
result of wound care revenues following the Company's entrance into that
business with the December 1997 acquisition of STAT Healthcare, higher
management fees and earnings of 50% owned partnerships in the 1998 period
compared to the 1997 period. The revenue per treatment increase is 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 the
Company'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
$36,468,000 for the three months ended September 30, 1997 to $63,432,000 for the
three months ended September 30, 1998, an increase of $26,964,000, or 73.9%.
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
labor, drugs and supplies. Patient care costs as a percentage of net revenue
decreased from 67.5% in the 1997 period to 65.5% in the 1998 period primarily
due to an increase in net revenues. Patient care costs per treatment increased
from $138 in the 1997 period to $153 in the 1998 period, an increase of $15, or
10.9%. This increase is due to EPO and other drug utilization costs, the cost of
providing in-house laboratory services, the cost of providing acute hospital
services, and normal healthcare 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
$5,591,000 for the three months ended September 30, 1997 to $9,175,000 for the
three months ended September 30, 1998, an increase of $3,584,000, or 64.1%.
General and administrative expenses as a percentage of net revenue decreased
from 10.4% in the 1997 period to 9.5% in the 1998 period, primarily due to an
increase in net revenue for the 1998 period.
Provision for Doubtful Accounts. It is the Company's practice to
reserve 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 based upon an analysis of payor mix, billing practices and other
factors. The provision for doubtful accounts increased from $1,264,000 for the
three months ended September 30, 1997 to $2,493,000 for the three months ended
September 30, 1998. The provision for doubtful accounts as a percentage of net
revenue increased from 2.3% in the 1997 period to 2.6% in the 1998 period, or
0.3%. This increase in provision for doubtful accounts was due to an increase in
reserves related to the amount of net operating revenues generated from
non-governmental payor sources and the temporary degradation of accounts
receivable collections associated with the conversion of patient billing
systems.
<PAGE> 9
RENAL CARE GROUP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Depreciation and Amortization. Depreciation and amortization increased
from $2,238,000 for the three months ended September 30, 1997 to $4,811,000 for
the three months ended September 30, 1998, an increase of $2,573,000, or 115.0%.
This net 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
acquisitions accounted for under the purchase method of accounting.
Income from Operations. Income from operations increased from
$8,477,000 for the three months ended September 30, 1997 to $16,896,000 for the
three months ended September 30, 1998, an increase of $8,419,000, or 99.3%.
Income from operations as a percentage of net revenue increased from 15.7% in
the 1997 period to 17.5% in the 1998 period. Income from operations increased
due to the increase in net revenue in excess of patient care costs, which was
primarily due to an increase in the number of treatments performed during the
period.
Interest, Net. Interest income was $88,000 for the three months ended
September 30, 1997 and interest expense was $906,000 for the three months ended
September 30, 1998. Interest expense is a result of borrowings from the
Company's credit facility. The use of the credit facility increased due to the
use of cash in acquisitions and the construction of de novo facilities, the
normal replacement of dialysis facilities and equipment and the purchase of
information systems.
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 September 30, 1998, this was primarily comprised of
three joint venture partnerships.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net revenue. Net revenue increased from $151,813,000 for the nine
months ended September 30, 1997 to $266,780,000 for the nine months ended
September 30, 1998, an increase of $114,967,000, or 75.7%. This increase
resulted primarily from a 58.8% increase in the number of treatments from
737,727 in the 1997 period to 1,171,135 in the 1998 period. This growth in
treatments is the result of the acquisition and development of various dialysis
facilities and a 10.3% increase in same-center treatments for the 1998 period
over the 1997 period. In addition, average patient revenue per treatment
increased 7.8% from $205 in the 1997 period to $221 in the 1998 period. The
remaining revenue increase is a result of hyperbaric and wound care revenues as
a result of the STAT acquisition, higher management fees and earnings of 50%
owned partnerships in the 1998 period compared to the 1997 period. The
<PAGE> 10
RENAL CARE GROUP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
revenue per treatment increase is due to an improvement in the Company's payor
mix, increases in EPO and other drug utilization, the implementation of the
Company'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 increased from $104,037,000 for
the nine months ended September 30, 1997 to $176,155,000 for the nine months
ended September 30, 1998, an increase of $72,118,000, or 69.3%. This increase
was due to the increase in the number of associated treatments, which caused a
corresponding increase in the use of labor, drugs and supplies. Patient care
costs as a percentage of net revenue decreased from 68.5% in the 1997 period to
66.0% in the 1998 period. Patient care costs per treatment increased from $141
in the 1997 period to $150 in the 1998 period, an increase of $9 or 6.4%. This
increase is due to greater EPO and other drug utilization costs, the cost of
providing in-house laboratory services and normal healthcare inflation.
General and Administrative Expenses. General and administrative
expenses increased from $15,599,000 for the nine months ended September 30, 1997
to $25,603,000 for the nine months ended September 30, 1998, an increase of
$10,004,000, or 64.1%. General and administrative expenses as a percentage of
net revenue decreased from 10.3% for the 1997 period to 9.6% in the 1998 period,
primarily as a result of higher net revenues for the 1998 period.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased from $3,436,000 for the nine months ended September 30, 1997 to
$6,913,000 for the nine months ended September 30, 1998, an increase of
$3,477,000, or 101.2%. The provision for doubtful accounts as a percentage of
net revenue increased from 2.3% for the nine months ended September 30, 1997 to
2.6% for the nine months ended September 30, 1998, or 0.3%. The increase in the
provision for doubtful accounts was influenced by the amount of net operating
revenues generated from non-governmental payor sources and the temporary
degradation of accounts receivable collections due to the conversion of the
patient billing systems.
Depreciation and Amortization. Depreciation and amortization increased
from $6,343,000 for the nine months ended September 30, 1997 to $13,286,000 for
the nine months ended September 30, 1998, an increase of $6,943,000, or 109.5%.
This net increase was due to the acquisition and 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 under the purchase method of
accounting.
Merger Expenses. Merger expenses of $1,000,000 represented legal,
accounting, employee severance and related benefits and other assimilation and
transitional costs related to the Company's merger of the operations of thirteen
dialysis facilities located in Arkansas, Missouri, Kansas and Oklahoma.
Income from Operations. Income from operations increased from
$22,098,000 for the nine months ended September 30, 1997 to $43,823,000 for the
nine months ended September 30, 1998, an increase of $21,725,000, or 98.3%.
Income from operations as a percent of net revenue increased from
<PAGE> 11
RENAL CARE GROUP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
14.6% in the 1997 period to 16.4% in the 1998 period. Income from operations
increased due to the increase in net revenue in excess of patient care costs,
which was primarily due to an increase in the number of treatments performed
during the period.
Interest, Net. Interest income was $591,000 for the nine months ended
September 30, 1997 and interest expense was $2,248,000 for the nine months ended
September 30, 1998. Interest expense is a result of borrowings from the
Company's credit facility. The use of the credit facility increased due to the
use of cash in acquisitions and the construction of de novo facilities, the
normal replacement of dialysis facilities and equipment and the purchase of
information systems.
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 September 30, 1998, this was primarily comprised of
three joint venture partnerships.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the acquisition and the
development of dialysis facilities, the purchase of property and equipment for
existing facilities, and to finance working capital requirements. At September
30, 1998, the Company's working capital was $41,856,000, cash and cash
equivalents were $19,466,000 and the Company's current ratio was 1.6 to 1.
The Company's net cash provided by operating activities was $21,471,000
for the nine months ended September 30, 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.
The Company's net cash used in investing activities was $55,244,000 for the nine
months ended September 30, 1998. Cash used in investing activities resulted
primarily from $41,535,000 of cash paid for acquisitions, net of cash acquired,
and $17,334,000 of capital expenditures, partially offset by a $3,625,000
decrease in investments.
Cash provided by financing activities was $44,101,000 for the nine
months ended September 30, 1998. Cash provided by financing activities resulted
primarily from $41,082,000 in net borrowings under the line of credit in
connection with certain acquisitions and construction of de novo facilities, and
$6,487,000 in proceeds from the exercise of stock options, offset by $3,068,000
in debt paid in connection with merger transactions.
A significant component of the Company's growth strategy is the
acquisition and development of dialysis facilities. The Company believes that
existing cash and funds from operations, together with funds available under the
line of credit, will be sufficient to meet the Company's acquisition, expansion,
capital expenditure and working capital needs for the foreseeable future.
However, in order to finance certain large strategic acquisition opportunities,
the Company may incur from time to time additional short- and long-term bank
indebtedness and may issue equity or debt securities, the availability and terms
of which will depend on market and other conditions. There can be no assurance
that such additional financing, if required, will be available on terms
acceptable to the Company.
<PAGE> 12
RENAL CARE GROUP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Capital expenditures of approximately $28,000,000, primarily for
equipment replacement, expansion of existing dialysis facilities and
construction of de novo facilities are planned in 1998. The Company has made
capital expenditures to date of $17,334,000. The Company expects that such
capital expenditures will be funded with cash provided by operating activities
and available lines of credit. The Company believes that capital resources
available to it will be sufficient to meet the needs of its business, both on a
short- and long-term basis.
THE YEAR 2000 ISSUE
Introduction. The term "year 2000 issue" is a general term used to
describe the 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.
The Company's State of Readiness. The Company's efforts in addressing
the year 2000 issue are focused in the following four areas: (i) developing
awareness and educating employees regarding the year 2000 issue; (ii)
implementing procedures to determine whether the Company'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 the Company's ability to receive timely shipments of
inventory or payment for services as a result of the year 2000 issue; (iii)
evaluating and making necessary modifications to the Company's software and
hardware systems and other systems that contain imbedded chips, such as phone
systems, which process dates and date sensitive materials, and (iv) testing of
systems for year 2000 compliance. To date the Company is in the early stages of
its education and assessment phases, with each of these phases less than 25%
complete. The Company expects to complete the assessment phase by January 31,
1999, the remediation phase by June 30, 1999 and the testing phase by August 31,
1999. The education phase will continue to be an on-going process throughout
1999.
The Company is in the process of obtaining written verification from
vendors to the effect that the Company's software applications and hardware
platforms acquired from such vendors will correctly 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: (i) over 90% of the Company's core systems are
packaged applications licensed from third-party vendors, thus less than 10% were
developed internally; and (ii) substantially all of such third-party
applications have been certified to the Company 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, the
Company 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. The Company
expects these systems to be put into use in 1999, and each of these systems has
been certified by its manufacturer to be Year 2000 compliant. The Company
currently believes that with upgrades or replacements of certain software and
hardware, the Company's internal systems will be substantially Year 2000
compliant. Nevertheless, there can be no assurance that the software
applications and hardware platforms on which the Company'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 the Company's
business, financial condition and results of operations.
The Company's business relies heavily upon its ability to obtain
supplies from vendors and to obtain reimbursement from third party payors,
including Medicare and Medicaid. The Company is in the process of obtaining
written verification from each of its suppliers, and certain significant third
party payors, to determine whether there will be any interruption in the
provision of supplies or receipt of reimbursement for services performed
resulting from the year 2000 issue. The Company expects to complete this process
by January 31, 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 or any of the Company's other significant third party payors
to remedy year 2000 related problems could result in a delay in the Company's
receipt of payments for services which could have a material adverse impact on
the Company's business, financial condition and results of operations.
Furthermore, a delay in receiving supplies from certain vendors could hinder the
Company's ability to provide services to its customers which could have a
material adverse impact on the Company's business, financial condition and
results of operations.
The Company is aware that certain of its systems, such as phone
systems, facsimile machines, heating and air conditioning, security systems and
other non-data processing oriented systems may include imbedded chips which
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. The Company intends to perform an
evaluation of its systems to determine whether the Company needs to repair or
replace any chips to avoid year 2000 problems. Failure of the Company to
identify or remediate any embedded chips (either on an individual or an
aggregate basis) on which significant business operations depend, such as phone
systems, could have a material adverse impact on the Company's business,
financial condition and results of operations.
Costs to Address the Company's Year 2000 Issues. The Company will
utilize both internal and external resources to complete it's Year 2000 project.
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. The Company is still in the
process of evaluating potential disruptions or complications that might result
from year 2000 related problems. However, at this time, the Company has not
identified any specific business functions that will suffer material disruption
as a result of year 2000 related events. It is possible, however, that the
Company may identify business functions in the future that are specifically at
risk of year 2000 disruption. The absence of any such determination at this
point represents only the Company's current status of evaluating potential year
2000 related problems and facts presently known to the Company, and 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, it is
impracticable to anticipate each of the wide variety of year 2000 events,
particularly outside of the Company, that might arise in a worst case scenario
which might have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's Contingency Plans. Since the Company has not identified
any specific business function that will by 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, the Company has not
yet developed detailed contingency plans specific to year 2000 problems. The
Company 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.
RISK FACTORS
In evaluating the Company and its business, prospective investors
should carefully consider the following risk factors in addition to the other
information contained herein. This quarterly report contains statements that
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements relate
to future events or the future financial performance of the Company and involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those discussed below, and such factors could cause actual results to
differ materially from those indicated by such forward-looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this quarterly
report or the materials incorporated herein by reference will in fact transpire.
Limited Combined Operating History. The Company has conducted
operations as a combined entity only since February 1996, upon the closing of
its initial public offering. Since the initial public offering, the Company has
made several additional acquisitions of entities that, in some cases, have been
part of the Company's combined operations for only a few weeks or months. There
can be no assurance that the Company will be able to integrate the dialysis
centers, information systems and related operations of the entities acquired by
it or to continue operating them profitably. Nor can there be any assurance that
the Company's management group will be able to implement effectively the
Company's operating and growth strategy while it is engaged in acquisition
activity. Failure to integrate successfully the centers and other operations
acquired by the Company or to implement effectively the Company's operating and
growth strategy could have a material adverse effect on the Company's results of
operations, financial condition or business.
Dependence On Government Reimbursement. The Company estimates that
approximately 68%, 63% and 60% of its net revenue for the years ended December
31, 1996 and 1997, and the nine months ended September 30, 1998, respectively,
consisted of reimbursements from Medicare under the ESRD program, including
revenue for the reimbursement of the administration of EPO. Since 1983,
Congressional actions have resulted in occasional changes in the Medicare
composite reimbursement rate, and the Company is not able to predict whether
future rate changes will be made. Legislation or regulations may be enacted in
the future that may significantly modify the ESRD program or otherwise affect
the amount paid for the Company's services. Any such action could have a
material adverse effect
<PAGE> 13
on the Company's results of operations, financial condition and business.
Furthermore, increases in operating costs that are subject to inflation, such as
labor and supply costs, without a compensating increase in prescribed rates, may
have a material adverse effect on the Company's earnings in the future. The
Company is also unable to predict whether certain ancillary services, for which
the Company currently is reimbursed separately, may in the future be included in
the Medicare composite rate.
Revenues from the administration of EPO (the substantial majority of
which are reimbursed through Medicare and Medicaid programs) were approximately
19%, 21% and 23% of the net revenue of the Company for the years ended December
31, 1996 and 1997, and the nine months ended September 30, 1998, respectively.
EPO reimbursement significantly affects the Company's earnings. Any reduction in
reimbursement rates for EPO could have a material adverse effect on the
Company's results of operations, financial condition or business. EPO is
produced by a single manufacturer, and any interruption of supply or product
cost increases could have a material adverse effect on the Company's results of
operations, financial condition or business.
The Company estimates that approximately 6%, 7% and 6% of the Company's
net revenue for the years ended December 31, 1996 and 1997, and the nine months
ended September 30, 1998, respectively, were funded by Medicaid or comparable
state programs. The Medicaid programs are subject to statutory and regulatory
changes, administrative rulings, interpretations of policy and governmental
funding restrictions, all of which may have the effect of decreasing program
payments, increasing costs or modifying the way the Company operates its
dialysis business.
Dependence On Other Sources Of Reimbursement. The Company estimates
that approximately 26%, 30% and 34% of its net revenue for the years ended
December 31, 1996 and 1997, and the nine months ended September 30, 1998,
respectively, were derived from sources other than Medicare and Medicaid.
Substantially all of this revenue comes from private insurance for chronic
dialysis treatments and payments from hospitals with which the Company has
contracts for the provision of acute dialysis services. In general, private
insurance reimbursement and payments for treatments performed at hospitals are
at rates significantly higher than Medicare and Medicaid rates. The Company
believes that if Medicare reimbursement for dialysis treatment is reduced in the
future, these private payors may be required to assume a greater percentage of
the costs of dialysis care and, as a result, may focus on reducing dialysis
payments as their overall costs increase. In addition, the Company believes that
health maintenance organizations ("HMOs") and other managed care providers may
have a strong incentive to reduce further the costs of specialty care and may
seek to reduce amounts paid for dialysis. The Company is unable to predict
whether and to what extent changes in these private reimbursement rates may be
made in the future. Any reduction in the rates paid by private insurers and
hospitals or a significant change in the Company's payor mix toward additional
Medicare or Medicaid reimbursement could have a material adverse effect on the
Company's results of operations, financial condition and business. Similarly,
increases in operating costs that are subject to inflation, such as labor and
supply costs, without a compensating increase in private reimbursement rates,
could have a material adverse effect on the Company's results of operations,
financial condition or business.
Risks Associated With Growth Strategy. The Company's strategy includes
expanding its dialysis business through the acquisition and development of
dialysis centers and the management of nephrology practices. Competition for
acquisitions in the dialysis industry has increased significantly in recent
years and, as a result, the cost of acquiring dialysis centers has increased.
There can be no assurance that the Company will be able to identify, acquire or
profitably integrate acquired dialysis centers and nephrology practices.
Acquisitions involve a number of risks related to integration, including adverse
short-term effects on the Company's reported operating results, diversion of
management's attention,
<PAGE> 14
dependence on retention, hiring and training of key personnel, including Medical
Directors for each dialysis center, some or all of which could have a material
adverse effect on the Company's results of operations, financial condition or
business. In addition, there can be no assurance that acquired or managed
dialysis centers will achieve net revenue and earnings that justify the
Company's investment therein or expenses related thereto. In order to implement
its growth strategy, the Company may require substantial capital resources and
need to incur, from time to time, short- and long-term bank indebtedness. The
Company also may need to issue in public or private transactions, equity or debt
securities, the terms of which will depend on market and other conditions. There
can be no assurance that any such additional financing will be available on
terms acceptable to the Company, if at all. To the extent that the Company is
unable to acquire dialysis centers or acquire or manage nephrology practices, to
integrate such centers and practices successfully, or to obtain financing on
terms acceptable to the Company, its ability to expand its business could be
reduced significantly.
Risks Associated With Liabilities Of Acquired Businesses. The Company
has acquired and will continue to acquire businesses with prior operating
histories. Acquired companies may have unknown or contingent liabilities,
including liabilities for failure to comply with health care laws and
regulations, such as billing and reimbursement, fraud and abuse and similar
anti-referral laws. The Company has from time to time identified certain past
practices of acquired companies that do not conform to its standards. Although
the Company institutes policies designed to conform such practices to its
standards following completion of acquisitions, there can be no assurance that
the Company will not become liable for past activities that may later be
asserted to be improper by private plaintiffs or government agencies. Although
the Company generally seeks to obtain indemnification from prospective sellers
covering such matters, there can be no assurance that any such matter will be
covered by indemnification or, if covered, that the liability sustained will not
exceed contractual limits or the financial capacity of the indemnifying party.
Dependence On Physician Referrals. The Company's dialysis centers
depend upon local nephrologists for referrals of ESRD patients for treatment and
one or a few physicians typically account for all or a significant portion of
the patient referral base at a center. The loss of one or more referring
physicians at a particular center could have a material adverse effect on the
operations of such center, and the loss of a significant number of referring
physicians could have a material adverse effect on the Company's results of
operations, financial conditions and business. In many instances stockholders of
the Company are the primary referral sources for the dialysis centers operated
by the Company. If such ownership is deemed to violate applicable federal or
state law, such as the illegal remuneration provisions of the Social Security
Act and similar state laws which prohibit the payment of remuneration to induce
referrals, such physician owners may be forced to dispose of their stock in the
Company.
Operations Subject To Extensive Government Regulation. The Company is
subject to extensive federal, state and local regulation regarding, among other
things, fraud and abuse, patient referral, false claims, health and safety,
environmental compliance 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. First, the illegal remuneration
provisions of the Anti-Kickback Statute make it illegal for any person to, among
other things, solicit, offer, receive or pay any remuneration in exchange for
referring, or to induce the referral of, a patient for treatment which may be
paid for by Medicare, Medicaid or a similar state program. Second, the Stark Law
prohibits physician referrals for "designated health services" (including some
of the specific services offered by the Company) to entities with which a
physician or an immediate family member has a "financial relationship." These
laws contain certain statutory exemptions, and federal agencies have promulgated
regulations clarifying certain of these provisions and exceptions and creating
certain additional exceptions or "safe harbors" from such
<PAGE> 15
prohibitions. Many states have enacted similar provisions of law, which may not
have identical prohibitions or exceptions, but which may apply regardless of
whether Medicare or Medicaid funds are involved. However, due to the breadth of
the statutory provisions and the absence in many instances of regulations or
court decisions addressing the specific arrangements by which the Company
conducts its business, it is possible that some of the Company's practices might
be challenged under these laws. Sanctions for violating these federal and state
laws may include civil monetary fines, disqualification from participation in
the Medicare or Medicaid programs and criminal sanctions. There can be no
assurance that the Company's practices will not be challenged by governmental
authorities, or that the Company will not be subject to sanctions under such
laws or be required to alter or discontinue certain of its practices. In
addition, there can be no assurance that if the Company is required to alter its
practices, that it will be able to do so successfully. The occurrence of any of
these events could result in a material adverse effect on the Company's results
of operations, financial condition or business.
A number of proposals for health care reform have been made recently to
provide greater governmental control of health care spending and to provide
broader access to health care services. For example, HIPAA, among other things,
provides for insurance portability for individuals who lose or change jobs,
limits exclusions for pre-existing conditions and establishes a pilot program
for medical savings accounts. HIPAA also amends existing crimes and criminal
penalties for Medicare fraud and enacts new federal health care fraud crimes. It
is uncertain what additional health care reform legislation, if any, ultimately
will be implemented or whether other changes in the administration or
interpretation of governmental health care programs will occur. The Company
cannot predict what effect future health care legislation or other changes in
the administration or interpretation of governmental health care statutes,
regulations, or programs may have on the Company's operations.
Substantial Competition. The dialysis industry is fragmented and is
consolidating rapidly. Accordingly, the industry is highly competitive,
particularly from the standpoint of competition for the acquisition of existing
dialysis centers and the development of relationships with referring physicians.
Many of the Company's competitors have substantially greater financial resources
and more established operations and infrastructure than the Company and may
compete with the Company for acquisitions of dialysis centers and nephrology
practices. In addition, the Company may also experience competition from
referring physicians who open their own dialysis centers. There can be no
assurance that the Company will be able to compete effectively with any such
competitors.
Dependence On Key Personnel. The Company is dependent upon the services
of certain key executive officers. The Company's growth will depend in part upon
its ability to attract and retain skilled employees, for whom competition is
intense. The Company believes that its future success will also depend on its
ability to attract and retain qualified physicians to serve as Medical Directors
of its dialysis centers. The Company does not carry key-man life insurance on
any of its officers. The loss by the Company of any of its executive officers,
or the inability to attract and retain qualified management personnel and
Medical Directors, could have a material adverse effect on the Company's results
of operations, financial condition or business.
Year 2000 Compliance Risk. Many currently installed computer systems
and software products are coded to accept only two-digit entries in the date
code field. By the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates.
Computer systems that do not accept four-digit entries could fail or product
erroneous results and cause disruptions of operations. As a result, many
software and computer systems may need to be upgraded or replaced in order to
comply with such "year 2000" requirements. The Company is in the process of
obtaining written verification from vendors to determine whether the Company's
computer systems and software products are year 2000 compliant. Also, the
Company is undertaking a separate initiative to implement certain new
information systems, including laboratory, human resources and payroll, patient
index and registration and practice management systems, which will have the
ancillary benefit of addressing year 2000 issues for these systems. The failure
of the Company's systems to be year 2000 compliant could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000 Issue."
In addition, the Company has ongoing relationships with third-party
payors, suppliers, vendors, and others that may have computer systems with year
2000 problems that the Company does not control. There can be no assurance that
the Company's payors, including the fiscal intermediaries and governmental
agencies, with which the Company transacts business and which are responsible
for payment to the Company will not experience significant problems with year
2000 compliance. According to testimony before a U.S. House of Representatives
subcommittee, HCFA, which administers the Medicare and Medicaid programs, is far
behind in remedying year 2000 problems, which could delay payment of claims to
providers. The failure of third parties to remedy year 2000 problems could have
a material adverse effect on the Company's business, financial condition and
results of operations.
<PAGE> 16
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
THIS REPORT, PRESS RELEASES AND OTHER PUBLIC STATEMENTS BY THE COMPANY CONTAIN
"FORWARD-LOOKING STATEMENTS," WITHIN THE MEANING OF VARIOUS PROVISIONS OF THE
FEDERAL SECURITIES LAWS, THAT ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT
WILL OR MAY OCCUR IN THE FUTURE. THESE STATEMENTS ARE BASED ON ASSUMPTIONS AND
ANALYSES MADE BY THE COMPANY IN LIGHT OF ITS EXPERIENCE AND PERCEPTION OF
HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE DEVELOPMENTS, AND
OTHER FACTORS BELIEVED APPROPRIATE IN THE CIRCUMSTANCES. ACTUAL RESULTS AND
DEVELOPMENTS ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING
GENERAL ECONOMIC, MARKET OR BUSINESS CONDITIONS; OPPORTUNITIES (OR LACK THEREOF)
THAT MAY BE PRESENTED TO AND PURSUED BY THE COMPANY; COMPETITIVE ACTIONS BY
OTHER COMPANIES; CHANGES IN LAWS OR REGULATIONS; AND OTHER FACTORS AS MAY BE
DISCUSSED FROM TIME TO TIME IN THE COMPANY'S SEC REPORTS AND OTHER FILINGS, MANY
OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY. ACCORDINGLY, READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE MADE AND WHICH THE COMPANY UNDERTAKES NO OBLIGATION TO
REVISE TO REFLECT EVENTS AFTER THE DATE MADE.
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(a) None.
(b) See Note 2 to Financial Statements concerning the three-for-two stock
split in the form of a dividend.
(c) None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule for the nine months ended September
30, 1998 (filed via Edgar on November 16, 1998)
27.2 Financial Data Schedule for the nine months ended September
30, 1997 (filed via Edgar on November 16, 1998)
(b) Reports on Form 8-K
None
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RENAL CARE GROUP, INC.
(Registrant)
November 16, 1998 BY: /s/ Ronald Hinds
--------------------------------------------
Ronald Hinds
Executive Vice President,
Chief Financial Officer, Secretary/Treasurer
and Principal Financial Officer and
Principal Accounting Officer
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits Page No.
------ ----------------------- --------
<S> <C> <C>
27.1 Financial Data Schedule for the nine months ended September
30, 1998 (filed via Edgar on November 16, 1998)
27.2 Financial Data Schedule for the nine months ended September
30, 1997 (filed via Edgar on November 16, 1998)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 19,466
<SECURITIES> 0
<RECEIVABLES> 72,023
<ALLOWANCES> 0
<INVENTORY> 6,488
<CURRENT-ASSETS> 106,211
<PP&E> 76,261
<DEPRECIATION> 0
<TOTAL-ASSETS> 355,109
<CURRENT-LIABILITIES> 64,355
<BONDS> 0
0
0
<COMMON> 405
<OTHER-SE> 208,142
<TOTAL-LIABILITY-AND-EQUITY> 355,109
<SALES> 266,780
<TOTAL-REVENUES> 266,780
<CGS> 176,155
<TOTAL-COSTS> 176,155
<OTHER-EXPENSES> 38,889
<LOSS-PROVISION> 6,913
<INTEREST-EXPENSE> 2,248
<INCOME-PRETAX> 39,375
<INCOME-TAX> 14,569
<INCOME-CONTINUING> 24,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,806
<EPS-PRIMARY> .62
<EPS-DILUTED> .58
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 8,011
<SECURITIES> 6,007
<RECEIVABLES> 37,212
<ALLOWANCES> 0
<INVENTORY> 3,475
<CURRENT-ASSETS> 56,439
<PP&E> 52,906
<DEPRECIATION> 0
<TOTAL-ASSETS> 171,930
<CURRENT-LIABILITIES> 39,249
<BONDS> 0
0
0
<COMMON> 341
<OTHER-SE> 116,493
<TOTAL-LIABILITY-AND-EQUITY> 171,930
<SALES> 151,813
<TOTAL-REVENUES> 151,813
<CGS> 104,037
<TOTAL-COSTS> 104,037
<OTHER-EXPENSES> 21,942
<LOSS-PROVISION> 3,436
<INTEREST-EXPENSE> (591)
<INCOME-PRETAX> 22,181
<INCOME-TAX> 8,242
<INCOME-CONTINUING> 13,939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,939
<EPS-PRIMARY> .42
<EPS-DILUTED> .40
</TABLE>
