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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 11, 2000
RENAL CARE GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-27640 62-1622383
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
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 April 11, 2000, Renal Care Group, Inc. ("Renal Care Group" or the
"Company") acquired by merger all of the capital stock of Renal Disease
Management by Physicians, Inc., a Delaware corporation ("RDM"), for
approximately 556,000 shares, subject to certain adjustments, of the Company's
$0.01 par value per share common stock. The merger was completed under an
Agreement and Plan of Merger dated as of January 27, 2000 by and among the
Company, a newly formed merger subsidiary of the Company, RDM and certain of the
shareholders and warrantholders of RDM. The transaction was accounted for as a
pooling-of-interests.
Renal Care Group hereby files the Supplemental Selected Financial Data,
Supplemental Management's Discussion and Analysis of Financial Condition and
Results of Operations and Supplemental Consolidated Financial Statements, which
give effect to the transaction and restating the accounts of the Company to give
effect to the pooling-of-interests.
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SUPPLEMENTAL SELECTED FINANCIAL DATA
On April 11, 2000, Renal Care Group, Inc. (with its subsidiaries the
"Company" or "Renal Care Group") merged with Renal Disease Management by
Physicians, Inc. ("RDM"). RDM owned and operated six 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 RDM for all periods.
The Supplemental Selected Financial Data - Renal Care Group, Inc.
represent the historical results of operations of the Company and include the
results of operations of certain businesses that were acquired during 1996, 1999
and 2000 pooling-of-interests transactions. This information does not include
the results of operations for any periods prior to the date of the Company'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 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 Renal Care Group as of the closing of Renal Care Group'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 Supplemental Selected Financial Data - Renal Care Group, Inc. for
the years ended December 31, 1997, 1998 and 1999 are derived from audited data
included elsewhere in this Form 8-K. 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)
-----------------------------------------------------
1995(2) 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue .................................... $ 56,157 $165,690 $274,518 $441,063 $541,895
Patient care costs ............................. 37,651 115,375 189,284 292,113 351,367
General and administrative expenses ............ 11,101 17,404 27,827 43,894 51,315
Provision for doubtful accounts ................ 2,845 3,454 8,072 13,484 14,632
Depreciation and amortization .................. 2,471 6,125 12,070 22,241 27,835
Merger expenses ................................ -- 1,960 300 1,000 4,300
-------- -------- -------- -------- --------
Total operating costs and expenses ............. 54,068 144,318 237,553 372,732 449,449
-------- -------- -------- -------- --------
Income from operations ......................... 2,089 21,372 36,965 68,331 92,446
Interest expense, net .......................... 1,109 1,091 1,976 6,558 6,224
-------- -------- -------- -------- --------
Income before income taxes and minority interest 980 20,281 34,989 61,773 86,222
Minority interest .............................. -- -- 955 3,492 7,768
-------- -------- -------- -------- --------
Income before income taxes ..................... $ 980 20,281 34,034 58,281 78,454
========
Provision for income taxes ..................... 8,003 12,736 21,601 31,367
-------- -------- -------- --------
Net income ..................................... $ 12,278 $ 21,298 $ 36,680 $ 47,087
======== ======== ======== ========
Basic net income per share ..................... $ 0.41 $ 0.57 $ 0.84 $ 1.05
======== ======== ======== ========
Basic weighted average shares outstanding ...... 30,162 37,398 43,740 45,015
======== ======== ======== ========
Diluted net income per share ................... $ 0.38 $ 0.54 $ 0.79 $ 1.00
======== ======== ======== ========
Diluted weighted average shares outstanding .... 32,523 39,496 46,367 47,052
======== ======== ======== ========
DECEMBER 31,(1)
-----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) ...................... $ (1,168) $ 52,436 $ 22,045 $ 47,851 $ 73,651
Total assets ................................... 49,461 194,647 311,661 433,687 501,326
Long-term debt, net of current portion ......... 21,340 26,705 49,844 90,928 79,690
Stockholders' equity ........................... 12,496 116,758 191,720 248,180 312,259
</TABLE>
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(1) The financial information for the year ended December 31, 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 the Company in the
Combination simultaneously with the Company's initial public offering.
(2) Net income per share amounts are not presented for the year ended December
31, 1995 as the historical results of operations of the Company for this
year primarily consisted of non-taxed net income from Main Line and
RenalWest which were S corporations and a net loss from Dialysis Centers of
America, Inc.; therefore, all taxes were payable personally by the
stockholders of the respective entities. Additionally, the entities had
materially different equity structures than the Company, and net income per
share is not meaningful.
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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,
1999.
OVERVIEW
Renal Care Group provides dialysis services to patients with chronic
kidney failure. The Company began operating in February 1996 when it acquired
the Founding Companies in the Combination simultaneous with its initial public
offering. As of December 31, 1999, the Company provided dialysis and ancillary
services to approximately 15,100 patients through 188 outpatient dialysis
centers in 23 states, in addition to providing acute dialysis services in 111
hospitals.
For the comparison discussion that follows, the Supplemental Selected
Financial Data include the financial information of companies acquired in
previously reported transactions accounted for as poolings-of-interests. On
April 11, 2000, the Company merged with RDM in a transaction accounted for as a
pooling-of-interests. Consistent with other pooling-of-interests transactions,
the comparison discussion that follows includes Supplemental Selected Financial
Data that include the combined results of Renal Care Group and Renal Disease
Management. Because the companies added in pooling transactions were independent
and not operated by Renal Care Group's management before the dates of
acquisition, the historical results of such companies before such times may not
be indicative of future performance.
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 (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, 1999,
approximately 61% of the Company's net revenue was derived from
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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 for separate reimbursement under Medicare and are not part of
the composite rate, including specific drugs such as EPO and certain
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 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 contract with the manufacturer may allow it to mitigate the price
increase to some extent.
RESULTS OF OPERATIONS
On April 11, 2000, the Company merged with Renal Disease Management by
Physicians, Inc. in a transaction accounted for as a poolings-of-interests. 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 all companies acquired in transactions accounted
for as poolings-of-interests, all on a pro-forma basis as if these transactions
accounted for as poolings-of-interests had occurred for all periods presented.
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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,
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1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue ....................... $274,518 100.0% $441,063 100.0% $541,895 100.0%
Patient care costs ................ 189,284 69.0 292,113 66.2 351,367 64.8
General and administrative expenses 27,827 10.1 43,894 10.0 51,315 9.5
Provision for doubtful accounts ... 8,072 2.9 13,484 3.1 14,632 2.7
Depreciation and amortization ..... 12,070 4.4 22,241 5.0 27,835 5.1
Merger expenses ................... 300 0.1 1,000 0.2 4,300 0.8
-------- ----- -------- ----- -------- -----
Total operating costs and expenses 237,553 86.5 372,732 84.5 449,449 82.9
-------- ----- -------- ----- -------- -----
Income from operations ............ 36,965 13.5 68,331 15.5 92,446 17.1
Interest expense, net ............. 1,976 0.7 6,558 1.5 6,224 1.1
Minority interest ................. 955 0.3 3,492 0.8 7,768 1.4
-------- ----- -------- ----- -------- -----
Income before income taxes ........ 34,034 12.4 58,281 13.2 78,454 14.5
-------- ----- -------- ----- -------- -----
Income tax expense ................ 12,736 4.6 21,601 4.9 31,367 5.8
-------- ----- -------- ----- -------- -----
Net income ........................ $ 21,298 7.8% $ 36,680 8.3% $ 47,087 8.7%
======== ===== ======== ===== ======== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Revenue. Net revenue increased from $441.1 million for the year
ended December 31, 1998 to $541.9 million for the year ended December 31, 1999,
an increase of $100.8 million, or 22.9%. This increase resulted primarily from a
15.3% increase in the number of treatments from 1,921,996 in 1998 to 2,215,728
in 1999. This growth in treatments is a result of the acquisition and
development of various dialysis facilities and an 8.6% increase in same-center
treatments for 1999 over 1998. In addition, average net revenue per dialysis
treatment increased 6.3% from $223 in 1998 to $237 in 1999. The remaining
revenue increase is a result of wound care and diabetes revenues and higher
management fees. The increase in revenue per treatment was due to an improvement
in the Company's payor mix, increases in the utilization of EPO and other drugs,
and increases in acute hospital 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 $292.1 million for the year ended December 31, 1998 to $351.4
million for the year ended December 31, 1999, an increase of 20.3%. This
increase was 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 66.2% in 1998 to 64.8% in 1999. Patient care costs per treatment increased
4.6% from $152 in 1998 to $159 in 1999. 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
$43.9 million for the year ended December 31, 1998 to $51.3 million for the year
ended December 31, 1999, an increase of 16.9%. General and administrative
expenses as a
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percentage of revenue decreased from 10.0% in 1998 to 9.5% in 1999, primarily as
the result of the increase in net revenue for 1999.
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 continually reviewing detailed accounts
receivable agings. The provision for doubtful accounts increased from $13.5
million in 1998 to $14.6 million in 1999, an increase of $1.1 million, or 8.1%.
The provision for doubtful accounts as a percentage of net revenue decreased
from 3.1% in 1998 to 2.7% in 1999. The decrease in provision for doubtful
accounts as a percentage of net revenue resulted primarily from improved
collections of accounts receivable that were assumed in the Company's merger
with Dialysis Centers of America, Inc. in January 1999.
Depreciation and Amortization. Depreciation and amortization increased
from $22.2 million for the year ended December 31, 1998 to $27.8 million for the
year ended December 31, 1999, an increase of 25.2%. 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.
Merger Expenses. Merger expenses of $4.3 million for the year ended
December 31, 1999, represent legal, accounting and employee severance costs and
related benefits and other costs associated with the assimilation and transition
of the merger with Dialysis Centers of America.
Income from Operations. Income from operations increased from $68.3
million for the year ended December 31, 1998 to $92.4 million for the year ended
December 31, 1999, an increase of 35.3%. Income from operations as a percentage
of net revenue increased from 15.5% in 1998 to 17.1% in 1999 as a result of the
factors discussed above.
Interest Expense, Net. Interest expense of $6.2 million for the
year-ended December 31, 1999 decreased $400,000 compared to $6.6 million for the
year ended December 31, 1998. The decrease was the result of both lower average
borrowings and lower effective interest rates during 1999. The lower effective
interest rates were the result of replacing debt assumed in the Dialysis Centers
of America transaction with proceeds from Renal Care Group's credit facility
combined with generally lower market interest rates in much of 1999.
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 1.4% in 1999 from 0.8% in 1998. This increase was the result of continued
operational improvements in the operations of Renal Care Group's joint ventures,
primarily those in Ohio and Oregon.
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Income Tax Expense. Income tax expense increased from $21.6 million in
1998 to $31.4 million in 1999, an increase of 45.4%. The increase is a result of
pre-tax earnings increasing by approximately 34.6%. In addition, the effective
income tax rate of the Company increased from 37.1% to 40.0% in the current year
as a result of non-deductible merger costs incurred during 1999.
Net Income. Net income increased from $36.7 million in 1998 to $47.1
million in 1999, an increase of 28.3%. This increase is a result of the above
mentioned items.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Revenue. Net revenue increased from $274.5 million for the year
ended December 31, 1997 to $441.1 million for the year ended December 31, 1998,
an increase of $166.6 million, or 60.7%. This increase resulted primarily from a
45.0% increase in the number of treatments from 1,325,503 in 1997 to 1,921,996
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 revenue per dialysis
treatment increased 8.8% from $205 in 1997 to $223 in 1998. The remaining
revenue increase is a result of wound care and diabetes revenues and higher
management fees. The increase in revenue per treatment was due to an improvement
in Renal Care Group's payor mix, increases in the utilization of EPO and other
drugs, increases in acute hospital services, the continued roll-out of Renal
Care Group's in-house laboratory services and the positive impact on commercial
payments of the Medicare secondary payor provisions of the Balanced Budget Act.
Patient Care Costs. Patient care costs increased from $189.3 million
for the year ended December 31, 1997 to $292.1 million for the year ended
December 31, 1998, an increase of 54.3%. This increase resulted primarily from
an increase in the number of treatments performed during the period, which was
reflected in corresponding increases in the use of drugs, supplies and labor.
Patient care costs as a percentage of net revenue decreased from 69.0% in 1997
to 66.2% in 1998 primarily due to the increase in net revenue per treatment.
Patient care costs per treatment increased 6.3% from $143 in 1997 to $152 in
1998. This increase was 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 increased from $27.8 million for the year ended December 31, 1997 to
$43.9 million for the year ended December 31, 1998, an increase of 57.9%.
General and administrative expenses as a percentage of revenue decreased from
10.1% in 1997 to 10.0% in 1998, primarily as the result of the increase in net
revenue for 1998.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased from $8.1 million in 1997 to $13.5 million in 1998. The provision for
doubtful accounts as a percentage of net revenue increased from 2.9% in 1997 to
3.1% in 1998. This percentage increase is the result of greater net operating
revenues generated from non-governmental payor sources.
Depreciation and Amortization. Depreciation and amortization increased
from $12.1 million for the year ended December 31, 1997 to $22.2 million for the
year ended December 31, 1998, an increase of 83.5%. 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
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amortization of the goodwill and other intangible assets 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 mergers in Arkansas, Missouri and Oklahoma during January and April 1998.
Income from Operations. Income from operations increased from $37.0
million for the year ended December 31, 1997 to $68.3 million for the year ended
December 31, 1998, an increase of 84.6%. Income from operations as a percentage
of net revenue increased from 13.5% in 1997 to 15.5% in 1998 as a result of the
factors discussed above.
Interest Expense, Net. Interest expense of $6.6 million for the year
ended December 31, 1998 increased $4.6 million compared to interest expense of
$2.0 million for the year ended December 31, 1997. This increase was primarily
attributable to increased borrowings under Renal Care Group's $125.0 million
credit facility along with certain borrowings under Dialysis Centers of
America'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 Renal Care Group's consolidated entities
that are not wholly-owned. As of December 31, 1998, this was primarily comprised
of three joint venture partnerships.
Income Tax Expense. Income tax expense increased from $12.7 million in
1997 to $21.6 million in 1998, an increase of 70.1%. The increase is a result of
pre-tax earnings of the Company increasing by approximately 71.2% during the
year.
Net Income. Net income increased from $21.3 million in 1997 to $36.7
million in 1998, an increase of 72.3%. This increase is a result of the above
mentioned items.
LIQUIDITY AND CAPITAL RESOURCES
Renal Care Group 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, 1999, the Company's working
capital was $73.7 million, cash and cash equivalents were $15.6 million, and the
Company's current ratio was 1.8 to 1.0. Renal Care Group's working capital
increased during the year primarily as a result of acquisitions and the increase
in net income.
Net cash provided by operating activities was $63.3 million for the
year ended December 31, 1999. 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 $61.2 million for the year ended December 31, 1999.
Cash used in investing activities consisted primarily of $17.2 million of cash
paid for acquisitions, net of cash acquired, and $46.0 million of purchases of
property and equipment. Cash used in financing activities was $7.6 million for
the year ended December 31, 1999. Cash used by financing activities primarily
reflects $11.7 million in net borrowings under Renal Care Group's line of
credit, $1.9 million in proceeds from the issuance of long-term debt, $6.8
million in net
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proceeds from the issuance of common stock and payments of $28.0 on the
Company's long-term debt.
On June 23, 1999, the Company executed a Second Amendment to its First
Amended and Restated Loan Agreement with a group of banks. The Second Amendment
provides for an increase in the credit facility from $125.0 million to $185.0
million through August 2000. 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, Renal Care Group
may borrow up to $5.0 million in swing line loans.
The Company 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 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 December 31, 1999, there was $74.2 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 incur additional
short and long-term bank indebtedness and may issue equity or debt securities.
The availability and terms of any future indebtedness or securities 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 expects that
such capital expenditures 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.
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Renal Care Group completed a comprehensive review and evaluation of key
computer systems and electronic devices in preparation for January 1, 2000. The
Company's efforts in addressing Year 2000 issues focused on educating employees,
evaluating Renal Care Group's software systems and hardware platforms,
communicating with suppliers and third party payors, evaluating and making
necessary modifications to the appropriate software and hardware systems and
testing these systems. Based on this review and evaluation certain changes and
modifications were made to some of Renal Care Group's systems. These changes
allowed Renal Care Group to successfully operate prior to, on, and subsequent to
January 1, 2000. We incurred approximately $600,000 in 1999 related to Year
2000, and we do not expect future expenditures to materially impact the
Company's operations.
NEWLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25" in March 2000. This Interpretation is effective July
1, 2000, and covers specific events that occur after either December 15, 1998 or
January 12, 2000. The Interpretation addresses and further clarifies certain
aspects of APB 25 such as: the definition of an employee, criteria for
determining whether a plan qualifies as non-compensatory, the accounting
consequences of various modifications to the terms of previously granted stock
options, or awards, and the accounting for an exchange of stock compensation
awards in a business combination. Renal Care Group, Inc. is currently assessing
the impact, if any, of this Interpretation.
IMPACT OF INFLATION
A substantial portion of Renal Care Group's net revenue is subject to
reimbursement rates that are regulated by the federal government and do not
automatically adjust for inflation. Renal Care Group 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 Renal Care Group'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).
12
<PAGE> 13
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 Renal Disease Management by Physicians, Inc.) as of December 31, 1998
and 1999, 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, 1999. The supplemental consolidated financial statements give
retroactive effect to the merger of Renal Care Group, Inc. and Renal Disease
Management by Physicians, Inc. consummated on April 11, 2000, 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 auditing standards generally accepted
in the United States. 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, 1998 and 1999 and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999, after giving retroactive effect to
the merger with Renal Disease Management by Physicians, Inc., as described in
the notes to the supplemental consolidated financial statements, in conformity
with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Nashville, Tennessee
April 14, 2000
13
<PAGE> 14
RENAL CARE GROUP, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 21,086 $ 15,608
Accounts receivable, less allowance for doubtful accounts of
$31,226 in 1998 and $40,876 in 1999 ................................ 86,026 103,230
Inventories ........................................................... 9,024 12,654
Prepaid expenses and other current assets ............................. 9,710 13,927
Income taxes receivable ............................................... -- 1,511
Deferred income taxes ................................................. 6,146 17,531
-------- --------
Total current assets ............................................. 131,992 164,461
Property, plant and equipment, net ....................................... 97,625 123,963
Goodwill and other intangibles, net ...................................... 197,214 207,374
Other assets ............................................................. 6,856 5,528
-------- --------
Total assets ..................................................... $433,687 $501,326
======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
14
<PAGE> 15
RENAL CARE GROUP, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1999
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 20,823 $ 22,451
Accrued compensation .................................................. 15,325 17,236
Due to third-party payors ............................................. 17,068 22,277
Accrued expenses and other current liabilities ........................ 16,630 19,187
Income taxes payable .................................................. 1,499 --
Current portion of long-term debt ..................................... 12,796 9,659
-------- --------
Total current liabilities ........................................ 84,141 90,810
Long-term debt, net of current portion ................................... 90,928 79,690
Deferred income taxes .................................................... 5,269 9,861
Minority interest ........................................................ 5,169 8,706
-------- --------
Total liabilities ................................................ 185,507 189,067
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.01 par value, 10,000 shares authorized, none issued -- --
Common stock, $0.01 par value, 60,000 and 90,000 shares
authorized at December 31, 1998 and 1999, respectively;
44,491 and 45,320 shares issued and outstanding at
December 31, 1998 and 1999, respectively ........................... 445 453
Additional paid-in capital ............................................ 187,368 204,352
Retained earnings ..................................................... 60,367 107,454
-------- --------
Total stockholders' equity ......................................... 248,180 312,259
-------- --------
Total liabilities and stockholders' equity ......................... $433,687 $501,326
======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
15
<PAGE> 16
RENAL CARE GROUP, INC.
SUPPLEMENTAL CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenue .......................................... $274,518 $441,063 $541,895
Operating costs and expenses:
Patient care costs ................................ 189,284 292,113 351,367
General and administrative expenses ............... 27,827 43,894 51,315
Provision for doubtful accounts ................... 8,072 13,484 14,632
Depreciation and amortization ..................... 12,070 22,241 27,835
Merger expenses ................................... 300 1,000 4,300
-------- -------- --------
Total operating costs and expenses ........... 237,553 372,732 449,449
-------- -------- --------
Income from operations ............................... 36,965 68,331 92,446
Interest expense, net ................................ 1,976 6,558 6,224
-------- -------- --------
Income before income taxes and minority interest 34,989 61,773 86,222
Minority interest .................................... 955 3,492 7,768
-------- -------- --------
Income before income taxes ..................... 34,034 58,281 78,454
Provision for income taxes ........................... 12,736 21,601 31,367
-------- -------- --------
Net income ..................................... $ 21,298 $ 36,680 $ 47,087
======== ======== ========
Net income per share:
Basic ............................................. $ 0.57 $ 0.84 $ 1.05
======== ======== ========
Diluted ........................................... $ 0.54 $ 0.79 $ 1.00
======== ======== ========
Weighted average shares outstanding:
Basic ............................................. 37,398 43,740 45,015
======== ======== ========
Diluted ........................................... 39,496 46,367 47,052
======== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
16
<PAGE> 17
RENAL CARE GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .............. 35,846 $ 359 $ 113,127 $ 3,272 $ 116,758
Issuance of common stock in acquisitions 3,796 37 58,731 -- 58,768
Net income ............................. -- -- -- 21,298 21,298
Common stock issued and
related income tax benefit .......... 510 5 2,747 -- 2,752
Repurchase of common stock ............. (513) (5) (7,472) (883) (8,360)
Equity acquired in business combination 1,214 12 492 -- 504
------- ----- --------- --------- ---------
Balance at December 31, 1997 .............. 40,853 408 167,625 23,687 191,720
Issuance of common stock in acquisitions 56 1 1,126 -- 1,127
Net income ............................. -- -- -- 36,680 36,680
Common stock issued and
related income tax benefit .......... 1,247 13 17,774 -- 17,787
Equity acquired in business combination 2,335 23 843 -- 866
------- ----- --------- --------- ---------
Balance at December 31, 1998 .............. 44,491 445 187,368 60,367 248,180
Issuance of common stock in acquisitions 99 1 2,999 -- 3,000
Net income ............................. -- -- -- 47,087 47,087
Common stock issued and
related income tax benefit .......... 730 7 13,985 -- 13,992
------- ----- --------- --------- ---------
Balance at December 31, 1999 .............. 45,320 $ 453 $ 204,352 $ 107,454 $ 312,259
======= ===== ========= ========= =========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
17
<PAGE> 18
RENAL CARE GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ...................................................................... $ 21,298 $ 36,680 $ 47,087
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 12,070 22,241 27,835
(Gain) loss on sale of property and equipment ................................ (37) 328 362
Income applicable to minority interest ....................................... 955 3,492 7,768
Distributions to minority shareholders ....................................... (290) -- (4,231)
Deferred income taxes ........................................................ (1,244) (38) (6,793)
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable ..................................................... (13,374) (26,004) (16,237)
Inventories ............................................................. (1,887) (2,107) (3,480)
Prepaid expenses and other current assets ............................... (3,187) (3,418) (4,194)
Income taxes receivable ................................................. -- -- (1,511)
Accounts payable ........................................................ 2,048 3,688 1,551
Accrued compensation .................................................... 3,124 1,913 1,853
Due to third-party payors ............................................... 1,018 6,307 5,209
Accrued expenses and other current liabilities .......................... (2,057) 680 2,422
Income taxes payable .................................................... (846) 6,555 5,701
-------- -------- --------
Net cash provided by operating activities .............................. 17,591 50,317 63,342
INVESTING ACTIVITIES
Proceeds from sale of property and equipment .................................... 147 162 336
Purchases of property and equipment ............................................. (29,934) (30,550) (45,963)
Cash paid for acquisitions, net of cash acquired ................................ (42,227) (57,806) (17,158)
Advances to investees ........................................................... (1,111) (1,614) --
Maturity of investments, net .................................................... 2,189 3,625 --
Cash distribution to founders, net of cash contributions ........................ (5,625) -- --
(Increase) decrease in other assets ............................................. (1,349) (2,138) 1,548
-------- -------- --------
Net cash used in investing activities .................................. (77,910) (88,321) (61,237)
FINANCING ACTIVITIES
Net borrowings under line of credit ............................................. 13,848 48,653 11,728
Payments on long-term debt ...................................................... (6,111) (12,000) (27,975)
Proceeds from issuance of long-term debt ........................................ 17,434 468 1,872
Net proceeds from issuance of common stock ...................................... 2,752 11,288 6,792
Repurchase of common stock ...................................................... (8,360) -- --
-------- -------- --------
Net cash provided by (used in) financing activities ..................... 19,563 48,409 (7,583)
(Decrease) increase in cash and cash equivalents ................................ (40,756) 10,405 (5,478)
Cash and cash equivalents, at beginning of year ................................. 51,437 10,681 21,086
-------- -------- --------
Cash and cash equivalents, at end of year ....................................... $ 10,681 $ 21,086 $ 15,608
======== ======== ========
</TABLE>
18
<PAGE> 19
RENAL CARE GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest .................................................................. $ 2,919 $ 6,452 $ 6,603
======== ======== ========
Income taxes .............................................................. $ 15,709 $ 15,362 $ 30,497
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Issuance of common stock in acquisitions ........................................ $ 58,768 $ 1,127 $ 3,000
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF BUSINESS ACQUISITIONS:
Fair value of assets acquired ................................................ $112,245 $ 70,370 $ 20,428
Liabilities assumed .......................................................... 11,250 11,437 270
Common stock issued .......................................................... 58,768 1,127 3,000
-------- -------- --------
Cash paid for acquisitions, net of cash acquired .......................... $ 42,227 $ 57,806 $ 17,158
======== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
19
<PAGE> 20
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION
Renal Care Group, Inc. (the "Company") provides dialysis services to patients
with chronic kidney failure, also known as end-stage renal disease ("ESRD"). As
of December 31, 1999, the Company provided dialysis and ancillary services to
approximately 15,100 patients through 188 outpatient dialysis centers in 23
states. In addition to its outpatient dialysis center operations as of December
31, 1999, the Company provided acute dialysis services through contractual
relationships with 111 hospitals. The Company also operates a business providing
diabetic and wound care services.
On April 11, 2000, the Company merged with Renal Disease Management by
Physicians, Inc. ("RDM") in a business combination accounted for as a
pooling-of-interests. RDM became a wholly-owned subsidiary of the Company
through the exchange of approximately 556,000 shares of the Company's common
stock for all of the outstanding stock of RDM. The Company's supplemental
consolidated financial statements included herein give retroactive effect to
this transaction and include the combined operations of the Company and RDM 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 subsidiaries, and majority-owned subsidiaries over
which the Company exercises control, and for which control is other than
temporary. All significant intercompany transactions and accounts have been
eliminated in consolidation.
The RDM 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 RDM for all periods presented.
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 RDM
merger; however, they will become the historical consolidated financial
statements of Renal Care Group, Inc. after the Company issues financial
statements including the consummation date of the RDM merger.
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.
20
<PAGE> 21
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.
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. Receivables from Medicare and
Medicaid represented 55% of gross accounts receivable at December 31, 1998 and
53% at December 31, 1999. Concentration of credit risk relating to accounts
receivable is limited to some extent by the diversity of the number of patients
and payors and the geographic dispersion of the Company's operations. Laws and
regulations governing the Medicare and Medicaid programs are complex and subject
to interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare and Medicaid programs.
INVENTORIES
Inventories consist of drugs, supplies and parts consumed in dialysis treatments
and are stated at the lower of cost or market. Cost is determined using either
the first-in, first-out method, or average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the useful lives of the related assets, ranging
from 3 to 40 years. Leasehold improvements are amortized using the straight-line
method over the shorter of related lease terms or the useful lives.
GOODWILL AND OTHER INTANGIBLES (IN THOUSANDS)
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 $10,986 and $20,339 at
December 31, 1998 and 1999, respectively.
21
<PAGE> 22
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, 1999, this was primarily comprised of four joint
venture partnerships.
NET REVENUE
Net revenue is recorded at the estimated net realizable amount from Medicare,
Medicaid, commercial insurers and other third-party payors for services
rendered. The Medicare and Medicaid programs reimburse the Company at amounts
that are different from the Company's established rates. Contractual adjustments
under these programs represent the difference between the amounts billed for
these services and the amounts that are reimbursable by third-party payors. A
summary of the basis for reimbursement with these payors follows:
Medicare
The Company is reimbursed by the Medicare program predominantly on a prospective
payment system for dialysis services. Under the prospective payment system, each
facility receives a composite rate per treatment. The composite rate differs
among facilities 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 are separately administered in each state in which the
Company operates, and they 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
generally provide for higher payments than those received from the Medicare and
Medicaid programs.
Reimbursements from Medicare and Medicaid at established rates approximated 69%,
64% and 61% of net revenue for the years ended December 31, 1997, 1998 and 1999,
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.
22
<PAGE> 23
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.
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%, 23%, and 26% of the net revenue
of the Company for the years ended December 31, 1997, 1998, and 1999,
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. As of December 31, 1999, in the opinion
of management, there has been no such impairment.
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.
23
<PAGE> 24
3. BUSINESS ACQUISITIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
POOLING-OF-INTEREST TRANSACTIONS
On January 27, 2000, the Company entered into a definitive agreement to merge
with RDM. The transaction was consummated on April 11, 2000. In connection with
the merger, each share of RDM common stock was converted on a tax-deferred basis
into approximately 0.10 shares of the Company's common stock. Prior to
conversion at December 31, 1999, approximately 5,386 shares of RDM common stock
were outstanding. RDM owned and operated six dialysis centers and provided acute
dialysis services through contractual relationships with six hospitals. RDM
conducted its business in the Youngstown, Ohio market. The RDM 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
RDM merger for all periods presented.
In January 1999, the Company completed a merger with Dialysis Centers of
America, Inc. ("DCA"). The Company issued approximately 3,127 shares of common
stock in the merger. 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 was accounted for as a pooling-of-interests, and as such, the Company's
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
POOLING-OF-
INTEREST
TRANSACTIONS) DCA RDM COMBINED
------------- --------- -------- --------
<S> <C> <C> <C> <C>
1999
Net revenue .............. $ 520,607 $ -- $ 21,288 $541,895
========= ========= ======== ========
Income from operations ... $ 92,308 $ -- $ 138 $ 92,446
========= ========= ======== ========
Net income (loss) ........ $ 48,461 $ -- $ (1,374) $ 47,087
========= ========= ======== ========
1998
Net revenue .............. $ 369,372 $ 51,322 $ 20,369 $441,063
========= ========= ======== ========
Income (loss) from
operations $ 62,410 $ 6,069 $ (148) $ 68,331
========= ========= ======== ========
Net income (loss) ........ $ 35,211 $ 2,191 $ (722) $ 36,680
========= ========= ======== ========
1997
Net revenue .............. $ 214,009 $ 43,857 $ 16,652 $274,518
========= ========= ======== ========
Income from operations ... $ 32,141 $ 2,579 $ 2,245 $ 36,965
========= ========= ======== ========
Net income ............... $ 19,978 $ 179 $ 1,141 $ 21,298
========= ========= ======== ========
</TABLE>
1999 ACQUISITIONS
During 1999, the Company completed five acquisitions one of which was accounted
for as a pooling-of-interests as noted above and the remaining four of which
were accounted for under the purchase method of accounting. All such
transactions involved the acquisition of entities that
24
<PAGE> 25
provided care to ESRD patients through owned hemodialysis facilities or acute
in-patient dialysis services.
As previously indicated, during 1999, the Company completed four acquisitions
that were accounted for under the purchase method resulting in goodwill and
other intangibles of approximately $18,841. 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.
<TABLE>
<CAPTION>
1999
-------
<S> <C>
Number of shares issued ........ 99
-------
Estimated value of shares issued $ 3,000
Cash consideration ............. 17,158
-------
Aggregate purchase price ....... $20,158
=======
</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 services business during this period. The majority of the 1998
acquisitions were accounted for under the purchase method of accounting;
however, two of these transactions were accounted for using the
pooling-of-interests method.
Effective January 1, 1998, the Company merged with companies that owned nine
dialysis facilities located in Arkansas, Oklahoma and Missouri. In addition to
the services provided to patients in these facilities, the merged entities
provided 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 provided 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 transactions. The
consolidated financial statements have not been restated for these transactions
as the effects are not considered material. Accordingly, the results of the
combined operations of these entities, reported in the accompanying consolidated
financial statements, commence on the effective date of each transaction.
Effective February 1, 1998, the Company formed a joint venture in Portland,
Oregon, for purposes of operating six dialysis facilities and a home dialysis
program. The Company acquired an 80% interest in the joint venture, with an
equivalent share of voting rights for cash.
As previously indicated, during 1998, the Company completed several other
acquisitions. These transactions were accounted for under the purchase method
with goodwill and other intangibles of approximately $58,496 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.
25
<PAGE> 26
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 ............. 57,806
--------
Aggregate purchase price ....... $ 58,933
========
</TABLE>
1997 ACQUISITIONS
In 1997, the Company acquired and developed 43 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>
1998
--------
<S> <C>
Number of shares issued ........ 3,796
--------
Estimated value of shares issued $ 58,768
Cash consideration ............. 42,227
--------
Aggregate purchase price ....... $100,995
========
</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
$93,424. The results of operations of the acquisitions have been included in the
Company's consolidated financial statements from their respective acquisition
dates.
The results of operations have not been restated for a 1997 pooling transaction
as the effects are not considered material. 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 was used for working capital and
to construct dialysis facilities.
PRO FORMA DATA (UNAUDITED)
The following summary, prepared on a pro forma basis, combines the results of
operations of the Company and the acquired entities, 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>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Pro forma net revenue ........ $ 344,308 $ 475,782 $ 546,155
========= ========= =========
Pro forma net income ......... $ 27,500 $ 39,926 $ 47,410
========= ========= =========
Pro forma net income per share
Basic ..................... $ 0.74 $ 0.91 $ 1.05
========= ========= =========
Diluted ................... $ 0.70 $ 0.86 $ 1.01
========= ========= =========
</TABLE>
26
<PAGE> 27
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. PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS)
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
--------- ---------
<S> <C> <C>
Medical equipment ............. $ 57,320 $ 70,040
Computer software and equipment 16,858 31,510
Furniture and fixtures ........ 14,108 15,313
Leasehold improvements ........ 25,178 39,659
Buildings ..................... 14,051 14,801
Construction-in-progress ...... 3,067 3,422
--------- ---------
130,582 174,745
Less accumulated depreciation.. (32,957) (50,782)
--------- ---------
$ 97,625 $ 123,963
========= =========
</TABLE>
Depreciation expense was $8,566, $15,151 and $19,459 for the years ended
December 31, 1997, 1998 and 1999, respectively.
5. LONG-TERM DEBT (IN THOUSANDS)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- -------
<S> <C> <C>
Line of credit, bearing interest at LIBO rate
(6.32% and 6.98% at December 31, 1998
and 1999, respectively) .............................. $ 62,500 $74,228
Term note, bearing interest at variable rates
(weighted average rate of 7.10%
at December 31, 1998) ................................ 20,699 --
Revolving credit note, bearing interest at variable rates
(weighted average rate of 6.83% at December 31, 1998) 4,165 --
Note payable - bank, bearing interest at variable rates
(7.70% and 8.75% at December 31, 1998 and
1999, respectively) .................................. 8,833 7,833
Subordinated notes, bearing interest at 7.0% ............ 4,129 4,129
Equipment note payable .................................. 2,230 2,120
Other ................................................... 1,168 1,039
-------- -------
103,724 89,349
Less current portion .................................... 12,796 9,659
-------- -------
$ 90,928 $79,690
======== =======
</TABLE>
27
<PAGE> 28
LINE OF CREDIT
On June 23, 1999, the Company executed a Second Amendment to its First Amended
and Restated Loan Agreement effectively raising its credit facility to $185,000.
Borrowings under the credit facility may be used for acquisitions, capital
expenditures, working capital, and general corporate purposes. No more than
$25,000 of the credit facility may be used for working capital purposes. Within
the working capital sublimit, the Company may borrow up to $5,000 in swing line
loans. The Company 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 range
from 0.20% to 0.30% pursuant to leverage ratio tiers.
Under the loan agreement, commitments range in amounts and dates from the
closing date through August 2003. The Company has obtained lender commitments of
$185,000 through August 2000, $157,300 through August 2001, $129,500 through
August 2002 and $101,800 through August 2003. All loans under the loan agreement
are due and payable on August 4, 2003. At December 31, 1999, there was $74,228
outstanding under this agreement. The Company had $110,772 available under this
agreement at December 31, 1999.
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, 1999.
CREDIT AGREEMENT
On February 1, 1999 the Company repaid in full balances totaling $24,864, which
existed under an amended credit agreement with a bank. Such credit agreement had
consisted of a term note with an original balance of $29,400 and a $15,000
revolving credit note.
NOTE PAYABLE - BANK
On November 30, 1997, the Company entered into a financing agreement (the "Bank
Agreement") with a bank. The Bank Agreement provides for a line of credit
facility, a term loan facility and a revolver advance facility. Borrowings under
the Bank Agreement are collateralized by the Company's assets. The term loan
provided an initial borrowing of $10,000 and bears interest, payable monthly, at
a floating rate, based upon the bank's prime lending rate or LIBOR. The rate is
adjusted further by the results of certain financial ratios as defined in the
Bank Agreement. The term loan proceeds are restricted by the Bank Agreement for
the repurchase of common stock from certain investors.
The Revolver advance facility provides for borrowings up to $7,500 and bears
interest consistent with the rate of the Term Loan. The use of proceeds is
restricted for acquisitions, as defined in the Bank Agreement. The bank must
approve any borrowings that increase the total amount outstanding under the
facility in excess of $1,000. The Revolver, which expires October 31, 2002, had
no amounts outstanding as of December 31, 1999.
Effective August 19, 1999, the Company entered into a First Amendment to the
Bank Agreement that extended the expiration of the line of credit to January 31,
2000. Effective October 5, 1999, the Company entered into a Second Amendment to
the Bank Agreement. The Second Amendment,
28
<PAGE> 29
which eliminates any additional borrowings previously available under the Bank
Agreement, adjusted the payment terms of the term note facility to monthly
principal payments of $83, with a final balloon payment of $7,833 due January
31, 2000. This due date was subsequently extended to March 31, 2000.
SUBORDINATED NOTES PAYABLE
Subordinated notes include five separate debt instruments totaling $3,593 issued
in conjunction with certain dialysis center acquisitions and $536 issued in 1998
as payment of contingent purchase price relating to past acquisitions. The
subordinated notes totaling $3,593 are due in five equal annual installments
commencing three years after the date of the acquisitions through 2004. Such
amounts are subordinated to other debt of the Company. Each of the notes bears
interest, payable annually at 7.0%. The subordinated notes issued in 1998 as
payment of the contingent purchase price also bear interest at 7.0%, payable
annually. These notes are due in five equal annual installments through 2005 and
are subordinated to other debt of the Company.
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 consists of notes maturing at various times through
April 2000.
The aggregate maturities of long-term debt at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 ..... $ 9,659
2001 ..... 1,110
2002 ..... 1,315
2003 ..... 75,453
2004 ..... 1,130
Thereafter 682
-------
$89,349
=======
</TABLE>
Subsequent to the RDM merger, borrowings under the Company's $185,000 credit
facility were used to repay the $7,833 note payable to bank, $4,129 of
subordinated notes and $918 of other debt all of which was assumed in the RDM
merger.
29
<PAGE> 30
6. INCOME TAXES (IN THOUSANDS)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal ................... $ 12,808 $ 19,969 $ 35,265
State and local ........... 1,172 1,670 2,895
-------- -------- --------
13,980 21,639 38,160
-------- -------- --------
Deferred:
Federal ................... (979) 72 (6,477)
State and local ........... (265) (110) (316)
-------- -------- --------
(1,244) (38) (6,793)
-------- -------- --------
Provision for income taxes $ 12,736 $ 21,601 $ 31,367
======== ======== ========
</TABLE>
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $54,555 for state income tax purposes that expire in years 2001
through 2014. The utilization of the state net operating loss carryforwards may
be limited in future years due to the profitability of certain subsidiary
corporations. Therefore, the Company has recorded a valuation allowance of
$2,032 against the deferred tax asset attributable to the state net operating
loss carryforwards; this valuation allowance was increased by $208 in 1999.
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
----------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ............. $ 1,824 $ 2,032
Allowance for doubtful accounts .............. 5,453 14,733
Accrued vacation and other accrued liabilities 2,716 4,976
Other ........................................ 112 230
Less: Valuation allowance .................... (1,824) (2,032)
-------- --------
8,281 19,939
-------- --------
Deferred tax liabilities:
Depreciation ................................. 3,395 5,098
Cash to accrual adjustments (Section 481) .... 616 434
Amortization ................................. 2,951 6,170
Investments in partnerships .................. 442 567
-------- --------
7,404 12,269
-------- --------
Net deferred tax asset .......................... $ 877 $ 7,670
======== ========
</TABLE>
30
<PAGE> 31
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 supplemental consolidated financial statements:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
U.S. federal income tax rate ... 35.0% 35.0% 35.0%
State income tax, net of federal
income tax benefit ........... 1.8 0.1 2.5
Increase in valuation allowances -- 1.6 0.3
Other .......................... 0.6 0.4 2.2
Effective income tax rate ...... 37.4% 37.1% 40.0%
</TABLE>
7. STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
STOCK OPTION PLANS
As of December 31, 1999, the Company had six stock option plans. The Company
also issues options outside of these plans known as Free Standing Options.
Options issued as Free Standing are for employees, officers, directors, and
other key persons. Free Standing Options vest over various periods up to five
years and have a term of ten years from the date of issuance.
Options issued under the 1999 and 1996 Plans have similar terms and purposes.
Specifically, options under each of these plans are available for grant to
eligible employees and other key persons, the options vest over four to five
years and have a term of ten years from the date of issuance. These plans were
adopted in 1999 and 1996, respectively, and have 1,500 and 6,000 shares of
common stock reserved for issuance, respectively.
Options issued under the Equity Compensation Plan ("Equity Plan") are for
eligible employees and other key persons. The options vest over periods up to
three years and have a term of ten years from the date of issuance. This plan
was adopted by Dialysis Centers of America, Inc. in 1995 and there are 350
shares of common stock reserved for issuance.
Options issued under the 1994 Stock Option Plan (the "1994 Plan") are for
directors, officers and other key persons, these options vest over four years
and the options have a term of ten years from the date of issuance. This plan
was adopted in 1994 and there are 720 shares of common stock reserved for
issuance.
Options issued under the Directors Plan are for non-management directors. These
options vest immediately and have a term of ten years from the date of issuance.
The plan was adopted in 1996 and there are 225 shares of common stock reserved
for issuance.
Options issued under the RDM Plan are for directors, offices, and other key
persons. These options vest immediately upon grant and have a term of 5 to 10
years from the date of issuance. The plan was adopted by RDM in 1997 and there
are 109 shares of common stock reserved for issuance.
31
<PAGE> 32
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, compensation expense would generally be
recorded only if on the date of grant the then current market price of the
underlying stock exceeded the exercise price.
The following is a summary of option transactions during the period from January
1, 1997 through December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
1999 1996 EXERCISE AVERAGE
FREE EMPLOYEE EMPLOYEE EQUITY 1994 DIRECTORS RDM PRICE EXERCISE
STANDING PLAN PLAN PLAN PLAN PLAN PLAN RANGE PRICE
-------- ---- ---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 .. 1,979 -- 1,962 35 261 -- 2 $ 0.11 - 13.55 $ 7.88
Granted .......... -- -- 1,880 37 -- 6 46 13.33 - 25.58 14.99
Exercised ........ (117) -- (95) -- (95) -- -- 3.33 - 15.33 5.81
Forfeited .......... (19) -- (80) (3) (2) -- -- 3.33 - 25.58 14.39
----- ---- ------ ---- ---- ---- ----
Balance at
December 31, 1997 .. 1,843 -- 3,667 69 164 6 48 0.11 - 25.58 10.38
Granted ............ -- -- 2,128 -- -- 11 10 20.00 - 29.50 22.05
Exercised .......... (383) -- (617) -- (139) (6) -- 0.89 - 22.75 8.93
Forfeited .......... (10) -- (165) (5) (2) -- -- 3.33 - 25.58 15.71
----- ---- ------ ---- ---- ---- ----
Balance at
December 31, 1998 .. 1,450 -- 5,013 64 23 11 58 0.11 - 29.50 14.30
Granted ............ 536 939 235 -- -- 23 7 16.63 - 28.50 18.12
Exercised .......... (82) -- (305) (36) -- -- -- 0.11 - 22.00 11.99
Forfeited .......... -- -- (142) (10) -- -- -- 3.33 - 24.67 17.85
----- ---- ------ ---- ---- ---- ----
Balance at
December 31, 1999 .. 1,904 939 4,801 18 23 34 65 $ 3.33 - 29.50 $ 15.17
===== ==== ====== ==== ==== ==== ====
Available for Grant at
December 31, 1999 .. -- 561 173 10 463 185 44
===== ==== ====== ==== ==== ==== ====
Exercisable at
December 31, 1999 .. 1,295 188 2,165 12 23 34 35 $ 12.70
===== ==== ====== ==== ==== ==== ==== ========
Exercisable at
December 31, 1998 .. 995 -- 1,368 55 8 11 22
===== ==== ====== ==== ==== ==== ====
Exercisable at
December 31, 1997 .. 1,158 -- 855 35 126 3 10
===== ==== ====== ==== ==== ==== ====
</TABLE>
The weighted-average fair value of options granted during 1997, 1998 and 1999 is
$6.16, $8.93 and $7.88, respectively.
32
<PAGE> 33
The following table summarizes information about fixed stock options outstanding
at December 31, 1999.
<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 1999 CONTRACTUAL LIFE EXERCISE PRICE 1999 EXERCISE PRICE
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.33 - $ 8.00 1,744 5.93 $ 5.62 1,459 $ 5.16
$10.16 - $14.00 1,298 7.09 $13.15 729 $ 13.18
$14.06 - $18.25 2,751 8.75 $17.16 786 $ 16.91
$19.16 - $29.50 1,991 8.40 $22.23 778 $ 22.27
============================================================================================================
$ 3.33 - $29.50 7,784 7.75 $15.20 3,752 $ 12.73
============================================================================================================
</TABLE>
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
------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Expected volatility .... 30.0% 33.0% 40.0%
Expected dividend yield None None None
Risk-free interest rate 5.5% 5.5% 5.5%
Expected life of options 5 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.
33
<PAGE> 34
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
-------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net income ........................ $21,298 $36,680 $47,087
Pro forma compensation expense from
stock options, net of taxes .... 1,903 4,469 5,979
------- ------- -------
Pro forma net income .............. $19,395 $32,211 $41,108
======= ======= =======
Pro forma net income per share
Basic .......................... $ 0.52 $ 0.74 $ 0.91
======= ======= =======
Diluted ........................ $ 0.49 $ 0.69 $ 0.87
======= ======= =======
</TABLE>
WARRANTS
At December 31, 1999, the Company has outstanding warrants to purchase an
aggregate of 495 shares of common stock that were issued in 1994 and 1995. These
warrants have a term of ten years from the date of issuance and an exercise
price of $4.44 per warrant. Additionally, at December 31, 1999, the Company has
41 warrants assumed in the RDM merger. These warrants expire November 30, 2000
and have an exercise price of $0.01.
8. OPERATING LEASES (IN THOUSANDS)
The Company rents office and medical facilities under lease agreements that are
classified as operating leases for financial statement purposes. At December 31,
1999, future minimum rental payments under noncancelable operating leases with
terms of one year or more consist of the following:
<TABLE>
<S> <C>
2000................... $ 14,045
2001................... 13,371
2002................... 12,220
2003................... 10,787
2004................... 9,784
Thereafter............. 28,102
--------
$ 88,309
========
</TABLE>
Rent expense related to operating leases amounted to $8,419, $13,012 and $17,189
for the years ending December 31, 1997, 1998 and 1999, respectively.
9. EMPLOYEE BENEFIT PLANS (IN THOUSANDS)
DEFINED CONTRIBUTION PLANS
The Company has qualified defined contribution plans covering substantially all
employees that 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.
34
<PAGE> 35
The Company made contributions relating to these plans totaling $1,111, $1,216
and $1,532 for the years ended December 31, 1997, 1998 and 1999, 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, 1998 and 1999, approximately $1,274
and $1,377, respectively, were included in accrued wages and benefits relating
to the Stock Purchase Plan.
10. EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
The following table sets forth the computation of basic and diluted net income
per share.
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income per share ................ $21,298 $36,680 $47,087
Denominator:
Denominator for basic net income per share-weighted-average shares .. 37,398 43,740 45,015
Effect of dilutive securities:
Stock options .................................................... 1,563 2,065 1,529
Warrants ......................................................... 535 562 508
------- ------- -------
Denominator for diluted net income
per share-adjusted weighted-average shares and assumed conversions 39,496 46,367 47,052
======= ======= =======
Basic net income per share ............................................. $ 0.57 $ 0.84 $ 1.05
======= ======= =======
Diluted net income per share ........................................... $ 0.54 $ 0.79 $ 1.00
======= ======= =======
</TABLE>
11. 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 supplemental consolidated financial position or
results of operations.
12. SUBSEQUENT EVENT (UNAUDITED)
On October 2, 2000 the Company announced that its Board of Directors has
authorized the Company to expend up to $50 million to repurchase the Company's
common stock. The purchases are to be made over the next 12 months on the Nasdaq
Stock Market's National Market at prices prevailing on that market or in
privately negotiated transactions on conditions acceptable to the Company.
35
<PAGE> 36
On September 20, 2000 the Company announced that it would exit its wound care
business. In connection with exiting this business, the Company expects to
record a one-time restructuring charge of approximately $9 million in the third
quarter of 2000.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER
SHARE DATA)
The following tables set forth, for 1998 and 1999, 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.
<TABLE>
<CAPTION>
1998
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue ................. $ 95,928 $107,588 $115,567 $121,980
Operating expenses .......... 77,324 84,481 90,203 97,483
Depreciation and amortization 4,802 5,456 5,711 6,272
Merger expenses ............. 700 300 -- --
-------- -------- -------- --------
Income from operations ...... 13,102 17,351 19,653 18,225
Interest expense, net ....... 1,512 1,689 1,811 1,546
Minority interest ........... 547 608 1,045 1,292
-------- -------- -------- --------
Income before income taxes .. 11,043 15,054 16,797 15,387
Income taxes ................ 4,245 5,622 6,270 5,464
-------- -------- -------- --------
Net income .................. $ 6,798 $ 9,432 $ 10,527 $ 9,923
======== ======== ======== ========
Net income per share:
Basic ....................... $ 0.16 $ 0.22 $ 0.24 $ 0.23
======== ======== ======== ========
Diluted ..................... $ 0.15 $ 0.20 $ 0.23 $ 0.21
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1999
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue ................. $126,528 $134,013 $138,780 $142,574
Operating expenses .......... 97,512 103,171 106,449 110,182
Depreciation and amortization 6,375 6,781 7,201 7,478
Merger expenses ............. 4,300 -- -- --
-------- -------- -------- --------
Income from operations ...... 18,341 24,061 25,130 24,914
Interest expense, net ....... 1,662 1,545 1,573 1,444
Minority interest ........... 1,500 1,744 2,350 2,174
-------- -------- -------- --------
Income before income taxes .. 15,179 20,772 21,207 21,296
Income taxes ................ 6,811 7,792 7,953 8,811
-------- -------- -------- --------
Net income .................. $ 8,368 $ 12,980 $ 13,254 $ 12,485
======== ======== ======== ========
Net income per share:
Basic .................... $ 0.19 $ 0.29 $ 0.28 $ 0.28
======== ======== ======== ========
Diluted .................. $ 0.18 $ 0.28 $ 0.28 $ 0.27
======== ======== ======== ========
</TABLE>
36
<PAGE> 37
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, 1998 and 1999, and for each of the three years in
the period ended December 31, 1999, and have issued our report thereon dated
April 14, 2000 (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 consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
April 14, 2000
37
<PAGE> 38
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, 1997 ......... $ 8,429 $3,949 $ 8,072 $(1,306) $19,144
======= ====== ======= ======= =======
Year ended
December 31, 1998 ......... $19,144 $2,321 $13,484 $(3,723) $31,226
======= ====== ======= ======= =======
Year ended
December 31, 1999 ......... $31,226 $ 283 $14,632 $(5,265) $40,876
======= ====== ======= ======= =======
</TABLE>
38
<PAGE> 39
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(a) Amended Financial Data Schedule - 1999
Exhibit 27(b) Amended Financial Data Schedule - 1998
Exhibit 27(c) Amended Financial Data Schedule - 1997
39
<PAGE> 40
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.
By: /s/ R. Dirk Allison
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R. Dirk Allison
Executive Vice President and
Chief Financial Officer
Date: October 9, 2000
