<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NO. 0-27640
RENAL CARE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1622383
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2100 WEST END AVENUE, SUITE 800, NASHVILLE, TENNESSEE 37203
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 345-5500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
CLASS OUTSTANDING AT MAY 8, 2000
----- --------------------------
Common Stock, $.01 par value 45,156,527
<PAGE> 2
RENAL CARE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 1999 and March 31, 2000 (unaudited)............... 1
Consolidated Income Statements - (unaudited)
For the three months ended March 31, 1999 and 2000............ 2
Consolidated Statements of Cash Flows - (unaudited)
For the three months ended March 31, 1999 and 2000............ 3
Notes to the Consolidated Financial Statements - (unaudited)........ 4
Item 2. Management's Discussion and Analysis of Financial Condition And
Results of Operations.......................................... 7
Risk Factors ................................................................ 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 16
</TABLE>
Note: Item 3 of Part I, and Items 1, 2, 3, 4, and 5 of Part II are omitted
because they are not applicable
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RENAL CARE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 14,507 $ 21,292
Accounts receivable, net .............................. 99,877 101,498
Inventories ........................................... 12,044 10,556
Prepaid expenses and other current assets ............. 13,252 14,155
Income taxes receivable ............................... 1,147 --
Deferred income taxes ................................. 19,172 19,172
-------- --------
Total current assets ..................................... 159,999 166,673
Property, plant and equipment, net ....................... 121,143 124,937
Goodwill and other intangibles, net ...................... 196,532 194,309
Other assets ............................................. 4,710 4,923
-------- --------
Total assets ............................................. $482,384 $490,842
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 21,460 $ 18,193
Income taxes payable .................................. -- 5,666
Current portion of long-term debt ..................... 367 345
Other current liabilities ............................. 52,563 55,875
-------- --------
Total current liabilities ................................ 74,390 80,079
Long-term debt, net of current portion ................... 76,102 60,076
Deferred income taxes .................................... 12,872 12,872
Minority interest ........................................ 8,706 9,227
-------- --------
Total liabilities ........................................ 172,070 162,254
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000 shares
authorized, none issued ............................ -- --
Common stock, $.01 par value, 90,000 shares authorized,
44,764 and 45,057 shares issued and outstanding at
December 31, 1999 and March 31, 2000, respectively . 448 451
Additional paid-in capital ............................ 199,982 203,199
Retained earnings ..................................... 109,884 124,938
-------- --------
Total stockholders' equity ............................... 310,314 328,588
-------- --------
Total liabilities and stockholders' equity ............... $482,384 $490,842
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE> 4
RENAL CARE GROUP, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 2000
---- ----
<S> <C> <C>
Net revenue ........................................ $120,861 $144,297
Operating costs and expenses:
Patient care costs .............................. 78,247 92,140
General and administrative expenses ............. 11,294 13,161
Provision for doubtful accounts ................. 3,201 3,949
Depreciation and amortization ................... 6,163 7,404
Merger expenses ................................. 4,300 --
-------- --------
Total operating costs and expenses ................. 103,205 116,654
-------- --------
Income from operations ............................. 17,656 27,643
Interest expense, net .............................. 1,405 1,191
-------- --------
Income before minority interest and income taxes ... 16,251 26,452
Minority interest .................................. 1,500 2,169
-------- --------
Income before income taxes ......................... 14,751 24,283
Provision for income taxes ......................... 6,644 9,229
-------- --------
Net income ......................................... $ 8,107 $ 15,054
======== ========
Net income per share:
Basic ........................................... $ 0.18 $ 0.33
======== ========
Diluted ......................................... $ 0.17 $ 0.32
======== ========
Weighted average shares outstanding:
Basic ........................................... 44,193 44,987
======== ========
Diluted ......................................... 46,400 46,900
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 5
RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1999 2000
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income ................................................. $ 8,107 $ 15,054
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 6,163 7,404
Distributions to minority shareholders ............... (967) (1,648)
Income applicable to minority interest ............... 1,500 2,169
Changes in operating assets and liabilities net of
effects from acquisitions ........................ (10,252) 5,823
-------- --------
Net cash provided by operating activities ......... 4,551 28,802
INVESTING ACTIVITIES
Purchases of property and equipment ........................ (12,704) (8,172)
Cash paid for acquisitions, net of cash acquired ........... (7,898) (1,189)
Change in other assets ..................................... 134 173
-------- --------
Net cash used in investing activities ............. (20,468) (9,188)
FINANCING ACTIVITIES
Net borrowings under line of credit ........................ 17,116 --
Payments on long-term debt ................................. (195) (16,048)
Proceeds from exercise of stock options .................... 1,770 3,219
-------- --------
Net cash provided by (used in) financing
activities ..................................... 18,691 (12,829)
-------- --------
Increase in cash and cash equivalents ...................... 2,774 6,785
Cash and cash equivalents at beginning of period ........... 19,943 14,507
-------- --------
Cash and cash equivalents at end of period ................. $ 22,717 $ 21,292
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................. $ 1,175 $ 1,411
======== ========
Income taxes ......................................... $ 2,069 $ 2,416
======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Issuance of common stock in acquisition ................. $ 3,000 $ --
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 6
RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2000
(in thousands, except per share data)
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
OVERVIEW
Renal Care Group, Inc. ("Renal Care Group" or the "Company") provides
dialysis services to patients with chronic kidney failure, also known as
end-stage renal disease ("ESRD"). As of March 31, 2000, the Company provided
dialysis and ancillary services to approximately 15,000 patients through 186
outpatient dialysis centers in 23 states. In addition to its outpatient dialysis
center operations as of March 31, 2000, the Company provided acute dialysis
services through contractual relationships with 104 hospitals. The Company also
operates a business providing diabetic and wound care services.
Renal Care Group's net revenue has been derived primarily from the
following sources:
- outpatient hemodialysis services;
- ancillary services associated with dialysis, primarily the
administration of erythropoietin (also known as Epogen(R) or
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 diabetes services.
Patients with end-stage renal disease typically receive three dialysis
treatments each week, with reimbursement for services provided largely by the
Medicare ESRD program based on rates established by the Health Care Financing
Administration ("HCFA"). For the three months ended March 31, 2000,
approximately 58% of the Company's net revenue was derived from reimbursement
under the Medicare and Medicaid programs. Medicare reimbursement is subject to
rate and other legislative changes by Congress and periodic changes in
regulations, including changes that may reduce payments under the ESRD program.
Effective January 2000, Congress increased the Medicare composite rate by 1.2%.
An additional increase of 1.2% is scheduled to take effect in January 2001.
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 Renal Care Group. Certain other services, laboratory tests, and
drugs are eligible
4
<PAGE> 7
for separate reimbursement under Medicare and are not part of the composite
rate, including specific drugs such as EPO and some physician-ordered tests
provided to dialysis patients.
For patients with private health insurance, dialysis is now reimbursed
at rates higher than Medicare during the first 30 months of treatment, and after
that time Medicare becomes the primary payor. Prior to August 5, 1997, the
health insurance coordination period during which private insurance was required
to pay for dialysis was the first 18 months of treatment, and after that period
Medicare became the primary payor. Reimbursement for dialysis services provided
pursuant to a hospital contract is negotiated with the individual hospital and
generally is higher on a per treatment equivalent basis than the Medicare
composite rate. Because dialysis is a life-sustaining therapy used to treat a
chronic disease, utilization is predictable and is not subject to seasonal
fluctuations.
Renal Care Group derives a significant portion of its net revenue and
net income from the administration of EPO. EPO is manufactured by a single
company. In February 2000, this manufacturer announced a 3.9% increase in its
price for EPO. Renal Care Group estimates that this price increase will reduce
its earnings per share by up to $0.05 for the year ending December 31, 2000. The
Company does not know the precise effect of the increase, since Renal Care
Group's new contract with the manufacturer may allow it to mitigate the price
increase to some extent.
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the information contained in this
quarterly report on Form 10-Q reflects all adjustments necessary to make the
results of operations for the interim periods a fair representation of such
operations. All such adjustments are of a normal recurring nature. Operating
results for interim periods are not necessarily indicative of results that may
be expected for the year as a whole. The Company suggests that persons read
these financial statements in conjunction with the consolidated financial
statements and the related notes thereto included in the Company's Form 10-K, as
filed with the SEC on March 30, 2000.
NOTE 2 - SUBSEQUENT EVENT
In April 2000, RCG completed a merger with Renal Disease Management by
Physicians, Inc. ("RDM"), an operator of six dialysis facilities located in
Northeast Ohio and Western Pennsylvania. The facilities also provide acute,
in-patient dialysis treatment services to six area hospitals. RCG expects to
issue approximately 430,000 shares of common stock in the merger. The RDM merger
will be treated as a pooling-of-interests for accounting purposes and as such
the Company's consolidated financial statements, presented in future reports,
will be restated to include the accounts and results of operations of RDM.
The following unaudited data reflect the results of operations as if
the combination had been consummated as of the date of the consolidated
financial statements. The unaudited data may not be representative of future
results and do not reflect any changes in the operations of either the Company
or RDM that may result from the combination of their operations:
5
<PAGE> 8
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1999 2000
---- ----
<S> <C> <C>
Pro forma net revenue $126,460 $149,478
======== ========
Pro forma net income $ 8,173 $ 14,974
======== ========
Pro forma net income per share:
Basic $ 0.18 $ 0.33
======== ========
Diluted $ 0.17 $ 0.32
======== ========
</TABLE>
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
income per share in accordance with SFAS 128.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1999 2000
---- ----
<S> <C> <C>
Numerator:
Numerator for basic and diluted
income per share $ 8,107 $15,054
Denominator:
Denominator for basic net income per
share - weighted-average shares 44,193 44,987
Effect of dilutive securities:
Stock Options 1,678 1,511
Warrants 529 402
------- -------
Denominator for diluted net income per
share-adjusted weighted-average
shares and assumed conversions 46,400 46,900
======= =======
Net income per share:
Basic $ 0.18 $ 0.33
======= =======
Diluted $ 0.17 $ 0.32
======= =======
</TABLE>
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net Revenue. Net revenue increased from $120.9 million for the three
months ended March 31, 1999 to $144.3 million for the three months ended March
31, 2000, an increase of $23.4 million, or 19.4%. This increase resulted
primarily from a 13.6% increase in the number of treatments from 500,177 in the
1999 period to 568,081 in the 2000 period. This growth in treatments is the
result of the acquisition and development of various dialysis facilities and an
8.4% increase in same-center treatments for the 2000 period over the 1999
period. In addition, average net revenue per dialysis treatment increased 5.1%
from $234 in the 1999 period to $246 in the 2000 period. The increase in revenue
per treatment was due to the 1.2% increase in the Medicare composite rate,
increases in the Company's prices to private payors, an improvement in the
Company's payor mix, increases in the utilization of EPO and other drugs, and
increases in acute hospital services. The remainder of the revenue increase was
a result of wound care and diabetes revenues and higher management fees related
to hospital-based and medical university dialysis programs.
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 $78.2 million for the three months ended March 31, 1999 to $92.1
million for the three months ended March 31, 2000, an increase of $13.9 million,
or 17.8%. This increase was principally due to the increase in the number of
treatments performed during the period, which was reflected in corresponding
increases in the use of labor, drugs and supplies. Patient care costs as a
percentage of net revenue decreased from 64.7% in the 1999 period to 63.9% in
the 2000 period. Patient care costs per treatment increased 3.8% from $156 in
the 1999 period to $162 in the 2000 period. This increase was due to greater EPO
and other drug utilization costs, the cost of providing in-house laboratory
services and normal health care inflation.
General and Administrative Expenses. General and administrative
expenses include corporate office costs and facility costs not directly related
to the care of patients, including facility administration, accounting, billing
and information systems. General and administrative expenses increased from
$11.3 million for the three months ended March 31, 1999 to $13.2 million for the
three months ended March 31, 2000, an increase of $1.9 million, or 16.8%.
General and administrative expenses as a percentage of revenue decreased from
9.3% in the 1999 period to 9.1% in the 2000 period, primarily as the result of
spreading such costs over an increased base of net revenue.
Provision for Doubtful Accounts. The provision for doubtful accounts is
determined as a function of payor mix, billing practices, and other factors.
Renal Care Group reserves for doubtful accounts in the period in which the
revenue is recognized based on management's estimate of the net collectibility
of the accounts receivable. Management estimates the net collectibility of
accounts receivable based upon a variety of factors. These factors include, but
are not limited to, analyzing revenues generated from payor sources, performing
subsequent collection testing and regularly reviewing detailed accounts
receivable agings. The provision for doubtful accounts increased from $3.2
million for the three months ended March 31, 1999 to $3.9 million for the three
months ended March 31, 2000. The provision for doubtful accounts as a percentage
of net revenue remained relatively consistent at 2.6% in the 1999 period
compared to 2.7% in the 2000 period.
7
<PAGE> 10
Depreciation and Amortization. Depreciation and amortization increased
from $6.2 million for the three months ended March 31, 1999 to $7.4 million for
the three months ended March 31, 2000, an increase of $1.2 million, or 19.4%.
This increase was due to the start-up of dialysis facilities, the normal
replacement costs of dialysis facilities and equipment, the purchase of
information systems and the amortization of the goodwill and other intangible
assets associated with acquisitions accounted for as purchases.
Income from Operations. Income from operations increased from $17.7
million for the three months ended March 31, 1999 to $27.6 million for the three
months ended March 31, 2000, an increase of $9.9 million, or 55.9%. Income from
operations as a percentage of net revenue increased from 14.6% in the 1999
period to 19.2% in the 2000 period as a result of the factors discussed above.
Interest Expense. Interest expense decreased from $1.4 million for the
three months ended March 31, 1999 to $1.2 million for the three months ended
March 31, 2000, a decrease of $200,000 or 14.3%. The decrease was the result of
lower average borrowings partially offset by slightly higher effective borrowing
rates during the 2000 period.
Minority Interest. Minority interest represents the proportionate
equity interest of other partners in the Company's consolidated entities that
are not wholly-owned, whose financial results are included in the Company's
consolidated results. Minority interest as a percentage of net revenue increased
to 1.5% in 2000 from 1.2% in 1999. This increase was the result of continued
operational improvements in Renal Care Group's joint ventures, primarily those
in Ohio and Oregon.
Income Tax Expense. Income tax expense increased from $6.6 million for
the three months ended March 31, 1999 to $9.2 million for the three months ended
March 31, 2000, an increase of $2.6 million or 39.4%. The increase is a result
of pre-tax earnings increasing to $24.3 million representing a 64.6% increase
over the 1999 period.
Net Income. Net income increased from $8.1 million for the three months
ended March 31, 1999 to $15.1 million for the three months ended March 31, 2000,
an increase of $7.0 million or 86.4%. The increase is a result of the items
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Renal Care Group requires capital primarily to acquire and develop
dialysis facilities, to purchase property and equipment for existing centers,
and to finance working capital needs. At March 31, 2000, the Company's working
capital was $86.6 million, cash and cash equivalents were $21.3 million, and the
Company's current ratio was approximately 2.1 to 1.
Net cash provided by operating activities was $28.8 million for the
three months ended March 31, 2000. Cash provided by operating activities
consists of net income before depreciation and amortization expense, adjusted
for changes in components of working capital, primarily accounts receivable. Net
cash used in investing activities was $9.2 million for the three months ended
March 31, 2000. Cash used in investing activities consisted primarily of $1.2
million of cash paid for acquisitions and $8.2 million of purchases of property
and equipment. Cash used in financing activities was $12.8 million for the three
months ended March 31, 2000. Cash used in financing activities primarily
reflects $16.0 million in repayments under Renal Care Group's long-term debt
partially offset by $3.2 million in proceeds from stock option exercises.
8
<PAGE> 11
In 1999, the Company executed a Second Amendment to its First Amended
and Restated Loan Agreement with a group of banks. This agreement provides for a
credit facility of $185.0 million. Borrowings under the credit facility may be
used for acquisitions, capital expenditures, working capital and general
corporate purposes. No more than $25.0 million of the credit facility may be
used for working capital purposes. Within the working capital sublimit, the
Company may borrow up to $5.0 million in swing line loans.
Renal Care Group has negotiated loan pricing based on a LIBO rate
margin pursuant to leverage tiers. These leverage tiers extend from 0.75 to 2.25
times and are priced at a LIBO rate margin of 0.60% to 1.35%. Commitment fees
are also priced pursuant to leverage ratio tiers. Commitment fees range from
0.20% to 0.30% pursuant to leverage ratios ranging between 0.75 and 2.25. Under
the loan agreement, commitments range in amounts and dates from the closing date
through August 2003. Renal Care Group has obtained total lender commitments of
$185.0 million through August 2000. Lender commitments are then reduced to
$157.3 million through August 2001, $129.5 million through August 2002 and
$101.8 million through August 2003. All loans under the loan agreement are due
and payable on August 4, 2003. As of March 31, 2000, there was $58.0 million
outstanding under this agreement. These variable rate debt instruments of the
Company carry a degree of interest rate risk. Specifically, variable rate debt
may result in higher costs to the Company if interest rates rise.
Each of Renal Care Group's subsidiaries has guaranteed all of Renal
Care Group's obligations under the loan agreement. Further, Renal Care Group's
obligations under the loan agreement, and the obligations of each of its
subsidiaries under its guaranty, are secured by a pledge of the equity interests
held by Renal Care Group in each of the subsidiaries. Financial covenants are
customary based on the amount and duration of this commitment.
A significant component of Renal Care Group's growth strategy is the
acquisition and development of dialysis facilities. There can be no assurance
that Renal Care Group will be able to identify suitable acquisition candidates
or to close acquisition transactions with them on acceptable terms. Management
of Renal Care Group believes that existing cash and funds from operations,
together with funds available under the line of credit, will be sufficient to
meet Renal Care Group's acquisition, expansion, capital expenditure and working
capital needs for the foreseeable future. However, in order to finance certain
large strategic acquisition opportunities, Renal Care Group may from time to
time incur additional short and long-term bank indebtedness and may issue equity
or debt securities. The availability and terms of any future financing will
depend on market and other conditions. There can be no assurance that any
additional financing, if required, will be available on terms acceptable to
Renal Care Group.
Capital expenditures of approximately $30.0 million, primarily for
equipment replacement, expansion of existing dialysis facilities and
construction of de novo facilities are planned in 2000. The Company has made
capital expenditures of $8.2 million through March 31, 2000. The Company expects
that remaining capital expenditures in 2000 will be funded with cash provided by
operating activities and the Company's existing credit facility. Management
believes that capital resources available to Renal Care Group will be sufficient
to meet the needs of its business, both on a short- and long-term basis.
RISK FACTORS
You should carefully consider the risks described below before
investing in Renal Care Group. The risks and uncertainties described below ARE
NOT the only ones facing Renal Care Group. Other risks and uncertainties that we
have not predicted or assessed may also adversely affect our company.
If any of the following risks occur, our earnings, financial condition
or business could be materially harmed, and the trading price of our common
stock could decline, resulting in the loss of all or part of your investment.
9
<PAGE> 12
IF WE FAIL TO INTEGRATE ACQUIRED COMPANIES, WE WILL BE LESS PROFITABLE.
Renal Care Group has grown significantly by acquisitions of other
dialysis providers since its formation in February 1996. We have completed some
of our acquisitions as recently as April 2000, and we intend to acquire more
dialysis businesses in the future. After an acquisition, we face the challenge
of integrating the acquired company's management and other personnel, clinical
operations, and financial and operating systems with ours, often without the
benefit of continued services from key personnel of the acquired company. We may
be unable to integrate the businesses we acquire successfully or to achieve
anticipated benefits from an acquisition in a timely manner, which could lead to
substantial costs and delays or other operational, technical or financial
problems, including diverting management's attention from our existing business.
Any of these results could damage our profitability and our prospects for future
growth.
IF MEDICARE OR MEDICAID CHANGES ITS PROGRAMS FOR DIALYSIS, OUR REVENUE AND
EARNINGS COULD DECREASE.
If the government changes the Medicare, Medicaid or similar government
programs or the rates paid by those programs for our services, then our revenue
and earnings may decline. We estimate that approximately 59% of our net revenue
for 1998, 57% of our net revenue for 1999 and 53% of our net revenue for the
three months ended March 31, 2000 consisted of reimbursements from Medicare,
including revenue from the administration of EPO to treat anemia. We also
estimate that approximately 5% of our net revenue for 1998, 4% of our net
revenue for 1999, and 5% of our net revenue for the three months ended March 31,
2000, consisted of reimbursements from Medicaid or comparable state programs.
Any of the following actions in connection with these programs could cause our
revenue and earnings to decline:
- a reduction of the amount paid to us under government programs;
- an increase in the costs associated with performing our services
that are subject to inflation, such as labor and supply costs,
without a corresponding increase in reimbursement rates;
- the inclusion of some or all ancillary services, for which we
are now reimbursed separately, in the flat composite rate for a
standard dialysis treatment; or
- changes in laws, or the interpretations of laws, which could
cause us to modify our operations.
IF REIMBURSEMENT FOR EPO DECREASES, THEN WE COULD BE LESS PROFITABLE.
If government or private payors decrease reimbursement rates for EPO,
for which we are currently reimbursed separately outside of the flat composite
rate, our revenue and earnings may decline. EPO is a bio-engineered hormone that
is used to treat anemia. Our revenues from EPO were approximately 23% of net
revenue for 1998 and 26% of net revenue for both the year 1999 and the three
months ended March 31, 2000. Most of our payments for EPO come from government
programs. President Clinton included a proposal to decrease the reimbursement
for EPO by $1 per thousand units in his fiscal year 2001 budget, which would
represent a 10% reduction from the current government reimbursement rate. For
the quarter ended March 31, 2000, government reimbursement represented
approximately 58% of the total revenue we derived from EPO. Because we are
unable to predict accurately the possible effect that the proposed reduction
would have on the cost of EPO or private reimbursement rates, we cannot quantify
what the net effect would be on our revenue and earnings.
10
<PAGE> 13
IF AMGEN RAISES THE PRICE FOR EPO OR IF EPO BECOMES IN SHORT SUPPLY, THEN WE
COULD BE LESS PROFITABLE.
EPO is produced by a single manufacturer, Amgen Inc., and there are no
substitute products available in the United States. Amgen announced a 3.9%
increase in the price of EPO in February 2000, its first price increase since
before Renal Care Group was formed. If Amgen imposes additional price increases
or if Amgen or other factors interrupt the supply of EPO, then our revenue and
earnings may decline.
IF PAYMENTS BY PRIVATE INSURERS, HOSPITALS OR MANAGED CARE ORGANIZATIONS
DECREASE, THEN OUR REVENUE AND EARNINGS COULD DECREASE.
If private insurers, hospitals or managed care organizations reduce
their rates or we experience a significant shift in our revenue mix toward
additional Medicare or Medicaid reimbursement, then our revenue and earnings may
decline. We estimate that approximately 36% of our net revenue for 1998, 39% of
our net revenue for 1999, and 42% of our net revenue for the three months ended
March 31, 2000, were derived from sources other than Medicare and Medicaid. In
general, payments we receive from private insurers and hospitals for our
services are at rates significantly higher than the Medicare or Medicaid rates.
As a result, any of the following events could have a material adverse effect on
our revenue and earnings:
- an increase in dialysis procedures reimbursed by private
insurers, hospitals or managed care companies could cause these
payor organizations to reduce the rates they pay us;
- a portion of our business that is currently reimbursed by
private insurers or hospitals may become reimbursed by managed
care organizations, which generally have lower rates for our
services; or
- the scope of coverage by Medicare or Medicaid under the flat
composite rate could expand and, as a result, reduce the extent
of our services being reimbursed at the higher private-insurance
rates.
IF WE ARE UNABLE TO MAKE ACQUISITIONS IN THE FUTURE, OUR RATE OF GROWTH WILL
SLOW.
Much of our historical growth has come from acquisitions, and we expect
to continue to pursue growth through the acquisition and development of dialysis
centers. However, we may be unable to continue to identify and complete suitable
acquisitions at prices we are willing to pay or to obtain the necessary
financing. In addition, since we are a bigger company, the amount that acquired
businesses contribute to our revenue and profits will likely be smaller on a
percentage basis. We also compete with other companies to identify and complete
suitable acquisitions. We expect this competition to intensify, making it more
difficult to acquire suitable companies on favorable terms. Further, the
businesses we acquire may not perform well enough to justify our investment. If
we are unable to make additional acquisitions on suitable terms, we may not meet
our growth expectations.
IF WE COMPLETE FUTURE ACQUISITIONS, WE MAY DILUTE EXISTING STOCKHOLDERS BY
ISSUING MORE OF OUR COMMON STOCK OR WE MAY INCUR ADDITIONAL EXPENSES RELATED TO
DEBT AND GOODWILL, WHICH COULD REDUCE OUR EARNINGS.
We may issue equity securities in future acquisitions that could be
dilutive to our shareholders. We also may incur additional debt and amortization
expense related to goodwill and other intangible assets in future acquisitions.
We have used the pooling-of-interests accounting method for many of our
acquisitions, and as a result
11
<PAGE> 14
we have not recorded goodwill (the excess of acquisition cost over identifiable
tangible assets) in these acquisitions. In those instances where we have used
the purchase accounting method in acquisitions, we have recorded goodwill and
other intangible assets, which are then amortized yearly against our earnings at
a blended average life of 35 years. We had approximately $194.3 million of
goodwill and other intangibles, net, as of March 31, 2000. The SEC and
accounting policymakers have announced that they are considering policy and rule
changes that would likely eliminate the pooling-of-interests method, which would
result in more goodwill and associated amortization expense for future and,
possibly, prior acquisitions. Further, the SEC and accounting policymakers have
announced that they may reduce the allowable life over which companies may
amortize goodwill, which would result in increased amortization expense in each
year. Interest expense on additional debt and amortization expense from
acquisitions may significantly reduce our profitability.
IF ACQUIRED BUSINESSES HAVE UNKNOWN LIABILITIES, THEN WE COULD BE EXPOSED TO
LIABILITIES THAT COULD HARM OUR BUSINESS AND PROFITABILITY.
Businesses we acquire may have unknown or contingent liabilities,
including liabilities for failure to comply with health care laws. Although we
generally attempt to identify any practices that may give rise to unknown or
contingent liabilities and conform them to our standards after the acquisition,
private plaintiffs or governmental agencies may still assert claims. Even though
we generally seek to obtain indemnification from prospective sellers, unknown
and contingent liabilities may not be covered by indemnification or may exceed
contractual limits or the financial capacity of the indemnifying party.
IF OUR REFERRING PHYSICIANS WERE TO CEASE REFERRING TO OUR CENTERS OR WERE
PROHIBITED FROM REFERRING FOR REGULATORY REASONS, OUR REVENUE AND EARNINGS WOULD
DECLINE.
Our dialysis centers depend on referrals from local nephrologists.
Typically, one or a few physicians account for all or a significant portion of
the patient base at each of our dialysis centers, and the loss of one or more
referring physicians could have a material adverse effect on the operations of
that center. The loss of a significant number of referring physicians could
cause our revenue and earnings to decline. In many instances, the primary
referral sources for our centers are physicians who are also stockholders of
Renal Care Group and serve as medical directors of our centers. If stock
ownership or the medical director relationship were deemed to violate applicable
federal or state law, including fraud and abuse laws and laws prohibiting
self-referrals, the physicians owning our stock or acting as medical directors
could be forced to stop referring to our centers. Further, we may not be able to
renew or renegotiate our medical director agreements successfully, which could
result in a loss of patients since dialysis patients are typically treated at a
center where their physician serves as a medical director.
IF OUR BUSINESS IS ALLEGED OR FOUND TO VIOLATE HEATH CARE OR OTHER APPLICABLE
LAWS, OUR REVENUE AND EARNINGS COULD DECREASE.
We are subject to extensive federal, state and local regulation
regarding the following:
- fraud and abuse prohibitions under health care reimbursement laws;
- prohibitions and limitations on patient referrals;
- false claims prohibitions under health care reimbursement laws;
- facility licensure;
12
<PAGE> 15
- health and safety requirements;
- environmental compliance; and
- medical and toxic waste disposal.
Much of this regulation, particularly in the areas of fraud and abuse
and patient referral, is complex and open to differing interpretations. Due to
the broad application of the statutory provisions and the absence in many
instances of regulations or court decisions addressing the specific arrangements
by which we conduct our business, including our arrangements with medical
directors, physician stockholders and physician joint venture partners,
governmental agencies could challenge some of our practices under these laws. If
any of our operations are found to violate these laws, we may be subject to
severe sanctions or be required to alter or discontinue the challenged conduct
or both. If we are required to alter our practices, we may not be able to do so
successfully. If any of these events occurs, our revenue and earnings could
decline.
CHANGES IN THE HEALTH CARE DELIVERY, FINANCING OR REIMBURSEMENT SYSTEMS COULD
ADVERSELY AFFECT OUR BUSINESS.
The health care industry in the United States is in a period of rapid
change and uncertainty. Health care organizations, public or private, may
dramatically change the way they operate and pay for services. Our business is
designed to function within the current health care financing and reimbursement
system. During the past several years, the health care industry has been subject
to increasing levels of government regulation of, among other things,
reimbursement rates and capital expenditures. In addition, proposals to reform
the health care system have been considered by Congress. These proposals, if
enacted, may further increase government regulation of or other involvement in
health care, lower reimbursement rates and otherwise change the operating
environment for health care companies. We cannot predict the likelihood of those
events or what impact they may have on our business.
THE DIALYSIS BUSINESS IS HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE
EFFECTIVELY IN OUR MARKETS, WE COULD LOSE MARKET SHARE AND OUR RATE OF GROWTH
COULD SLOW.
The dialysis industry is fragmented and rapidly consolidating. There
are several large dialysis companies that compete for the acquisition of
existing dialysis centers and the development of relationships with referring
physicians. Several of our competitors are part of larger companies that also
manufacture dialysis equipment, which allows them to lower equipment costs.
Several of our competitors, including these equipment manufacturers, are much
larger than we are and have substantially greater financial resources and more
established operations and infrastructure than us. We also experience
competition from referring physicians who open their own dialysis centers. There
can be no assurance that we will be able to compete effectively with any of our
competitors.
IF WE LOSE ANY OF OUR EXECUTIVE OFFICERS, OR ARE UNABLE TO ATTRACT AND RETAIN
QUALIFIED MANAGEMENT PERSONNEL AND MEDICAL DIRECTORS, OUR ABILITY TO RUN OUR
BUSINESS COULD BE ADVERSELY AFFECTED AND OUR REVENUE AND EARNINGS COULD DECLINE.
We are dependent upon the services of our executive officers Sam A.
Brooks, Jr., our Chairman, Chief Executive Officer and President, and Raymond
Hakim, M.D., Ph.D., R. Dirk Allison and Gary Brukardt, each an Executive Vice
President. Mr. Brooks, Dr. Hakim and Mr. Brukardt have each been with Renal Care
Group since its formation. We have entered into employment agreements with
Messrs. Brooks, Allison, and Brukardt and Dr. Hakim. The employment agreements
for each of these executive officers other than Dr. Hakim contain restrictive
covenants prohibiting the officer from competing with Renal Care Group for a
period of one year following the end
13
<PAGE> 16
of the officer's employment term. The services of these individuals would be
very difficult to replace. We do not carry key-man life insurance on any of our
officers. Further, our growth will depend in part upon our ability to attract
and retain skilled employees, for whom competition is intense. We also believe
that our future success will depend on our ability to attract and retain
qualified physicians to serve as medical directors of our dialysis centers. We
have entered into medical director agreements with the physicians serving as
medical directors of our dialysis centers, most of which contain noncompetition
covenants of varying durations.
IF OUR BOARD OF DIRECTORS DOES NOT APPROVE AN ACQUISITION OR CHANGE IN CONTROL
OF RENAL CARE GROUP, OUR STOCKHOLDERS MAY NOT REALIZE THE FULL VALUE OF THEIR
STOCK.
Our certificate of incorporation and bylaws contain a number of
provisions that may delay, deter or inhibit a future acquisition or change in
control of Renal Care Group that is not first approved by our board of
directors. This could occur even if our stockholders are offered an attractive
value for their shares or if a substantial number or even a majority of our
stockholders believe the takeover may be in their best interest. These
provisions are intended to encourage any person interested in acquiring Renal
Care Group to negotiate with and obtain approval from our board of directors
before pursuing the transaction. Provisions that could delay, deter or inhibit a
future acquisition or change in control of Renal Care Group include the
following:
- a staggered board of directors that would require two annual
meetings to replace a majority of the board of directors;
- restrictions on calling special meetings at which an acquisition
or change in control might be brought to a vote of the
stockholders;
- blank check preferred stock that may be issued by our board of
directors without stockholder approval and that may be
substantially dilutive or contain preferences or rights
objectionable to an acquiror; and
- a poison pill that would substantially dilute the interest sought
by an acquiror.
These provisions could also discourage bids for our common stock at a
premium and cause the market price of our common stock to decline.
OUR STOCK PRICE IS VOLATILE AND AS A RESULT, THE VALUE OF YOUR INVESTMENT MAY GO
DOWN FOR REASONS UNRELATED TO THE PERFORMANCE OF OUR BUSINESS
Our common stock is traded on the Nasdaq National Market. The market
price of our common stock has been volatile, with trades ranging from a low of
$16.375 per share to a high of $27.875 per share during the three months ended
March 31, 2000. The market price for our common stock could fluctuate
substantially based on a variety of factors, including the following:
- future announcements concerning us, our competitors, our suppliers
or the health care market;
- changes in government regulations; and
- changes in earnings estimates by analysts.
14
<PAGE> 17
Furthermore, stock prices for many companies fluctuate widely for
reasons that may not be related to their operating results. These fluctuations,
coupled with changes in demand or reimbursement levels for our services and
general economic, political and market conditions, could cause the market price
of our common stock to decline.
FORWARD LOOKING STATEMENTS
Some of the information in this quarterly report on Form 10-Q contains
forward-looking statements that involve substantial risks and uncertainties. You
can identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "intend," "estimate" and "continue" or
similar words. You should read statements that contain these words carefully for
the following reasons:
- the statements discuss our future expectations;
- the statements contain projections of our future earnings or of
our financial condition; and
- the statements state other "forward-looking" information.
We believe it is important to communicate our expectations to our
investors. There may be events in the future, however, that we are not
accurately able to predict or over which we have no control. The risk factors
listed above, as well as any cautionary language in or incorporated by reference
into this quarterly report on Form 10-Q, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. The SEC
allows us to "incorporate by reference" the information we file with them, which
means we can disclose important information to you by referring you to those
documents. Before you invest in our common stock, you should be aware that the
occurrence of any of the events described in the above risk factors, elsewhere
in or incorporated by reference into this quarterly report on Form 10-Q and
other events that we have not predicted or assessed could have a material
adverse effect on our earnings, financial condition and business. If the events
described above or other unpredicted events occur, then the trading price of our
common stock could decline and you may lose all or part of your investment.
15
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule for the three months ended March 31, 2000
(filed via Edgar on May 12, 2000)
(b) Reports on Form 8-K
None
16
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RENAL CARE GROUP, INC. (Registrant)
May 12, 2000 BY: /s/ R. DIRK ALLISON
--------------------------------------
R. Dirk Allison
Executive Vice President,
Chief Financial Officer, and Principal
Financial Officer and Principal
Accounting Officer
17
<PAGE> 20
RENAL CARE GROUP, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER AND
DESCRIPTION OF EXHIBIT
- ----------------------
<S> <C>
27.1 Financial Data Schedule for the three months ended March
31, 2000 (filed via Edgar on May 12, 2000)
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 21,292
<SECURITIES> 0
<RECEIVABLES> 101,498
<ALLOWANCES> 0
<INVENTORY> 10,556
<CURRENT-ASSETS> 166,673
<PP&E> 124,937
<DEPRECIATION> 0
<TOTAL-ASSETS> 490,842
<CURRENT-LIABILITIES> 80,079
<BONDS> 0
0
0
<COMMON> 451
<OTHER-SE> 328,137
<TOTAL-LIABILITY-AND-EQUITY> 490,842
<SALES> 0
<TOTAL-REVENUES> 144,297
<CGS> 0
<TOTAL-COSTS> 92,140
<OTHER-EXPENSES> 22,734
<LOSS-PROVISION> 3,949
<INTEREST-EXPENSE> 1,191
<INCOME-PRETAX> 24,283
<INCOME-TAX> 9,229
<INCOME-CONTINUING> 15,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,054
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.32
</TABLE>
