<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 21, 1999
RENAL CARE GROUP, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 0-27640 62-1622383
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<S> <C> <C>
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
</TABLE>
2100 West End Avenue, Suite 800, Nashville, Tennessee 37203
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(Address, including zip code, of principal executive offices)
(615) 345-5500
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(Registrant's telephone number, including area code)
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Item 5. Other Events.
On January 29, 1999, Renal Care Group, Inc. ("RCG" or the "Company")
acquired by merger all of the capital stock of Dialysis Centers of America,
Inc., a Delaware corporation ("DCA"), for approximately 3,226,546 shares,
subject to certain adjustments, of the Company's $0.01 par value per share
common stock. The merger was consummated under an Agreement and Plan
of Merger dated as of January 12, 1999 by and among the Company, a newly formed
merger subsidiary of the Company, DCA and certain of the shareholders and
warrantholders of DCA. The transaction was accounted for as a
pooling-of-interests.
RCG hereby files the Supplemental Selected Financial Data, Supplemental
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Supplemental Consolidated Financial Statements and Supplemental
Financial Statement Schedule, which give effect to the transaction and restate
the accounts of the Company to give effect to the pooling-of-interests.
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SUPPLEMENTAL SELECTED FINANCIAL DATA
On January 29, 1999, Renal Care Group, Inc. (with its subsidiaries the
"Company" or "RCG") merged with Dialysis Centers of America, Inc. ("DCA"). DCA
owned and operated 12 dialysis centers and provided acute dialysis services to
six hospitals. The transaction has been accounted for as a pooling-of-interests,
and as such, the Supplemental Selected Financial Data included herein give
retroactive effect to the transaction and include the combined operations of the
Company and DCA for all periods.
The Supplemental Selected Historical Financial Data - Renal Care Group,
Inc. on page 4 represent the historical results of operations of the Company.
This information does not include the results of operations for any periods
prior to the date of RCG's initial public offering in February 1996 for the five
companies (the "Founding Companies") that were simultaneously acquired (the
"Combination") when the Company commenced business in February 1996.
The Supplemental Selected Combined and Pro Forma Financial Data - Renal
Care Group, Inc. and Founding Companies on page 5 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 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 supplemental consolidated financial
statements.
The Supplemental 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 this Form 8-K. The unaudited combined
financial data have been prepared on the same basis as the supplemental 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 supplemental consolidated financial statements and related
notes and "Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations" that appear elsewhere in this Form 8-K.
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SUPPLEMENTAL SELECTED HISTORICAL FINANCIAL DATA --
RENAL CARE GROUP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
--------------------------
1994(2) 1995(2) 1996 1997 1998
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<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue .................................... $41,627 $56,157 $163,377 $257,866 $420,694
Patient care costs ............................. 25,003 37,651 113,169 177,109 276,895
General and administrative expenses ............ 8,721 11,101 17,442 26,279 39,953
Provision for doubtful accounts ................ 1,418 2,845 3,414 8,022 13,074
Depreciation and amortization .................. 1,484 2,471 6,021 11,436 21,293
Merger expenses ................................ -- -- 1,960 300 1,000
------- ------- -------- -------- --------
Total operating costs and expenses ............. 36,626 54,068 142,006 223,146 352,215
------- ------- -------- -------- --------
Income from operations ......................... 5,001 2,089 21,371 34,720 68,479
Interest expense, net .......................... 363 1,109 1,103 1,695 5,493
------- ------- -------- -------- --------
Income before income taxes and minority interest 4,638 980 20,268 33,025 62,986
Minority interest .............................. -- -- -- 955 3,492
------- ------- -------- -------- --------
Income before income taxes ..................... $ 4,638 $ 980 20,268 32,070 59,494
======= =======
Provision for income taxes.......................... 7,991 11,913 22,092
-------- ------- --------
Net income.......................................... $ 12,277 $ 20,157 $ 37,402
======== ======== ========
Basic net income per share.......................... $ 0.42 $ 0.55 $ 0.86
======== ======== ========
Basic weighted average shares outstanding........... 29,455 36,747 43,274
======== ======== ========
Diluted net income per share........................ $ 0.39 $ 0.52 $ 0.82
======== ======== ========
Diluted weighted average shares outstanding......... 31,750 38,779 45,835
======== ======== ========
<CAPTION>
DECEMBER 31, (1)
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1994 1995 1996 1997 1998
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<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................... $ 3,171 $ (1,168) $ 49,420 $ 19,973 $ 45,795
Total assets........................................ 17,318 49,461 180,149 307,498 433,377
Long-term debt...................................... 5,420 21,340 24,000 37,406 79,507
Stockholders' equity................................ 5,919 12,496 107,305 188,972 245,680
</TABLE>
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(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 primarily consisted of non-taxed net income from Main Line
and RenalWest which were S corporations; therefore, 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.
4
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SUPPLEMENTAL SELECTED COMBINED AND PRO FORMA FINANCIAL
DATA -- RENAL CARE GROUP, INC. AND FOUNDING COMPANIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (1)
---------------------------
1994 1995(2) 1996(3) 1997 1998
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<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue......................................... $110,670 $128,515 $169,753 $257,866 $420,694
Patient care costs.................................. 75,366 91,160 117,896 177,109 276,895
General and administrative expenses................. 12,616 15,266 17,875 26,279 39,953
Provision for doubtful accounts..................... 2,914 4,485 3,539 8,022 13,074
Depreciation and amortization....................... 3,414 4,552 6,195 11,436 21,293
Merger expenses..................................... -- -- 1,960 300 1,000
-------- -------- -------- -------- --------
Total operating costs and expenses.................. 94,310 115,463 147,465 223,146 352,215
-------- -------- -------- -------- --------
Income from operations.............................. 16,360 13,052 22,288 34,720 68,479
Interest expense, net............................... 646 1,670 1,197 1,695 5,493
-------- -------- -------- -------- --------
Income before income taxes and minority interest.... 15,714 11,382 21,091 33,025 62,986
Minority interest................................... -- -- -- 955 3,492
-------- -------- -------- -------- --------
Income before income taxes.......................... $ 15,714 $ 11,382 21,091 32,070 59,494
======== ======== 8,058 11,913 22,092
Provision for income taxes.......................... -------- -------- --------
Net income.......................................... $ 13,033 $ 20,157 $ 37,402
======== ======== ========
Basic net income per share.......................... $ 0.42 0.55 $ 0.86
======== ======== ========
Basic weighted average shares outstanding........... 31,158 36,747 43,274
======== ======== ========
Diluted net income per share........................ $ 0.39 $ 0.52 0.82
======== ======== =========
Diluted weighted average shares outstanding......... 33,452 38,779 45,835
======== ======== =========
<CAPTION>
DECEMBER 31, (1)
----------------
1994 1995 1996(1) 1997 1998
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<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 18,158 $ 12,487 $ 49,420 $ 19,973 $ 45,795
Total assets........................................ 49,918 89,595 180,149 307,498 433,377
Long-term debt...................................... 8,630 29,915 24,000 37,406 79,507
Stockholders' equity................................ 26,825 33,288 107,305 188,972 245,680
</TABLE>
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(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 $14,269 and $0.43, respectively.
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SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with (1) the
Company's Supplemental Consolidated Financial Statements, including the notes
thereto, contained elsewhere in this Current Report on Form 8-K, and (2) the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
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 13,100 patients through 172 outpatient dialysis
centers in 20 states, in addition to providing acute dialysis services in 100
hospitals.
For the comparison discussion that follows, the Supplemental Selected
Combined and Pro Forma Data include the financial information of the Founding
Companies, and previously reported transactions accounted for as
poolings-of-interests. On January 29, 1999, the Company merged with DCA in a
transaction accounted for as a pooling-of-interests. Consistent with other
poolings-of-interests transactions, the comparison discussion that follows
include Supplemental Selected Combined amounts that include the combined results
of RCG and DCA. Because the Founding Companies and other 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.
Patients with end-stage renal disease (ESRD) typically receive three
dialysis treatments each week, with reimbursement for services provided
primarily by the Medicare ESRD program based on rates established by the Health
Care Financing Administration. For the year ended December 31, 1998,
approximately 64% 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.
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 erythropoietin 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 Balanced Budget Act provided that 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
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.
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<PAGE> 7
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
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<S> <C> <C> <C> <C> <C> <C>
Net Revenue ................... $169,753 100.0% $257,866 100.0% $420,694 100.0%
Patient care costs ............ 117,896 69.5 177,109 68.7 276,895 65.8
General and administrative
expenses ................... 17,875 10.5 26,279 10.2 39,953 9.5
Provision for doubtful accounts 3,539 2.1 8,022 3.1 13,074 3.1
Depreciation and amortization . 6,195 3.6 11,436 4.4 21,293 5.1
Merger expenses ............... 1,960 1.2 300 0.1 1,000 0.2
-------- ----- -------- ----- -------- -----
Total operating costs and
expenses .................. 147,465 86.9 223,146 86.5 352,215 83.7
-------- ----- -------- ----- -------- -----
Income from operations ........ 22,288 13.1 34,720 13.5 68,479 16.3
Interest expense, net ......... 1,197 0.7 1,695 0.7 5,493 1.3
Minority interest ............. -- -- 955 0.4 3,492 0.9
-------- ----- -------- ----- -------- -----
Income before income taxes .... $ 21,091 12.4% $ 32,070 12.4% $ 59,494 14.1%
======== ===== ======== ===== ======== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Revenue. Net revenue increased from $257.9 million for the year
ended December 31, 1997 to $420.7 million for the year ended December 31, 1998,
an increase of $162.8 million, or 63.1%. This increase resulted primarily from a
47.0% increase in the number of treatments from 1,246,650 in 1997 to 1,831,960
in 1998. This growth in treatments is a result of the acquisition and
development of various dialysis facilities and a 9.7% increase in same-center
treatments for 1998 over 1997. In addition, average net revenue per dialysis
treatment increased 8.3% from $206 in 1997 to $223 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 Systems, 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.
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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
$177.1 million for the year ended December 31, 1997 to $276.9 million for the
year ended December 31, 1998, an increase of $99.8 million, or 56.4%. 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 68.7% in 1997 to 65.8% in 1998 primarily due to the increase in
net revenue per treatment. Patient care costs per treatment increased from $142
in 1997 to $151 in 1998, or 6.3%. This increase was 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.
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
$26.3 million for the year ended December 31, 1997 to $40.0 million for the year
ended December 31, 1998, an increase of $13.7 million, or 52.1%. 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 $8.0 million in 1997 to $13.1 million in 1998.
The provision for doubtful accounts as a percentage of net revenue remained
constant at 3.1% in 1997 and 1998.
Depreciation and Amortization. Depreciation and amortization increased
from $11.4 million for the year ended December 31, 1997 to $21.3 million for the
year ended December 31, 1998, an increase of $9.9 million, or 86.8%. 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 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.
Income from Operations. Income from operations increased from $34.7
million for the year ended December 31, 1997 to $68.5 million for the year ended
December 31, 1998,
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an increase of $33.8 million, or 97.4%. Income from operations as a percentage
of net revenue increased from 13.5% in 1997 to 16.3% in 1998 as a result of the
factors discussed above.
Interest Expense, Net. Interest expense of $5.5 million for the year
ended December 31, 1998 increased $3.8 million compared to interest expense of
$1.7 million for the year ended December 31, 1997. The 1998 interest expense
increase is primarily attributable to increased borrowings under RCG's $125.0
million credit facility along with certain borrowings under DCA's credit
facility. These borrowings were used for a combination of acquisitions, capital
expenditures and working capital requirements.
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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Revenue. Net revenue increased from $169.8 million for the year
ended December 31, 1996 to $257.9 million for the year ended December 31, 1997,
an increase of $88.1 million, or 51.9%. This increase resulted primarily from a
43.3% increase in the number of treatments from 869,999 in 1996 to 1,246,650 in
1997. This growth in treatments is a result of the acquisition and development
of various dialysis facilities and an 8.0% increase in same-center treatments
for 1997 over 1996. In addition, average revenue per dialysis treatment
increased 6.7% from $193 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
$117.9 million for the year ended December 31, 1996 to $177.1 million for the
year ended December 31, 1997, an increase of $59.2 million, or 50.2%. 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 69.5% in 1996 to 68.7% in 1997 primarily due to the increase in
net revenue per treatment. Patient care costs per treatment increased from $136
in 1996 to $142 in 1997, or 4.4%. This increase is due to costs associated with
the utilization of EPO and other drugs, 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
$17.9 million for the year ended December 31,
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1996 to $26.3 million for the year ended December 31, 1997, an increase of $8.4
million, or 46.9%. General and administrative expenses as a percentage of
revenue decreased from 10.5% in 1996 to 10.2% in 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 $3.5 million in 1996 to $8.0
million in 1997. The provision for doubtful accounts as a percentage of net
revenue increased from 2.1% in 1996 to 3.1% 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 $6.2 million for the year ended December 31, 1996 to $11.4 million for the
year ended December 31, 1997, an increase of $5.2 million, or 83.9%. 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 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
Company's acquisition of a dialysis business in Corpus Christi, Texas.
Income from Operations. Income from operations increased from $22.3
million for the year ended December 31, 1996 to $34.7 million for the year ended
December 31, 1997, an increase of $12.4 million, or 55.6%. Income from
operations as a percentage of net revenue increased from 13.1% in 1996 to 13.5%
in 1997 as a result of the factors discussed above.
Interest Expense, Net. Interest expense of $1.7 million for the year
ended December 31, 1997 increased $500,000 compared to interest expense of $1.2
million for the year ended December 31, 1996. The 1997 interest expense is
primarily attributable to DCA's borrowings under both a term note and revolving
credit note outstanding under a credit facility with a bank.
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 $45.8 million,
cash and cash
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<PAGE> 11
equivalents were $20.0 million, and the Company's current ratio was 1.6 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 $43.6 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 $87.2 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 $29.7
million of capital expenditures. Cash provided by financing activities was $54.4
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
net of $12.0 million payments on long-term debt.
At December 31, 1998, the Company was party to two separate credit
facilities totaling $140.0 million plus a term note with an outstanding balance
of $20.7 million. Upon completion of the merger with DCA in January 1999, the
Company repaid approximately $6.0 million outstanding under DCA's $15.0 million
credit facility and the $20.7 million term note. The Company borrowed amounts
under its $125.0 million credit facility to make these repayments. The following
provides information relating to the Company's First Amended and Restated Loan
Agreement of $125.0 million, which remains in existence after the merger.
Borrowings under the $125.0 million 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. 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.
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Under the loan agreement, each of RCG's subsidiaries has guaranteed 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 $33.5 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 supplemental consolidated 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 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,
12
<PAGE> 13
1998. The adoption of Statement 131 did not impact the presentations of the
accompanying supplemental 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 30, 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 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
13
<PAGE> 14
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.
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
14
<PAGE> 15
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 Current
Report on Form 8-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
the discussion of "Risk Factors" in the Company's previously filed Annual Report
on Form 10-K).
15
<PAGE> 16
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Renal Care Group, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
Renal Care Group, Inc. (formed as a result of the merger of Renal Care Group,
Inc. and Dialysis Centers of America, Inc.) as of December 31, 1997 and 1998,
and the related supplemental consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. The supplemental consolidated financial statements give retroactive
effect to the merger of Renal Care Group, Inc. and Dialysis Centers of America,
Inc. consummated on January 29, 1999, which has been accounted for using the
pooling-of-interests method as described in the notes to the supplemental
consolidated financial statements. These supplemental financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these supplemental 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 supplemental 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, after giving retroactive effect to
the merger with Dialysis Centers of America, Inc., as described in the notes to
the supplemental consolidated financial statements, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
March 2, 1999
16
<PAGE> 17
Renal Care Group, Inc.
Supplemental Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
----------- --------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,138 $ 19,943
Investments 3,625 --
Accounts receivable, less allowance for doubtful accounts of
$19,044 in 1997 and $30,726 in 1998 56,660 84,795
Inventories 5,628 8,553
Prepaid expenses and other current assets 5,978 8,329
Deferred income taxes 3,166 3,381
----------- --------
Total current assets 84,195 125,001
Property, plant and equipment, net 71,063 96,256
Goodwill and other intangibles, net 146,733 205,765
Other assets 5,507 6,355
----------- --------
Total assets $ 307,498 $433,377
=========== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
17
<PAGE> 18
Renal Care Group, Inc.
Supplemental Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
----------- -----------
(In thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,762 $ 20,109
Accrued compensation 11,474 14,790
Due to third-party payors 11,453 17,286
Accrued expenses and other current liabilities 12,383 14,700
Income taxes payable 1,524 1,579
Current portion of long-term debt 12,626 10,742
----------- -----------
Total current liabilities 64,222 79,206
Long-term debt, net of current portion 37,406 79,507
Deferred income taxes 2,301 3,467
Minority interest 14,597 25,517
----------- -----------
Total liabilities 118,526 187,697
----------- -----------
Stockholders' equity:
Preferred Stock, $0.01 par value, 10,000 shares authorized,
none issued -- --
Common stock, $0.01 par value, 60,000 shares
authorized; 40,418 and 43,995 shares issued
and outstanding at December 31, 1997
and 1998, respectively
404 440
Additional paid-in capital 164,547 183,817
Retained earnings 24,021 61,423
----------- -----------
Total stockholders' equity 188,972 245,680
=========== ===========
Total liabilities and stockholders' equity $ 307,498 $ 433,377
=========== ===========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
18
<PAGE> 19
Renal Care Group, Inc.
Supplemental Consolidated Income Statements
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
-------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C>
Net revenue $163,377 $257,866 $420,694
Operating costs and expenses:
Patient care costs 113,169 177,109 276,895
General and administrative expenses 17,442 26,279 39,953
Provision for doubtful accounts 3,414 8,022 13,074
Depreciation and amortization 6,021 11,436 21,293
Merger expenses 1,960 300 1,000
-------- -------- --------
Total operating costs and expenses 142,006 223,146 352,215
-------- -------- --------
Income from operations 21,371 34,720 68,479
Interest expense, net 1,103 1,695 5,493
-------- -------- --------
Income before income taxes and minority interest 20,268 33,025 62,986
Minority interest -- 955 3,492
-------- -------- --------
Income before income taxes 20,268 32,070 59,494
Provision for income taxes 7,991 11,913 22,092
-------- -------- --------
Net income $ 12,277 $ 20,157 $ 37,402
======== ======== ========
Net income per share:
Basic $ 0.42 $ 0.55 $ 0.86
======== ======== ========
Diluted $ 0.39 $ 0.52 $ 0.82
======== ======== ========
Weighted average shares outstanding:
Basic 29,455 36,747 43,274
======== ======== ========
Diluted 31,750 38,779 45,835
======== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
19
<PAGE> 20
Renal Care Group, Inc.
Supplemental Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------- ------ --------- --------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 9,465 $ 95 $ 14,569 $ (2,168) $ 12,496
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 1,024 10 6,836 -- 6,846
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 -- -- -- 12,277 12,277
Distributions to owners (Renal
Care Group, Inc.) -- -- -- (6,245) (6,245)
Dividends to founders (Renal
Care Group, Inc.) -- -- (46,699) -- (46,699)
------ ------ --------- -------- ---------
Balance at December 31, 1996 34,979 350 103,090 3,864 107,304
Issuance of common stock in
acquisitions 3,730 37 58,364 -- 58,401
Net income -- -- -- 20,157 20,157
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 40,418 404 164,547 24,021 188,972
Issuance of common stock in
acquisitions 56 1 1,126 -- 1,127
Net income -- -- -- 37,402 37,402
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 43,995 $ 440 $ 183,817 $ 61,423 $ 245,680
====== ====== ========= ======== =========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
20
<PAGE> 21
Renal Care Group, Inc.
Supplemental Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
--------- -------- --------
(In thousands)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 12,277 $ 20,157 $ 37,402
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,021 11,436 21,293
Loss (gain) on sale of property and equipment (118) (37) 327
Income applicable to minority interest -- 955 3,492
Equity in (earnings) loss of investees (311) -- 242
Deferred income taxes 465 (1,340) 951
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (9,010) (14,556) (26,693)
Inventories (86) (1,798) (2,105)
Prepaid expenses and other current assets 820 (3,253) (1,733)
Accounts payable 1,214 2,380 4,096
Accrued compensation 3,042 3,124 1,783
Due to third-party payors -- 1,710 5,833
Due to related parties (331) (450) (363)
Accrued expenses and other current liabilities 4,211 (620) (935)
Income taxes payable 2,236 (1,128) 55
--------- -------- --------
Net cash provided by operating activities 20,430 16,580 43,645
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 395 147 162
Purchases of property and equipment (12,769) (29,539) (29,728)
Cash paid for acquisitions, net of cash acquired (19,967) (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) (2,000)
--------- -------- --------
Net cash used in investing activities (76,815) (73,867) (87,249)
FINANCING ACTIVITIES
Net borrowings under line of credit (157) 13,848 48,653
Payments on long-term debt (16,713) (5,968) (12,025)
Proceeds from issuance of long-term debt 13,940 7,434 468
Net proceeds from issuance of common stock 112,483 2,661 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 103,308 17,685 54,409
--------- -------- --------
Increase (decrease) in cash and cash equivalents 46,923 (39,602) 10,805
Cash and cash equivalents, at beginning of year 1,817 48,740 9,138
--------- -------- --------
Cash and cash equivalents, at end of year $ 48,740 $ 9,138 $ 19,943
========= ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
21
<PAGE> 22
Renal Care Group, Inc.
Supplemental Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 2,056 $ 2,525 $ 5,711
======= ======== =======
Income taxes $ 5,692 $ 15,276 $14,402
======= ======== =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Common stock to Founders $14,865 $ -- $ --
======= ======== =======
Conversion of subordinated notes $ 1,477 $ -- $ --
======= ======== =======
Issuance of common stock in acquisitions $ 6,704 $ 58,346 $ 1,127
======= ======== =======
SUPPLEMENTAL DISCLOSURES OF BUSINESS ACQUISITIONS:
Fair value of assets acquired $28,413 $107,946 $70,258
Liabilities assumed 1,742 11,031 11,437
Common stock issued 6,704 58,346 1,127
------- -------- -------
Cash paid for acquisitions, net of cash acquired $19,967 $ 38,569 $57,694
======= ======== =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
22
<PAGE> 23
Renal Care Group, Inc.
Notes to Supplemental 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 13,100
patients through 172 outpatient dialysis centers in 20 states. In addition to
its outpatient dialysis center operations, the Company provides acute dialysis
services through contractual relationships with 100 hospitals. The Company also
operates a business providing diabetic and wound care services.
On January 29, 1999, the Company merged with Dialysis Centers of America, Inc.
("DCA") in a business combination accounted for as a pooling-of-interests. DCA
became a wholly-owned subsidiary of the Company through the exchange of 3,073
shares of the Company's common stock for all of the outstanding stock of DCA.
The Company's supplemental consolidated financial statements included herein
give retroactive effect to these transactions and include the combined
operations of the Company and DCA for all periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The supplemental 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.
The DCA merger has been accounted for by the pooling-of-interests method.
Accordingly, the supplemental consolidated financial statements included herein
give retroactive effect to this transaction and includes the combined operations
of the Company and DCA for all periods presented.
23
<PAGE> 24
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
Generally accepted accounting principles prohibit giving effect to a consummated
business combination accounted for by the pooling-of-interests method in
financial statements that do not include the date of consummation. These
financial statements do not extend through the consummation date of the DCA
merger; however, they will become the historical consolidated financial
statements of Renal Care Group, Inc. after financial statements including the
consummation date of the DCA merger are issued.
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.
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 59% and 55%, 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 threatening 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.
24
<PAGE> 25
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
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.
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 $5,137 and $10,117 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:
25
<PAGE> 26
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
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.
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 70%,
69% and 64% 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.
26
<PAGE> 27
Renal Care Group, Inc.
Notes to Supplemental 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 supplemental consolidated balance sheets
for cash and cash equivalents approximate fair value.
Accounts Receivable, Accounts Payable and Accrued Liabilities
The carrying amounts reported in the supplemental 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 supplemental 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 20%, 20%, 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 or fair value less costs to sell.
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.
27
<PAGE> 28
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
3. BUSINESS ACQUISITIONS
DCA MERGER
On January 12, 1999 the Company entered into a definitive agreement to merge
with DCA. The transaction was consummated on January 29, 1999. In connection
with the merger, each share of DCA common stock was converted on a tax-free
basis into approximately 0.19 shares of the Company's common stock. Prior to
conversion, at December 31, 1998, approximately 16,374 shares of DCA common
stock were outstanding. DCA owned and operated 12 dialysis centers and was
affiliated with approximately 25 nephrologists in the metropolitan Chicago area.
In addition, DCA provided acute dialysis services to six hospitals. The DCA
merger has been accounted for as a pooling-of-interests, and as such, the
Company's supplemental consolidated financial statements included herein give
retroactive effect to the DCA merger for all periods presented.
The following is a summary of the results of operations of the separate
entities:
<TABLE>
<CAPTION>
RCG
(PRIOR TO DCA
MERGER) DCA COMBINED
------------- -------- ---------
<S> <C> <C> <C>
1998
Net revenue $369,372 $ 51,322 $ 420,694
======== ======== =========
Income from operations $ 62,410 $ 6,069 $ 68,479
======== ======== =========
Net income $ 35,211 $ 2,191 $ 37,402
======== ======== =========
1997
Net revenue $214,009 $ 43,857 $ 257,866
======== ======== =========
Income from operations $ 32,141 $ 2,579 $ 34,720
======== ======== =========
Net income $ 19,978 $ 179 $ 20,157
======== ======== =========
1996
Net revenue $129,518 $ 33,859 $ 163,377
======== ======== =========
Income from operations $ 17,085 $ 4,286 $ 21,371
======== ======== =========
Net income $ 10,746 $ 1,531 $ 12,277
======== ======== =========
</TABLE>
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.
28
<PAGE> 29
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
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 supplemental
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 supplemental
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.
The purchase price of 1998 acquisitions is summarized as follows:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Number of shares issued 56
Estimated value of shares issued $ 1,127
Cash consideration 57,694
----------
Aggregate purchase price $ 58,821
==========
</TABLE>
29
<PAGE> 30
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
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:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Number of shares issued 3,727
Estimated value of shares issued $ 58,346
Cash consideration 38,569
----------
Aggregate purchase price $ 96,915
==========
</TABLE>
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 supplemental consolidated 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.
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
poolings-of-interests, and accordingly, the supplemental consolidated financial
statements give retroactive effect to the combined operations of Renal Care
Group, Inc., Main Line and Renal West for all periods presented.
Additionally, in 1996, the Company purchased two dialysis businesses,
substantially all of the assets of a third business and a chronic outpatient
dialysis unit of a hospital, all within the metropolitan Chicago area. The total
purchase price of these acquisitions consisted of cash of $11,952 and
approximately 187 shares of common stock. These acquisitions were accounted for
under the purchase method and have been included in the results of operations
commencing with the effective date of the acquisition.
30
<PAGE> 31
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
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.
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Pro forma net revenue $ 203,814 $ 327,193 $ 435,362
============ ============ ===========
Pro forma net income $ 14,357 $ 26,327 $ 38,843
============ ============ ===========
Pro forma net income per share
Basic $ 0.42 $ 0.62 $ 0.89
============ ============ ===========
Diluted $ 0.40 $ 0.59 $ 0.84
============ ============ ===========
</TABLE>
The unaudited pro forma results of operations are not necessarily indicative of
what actually would have occurred if the acquisitions had been completed prior
to the beginning of the periods presented.
4. INVESTMENTS
The amortized cost and estimated fair value of the investments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Government agencies $ 75 $ -- $- $ 75
Corporate bonds and notes 3,550 -- 3 3,547
------ --------- -- ------
Total $3,625 $ -- $3 $3,622
====== ========= == ======
</TABLE>
31
<PAGE> 32
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
--------- ---------
<S> <C> <C>
Medical equipment $ 39,202 $ 56,603
Computer equipment 6,195 16,846
Furniture and fixtures 10,045 13,481
Leasehold improvements 17,293 24,691
Buildings 10,119 14,051
Construction-in-progress 4,348 3,068
--------- ---------
87,202 128,740
Less accumulated depreciation (16,139) (32,484)
--------- ---------
$ 71,063 $ 96,256
========= =========
</TABLE>
Depreciation expense is $4,943, $8,401 and $14,861 for the years ended December
31, 1996, 1997 and 1998, respectively.
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
------- -------
<S> <C> <C>
Line of credit, bearing interest at LIBO rate
(6.60% and 6.32% at December 31, 1997
and 1998, respectively) $13,848 $62,500
Term note, bearing interest at variable rates
(weighted average rate of 7.68%
and 7.10% at December 31, 1997 and 1998,
respectively) 24,000 20,699
Revolving credit note, bearing interest at variable rates
(weighted average rate of 7.96% and 6.83% at
December 31, 1997 and 1998, respectively) 7,434 4,165
Equipment note payable 2,337 2,230
Other 2,413 655
------- -------
50,032 90,249
Less current portion 12,626 10,742
------- -------
$37,406 $79,507
======= =======
</TABLE>
32
<PAGE> 33
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
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.
CREDIT AGREEMENT
The Company's Credit Agreement with a bank, as amended, consists of a term note
with an original balance of $29,400 and a $15,000 revolving credit note.
Borrowings under the Credit Agreement may be used for acquisitions and working
capital purposes. The term note is payable in quarterly installments and had an
outstanding balance of $20,699 at December 31, 1998. At December 31, 1998, the
Company had borrowings of $4,165 outstanding and $10,835 available under the
revolving credit note.
At the Company's option, the term note and the revolving credit note bear
interest at a variable margin over either the LIBO rate or the prime rate. The
credit agreement is collateralized by a continuing security interest in
substantially all of the assets of the Company and shares of common stock of
certain 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.
EQUIPMENT NOTE PAYABLE
The equipment note payable is to a vendor for certain equipment and software
purchased by the Company. The note is payable in monthly installments over a
period of 108 months.
OTHER
The other long-term debt consist of three term notes maturing in various stages
through April 2000.
33
<PAGE> 34
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
The aggregate maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 10,742
2000 15,133
2001 392
2002 488
2003 62,900
Thereafter 594
----------
$ 90,249
==========
</TABLE>
Subsequent to the DCA merger, borrowings under the Company's First Amended and
Restated Loan Agreement of $125.0 million were used to repay the $20,699 term
note, the $4,165 revolving credit note and the $2,230 equipment note, as these
debt instruments had been assumed in the DCA merger.
7. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal $ 6,233 $ 12,215 $19,563
State and local 1,293 1,038 1,578
-------- -------- -------
7,526 13,253 21,141
-------- -------- -------
Deferred:
Federal 383 (1,058) 878
State and local 82 (282) 73
-------- -------- -------
465 (1,340) 951
-------- -------- -------
Provision for income taxes $ 7,991 $ 11,913 $22,092
======== ======== =======
</TABLE>
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.
34
<PAGE> 35
Renal Care Group, Inc.
Notes to Supplemental 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:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,214 $ 1,824
Allowance for doubtful accounts 3,057 5,253
Accrued vacation and other accrued liabilities 2,590 2,631
Other 21 --
Less: Valuation allowance (1,214) (1,824)
------- -------
5,668 7,884
------- -------
Deferred tax liabilities:
Allowance for doubtful accounts 480 --
Depreciation 917 3,371
Cash to accrual adjustments (Section 481) 1,303 616
Amortization 2,103 3,541
Investments in partnerships -- 442
------- -------
4,803 7,970
------- -------
Net deferred tax asset (liability) $ 865 $ (86)
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
U.S. federal income tax rate 34.9% 35.0% 34.9%
State income tax, net of federal income tax benefit 5.4 1.5 1.7
Cash to accrual adjustments 5.9 -- --
Federal and state income tax benefit from S corporations
(7.7) -- --
Other 0.9 0.6 0.5
---- ---- ----
Effective income tax rate 39.4% 37.1% 37.1%
==== ==== ====
</TABLE>
35
<PAGE> 36
Renal Care Group, Inc.
Notes to Supplemental 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. Also in 1995, the Company adopted the Equity
Compensation Plan ("Equity Plan") which authorized the Company to grant up to
350 shares of common stock to eligible employees and other key persons. The
options vest over various periods up to three 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.
36
<PAGE> 37
Renal Care Group, Inc.
Notes to Supplemental 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:
<TABLE>
<CAPTION>
1996 EXERCISE WEIGHTED
EMPLOYEE 1994 FREE EQUITY PRICE AVERAGE
PLAN PLAN STANDING PLAN RANGE PRICE
-------- ------- -------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996 -- 261 1,529 35 $ 0.11 - $3.33 $ 3.78
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 35 0.11 - 13.55 7.88
Granted 1,886 -- -- 37 13.33 - 25.58 15.11
Exercised (95) (95) (117) -- 3.33 - 15.33 5.81
Forfeited (80) (2) (19) (3) 3.33 - 25.58 14.39
------- ------ ------ ------
Balance at
December 31, 1997 3,673 164 1,843 69 0.11 - 25.58 10.39
Granted 2,140 -- -- -- 20.00 - 29.50 22.06
Exercised (664) (139) (383) -- 0.89 - 22.75 8.93
Forfeited (125) (2) (10) (5) 3.33 - 25.58 15.71
Balance at
December 31, 1998 5,024 23 1,450 64 $0.11 - $29.50 $ 14.33
======= ====== ====== ======
Available for grant at
December 31, 1998 208 -- -- 286
======= ====== ====== ======
Exercisable at
December 31, 1998 1,379 8 995 55 $ 10.90
======= ====== ====== ====== =========
</TABLE>
The weighted-average fair value of options granted during 1996, 1997 and 1998 is
$3.82, $6.10 and $8.89 respectively.
The following table summarizes information about fixed stock options outstanding
at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER WEIGHTED NUMBER
OUTSTANDING AS AVERAGE WEIGHTED EXERCISABLE AS WEIGHTED
RANGE OF OF DECEMBER 31, REMAINING AVERAGE OF DECEMBER 31, AVERAGE
EXERCISE PRICES 1998 CONTRACTUAL LIFE EXERCISE PRICE 1998 EXERCISE PRICE
- ----------------- --------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.11 - $ 3.33 1,910 6.94 $ 5.56 1,237 $ 4.89
$10.67 - $ 14.00 1,399 8.04 $ 13.09 496 $ 13.03
$14.06 - $ 29.50 3,252 9.00 $ 20.02 704 $ 19.20
- ---------------- --------- --------- --------- --------- ---------
$ 0.11 - $ 29.50 6,561 8.20 $ 14.33 2,437 $ 10.90
================ ========= ========= ========= ========= =========
</TABLE>
37
<PAGE> 38
Renal Care Group, Inc.
Notes to Supplemental 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
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 years 5 years 5 years
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1997 1998
---------- ---------- -------
<S> <C> <C> <C>
Net income $ 12,277 $ 20,157 $37,402
Pro forma compensation expense from stock options,
net of taxes 1,253 1,643 4,388
---------- ---------- -------
Pro forma net income $ 11,024 $ 18,514 $33,014
========== ========== =======
Pro forma net income per share
Basic $ 0.37 $ 0.50 $ 0.76
========== ========== =======
Diluted $ 0.35 $ 0.48 $ 0.72
========== ========== =======
</TABLE>
38
<PAGE> 39
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
WARRANTS
In June 1995, the Company issued warrants to purchase an aggregate of 90 shares
of common stock. These warrants have a term of five years from the date of
issuance. Additionally, in February 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:
<TABLE>
<S> <C>
1999 $11,437
2000 9,600
2001 8,776
2002 7,627
2003 5,896
Thereafter 20,881
-------
$64,217
=======
</TABLE>
Rent expense related to operating leases amounted to $4,838, $7,692 and $11,966
for the years ending December 31, 1996, 1997 and 1998, respectively.
39
<PAGE> 40
Renal Care Group, Inc.
Notes to Supplemental 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 $685, $946 and $1,147 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.
40
<PAGE> 41
Renal Care Group, Inc.
Notes to Supplemental 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.
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted net
income per share $12,277 $20,157 $37,402
Denominator:
Denominator for basic net income per
share-weighted-average shares 29,455 36,747 43,274
Effect of dilutive securities:
Stock options 1,828 1,538 2,040
Warrants 467 494 521
------- ------- -------
Denominator for diluted net income
per share-adjusted weighted-average shares and
assumed conversions 31,750 38,779 45,835
======= ======= =======
Basic net income per share $ 0.42 $ 0.55 $ 0.86
======= ======= =======
Diluted net income per share $ 0.39 $ 0.52 $ 0.82
======= ======= =======
</TABLE>
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.
41
<PAGE> 42
Renal Care Group, Inc.
Notes to Supplemental Consolidated Financial Statements (continued)
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net operating revenue $ 91,542 $ 102,549 $ 110,357 $ 116,246
Operating expenses 73,660 80,442 85,820 90,000
Depreciation and amortization 4,613 5,218 5,497 5,965
Merger expenses 700 300 - -
----------- ----------- ----------- -----------
Income from operations 12,569 16,589 19,040 20,281
Minority interest 547 608 1,045 1,292
Interest expense, net 1,246 1,436 1,557 1,254
----------- ----------- ----------- -----------
Income before income taxes 10,776 14,545 16,438 17,735
Income taxes 4,114 5,438 6,126 6,414
----------- ----------- ----------- -----------
Net income $ 6,662 $ 9,107 $ 10,312 $ 11,321
=========== =========== =========== ===========
Net income per share:
Basic $ 0.16 $ 0.21 $ 0.24 $ 0.26
=========== =========== =========== ===========
Diluted $ 0.15 $ 0.20 $ 0.22 $ 0.24
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net operating revenue $ 57,022 $ 63,071 $ 65,432 $ 72,341
Operating expenses 46,016 50,738 51,942 62,714
Depreciation and amortization 2,493 2,675 2,857 3,411
Merger expenses - 300 - -
----------- ----------- ----------- -----------
Income from operations 8,513 9,358 10,633 6,216
Minority interest - 218 290 447
Interest expense, net 102 415 482 696
----------- ----------- ----------- -----------
Income before income taxes 8,411 8,725 9,861 5,073
Income taxes 3,153 3,239 3,656 1,865
----------- ----------- ----------- -----------
Net income $ 5,258 $ 5,486 $ 6,205 $ 3,208
=========== =========== =========== ===========
Net income per share:
Basic $ 0.15 $ 0.15 $ 0.17 $ 0.08
=========== =========== =========== ===========
Diluted $ 0.14 $ 0.14 $ 0.16 $ 0.08
=========== =========== =========== ===========
</TABLE>
42
<PAGE> 43
Report of Independent Auditors
The Board of Directors
Renal Care Group, Inc.
We have audited the supplemental 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 8-K). Our audits also included
the supplemental financial statement schedule included in this Form 8-K. This
supplemental schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the supplemental financial statement schedule referred to above,
when considered in relation to the basic supplemental 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
43
<PAGE> 44
Schedule II
Renal Care Group, Inc.
Supplemental Consolidated Schedule - Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Balance Amount Balance
Beginning Allowances Charged to At End of
Of Period Acquired Expense Write-Offs Period
--------- -------- ------- ---------- ------
<S> <C> <C> <C> <C> <C>
Allowances for doubtful accounts:
Year ended
December 31, 1996 $ 5,062 $4,344 $ 3,414 $(4,441) $ 8,379
======= ====== ======= ======== =======
Year ended
December 31, 1997 $ 8,379 $3,949 $ 8,022 $(1,306) $19,044
======= ====== ======= ======== =======
Year ended
December 31, 1998 $19,044 $2,321 $13,074 $(3,713) $30,726
======= ====== ======= ======== =======
</TABLE>
44
<PAGE> 45
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired. None.
(b) Pro Forma Financial Information. None.
(c) Exhibits.
Exhibit 23(b) Consent of Independent Auditors
Exhibit 27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RENAL CARE GROUP, INC.
/s/ Ronald Hinds
---------------------------------
Ronald Hinds
Executive Vice President and
Chief Financial Officer
Date: April 22, 1999
---------
45
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in (1) the Registration Statement
(Form S-8 No. 333-37299) pertaining to the Renal Care Group, Inc. Third Amended
and Restated 1996 Stock Incentive Plan; and in (2) the Registration Statement
(Form S-8 No. 333-74565) pertaining to the Renal Care Group, Inc. Fourth
Amended and Restated 1996 Stock Incentive Plan and the Dialysis Centers of
America, Inc. Equity Compensation Plan of our reports dated March 2, 1999,
with respect to the supplemental consolidated financial statements and schedule
of Renal Care Group, Inc. as of and for the periods ended December 31, 1998
included in its Current Report on Form 8-K.
ERNST & YOUNG LLP
Nashville, Tennessee
April 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,943
<SECURITIES> 0
<RECEIVABLES> 115,521
<ALLOWANCES> 30,726
<INVENTORY> 8,553
<CURRENT-ASSETS> 125,001
<PP&E> 128,740
<DEPRECIATION> 32,484
<TOTAL-ASSETS> 433,377
<CURRENT-LIABILITIES> 79,206
<BONDS> 0
0
0
<COMMON> 440
<OTHER-SE> 245,240
<TOTAL-LIABILITY-AND-EQUITY> 433,377
<SALES> 0
<TOTAL-REVENUES> 420,694
<CGS> 0
<TOTAL-COSTS> 276,895
<OTHER-EXPENSES> 65,738
<LOSS-PROVISION> 13,074
<INTEREST-EXPENSE> 5,493
<INCOME-PRETAX> 59,494
<INCOME-TAX> 22,092
<INCOME-CONTINUING> 37,402
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,402
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.82
</TABLE>
