<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27640
RENAL CARE GROUP, INC.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1622383
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2100 WEST END AVENUE, SUITE 800,
NASHVILLE, TENNESSEE 37203
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 345-5500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Company was $859,096,292 as of March 17, 2000, based upon the closing
price of such stock as reported on the Nasdaq National Market System ("Nasdaq
Stock Market") on that day (assuming for purposes of this calculation, without
conceding, that all executive officers and directors are affiliates). There were
45,021,956 shares of common stock, $0.01 par value, issued and outstanding at
March 17, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2000 Annual
Meeting of Stockholders are incorporated by reference in Part III of this Annual
Report.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Renal Care Group, Inc. provides dialysis services to patients with
chronic kidney failure, also known as end-stage renal disease ("ESRD"). As of
December 31, 1999, Renal Care Group provided dialysis and ancillary services to
approximately 14,200 patients through 181 outpatient dialysis centers in 23
states. In addition to outpatient dialysis center operations, Renal Care Group
provided acute dialysis services through contractual relationships with 103
hospitals. Renal Care Group was formed in 1996 by leading nephrologists with the
objective of creating a company with the clinical and financial capability to
manage the full range of care for ESRD patients on a cost-effective basis.
In Renal Care Group's dialysis facilities, ESRD patients receive
dialysis treatments, generally three times a week, in a technologically advanced
outpatient setting. According to the Health Care Financing Administration
("HCFA"), there were more than 3,800 facilities providing dialysis in the United
States at the end of 1999. In the past many outpatient dialysis facilities have
been owned by groups of nephrologists and comprise an integral component of the
nephrologists' practice because of the critical role that dialysis plays in the
treatment of ESRD patients. Recently, however, the dialysis services industry
has been consolidating. As a result, Renal Care Group believes that
approximately 55% of dialysis centers are now owned by multi-center dialysis
companies, between 20% and 25% are owned by independent physicians and other
small operators, and between 20% and 25% are hospital-based centers.
As an adjunct to its dialysis business, Renal Care Group provides
certain practice management and administrative services to 21 physician
practices with a total of 73 physicians. As of December 31, 1999, there were 263
nephrologists affiliated with the Company's outpatient dialysis centers. In
addition, the Company operates a business providing wound and diabetic care
services. Because of the chronic nature of ESRD and the fact that many ESRD
patients also have diabetes, many of Renal Care Group's dialysis patients also
have needs for wound care services.
Renal Care Group is a Delaware corporation that commenced business in
February 1996, with the simultaneous acquisition (the "Combination") of Kidney
Care, Inc. and Medical Enterprises Ltd., D.M.N. Professional Corporation, Tyler
Nephrology Associates, Kansas Nephrology Association, and Renal Care Group,
Inc., a Tennessee corporation (collectively, the "Founding Companies"). The
Company's principal executive offices are located at 2100 West End Avenue, Suite
800, Nashville, Tennessee 37203, and its telephone number is (615) 345-5500.
2
<PAGE> 3
INDUSTRY OVERVIEW
End-Stage Renal Disease
ESRD is a state of advanced kidney failure. ESRD is irreversible and
ultimately lethal. It is most commonly a result of complications associated with
diabetes, hypertension, certain renal and hereditary diseases, aging and other
factors. In order to sustain life, ESRD patients require either dialysis for the
remainder of their lives or a successful kidney transplant. By the end of 1997,
dialysis was the primary treatment for approximately 72% of all ESRD patients,
and the remaining 28% of ESRD patients had a functioning kidney transplant.
According to United States Renal Data System ("USRDS") estimates, the
total direct medical payments for ESRD exceeded $15.6 billion during 1997. Of
the total direct medical payments for ESRD, approximately $11.7 billion was paid
by the federal government through the Medicare program. As a result of
legislation enacted in 1972, the federal government provides Medicare benefits
to patients who are diagnosed with ESRD regardless of their age or financial
circumstances, if they are eligible for Social Security.
According to HCFA data, the number of ESRD patients in the United
States who need dialysis grew from approximately 66,000 in 1982 to approximately
220,000 in 1997. Based on USRDS data, the ESRD incidence rate among
Medicare-eligible patients was approximately 287 patients per million in 1997 as
compared to 111 patients per million in 1984.
USRDS data also indicate that the ESRD incidence rate increased by
78.0% from 1988 to 1997, with an increase of 100.3% in patients ages 65 to 74
and 252% in patients ages 75 and older. The growth in the number of ESRD
patients has resulted principally from the aging of the population along with
better treatment of, and better survival rates for, patients with high blood
pressure, diabetes and other illnesses that lead to chronic kidney disease. In
addition, as a result of improved technology, older patients and patients who
could not previously tolerate dialysis due to other illnesses can now receive
life-sustaining dialysis treatment.
Treatment Options for End-Stage Renal Disease
Currently, there are three treatment options for ESRD:
- hemodialysis, which is performed either in a hospital setting,
an outpatient facility or a patient's home,
- peritoneal dialysis, which is generally performed in the
patient's home, and
- kidney transplant surgery.
According to HCFA data, in 1997 approximately 87% of patients on
dialysis in the United States received outpatient hemodialysis and approximately
13% received hemodialysis or peritoneal dialysis in their homes.
3
<PAGE> 4
Hemodialysis is the most common form of ESRD treatment. It is generally
performed either in a freestanding center or in a hospital. The process of
hemodialysis uses a dialyzer, essentially an artificial kidney, to remove
certain toxins, fluid and chemicals from the patient's blood and another device
that controls external blood flow and monitors the patient's vital signs. The
dialysis process occurs across a semi-permeable membrane that divides the
dialyzer into two chambers. While the blood is circulated through one chamber, a
pre-mixed dialysis fluid is circulated through the adjacent chamber. The toxins
and excess fluid contained in the patient's blood cross the membrane into the
dialysis fluid. Hemodialysis usually takes approximately four hours and is
generally administered three times per week for the life of the patient or until
the patient receives a transplant.
Peritoneal dialysis is typically performed by the patient at home and
uses the patient's peritoneal (abdominal) cavity to eliminate fluids and toxins
in the patient's blood. There are several forms of peritoneal dialysis.
Continuous ambulatory peritoneal dialysis and continuous cyclic peritoneal
dialysis are the most common. In both the patient's blood is circulated across
the peritoneal membrane into the dialysis solution which removes toxins and
excess fluid from the patient's blood. Patients treated at home are monitored
monthly either by a visit from a staff person from a designated outpatient
center or by a visit by the patient to a center.
Kidney transplants, when successful, are the most desirable form of
ESRD therapy. However, the shortage of suitable donors severely limits the
availability of this surgical procedure as a treatment option. Only about 6% of
ESRD patients receive kidney transplants annually. Typically, transplant surgery
is performed by transplant surgeons and not nephrologists.
Ancillary Services
Renal Care Group provides a variety of ancillary services to treat ESRD
patients. The most significant ancillary service is the administration of
erythropoietin (also known as Epogen(R) or EPO). EPO is a bio-engineered protein
that stimulates the production of red blood cells. It is used in connection with
all forms of dialysis to treat anemia, a complication experienced by almost all
ESRD patients. Other ancillary services offered by Renal Care Group, depending
on medical appropriateness, include tests for bone deterioration,
electrocardiograms, nerve conduction studies to test for deterioration of a
patient's nerves, Doppler flow testing for the effectiveness of the patient's
vascular access for dialysis, and blood transfusions. Renal Care Group, through
its RenaLab subsidiary, also provides clinical laboratory services for its
dialysis operations.
Nephrology Practice
Caring for ESRD patients is typically the primary clinical activity of
a nephrologist. Other clinical activities of a nephrologist include the
post-surgical care of kidney transplant patients, the diagnosis and treatment of
kidney diseases in patients who are at risk for developing ESRD, and the
diagnosis, treatment and management of clinical disorders including
hypertension, kidney stones and autoimmune diseases. Because of the complexity
involved in treating patients with chronic kidney disease, the nephrologist
typically assumes the role of primary care physician for the ESRD patient. While
some nephrologists practice independently or are members of multi-specialty
groups,
4
<PAGE> 5
most nephrologists practice in small single-specialty groups. A nephrology
group's practice often covers a relatively large geographic service area, but,
outside metropolitan areas, a large geographic area may be served by only one
nephrology group. Most nephrologists also have a significant office practice,
consult on numerous hospitalized patients who are not on dialysis and follow the
clinical outcomes of kidney transplant patients.
RECENT ACQUISITION AND DEVELOPMENT ACTIVITIES
Since January 1999, Renal Care Group has completed acquisitions which
increased the number of patients the Company serves by over 2,000 patients.
These acquisitions include the merger with Dialysis Centers of America, Inc.,
the operator of 12 dialysis facilities located in metropolitan Chicago. In 1999,
Renal Care Group also completed acquisitions in Alaska, Alabama, Indiana and
Wisconsin.
In January 2000, Renal Care Group acquired the outpatient and home
dialysis programs of Northwestern Memorial Hospital of Chicago which provides
dialysis services to approximately 200 patients.
In February 2000, the Company announced the signing of a definitive
agreement to merge with Renal Disease Management by Physicians, Inc. which owns
and operates six dialysis centers in Northeast Ohio and Western Pennsylvania.
OPERATIONS
Location, Capacity and Use of Facilities
As of December 31, 1999, Renal Care Group operated 181 outpatient
dialysis centers in 23 states with 2,898 certified dialysis stations. The
Company also provided inpatient dialysis services to 103 acute care hospitals.
During 1999, Renal Care Group provided 2,127,073 hemodialysis treatments.
Renal Care Group estimates that on average its centers were operating
at approximately 66% of capacity as of December 31, 1999, based on the
assumption that a dialysis center is able to provide up to three treatments a
day per station, six days a week. Management believes the Company can increase
the number of dialysis treatments at its existing centers without making
significant additional capital expenditures.
Operation of Facilities
Renal Care Group's dialysis centers provide outpatient hemodialysis and
related services to ESRD patients. Most of Renal Care Group's centers use
technologically advanced dialysis equipment to provide effective and efficient
dialysis. The Company's centers generally contain between 10 and 30 dialysis
stations, a nurses' station, a patient waiting area, examination rooms, a supply
room, a water treatment space to purify water used in hemodialysis treatments, a
dialyzer reprocessing room, staff work areas, offices and a staff lounge. Many
of Renal Care Group's centers also have a designated area for training patients
in home dialysis.
For Renal Care Group to be eligible to participate in the Medicare ESRD
program, a qualified physician or group of physicians must act as medical
director for each of Renal Care
5
<PAGE> 6
Group's centers and must supervise medical aspects of the center's operations.
An administrator, typically a registered nurse, who is responsible for the
day-to-day operations of the center and oversight of the staff, manages each
center. The staff of each center typically includes registered nurses, licensed
practical or vocational nurses, patient care technicians, social workers,
registered dietitians, a unit clerk and biomedical equipment technicians. Renal
Care Group works to staff each center in a manner that allows the scheduling of
personnel to be adjusted according to the number of patients receiving
treatments.
Home Dialysis
All of Renal Care Group's centers offer home hemodialysis and various
forms of peritoneal dialysis. As of December 31, 1999, approximately 13% of
Renal Care Group's patients received home dialysis. Renal Care Group's home
dialysis services consist of providing equipment and supplies, training, patient
monitoring and follow-up assistance to patients who receive dialysis treatments
in their homes. The Company believes that home dialysis is important to the
development of a full range of dialysis care and intends to continue efforts to
expand its home dialysis program.
Hospital and Skilled Nursing Facility Care
Some of Renal Care Group's centers provide inpatient dialysis services
to hospitals in their service areas. As of December 31, 1999, Renal Care Group
had contracts to provide inpatient services to 103 hospitals. Under these
contracts, Renal Care Group typically provides equipment, supplies and personnel
to perform hemodialysis and peritoneal dialysis in connection with the
hospital's inpatient services. These inpatient dialysis services are typically
required for patients with acute renal failure resulting from accidents, medical
and surgical complications, patients in the early stage of renal failure and
ESRD patients who require hospitalization for other reasons. Most of Renal Care
Group's hospital contracts specify predetermined fees per dialysis treatment.
The Company believes that such fees may be subject to re-negotiation in the
future as competition increases among dialysis providers and as the health care
industry becomes more influenced by managed care and subject to capitated
arrangements.
Renal Care Group also provides staff-assisted dialysis services to
skilled nursing facilities in the Phoenix, Arizona metropolitan area. A central
office dispatches personnel, equipment and supplies required to perform dialysis
treatments at skilled nursing facilities.
University Division
Renal Care Group currently manages the dialysis programs at Vanderbilt
University Medical Center, and is the managing partner of programs at the
Cleveland Clinic Foundation, MetroHealth (a hospital affiliated with Case
Western Reserve University), St. Louis University Hospital, the University of
Arkansas and Froedtert Hospital (a hospital affiliated with Medical College of
Wisconsin). The Company also provides home dialysis services for a group of
patients at the University of Arkansas. Renal Care Group expects these
affiliations will expand its patient base and provide opportunities for the
development of new centers. Furthermore, Renal
6
<PAGE> 7
Care Group expects these affiliations to provide access to outcomes research and
highly trained nephrologists who may become medical directors at Renal Care
Group's centers.
Relationships with Nephrologists
A key factor in the success of a dialysis center is Renal Care Group's
relationship with local nephrologists. An ESRD patient generally seeks treatment
at a center where his or her nephrologist has practice privileges. Consequently,
the Company relies on its ability to attract and meet the needs of referring
nephrologists in order to gain new patients and to retain existing patients. As
of December 31, 1999, there were 263 nephrologists affiliated with the Company's
outpatient dialysis centers.
Medical Directors
Renal Care Group generally engages practicing, board-certified or
board-eligible nephrologists to serve as medical directors for its centers. Each
medical director provides services pursuant to an independent contractor
agreement between the Company and the physician or his or her professional
practice group. Medical directors are responsible for the administration and
monitoring of the Company's patient care policies, including patient education,
administration of dialysis treatment, development and training programs and
assessment of all patients. Medical directors play an important role in
coordinating the delivery of care to maintain ESRD patients' general level of
health and to avoid medical complications that might require hospitalization.
Renal Care Group's typical medical director agreement has a term of
seven years with three-year renewal options. Renal Care Group pays the medical
directors fees that approximate the fair market value of the required
supervisory services. These medical director fees are the result of arms-length
negotiations. Most of the Company's medical director agreements also include
non-competition clauses with specific limitations on the medical director's
ability to compete with Renal Care Group for certain periods of time and in
certain geographic areas.
Administrative and Management Services
As an adjunct to dialysis center operations and as an additional
service to affiliated nephrologists, Renal Care Group currently offers certain
administrative and management services for physician practices. Renal Care Group
currently provides such services to 21 physician practices with a total of 73
physicians. Under these arrangements, in exchange for a fair market value
management fee, the Company typically provides operations management and
administrative services, including billing, collection, accounting, human
resources and information systems, and may provide certain equipment and
supplies to the practice. The physicians generally retain ownership of their
practices and the related assets. Each physician is exclusively responsible for
providing medical services to his or her patients.
7
<PAGE> 8
QUALITY ASSURANCE
Integral to Renal Care Group's operating philosophy is the
understanding that providing superior care is in the best interests not only of
patients but also of the Company's stockholders. Better patient care results in
improved mortality and morbidity and a greater number of treatments as patients'
lifespans increase and the number of days patients spend in hospitals declines.
In order to optimize therapy and improve outcomes, Renal Care Group maintains a
quality assurance program. Renal Care Group establishes, maintains and monitors
quality criteria for its clinical operations and monitors patient outcomes in
all of its centers.
Medical Advisory Board
Renal Care Group's Medical Advisory Board oversees the development and
implementation of clinical protocols and the review of patient outcomes. The
Medical Advisory Board is chaired by Renal Care Group's Chief Medical Officer
and is composed of 12 affiliated nephrologists. The Medical Advisory Board is
responsible for establishing, implementing and monitoring the Company's quality
assurance policies and procedures. The Medical Advisory Board also works to
identify therapy deficiencies and to evaluate technological changes. The Medical
Advisory Board's ultimate objective is to assist Renal Care Group in developing
and communicating a protocol-driven clinical management model that will enable
the Company to provide optimal care to its patients and, ultimately, to manage
effectively the financial risk associated with providing ESRD services on a
capitated basis.
Quality Criteria
Continuous quality improvement is Renal Care Group's primary clinical
objective. Working to achieve this objective, Renal Care Group regularly
evaluates the prescribed dialysis treatments and patients' key physiological
parameters. The Company's corporate Quality Assurance Coordinator is a
registered nurse who oversees Renal Care Group's quality assurance program. In
addition, each center has a quality assurance committee that typically includes
the medical director, the center administrator and nurses, as well as other
technical personnel. These committees monitor the quality of care in the centers
and oversee compliance with applicable regulations.
Outcomes Data
Renal Care Group believes that an important factor in managing ESRD
successfully is the development of clinical pathways and treatment protocols. To
develop, review and maintain these pathways and protocols, Renal Care Group has
access to a broad database of treatment-specific outcomes information. The
Company's Quality Assurance Coordinator oversees the collection of patient
outcomes and cost data in the Company's centers. Renal Care Group makes these
data available to the Medical Advisory Board and affiliated physicians to assist
in developing, implementing and evaluating clinical pathways to enhance patient
outcomes while reducing the cost of care. The Company believes that the
implementation of such clinical pathways will assist in improving the overall
quality and operating efficiencies of its dialysis centers.
8
<PAGE> 9
Patient Involvement
Renal Care Group also works to improve the quality of care by providing
training to ESRD patients both before and after they begin a course of dialysis.
The Company works to train patients to participate in their own care to the
fullest extent possible. In addition, in some of its centers, Renal Care Group,
affiliated physicians and patients form "self-care" units in which self-reliance
is fostered through instruction and support.
CORPORATE COMPLIANCE PROGRAM
Renal Care Group has developed and maintains a system-wide corporate
compliance program as part of its commitment to comply fully with all applicable
laws and regulations and to maintain high standards of conduct by Renal Care
Group's associates. A purpose of the program is to heighten associates' and
affiliated professionals' awareness of the importance of complying with all
applicable laws and regulations in an increasingly complicated regulatory
environment and to take steps to promptly identify and resolve instances of
non-compliance.
The compliance program has been authorized and mandated by Renal Care
Group's Board of Directors. It addresses general compliance issues and areas of
particular sensitivity. As part of the program Renal Care Group has published a
code of conduct setting forth standards of conduct and principles of business
ethics to be followed by the Company and each employee and affiliated
professional. A Compliance Committee comprised of officers and senior managers
of Renal Care Group and a full-time Compliance Officer administer the corporate
compliance program. The Compliance Committee and Compliance Officer report to
the Audit and Compliance Committee of the Board of Directors.
REIMBURSEMENT
Sources of Net Patient Revenue
The following table sets forth information regarding the sources of
Renal Care Group's net patient revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Medicare 62% 59% 57%
Medicaid 7 5 4
Commercial and other payors 26 30 33
Hospital inpatient dialysis services 5 6 6
--- --- ---
Total 100% 100% 100%
=== === ===
</TABLE>
9
<PAGE> 10
Medicare
The Social Security Act provides that most U.S. citizens and resident
aliens with ESRD are entitled to Medicare coverage. If a physician finds that an
eligible person has ESRD, then he or she will be entitled to Medicare coverage
if (i) a regular course of dialysis has begun, or (ii) he or she has received a
kidney transplant. The person is entitled to Medicare beginning the third month
after the month in which a regular course of dialysis is initiated.
For Medicare purposes, ESRD is defined as kidney impairment that
appears irreversible and permanent and that requires a regular course of
dialysis or a kidney transplant to maintain life. For a period of time, Medicare
coverage is generally secondary for patients who have qualifying employer group
health insurance. The Balanced Budget Act of 1997 extended the period during
which Medicare is secondary to a patient's group health plan from 18 months to
30 months effective for items and services provided on or after August 5, 1997.
After this 30-month period, Medicare becomes the primary coverage for patients,
and the patient's group health coverage generally pays applicable Medicare
coinsurance payments and deductibles.
Under the Medicare ESRD program, Medicare reimbursement rates per
treatment are fixed under a composite rate structure. The Medicare ESRD
composite rate may be changed by legislation or rulemaking. Effective January 1,
2000, the Medicare composite rate was increased for the first time since 1991.
Although Medicare reimbursement limits the allowable charge per treatment, it
provides Renal Care Group with predictable and recurring treatment revenue.
The Medicare ESRD composite rate for outpatient dialysis services
currently averages $126 per treatment in freestanding facilities. The Medicare
ESRD composite rate is subject to regional differences based on certain factors,
including labor costs. HCFA or Congress may periodically adjust Medicare
reimbursement rates, including the ESRD composite rate, based on certain
factors, including legislation, executive and congressional budget reduction and
control processes, inflation and costs incurred in rendering the services.
Historically, adjustments in the Medicare ESRD composite rate have had little
relationship to the cost of conducting business.
The Medicare ESRD composite rate applies to a designated group of
dialysis services, including the dialysis treatment, supplies used for such
treatment, certain laboratory tests and certain medications, and most of the
home dialysis services provided by Renal Care Group. Some other services,
laboratory tests and drugs are eligible for separate reimbursement under
Medicare and are not part of the composite rate. These separately reimbursed
items include specific drugs such as EPO, some physician-ordered tests provided
to dialysis patients and some home dialysis services. Renal Care Group usually
submits Medicare claims monthly and is usually paid within 30 days of the
submission.
Changes in the Medicare ESRD Composite Rate
Effective January 2000 Congress increased the Medicare ESRD composite
rate by 1.2%. An additional increase of 1.2% is scheduled to take effect in
January 2001. Previously, the Medicare ESRD composite rate was unchanged from
commencement of the program in 1972 until 1983. From 1983 through December 1990,
numerous congressional actions resulted in net
10
<PAGE> 11
reductions of the average Medicate ESRD composite rate from approximately $138
per treatment in 1983 to approximately $125 per treatment in 1986. Congress
increased the Medicare ESRD composite rate, effective January 1991, resulting in
an average rate of $126 per treatment during 1999.
The Medicare ESRD composite rate has been the subject of a number of
reports and studies. In April 1991, the Institute of Medicine, an organization
chartered by the National Academy of Sciences and an advisor to the federal
government, released a report recommending that the Medicare ESRD composite rate
be adjusted for the effects of inflation. In March 1996, the Prospective Payment
Assessment Commission ("PROPAC") recommended that the Medicare ESRD composite
rate be increased by 2.0% for freestanding facilities for fiscal year 1997.
Congress is not required to implement these recommendations and could either
raise or lower the reimbursement rate.
During recent congressional sessions, there have been various proposals
for the reform of numerous aspects of Medicare. Renal Care Group is unable to
predict what, if any, future changes may occur in the Medicare ESRD composite
rate. Any reductions in the Medicare ESRD composite rate could have a material
adverse effect on Renal Care Group's earnings, financial condition and business.
Medicare Reimbursement for EPO
Renal Care Group also derives a significant portion of its revenue and
earnings from the administration of erythropoietin. Medicare reimbursement for
EPO has been fixed at $10 per 1,000 units since 1994. The Secretary of the
Department of Health and Human Services has the authority to determine the
Medicare reimbursement rate for EPO. In 1997 the Department for Health and Human
Services Office of Inspector General conducted a review of EPO reimbursement and
recommended a $1 reduction per 1,000 units in Medicare reimbursement for EPO.
The President's proposed budgets for fiscal years 1998, 1999 and 2000 proposed a
$1 reduction. None of these proposals passed. The President's recently proposed
budget for fiscal year 2001 again includes a proposal to reduce EPO
reimbursement by $1 per 1,000 units. Renal Care Group is unable to predict
whether any changes in EPO reimbursement will occur. Any reduction in Medicare
reimbursement for EPO could have a material adverse effect on Renal Care Group's
earnings, financial condition and business, particularly in light of a
recently announced 3.9% increase in the price of EPO by Renal Care Group's sole
supplier of EPO.
HCFA also places limits on EPO reimbursement based on patients'
hematocrit levels. Hematocrit is a measure of anemia. Currently, if a patient's
hematocrit is below 36%, HCFA approves Medicare reimbursement for EPO without
specific documentation of medical necessity. If a patient's average hematocrit
over a three-month period is higher than 36%, then the provider must either
reduce the amount of EPO being administered by at least 20% or Medicare
reimbursement will be reduced and calculated as if the provider had reduced the
amount of EPO administered by 20%. Prior to 1998, no Medicare reimbursement was
available for patients with average hematocrits higher than 36.5%. Renal Care
Group is unable to predict whether any changes in EPO reimbursement based on
hematocrit levels will occur. Any reduction in
11
<PAGE> 12
Medicare reimbursement for EPO could have a material adverse effect on Renal
Care Group's earnings, financial condition and business.
Medicaid Reimbursement
Medicaid programs are health care programs partially funded by the
federal government that are administered by the states. These programs generally
provide coverage for uninsured patients whose income and assets fall below
levels determined by the states. The programs also serve as supplemental
insurance programs for the Medicare co-insurance portion and provide coverage
for certain items (for example, oral medications) that are not covered by
Medicare. State regulations generally follow Medicare reimbursement levels and
coverage without any coinsurance amounts. Some states, however, require
beneficiaries to pay a share of the cost based upon their income or assets.
Renal Care Group is a licensed ESRD Medicaid provider in all of the states in
which it does business.
Private Reimbursement/Acute Care Contracts
Before Medicare becomes a patient's primary payor, the patient's own
insurance plan or other health care coverage, if any, pays for his or her ESRD
treatments. Reimbursement rates from these private payors are generally
significantly higher than the rate set by Medicare. Renal Care Group has also
negotiated managed care contracts with certain payors at rates that are higher
than the Medicare ESRD composite rate, but rates under these managed care
contracts are generally lower than those Renal Care Group charges other private
payors. After Medicare becomes a patient's primary payor, private secondary
payors generally reimburse Renal Care Group for the patient's copayment of 20%
of the Medicare per treatment rate. Renal Care Group also receives payments from
hospitals under 103 acute care contracts at rates significantly higher than the
Medicare ESRD composite rate. Rates under these acute care contracts are the
result of arms-length negotiations between the hospital and Renal Care Group and
approximate fair market value of the services provided by the Company.
GOVERNMENT REGULATION
General
Federal, state, and local governments extensively regulate Renal
Care Group's operations, including the operation of the dialysis centers and
laboratory owned by Renal Care Group. Applicable federal and state statutes and
regulations require the Company to meet various standards relating, among other
things, to licensure, billing and reimbursement, management of dialysis centers,
patient care personnel, maintenance of proper records, confidentiality of
medical records, equipment and quality assurance programs, and the treatment and
disposal of biomedical waste. In addition, Renal Care Group's laboratory
operations are subject, among other laws, to the federal Clinical Laboratory
Improvement Amendments of 1988, also known as CLIA. Renal Care Group's dialysis
centers and laboratory are subject to periodic inspection by state and federal
agencies to determine if they satisfy applicable requirements. In addition,
through certificate of need, or CON, programs, some states regulate the
development or expansion of health care facilities and services, including
dialysis centers. Renal Care Group's operations also are subject to regulations
of the Occupational Safety and Health Administration, also known as OSHA,
concerning workplace safety and employee exposure to blood and other potentially
infectious materials.
Renal Care Group is subject to federal and state laws governing, among
other things, the relationships between Renal Care Group and physicians and
other health care providers, patient referrals, and false claims. See
"Government Regulation--Anti-Kickback Statute," "Government Regulation--Stark
Law" and "Government Regulation--Civil Monetary Penalties." The federal
government, many states, and private third-party payors have made combating
fraud and abuse in the health care industry a high priority. As a result,
scrutiny and investigation of health care providers and their relationships with
physicians and other referral sources recently has increased significantly.
Renal Care Group believes it substantially complies with applicable
federal and state laws. However, if a state or the federal government finds that
Renal Care Group has not complied with these laws, then Renal Care Group could
be required to change its way of operating, and any changes could have a
negative impact on the Company. To date, the dialysis centers owned by Renal
Care Group have maintained their licenses and Medicare and Medicaid
certifications. Any loss of certification to participate in the Medicare and
Medicaid programs or loss of any required state or federal licenses or
certifications would have a negative effect on Renal Care Group. Renal Care
Group believes that the health care services industry will continue to be
subject to extensive regulation at the federal, state, and local levels. Renal
Care Group cannot predict the scope and effect of future regulation of its
business and cannot predict whether health care reform will require Renal Care
Group to change its operations or whether such reform will have a negative
impact on Renal Care Group.
The Company cannot predict whether it will be held responsible for
actions previously taken by acquired companies before Renal Care Group purchased
them. Renal Care Group also cannot predict whether its operations, or the
previous operations of acquired companies, will be reviewed or challenged by the
government. Any review or challenge of its operations could have a negative
impact on Renal Care Group.
Medicare and Medicaid Certification and Reimbursement
To receive reimbursement from federal health care programs for
dialysis and laboratory services, the dialysis centers and laboratory operated
by Renal Care Group must be certified as meeting certain requirements. For
example, to receive Medicare reimbursement, Renal Care Group's dialysis center
and laboratory must be certified by the Health Care Financing Administration.
All of the dialysis centers operated by Renal Care Group and its laboratory
operations are certified under the Medicare program and many state Medicaid
programs. Renal Care Group must comply with extensive billing rules governing,
among other things, medical necessity and documentation. See "Government
Regulation--False Claims Act" and "Government Regulation--Civil Monetary
Penalties."
HCFA recently announced that it is in the process of revising the
current Medicare conditions of coverage for ESRD services. Proposed revisions
have not been published. Renal Care Group cannot predict what, if any, changes
HCFA might make to the current conditions of coverage and whether Renal Care
Group will be able to meet new or revised conditions of coverage. Any changes to
the Medicare conditions of coverage for ESRD facilities could require Renal Care
Group to change its operations and could have a negative effect on the business
and profitability of Renal Care Group. Any reduction in governmental payments
for dialysis services or any reduction or elimination of coverage of dialysis
services by a governmental party would have a negative impact on Renal Care
Group's business.
12
<PAGE> 13
The Anti-Kickback Statute
Under Medicare, Medicaid, and other government-funded health care
programs such as the CHAMPUS program, federal and state governments enforce a
federal law called the Anti-Kickback Statute. The Anti-Kickback Statute
prohibits any person from offering, paying, soliciting or receiving any type of
benefit (1) in exchange for the referral of a patient covered by Medicare,
Medicaid or other federally-subsidized program or (2) for the leasing,
purchasing, ordering or arranging for or recommending the lease, purchase or
order of any item, good, facility or service covered by the programs.
Remuneration prohibited by the Anti-Kickback Statute includes the payment or
transfer of anything of value. Many states have similar anti-kickback statutes
that are not necessarily limited to items or services for which payment is made
by a federal or state health care program.
Any person or entity that violates the Anti-Kickback Statute may be
penalized. These penalties include criminal fines of up to $25,000 per violation
and imprisonment. In addition, the government may impose civil penalties of up
to $50,000 per violation, plus three times total remuneration offered, paid,
solicited or received. Further,
13
<PAGE> 14
the Secretary of the Department of Health and Human Services, HHS, has the
authority to exclude or bar individuals or entities who violate the
Anti-Kickback Statute from participating in Medicare and Medicaid.
The Anti-Kickback Statute is a broad law, and courts have not been
consistent in their interpretations of it. Courts have stated that, under
certain circumstances, the Anti-Kickback Statute is violated when just one
purpose, as opposed to the primary purpose, of a payment is to induce referrals.
To clarify what acts or arrangements will not be subject to prosecution by the
Office of Inspector General of HHS or the United States Attorney, HHS adopted a
set of safe harbor regulations and continues to publish clarifications to these
safe harbors. If an arrangement meets all of the requirements of a safe harbor,
it will not be considered to violate the Anti-Kickback Statute. The types of
arrangements covered by safe harbors include, but are not limited to, certain
investments in companies whose stock is traded on a national exchange, certain
small company investments in which physician ownership is limited, rental of
space, rental of equipment, personal services and management contracts, sales of
physician practices, physician referral services, warranties, discounts,
payments to employees, group purchasing organizations, and waivers of
beneficiary deductibles and co-payments. Each type of arrangement must meet a
number of specific requirements in order to enjoy the benefits of the applicable
safe harbor. Meeting the requirements of a safe harbor will protect an
arrangement from enforcement action by the government. However, the fact that an
arrangement does not meet the requirements of a safe harbor does not mean that
the arrangement is necessarily illegal or will be prosecuted under the
Anti-Kickback Statute.
The Office of Inspector General of HHS, also known as the OIG, has
issued a Special Fraud Alert concerning the pricing of laboratory testing at
ESRD centers. Medicare pays for laboratory tests provided to ESRD patients in
two different ways. Some laboratory tests are considered routine, and Medicare
includes payment for those tests in the ESRD composite rate paid to the
dialysis center. Some laboratory testing is not included in the composite rate,
and these tests are billed by the laboratory directly to Medicare. In the
Special Fraud Alert, the OIG stated it is aware of cases where a laboratory
offers to perform tests included in the composite rate at a price below fair
market value. In exchange, the ESRD facility agrees to refer all or most of its
non-composite rate tests to the laboratory. The OIG identified such an
arrangement as raising issues under the Anti-Kickback Statute. Renal Care
Group's arrangements with laboratories reflect fair market value, and Renal
Care Group believes these arrangements comply with the Anti-Kickback Statute.
Renal Care Group seeks to satisfy as many safe harbor requirements as
possible when it is structuring its business arrangements. However, not all of
Renal Care Group's arrangements satisfy all elements of a safe harbor.
Management believes Renal Care Group has a reasonable basis for concluding that
it substantially complies with the Anti-Kickback Statute and other applicable
related federal and state laws and regulations. The Company believes that its
current arrangements with physicians including nephrologists owning Renal Care
Group's common stock, medical directors, laboratories, suppliers, hospitals, and
other sources of referrals to its dialysis centers and its acute dialysis
services agreements with hospitals materially comply with the Anti-Kickback
Statute. However, a government agency might take a position contrary to the
interpretations made by Renal Care Group or may require the Company to change
its practices. If an agency were to take such a position, it could adversely
affect Renal Care Group.
The Stark Law
Congress has also passed significant prohibitions against certain
physician referrals of patients for health care services. These prohibitions are
commonly known as the Stark Law. The Stark Law prohibits a physician from making
referrals for certain designated health services to entities with which the
physician, or an immediate family member of the physician, has a financial
relationship. The term "financial relationship" is defined very broadly to
include most types of ownership or compensation relationships. The Stark Law
also prohibits the entity receiving the referral from seeking payment under the
Medicare and Medicaid programs for services rendered pursuant to a prohibited
referral. If an entity is paid for services rendered
14
<PAGE> 15
pursuant to a prohibited referral, it may incur civil penalties and could be
excluded from participating in Medicare or Medicaid.
As originally enacted, the Stark Law restricted referrals for clinical
laboratory services. This version of the Stark Law is also called Stark I.
Effective January 1, 1995, the Stark Law was expanded to include, in addition to
clinical laboratory services, a list of designated health services, including
physical therapy services; occupational therapy services; radiology services,
including magnetic resonance imaging (MRI), computerized axial tomography (CAT)
scans, and ultrasound services; radiation therapy services and supplies; durable
medical equipment and supplies; parenteral and enteral nutrients, equipment, and
supplies; prosthetics, orthotics, and prosthetic devices and supplies; home
health services; outpatient prescription drugs; and inpatient and outpatient
hospital services. This version of the Stark Law is also known as Stark II.
These listed services are called "designated health services" under the Stark
Law.
The Stark Law defines a financial relationship broadly to include (1) a
physician's ownership or investment interest in an entity and (2) a compensation
relationship between a physician and an entity. Under the Stark Law, financial
relationships include both direct and indirect relationships. Renal Care Group
has compensation arrangements with its medical directors or the professional
practices of the medical directors. The medical directors or their practices may
also own shares, and options to purchase shares, of common stock of Renal Care
Group. In addition, other physicians who refer patients to Renal Care Group's
centers may own stock of Renal Care Group. If so, the medical directors and
other physicians would have a financial relationship with Renal Care Group.
Accordingly, these physicians would not be able to refer patients to Renal Care
Group's dialysis centers for designated health services unless a Stark Law
exception applies.
Dialysis is not listed as a designated health service under the Stark
Law. However, the definition of "designated health services" includes some items
and services that are components of dialysis or which may be provided to
patients by Renal Care Group in connection with their dialysis services. Final
regulations adopted by HHS under Stark I contain an exception under the Stark
Law for clinical laboratory services that are included in the Medicare ESRD
composite rate. HHS has proposed regulations for Stark II that exclude from the
Stark Law prohibition all services furnished in a dialysis facility which are
included in the Medicare ESRD composite rate. The Stark II proposed regulations
also exclude from the definition of outpatient prescription drugs, a designated
health service, EPO and other drugs furnished as part of dialysis treatment,
whether or not they are included in the Medicare ESRD composite rate. Further,
the proposed regulations would exclude from the definition of "inpatient
hospital services" any dialysis services provided by a hospital which is not
certified by HCFA to provide dialysis services. This proposal would have the
effect of excluding from the Stark Law prohibition, any dialysis services
provided by a Renal Care Group facility under an acute dialysis contract with a
hospital if that hospital is not certified to provide dialysis directly.
Finally, the proposed Stark II regulations would exclude from the definition of
"durable medical equipment" all equipment and supplies used in connection with
home dialysis. These proposed Stark II regulations, if adopted, would exclude
most of the items and services connected with dialysis from the Stark Law
prohibitions. However, the proposed Stark II regulations have elicited
significant comments from the public, and HHS has not finalized the regulations.
Renal Care Group cannot predict
15
<PAGE> 16
when HHS will finalize the Stark II proposed regulations or whether HHS will
finalize these regulations in their proposed form.
Until the Stark II proposed regulations are final, designated health
services, other than clinical laboratory services included in the ESRD composite
payment rate, provided in an ESRD center are technically subject to the Stark
Law. In addition, all clinical laboratory services billed by Renal Care Group
outside of the Medicare ESRD composite rate technically fall under the Stark
Law's referral prohibition.
If the Stark Law applies to the relationships between Renal Care Group
and its referring physicians, there are exceptions to the Stark Law which, if
certain requirements are met, would permit such physicians to refer patients to
Renal Care Group for designated health services. The Stark Law contains
exceptions for certain physician ownership or investment interests in entities
and certain physician compensation arrangements with entities. The exceptions
for compensation arrangements include employment relationships, personal
services contracts, and space and equipment leases. If a compensation
arrangement between a physician, or immediate family member, and an entity
satisfies all requirements for a Stark Law exception, then the Stark Law will
not prohibit the physician from referring patients to the entity for designated
health services. Renal Care Group believes its compensation arrangements with
physicians who refer to Renal Care Group meet the requirements for an exception
under the Stark Law. For example, the Company believes that its agreements with
medical directors or their professional practices materially satisfy the Stark
Law exception for personal services agreements.
The Stark Law also includes an exception for a physician's ownership or
investment interest in certain entities through the ownership of stock. If a
physician owns stock in an entity, and the stock is listed on a national
exchange or is quoted on the Nasdaq Stock Market and the ownership meets certain
other requirements, then the Stark Law will not apply to prohibit the physician
from referring to the entity for designated health services. The requirements
for this Stark Law exception include a requirement that the entity issuing the
stock have at least $75.0 million in stockholders' equity at the end of its most
recent fiscal year or on average during the previous three fiscal years. As of
March 15, 2000, Renal Care Group had stockholders' equity of more than $75.0
million. Renal Care Group believes that physician ownership of Renal Care Group
stock satisfies this Stark Law exception.
If an entity violates the Stark Law, it could be responsible for civil
penalties of up to $15,000 per prohibited claim and may be subject to exclusion
from Medicare and Medicaid. If the Stark Law applies to the relationships
between Renal Care Group and its referring physicians and no exceptions under
the Stark Law are available, then Renal Care Group may be required to
restructure these relationships or refuse to accept referrals for designated
health services from these physicians. If Renal Care Group is found to have
submitted claims to Medicare for services provided pursuant to a referral
prohibited by the Stark Law, then Renal Care Group could be required to repay
amounts it received from Medicare for those services and could be subject to
civil monetary penalties. If Renal Care Group is required to repay amounts to
Medicare or is subject to fines, the Company could be harmed.
16
<PAGE> 17
Many states have physician relationship and referral statutes that are
similar to the Stark Law. Renal Care Group believes it is in substantial
compliance with applicable state laws on physician relationships and referrals.
However, any finding that Renal Care Group is not in compliance with these state
laws could require the Company to change its operations and could have a
negative impact on Renal Care Group.
The Health Insurance Portability and Accountability Act of 1996
In an effort to combat health care fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act
of 1996, also called HIPAA. Among other things, HIPAA broadened the scope of
certain fraud and abuse laws, extended criminal penalties for Medicare and
Medicaid fraud to other federal health care programs, and expanded the authority
of the Office of the Inspector General to exclude persons and entities from
participating in the Medicare and Medicaid programs. HIPAA also extended the
Medicare and Medicaid civil monetary penalty provisions to other federal health
care programs, increased the amounts of civil monetary penalties, and
established a criminal health care fraud statute.
Federal health care offenses under HIPAA include health care fraud and
making false statements relating to health care matters. Under HIPAA, among
other things, any person or entity that knowingly and willfully defrauds or
attempts to defraud a health care benefit program is subject to a fine,
imprisonment or both. Also under HIPAA, any person or entity that knowingly and
willfully falsifies or conceals or covers up a material fact or makes any
materially false or fraudulent statements in connection with the delivery of or
payment of health care services by a health care benefit plan is subject to a
fine, imprisonment or both.
HIPAA also required the Office of Inspector General of HHS, known
as the OIG, to issue advisory opinions to outside parties regarding the
interpretation and applicability of the Anti-Kickback Statute and other OIG
health care fraud and abuse sanctions. An OIG advisory opinion only applies to
the people or entities which requested it. However, advisory opinions are
published and made available to the public, and they provide guidance on those
practices the OIG believes may violate federal law. Renal Care Group has not
requested any advisory opinions from the OIG. However, the OIG has issued
several advisory opinions addressing practices of companies owning ESRD centers.
In advisory opinions addressing practices of companies owning ESRD
centers, the OIG has advised ESRD companies that they may not pay policy
premiums for Medicare supplemental insurance for patients, even patients with
proven financial hardship. Prior to the adoption of HIPAA and the issuance of
these opinions, Renal Care Group had paid premiums for Medicare supplemental
insurance for some patients with demonstrated financial need. The Company
stopped making such payments following the adoption of HIPAA. Consistent with
the advisory opinions, the Company has made grants to charitable foundations
that may, but are not required to, make premium payments on behalf of ESRD
patients. Renal Care Group believes, but cannot
17
<PAGE> 18
promise, that its current practices regarding supplemental insurance
substantially comply with the general principles expressed by the OIG in these
advisory opinions.
The federal Department of Health and Human Services has proposed
regulations implementing HIPAA concerning standards for electronic
transactions, security and electronic signatures, and privacy of individually
identifiable health information. The proposed regulations, among other things,
would require companies to develop security standards for all health
information that is used electronically. The proposed regulations would impose
significant obligations on companies that send or receive electronic health
information. Renal Care Group cannot predict when these proposed regulations
will be finalized and whether they will be changed before they are finalized.
Renal Care Group currently stores, receives, and sends patient health
information electronically and has designed its operations to comply with the
proposed regulations. Any changes to the proposed regulations could require
Renal Care Group to spend additional time, money, and other resources to comply
with the requirements.
The False Claims Act
The federal False Claims Act gives the federal government an additional
way to police false bills or requests for payment for health care services.
Under the False Claims Act, the government may fine any person who knowingly
submits, or participates in submitting, claims for payment to the federal
government that are false or fraudulent, or that contain false or misleading
information. Any person who knowingly makes or uses a false record or statement
to avoid paying the federal government may also be subject to fines under the
False Claims Act. Under the False Claims Act, the term "person" means an
individual, company, or corporation. The federal government has used the False
Claims Act widely to prosecute fraud against Medicare and other governmental
programs in areas such as coding errors, billing for services not provided and
submitting false cost reports. The False Claims Act has also been used to
prosecute people or entities which bill services at a higher reimbursement rate
than is allowed and billing for care that is not medically necessary.
The penalty for violation of the False Claims Act ranges from $5,000 to
$10,000 for each fraudulent claim plus three times the amount of damages caused
to the government as a result of each fraudulent claim. In addition to the False
Claims Act, the federal government may use several criminal statutes to
prosecute the submission of false or fraudulent claims for payment to the
federal government. Many states have similar false claims statutes that impose
liability for the types of acts prohibited by the False Claims Act.
Civil Monetary Penalties
The Secretary of HHS may impose civil monetary penalties on any person
or entity that presents or causes to be presented certain ineligible claims for
medical items or services. The amount of penalties varies, depending on the
offense, from $1,000 to $50,000 per violation. HHS can impose penalties for
false or fraudulent claims and those that include services not provided as
claimed. In addition, HHS may impose penalties on claims:
- for physician services the person or entity knew or should
have known were rendered by a person who was unlicensed, or
misrepresented either (1) his or her qualifications in
obtaining his or her license or (2) his or her certification
in a medical specialty;
- were furnished by a person who was, at the time the claim was
made, excluded from the program to which the claim was made;
or
- that show a pattern of medically unnecessary items or
services.
Penalties also may be imposed on a person or entity that violates rules
regarding the assignment of payments, that knowingly gives false or misleading
information that could
18
<PAGE> 19
reasonably influence the discharge of patients from a hospital, or that offers
inducements to beneficiaries for program services. Persons who have been
excluded from the program and who retain ownership in a participating entity, or
who contract with excluded persons, may be penalized. Penalties also are
applicable in certain other cases, including violations of the federal
Anti-Kickback Statute, payments to limit certain patient services and improper
execution of statements of medical necessity.
Health Care Legislation
Congress may enact legislation in the future which may significantly
change the Medicare ESRD program or reduce the amount that Medicare and Medicaid
will pay for services offered by Renal Care Group. Federal and state statutes or
regulations may be enacted to impose additional requirements on Renal Care Group
to continue to provide services to ESRD patients, to provide new services, or to
maintain eligibility to participate in federal and state payment programs. Any
new legislation or regulations, or new interpretations of existing statutes and
regulations, governing reimbursement to Renal Care Group or the manner in which
the Company provides services to patients could have a material impact on Renal
Care Group and could adversely affect its profitability.
COMPETITION
The dialysis industry is fragmented and highly competitive. Competition
for qualified physicians to act as medical directors is also significant.
According to HCFA, there were more than 3,800 facilities providing dialysis in
the United States at the end of 1997. Renal Care Group believes that
approximately 55% are currently owned by multi-center dialysis companies,
between 20% and 25% are owned by independent physicians and other small
operators, and between 20% and 25% are hospital-affiliated centers. The largest
multi-center dialysis company is Fresenius Medical Care, Inc. A.G. Other large
competitors of the Company include Total Renal Care Holdings, Inc. and Gambro
Healthcare, Inc. In addition, Fresenius and Gambro are both vertically
integrated providers that sell dialysis equipment and supplies, as well as
operating dialysis centers. There are also a number of health care providers
that have entered or may decide to enter the dialysis business. Some of Renal
Care Group's competitors have substantially greater financial resources than
Renal Care Group and may compete with the Company for acquisitions, development
and/or management of dialysis centers and nephrology practices. Renal Care Group
believes that competition for acquisitions has, over time, increased the cost of
acquiring dialysis centers. Renal Care Group may also experience competition
from centers established by former medical directors or other referring
physicians. There can be no assurance that Renal Care Group will compete
effectively with any such competitors.
19
<PAGE> 20
INSURANCE
Renal Care Group maintains professional liability insurance and general
liability insurance policies for all of its operations. Renal Care Group also
maintains insurance in amounts it deems adequate to cover property and casualty
risks, workers' compensation, and directors and officers liability. However,
there can be no assurance that the aggregate amount and types of Renal Care
Group's insurance are adequate to cover all risks it may incur or that insurance
will be available in the future.
EMPLOYEES
At December 31, 1999 Renal Care Group employed 4,107 full-time
employees and 556 part-time employees. Of the total employees, 103 were employed
at the Company's headquarters and 4,560 were employed at the Company's
facilities or regional business offices. In management's opinion, employee
relations are good.
RISK FACTORS
You should carefully consider the risks described below before
investing in Renal Care Group. The risks and uncertainties described below ARE
NOT the only ones facing Renal Care Group. Other risks and uncertainties that we
have not predicted or assessed may also adversely affect our company.
If any of the following risks occur, our earnings, financial condition
or business could be materially harmed, and the trading price of our common
stock could decline, resulting in the loss of all or part of your investment.
IF WE FAIL TO INTEGRATE ACQUIRED COMPANIES, WE WILL BE LESS PROFITABLE.
Renal Care Group has grown significantly by acquisitions of other
dialysis providers since its formation in February 1996. We have completed some
of our acquisitions as recently as January 2000, and we intend to acquire more
dialysis businesses in the future. After an acquisition, we face the challenge
of integrating the acquired company's management and other personnel, clinical
operations, and financial and operating systems with ours, often without the
benefit of continued services from key personnel of the acquired company. We may
be unable to integrate the businesses we acquire successfully or to achieve
anticipated benefits from an acquisition in a timely manner, which could lead to
substantial costs and delays or other operational, technical or financial
problems, including diverting management's attention from our existing business.
Any of these results could damage our profitability and our prospects for future
growth.
IF MEDICARE OR MEDICAID CHANGES ITS PROGRAMS FOR DIALYSIS, OUR REVENUE AND
EARNINGS COULD DECREASE.
If the government changes the Medicare, Medicaid or similar government
programs or the rates paid by those programs for our services, then our revenue
and earnings may decline. We
20
<PAGE> 21
estimate that approximately 62% of our net revenue for 1997, 59% of our net
revenue for 1998 and 57% of our net revenue for 1999 consisted of reimbursements
from Medicare, including revenue from the administration of EPO to treat anemia.
We also estimate that approximately 7% of our net revenue for 1997, 5% of our
net revenue for 1998, and 4% of our net revenue for 1999, consisted of
reimbursements from Medicaid or comparable state programs. Any of the following
actions in connection with these programs could cause our revenue and earnings
to decline:
- a reduction of the amount paid to us under government
programs;
- an increase in the costs associated with performing our
services that are subject to inflation, such as labor and
supply costs, without a corresponding increase in
reimbursement rates;
- the inclusion of some or all ancillary services, for which we
are now reimbursed separately, in the flat composite rate for
a standard dialysis treatment; or
- changes in laws, or the interpretations of laws, which could
cause us to modify our operations.
IF REIMBURSEMENT FOR EPO DECREASES, THEN WE COULD BE LESS PROFITABLE.
If government or private payors decrease reimbursement rates for EPO,
for which we are currently reimbursed separately outside of the flat composite
rate, our revenue and earnings may decline. EPO is a bio-engineered hormone that
is used to treat anemia. Our revenues from EPO were approximately 20% of net
revenue for 1997, 23% of net revenue for 1998, and 26% of net revenue for 1999.
Most of our payments for EPO come from government programs. President Clinton
included a proposal to decrease the reimbursement for EPO by $1 per thousand
units in his fiscal year 2001 budget, which would represent a 10% reduction from
the current government reimbursement rate. For the year ended December 31, 1999,
government reimbursement represented approximately 61% of the total revenue we
derived from EPO. Because we are unable to predict accurately the possible
effect that the proposed reduction would have on the cost of EPO or private
reimbursement rates, we cannot quantify what the net effect would be on our
revenue and earnings.
IF AMGEN RAISES THE PRICE FOR EPO OR IT BECOMES IN SHORT SUPPLY, THEN WE COULD
BE LESS PROFITABLE.
EPO is produced by a single manufacturer, Amgen Inc., and there are no
substitute products available in the United States. Amgen announced a 3.9%
increase in the price of EPO in February, 2000, its first price increase since
before Renal Care Group was formed. If Amgen imposes additional price increases
or if Amgen or other factors interrupt the supply of EPO, then our revenue and
earnings may decline.
21
<PAGE> 22
IF PAYMENTS BY PRIVATE INSURERS, HOSPITALS OR MANAGED CARE ORGANIZATIONS
DECREASE, THEN OUR REVENUE AND EARNINGS COULD DECREASE.
If private insurers, hospitals or managed care organizations reduce
their rates or we experience a significant shift in our revenue mix toward
additional Medicare or Medicaid reimbursement, then our revenue and earnings may
decline. We estimate that approximately 31% of our net revenue for 1997, 36% of
our net revenue for 1998, and 39% of our net revenue for 1999, were derived from
sources other than Medicare and Medicaid. In general, payments we receive from
private insurers and hospitals for our services are at rates significantly
higher than the Medicare or Medicaid rates. As a result, any of the following
events could have a material adverse effect on our revenue and earnings:
- an increase in dialysis procedures reimbursed by private
insurers, hospitals or managed care companies could cause
these payor organizations to reduce the rates they pay us;
- a portion of our business that is currently reimbursed by
private insurers or hospitals may become reimbursed by managed
care organizations, which generally have lower rates for our
services; or
- the scope of coverage by Medicare or Medicaid under the flat
composite rate could expand and, as a result, reduce the
extent of our services being reimbursed at the higher
private-insurance rates.
IF WE ARE UNABLE TO MAKE ACQUISITIONS IN THE FUTURE, OUR RATE OF GROWTH WILL
SLOW.
Much of our historical growth has come from acquisitions, and we expect
to continue to pursue growth through the acquisition and development of dialysis
centers. However, we may be unable to continue to identify and complete suitable
acquisitions at prices we are willing to pay or to obtain the necessary
financing. In addition, since we are a bigger company, the amount that acquired
businesses contribute to our revenue and profits will likely be smaller on a
percentage basis. We also compete with other companies to identify and complete
suitable acquisitions. We expect this competition to intensify, making it more
difficult to acquire suitable companies on favorable terms. Further, the
businesses we acquire may not perform well enough to justify our investment. If
we are unable to make additional acquisitions on suitable terms, we may not meet
our growth expectations.
IF WE COMPLETE FUTURE ACQUISITIONS, WE MAY DILUTE EXISTING STOCKHOLDERS BY
ISSUING MORE OF OUR COMMON STOCK OR WE MAY INCUR ADDITIONAL EXPENSES RELATED TO
DEBT AND GOODWILL, WHICH COULD REDUCE OUR EARNINGS.
We may issue equity securities in future acquisitions that could be
dilutive to our shareholders. We also may incur additional debt and amortization
expense related to goodwill and other intangible assets in future acquisitions.
We have used the pooling-of-interests accounting method for many of our
acquisitions, and as a result we have not recorded goodwill (the excess of
acquisition cost over identifiable tangible assets) in these acquisitions. In
those instances where we
22
<PAGE> 23
have used the purchase accounting method in acquisitions, we have recorded
goodwill and other intangible assets, which are then amortized yearly against
our earnings at a blended average life of 35 years. We had approximately $196.5
million of goodwill and other intangibles, net, as of December 31, 1999. The SEC
and accounting policymakers have announced that they are considering policy and
rule changes that would likely eliminate the pooling-of-interests method, which
would result in more goodwill and associated amortization expense for future
and, possibly, prior acquisitions. Further, the SEC and accounting policymakers
have announced that they may reduce the allowable life over which companies may
amortize goodwill, which would result in increased amortization expense in each
year. Interest expense on additional debt and amortization expense from
acquisitions may significantly reduce our profitability.
IF ACQUIRED BUSINESSES HAVE UNKNOWN LIABILITIES, THEN WE COULD BE EXPOSED TO
LIABILITIES THAT COULD HARM OUR BUSINESS AND PROFITABILITY.
Businesses we acquire may have unknown or contingent liabilities,
including liabilities for failure to comply with health care laws. Although we
generally attempt to identify any practices that may give rise to unknown or
contingent liabilities and conform them to our standards after the acquisition,
private plaintiffs or governmental agencies may still assert claims. Even though
we generally seek to obtain indemnification from prospective sellers, unknown
and contingent liabilities may not be covered by indemnification or may exceed
contractual limits or the financial capacity of the indemnifying party.
IF OUR REFERRING PHYSICIANS WERE TO CEASE REFERRING TO OUR CENTERS OR WERE
PROHIBITED FROM REFERRING FOR REGULATORY REASONS, OUR REVENUE AND EARNINGS WOULD
DECLINE.
Our dialysis centers depend on referrals from local nephrologists.
Typically, one or a few physicians account for all or a significant portion of
the patient base at each of our dialysis centers, and the loss of one or more
referring physicians could have a material adverse effect on the operations of
that center. The loss of a significant number of referring physicians could
cause our revenue and earnings to decline. In many instances, the primary
referral sources for our centers are physicians who are also stockholders of
Renal Care Group and serve as medical directors of our centers. If stock
ownership or the medical director relationship were deemed to violate applicable
federal or state law, including fraud and abuse laws and laws prohibiting
self-referrals, the physicians owning our stock or acting as medical directors
could be forced to stop referring to our centers. Further, we may not be able to
renew or renegotiate our medical director agreements successfully, which could
result in a loss of patients since dialysis patients are typically treated at a
center where their physician serves as a medical director.
IF OUR BUSINESS IS ALLEGED OR FOUND TO VIOLATE HEATH CARE OR OTHER APPLICABLE
LAWS, OUR REVENUE AND EARNINGS COULD DECREASE.
We are subject to extensive federal, state and local regulation
regarding the following:
- fraud and abuse prohibitions under health care reimbursement
laws;
23
<PAGE> 24
- prohibitions and limitations on patient referrals;
- false claims prohibitions under health care reimbursement
laws;
- facility licensure;
- health and safety requirements;
- environmental compliance; and
- medical and toxic waste disposal.
Much of this regulation, particularly in the areas of fraud and abuse
and patient referral, is complex and open to differing interpretations. Due to
the broad application of the statutory provisions and the absence in many
instances of regulations or court decisions addressing the specific arrangements
by which we conduct our business, including our arrangements with medical
directors, physician stockholders and physician joint venture partners,
governmental agencies could challenge some of our practices under these laws. If
any of our operations are found to violate these laws, we may be subject to
severe sanctions or be required to alter or discontinue the challenged conduct
or both. If we are required to alter our practices, we may not be able to do so
successfully. If any of these events occur, our revenue and earnings could
decline.
CHANGES IN THE HEALTH CARE DELIVERY, FINANCING OR REIMBURSEMENT SYSTEMS COULD
ADVERSELY AFFECT OUR BUSINESS.
The health care industry in the United States is in a period of rapid
change and uncertainty. Health care organizations, public or private, may
dramatically change the way they operate and pay for services. Our business is
designed to function within the current health care financing and reimbursement
system. During the past several years, the health care industry has been subject
to increasing levels of government regulation of, among other things,
reimbursement rates and capital expenditures. In addition, proposals to reform
the health care system have been considered by Congress. These proposals, if
enacted, may further increase government regulation of or other involvement in
health care, lower reimbursement rates and otherwise change the operating
environment for health care companies. We cannot predict the likelihood of those
events or what impact they may have on our business.
THE DIALYSIS BUSINESS IS HIGHLY COMPETITIVE AND IF WE DO NOT COMPETE EFFECTIVELY
IN OUR MARKETS, WE COULD LOSE MARKET SHARE AND OUR RATE OF GROWTH COULD SLOW.
The dialysis industry is fragmented and rapidly consolidating. There
are several large dialysis companies that compete for the acquisition of
existing dialysis centers and the development of relationships with referring
physicians. Several of our competitors are part of larger companies that also
manufacture dialysis equipment, which allows them to lower equipment costs.
Several of our competitors, including these equipment manufacturers, are much
larger than we are and have substantially greater financial resources and more
established operations and infrastructure than us.
24
<PAGE> 25
We also experience competition from referring physicians who open their own
dialysis centers. There can be no assurance that we will be able to compete
effectively with any of our competitors.
IF WE LOSE ANY OF OUR EXECUTIVE OFFICERS, OR ARE UNABLE TO ATTRACT AND RETAIN
QUALIFIED MANAGEMENT PERSONNEL AND MEDICAL DIRECTORS, OUR ABILITY TO RUN OUR
BUSINESS COULD BE ADVERSELY AFFECTED AND OUR REVENUE AND EARNINGS COULD DECLINE.
We are dependent upon the services of our executive officers Sam A.
Brooks, Jr., our Chairman, Chief Executive Officer and President, and Raymond
Hakim, M.D., Ph.D., R. Dirk Allison and Gary Brukardt, each an Executive Vice
President. Mr. Brooks, Dr. Hakim and Mr. Brukardt have each been with Renal Care
Group since its formation. We have entered into employment agreements with
Messrs. Brooks, Allison, and Brukardt and Dr. Hakim. The employment agreements
for each of these executive officers other than Dr. Hakim contain restrictive
covenants prohibiting the officer from competing with Renal Care Group for a
period of one year following the end of the officer's employment term. The
services of these individuals would be very difficult to replace. We do not
carry key-man life insurance on any of our officers. Further, our growth will
depend in part upon our ability to attract and retain skilled employees, for
whom competition is intense. We also believe that our future success will depend
on our ability to attract and retain qualified physicians to serve as medical
directors of our dialysis centers. We have entered into medical director
agreements with the physicians serving as medical directors of our dialysis
centers, most of which contain noncompetition covenants of varying durations.
IF OUR BOARD OF DIRECTORS DOES NOT APPROVE AN ACQUISITION OR CHANGE IN CONTROL
OF RENAL CARE GROUP, OUR STOCKHOLDERS MAY NOT REALIZE THE FULL VALUE OF THEIR
STOCK.
Our certificate of incorporation and bylaws contain a number of
provisions that may delay, deter or inhibit a future acquisition or change in
control of Renal Care Group that is not first approved by our board of
directors. This could occur even if our stockholders are offered an attractive
value for their shares or if a substantial number or even a majority of our
stockholders believe the takeover may be in their best interest. These
provisions are intended to encourage any person interested in acquiring Renal
Care Group to negotiate with and obtain approval from our board of directors
before pursuing the transaction. Provisions that could delay, deter or inhibit a
future acquisition or change in control of Renal Care Group include the
following:
- a staggered board of directors that would require two annual
meetings to replace a majority of the board of directors;
- restrictions on calling special meetings at which an
acquisition or change in control might be brought to a vote of
the stockholders;
- blank check preferred stock that may be issued by our board of
directors without stockholder approval and that may be
substantially dilutive or contain preferences or rights
objectionable to an acquiror; and
- a poison pill that would substantially dilute the interest
sought by an acquiror.
25
<PAGE> 26
These provisions could also discourage bids for our common stock at a premium
and cause the market price of our common stock to decline.
OUR STOCK PRICE IS VOLATILE AND AS A RESULT, THE VALUE OF YOUR INVESTMENT MAY GO
DOWN FOR REASONS UNRELATED TO THE PERFORMANCE OF OUR BUSINESS
Our common stock is traded on the Nasdaq National Market. The market
price of our common stock has been volatile, with trades ranging from a low of
$14.875 per share to a high of $34.375 per share during the year ended December
31, 1999. The market price for our common stock could fluctuate substantially
based on a variety of factors, including the following:
- future announcements concerning us, our competitors, our
suppliers or the health care market;
- changes in government regulations; and
- changes in earnings estimates by analysts.
Furthermore, stock prices for many companies fluctuate widely for
reasons that may be unrelated to their operating results. These fluctuations,
coupled with changes in demand or reimbursement levels for our services and
general economic, political and market conditions, could cause the market price
of our common stock to decline.
FORWARD LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "intend," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully for the following
reasons:
- the statements discuss our future expectations;
- the statements contain projections of our future earnings or
of our financial condition; and
- the statements state other "forward-looking" information.
We believe it is important to communicate our expectations to our
investors. There may, however, be events in the future that we are not
accurately able to predict or over which we have no control. The risk factors
listed above, as well as any cautionary language in or incorporated by reference
into this annual report on Form 10-K, provide examples of risks, uncertainties
and events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. The SEC allows us to
"incorporate by reference" the information we
26
<PAGE> 27
file with them, which means we can disclose important information to you by
referring you to those documents. Before you invest in our common stock, you
should be aware that the occurrence of any of the events described in these risk
factors, elsewhere in or incorporated by reference into this annual report on
Form 10-K and other events that we have not predicted or assessed could have a
material adverse effect on our earnings, financial condition and business. If
the events described above or other unpredicted events occur, then the trading
price of our common stock could decline and you may lose all or part of your
investment.
ITEM 2. PROPERTIES
PROPERTIES
As of December 31, 1999, Renal Care Group operated dialysis centers in
23 states, of which 158 are located in leased facilities and 23 are owned. The
following is a summary of Renal Care Group's outpatient dialysis centers by
state.
-------------------------------------------------------
OUTPATIENT FACILITIES BY STATE
-------------------------------------------------------
Alabama 5
-------------------------------------------------------
Alaska 2
-------------------------------------------------------
Arizona 23
-------------------------------------------------------
Arkansas 9
-------------------------------------------------------
Florida 5
-------------------------------------------------------
Illinois 12
-------------------------------------------------------
Indiana 17
-------------------------------------------------------
Kansas 12
-------------------------------------------------------
Kentucky 1
-------------------------------------------------------
Louisiana 1
-------------------------------------------------------
Michigan 4
-------------------------------------------------------
Mississippi 23
-------------------------------------------------------
Missouri 6
-------------------------------------------------------
New Jersey 2
-------------------------------------------------------
Ohio 7
-------------------------------------------------------
Oklahoma 3
-------------------------------------------------------
Oregon 7
-------------------------------------------------------
Pennsylvania 6
-------------------------------------------------------
Tennessee 1
-------------------------------------------------------
Texas 30
-------------------------------------------------------
Washington 2
-------------------------------------------------------
West Virginia 1
-------------------------------------------------------
Wisconsin 2
-------------------------------------------------------
TOTAL 181
-------------------------------------------------------
Certain of Renal Care Group's centers are leased from physicians who
practice at the center and who are stockholders of the Company. Renal Care
Group's leases generally have
27
<PAGE> 28
terms ranging from one to 15 years and typically contain renewal options. The
size of Renal Care Group's centers ranges from approximately 400 to 17,000
square feet. Renal Care Group leases office space in Nashville, Tennessee for
its corporate headquarters under a lease that expires in 2002. The Company
leases other office space in and around Nashville, Tennessee for its University
division, for certain billing and computer operations and for its wound care and
diabetic division. Renal Care Group considers its physical properties to be in
good operating condition and suitable for the purposes for which they are being
used.
Expansion or relocation of Renal Care Group's dialysis centers is
subject to compliance with conditions relating to participation in the Medicare
ESRD program. In states that require a certificate of need, approval of an
application submitted by the Company is necessary for expansion of an existing
dialysis center or development of a new center.
Renal Care Group generally owns the equipment used in its outpatient
centers. Renal Care Group considers its equipment to generally be in good
operating condition and suitable for the purposes for which it is being used.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business, including those arising from patient treatment, which claims and suits
the Company believes will be covered by its professional liability insurance.
The Company is not currently a party to any material legal actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's common stock has been traded on the Nasdaq National Market
System under the symbol "RCGI" since February 7, 1996. The following table sets
forth the quarterly high and low closing sales prices as reported on the Nasdaq
National Market System for the last two fiscal years.
On July 23, 1998, the Board of Directors approved a three-for-two stock
split to be effected in the form of a 50% stock dividend. One additional share
of common stock was issued for every two shares held by shareholders of record
at the close of business on August 7, 1998. The additional shares were
distributed on August 24, 1998. All financial and share data included in this
report have been adjusted for the stock split.
28
<PAGE> 29
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1998 HIGH LOW
---------------------------------------------------------------------
<S> <C> <C>
First Quarter $26.750 $18.672
---------------------------------------------------------------------
Second Quarter $29.375 $22.500
---------------------------------------------------------------------
Third Quarter $30.203 $19.750
---------------------------------------------------------------------
Fourth Quarter $29.563 $23.188
---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1999 HIGH LOW
---------------------------------------------------------------------
<S> <C> <C>
First Quarter $33.000 $15.000
---------------------------------------------------------------------
Second Quarter $27.750 $17.375
---------------------------------------------------------------------
Third Quarter $25.500 $18.250
---------------------------------------------------------------------
Fourth Quarter $23.625 $16.625
---------------------------------------------------------------------
</TABLE>
HOLDERS
As of March 17, 2000, the approximate number of registered stockholders
was 256 and approximately 8,400 beneficial owners.
DIVIDEND POLICY
Renal Care Group has never paid any cash dividend on its capital stock.
Renal Care Group currently anticipates that all of its earnings will be retained
to finance the growth and development of its business, and therefore, does not
anticipate that any cash dividend will be declared or paid on the common stock
in the foreseeable future. Any future declaration of dividends will be subject
to the discretion of Renal Care Group's Board of Directors and its review of
Renal Care Group's earnings, financial condition, capital requirements and
surplus, contractual restrictions to pay such dividends and other factors it
deems relevant.
29
<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA
The Selected Historical Financial Data - Renal Care Group, Inc. on page
31 represent the historical results of operations of the Company and include the
results of operations of certain businesses that were acquired during 1996 and
1999 in pooling-of-interests transactions. This information does not include the
results of operations for the Founding Companies for any periods prior to the
date of Renal Care Group's initial public offering in February 1996.
The Combination at the Company's inception 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 Selected Historical Financial Data - Renal Care Group, Inc. for the
years ended December 31, 1996, 1997, 1998 and 1999 are derived from the audited
consolidated financial statements of the Company and its subsidiaries. The
consolidated financial statements and related notes to Consolidated Financial
Statements for the years ended December 31, 1997, 1998 and 1999, together with
the related Report of Independent Auditors are included elsewhere in this annual
report on Form 10-K. The following data should be read in conjunction with the
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" that appear elsewhere in this
annual report on Form 10-K.
30
<PAGE> 31
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 $163,377 $257,866 $420,694 $520,607
Patient care costs 37,651 113,169 177,109 276,895 335,366
General and administrative expenses 11,101 17,442 26,279 39,953 48,330
Provision for doubtful accounts 2,845 3,414 8,022 13,074 13,878
Depreciation and amortization 2,471 6,021 11,436 21,293 26,425
Merger expenses -- 1,960 300 1,000 4,300
-------- -------- -------- -------- --------
Total operating costs and expenses 54,068 142,006 223,146 352,215 428,299
-------- -------- -------- -------- --------
Income from operations 2,089 21,371 34,720 68,479 92,308
Interest expense, net 1,109 1,103 1,695 5,493 5,038
-------- -------- -------- -------- --------
Income before income taxes and minority interest 980 20,268 33,025 62,986 87,270
Minority interest -- -- 955 3,492 7,768
-------- -------- -------- -------- --------
Income before income taxes $ 980 20,268 32,070 59,494 79,502
========
Provision for income taxes 7,991 11,913 22,092 31,041
-------- -------- -------- --------
Net income $ 12,277 $ 20,157 $ 37,402 $ 48,461
======== ======== ======== ========
Basic net income per share $ 0.42 $ 0.55 $ 0.86 $ 1.09
======== ======== ======== ========
Basic weighted average shares outstanding 29,445 36,747 43,274 44,489
======== ======== ======== ========
Diluted net income per share $ 0.39 $ 0.52 $ 0.82 $ 1.04
======== ======== ======== ========
Diluted weighted average shares outstanding 31,750 38,779 45,835 46,460
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,(1)
-----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $ (1,168) $ 49,420 $ 19,973 $ 49,878 $ 85,609
Total assets 49,461 180,149 292,846 416,132 482,384
Long-term debt 21,340 24,000 37,406 79,507 76,102
Stockholders' equity 12,496 107,305 188,972 245,680 310,314
- ----------
</TABLE>
(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 its 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.
31
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements, including the notes thereto,
contained elsewhere in this Annual Report on Form 10-K.
OVERVIEW
Renal Care Group, Inc. provides dialysis services to patients with
chronic kidney failure. 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 14,200 patients through 181 outpatient
dialysis centers in 23 states, in addition to providing acute dialysis services
in 103 hospitals.
For the comparison discussion that follows, the Selected Historical
Financial Data include the financial information of companies acquired in
previously reported transactions accounted for as poolings-of-interests. On
January 29, 1999, the Company merged with DCA in a transaction accounted for as
a pooling-of-interests. Consistent with other pooling-of-interests transactions,
the comparison discussion that follows includes Supplemental Selected Combined
amounts that include the combined results of Renal Care Group and Dialysis
Centers of America, Inc. 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.
32
<PAGE> 33
Patients with end-stage renal disease 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 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 new contract with Amgen may allow it to mitigate the price increase to
some extent.
RESULTS OF OPERATIONS
On January 29, 1999, the Company merged with Dialysis Centers of
America, Inc. in a transaction accounted for as a pooling-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.
33
<PAGE> 34
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,
-----------------------
1997 1998 1999
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue $257,866 100.0% $420,694 100.0% $520,607 100.0%
Patient care costs 177,109 68.7 276,895 65.8 335,366 64.4
General and administrative
expenses 26,279 10.2 39,953 9.5 48,330 9.3
Provision for doubtful accounts 8,022 3.1 13,074 3.1 13,878 2.7
Depreciation and amortization 11,436 4.4 21,293 5.1 26,425 5.1
Merger expenses 300 0.1 1,000 0.2 4,300 0.8
-------- ----- -------- ----- -------- -----
Total operating costs and
expenses 223,146 86.5 352,215 83.7 428,299 82.3
-------- ----- -------- ----- -------- -----
Income from operations 34,720 13.5 68,479 16.3 92,308 17.7
Interest expense, net 1,695 0.7 5,493 1.3 5,038 1.0
Minority interest 955 0.4 3,492 0.9 7,768 1.4
-------- ----- -------- ----- -------- -----
Income before income taxes 32,070 12.4 59,494 14.1 79,502 15.3%
-------- ----- -------- ----- -------- -----
Income tax expense 11,913 4.6 22,092 5.3 31,041 6.0
-------- ----- -------- ----- -------- -----
Net income $ 20,157 7.8% $ 37,402 8.8% $ 48,461 9.3%
======== ===== ======== ===== ======== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Revenue. Net revenue increased from $420.7 million for the year
ended December 31, 1998 to $520.6 million for the year ended December 31, 1999,
an increase of $99.9 million, or 23.7%. This increase resulted primarily from a
16.1% increase in the number of treatments from 1,831,960 in 1998 to 2,127,073
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 6.7% from $223 in 1998 to $238 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 $276.9 million for the year ended December 31, 1998 to $335.4
million for the year ended December 31, 1999, an increase of 21.1%. 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 65.8% in 1998 to 64.4% in 1999. Patient care costs per treatment increased
4.6% from $151 in 1998 to $158 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.
34
<PAGE> 35
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
$40.0 million for the year ended December 31, 1998 to $48.3 million for the year
ended December 31, 1999, an increase of 20.8%. General and administrative
expenses as a percentage of revenue decreased from 9.5% in 1998 to 9.3% 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 $13.1
million in 1998 to $13.9 million in 1999, an increase of $800,000, or 6.1%. 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 merger with Dialysis Centers of
America, Inc. in January 1999.
Depreciation and Amortization. Depreciation and amortization increased
from $21.3 million for the year ended December 31, 1998 to $26.4 million for the
year ended December 31, 1999, an increase of 23.9%. This increase was due to the
start-up of dialysis facilities, the normal replacement costs of dialysis
facilities and equipment, the purchase of information systems and the
amortization of the goodwill 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 $68.5
million for the year ended December 31, 1998 to $92.3 million for the year ended
December 31, 1999, an increase of 34.7%. Income from operations as a percentage
of net revenue increased from 16.3% in 1998 to 17.7% in 1999 as a result of the
factors discussed above.
Interest Expense, Net. Interest expense of $5.0 million for the
year-ended December 31, 1999 decreased $500,000 compared to $5.5 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 DCA transaction
with proceeds from Renal Care Group's credit facility combined with generally
lower market interest.
35
<PAGE> 36
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 0.9% 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.
Income Tax Expense. Income tax expense increased from $22.1 million in
1998 to $31.0 million in 1999, an increase of 40.3%. The increase is a result of
pre-tax earnings increasing by approximately 34%. In addition, the effective
rate of the Company increased from 37% to 39% in the current year as a result of
non deductible merger costs incurred during the current year.
Net Income. Net income increased from $37.4 million in 1998 to $48.5
million in 1999, an increase of 30.0%. 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 $257.9 million for the year
ended December 31, 1997 to $420.7 million for the year ended December 31, 1998,
an increase of $162.8 million, or 63.1%. This increase resulted primarily from a
47.0% increase in the number of treatments from 1,246,650 in 1997 to 1,831,960
in 1998. This growth in treatments is a result of the acquisition and
development of various dialysis facilities and a 9.7% increase in same-center
treatments for 1998 over 1997. In addition, average revenue per dialysis
treatment increased 8.3% from $206 in 1997 to $223 in 1998. The remaining
revenue increase is a result of wound care and diabetes revenues 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 $177.1 million
for the year ended December 31, 1997 to $276.9 million for the year ended
December 31, 1998, an increase of 56.4%. 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 68.7% in 1997
to 65.8% in 1998 primarily due to the increase in net revenue per treatment.
Patient care costs per treatment increased 6.3% from $142 in 1997 to $151 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 $26.3 million for the year ended December 31, 1997 to
$40.0 million for the year ended December 31, 1998, an increase of 52.1%.
General and administrative expenses as a percentage of revenue decreased from
10.2% in 1997 to 9.5% in 1998, primarily as the result of the increase in net
revenue for 1998.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased from $8.0 million in 1997 to $13.1 million in 1998. The provision for
doubtful accounts as a percentage of net revenue remained constant at 3.1% in
1997 and 1998.
Depreciation and Amortization. Depreciation and amortization increased
from $11.4 million for the year ended December 31, 1997 to $21.3 million for the
year ended December 31, 1998, an increase of 86.8%. This increase was due to the
start-up of dialysis facilities, the normal
36
<PAGE> 37
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 $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 $34.7
million for the year ended December 31, 1997 to $68.5 million for the year ended
December 31, 1998, an increase of 97.4%. Income from operations as a percentage
of net revenue increased from 13.5% in 1997 to 16.3% in 1998 as a result of the
factors discussed above.
Interest Expense, Net. Interest expense of $5.5 million for the year
ended December 31, 1998 increased $3.8 million compared to interest expense of
$1.7 million for the year ended December 31, 1997. 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 $11.9 million in
1997 to $22.1 million in 1998, an increase of 85.7%. The increase is a result of
pre-tax earnings of the Company increasing by approximately 85% during the year.
Net Income. Net income increased from $20.2 million in 1997 to $37.4
million in 1998, an increase of 85.1%. 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 $85.6 million, cash and cash equivalents were $14.5 million, and the
Company's current ratio was 2.2 to 1. Renal Care Group's working capital
increased during the year primarily as a result of acquisitions, the increase in
long-term debt primarily to fund those acquisitions and the increase in net
income.
Net cash provided by operating activities was $61.0 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 $58.6 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 $44.1 million of purchases of
property and equipment. Cash used in financing activities was $7.8 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 and $27.4 million in repayments of long-term debt.
37
<PAGE> 38
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. 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.
38
<PAGE> 39
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
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 requires companies to
report selected segment information when certain tests are met. Management has
determined that the Company operates in only one reportable segment in
accordance with the applicable tests of SFAS No. 131.
IMPACT OF INFLATION
A substantial portion of RCG's net revenue is subject to reimbursement
rates that are regulated by the federal government and do not automatically
adjust for inflation. RCG is unable to increase the amount it receives for the
services provided by its dialysis business that are reimbursed under the
Medicare composite rate. Increased operating costs due to inflation, such as
labor and supply costs, without a corresponding increase in reimbursement rates,
may adversely affect RCG's results of operations, financial condition and
business.
FORWARD-LOOKING INFORMATION
Certain of the matters discussed in the preceding pages of this annual
report on Form 10-K, particularly regarding implementation of the Company's
strategy, development of the dialysis and nephrology industries, anticipated
growth and revenues, anticipated working capital and sources of funding for
growth opportunities and construction, expenditures, interest, costs and income
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (See "Risk Factors").
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RCG maintains all cash in United States dollars in highly liquid,
interest-bearing, investment grade instruments with maturities of less than
three months, which RCG considers cash equivalents; therefore, RCG has no
"market risk sensitive instruments," and no disclosure is required under this
Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and financial statement schedule
in Part IV, Item 14(a) (1) and (2) of the report are incorporated by reference
into this Item 8.
39
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item will appear in, and is
incorporated by reference from, the sections entitled "Proposals for Stockholder
Action - Proposal 1. Election of Directors" and "Management - Directors and
Executive Officers" included in the Company's definitive Proxy Statement
relating to the 2000 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the sections
entitled "Executive Compensation" included in the Company's definitive Proxy
Statement relating to the 2000 Annual Meeting of Stockholders, which
information, other than the Compensation Committee Report and Performance Graph
required by Items 402(k) and (l) of Regulation S-K, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in, and is
incorporated by reference from, the section entitled "Security Ownership of
Directors, Officers and Principal Stockholders" included in the Company's
definitive Proxy Statement relating to the 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will appear in, and is
incorporated by reference from, the sections entitled "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions" included in the Company's definitive Proxy Statement relating to
the 2000 Annual Meeting of Stockholders.
40
<PAGE> 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
(1) Index To Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets at December 31, 1998
and 1999 F-2
Consolidated Income Statements for the years
ended December 31, 1997, 1998, and 1999 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1998, and 1999 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1998, and 1999 F-6
Notes to Consolidated Financial Statements F-7
(2) Index to Financial Statement Schedules.
Report of Independent Auditors F-20
Schedule II - Consolidated Schedule-Valuation
and Qualifying Accounts F-21
(3) The Exhibits are listed in the Index of Exhibits
Required by Item 601 of Regulation S-K included
herewith, which is incorporated herein by reference.
</TABLE>
(b) The Company filed a current report on Form 8-K on
November 3, 1999.
41
<PAGE> 42
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Renal Care Group, Inc.
We have audited the accompanying consolidated balance sheets of Renal Care
Group, Inc. as of December 31, 1998 and 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 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
operations and cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 24, 2000
F-1
<PAGE> 43
Renal Care Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,943 $ 14,507
Accounts receivable, less allowance for doubtful accounts of
$30,726 in 1998 and $39,997 in 1999 82,521 99,877
Inventories 8,553 12,044
Prepaid expenses and other current assets 8,783 13,252
Income taxes receivable -- 1,147
Deferred income taxes 7,884 19,172
-------- --------
Total current assets 127,684 159,999
Property, plant and equipment, net 96,256 121,143
Goodwill and other intangibles, net 185,417 196,532
Other assets 6,775 4,710
-------- --------
Total assets $416,132 $482,384
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 44
Renal Care Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
-------- --------
(In thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,109 $ 21,460
Accrued compensation 14,790 16,534
Due to third-party payors 15,886 20,541
Accrued expenses and other current liabilities 14,700 15,488
Income taxes payable 1,579 --
Current portion of long-term debt 10,742 367
-------- --------
Total current liabilities 77,806 74,390
Long-term debt, net of current portion 79,507 76,102
Deferred income taxes 7,970 12,872
Minority interest 5,169 8,706
-------- --------
Total liabilities 170,452 172,070
-------- --------
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;
43,995 and 44,764 shares issued and outstanding at
December 31, 1998 and 1999, respectively 440 448
Additional paid-in capital 183,817 199,982
Retained earnings 61,423 109,884
-------- --------
Total stockholders' equity 245,680 310,314
-------- --------
Total liabilities and stockholders' equity $416,132 $482,384
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 45
Renal Care Group, Inc.
Consolidated Income Statements
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
-------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C>
Net revenue $257,866 $420,694 $520,607
Operating costs and expenses:
Patient care costs 177,109 276,895 335,366
General and administrative expenses 26,279 39,953 48,330
Provision for doubtful accounts 8,022 13,074 13,878
Depreciation and amortization 11,436 21,293 26,425
Merger expenses 300 1,000 4,300
-------- -------- --------
Total operating costs and expenses 223,146 352,215 428,299
-------- -------- --------
Income from operations 34,720 68,479 92,308
Interest expense, net 1,695 5,493 5,038
-------- -------- --------
Income before income taxes and minority interest 33,025 62,986 87,270
Minority interest 955 3,492 7,768
-------- -------- --------
Income before income taxes 32,070 59,494 79,502
Provision for income taxes 11,913 22,092 31,041
-------- -------- --------
Net income $ 20,157 $ 37,402 48,461
======== ======== ========
Net income per share:
Basic $ 0.55 $ 0.86 $ 1.09
======== ======== ========
Diluted $ 0.52 $ 0.82 $ 1.04
======== ======== ========
Weighted average shares outstanding:
Basic 36,747 43,274 44,489
======== ======== ========
Diluted 38,779 45,835 46,460
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 46
Renal Care Group, Inc.
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 34,979 $350 $103,090 $ 3,864 $107,304
Issuance of common stock in
acquisitions 3,730 37 58,364 -- 58,401
Net income -- -- -- 20,157 20,157
Common stock issued and
related income tax benefit 495 5 2,601 -- 2,606
Equity acquired in business
combination 1,214 12 492 -- 504
------ ---- -------- -------- --------
Balance at December 31, 1997 40,418 404 164,547 24,021 188,972
Issuance of common stock in
acquisitions 56 1 1,126 -- 1,127
Net income -- -- -- 37,402 37,402
Common stock issued and
related income tax benefit 1,186 12 17,301 -- 17,313
Equity acquired in business
combination 2,335 23 843 -- 866
------ ---- -------- -------- --------
Balance at December 31, 1998 43,995 440 183,817 61,423 245,680
Issuance of common stock in
acquisitions 96 1 2,999 -- 3,000
Net income -- -- -- 48,461 48,461
Common stock issued and
related income tax benefit 673 7 13,166 -- 13,173
------ ---- -------- -------- --------
Balance at December 31, 1999 44,764 $448 $199,982 $109,884 $310,314
====== ==== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 47
Renal Care Group, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 20,157 $ 37,402 $ 48,461
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,436 21,293 26,425
(Gain) loss on sale of property and equipment (37) 327 362
Income applicable to minority interest 955 3,492 7,768
Distributions to minority shareholders (290) -- (4,231)
Deferred income taxes (1,340) 951 (6,386)
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable (13,156) (25,819) (16,389)
Inventories (1,798) (2,104) (3,341)
Prepaid expenses and other current assets (3,253) (2,510) (4,446)
Income taxes receivable -- -- (1,147)
Accounts payable 2,380 4,096 1,274
Accrued compensation 3,124 1,783 1,686
Due to third-party payors 310 5,833 4,655
Accrued expenses and other current liabilities (1,070) (976) 653
Income taxes payable (1,128) 6,555 5,621
--------- -------- --------
Net cash provided by operating activities 16,290 50,323 60,965
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 147 162 336
Purchases of property and equipment (29,539) (29,728) (44,057)
Cash paid for acquisitions, net of cash acquired (38,569) (57,694) (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 (1,359) (2,179) 2,285
--------- -------- --------
Net cash used in investing activities (73,867) (87,428) (58,594)
FINANCING ACTIVITIES
Net borrowings under line of credit 13,848 48,653 11,728
Payments on long-term debt (5,968) (12,025) (27,380)
Proceeds from issuance of long-term debt 7,434 468 1,872
Net proceeds from issuance of common stock 2,661 10,814 5,973
--------- -------- --------
Net cash provided by (used in) financing
activities 17,975 47,910 (7,807)
--------- -------- --------
(Decrease) increase in cash and cash equivalents (39,602) 10,805 (5,436)
Cash and cash equivalents, at beginning of year 48,740 9,138 19,943
--------- -------- --------
Cash and cash equivalents, at end of year $ 9,138 $ 19,943 $ 14,507
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 2,525 $ 5,711 $ 5,728
========= ======== ========
Income taxes $ 15,276 $ 14,402 $ 30,267
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Issuance of common stock in acquisitions $ 58,346 $ 1,127 $ 3,000
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF BUSINESS ACQUISITIONS:
Fair value of assets acquired $ 107,946 $ 70,258 $ 20,428
Liabilities assumed 11,031 11,437 270
Common stock issued 58,346 1,127 3,000
--------- -------- --------
Cash paid for acquisitions, net of cash acquired $ 38,569 $ 57,694 $ 17,158
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 48
Renal Care Group, Inc.
Notes to Consolidated Financial Statements
(In thousands, except per share data)
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 14,200 patients through 181 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 103 hospitals. The Company also operates a business providing
diabetic and wound care services.
On January 29, 1999, the Company merged with Dialysis Centers of America, Inc.
("DCA") in a business combination accounted for as a pooling-of-interests. DCA
became a wholly-owned subsidiary of the Company through the exchange of
approximately 3,127 shares of the Company's common stock for all of the
outstanding stock of DCA. The Company's consolidated financial statements
included herein give retroactive effect to this transaction and include the
combined operations of the Company and DCA for all periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The 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.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with original maturities of
three months or less to be cash equivalents. The Company places its cash in
financial institutions that are federally insured and limits the amount of
credit exposure with any one financial institution.
F-7
<PAGE> 49
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
51% 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 threatening
investigations involving allegations of potential wrongdoing. While no such
regulatory inquiries have been made, compliance with such laws and regulations
can be subject to future government review and interpretation as well as
significant regulatory action including fines, penalties, and exclusion from the
Medicare and Medicaid programs.
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
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 $10,117 and $18,793 at
December 31, 1998 and 1999, respectively.
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.
F-8
<PAGE> 50
Medicaid
Medicaid is a state administered program with reimbursements varying by state.
The Medicaid programs administered in each state in which the Company operates,
reimburse the Company predominantly on a prospective payment system for dialysis
services rendered.
Other
Other payments from patients, commercial insurers and other third-party payors
are received pursuant to a variety of reimbursement arrangements, which
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.
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 consolidated balance sheets for cash and
cash equivalents approximate fair value.
Accounts Receivable, Accounts Payable and Accrued Liabilities
The carrying amounts reported in the consolidated balance sheets for accounts
receivable, accounts payable, and accrued liabilities approximate fair value.
Accounts receivable are usually unsecured.
Long-Term Debt
Based upon the borrowing rates currently available to the Company, the carrying
amounts reported in the consolidated balance sheets for long-term debt
approximate fair value.
CONCENTRATION OF CREDIT RISKS
The administration of erythropoietin ("EPO") is beneficial in the treatment of
anemia, a medical complication frequently experienced by dialysis patients.
Revenue from the administration of EPO was 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.
F-9
<PAGE> 51
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.
3. BUSINESS ACQUISITIONS
1999 ACQUISITIONS
During 1999, the Company completed five acquisitions one of which was accounted
for as a pooling-of-interests and the remaining four which were accounted for
under the purchase method of accounting. All such transactions involved the
acquisition of entities that provided care to ESRD patients through owned
hemodialysis facilities or acute in-patient dialysis services.
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 DCA
MERGER) DCA COMBINED
-------- ------- --------
<S> <C> <C> <C>
1998
Net revenue $369,372 $51,322 $420,694
======== ======= ========
Income from operations $ 62,410 $ 6,069 $ 68,479
======== ======= ========
Net income $ 35,211 $ 2,191 $ 37,402
======== ======= ========
1997
Net revenue $214,009 $43,857 $257,866
======== ======= ========
Income from operations $ 32,141 $ 2,579 $ 34,720
======== ======= ========
Net income $ 19,978 $ 179 $ 20,157
======== ======= ========
</TABLE>
F-10
<PAGE> 52
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 96
--------
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 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. 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 $58,384 recorded. Goodwill
and other intangibles are being amortized on a straight-line basis over an
average of 35 years. The Company began recording the results of operations from
these acquired companies beginning with the effective date of each transaction.
The purchase price of 1998 acquisitions is summarized as follows:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Number of shares issued 56
--------
Estimated value of shares issued $ 1,127
Cash consideration 57,694
--------
Aggregate purchase price $ 58,821
========
</TABLE>
F-11
<PAGE> 53
1997 ACQUISITIONS
In 1997, the Company acquired and developed 42 facilities providing care to ESRD
patients, 19 programs providing acute hospital in-patient dialysis services and
a laboratory.
The following is a summary of acquisition activity:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Number of shares issued 3,727
-------
Estimated value of shares issued $58,346
Cash consideration 38,569
-------
Aggregate purchase price $96,915
=======
</TABLE>
The majority of these acquisitions were accounted for under the purchase method
and, accordingly, the assets and liabilities of the acquired entities were
recorded at their estimated fair values at the dates of acquisition. The
allocation of the purchase price resulted in goodwill and intangible assets of
$89,086. The results of operations of the acquisitions have been included in the
Company's 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 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 $ 327,193 $ 455,413 $ 524,867
=========== =========== ===========
Pro forma net income $ 26,327 $ 40,648 $ 48,784
=========== =========== ===========
Pro forma net income per share
Basic $ 0.62 $ 0.93 $ 1.09
=========== =========== ===========
Diluted $ 0.59 $ 0.88 $ 1.05
=========== =========== ===========
</TABLE>
The unaudited pro forma results of operations are not necessarily indicative of
what actually would have occurred if the acquisitions had been completed prior
to the beginning of the periods presented.
F-12
<PAGE> 54
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
--------- ---------
<S> <C> <C>
Medical equipment $ 56,603 $ 68,800
Computer software and equipment 16,846 30,791
Furniture and fixtures 13,481 15,153
Leasehold improvements 24,691 37,969
Buildings 14,051 14,801
Construction-in-progress 3,068 3,397
--------- ---------
128,740 170,911
Less accumulated depreciation (32,484) (49,768)
--------- ---------
$ 96,256 $ 121,143
========= =========
</TABLE>
Depreciation expense was $8,401, $14,861 and $18,919 for the years ended
December 31, 1997, 1998 and 1999, respectively.
5. LONG-TERM DEBT
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 --
Equipment note payable 2,230 2,120
Other 655 121
------- -------
90,249 76,469
Less current portion 10,742 367
------- -------
$79,507 $76,102
======= =======
</TABLE>
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.
F-13
<PAGE> 55
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.
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 term 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 $ 367
2001 392
2002 489
2003 74,627
2004 304
Thereafter 290
--------
$ 76,469
========
</TABLE>
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 12,215 $ 19,563 $ 35,065
State and local 1,038 1,578 2,362
-------- -------- --------
13,253 21,141 37,427
-------- -------- --------
Deferred:
Federal (1,058) 878 (6,120)
State and local (282) 73 (266)
-------- -------- --------
(1,340) 951 (6,386)
-------- -------- --------
Provision for income taxes $ 11,913 $ 22,092 $ 31,041
======== ======== ========
</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.
F-14
<PAGE> 56
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 5,253 14,381
Accrued vacation and other accrued liabilities 2,631 4,784
Other -- 7
Less: Valuation allowance (1,824) (2,032)
-------- --------
7,884 19,172
-------- --------
Deferred tax liabilities:
Depreciation 3,371 5,136
Cash to accrual adjustments (Section 481) 616 434
Amortization 3,541 6,735
Investments in partnerships 442 567
-------- --------
7,970 12,872
-------- --------
Net deferred tax (liability) asset $ (86) $ 6,300
======== ========
</TABLE>
The following is a reconciliation of the statutory federal and state income tax
rates to the effective rates as a percentage of income before provision for
income taxes as reported in the financial statements:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
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 1.5 (0.1) 2.3
Increase in valuation allowances -- 1.6 0.3
Other 0.6 0.6 1.4
---- ---- ----
Effective income tax rate 37.1% 37.1% 39.0%
==== ==== ====
</TABLE>
7. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
As of December 31, 1999, the Company had five 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 to 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 each.
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 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.
F-15
<PAGE> 57
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 PRICE EXERCISE
STANDING PLAN PLAN PLAN PLAN PLAN RANGE PRICE
-------- -------- -------- ------ ---- --------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 1,979 -- 1,962 35 261 -- $0.11 - 13.55 $ 7.88
Granted -- 1,880 37 -- 6 13.33 - 25.58 15.11
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 0.11 - 25.58 10.39
Granted -- 2,128 -- -- 11 20.00 - 29.50 22.06
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 0.11 - 29.50 14.33
Granted 536 939 235 -- -- 23 16.63 - 28.50 18.08
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 $3.33 - 29.50 $ 15.19
===== ===== ===== ==== ==== ====
Available for Grant at
December 31, 1999 -- 561 173 10 463 185
===== ===== ===== ==== ==== ====
Exercisable at
December 31, 1999 1,295 188 2,165 12 23 34 $ 12.68
===== ===== ===== ==== ==== ==== ========
Excercisable at
December 31, 1998 995 -- 1,368 55 8 11
===== ===== ===== ==== ==== ====
Exercisable at
December 31, 1997 1,158 -- 855 35 126 3
===== ===== ===== ==== ==== ====
</TABLE>
The weighted-average fair value of options granted during 1997, 1998 and 1999 is
$6.10, $8.89 and $7.86, respectively.
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
$10.78 - $14.00 1,250 7.09 $ 13.26 700 $ 13.31
$14.06 - $18.25 2,751 8.75 $ 17.16 786 $ 16.91
$20.00 - $29.50 1,974 8.40 $ 22.22 772 $ 22.26
--------------- ----- ---- ------- ----- -------
$ 3.33 - $29.50 7,719 7.75 $ 15.19 3,717 $ 12.68
=============== ===== ==== ======= ===== =======
</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>
F-16
<PAGE> 58
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the option's vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net income $20,157 $37,402 $48,461
Pro forma compensation expense from stock options,
net of taxes 1,643 4,388 5,954
------- ------- -------
Pro forma net income $18,514 $33,014 $42,507
======= ======= =======
Pro forma net income per share
Basic $ 0.50 $ 0.76 $ 0.95
======= ======= =======
Diluted $ 0.48 $ 0.72 $ 0.91
======= ======= =======
</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.
8. OPERATING LEASES
The Company rents office and medical facilities under lease agreements that are
classified as operating leases for financial statement purposes. At December 31,
1999, future minimum rental payments under noncancelable operating leases with
terms of one year or more consist of the following:
<TABLE>
<S> <C>
2000 $12,827
2001 12,178
2002 11,064
2003 9,787
2004 9,145
Thereafter 26,194
-------
$81,195
=======
</TABLE>
Rent expense related to operating leases amounted to $7,692, $11,966 and $16,009
for the years ending December 31, 1997, 1998 and 1999, respectively.
9. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Company has qualified defined contribution plans covering substantially all
employees which permit participants to make voluntary contributions. The Company
pays all general and administrative expenses of the plans and makes matching
contributions on behalf of the employees. The Company made contributions
relating to these plans totaling $946, $1,147 and $1,473 for the years ended
December 31, 1997, 1998 and 1999, respectively.
F-17
<PAGE> 59
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 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 $20,157 $37,402 $48,461
Denominator:
Denominator for basic net income per
share-weighted-average shares 36,747 43,274 44,489
Effect of dilutive securities:
Stock options 1,538 2,040 1,504
Warrants 494 521 467
------- ------- -------
Denominator for diluted net income
per share-adjusted weighted-average
shares and assumed conversions 38,779 45,835 46,460
======= ======= =======
Basic net income per share $ 0.55 $ 0.86 $ 1.09
======= ======= =======
Diluted net income per share $ 0.52 $ 0.82 $ 1.04
======= ======= =======
</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 consolidated financial position or results of
operations.
F-18
<PAGE> 60
12. SUBSEQUENT EVENT
On February 24, 2000, the Company announced the signing of a definitive
agreement to merge with Renal Disease Management by Physicians, Inc. ("RDM").
RDM owns and operates six dialysis centers in Northeast Ohio and Western
Pennsylvania. The Company expects to account for the transaction as a
pooling-of-interests, and as such the Company's consolidated financial
statements, presented in future reports, will be restated to include the
accounts and results of operations of RDM.
The following unaudited data reflect the results of operations as if the
combination had been consummated as of the date of the consolidated financial
statements. The unaudited data may not be representative of future results and
do not reflect any changes in the operations of either the Company or RDM that
may result from the combination of their operations.
<TABLE>
<CAPTION>
(UNAUDITED)
1997 1998 1999
---------- --------- ---------
<S> <C> <C> <C>
Pro forma net revenue $ 275,294 $ 441,860 $ 543,358
========== ========= =========
Pro forma net income $ 21,298 $ 36,680 $ 48,725
========== ========= =========
Pro forma net income per share
Basic $ 0.57 $ 0.84 $ 1.08
========== ========= =========
Diluted $ 0.54 $ 0.79 $ 1.04
========== ========= =========
</TABLE>
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
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 operating revenue $91,542 $102,549 $110,357 $116,246
Operating expenses 73,660 80,442 85,820 90,000
Depreciation and
amortization 4,613 5,218 5,497 5,965
Merger expenses 700 300 -- --
------- -------- -------- --------
Income from operations 12,569 16,589 19,040 20,281
Interest expense, net 1,246 1,436 1,557 1,254
Minority interest 547 608 1,045 1,292
------- -------- -------- --------
Income before income taxes 10,776 14,545 16,438 17,735
Income taxes 4,114 5,438 6,126 6,414
------- -------- -------- --------
Net income $ 6,662 $ 9,107 $ 10,312 $ 11,321
======= ======== ======== ========
Net income per share:
Basic $ 0.16 $ 0.21 $ 0.24 $ 0.26
======= ======== ======== ========
Diluted $ 0.15 $ 0.20 $ 0.22 $ 0.24
======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net operating revenue $120,861 $128,496 $133,484 $137,766
Operating expenses 92,742 98,303 101,818 104,711
Depreciation and
amortization 6,163 6,527 6,798 6,937
Merger expenses 4,300 -- -- --
-------- -------- -------- --------
Income from operations 17,656 23,666 24,868 26,118
Interest expense, net 1,405 1,288 1,284 1,061
Minority interest 1,500 1,744 2,350 2,174
-------- -------- -------- --------
Income before income taxes 14,751 20,634 21,234 22,883
Income taxes 6,644 7,738 7,963 8,696
-------- -------- -------- --------
Net income $ 8,107 $ 12,896 $ 13,271 $ 14,187
======== ======== ======== ========
Net income per share:
Basic $ 0.18 $ 0.29 $ 0.30 $ 0.32
======= ======== ======== ========
Diluted $ 0.17 $ 0.28 $ 0.29 $ 0.31
======= ======== ======== ========
</TABLE>
F-19
<PAGE> 61
Report of Independent Auditors
The Board of Directors
Renal Care Group, Inc.
We have audited the consolidated financial statements of Renal Care Group, Inc.
as of December 31, 1998 and 1999, and for each of the three years in the period
ended December 31, 1999, and have issued our report thereon dated February 24,
2000. Our audits also included the financial statement schedule included in this
Form 10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
February 24, 2000
F-20
<PAGE> 62
Schedule II
Renal Care Group, Inc.
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 $ 8,379 $3,949 $ 8,022 $(1,306) $19,044
======= ====== ======= ======= =======
Year ended
December 31, 1998 $19,044 $2,321 $13,074 $(3,713) $30,726
======= ====== ======= ======= =======
Year ended
December 31, 1999 $30,726 $ 283 $13,878 $(4,890) $39,997
======= ====== ======= ======= =======
</TABLE>
F-21
<PAGE> 63
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Nashville, State of Tennessee, on the 28th day of March, 2000.
RENAL CARE GROUP, INC.
By: Sam A. Brooks, Jr.
---------------------------------------
Sam A. Brooks, Jr.
Chairman of the Board, President and
Chief Executive Officer
<PAGE> 64
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Sam A. Brooks, Jr. and R. Dirk Allison
and either of them (with full power in each to act alone) as true and lawful
attorneys-in-fact with full power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Annual Report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Sam A. Brooks, Jr.
- --------------------------------- Chairman of the Board, March 28, 2000
Sam A. Brooks, Jr. President, Chief Executive
Officer and Director
(Principal Executive Officer)
/s/ R. Dirk Allison
- --------------------------------- Executive Vice President, March 28, 2000
R. Dirk Allison Chief Financial Officer
Treasurer (Principal Financial
and Accounting Officer)
/s/ Joseph C. Hutts
- --------------------------------- Director March 28, 2000
Joseph C. Hutts
/s/ Harry R. Jacobson, M.D.
- --------------------------------- Director March 28, 2000
Harry R. Jacobson, M.D.
/s/ Thomas A. Lowery, M.D.
- --------------------------------- Director March 28, 2000
Thomas A. Lowery, M.D.
/s/ John D. Bower, M.D.
- --------------------------------- Director March 28, 2000
John D. Bower, M.D.
/s/ Stephen D. McMurray, M.D.
- --------------------------------- Director March 28, 2000
Stephen D. McMurray, M.D.
/s/ W. Tom Meredith, M.D.
- --------------------------------- Director March 28, 2000
W. Tom Meredith, M.D.
/s/ Kenneth E. Johnson, Jr., M.D.
- --------------------------------- Director March 28, 2000
Kenneth E. Johnson, Jr., M.D.
/s/ William Lapham
- --------------------------------- Director March 28, 2000
William Lapham
</TABLE>
<PAGE> 65
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company (1)
3.1.2 Certificate of Amendment of Certificate of Incorporation of the Company
(2)
3.1.3 Certificate of Designation, Preferences, and Rights of Series A Junior
Participating Preferred Stock of the Company (2)
3.1.4 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Company (15)
3.2 Amended and Restated Bylaws of the Company (1)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated
Certificate of Incorporation and Bylaws of the Company defining rights
of holders of Common Stock of the Company (1)
4.2 Specimen stock certificate for the Common Stock of the Company (1)
4.3 Shareholder Rights Protection Agreement, dated May 2, 1997 between the
Company and First Union National Bank of North Carolina, as Rights
Agent (3)
10.1 Employment Agreement, dated January 15, 1998, between the Company and
Sam A. Brooks (4)*
10.2 Employment Agreement, dated October 15, 1999, between the Company and
R. Dirk Allison.*
10.3 Employment Agreement, dated January 15, 1998, between the Company and
Raymond Hakim, M.D. (5)*
10.4 Employment Agreement, dated February 12, 1996, between the Company and
Anne N. Bower (6)*
10.5 Medical Director Services Agreement, dated February 12, 1996, between
the Company and Kansas Nephrology Physicians, P.A. (6)
10.6 Medical Director Services Agreement, dated February 12, 1996, between
the Company and Indiana Dialysis Management, P.C. (6)
10.7 Medical Director Services Agreement, dated February 12, 1996, between
the Company and Tyler Dialysis & Transplant Associates, P.A. (6)
10.8 Lease Agreement, dated February 5, 1996, between the Company and MEL,
Inc. relating to approximately 20,000 square feet of space (6)
10.9 Lease Agreement, dated February 12, 1996, among the Company and Thomas
A. Lowery, M.D., James R. Cotton, M.D., Roy D. Gerard, M.D. and Kevin
A. Curran, M.D., relating to property in Carthage, Texas (6)
10.10 Lease Agreement, dated February 12, 1996, among the Company and Thomas
A. Lowery, M.D., James R. Cotton, M.D., Roy D. Gerard, M.D., and Kevin
A. Curran, M.D., relating to property in Tyler, Texas (6)
10.11 Sublease Agreement between M-W-R Investment and Kansas Nephrology
Associates, P.A. dated February 1, 1990, to be assumed by the Company,
and related Lease Agreement between Dodge City Medical Center Building,
Inc. and M-W-R Investment (1)
10.12 Sublease Agreement, dated February 12, 1996, with Tyler Nephrology
Associates, Inc. (6)
10.13 Dialysis Center Management Agreement, dated May 11, 1994, between Renal
Care Group, Inc. (of Tennessee) and Vanderbilt University (1)
<PAGE> 66
10.14 1996 Stock Option Plan for Outside Directors (1)*
10.15 Fourth Amended and Restated 1996 Stock Incentive Plan (7)*
10.16 Amended and Restated Employee Stock Purchase Plan (2)*
10.17 Agreement between the Company and Healthcare Suppliers, Inc. dated
December 7, 1995 (1)
10.18 Chief Medical Officer Agreement, dated February 12, 1996, between the
Company and John D. Bower, M.D.(8)
10.19 Medical Director Services Agreement, dated September 30, 1996, between
the Company and a group of individual physicians (8)
10.20 Employment Agreement, dated January 15, 1998, between the Company and
Gary Brukardt (4)*
10.21 First Amended and Restated Loan Agreement, dated as of August 4, 1997,
among the Company, its subsidiaries and NationsBank of Tennessee,
N.A. (2)
10.22 Stock Option Agreement between the Company and Sam A. Brooks (2)*
10.23 Stock Option Agreement between the Company and Ronald Hinds (2)*
10.24 Stock Option Agreement between the Company and Gary Brukardt (2)*
10.25 Asset Purchase Agreement with an effective date of February 1, 1997
among the Company, RCG Indiana, LLC, Eastern Indiana Kidney Center,
Indiana Kidney Center, Indiana Kidney Center South, LLC, St. Vincent
Dialysis Center, Saint Joseph Dialysis Center and Indiana Dialysis
Services PC and Community Hospitals of Indiana, Inc., Seton Health
Corporation of Central Indiana, Inc., Reid Hospital & Health Care
Services, Inc., and Saint Joseph Hospital and Health Care Center of
Kokomo, Indiana, Inc. and Indiana Dialysis Services, PC, Reid Hospital
Physicians, Greenwood Dialysis Services, PC and certain individuals
named on the signature pages thereto and Indiana Nephrology & Internal
Medicine, P.C. (9)
10.26 Stock Purchase Agreement, dated November 4, 1997 by and among the
Company, Laidlaw, Inc., and STAT Healthcare, Inc. (10)
10.27 Restricted Stock Award Agreement between the Company and Harry R.
Jacobson, M.D. (4)*
10.28 Restricted Stock Award Agreement between the Company and Sam A. Brooks
(4)*
10.29 Restricted Stock Award Agreement between the Company and Ronald Hinds
(4)*
10.30 Restricted Stock Award Agreement between the Company and Gary Brukardt
(4)*
10.31 Restricted Stock Award Agreement between the Company and Raymond Hakim,
M.D. (4)*
10.32 Restricted Stock Award Agreement between the Company and Thomas Lowery,
M.D. (4)*
10.33 Restricted Stock Award Agreement between the Company and Stephen D.
McMurray, M.D. (4)*
10.34 Stock Option Agreement between the Company and Sam A. Brooks (11)*
10.35 Stock Option Agreement between the Company and Gary A. Brukardt (11)*
10.36 Stock Option Agreement between the Company and Raymond Hakim, M.D.
(11)*
10.37 Stock Option Agreement between the Company and Ronald Hinds (11)*
10.38 Stock Option Agreement between the Company and Joseph C. Hutts (11)*
10.39 Stock Option Agreement between the Company and Harry R. Jacobson, M.D.
(11)*
10.40 Agreement and Plan of Merger, dated as of January 12, 1999, by and
among Renal Care Group, Inc., DCA Merger Corporation, Dialysis Centers
of America, Inc. and the Owners described therein. (12)
<PAGE> 67
10.41 Amendment #2 dated March 15, 2000 to Agreement No. 980202, between
Renal Care Group, Inc. and Amgen Inc. (The Company has requested
confidential treatment of certain portions of this Exhibit.)
10.42 Restricted Stock Award Agreement between the Company and Sam A. Brooks
(13)*
10.43 Restricted Stock Award Agreement between the Company and Harry R.
Jacobson (13)*
10.44 Restricted Stock Award Agreement between the Company and Ronald Hinds
(13)*
10.45 Restricted Stock Award Agreement between the Company and Stephen D.
McMurray (13)*
10.46 Renal Care Group, Inc. 1999 Long-Term Incentive Plan (14)*
10.47 Second Amendment to First Amended and Restated Loan Agreement, dated as
of June 23, 1999, among the Company, First American National Bank,
First Union National Bank, and NationsBank, N.A., SunTrust Bank,
Nashville, N.A., AmSouth Bank, and NorWest Bank Arizona, N.A. (15)
10.48 Stock Option Agreement between the Company and Sam A. Brooks (16)*
10.49 Stock Option Agreement between the Company and Gary A. Brukardt (16)*
10.50 Stock Option Agreement between the Company and Raymond Hakim, M.D.
(16)*
10.51 Stock Option Agreement between the Company and Ronald Hinds (16)*
10.52 Stock Option Agreement between the Company and Joseph C. Hutts (16)*
10.53 Stock Option Agreement between the Company and Harry R. Jacobson, M.D.
(16)*
10.54 Stock Option Agreement between the Company and William Lapham (16)*
10.55 Stock Option Agreement between the Company and R. Dirk Allison*
21.1 List of subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (contained on the signature page of this report)
27.1 Financial Data Schedule for the year ended December 31, 1999
- ------------
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 333-80221) effective February 6, 1996.
(2) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1997 (Commission File No. 0-27640).
(3) Incorporated by reference to the Company's Current Report on Form 8-K
filed May 5, 1997 (Commission File No. 0-27640).
(4) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1997 (Commission File No. 0-27640).
(5) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1998 (Commission File No. 0-27640).
(6) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1996 (Commission File No. 0-27640).
(7) Incorporated by reference to Appendix A to the Company's definitive
Proxy Statement filed April 27, 1998 relating to the 1998 Annual
Meeting of Stockholders (Commission File No. 0-27640).
(8) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Reg. No. 333-13813) effective October 30, 1996.
(9) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1996 (Commission File No. 0-27640).
<PAGE> 68
(10) Incorporated by reference to the Company's Current Report on Form 8-K
filed December 16, 1997 (Commission File No. 0-27640).
(11) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1998 (Commission File No. 0-27640).
(12) Incorporated by reference to the Company's Current Report on Form 8-K
filed February 10, 1999 (Commission File No. 0-27640).
(13) Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1999 (Commission File No. 0-27640).
(14) Incorporated by reference to Appendix A to the Company's definitive
Proxy Statement filed April 27, 1999 relating to the 1999 Annual
Meeting of Stockholders (Commission File No. 0-27640).
(15) Incorporated by reference to the Company's Form 10-Q for the quarter
ended June 30, 1999 (Commission File No. 0-27640).
(16) Incorporated by reference to the Company's Form 10-Q for the quarter
ended September 30, 1999 (Commission File No. 0-27640).
* Management contract or executive compensation plan or arrangement.
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of October 15, 1999, by and
between RENAL CARE GROUP, INC., a Delaware corporation (the "Company"), and R.
DIRK ALLISON (hereinafter "Employee").
WITNESSETH:
WHEREAS, the Company desires to employ Employee, and Employee desires
to be employed by the Company, on the terms and conditions contained herein; and
NOW, THEREFORE, in consideration of the compensation payable to
Employee by the Company pursuant to this Agreement, and the mutual promises,
covenants, representations and warranties contained herein, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do agree as
follows:
1. Employment.
Effective as of October 18, 1999 (the "Effective Date"), the
Company employs Employee and Employee accepts employment with the Company under
the terms of this Agreement.
2. Term.
This Agreement shall begin on the Effective Date, and shall
continue for an initial period beginning on the Effective Date and ending on
December 31, 2002 (the "Initial Period"), subject to earlier termination by
Employee or the Company as hereinafter provided. Unless one party gives the
other notice of non-renewal not less than sixty (60) days prior to the
expiration of the Initial Period or an additional term, this Agreement shall
renew for additional terms of twelve (12) months each, subject to earlier
termination as hereinafter provided, on the same terms and conditions (subject
to mutually agreeable modifications, if any).
3. Compensation and Benefits.
(a) Base Compensation: The Company shall pay Employee a base
salary at an annual rate of (i) Two Hundred Fifty Thousand Dollars ($250,000)
from the Effective Date through March 31, 2001 (the "Base Compensation"). Such
Base Compensation may be adjusted as provided herein. The Base Compensation is
payable according to the pay periods of the Company as may be in effect from
time to time. Such payments shall be prorated for periods less than a full pay
period. The Base Compensation shall be subject to withholding for federal, state
and local payroll and all other taxes or withholdings applicable to Employee.
Any increases of the Base Compensation shall be at the discretion of the
Company, provided that any decreases to the then current Base Compensation shall
require the consent of Employee. The Base Compensation and target percentage for
the Annual Bonus (as defined below) will be reviewed annually by the
Compensation Committee of the Company.
(b) Benefits: During the term of this Agreement, Employee
shall also be entitled to participate in the insurance and other fringe benefits
made available generally to
<PAGE> 2
similar employees of the Company, as such benefits may be determined from time
to time by the Company, provided that Employee shall have at least four (4)
weeks of paid vacation time. In addition, during the term of this Agreement, the
Company will provide term life insurance coverage of One Million Dollars
($1,000,000) on Employee's life with the death benefit to be payable to
Employee's estate or as otherwise directed in writing by Employee.
(c) Bonuses: In addition to the Base Compensation payable to
Employee pursuant to Section 3(a) above, Employee is entitled to a bonus of
Twenty-Five Thousand Dollars ($25,000) for services from the Effective Date
through December 31, 1999, which bonus will be paid when the Company pays
bonuses to other employees with respect to the year ended December 31, 1999. In
addition to the Base Compensation, Employee will be entitled to an annual bonus
for periods after January 1, 2000, with a target amount equal to not less than
fifty percent (50%) of the Base Compensation for such year based on the
Company's and Employee's achievement of performance goals reasonably established
by the Compensation Committee of the Company and, in the case of performance
goals established specifically for Employee, agreed to by Employee (the "Annual
Bonus"). The Company agrees that the Company-related performance goals for
Employee shall be substantially similar to those established for other members
of senior management.
(d) Expenses: The Company shall reimburse Employee for any and
all expenses reasonably incurred by employee incident to the performance of the
duties imposed upon Employee hereunder.
4. Duties, Extent of Services.
Employee is initially engaged as an employee of the Company,
and Employee shall be engaged as Executive Vice President and Chief Financial
Officer of the Company effective upon the effective date of the resignation of
Ronald Hinds from such positions. As Executive Vice President and Chief
Financial Officer, Employee shall perform such duties and responsibilities as
are typically incident thereto and shall perform in a faithful and competent
manner such additional duties as may be reasonably assigned from time to time by
the Company. Throughout the term of this Agreement, Employee shall report to the
Chairman or Chief Executive Officer of the Company. Such duties shall be
performed on a full-time basis for the Company at the Company's offices in
Nashville, Tennessee. Employee may be required, from time to time, to perform
his duties temporarily hereunder at such other place or places as the Company
shall reasonably require, provided that such period does not exceed thirty (30)
consecutive days without Employee's consent and that during any such period
Employee is able to return to Nashville, Tennessee at the Company's expense for
weekends.
Employee shall devote all of Employee's business time,
attention, knowledge, and skill solely to the business and interest of the
Company, and the Company shall be entitled to all the benefits, profits, and
other issues arising from, or incident to, all work, services, and advice of
Employee.
5. Termination.
This Agreement may be terminated by the parties in the manners
specified below:
-2-
<PAGE> 3
(a) Termination without Cause. Either the Company or the
employee may terminate Employee's employment under this Agreement at any time
for any reason upon thirty (30) day's prior written notice to the other party.
(b) Termination for Cause. The Company may terminate this
Agreement on written notice at any time for "Cause". For purposes of this
Agreement, "Cause" shall mean: (i) Employee is convicted of, pleads guilty to,
or confesses to a felony or any crime involving any act of dishonesty, fraud,
misappropriation, embezzlement or moral turpitude, in which event the Company
may terminate this Agreement immediately, (ii) the misconduct or gross
negligence by Employee in connection with the performance of Employee's duties
hereunder, (iii) the engaging by Employee in any fraudulent, disloyal or
unprofessional conduct which results in an injury to the Company, its affiliates
or any of its or their centers, monetarily or otherwise, (iv) Employee breaches
any provision of Section 6 of this Agreement, or (v) the material failure by
Employee otherwise substantially to perform his duties with the Company (other
than any such failure resulting from the disability of Employee under Section
5(d)(i)) or the breach of any provision of this Agreement other than Section 6.
In the event of any termination for Cause pursuant to the provisions of (ii),
(iii), (iv) or (v) of this subsection, the Company shall give Employee written
notice prior to such termination detailing the specific acts, actions, failures,
or events upon which the forecast termination is based, and Employee shall have
fifteen (15) days after such written notice to cease such actions or otherwise
correct any such failure or breach. If Employee does not cease such action or
otherwise correct such failure or breach within such fifteen (15)-day time
period, or having once received such written notice and ceased such actions or
corrected such failure or breach, Employee at any time thereafter again so acts,
fails or breaches, the Company may terminate this Agreement immediately.
(c) Termination for Good Reason. Employee may terminate this
Agreement on written notice at any time for "Good Reason". For purposes of this
Agreement, "Good Reason" shall mean: (i) without the express written consent of
Employee, a material diminution of his position, duties, responsibilities and
status with the Company as in effect as of the Effective Date, a change in
Employee's reporting responsibilities, a material reduction of Employee's titles
or offices as in effect on the date of this Agreement, or the removal of
Employee from, or failure to re-elect Employee to, any position referred to in
Section 4 of this Agreement, except in connection with promotions to higher
office or except in connection with the termination of this Agreement for Cause;
(ii) the reduction of the Base Compensation; (iii) the requirement that Employee
relocate outside of the Nashville, Tennessee metropolitan area; (iv) the
material breach by the Company of any material provision of this Agreement,
which breach continues uncorrected and uncured for fifteen (15) days after
Employee gives notice of such breach to the Company; or (v) the termination of
this Agreement by written notice from Employee to the Company during the thirty
(30) day period immediately following the first anniversary of a Change in
Control (as defined below).
(d) Involuntary Termination. The employment of Employee
hereunder shall be automatically terminated by the death or disability of
Employee as outlined below.
(i) Disability. The Company may terminate this Agreement
at the time Employee shall have been Disabled for a continuous period of six (6)
months during any continuous twelve (12) month period. For purposes of this
Paragraph 5(d)(i), the term "Disabled" shall mean Employee's inability to
perform the essential functions of his duties, with or without reasonable
accommodation. During Employee's six month period of Disability, the
-3-
<PAGE> 4
Company agrees to continue to pay Employee's Base Compensation (less regular
withholdings for payroll or other taxes and other required or proper items, and
less proceeds from all disability insurance policies or plans provided or made
available by the Company). In the event of a termination of Employee on account
of Disability, the Company shall be obligated to pay Employee's Base
Compensation for a period of six (6) months following the effective date of
termination (less regular withholdings for payroll or other taxes and other
required or proper times, and less proceeds from all disability insurance
policies or plans provided or made available by the Company). In addition, any
provisions in the relevant stock option agreements notwithstanding, all
outstanding stock options granted to Employee by the Company shall vest
immediately upon termination pursuant to this Section 5(d)(i).
(ii) Death. In the event Employee shall die during the
term of this Agreement, this Agreement shall terminate and Employee's estate
shall receive the remainder of the Base Compensation set forth in Section 3(a)
hereof accrued to the last day of the month in which death occurs. In addition,
any provisions in the relevant stock option agreements notwithstanding, all
outstanding stock options granted to Employee by the Company shall vest
immediately upon termination pursuant to this Section 5(d)(i).
(e) Post-Termination Compensation. Except as provided in
Section 5(d) above, upon termination of this Agreement, the Company shall be
relieved of all of its obligations hereunder notwithstanding any period of time
remaining under the initial or any renewal term, subject to the following:
(i) Termination without Cause or with Good Reason. If the
Company terminates Employee's employment hereunder without Cause under Section
5(a) above or if Employee terminates Employee's employment hereunder with Good
Reason under Section 5(c) above, then Employee shall, after the effective date
of such termination, as Employee's sole and exclusive remedy, receive the Base
Compensation (as then in effect) for a period of twelve (12) months after the
termination date plus any unpaid bonus payable for the most recently completed
calendar year plus a portion of Employee's Annual Bonus equal to the target
percentage of Base Compensation (as then in effect) multiplied by a fraction,
the numerator of which is the number of months (or portions thereof) that have
elapsed in the then-current calendar year and the denominator of which is twelve
(12). If the Employee's employment is terminated by the Company without Cause or
by Employee for good reason, Employee shall be under no duty to seek or accept
other employment; but if he shall do so, any compensation he shall receive
therefrom shall not diminish the Company's obligation to make payments required
to the Employee hereunder.
(ii) Termination without Good Reason. In the event that
Employee terminates his or her employment under Section 5(a) above, the
Company's obligation to pay Employee's Base Compensation shall terminate as of
the date of termination.
(iii) Termination for Cause. In the event that the Company
terminates Employee's employment hereunder with Cause under Section 5(b) above,
then Employee shall, after the effective date of such termination, receive the
Base Compensation (as then in effect) for a period of one (1) month after the
termination date.
(iv) Termination following Change in Control. If, within
twelve (12) months following a Change in Control, either (A) the Company
terminates the employment
-4-
<PAGE> 5
of Employee hereunder without Cause under Section 5(a) above or (B) Employee
terminates his employment for Good Reason under Section 5(c) above (except for a
termination under clause (v) of Section 5(c)), then, in lieu of any other
compensation that may be specified herein, the Company shall pay Employee an
amount equal to (i) the Base Compensation (as then in effect) plus an amount of
Annual Bonus equal to the target percentage of Base Compensation (as then in
effect) multiplied by (ii) three (3). If Employee terminates his employment for
Good Reason under clause (v) of Section 5(c) above, then, in lieu of any other
compensation that may be specified herein, the Company shall pay Employee an
amount equal to (x) the Base Compensation (as then in effect) plus an amount of
Annual Bonus equal to the target percentage of Base Compensation (as then in
effect) multiplied by (y) two (2). The Company will make any payment due under
this clause (iv) in a single lump-sum payment not later than thirty (30) days
after termination. In the event any payment obligation under this Section 5(e)
arises, no compensation received from other employment (or otherwise) shall
reduce the Company's obligation to make the payment(s) described in this
paragraph.
(f) Change in Control. "Change in Control" means a change in
control of the Company of a nature that would be required to be reported
(assuming such event has not been "previously reported") in response to Item
1(a) of a Current Report on Form 8-K pursuant to Section 13 or 15(d) of the
Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, a
Change in Control shall also be deemed to have occurred at such time as:
(i) Any "person" within the meaning of Section 14(d) of
the Exchange Act, other than the Company; a subsidiary, or any employee benefit
plan(s) sponsored by the Company or any Subsidiary, is or has become the
"beneficial owner," as defined in rule l3d-3 under the Exchange Act, directly or
indirectly, of 25% or more of the combined voting power of the outstanding
securities of the Company ordinarily having the right to vote at the election of
directors, or
(ii) Individuals who constitute the Board immediately
prior to any meeting of stockholders (the "Incumbent Board") have ceased for any
reason to constitute at least a majority thereof, provided that any person
becoming a director whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least three-quarters (3/4) of the
directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named as
a nominee for director without objection to such nomination) shall be, for
purposes of this Agreement, considered as though such person were a member of
the Incumbent Board; or
(iii) Upon approval by the Company's stockholders of a
reorganization, merger, share exchange or consolidation, other than one with
respect to which those persons who were the beneficial owners, immediately prior
to such reorganization, merger, share exchange or consolidation, of outstanding
securities of the Company ordinarily having the right to vote in the election of
directors own, immediately after such transaction, more than 75% of the
outstanding securities of the resulting corporation ordinarily having the right
to vote in the election of directors; or
(iv) Upon approval by the Company's stockholders of a
complete liquidation and dissolution of the Company or the sale or other
disposition of all or substantially all of the assets of the Company other than
to a Subsidiary.
-5-
<PAGE> 6
6. Nondisclosure, Confidentiality; Competition.
(a) Subject to Section 6(f) below, Employee agrees that,
during the term of this Agreement and of Employee's employment by the Company,
and for a period twelve (12) months after the termination of Employee's
employment with the Company, Employee will not in any manner, directly or
indirectly, by himself or in conjunction with any other person, (i) conduct any
of the activities or perform any of the responsibilities or duties that Employee
provided the Company during his employment by the Company for any business
entity that is competitive with the business of the Company or its affiliates or
(ii) establish or own any financial, beneficial or other interest in (other than
an interest consisting of less than one percent (1%) of a class of publicly
traded security), make any loan to or for the benefit of, or render any
managerial, marketing or other business advice, to any entity that is then
conducting activities that are competitive with those of the business of the
Company or its affiliates, in either case within a geographic territory defined
as the greater of (I) a seventy-five (75) mile radius of any renal dialysis
center, unit or facility owned or operated by the Company or an affiliate of the
Company (an "RCG Center"), or (II) the geographic area, as narrowly construed as
is practicable, from which the Company received patients at each of the RCG
Centers. For purposes of this Section, the "business of the Company or its
affiliates" shall mean owning or operating a renal dialysis center, unit or
facility, and providing practice management services to nephrologists.
(b) Subject to Section 6(f) below, Employee further agrees
that, for a period of three (3) years after the termination of Employee's
employment with the Company, Employee will keep confidential and not directly
divulge, or allow through a lack of reasonable care to be divulged to anyone, or
use or otherwise appropriate for Employee's own benefit or for the benefit of
others, any knowledge or information of a confidential nature with respect to
the Company's and its affiliates' current business, the Company itself, or any
of its affiliates, including all trade secrets, pricing information, marketing
information or technical information (hereinafter referred to as the
"Confidential Data"), except for (i) a disclosure that is required by law; or
(ii) information that has been made generally available to the public by the act
of one who has the right to disclose such information; or (iii) information that
has become part of the public domain through no fault of the Employee; and (iv)
was known to the Employee prior to June 1995. Employee hereby acknowledges and
agrees that the prohibitions against disclosure of Confidential Data recited
herein are in addition to, and not in lieu of, any rights or remedies which the
Company may have available pursuant to the laws of any jurisdiction or at common
law to prevent the disclosure of confidential information, and the enforcement
by the Company of its rights and remedies pursuant hereto shall not be construed
as a waiver of any other rights or available remedies which the Company may
possess in law or equity. Employee acknowledges that the Company has taken
reasonable and appropriate steps to ensure the confidentiality and
non-disclosure of all such Confidential Data. For purposes of this Section the
Company's and its affiliates' "current business" shall mean owning or opening a
renal dialysis center, unit or facility.
(c) Subject to Section 6(f) below, Employee further agrees
that, for a period of three (3) years after the termination of Employee's
employment with the Company, Employee will not, for his own benefit or the
benefit of others, solicit any person or entity that has or has had, or disrupt
or attempt to disrupt, any relationship, contractual or otherwise, with the
Company or an affiliate of the Company (including any patient, payor, physician,
provider, managed care organization or supplier) at any time during Employee's
employment with the Company, for the purpose of assisting, or creating such a
relationship for, any business entity
-6-
<PAGE> 7
that is competitive with the Company or an affiliate of the Company. For
purposes of this Section, a business entity is competitive with the Company or
an affiliate of the Company if it provides or offers any renal dialysis service
that is provided by the Company or an affiliate of the Company.
(d) Subject to Section 6(f) below, Employee further agrees
that, for a period of three (3) years after the termination of Employee's
employment with the Company, Employee shall not induce, nor attempt to induce,
any employee of the Company, or any of its affiliates, to terminate such
employee's association with the Company or any of its affiliates.
(e) These post-employment covenants are considered by the
parties hereto to be fair, reasonable and integral for the protection of the
Company. The parties mutually agree that if a violation of any of these
covenants occurs, such violation or any threatened violation will cause
irreparable injury to the Company and the remedy at law for any such violation
or threatened violation will be inadequate. The parties acknowledge that these
covenants will survive, and remain in effect and enforceable after, termination
of this Agreement.
(f) The Company agrees that the forgoing covenants in
paragraphs 6(a) through (d) shall be null and void as to any period following
termination of employment in the event such termination occurs within thirteen
(13) months following a Change in Control through either (A) a termination by
the Company without Cause under Section 5(a) above or (B) a resignation by
Employee for any reason.
(g) Employee agrees to indemnify and hold harmless the Company
from and against any and all claims, causes of action, damages and/or any other
losses suffered or incurred by the Company as a result of any breach or
purported breach by Employee of any agreement applicable to Employee which
existed prior to the time of the entering into of this Agreement. Such
obligations of Employee to indemnify and hold the Company harmless shall include
any and all costs of defense of any such claim or threatened claim, including
reasonable attorneys' fees.
7. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding
and except as set forth below, in the event it shall be determined that any
payment or distribution by the Company to or for the benefit of Employee
(whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise, but determined without regard to any additional
payments required under this Section 7) (a "Payment") would be subject to the
excise tax imposed by Section 4999 of the Code or any interest or penalties are
incurred by Employee with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively referred to
as the "Excise Tax"), then Employee shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by Employee
of all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up
Payment, Employee retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed upon the Payments.
(b) Subject to the provisions of Section 7(c), all
determinations required to be made under this Section 7, including whether and
when a Gross-Up Payment is required and
-7-
<PAGE> 8
the amount of such Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, shall be made by Ernst & Young LLP or such other
certified public accounting firm as may be designated by Employee (the
"Accounting Firm") which shall provide detailed supporting calculations both to
the Company and Employee within fifteen (15) business days of the receipt of
notice from Employee that there has been a Payment, or such earlier time as is
requested by the Company. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting the Change
in Control, Employee shall appoint another nationally recognized accounting firm
to make the determinations required hereunder (which accounting firm shall then
be referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as
determined pursuant to this Section 7, shall be paid by the Company to Employee
within five (5) days of the receipt of the Accounting Firm's determination. Any
determination by the Accounting Firm shall be binding upon the Company and
Employee. It is possible (due to the uncertainty in the application of Section
4999 of the Code at the time of the initial determination by the Accounting Firm
hereunder) that Gross-Up Payments will not have been made by the Company which
it is ultimately determined should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. Consequently, in the event
that the Company exhausts its remedies pursuant to Section 7(c) and Employee
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of
Employee.
(c) Employee shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten (10) business days after Employee is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. Employee
shall not pay such claim prior to the expiration of the thirty (30)-day period
following the date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies Employee in writing prior to the expiration of
such period that it desires to contest such claim, Employee shall:
(i) give the Company any information reasonably requested
by the Company relating to such claim,
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall
-8-
<PAGE> 9
indemnify and hold Employee harmless, on an after-tax basis, for any Excise Tax
or income tax (including interest and penalties with respect thereto) imposed as
a result of such representation and payment of costs and expenses. Without
limitation of the foregoing provisions of this Section 7(c), the Company shall
control all proceedings taken in connection with such contest and, at its sole
option, may pursue or forgo any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim and
may, at its sole option, either direct Employee to pay the tax claimed and sue
for a refund or contest the claim in any permissible manner, and Employee agrees
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company directs Employee
to pay such claim and sue for a refund, the Company shall advance the amount of
such payment to Employee, on an interest-free basis and shall indemnify and hold
Employee harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of Employee with respect to which such
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
Employee shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Employee of an amount advanced by
the Company pursuant to Section 7(c), Employee becomes entitled to receive any
refund with respect to such claim, Employee shall (subject to the Company's
complying with the requirements of Section 7(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by Employee of an amount
advanced by the Company pursuant to Section 7(c), a determination is made that
Employee shall not be entitled to any refund with respect to such claim and the
Company does not notify Employee in writing of its intent to contest such denial
of refund prior to the expiration of thirty (30) days after such determination,
then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
8. Severability.
The parties hereto hereby expressly agree and contract that it
is not the intention of either party to violate any public policy, or any
statutory or common law, and that if any paragraph, sentence, clause or
combination of the same of this Agreement shall be in violation of the laws of
any state where applicable, such paragraph, sentence, clause or the combination
of the same shall be void in the jurisdictions where it is unlawful, and the
remainder thereof shall remain binding on the parties hereto. It is the
intention of the parties to make the covenants of this Agreement binding only to
the extent that they may be lawfully done under existing applicable laws. In the
event that any part of any term or covenant of this Agreement is determined by a
court of law or equity to be overly broad or otherwise unenforceable, the
parties hereto agree that such court shall be empowered to substitute, and it is
the intent of the parties hereto that such court substitute, a reasonably
judicially enforceable term or limitation in the place of such unenforceable
term or covenant, and that as so modified this Agreement shall be fully
enforceable.
-9-
<PAGE> 10
9. Entire Agreement; Modification.
This Agreement constitutes the entire agreement between the
parties and supersedes any and all prior understandings or agreements, and any
changes or additions hereto must be in writing and signed by both parties. If
there is any conflict between the terms of this Agreement and any stock option
agreement or other agreement between Employee and the Company (including any
agreement entered into after the date of this Agreement), then this Agreement
shall control unless there is specific reference to superseding this Agreement
in such other agreement.
10. Assignment.
(a) The rights and benefits of Employee under this Agreement,
other than accrued and unpaid amounts due under Section 3(a) hereof, are
personal to Employee and shall not be assignable.
(b) This Agreement may not be assigned by the Company except
to an affiliate of the Company, provided that such affiliate assumes the
Company's obligations under this Agreement; provided, further, that if the
Company shall merge or effect a consolidation or share exchange with or into, or
sell or otherwise transfer substantially all its assets to, another business
entity, the Company may assign its rights hereunder to that business entity
without the consent of the Employee provided that it causes such business entity
to assume the Company's obligations under this Agreement and provided, further,
that the provisions of Section 5 remain in full force and effect following such
assignment.
11. Notice.
The references to the notice periods of certain "days"
contained in this Agreement shall mean calendar days. Any notice provided for in
this Agreement shall be delivered to Employee at the most recent address of
Employee listed in the Company's then current employment records. Notice to the
Company shall be delivered to the following address: c/o Renal Care Group, Inc.,
2100 West End Avenue, Suite 800, Nashville, Tennessee 37203, Attention: Chief
Executive Officer.
12. Waiver.
The waiver by any party to this Agreement of a breach of any
of the provisions contained herein shall not operate or be construed as a waiver
of any subsequent breach.
13. Disputes and Governing Law.
The Company and Employee agree that any dispute arising in
connection with, or relating to, this Agreement or the termination of this
Agreement, to the maximum extent allowed by applicable law, shall be subject to
resolution through informal methods and, failing such efforts, through
arbitration. Either party may notify the other party of the existence of a
dispute by written notice to the address indicated above in Section 11. The
parties shall thereafter attempt in good faith to resolve their difference
within thirty (30) days after the receipt of such notice. If the dispute cannot
be resolved within such 30-day period, either party may file
-10-
<PAGE> 11
a written demand for arbitration with the other party. The arbitration shall
proceed in accordance with the terms of the Federal Arbitration Act and the
rules and procedures of the American Arbitration Association. A single
arbitrator shall be appointed through the American Arbitration Association's
procedures to resolve the dispute.
The parties agree that in the event arbitration is necessary,
the laws of the State of Tennessee and any applicable federal law shall apply.
The place of the arbitration shall be Nashville, Tennessee.
The award of the arbitrator shall be binding and conclusive
upon the parties. Either party shall have the right to have the award made the
judgment of a court of competent jurisdiction in the State of Tennessee.
In the event of a dispute arising under this Agreement, the
prevailing party shall be entitled to all reasonable attorneys' fees incurred in
connection with such dispute. The Company agrees, to the maximum extent
permitted by law and the Bylaws and Certificate of Incorporation of the Company,
to defend and indemnify the Employee against and to hold the Employee harmless
from any and all claims, suits, losses, liabilities, and expenses (including
disputes arising under this Agreement and including reasonable attorneys' fees
and payment of reasonable expenses incurred in defending against such claim or
suit as such expenses are incurred) asserted against the Employee for actions
taken or omitted to be taken by the Employee in good faith and within the scope
of his responsibilities as an officer or employee of the Company. If requested
by the Employee, the Company shall advance to the Employee, promptly following
the Company's receipt of any such request, any and all expenses for which
indemnification is available hereunder, subject to the requirements of
applicable law and the Company's Bylaws and Certificate of Incorporation.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the Company and Employee have executed
this Agreement on the day and year first above written.
COMPANY:
RENAL CARE GROUP, INC.
By: /s/ Sam A. Brooks
---------------------------------------
Sam A. Brooks
President
[Corporate Seal]
EMPLOYEE:
/s/ R. Dirk Allison (Seal)
--------------------------------------
R. DIRK ALLISON
-12-
<PAGE> 1
EXHIBIT 10.41
AMGEN
AMENDMENT #2 DATED MARCH 13, 2000 TO AGREEMENT NO. 980202
Agreement No. 980202, between Amgen Inc. ("Amgen") and Renal Care Group, Inc.,
including any prior amendments thereto, shall be amended and restated in its
entirety to read as stated below.
This agreement ("Agreement") between Amgen Inc. ("Amgen") and Renal Care Group,
Inc., including the freestanding dialysis center affiliate(s) listed on Appendix
B, (collectively, "Dialysis Center"), sets forth the terms and conditions for
the purchase of EPOGEN(R) (Epoetin alfa) by Dialysis Center for the exclusive
treatment of dialysis patients.
1. TERM OF AGREEMENT. The "Term" of this Agreement shall be defined as
April 1, 2000 ("Commencement Date") through March 31, 2001
("Termination Date").
2. DIALYSIS CENTER AFFILIATES. Dialysis Center must provide Amgen with a
complete list of its dialysis center affiliates ("Affiliates") on or
before the date this Agreement is executed by Dialysis Center. Only
those Affiliates approved by Amgen and referenced in Appendix B will be
eligible to participate under this Agreement. Modifications to the
dialysis center Affiliates listed on Appendix B may be made pursuant to
the request of Dialysis Center's corporate headquarters and are subject
to approval and acknowledgment by Amgen in writing. Amgen requires no
less than 30 days notice before the effective date of change for any
addition or deletion of Affiliates hereunder. Amgen reserves the right
to accept, reject, or immediately terminate any Affiliates with regard
to participation in this Agreement if Amgen determines that such
Affiliate is participating in any other contract or incentive with
Amgen pertaining to the purchase of Epogen(R) or such Affiliate is not
classified as a freestanding dialysis center or a home dialysis support
facility.
3. OWN USE. Dialysis Center hereby certifies that EPOGEN(R) purchased
hereunder shall be for Dialysis Center's "own use", for the exclusive
treatment of dialysis patients.
4. AUTHORIZED WHOLESALERS. Dialysis Center must provide Amgen with a
complete list of its current wholesalers, from whom Dialysis Center
intends to purchase EPOGEN(R), and must provide the list to Amgen on or
before the date this Agreement is executed by Dialysis Center's
corporate headquarters. The list must include the name and complete
address of each designated wholesaler. Wholesalers designated by
Dialysis Center and approved by Amgen to participate in this program
will be deemed "Authorized Wholesalers". A current listing of Dialysis
Center's Authorized Wholesalers is referenced in Appendix B.
Notification of proposed changes to the list of Authorized Wholesalers
must be provided to Amgen in writing at least 30 days before the
effective date of the proposed change. Amgen reserves the right to
accept, reject, or immediately terminate any wholesaler with regard to
participation in this Agreement. In the event Amgen terminates any
Authorized Wholesaler from which Dialysis Center is purchasing
EPOGEN(R), Amgen will work with Dialysis Center to identify other
possible Authorized Wholesalers from which Dialysis Center may purchase
EPOGEN(R), and/or arrange a temporary direct purchase relationship
between Dialysis Center and Amgen until such time as an alternative
Authorized Wholesaler can be secured by Dialysis Center. If Dialysis
Center purchases directly from Amgen as contemplated above, Amgen shall
be deemed an authorized Wholesaler for purposes of this Agreement.
Dialysis Center agrees to require all Authorized Wholesalers to submit
product sales information directly to Amgen and to a third-party sales
reporting organization designated by Amgen.
<PAGE> 2
5. QUALIFIED PURCHASES. Only EPOGEN(R) purchased under this Agreement by
Dialysis Center*.
6. COMMITMENT TO PURCHASE. Dialysis Center agrees to purchase EPOGEN(R)
for all of its dialysis use requirements for recombinant human
erythropoietin. Dialysis Center may purchase another brand of
recombinant human erythropoietin for its dialysis use requirements only
for the time, and only to the extent, that Amgen has notified Dialysis
Center's corporate headquarters in writing that Amgen cannot supply
EPOGEN(R) within and for the time period reasonably required by
Dialysis Center.
7. CONFIDENTIALITY. Both Amgen and Dialysis Center agree that this
Agreement represents and contains confidential information which shall
not be disclosed to any third party, or otherwise made public, without
prior written authorization of the other party, except where such
disclosure is contemplated hereunder or required by law, and then upon
notification to the other party.
8. DISCOUNTS. Dialysis Center may qualify for discounts and incentives in
accordance with the schedules and terms set forth in Appendix A.
Discounts in arrears will be paid in the form of a check payable to
Dialysis Center's corporate headquarters. Discounts in arrears will be
calculated in accordance with Amgen's discount calculation policies
based on * using the prevailing * as the calculation price, except as
otherwise provided hereunder. Upon vesting, Amgen will use its best
efforts to make such discounts available within 30 days after receipt
by Amgen of data, in a form acceptable to Amgen, detailing all * during
the applicable period. Payment amounts, as calculated by Amgen, must
equal or exceed $100.00 for the applicable period to qualify. Subject
to the section entitled "Breach of Agreement", in the event that Amgen
is notified in writing that Dialysis Center, and/or any Affiliates (the
"Acquiree") is acquired by another entity or a change of control
otherwise occurs with respect to the Acquiree, any discounts which may
have been earned hereunder shall be paid in the form of a check payable
to the Acquiree's corporate headquarters subject to the conditions
described herein. If any Affiliates are added to or deleted from this
Agreement during any of the periods used for comparison, for any of the
discounts paid in arrears contained herein, Amgen reserves the right in
its sole discretion to appropriately adjust Dialysis Center's discounts
for the relevant periods, by including or excluding any purchases made
by those Affiliates during any of those periods.
9. TREATMENT OF DISCOUNTS. Dialysis Center agrees that it will properly
disclose and account for any discount or other reduction in price
earned hereunder, in whatever form, (i.e. pricing, discount, or
incentive) in a way that complies with all applicable federal, state,
and local laws and regulations, including without limitation, Section
1128B(b) of the Social Security Act and its implementing regulations.
Section 1128B(b) requires that a provider of services will properly
disclose and appropriately reflect the value of any discount or other
reduction in price earned in the costs claimed or charges made by the
provider under a federal health care program, as that term is defined
in Section 1128B(f). Dialysis Center also agrees that it will (a) claim
the benefit of such discount received, in whatever form, in the fiscal
year in which such discount was earned or the year after, (b) fully and
accurately report the value of such discount in any cost reports filed
under Title XVIII or Title XIX of the Social Security Act, or a state
health care program, and (c) provide, upon request by the U.S.
Department of Health and Human Services or a state agency or any other
federally funded state health care program, the information furnished
by Amgen concerning the amount or value of such
- --------
* Omitted information is the subject of a request for confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act of
1934 and has been filed separately with the Securities and Exchange
Commission.
-2-
<PAGE> 3
discount. Dialysis Center's corporate headquarters agrees that it will
advise all Affiliates, in writing, of any discount received by Dialysis
Center's corporate headquarters hereunder with respect to purchases
made by such Affiliates and that said Affiliates will account for any
such discount in accordance with the above stated requirements.
10. DATA COLLECTION. Dialysis Center agrees that all data to be provided to
Amgen pursuant to this Agreement, shall be in a form that does not
disclose the identity or name of any patient or other
patient-identifying information such as address, telephone number, or
social security number. Dialysis Center acknowledges that the data to
be supplied to Amgen pursuant to this Agreement shall be used to
support verification of the discounts and incentives referenced herein,
as well as for Amgen-sponsored research concerning the role of
EPOGEN(R) in improving treatment outcomes and quality of life of
dialysis patients. Dialysis Center shall consistently use a unique
alpha-numeric code (which shall not be the same as the patient's social
security number) as a "case identifier" to track the care rendered to
each individual patient over time, and such case identifier shall be
included in the data provided to Amgen. The key or list matching
patient identities to their unique case identifiers shall not be
provided to Amgen personnel. In furtherance of Amgen research, Dialysis
Center may agree from time to time to use its key to update the patient
care data by linking it with information concerning health outcomes,
quality of life, and other pertinent data that may become available to
Amgen from other sources. Any such linking of data sources shall not
provide the identity of any patient to Amgen. Amgen agrees that it will
maintain data supplied under this agreement in confidence and that it
will not use such data to identify or contact any patient. No reports
by Amgen concerning analyses of the data or the results of such
research shall disclose the identity of any patient.
11. BREACH OF AGREEMENT. Either party may terminate this Agreement for
breach upon 30 days advance written notice. In addition, in the event
that Dialysis Center breaches any provision of this Agreement, Amgen
shall have no obligation to continue to offer the terms described
herein or pay any further discounts to Dialysis Center.
12. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California and the parties submit to the jurisdiction of the
California courts, both state and federal.
13. WARRANTIES. Each party represents and warrants to the other that this
Agreement (a) has been duly authorized, executed, and delivered by it,
(b) constitutes a valid, legal, and binding agreement enforceable
against it in accordance with the terms contained herein, and (c) does
not conflict with or violate any of its other contractual obligations,
expressed or implied, to which it is a party or by which it may be
bound. The party executing this Agreement on behalf of Dialysis Center
specifically warrants and represents to Amgen that he is authorized to
execute this Agreement on behalf of and has the power to bind Dialysis
Center and the Affiliates to the terms set forth in this Agreement. The
party executing this Agreement on behalf of Amgen specifically warrants
and represents to Dialysis Center that he is authorized to execute this
Agreement on behalf of and has the power to bind Amgen to the terms set
forth in this Agreement.
14. NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given or made when
delivered in person or when sent to the other party by first class
mail, nationally recognized overnight delivery service, or other means
of written communication at the respective party's current address or
at such other address as the party shall have furnished to the other in
accordance with this provision.
-3-
<PAGE> 4
15. COMPLIANCE WITH HEALTH CARE PRICING LEGISLATION AND STATUTES.
Notwithstanding anything contained herein to the contrary, at any time
following the enactment of any federal, state, or local law or
regulation that in any manner reforms, modifies, alters, restricts, or
otherwise adversely affects the pricing of or reimbursement available
for EPOGEN(R), Amgen may, in its sole discretion, upon 30 days notice
(a) terminate this Agreement, or (b) exclude any Affiliates from
participating in this Agreement unless such Affiliate(s) certifies in
writing that they are, or will be, exempt from the provisions
thereunder. Additionally, in order to assure compliance with any
existing federal, state or local statute, regulation or ordinance,
Amgen reserves the right to exclude any Affiliates from the pricing,
discount, and incentive provisions of this Agreement if, in the opinion
of Amgen's legal counsel such exclusion is necessary to assure such
compliance.
16. FORCE MAJEURE. Neither party will be liable for delays in performance
or nonperformance of this Agreement or any covenant contained herein if
such delay or nonperformance is a result of Acts of God, civil or
military authority, civil disobedience, epidemics, war, failure of
carriers to furnish transportation, strike, lockout or other labor
disturbances, inability to obtain material or equipment, or any other
cause of like or different nature beyond the control of such party.
17. MISCELLANEOUS. No modification of this Agreement will be effective
unless made in writing and executed by a duly authorized representative
of each party, except as otherwise provided hereunder. Neither party
may assign this Agreement to a third party without the prior written
consent of the other party. This Agreement may be executed in one or
more counterparts, each of which is deemed to be an original but all of
which taken together constitutes one and the same agreement.
18. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
between the parties and supersedes all prior written or oral proposals,
agreements, or commitments pertaining to the subject matter herein.
Please retain one fully executed original for your records and return the other
fully executed original to Amgen.
THE PARTIES EXECUTED THIS AMENDMENT AS OF THE DATES SET FORTH BELOW.
AMGEN INC. RENAL CARE GROUP, INC.
Signature: /s/Edward Johnson Signature: /s/Robert Stillwell
--------------------- ----------------------
Print Name: Edward Johnson Print Name: Robert Stillwell
--------------------- ----------------------
Print Title: Print Title: Senior Vice President
--------------------- ----------------------
Date: March 15, 2000 Date: March 15, 2000
--------------------- ----------------------
-4-
<PAGE> 5
APPENDIX A: DISCOUNT PRICING, SCHEDULE, AND TERMS
1. PRICING. * Contract prices do not include any wholesaler markup,
discount or rebate, service fees, or other charges or incentives.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
CONTRACT PRICE
NDC DESCRIPTION EFFECTIVE 4/1/2000
THROUGH 3/31/2001
(PER PACK)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
55513-126-10 S2 2,000 Unit, 1 mL (2,000 Units/mL) single-use vial *
10 vials/pack, 10 packs/case
-------------------------------------------------------------------------------------------------------------------
55513-267-10 S3 3,000 Unit, 1 mL (3,000 Units/mL) single-use vial *
10 vials/pack, 10 packs/case
-------------------------------------------------------------------------------------------------------------------
55513-148-10 S4 4,000 Unit, 1 mL (4,000 Units/mL) single-use vial *
10 vials/pack, 10 packs/case
-------------------------------------------------------------------------------------------------------------------
55513-144-10 S10 10,000 Unit, 1 mL (10,000 Units/mL) single-use vial *
10 vials/pack, 10 packs/case
-------------------------------------------------------------------------------------------------------------------
55513-823-10 S40 40,000 Unit, 1 mL (40,000 Units/mL) single-use vial *
10 vials/pack, 4 packs/case
-------------------------------------------------------------------------------------------------------------------
55513-283-10 M10 20,000 Unit, 2 mL (10,000 Units/mL) multi-use vial *
10 vials/pack, 4 packs/case
-------------------------------------------------------------------------------------------------------------------
55513-478-10 M20 20,000 Unit, 1 mL (20,000 Units/mL) multi-use vial *
10 vials/pack, 4 packs/case
-------------------------------------------------------------------------------------------------------------------
</TABLE>
*
2. OPTIONAL HEMATOCRIT INCENTIVE. Dialysis Center may qualify for an
Optional Hematocrit/Hemoglobin Incentive ("OHI") provided the following
requirements are met:
a. REQUIREMENTS: Dialysis Center's aggregate * of EPOGEN(R) by all
Affiliates as listed on Appendix B on the Commencement Date of this
Agreement must equal or exceed *of the aggregate * of EPOGEN(R) by
those same Affiliates for the same time period from the previous year.
In addition, at least * of Dialysis Center's patients must have Average
Patient Hematocrits (as defined in Section 2(b) below) greater than or
equal to * during each calendar quarter of the Term. If either of these
criteria is not met during any given calendar quarter of the Term,
Dialysis Center will not qualify for the OHI during that quarter.
In order to participate in the OHI, Dialysis Center must provide the
following to Amgen or to a data collection vendor specified by Amgen,
on a monthly basis, and no later than 30 days after the end of each
month:
- ----------
* Omitted information is the subject of a request for confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act of
1934 and has been filed separately with the Securities and Exchange
Commission.
A-1
<PAGE> 6
i) all hematocrit test results for each dialysis patient, the
date of each test, and a consistent, unique, alpha-numeric
identifier (sufficient to consistently track an individual
patient without in any way disclosing the identity of the
patient), along with the name, address and phone number of the
particular Affiliate at which each patient received treatment
(collectively the "Data"). Amgen may utilize the Data for any
purpose, and reserves the right to audit all Data. Under no
circumstances should the Data include any patient identifiable
information including, without limitation, name, complete
social security number, address or birth date. The identity of
the account submitting the Data and any association with the
Data will remain confidential. The hematocrit test results
mustbe derived from blood samples taken immediately before
dialysis treatment using any automated red blood cell counter
testing method (e.g. Coulter-counter, Bayer-Technicon, Sysmex,
CellDyne), must be reported to the nearest tenth of one
percent, and must be submitted directly from the clinical
laboratory in a format reasonably acceptable to Amgen. Hand
written reports are not acceptable; electronic submission of
the Data is preferred, and
ii) a properly executed "Annual Certification Letter", a sample of
which is attached hereto as Exhibit #1, that will be provided
to Dialysis Center's corporate headquarters, unless otherwise
requested, after this Agreement is executed by both parties.
b. CALCULATION: Assuming Dialysis Center has fulfilled all requirements as
described in Section 2(a) above, Dialysis Center's OHI payment will be
calculated as follows:
The "Average Patient Hematocrit" for each dialysis patient will be
based upon the average of all hematocrit test results gathered for each
patient during each calendar quarter of the Term. The Average Quarterly
Percentage of all dialysis patients with Average Patient Hematocrits
greater than or equal to * will be determined by dividing the total
number of dialysis patients with Average Patient Hematocrits greater
than or equal to * by the total number of dialysis patients treated by
Dialysis Center. The OHI will be calculated based on Dialysis Center's
overall performance in accordance with Amgen's discount calculation
policies.
c. PAYMENT: The OHI will be calculated on a quarterly basis and paid to
Dialysis Center's corporate headquarters, except as otherwise provided
hereunder. Payment is contingent upon receipt by Amgen of the "Annual
Certification Letter" and all required monthly Data for the
corresponding quarter. If Data is received more than thirty days after
the last day of any month within a given calendar quarter, the total *
of EPOGEN(R) attributable to Dialysis Center during such month will be
excluded from the calculation of the OHI for that quarter.
Notwithstanding the foregoing, if Amgen receives all required data from
a minimum of * of all entities within the definition of "Dialysis
Center" within the time frame referenced above for any month within a
given calendar quarter, the total * of EPOGEN(R) attributable to
Dialysis Center during such month, will be included in the calculation
of the OHI for that quarter. However, if Amgen determines that any
Affiliate is consistently not submitting the required Data, Amgen
reserves the right in its sole discretion to exclude such Affiliate's *
of EPOGEN(R) from the calculation of the OHI for any relevant quarter.
Quarterly OHI payments will be based upon the Data received from the
previous quarter, and will equal * during that quarter (exclusive of
any * of EPOGEN(R) made by Dialysis Center or any Affiliate not meeting
the Data submission requirements described above) as governed by the
- --------
* Omitted information is the subject of a request for confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act of
1934 and has been filed separately with the Securities and Exchange
Commission.
A-2
<PAGE> 7
OHI schedule listed below. Notwithstanding the foregoing, payment for
any period during the Term that is not equivalent to a complete
calendar quarter, will be based on an average of the Data that is
available for that period. If the EPOGEN(R) package insert language
changes, then Amgen and Dialysis Center agree to negotiate in good
faith a reasonable amendment to the OHI provisions of this Agreement to
address any such change, if necessary. In addition, at the end of the
Term of this Agreement, Amgen will conduct an analysis to determine if
Dialysis Center has achieved the required * growth rate (contemplated
by Section 2(a) above) throughout the Term of the Agreement. If
Dialysis Center has achieved the required * growth rate, Amgen will
reconcile all previous OHI calculations and appropriately adjust the
OHI for all relevant quarters during the Term in which an OHI was not
earned.
<TABLE>
<S> <C>
AVERAGE QUARTERLY PERCENTAGE OF ALL DIALYSIS PATIENTS OPTIONAL HEMATOCRIT
WITH AVERAGE PATIENT HEMATOCRITS GREATER THAN OR EQUAL TO * INCENTIVE PERCENTAGE
PLEASE DIRECT YOUR ATTENTION TO THE EPOGEN(R) PACKAGE INSERT
</TABLE>
*
d. VESTING: Dialysis Center's OHI will vest on the last day of the
corresponding quarter.
e. HEMOGLOBIN CONVERSION: Dialysis Center may choose to submit hemoglobin
test results rather than hematocrit test results as a measurement of
anemia. If during the Term, Dialysis Center elects to use hemoglobin
test results, Dialysis Center must: i) submit a "Notification Letter"
to Amgen, a sample of such Notification Letter is attached hereto as
Exhibit #2, and ii) begin submitting all hemoglobin test results for
all dialysis patients along with all other information described in
Section 2(a) above, rather than hematocrit test results for all
dialysis patients at each Affiliate for purposes of participating in
the OHI.
Amgen will accept the hemoglobin test results, multiply each test
result by *, and apply the converted results to the same schedule,
requirements, and calculations described above in place of the
hematocrit test results.
For the calendar quarter in which Dialysis Center submits its
Notification Letter ("Grace Period"), Amgen will apply Dialysis
Center's Average Quarterly Percentage from the last calendar quarter in
which complete hematocrit test results were received ("AQP-Hematocrit")
to the OHI schedule listed above in order to determine the applicable
OHI Percentage earned by Dialysis Center. If Dialysis Center's overall
performance on the OHI after the Grace Period does not equal or exceed
the overall performance by Dialysis Center prior to conversion to
hemoglobin, Amgen will continue to apply each Affiliate's
AQP-Hematocrit through the remainder of the Term, provided that during
the time period the AQP-Hematocrit is applied, *.
In the event any Affiliates still submitting Data based on hematocrit
test results are added to this Agreement after Dialysis Center has
converted to hemoglobin, such Affiliate's * of EPOGEN(R), for the
calendar quarter in which they were added, shall be included in the
calculation of the OHI payment. In order for such added Affiliates' *
of EPOGEN(R) to be included in all subsequent OHI payment calculations,
such Affiliate must submit hemoglobin test results rather than
hematocrit.
- ----------
* Omitted information is the subject of a request for confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act of
1934 and has been filed separately with the Securities and Exchange
Commission.
A-3
<PAGE> 8
3. ELECTRONIC DATA DISCOUNT. Dialysis Center shall be eligible to receive
a * if certain data elements are transmitted to Amgen electronically.
The * will be calculated as a percentage of the * of EPOGEN(R)
attributable to Dialysis Center during each quarter. In order to
qualify for the *, the following EPOGEN(R) Related Patient Data must be
submitted by all Affiliates in an electronic format reasonably
acceptable to Amgen (such as: Excel; Lotus 123.wk1; or text file that
is tab delimited, comma delimited, or space delimited): Facility ID,
Patient ID (sufficient to consistently track an individual patient
without in any way disclosing the identity of the patient), Draw Date,
Hematocrit, Hemoglobin, Transferrin Saturation, and Ferritin. Such
EPOGEN(R) Related Patient Data must be submitted, on a monthly basis,
and no later than 30 days after the end of each month. If such
EPOGEN(R) Related Patient Data is received more than thirty days after
the last day of any month within a given calendar quarter, the total *
of EPOGEN(R) attributable to Dialysis Center during such month will be
excluded from the calculation of the * for that quarter.
Notwithstanding the foregoing, if Amgen receives all required data from
a minimum of * of all entities within the definition of "Dialysis
Center" within the time frame referenced above for any month within a
given calendar quarter, the total * of EPOGEN(R) attributable to
Dialysis Center during such month, will be included in the calculation
of the * for that quarter. However, if Amgen determines that any
Affiliate is consistently not submitting the required data, Amgen
reserves the right in its sole discretion to exclude such Affiliate's *
of EPOGEN(R) from the calculation of the * for any relevant quarter.
The Electronic Data Discount will vest on the last day of the
corresponding quarter, and will be paid 30 days thereafter.
4. VOLUME PERFORMANCE INCENTIVE. Dialysis Center may qualify for the
Volume Performance Incentive ("VPI") as described below.
a. CALCULATION: Dialysis Center's VPI will be calculated in accordance
with the following formula.
*
Estimated payments will be made quarterly using Amgen's discount
calculation policies, and the VPI will be reconciled at the end of the
Term.
b. VESTING: Dialysis Center's VPI will vest quarterly.
- ----------
* Omitted information is the subject of a request for confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act of
1934 and has been filed separately with the Securities and Exchange
Commission.
A-4
<PAGE> 9
APPENDIX B: LIST OF DIALYSIS CENTER AFFILIATES
To ensure you receive the appropriate discount, it is important that we have
your current list of Authorized Wholesalers. The following list represents the
Wholesalers Amgen currently has associated with your contract. Please update the
list by adding or deleting Wholesalers as necessary.
Metro Medical Supply Inc.
3332 Powell Avenue
Nashville, TN 37204
Henry Schein, Inc.
135 Duryea Road
Nelville, NY 11747
Priority HealthCare Corporation
285 West Central Parkway, Suite 1704
Altamonte Springs, FL 32714
B-1
<PAGE> 10
EXHIBIT #1
SAMPLE ANNUAL CERTIFICATION LETTER
Month X, 199X
FSDC Legal Name
Street Address
City, ST Zip
RE: EPOGEN(R) (Epoetin alfa) Agreement No. 9XXXXX
Dear ____________:
Thank you for your participation in the Optional Hematocrit/Hemoglobin Incentive
Program. In order for us to enroll you, we require that a duly authorized
representative of your organization sign the certification below.
Upon receipt of this executed document, we will calculate the value of your
incentive. If we do not receive the executed certification, we cannot provide
you with this incentive.
If you have any questions regarding this letter please contact me at
(805) 447-4134. Thank you for your assistance in returning this certification.
Sincerely,
Sue Simon
Outcomes Incentive Analyst
CERTIFICATION:
On behalf of FSDC Legal Name and all eligible Affiliates participating in the
Optional Hematocrit/Hemoglobin Incentive Program under Agreement No. XXXXXX, the
undersigned hereby certifies that the hematocrit/hemoglobin data and any other
data required to be submitted (herein referred to as "Data"), for each eligible
Affiliate during the term of this Agreement includes the required Data from all
dialysis patients from each such Affiliate, and does not include Data from
non-patients. The party executing this document also represents and warrants
that it (i) has no reason to believe that the submitted Data is incorrect, and
(ii) is authorized to make this certification on behalf of all eligible
Affiliates submitting Data.
FSDC LEGAL NAME
Signature: _____________________________
Print Name: _____________________________
Print Title: _____________________________
Date: _____________________________
<PAGE> 11
EXHIBIT #2
SAMPLE NOTIFICATION LETTER
Month X, 199X
Ms. Sue Simon
Outcomes Incentive Analyst
Amgen Inc./Contract Sales Department
One Amgen Center Drive/Mail Stop 37-2-A
Thousand Oaks, CA 91320
RE: Amgen Agreement No. XXXXXX
Dear Ms. Simon:
This letter serves as notification that FSDC Legal Name and all eligible
Affiliates participating in the Optional Hematocrit/Hemoglobin Incentive Program
under Agreement No. XXXXXX, will begin using hemoglobin test results as a
measurement of anemia as of Month X, 199X, and will begin submitting hemoglobin
test results rather than hematocrit test results for purposes of participating
in the Optional Hematocrit/Hemoglobin Incentive Program.
We understand that any discount under the Optional Hematocrit/Hemoglobin
Incentive Program will now be based solely on hemoglobin test results and that
hematocrit test results will no longer be accepted. We also understand that such
hemoglobin test results will be converted and applied to the same schedule,
requirements, and calculations described in the Optional Hematocrit/Hemoglobin
Incentive Program outlined in the Agreement.
Sincerely,
Name of Administrator
Title
<PAGE> 1
EXHIBIT 10.55
RENAL CARE GROUP, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
(FREESTANDING OPTION)
R. DIRK ALLISON
THIS AGREEMENT is made as of the Date of Grant, by RENAL CARE GROUP,
INC., a corporation organized and existing under the laws of the State of
Delaware (the "Company"), to R. DIRK ALLISON (the "Optionee").
Upon and subject to the Additional Terms and Conditions attached hereto
and incorporated herein by reference as part of this Agreement, the Company
hereby awards as of the Date of Grant to Optionee an option (the "Option"), as
described below, to purchase the Option Shares.
A. DATE OF GRANT: October 27, 1999.
B. TYPE OF OPTION: Non-Qualified Stock Option.
C. EXERCISE PRICE PER SHARE: $16.625.
D. OPTION SHARES: 175,000 shares of the Company's Common
Stock, $.01 par value.
E. VESTING SCHEDULE:
The Vesting Schedule shall be as follows:
Schedule Percentage of Option Shares Vested
-------- ----------------------------------
Date of Grant 20%
1st anniversary of 40%
the Date of Grant
2nd anniversary of 60%
the Date of Grant
3rd anniversary of 80%
the Date of Grant
4th anniversary of 100%
the Date of Grant
<PAGE> 2
[OFFICERS/EMPLOYEES/CONSULTANTS]
F. EXPIRATION DATE: This Option may be exercised at any time
after the Date of Grant through 5:00 p.m., Nashville,
Tennessee time, on the 10th anniversary of the Date of Grant,
provided that this Option may be exercised as to no more than
the vested Option Shares, determined pursuant to the Vesting
Schedule or as modified as provided herein.
IN WITNESS WHEREOF, the Company has executed this Agreement the 27th
day of October, 1999.
RENAL CARE GROUP, INC.
By: /s/ Sam A. Brooks
---------------------------------------
Sam A. Brooks, President
ATTEST:
/s/ Douglas B. Chappell
- ---------------------------------
Douglas B. Chappell, Secretary
OPTIONEE:
/s/ R. Dirk Allison
--------------------------------------------
R. DIRK ALLISON
WITNESS:
- ----------------------------------
2
<PAGE> 3
[OFFICERS/EMPLOYEES/CONSULTANTS]
ADDITIONAL TERMS AND CONDITIONS
RENAL CARE GROUP, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
FOR R. DIRK ALLISON
1. Exercise of Option. This Option may be exercised in whole or in
part, but in no less than one hundred (100) share lots, by written notice, in
substantially the form as Exhibit 1 hereto, directed to the Secretary of the
Company at its principal place of business, accompanied by payment of the
Exercise Price for the number of shares purchased. Payment shall be made in
cash, by check, or in shares of Common Stock already held by the Optionee prior
to the exercise of the Option. In the event that all or part of the Exercise
Price is paid in shares of Common Stock, the value of such shares shall be equal
to the Fair Market Value of such shares on the date of exercise of the Option,
and the Optionee shall deliver to the Company a certificate or certificates for
such shares.
2. Issuance of Option Shares. Upon a valid exercise of this Option, the
Company shall, or shall direct its transfer agent to, make delivery of the
Option Shares as soon as reasonably possible; provided, however, that the
Company shall not be required to issue or deliver any certificates for Option
Shares pursuant to this Option prior to (a) the completion of any registration
or qualification of such shares under any federal or state law, or any ruling or
regulation of any governmental body which the Board shall, in its sole
discretion, determine to be necessary or advisable, and/or (b) the Optionee
making at the time of exercise any reasonable representations and warranties
requested by the Company in order to qualify the issuance of the Option Shares
for exemptions from registration under state or federal securities laws. The
Option Shares issued on the exercise of this Option, when paid for as herein
provided, will be fully paid and non-assessable.
3. Termination of Employment or Death.
(a) In the event of a termination of Optionee's employment or
consulting services for any reason (other than a termination of an Optionee
employee by his or her death or disability), (i) except as provided in clause
(ii) of this sentence this Option shall terminate as of the day of notice of
such termination by either party, but in no event later than the Expiration
Date, and (ii) any unexercised portion of this Option which is otherwise
exercisable on the date of termination may be exercised by Optionee at any time
within three (3) months following the date of such termination, unless Optionee
dies during such three (3) month period, but in no event later than the
Expiration Date. If Optionee is an employee, whether military, government or
other service by Optionee or other leave of absence granted to Optionee shall
constitute such a termination shall be determined in each case by the Board
3
<PAGE> 4
[OFFICERS/EMPLOYEES/CONSULTANTS]
at its discretion, and any determination by the Board shall be final and
conclusive. If the Board determines that such absence does not constitute such a
termination, however, Optionee may exercise his or her option only with the
consent of the Board.
(b) If Optionee is an employee, upon termination of Optionee's
employment with the Company (including its subsidiaries) as result of a
permanent disability (as defined by Section 22(e)(3) of the Code), (i) except as
provided in clause (ii) of this sentence, this Option shall terminate and be
unexercisable on the date of such termination, but in no event later than the
Expiration Date, and (ii) any unexercised portion of this Option which is
otherwise exercisable on the date of such termination may be exercised by
Optionee at any time within six (6) months following the date of such
termination, unless Optionee dies during such six (6) month period, but in no
event later than the Expiration Date.
(c) If Optionee is an employee, upon termination of his or her
employment by the Company without Cause, if there is a written employment
agreement between Optionee and the Company, this Option shall cease to vest in
accordance with the Vesting Schedule regardless of any salary continuation
specified by such employment agreement as a result of such termination. Upon
termination of his or her employment with the Company, (i) except as provided in
clause (ii) of this sentence, this Option shall terminate and be unexercisable
as to unvested options on the date of termination, but in no event later than
the Expiration Date, and (ii) any unexercised portion of this Option which is
otherwise exercisable as of such termination date may be exercised by Optionee
at any time within three (3) months following such termination date, unless
Optionee dies during such three (3) month period such option may be exercised
pursuant to subparagraph (d) below, but in no event later than the Expiration
Date. If there is no written employment agreement between Optionee and the
Company, upon termination of his or her employment by the Company without Cause
any unexercised portion of this Option shall terminate in accordance with
Section 3(a) above, but in no event later than the Expiration Date.
(d) If Optionee dies, (i) except as provided in clause (ii) of this
sentence, this Option shall terminate and be unexercisable on the date of death,
and (ii) any unexercised portion of this Option, if otherwise exercisable at the
date of death, may be exercised by his or her personal representatives, heirs,
or legatees at any time prior to the expiration of one (1) year after the date
of Optionee's death, but in no event later than the Expiration Date.
4. Full Information. Optionee represents that he or she is familiar
with the business and affairs of the Company and realizes that the receipt of
the Option and Option Shares is a speculative investment and that any
4
<PAGE> 5
[OFFICERS/EMPLOYEES/CONSULTANTS]
possible profit therefrom is uncertain. Optionee further represents that he or
she has had the opportunity to ask questions of and receive answers from the
Company and any person acting on its behalf and to obtain all information
available with respect to the Company and its affairs, and has received all
information and data with respect to the Company that he or she has requested
and which he or she has deemed relevant in connection with his or her receipt of
the Option and the Option Shares subject to the Option.
5. No Rights in Option Stock. Optionee shall have no rights as a
stockholder with respect to any of the Option Shares prior to the date of
issuance to the Optionee of a certificate or certificates for such shares.
Optionee shall have no rights with respect to such shares not expressly
conferred by this Agreement.
6. Stock Reserved. The Company shall at all times during the term of
this Agreement reserve and keep available such number of shares of the Common
Stock as will be sufficient to satisfy the requirements of this Agreement, and
shall pay all original issue taxes on the exercise of this Option, and all other
fees and expenses necessarily incurred by the Company in connection therewith.
7. Nonassignability. This Option shall not be encumbered or transferred
in whole or in part except by will or the laws of descent and distribution and
is exercisable during the lifetime of the Optionee only by the Optionee.
8. No Employment. This Agreement shall not give Optionee a right to
employment by, or membership on the board of directors of, the Company or its
subsidiaries.
9. Non-Qualified Option. It is the intent of the parties hereto that
this Option be a non-qualified stock option and subject to all of the applicable
provisions of the Internal Revenue Code of 1986, as amended. The Company
recognizes that the Optionee may be subject to restrictions regarding his or her
right to trade Common Stock under applicable securities laws. Accordingly, the
Optionee may want to consider making an election to be taxed upon exercise of
this Option under Section 83(b) of the Code. The Optionee shall have sole
discretion to make such an election and shall be solely responsible for
complying with the Code and all relevant rules and regulations in connection
with such election. The Optionee shall provide written notice to the Company of
such election immediately after making such election.
10. Share Adjustments. If the Company's outstanding shares of Common
Stock are increased or decreased or changed into or exchanged for a different
number or kind of shares or other securities of the Company by
5
<PAGE> 6
[OFFICERS/EMPLOYEES/CONSULTANTS]
reason of any recapitalization, reclassification, stock split, combination of
shares, stock dividend, or transaction having similar effect, the Board shall
proportionately and appropriately adjust the number and kind of shares that are
subject to this Option and the Exercise Price Per Share, without any change in
the aggregate price to be paid therefor upon exercise of this Option.
11. Changes in Control.
(a) Change in Control. Subject to Section 12, in the event that a
Change in Control shall occur, then (i) this Option (whether vested or not
vested) shall automatically become one hundred percent (100%) vested
immediately, and (ii) no other terms, conditions, restrictions or limitations
shall be imposed upon this Option after such date, and in no circumstance shall
this Option be forfeited on or after such date.
(b) Automatic Acceleration and Cash-Out. Subject to Section 12, upon
a Change in Control that results directly or indirectly in the Common Stock (or
the stock of any successor the Company received in exchange for Common Stock)
ceasing to be publicly traded on a national securities market at any time, (i)
this Option shall automatically become one hundred percent (100%) vested
immediately with respect to the Option Shares, (ii) no other terms, conditions,
restrictions or limitations shall be imposed upon this Option after such date,
and in no circumstance shall this Option be forfeited on or after such date, and
(iii) this Option shall be valued and cashed out on the basis of the Change in
Control Price.
(c) Section 16 Insider. Notwithstanding anything herein to the
contrary, if the Optionee is subject to the reporting requirements of Section 16
of the Exchange Act with respect to the Company, and on the date of the Change
in Control this Option has not been outstanding for a period of at least six
months from the Date of Grant, the Optionee shall not be paid the consideration
described in this Section 11 above until the first day next following the end of
such six-month period.
12. Modification, Extension and Renewal. The Board may modify, renew or
accept the surrender of this Option, including the acceleration or waiver of any
vesting or other restrictions or limitations, or the conversion of this Option
(with appropriate adjustments) to be applicable to the securities of any
successor corporation to the Company or parent of any such successor, and the
Board may authorize new options in substitution for the Option. Any substituted,
modified or converted options may bear such different or additional terms and
conditions as the Board shall deem appropriate. The determination of the Board
as to the terms of any of the foregoing may be made without regard to whether a
Change in Control has or has not occurred (or whether the Board has determined
that any event shall not be considered
6
<PAGE> 7
[OFFICERS/EMPLOYEES/CONSULTANTS]
to be a Change in Control) and shall be conclusive and binding notwithstanding
the provisions hereof regarding exercisability. Any fractional shares resulting
from any of the foregoing adjustments under this Section shall be disregarded
and eliminated. However, no modification of this Option shall, without the
consent of the Optionee, adversely affect the rights or obligations of the
Optionee with respect to this Option.
13. Administration. This Agreement shall be administered, construed
and interpreted by the Board.
14. Definitions.
"Board" means the Board of Directors of the Company.
"Change in Control" means a change in control of the Company of a
nature that would be required to be reported (assuming such event has not been
"previously reported") in response to Item 1(a) of a Current Report on Form 8-K
pursuant to Section 13 or 15(d) of the Exchange Act; provided that, without
limitation, a Change in Control shall also be deemed to have occurred at such
time as:
(i) any "person" within the meaning of Section
14(d) of the Exchange Act, other than the Company, a Subsidiary, or
any employee benefit plan(s) sponsored by the Company or any
Subsidiary, is or has become the "beneficial owner," as defined in
Rule l3d-3 under the Exchange Act, directly or indirectly, of 25% or
more of the combined voting power of the outstanding securities of
the Company ordinarily having the right to vote at the election of
directors;
(ii) individuals who constitute the Board
immediately prior to any meeting of stockholders (the "Incumbent
Board") have ceased for any reason to constitute at least a majority
thereof after such shareholder meeting, provided that any person
becoming a director whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least
three-quarters (3/4) of the directors comprising the Incumbent Board
(either by a specific vote or by approval of the proxy statement of
the Company in which such person is named as a nominee for director
without objection to such nomination) shall be, for purposes of this
Agreement, considered as though such person were a member of the
Incumbent Board;
(iii) upon approval by the Company's stockholders
of a reorganization, merger, share exchange or consolidation, other
than one with respect to which those persons who were the beneficial
owners, immediately prior to such reorganization, merger, share
exchange or consolidation, of outstanding securities of the Company
7
<PAGE> 8
[OFFICERS/EMPLOYEES/CONSULTANTS]
ordinarily having the right to vote in the election of directors own,
immediately after such transaction, more than 75% of the outstanding
securities of the resulting corporation ordinarily having the right
to vote in the election of directors; or
(iv) upon approval by the Company's stockholders of
a complete liquidation and dissolution of the Company or the sale or
other disposition of all or substantially all of the assets of the
Company other than to a Subsidiary.
Notwithstanding the occurrence of any of the foregoing, the Board
may determine, if it deems it to be in the best interest of the Company, that an
event or events otherwise constituting a Change in Control shall not be so
considered. Such determination shall be effective if it is made by the Board
prior to the occurrence of an event that otherwise would be or probably will
lead to a Change in Control or after such event if made by the Board a majority
of which is composed of directors who were members of the Board immediately
prior to the event that otherwise would be or probably will lead to a Change in
Control. Upon such determination, such event or events shall not be deemed to be
a Change in Control for any purposes hereunder, including but not limited to,
Section 12.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the Common Stock, $.01 par value, of the
Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
"Fair Market Value" means the closing price of the shares of Common
Stock on a national securities exchange on the day on which such value is to be
determined or, if no shares were traded on such day, on the next preceding day
on which shares were traded, as reported by the National Quotation Bureau, Inc.
or other national quotation service. If the shares are not traded on an exchange
but are traded in the over-the-counter market, on the day on which such value is
to be determined or, if such "asked" price is not available, the last sales
price on such day or, if no shares were traded on such day, on the next
preceding day on which the shares were traded, as reported by the National
Association of Securities Dealers Automatic Quotation System (NASDAQ) or other
national quotation service.
"Subsidiary" means any corporation that qualifies as a subsidiary of
a corporation under the definition of "subsidiary corporation" contained in
Section 424(f) of the Code.
8
<PAGE> 9
[OFFICERS/EMPLOYEES/CONSULTANTS]
EXHIBIT 1
NOTICE OF EXERCISE OF
STOCK OPTION TO PURCHASE
COMMON STOCK OF
RENAL CARE GROUP, INC.
Name:
--------------------------------
Address:
-----------------------------
-----------------------------
Date:
--------------------------------
Renal Care Group, Inc.
Attention: [Secretary]
2100 West End, Suite 800
Nashville, Tennessee 37203
Re: Exercise of Non-Qualified Stock Option
Ladies and Gentlemen:
Subject to acceptance hereof in writing by Renal Care Group, Inc.
(the "Company"), I hereby give at least ten days but not more than thirty (30)
days prior notice of my election to exercise options granted to me to purchase
_____________ shares of Common Stock of the Company under the Renal Care
Group, Inc. Non-Qualified Stock Option Agreement granted on
______________________, ______. The purchase shall take place as of
______________________, ______ (the "Exercise Date").
On or before the Exercise Date, I will pay the applicable purchase
price by delivery of a certified check for $__________ for the full purchase
price payable to the order of Renal Care Group, Inc.
The required federal, state and local income tax withholding, if any,
on the exercise of the option shall be paid on or before the Exercise Date.
I hereby reaffirm that the representations made in Additional Terms
and Conditions of the Agreement are true and correct as of the date of
exercising this Option.
9
<PAGE> 10
[OFFICERS/EMPLOYEES/CONSULTANTS]
As soon as the stock certificate is registered in my name, please
deliver it to me at the above address.
Very truly yours,
AGREED TO AND ACCEPTED:
RENAL CARE GROUP, INC.
By:
--------------------------------
Title:
-----------------------------
Number of Shares Exercised:
--------
Number of Shares Remaining:
--------
Date:
------------------
10
<PAGE> 1
EXHIBIT 21.1
RENAL CARE GROUP, INC. SUBSIDIARIES
1. RCG Mississippi, Inc.
2. Renal Care Group of the Midwest, Inc.
3. Renal Care Group Texas, Inc.
4. D.M.N. of Indiana Corporation
5. RCG University Division, Inc.
6. Renal Care Group of the Southeast, Inc.
7. Renal Care Group East, Inc.
8. Renal Care Group Arizona, Inc.
9. Northeast Alabama Kidney Clinic, Inc.
10. Dialysis Management Corporation
11. RCG PA Merger Corp.
12. RCG Indiana, LLC
13. RenaLab, Inc.
14. RCG Finance, Inc.
15. RenalPartners, Inc.
16. RenalNet, Inc.
17. RenalNet Florida, Inc.
18. R.C.G. Supply Company
19. RCG Brandon, LLC
20. RCG Pikeville, LLC
21. RCG Southaven, LLC
22. Southern Ocean County Dialysis Clinic, LLC
23. Renal Institute of Central Jersey, LLC
24. Saint Louis Renal Care, LLC
25. Saint Louis Supply Company, LLC
26. Ohio Renal Care Group, LLC
27. Ohio Renal Care Supply Company, LLC
28. Elyria Renal Care, LLC
29. Integrated Wound Care Systems, Inc.
30. STAT Dialysis Corporation
31. Brownsville Kidney Center, Ltd.
32. El Paso Kidney Center East, Ltd.
33. Angleton Dialysis, Inc.
34. Brazoria Kidney Center, Inc.
35. Fondren Dialysis Clinic, Inc.
36. Wharton Dialysis, Inc.
37. Stuttgart Dialysis, LLC
38. KDCO, Inc.
39. Little Rock Dialysis, Inc.
40. Jefferson County Dialysis, Inc.
41. Lawton Dialysis, Inc.
42. Northwest Dialysis, Inc.
43. Four State Regional Dialysis Center, Inc.
44. Fort Scott Regional Dialysis Center, Inc.
45. Miami Regional Dialysis Center, Inc.
46. RCG/Saint Luke's, LLC
47. Renal Care Group Michigan, Inc.
48. RCG Martin, LLC
49. TCMC Dialysis Center, LLC
50. Renal Care Group Northwest, Inc.
51. Pacific Northwest Renal Services, LLC
52. Michigan Home Dialysis Center, Inc.
53. Sumner Regional Dialysis Center, LLC
54. RCG Columbus, L.L.C.
55. RCG Lake Village, LLC
56. Summit Renal Care, LLC
57. RenalNet Arizona, Inc.
58. Wisconsin Renal Care Group, L.L.C.
59. Dialysis Centers of America, Inc.
60. SSKG Inc.
61. Dialysis Centers of America - Illinois, Inc.
62. Renal Care Group Alaska, Inc.
63. Renal Care Group Southwest Holdings, Inc.
64. Renal Care Group Southwest, L.P.
65. RCG West Health Supply, L.C.
66. Kidney Disease Centers of the Ozarks, LLC
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-37299, Form S-8 No. 333-74565 and Form S-8 No. 333-96197)
pertaining to the Renal Care Group, Inc. Fourth Amended and Restated 1996 Stock
Incentive Plan, the Renal Care Group, Inc. 1999 Long-Term Incentive Plan and the
Dialysis Centers of America Inc. Equity Compensation Plan of our reports dated
February 24, 2000, with respect to the consolidated financial statements and
schedule of Renal Care Group, Inc. included in the Annual Report (Form 10-K) for
the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 14,507
<SECURITIES> 0
<RECEIVABLES> 99,877
<ALLOWANCES> 0
<INVENTORY> 12,044
<CURRENT-ASSETS> 159,999
<PP&E> 121,143
<DEPRECIATION> 0
<TOTAL-ASSETS> 482,384
<CURRENT-LIABILITIES> 74,390
<BONDS> 0
0
0
<COMMON> 448
<OTHER-SE> 309,866
<TOTAL-LIABILITY-AND-EQUITY> 482,384
<SALES> 0
<TOTAL-REVENUES> 520,607
<CGS> 0
<TOTAL-COSTS> 335,366
<OTHER-EXPENSES> 86,823
<LOSS-PROVISION> 13,878
<INTEREST-EXPENSE> 5,038
<INCOME-PRETAX> 79,502
<INCOME-TAX> 31,041
<INCOME-CONTINUING> 48,461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,461
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.04
</TABLE>
