Renal Care Group, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-27640
RENAL CARE GROUP, INC.
(Exact Name of Company as Specified in its Charter)
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| Delaware
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62-1622383 |
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(I.R.S. Employer |
| Incorporation or Organization)
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Identification No.) |
2525 West End Avenue, Suite 600
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:
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| Title of Each Class |
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Name of Exchange on Which Registered |
| Common Stock, $0.01 par value
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New York Stock Exchange |
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| Series A Junior Participating Preferred Stock Purchase Rights
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New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes
þ No o
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes
o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Company was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer þ Accelerated
filer o Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes
o No þ
The aggregate market value of the voting stock held by non-affiliates of the Company was
$3,103,391,332 as of June 30, 2005, based upon the closing price of such stock as reported on the
New York Stock Exchange on that day (assuming for purposes of this calculation, without conceding,
that all executive officers and directors are affiliates).
There
were 68,742,244 shares of common stock, $0.01 par value, issued and outstanding at
March 9, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 2006 Annual Meeting of Stockholders are
incorporated by reference in Part III of this annual report on Form 10-K.
2
FORWARD LOOKING STATEMENTS
This report contains “forward-looking statements.” Forward-looking statements relate to our
expectations, beliefs, future plans and strategies, anticipated events or trends and similar
expressions concerning matters that are not historical facts or that necessarily depend upon future
events. In some cases, you can identify forward-looking statements by words like “may,” “will,”
“should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,”
“predict,” “potential” and similar expressions. Specifically, this report contains, among others,
forward-looking statements about:
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our expectations regarding financial condition or results of operations for periods after December 31, 2005; |
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the agreement by Fresenius Medical Care to acquire Renal Care
Group; |
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our critical accounting policies; |
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our business strategies and our ability to grow our business; |
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the reimbursement levels of third-party payors; and |
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our future sources of and needs for liquidity and capital resources. |
The forward-looking statements included in this report reflect our current views about future
events. They are based on assumptions and are subject to known and unknown risks and uncertainties.
Many factors could cause actual results or achievements to differ materially from future results or
achievements that may be expressed in or implied by our forward-looking statements. Many of the
factors that will determine future events or achievements are beyond our ability to control or
predict. Important factors that could cause actual results or achievements to differ materially
from the results or achievements reflected in our forward-looking statements include, among other
things, the factors discussed on pages 18 to 27 of this report under the heading “Risk Factors.”
You should read this report, the information incorporated by reference into this report and
the documents filed as exhibits to this report completely and with the understanding that our
actual future results or achievements may be materially different from what we expect or
anticipate.
The forward-looking statements contained in this report reflect our views and assumptions only
as of the date this report is filed with the Securities and Exchange Commission. Except as required
by law, we assume no responsibility to update any forward-looking statements.
Before you invest in our common stock, you should understand that the occurrence of any of the
events described in the Risk Factors section, located elsewhere in this annual report on Form 10-K
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 in the Risk Factors 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.
We qualify all of our forward-looking statements by these cautionary statements. In addition,
with respect to all of our forward-looking statements, we claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Unless
otherwise indicated, “Renal Care Group,” “we,”
“us,” “our,” and “the Company” refer to Renal
Care Group, Inc. and our consolidated subsidiaries.
PART I
Item 1. Business
ACQUISITION BY FRESENIUS MEDICAL CARE
On May 3, 2005 we entered into a definitive merger agreement with Fresenius Medical Care AG in
which Fresenius Medical Care agreed to acquire all of Renal Care Group’s outstanding stock.
Fresenius Medical Care will pay $48.00 for each of our outstanding shares of common stock.
Fresenius Medical Care will acquire Renal Care Group subject to its outstanding indebtedness.
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Our Board of Directors and the management and supervisory boards of Fresenius Medical Care
have approved the transaction, and on August 24, 2005 our stockholders voted to approve the
transaction. Completion of the transaction is subject to customary conditions to closing,
including the termination or expiration of the waiting period under the Hart-Scott Rodino Antitrust
Improvements Act of 1976, as amended. In June 2005, we received a request for additional
information under the Hart-Scott Rodino Act from the Federal Trade Commission. Management believes
the transaction will close by March 31, 2006.
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, 2005, we provided dialysis and
ancillary services to over 32,300 patients through 456 outpatient dialysis centers in 34 states, in
addition to providing acute dialysis services to more than 200 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. As of December 31, 2005, there were 1,314 nephrologists with privileges to practice at one
or more of our outpatient dialysis centers.
In our dialysis facilities, ESRD patients receive dialysis treatments, generally three times a
week, in a technologically advanced outpatient setting. According to the Centers for Medicare &
Medicaid Services (CMS), there were more than 4,500 facilities providing outpatient dialysis
services in the United States at the end of 2003. Because of the critical role of dialysis in the
treatment of patients with ESRD, many outpatient dialysis facilities were, in the 1980’s and
1990’s, owned by practicing nephrologists and comprised an integral component of their practice.
The dialysis services industry has been consolidating since before we were formed. As a result, we
believe that as of December 31, 2005, approximately 67% of outpatient dialysis centers are now
owned by multi-center dialysis companies, approximately 15% are owned by independent physicians,
small chains and other small operators, and approximately 18% are
owned by hospitals.
Renal Care Group is a Delaware corporation; our principal executive offices are located at
2525 West End Avenue, Suite 600, Nashville, Tennessee 37203; and our telephone number is (615)
345-5500. Our website is www.renalcaregroup.com.
INDUSTRY OVERVIEW
End-Stage Renal Disease
ESRD is a state of advanced kidney failure. ESRD is irreversible and, without a kidney
transplant, 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 must receive either dialysis for the remainder of their lives or a
successful kidney transplant. By the end of 2003, dialysis was the primary treatment for
approximately 72% of all ESRD patients in the United States, and the remaining 28% of ESRD patients
had a functioning kidney transplant.
According to United States Renal Data System estimates, direct medical payments for ESRD
totaled $27.3 billion during 2003. Of the total direct medical payments for ESRD, approximately
$18.1 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, if they are eligible for Social Security, regardless of their age or financial
circumstances.
According to CMS data, the number of ESRD patients in the United States who need dialysis grew
from approximately 66,000 in 1982 to approximately 325,000 as of December 31, 2003. Based on data
from the United States Renal Data System, the rate of ESRD incidence among Medicare-eligible
patients was approximately 341 patients per million in 2003 as compared to 111 patients per million
in 1984.
Based on these trends, United States Renal Data System forecasts indicate that the total
number of ESRD patients, including those with functioning transplants, will grow from approximately
453,000 in 2003 to 621,000 in 2012. The growth in the number of ESRD patients is expected to result
principally from the aging of the population along with better treatment of, and better survival
rates for, diabetes and other illnesses that lead to chronic kidney disease, reduced somewhat by
declines in incidence of ESRD among patients with high blood pressure as a result of better
treatments for high blood pressure. 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.
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Treatment Options for End-Stage Renal Disease
Currently, there are three treatment options for patients with ESRD:
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hemodialysis performed in a hospital setting, an outpatient facility or a patient’s home, |
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peritoneal dialysis, which is generally performed in the patient’s home, and |
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kidney transplant surgery. |
According to CMS data, in 2003 approximately 92% of patients on dialysis in the United States
received hemodialysis in an outpatient setting, and approximately 8% received hemodialysis or
peritoneal dialysis in their homes.
Hemodialysis is the most common form of ESRD treatment. It is generally performed in either a
freestanding center or a hospital. Hemodialysis uses a dialyzer, essentially an artificial kidney,
to remove toxins, fluid and chemicals from the patient’s blood, while the patient is connected to
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 about four hours and
is usually 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
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 cycling peritoneal
dialysis are the most common. Under each method, the patient’s blood is circulated across the
peritoneal membrane into a dialysis solution that removes toxins and excess fluid from the
patient’s blood. Patients treated at home are monitored monthly through either a visit from a staff
person from a designated outpatient dialysis center or a visit by the patient to a dialysis center
or home dialysis support facility.
Kidney transplants, when successful, are the most desirable form of therapy for ESRD patients.
There is a shortage of donors that severely limits the availability of this procedure as a
treatment option. Only about 4% of ESRD patients received kidney transplants in 2003.
OPERATIONS
Location, Capacity and Use of Facilities
As of December 31, 2005, Renal Care Group operated 456 outpatient dialysis centers in 34
states with 7,894 certified dialysis stations and provided inpatient dialysis services to more than
200 acute care hospitals. During 2005, we provided approximately 4.8 million dialysis treatments.
We estimate that on average our centers were operating at approximately 57% of capacity as of
December 31, 2005, based on the assumption that a dialysis center is able to provide up to three
treatments a day per station, six days a week.
Operation of Facilities
Our dialysis centers provide outpatient hemodialysis and related services to ESRD patients
using technologically advanced dialysis equipment to provide effective and efficient dialysis. Our
centers generally contain between 10 and 30 dialysis stations, one or more nurses’ stations, 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 our centers are adjacent to areas used for training patients in home
dialysis.
In order for our dialysis centers to be eligible to participate in the Medicare ESRD program,
a qualified physician or group of physicians must act as medical director for each center and must
supervise medical aspects of the center’s operations. An administrator or manager manages each
center. The administrator or manager is typically a registered nurse who is responsible for the
day-to-day operations of the center and oversight of the staff. 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. We work
to staff each center in a manner that allows us to adjust to the scheduling of personnel according
to the number of patients receiving treatments.
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Home Dialysis
All of our markets offer home dialysis, either home hemodialysis, peritoneal dialysis or both.
As of December 31, 2005, about 10% of the patients we were
treating received home dialysis. We provide equipment and supplies, training, patient monitoring and
follow-up assistance to patients who receive dialysis treatments in their homes. Management
believes that home dialysis is important to providing a full range of dialysis care, and we
continue to work to expand our home dialysis program.
Inpatient Care
We also provide inpatient dialysis services to hospitals in most of our markets. We often
refer to these services as acute dialysis services. As of December 31, 2005, we provided inpatient
services to more than 200 hospitals. Under these arrangements, we typically provide equipment,
supplies and personnel to perform hemodialysis and peritoneal dialysis in connection with a
hospital’s inpatient services. Patients with acute renal failure resulting from accidents, medical
and surgical complications, patients in early stages of renal failure and ESRD patients who need to
be in the hospital for other reasons often require inpatient dialysis services. Most of our
hospital acute dialysis contracts specify predetermined fees per dialysis treatment. Management
believes that these fees will be subject to re-negotiation in the future as competition increases
among dialysis providers and as hospitals face increased cost pressures.
Nephrologists
Caring for ESRD patients is typically the primary clinical activity of a physician
specializing in nephrology (a nephrologist). A nephrologist’s other clinical activities 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. While some
nephrologists practice independently or are members of multi-specialty groups, most nephrologists
practice in small single-specialty groups. A nephrology group’s practice often covers a relatively
large geographic service area. 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
progress of kidney
transplant patients.
A key factor in the success of a dialysis center is the local nephrologist. An ESRD patient
generally seeks treatment at a center where his or her nephrologist has privileges to admit
patients. Consequently, we rely on our ability to satisfy the needs of patients of local
nephrologists in order to gain new patients and to retain existing patients. As of December 31,
2005, there were 1,314 nephrologists with privileges to practice at one or more of our outpatient
dialysis centers.
Medical Directors
To satisfy the requirements of the Medicare ESRD program, we must engage a medical director
for each of our facilities. We generally engage practicing, board-certified or board-eligible
nephrologists to serve as medical directors for our centers. The
medical director is usually an independent
contractor who provides services under an agreement with Renal Care Group. Medical directors are
responsible for administering and monitoring our patient care policies, including patient
education, administration of dialysis treatment, staff development and training programs, and
assessment of all patients. Medical directors play an important role in quality assurance
activities in our facilities and in coordinating the delivery of care to maintain dialysis
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 between five and ten years
with renewal options. We pay medical directors fees that management believes are consistent with
the fair market value of the required services. These medical director fees are the result of
arms-length negotiations. Most of our medical director agreements also include non-competition
clauses with specific limitations on the medical director’s ability to compete with us by owning,
or providing medical director services for, another dialysis facility for certain specified periods
of time and in specified geographic areas.
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Ancillary Services
Renal Care Group provides a variety of ancillary services to treat ESRD patients in its
dialysis operations. The most significant ancillary service is the administration of erythropoietin
(also known as Epogen® or EPO). EPO is a bio-engineered protein that stimulates the production of
red blood cells. EPO is used in connection with all forms of dialysis to treat anemia, a
complication experienced by almost all ESRD patients. EPO is manufactured by a single supplier,
Amgen Inc. Through our RenaLab subsidiary, we also provide clinical laboratory services for our
dialysis operations. We also offer some other ancillary services ordered by patients’ physicians,
including the administration of other drugs, tests for bone deterioration, electrocardiograms,
nerve conduction studies to test for deterioration of a patient’s nerves, Doppler flow testing to
measure the effectiveness of the patient’s vascular access for dialysis, and blood transfusions.
QUALITY ASSURANCE
Integral to our operating philosophy is the belief that providing high quality care is in the
best interest not only of patients but also of our shareholders. Better patient care results in
improved mortality and morbidity and a greater number of treatments, as patients’ life spans
increase and the number of days patients spend in hospitals declines. In order to optimize therapy
and improve outcomes, we maintain a vigorous quality assurance program. We establish, maintain and
monitor quality criteria for clinical operations and monitor patient outcomes in all of our
centers.
Medical Advisory Board
Our Medical Advisory Board oversees the review of patient outcomes and the development and
communication of clinical protocols. The Medical Advisory Board is chaired by Raymond Hakim, M.D.,
Ph.D., our Chief Medical Officer, and is composed of 12 nephrologists, each of whom is the medical
director of one or more of our centers. The Medical Advisory Board is responsible for establishing,
implementing and monitoring our quality assurance policies and procedures and for reviewing and
recommending protocols, policies and procedures for clinical treatment. The Medical Advisory Board
also works to identify deficiencies in treatment practices 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 care model that will assist us in continuously improving
the care we provide to patients, with the goal of providing optimal care to all patients.
Quality Criteria
Continuous quality improvement is our primary clinical objective. We work to achieve this
objective by regularly evaluating dialysis treatments and patients’ key physiological parameters.
Our Quality Assurance Coordinator is a registered nurse who oversees our quality assurance program.
In addition, each of our dialysis centers has a quality assurance committee that monitors the
quality of care in the center and oversees compliance with applicable regulations. These committees
typically include the medical director, the center administrator, nurses and other technical
personnel.
CORPORATE COMPLIANCE PROGRAM
We have developed and maintain a company-wide compliance program as part of our commitment to
comply fully with all laws and regulations applicable to our business and to maintain high
standards of ethical conduct by our associates. The primary purposes of the program are to heighten
associates’ and affiliated professionals’ awareness of the importance of complying with all laws
and regulations that apply to our business and to take steps to identify and resolve
promptly instances of non-compliance.
The compliance program has been approved by our Board of Directors. The program addresses
general compliance issues and areas of particular sensitivity. Among the areas of particular
sensitivity covered by the compliance program are health care fraud and abuse issues, financial
reporting, conflicts of interest and antitrust. As part of the program we have published a code of
conduct setting forth standards of conduct and principles of business ethics that we will follow
and that we expect each employee and affiliated professional to follow. We review and update the
code of conduct regularly. An internal compliance committee comprised of some of our officers and
senior managers and our full-time Compliance Officer administer our corporate compliance program.
The internal compliance committee and our Compliance Officer are authorized to report compliance
issues directly to the Compliance Committee of our Board of Directors or, if appropriate, to the
Audit Committee of our Board of Directors.
We also maintain a compliance program specific to RenaLab, our laboratory subsidiary. This
program mandates laboratory-specific compliance standards, policies and procedures. The laboratory
compliance program is administered by an internal laboratory
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compliance
committee, composed of officers and senior managers of Renal Care Group and
RenaLab. This committee includes our Compliance Officer and a part-time RenaLab
Compliance Officer. This committee and the RenaLab Compliance Officer are authorized to report
compliance issues directly to the RenaLab Board of Directors and to the Compliance Committee and
the Audit Committee of Renal Care Group’s Board of Directors.
REIMBURSEMENT
Sources of Net Revenue
The following table sets forth information regarding the sources of our net revenue:
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Year Ended December 31, |
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2003 |
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2004 |
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2005 |
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Medicare |
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49 |
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49 |
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52 |
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Medicaid |
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6 |
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4 |
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Commercial and other payors |
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40 |
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42 |
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39 |
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Acute dialysis services |
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5 |
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5 |
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5 |
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Total |
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100 |
% |
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100 |
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100 |
% |
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Medicare
The Social Security Act provides that most U.S. citizens and resident aliens with ESRD are
entitled to Medicare coverage. If a physician diagnoses an eligible person with ESRD, then the
patient will be entitled to Medicare coverage (1) beginning the third month after the month in
which a regular course of dialysis is initiated, or (2) as early as the month in which a kidney
transplant candidate is hospitalized for the transplant if certain conditions are met.
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 30 months, Medicare coverage is secondary for patients who have qualifying
employer-based health insurance. After this 30-month period, Medicare becomes the primary coverage
for patients, and the patient’s other health insurance generally pays applicable Medicare
coinsurance payments and deductibles.
Congress mandated a change in the way we were paid beginning in 2005 for most of the drugs,
including EPO, that we bill for outside of the flat composite rate. This change resulted in lower
reimbursement for these drugs and a higher composite rate. In 2006 we
will be reimbursed for separately billable ESRD drugs at average sales price plus 6.0%. In addition, the composite rate
was increased by 14.7% for 2006 to account for the reduction in drug
payments. These regulations also include a case-mix adjustment that became
effective in April 2005, a geographic adjustment to the composite rate and a budget-neutrality
adjustment. Management believes these changes coupled with the 1.6% increase in the Medicare
composite rate in 2006 will be positive to Renal Care Group’s revenue per treatment and
earnings in 2006.
According
to the Medicare Payment Advisory Commission, also known as MedPAC,
the Medicare ESRD composite rate for outpatient dialysis services
averaged $140 per treatment
in freestanding facilities during 2005. The Medicare ESRD composite rate is subject to regional
differences based on a number of factors, including labor costs. CMS or Congress may periodically
adjust Medicare reimbursement rates, including the ESRD composite rate, based on many 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 providing dialysis care.
The Medicare ESRD composite rate applies to a designated group of outpatient dialysis
services, including dialysis treatment, supplies used for treatment, certain laboratory tests and
some medications, and most of the home dialysis services we provide. 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.
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Changes in the Medicare ESRD Composite Rate
Congress approved a 1.6% increase in the Medicare ESRD composite rate for 2006, following
increases of 1.6% in 2005, 2.4% in 2001 and 1.2% in 2000. Under the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, or MMA, in 2006, Medicare will reimburse
dialysis providers for ESRD drugs (including EPO) at an amount equal to the drug’s average sales
price (as determined by the Inspector General of the Department of Health and Human Services) plus
6.0%, and the Medicare ESRD composite rate will be increased by an amount estimated by HHS to be
dialysis provider’s average profit on these drugs before the
change in drug reimbursement. To account for the changes in drug
reimbursement, CMS has determined that in 2006 the composite rate
will be increased from 2005 levels by approximately 14.7%,
or approximately $19, per treatment, while payments for most separately billable drugs will be reduced. In
addition, Medicare has revised the geographic adjustments in the composite rate beginning in 2006.
Management believes that the net effect of all of these changes in Medicare payments (including the
1.6% increase in the composite rate, the increase in the composite rate intended to offset
reductions in drug reimbursements, the reductions in drug reimbursements and the change in the
geographic adjustments) will be positive to the Company in 2006 in terms of average Medicare
revenue per treatment.
Before 2000, the Medicare ESRD composite rate was unchanged from commencement of the program
in 1972 until 1983. From 1983 through December 1990, a series of congressional actions resulted in
net reductions of the average Medicare ESRD composite rate from approximately $138 per treatment in
1983 to approximately $125 per treatment in 1986. Our average Medicare rate per dialysis treatment
was $140 during 2005.
The Medicare ESRD composite rate has been the subject of a number of reports and studies.
During 2000, Congress directed a study of the ESRD composite rate structure, which was delivered in
2003. The study reviewed items included in the composite rate and items that are currently
separately billable (such as EPO and certain laboratory services) and analyzed whether the
composite rate should be subject to an annual inflationary update. The study made preliminary
recommendations to expand the services covered by the Medicare ESRD composite rate. The study made
no final recommendations, and Congress has not acted on it.
During recent congressional sessions, there have been proposals to change numerous aspects of
Medicare, not all of which were included in the MMA. We are unable to predict what, if any, future
changes may occur in the Medicare ESRD composite rate. Any reductions in the Medicare ESRD
composite rate or change in the items covered by the composite rate (such as EPO or certain
laboratory services) could have a material adverse effect on our earnings, financial condition and
business.
Medicare Reimbursement for EPO
We derive a significant portion of our revenue and earnings from the administration of EPO.
Medicare reimbursement for EPO was fixed at $10 per 1,000 units from 1994 through 2004. The Secretary of HHS has the authority to determine the
Medicare reimbursement rate for EPO, which will equal its average
sales price plus 6.0% for 2006. Medicare
reimbursement for EPO was reduced in 2005 to $9.76 as a result of the
MMA, and it will be further reduced
to $9.57 in the first quarter of 2006 and will be adjusted quarterly
in the future based on changes in the average sales price. Approximately
24% of our revenue in 2005 was generated from the administration of EPO; therefore, any further
reduction in Medicare reimbursement for EPO could have a material adverse effect on our earnings,
financial condition and business.
In the past CMS has placed limits on EPO reimbursement based on patients’ hematocrit levels.
Hematocrit is a measure of a patient’s anemia. In 2005, CMS
issued a national medical review
policy to limit EPO reimbursement based on hematocrit levels and EPO
dosage levels, which is scheduled to take effect in
April 2006. Medicare’s contractors often conduct medical necessity reviews of claims involving
high doses of EPO for patients with relatively high hematocrits. We
are unable to predict what
any changes in EPO reimbursement will occur based on this new policy. Any reduction in Medicare
reimbursement for EPO could have a material adverse effect on our earnings, financial condition and
business.
Medicaid Reimbursement
Medicaid programs are health care programs that are partially funded by the federal government
and are administered by the states. These programs generally provide coverage for uninsured
patients whose income and assets are below levels determined by the states. The programs also serve
as supplemental insurance programs for the Medicare co-insurance portion and provide coverage for
some 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. We are a licensed ESRD Medicaid provider in all of the states in which we do business.
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Some of the states in which we do business have dialysis reimbursement rates for Medicaid
patients that are higher than Medicare rates. Representatives of CMS and some of these states have
indicated that the states should consider reducing these higher reimbursement levels, and, as a
result, several states have implemented reductions in Medicaid reimbursement. We currently do
business in two states in which Medicaid reimbursement remains substantially higher than Medicare rates
— Alaska and New Mexico. Reductions in Medicaid reimbursement in these states could have an adverse
effect on our earnings, financial condition and business.
In addition, under the Balanced Budget Act of 1997, state Medicaid programs are not required
to pay the patient’s Medicare cost-sharing amounts for dialysis treatment if the state Medicaid
dialysis payment rates are at or below the Medicare composite rate. In such cases, the patient is
not liable for the cost-sharing amounts. Since the effect of the MMA has increased the Medicare
composite rate by dialysis providers’ average profit on separately billable drugs, nearly all state
dialysis payment rates are now below the new Medicare composite rate. Thus, if states exercise
their option not to pay applicable patient cost-sharing amounts, Medicaid reimbursement in these
states could be further reduced.
Non-governmental Reimbursement
Before Medicare becomes a patient’s primary payor, if a patient has private health insurance
coverage, then the patient’s own insurance plan or other health care coverage pays for his or her
ESRD treatments. We estimate that Medicare and Medicaid are the primary payors for approximately
80% of the patients to whom we provide care. Therefore, reimbursement from private payors,
including acute dialysis payors, cover the other 20% of the patients to whom we provide care;
however, that private reimbursement usually represents more than 40% of our net revenue.
Reimbursement rates from these private payors are generally significantly higher than the rates
paid by Medicare. We have negotiated contracts with most managed care payors in our markets at
rates that are higher than the Medicare ESRD composite rate. Rates under these managed care
contracts are, however, generally lower than those we charge other private payors. After Medicare
becomes a patient’s primary payor, private secondary payors generally reimburse us for the
patient’s copayment which is 20% of the applicable Medicare rate.
We also receive payments from hospitals under acute care contracts. Rates under these
contracts for dialysis treatments are generally higher than the Medicare ESRD composite rate. Rates
under these acute care contracts are the result of arms-length negotiations between the hospital
and us, and management believes they approximate fair market value of the services we provide.
GOVERNMENT REGULATION
General
Federal, state, and local governments extensively regulate Renal Care Group’s operations,
including the dialysis centers and laboratory we own. Applicable federal and state statutes and
regulations require us 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, our laboratory is subject, among other
laws, to the federal Clinical Laboratory Improvement Amendments of 1988, also known as CLIA. Our
dialysis centers and laboratory are subject to periodic inspection by state and federal agencies to
determine if they meet applicable requirements. In addition, through certificate of need or permit
programs, some states regulate the development or expansion of health care facilities and services,
including dialysis centers. Our 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.
We are subject to federal and state laws governing, among other things, our relationships with
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 some 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 has increased significantly.
We believe our operations substantially comply with applicable federal and state laws.
However, if a state or the federal government finds that we have not complied with these laws, then
we could be required to change our operations. We are currently under
investigation by two United States Attorneys’ offices (See
“Government Regulation — Government Investigations”).
Any changes we are required to make as a result of a
determination we have not complied with law or to settle an
investigation could have a negative impact on us. To
date, our dialysis centers have maintained their licenses and their Medicare and Medicaid
certifications, but if there is a determination that we have not
complied with law, our certifications could be revoked. 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
us. Management believes that the health care services industry will continue
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to be subject to extensive regulation at the federal, state and local levels. We cannot
predict the scope and effect of future regulation of our business and cannot predict whether health
care reform will require us to change our operations or whether such reform will have a negative
impact on us.
We cannot predict whether we will be held responsible for actions previously taken by acquired
companies or facilities before we purchased them. We also cannot predict whether our operations, or
the previous operations of acquired companies or facilities, will be reviewed or challenged by the
government. Any review or challenge of our operations could have a negative impact on us.
Government Investigations
Last year the federal government continued to investigate the practices of health care
providers, including providers of dialysis. In March 2005, the office of the United States
Attorney for the Eastern District of Missouri served a subpoena on one of our competitors, DaVita,
Inc., requiring the production of a broad range of documents. In April 2005, the office of the
United States Attorney for the Eastern District of Missouri served a similar subpoena on another of
our competitors, Fresenius Medical Care. In December 2004, another of our competitors, Gambro Healthcare, settled an investigation conducted
by the office of the United States Attorney for the Eastern District of Missouri and paid more than
$350 million in connection with the settlement.
On August 9, 2005, we received a subpoena from the office of the United States Attorney for
the Eastern District of Missouri. The subpoena requires us to produce documents related to
numerous aspects of our business and operations. The subpoena includes specific requests for
documents related to our supply company, pharmaceutical and other ancillary services we provide to
patients (including the administration of EPO), our relationships with pharmaceutical companies,
our relationships with physicians, medical director compensation, joint ventures with physicians
and our purchases of dialysis equipment from Fresenius Medical Care.
The subpoena was issued in connection with a joint civil and criminal
investigation. We are cooperating with the
government’s investigation; we have produced numerous documents
to the government in response to this subpoena. We have incurred significant legal and other
expenses responding to the subpoena and have experienced distraction of management attention.
Compliance with the subpoena will require us to incur substantial additional legal and other
expenses and will require further management attention. To our knowledge, no proceedings have been
initiated against Renal Care Group at this time, but we cannot predict whether or when proceedings
might be initiated. In addition, we cannot predict the outcome of any proceedings that may be
initiated against us as a result of this investigation. Any such proceedings could have a material
adverse effect on our business, financial condition and results of operations.
On
October 25, 2004, we received a subpoena from the office of the United States Attorney for
the Eastern District of New York. This subpoena requires the production of documents related to
numerous aspects of our business and operations, including those of our laboratory, RenaLab, Inc.
The subpoena includes specific requests for documents related to testing for parathyroid hormone
(PTH) levels and vitamin D therapies. Our competitors DaVita, Inc., Fresenius Medical Care, and
Gambro Healthcare, as well as other participants in the dialysis industry, have announced that they
have received similar subpoenas. We are cooperating with the government’s investigation. We have produced numerous documents to the
government in response to this subpoena. We have incurred significant legal and other expenses
responding to the subpoena. Compliance with this subpoena will require us to incur additional
legal expenses and could distract management attention. To our knowledge, no proceedings have been
initiated against Renal Care Group at this time, but we cannot predict whether or when proceedings
might be initiated. We cannot predict the outcome of any proceedings that may be initiated against
us a result of this investigation. Any such proceedings could have a material adverse effect on
our business, financial condition and results of operations.
If any aspect of our operations is found to violate applicable laws, then we may be subject to
severe sanctions and we could be required to alter or discontinue the challenged conduct or both. If
sanctions are imposed on us, then there could be a material adverse effect on our business,
financial condition and results of operations. If we are required to alter or discontinue
practices, then we may not be able to do so successfully, which could have a material adverse
effect on our business, financial condition and results of operations.
The federal government also continues to investigate practices of laboratories. Each of the
laboratories owned and operated by the major dialysis providers, including our laboratory, has been
the subject of a government investigation in addition to the one in the Eastern District of New York
described above. These laboratories, including our laboratory, could be the subject of future
investigations.
Medicare and Medicaid Certification and Reimbursement
To receive reimbursement from federal health care programs for dialysis and laboratory
services, our dialysis centers and laboratory must be certified by one or more government agencies.
For example, to receive Medicare reimbursement, our dialysis centers and laboratory must be
certified by CMS. All of our dialysis centers and our laboratory operations are certified under the
Medicare program and applicable state Medicaid programs. In connection with our participation in
Medicare, we must comply with conditions for coverage, including requirements concerning personnel,
management, patient care, patient rights, medical records and physical environment. We must also
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.”
HHS has recently issued proposed regulations to adopt new Medicare conditions for coverage for
ESRD services. The proposed changes to the Medicare conditions for coverage for ESRD facilities could
require us to change our operations and may have a negative effect on our business and
profitability.
The HHS Office of Inspector General, also known as the OIG, issued reports in the summer of
2000 recommending greater oversight of the quality of care in dialysis facilities. In January of
2003, the United States General Accounting Office (now the Government Accountability Office), known
as the GAO, issued a report finding that efforts by CMS to ensure quality care at certain
facilities including kidney dialysis facilities continue to be jeopardized by problems in the
performance of state inspections, complaint investigations and enforcement of federal standards.
Any increased oversight could lead to increased requirements and greater scrutiny of dialysis
facilities, including those we own.
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The Anti-Kickback Statute
Under Medicare, Medicaid and other government-funded health care programs, such as the
CHAMPUS/Tri-Care program, federal and state governments enforce provisions of the Social Security
Act of 1965 that are commonly referred to as 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 federal health care
programs, 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
paid for 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, the Secretary of 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. 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 OIG or the United States Attorney, HHS has 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 violate the Anti-Kickback Statute.
The types of arrangements covered by safe harbors include certain investments in companies
whose stock is traded on a national exchange, certain small company investments in which physician
ownership is limited, rentals of space, rentals 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 specific requirements 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 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
Medicare 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 dialysis
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. Management
believes that our arrangements with laboratories reflect fair market value and comply with the
Anti-Kickback Statute.
We seek to satisfy as many safe harbor requirements as possible when we are structuring
business arrangements. However, not all of our arrangements satisfy all elements of a safe harbor.
Management believes that we have a reasonable basis for concluding we substantially comply with the
Anti-Kickback Statute and other applicable related federal and state laws and regulations.
Management believes that our current arrangements with physicians including nephrologists owning
our common stock, medical directors, laboratories, suppliers, hospitals, and other sources of
referrals to our dialysis centers and our arrangements with hospitals to provide acute dialysis
materially comply with the Anti-Kickback Statute. However, a government agency might take a
position contrary to our interpretations or may require us to change our practices. If an agency
were to take such a position, it could materially and adversely affect Renal Care Group.
The Stark Law
Congress has also passed significant prohibitions against some 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 particular health care services (called designated
health services) to entities with which the physician, or an immediate family member of the
physician, has a financial relationship. If an arrangement is covered by the Stark Law, the
requirements of a Stark Law exception must be met for the physician to be able to make referrals to
the entity for designated health services.
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Under the Stark Law, the term “financial relationship” is defined very broadly to include most
ownership and 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 pursuant to a
prohibited referral, it may incur civil penalties or could be excluded from participating in
Medicare or Medicaid.
The Stark Law restricts referrals for clinical laboratory services; 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.
The Stark Law defines a financial relationship 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. We have compensation arrangements with 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 our common stock. In addition, other physicians who refer
patients to our centers may own our stock. If so, the medical directors and other physicians would
have a financial relationship with us. Accordingly, these physicians would not be able to refer
patients to our 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 that we may provide to patients in connection with dialysis services. On March 26,
2004, CMS issued Phase II of its regulations under the Stark Law (referred to as the Stark II
Regulations). The Stark II Regulations exclude from the definition of covered designated health
services those services that are reimbursed by Medicare as part of a composite rate. They also
contain an exception under the Stark Law for clinical laboratory services that are included in the
Medicare ESRD composite rate. Therefore, services that are included in the Medicare ESRD composite
rate are not covered by the Stark Law.
Further, the Stark II Regulations exclude from the referral prohibition EPO and certain other
dialysis-related drugs if certain requirements are met. The list of drugs eligible for this
exception is published and updated from time to time by CMS. If the requirements are met, this
exception applies whether or not these drugs are included in the Medicare ESRD composite rate.
The final regulations also exclude from the definition of “inpatient hospital services” any
dialysis services provided by a hospital that is not certified by CMS to provide outpatient
dialysis services. This rule would have the effect of excluding from the Stark Law prohibition, any
dialysis services we provide under an acute dialysis contract with a hospital, if that hospital is
not certified to provide outpatient dialysis. The Stark II Regulations exclude from the definition
of “durable medical equipment” all equipment and supplies used in connection with home dialysis
that are reimbursable under a composite rate. These Stark II Regulations exclude most of the items
and services connected with dialysis from the Stark Law prohibitions.
If the Stark Law were found to apply to our relationships with referring physicians, there are
exceptions to the Stark Law, which would permit such physicians to refer patients to us for
designated health services if we meet certain requirements. 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 of a physician, 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. The Stark II Regulations establish
a safe harbor for compensation to physicians providing that hourly payments set under either of two
methodologies will constitute fair market value, qualifying the arrangement for the fair market
value exception under the Stark Law. The preamble to the Stark II Regulations contains a discussion
indicating CMS’s view that the hourly rate methodologies could be applicable to compensation under
an ESRD facility medical director agreement. Our medical director agreements do not provide for
compensation to our medical directors based on an hourly rate. However, we believe that our
agreements with medical directors or their professional practices provide for fair market value
compensation and materially satisfy the Stark Law exception for personal service arrangements.
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
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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 December 31,
2005, we had stockholders’ equity of more than $739.0 million. Management believes that physician
ownership of our stock satisfies this Stark Law exception.
If an entity violates the Stark Law, it could be subject to civil penalties of up to $15,000
per prohibited claim and may be excluded from Medicare and Medicaid. If the Stark Law applies to
our relationships with referring physicians and no exceptions under the Stark Law are available,
then we would be required to restructure these relationships or refuse to accept referrals for
designated health services from these physicians. If we were found to have submitted claims to
Medicare for services provided pursuant to a referral prohibited by the Stark Law, then we would be
required to repay amounts we received from Medicare for those services and could be subject to
civil monetary penalties. If we were required to repay amounts to Medicare or were subject to
fines, our business and profits could be harmed.
Many states have physician relationship and referral statutes that are similar to the Stark
Law. Management believes we are in substantial compliance with applicable state laws with respect
to physician relationships and referrals. However, any finding that we are not in compliance with
these state laws could require us to change our operations and could have a negative impact on us.
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. HIPAA also expanded the authority of the
OIG to exclude persons and entities from participating in the Medicare and Medicaid programs. HIPAA
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, conceals or covers up a material fact, or makes any materially false or fraudulent
statements in connection with the delivery of or payment for health care services by a health care
benefit plan is subject to a fine, imprisonment or both.
HIPAA also required 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 that requested it.
However, advisory opinions are published and made available to the public, and they provide
guidance on practices the OIG believes may violate federal law. We have 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 OIG opinions, we had paid premiums for Medicare supplemental insurance for some
patients with demonstrated financial need. We stopped making such payments following the adoption
of HIPAA. Consistent with the OIG’s advisory opinions, we have made donations to charitable
foundations that may, but are not required to, make premium payments on behalf of ESRD patients. We
believe, but cannot make assurances, that our current practices regarding supplemental insurance
substantially comply with the general principles expressed by the OIG in these advisory opinions.
HHS has adopted regulations governing electronic transactions by certain entities involving
health information. These regulations are part of the administrative simplification provisions of
HIPAA. These regulations are commonly referred to as the Transaction Standards rule. The rule
establishes standards for eight of the most common health care transactions by reference to
technical standards promulgated by recognized standards publishing organizations. Under the new
standards, any party transmitting or receiving health transactions electronically must send and
receive data in a prescribed format, rather than the large number of different data formats
previously used. This rule applies to Renal Care Group as we submit and process health claims. The
Transaction Standards rule also applies to many of our payors and to our relationships with those
payors.
HHS has also adopted regulations implementing HIPAA that adopted standards for privacy of
individually identifiable health information. These regulations cover health care providers, health
care clearinghouses and health plans. The privacy regulations, among other things, require
companies covered by the regulations:
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to obtain patient authorization prior to certain uses or disclosures of protected health information, |
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to provide notice of privacy practices to patients and obtain an acknowledgement that the patient has received the notice, |
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to respond to requests from patients for access to or to obtain a copy of their information, |
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to respond to patient requests for amendments of their information, |
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to designate a privacy officer, |
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to use and disclose only the minimum necessary information to accomplish a particular purpose, and |
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to establish policies and procedures with respect to uses and disclosures of protected health information. |
These regulatory requirements impose significant administrative and financial obligations on
companies that use or disclose individually identifiable information relating to the health of a
patient. We have implemented policies and procedures to maintain patient privacy and comply with
HIPAA’s privacy requirements. The privacy regulations are extensive, and we may need to change some
of our practices to comply with them as they are interpreted and as we deal with issues that arise.
HHS has also published regulations implementing HIPAA that govern the security of health
information that is maintained or transmitted electronically. The regulations generally require the
implementation of administrative, physical and technical safe guards to ensure the confidentiality,
integrity and availability of electronic health information. Management believes we are in
substantial compliance with these regulations.
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 that 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 $5,500 to $11,000 for each
fraudulent claim plus up to 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 $2,000 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:
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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
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that were furnished by a person who was, at the time the claim was made, excluded from
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that show a pattern of medically unnecessary items or services. |
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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 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 and Regulatory Developments
Congress may enact legislation and/or CMS may promulgate regulations in the future that may
significantly change the Medicare ESRD program or reduce the amount that Medicare and Medicaid will
pay for our services. In addition, federal and state statutes or regulations may be enacted to
impose additional requirements on us 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 of dialysis providers or the manner in which dialysis companies provide
services to patients could have a material impact on us and could adversely affect our
profitability.
Joint Ventures
A number of the dialysis centers we operate are owned by joint ventures in which we own a
controlling interest and one or more physicians or physician practice groups own a minority
interest. The physician owners may also provide medical director services to those centers and/or
to other centers we own and operate. Because our relationships with physicians are governed by the
Anti-Kickback Statute, we have sought to satisfy as many safe harbor requirements as possible in
structuring these joint venture arrangements. However, our joint venture arrangements do not
satisfy all elements of a safe harbor. Management believes that we have a reasonable basis for
concluding that we substantially comply with the Anti-Kickback
Statute. We also believe we have
structured the physician relationships in these joint ventures in a way that substantially complies
with the Stark Law or meets applicable exceptions under the Stark Law. If the joint ventures were
found to be in violation of the Anti-Kickback Statute or the Stark Law, we could be required to
restructure them or refuse to accept referrals for designated health services from the physicians
with whom the joint venture centers have a financial relationship. We also could be required to repay to
Medicare amounts received by the joint ventures pursuant to prohibited referrals, and we could be
subject to monetary penalties. If the joint venture centers are subject to any of these penalties,
our business and profits could be damaged.
COMPETITION
The dialysis industry is highly competitive. Competition for qualified physicians to act as
medical directors is also intense. According to CMS, there were more
than 4,500 outpatient
facilities providing dialysis in the United States at the end of 2003. We believe that as of
December 31, 2005, approximately 67% of these facilities were owned by the three largest
multi-center dialysis companies, approximately 15% were owned by independent physicians, small
chains and other small operators, and approximately 18% were owned by
hospitals. The largest
multi-center dialysis company is DaVita, Inc., which acquired the United States dialysis services
business of Gambro Healthcare in October 2005. Fresenius Medical Care, Inc., which also
manufactures and sells dialysis equipment and supplies, is our next largest competitor. As a
vertically integrated provider, Fresenius may have some competitive advantages.
There are also a number of other health care providers that have entered or may decide to
enter the dialysis business. Some of our competitors have substantially greater financial resources
than ours, and they compete with us for acquisitions, development and/or management of dialysis
centers and nephrology practices. We believe that competition for acquisitions has, over time,
increased the cost of acquiring dialysis centers. We may also experience competition from centers
established by former medical directors or other referring physicians. There can be no assurance
that we will compete effectively with any of our competitors.
INSURANCE
We maintain professional liability insurance and general liability insurance policies for all
of our operations. We also maintain insurance in amounts management deems adequate to cover
property and casualty risks, workers’ compensation, and directors’ and officers’ liability. There
can be no assurance that the aggregate amount and types of our insurance are adequate to cover all
risks we may incur or that insurance will be available in the future.
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EMPLOYEES
At December 31, 2005, we employed 7,962 full-time employees and 1,454 part-time employees. Of
the total employees, 76 were employed at our headquarters and 9,340 were employed at our dialysis
facilities, laboratory or regional business offices. In management’s opinion, employee relations
are good.
INTERNET WEBSITE
Our internet website can be found at www.renalcaregroup.com. We make available free of charge
on or through our internet website, access to our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to the
Exchange Act as soon as reasonably practicable after such material is filed with, or furnished to,
the Securities and Exchange Commission. We will also provide a copy of these documents free of
charge to shareholders upon request.
Item 1A.
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 us.
If any of the following risks occurs, 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.
Completion of the Fresenius Medical Care transaction is subject to various conditions; as a result
we can not assure you that our transaction with Fresenius Medical Care will be completed.
The completion of the acquisition of Renal Care Group by Fresenius Medical Care is subject to
various conditions, including the following:
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the termination or expiration of the waiting period under the Hart-Scott Rodino Antitrust
Improvements Act of 1976, as amended, or the approval of the transaction under that act; |
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the absence of a temporary restraining order, preliminary or permanent injunction or other
order issued by any court or other legal restraint or prohibition preventing the
consummation of the transaction; |
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the accuracy of the representations and warranties of Renal Care Group and Fresenius
Medical Care in the merger agreement; |
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the performance in all material respects by Renal Care Group and Fresenius Medical Care
of all obligations required to be performed by each of them under the merger agreement at or
prior to the effective time of the transaction; |
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the absence of an event, change, effect or development that, individually or in the
aggregate, has had or would reasonably be expected to have, a material adverse effect on
Renal Care Group as defined in the merger agreement; or |
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the satisfaction or waiver by the lenders of the conditions precedent to the initial
funding of Fresenius Medical Care’s financing commitments that are related to the delivery
of releases of liens encumbering the assets of Renal Care Group and the delivery of
financial statements of Renal Care Group. |
Because of these conditions, the transaction with Fresenius Medical Care may not be completed.
If the transaction is not completed for any reason, then our current management, under the
direction of our Board of Directors, will continue to manage Renal Care Group.
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Failure to complete the Fresenius Medical Care transaction could negatively impact the market price
of our common stock and our ability to operate our business.
If the transaction with Fresenius Medical Care is not completed for any reason, we will be
subject to a number of material risks, including:
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the market price of our common stock could decline; |
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we must pay some of the costs related to the transaction, such as legal and accounting
fees and a portion of the investment banking fees and, in specified circumstances,
termination fees and expense reimbursement payments, even if the transaction is not
completed, and those costs will be expensed in the fiscal period in which termination
occurs; |
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the diversion of management’s attention from our day-to-day business and the unavoidable
disruption to our associates and our relationships with patients, medical directors,
attending physicians and suppliers, during the period before completion of the transaction,
may make it difficult for us to regain our financial and market position if the transaction
does not occur; and |
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the loss of key management, clinical and technical personnel who may be uncertain about
their future roles and relationships with Renal Care Group following the completion of the
transaction with Fresenius Medical Care could make it difficult for us to operate our
business effectively and profitably if we are unable to replace these employees if the
transaction with Fresenius Medical Care is not completed. |
If the merger agreement is terminated and our Board of Directors seeks another transaction or
business combination, then our shareholders cannot be certain that we will be able to find an
acquirer willing to pay an equivalent or better price than the price to be paid by Fresenius
Medical Care under the merger agreement.
Our profits are dependent on the services we provide to a small portion of our patients who are
covered by private insurance.
In recent reviews of dialysis reimbursement, the Medicare Payment Advisory Commission, also
known as MedPAC, has noted that Medicare payments for dialysis services are less than the average
costs that providers incur to provide the services. Since Medicaid rates are comparable to those of
Medicare and because Medicare only pays us 80% of the Medicare allowable amount (the patient,
Medicaid or secondary insurance being responsible for the remaining 20%), the amount we receive
from Medicare and Medicaid is less than our average cost per treatment. As a result, the payments
we receive from private payors both subsidize the losses we incur on services for Medicare and
Medicaid patients and generate all the profits we report. In fact, much of our profit is generated
from private-pay patients for whom we are paid at amounts equal to several times Medicare rates. We
estimate that Medicare and Medicaid are the primary payors for approximately 80% of the patients to
whom we provide care but that only 55% of our net revenue in 2003, 53% of our net revenue in 2004
and 56% of our net revenue in 2005 were derived from Medicare and Medicaid. Therefore, if the
private payors who pay for the care of the other 20% of our patients reduce their payments for our
services, or if we experience a shift in our revenue mix toward Medicare or Medicaid reimbursement,
then our revenue, cash flow and earnings would decrease, and our cash flow and profits would be
disproportionately impacted.
Over the last few years, we have generally been able to implement annual price increases of
between 7% and 12% for private insurers and managed care organizations, but government
reimbursement has remained flat or has been increased only modestly. Management believes that
health insurance pricing is cyclical and that we may be at or near the top of the cycle. During
2005 we experienced pricing pressure from a number of private payors. As a result of the industry
cycle and this pricing pressure, management believes that our ability to maintain or raise rates to
private insurers and managed care companies may be more limited over the next several years than it
has been in the recent past. Management believes that the reductions in reimbursement by commercial
insurers, along with pricing pressure from other commercial insurers and managed care
organizations, could adversely impact our revenue per treatment and earnings per share in 2006. Any
of the following events could have a material adverse effect on our revenue and earnings:
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any number of economic or demographic factors could cause private insurers, hospitals or
managed care companies to reduce the rates they pay us or to refuse to pay price increases
or to work to reduce the rate of our price increases; |
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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 |
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a portion of our business that is currently reimbursed by private insurers at rates based
on our billed charges may become reimbursed under a contract at lower rates. |
If Congress or CMS changes the Medicare or Medicaid programs for dialysis, then our net revenue and
earnings could decrease.
If the government changes the Medicare, Medicaid or other government programs or the rates
those programs pay for our services, then our revenue and earnings may decline. We estimate that
approximately 55% of our net revenue for 2003, 53% of our net revenue for 2004, and 56% of our net
revenue in 2005 consisted of reimbursements from Medicare, Medicaid and comparable state programs,
including reimbursement for the administration of EPO. Any of the following actions in connection
with government programs could cause our revenue and earnings to decline:
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a reduction of the amount paid to us under government programs; |
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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; |
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the inclusion of some or all ancillary services, for which we are now reimbursed
separately, in the flat composite rate for a dialysis treatment; or |
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changes in laws, or the interpretations of laws, which could cause us to modify our
operations. |
We cannot predict whether any of the proposed cuts will be made or how they will affect us. In
addition, Congress and CMS have proposed expanding the drugs and services that are included in the
flat composite rate. CMS has indicated that it believes such a mechanism would be fairer and easier
to administer. In addition, Congress mandated a change in the way we are paid for some of the
drugs, including EPO, that we bill for outside of the flat composite rate. This change has resulted
in lower reimbursement for these drugs and a higher composite rate. Under recently adopted
regulations, in 2006 we will be reimbursed for separately billable ESRD drugs at average sales price
plus 6.0%. In addition, the composite rate was increased by 14.7% to account for the change in drug
reimbursement. Other regulations
include changes in the geographic designations and wage indices used to calculate the composite rate in specific areas.
If states lower Medicaid reimbursement, then we would be less profitable.
The Medicaid programs in Alaska and New Mexico currently reimburse us for some items at rates
higher than those paid by Medicare. These programs may reduce payment levels to be at or close to
Medicare rates. In addition, a number of the states in which we operate are experiencing budget
shortfalls, and some of these states may consider reducing Medicaid reimbursement, changing their
Medicaid programs or not paying claims to address these shortfalls and cut costs. We are unable to
predict whether and, if so, when any reductions in Medicaid reimbursement might occur and what
their precise effect will be.
If reimbursement for EPO decreases, then we could be less profitable.
If government or private payors reduce reimbursement rates for EPO, for which we are currently
reimbursed separately outside of the flat composite rate, then our revenue and earnings will
decline. Revenues from the administration of EPO were approximately 24% of our net revenue for
2003, 26% of our net revenue for 2004 and 24% of our net revenue for 2005. Most of our payments for
EPO come from government programs. For the year ended December 31, 2005, Medicare and Medicaid
reimbursement represented approximately 56% of the total revenue we derived from EPO. A reduction
in the reimbursement rate for EPO or the inclusion of EPO in the list of items covered by the flat
composite rate could materially and adversely affect our net revenue and earnings. As discussed
above, as part of the Medicare Modernization Act, Congress mandated a change in the way we are
reimbursed for EPO, and CMS has adopted regulations to implement the
change. In 2005 we were
reimbursed for EPO at an average acquisition price. In 2006, we will
be reimbursed for CMS published proposed rules
for EPO at average sales price plus 6.0%. This average
sales price plus 6.0% will be substantially less than average acquisition price.
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If Amgen raises the price for EPO or if EPO becomes in short supply, then we could be less
profitable.
EPO is produced by a single manufacturer, Amgen, Inc. In April 2002, Amgen announced a 3.9%
increase in the price of EPO. This price increase adversely affected our earnings in 2003, and
changes in the rebate structure under our contracts with Amgen adversely affected our earnings in 2004
and 2005. In June 2005, Amgen
implemented a 4.9% increase in the price of EPO. This price increase
will not affect us in 2006. Further changes in the rebate structure under our current contract with Amgen or in
Amgen’s packaging process for EPO, may adversely affect our
earnings in 2006. If Amgen imposes additional EPO price increases or if Amgen or other factors interrupt the supply
of EPO, then our net revenue and earnings will decline.
If
Amgen markets Aranesp® for ESRD patients, then we could be less profitable.
Amgen has developed and obtained FDA approval for another drug to treat anemia that is
marketed as Aranesp® (darbepoetin alfa).
Aranesp® is a longer acting form of bio-engineered protein
that, like EPO, can be used to treat anemia. EPO is usually administered in conjunction with each
dialysis treatment. Aranesp® can remain effective for two
to three weeks. If Amgen markets
Aranesp®
for the treatment of dialysis patients, then our earnings could be materially and adversely
affected by either of the following factors:
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our margins realized from the administration of
Aranesp® could be lower than the margins
realized on the administration of EPO; or |
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physicians could decide to administer
Aranesp® in their offices, and we would not
recognize net revenue or profit from the administration of EPO or
Aranesp®. |
Changes in our clinical practices or reimbursement rules for EPO and other drugs could
substantially reduce our revenue and earnings.
The administration of EPO and other drugs accounted for approximately 35% of our net revenue
during 2005. Changes in physician practices or prescription patterns, changes in private and
governmental reimbursement criteria or the introduction of new drugs or new types of drug
administration could materially reduce our net revenue and profits. For example, some Medicare
fiscal intermediaries have implemented or may implement local medical review policies for EPO and
other drugs that would effectively limit reimbursement for those drugs. In 2005, CMS adopted a
national policy that will establish limits on reimbursement for EPO. This policy will become
effective in April 2006. These changes may have an adverse impact on our net revenue and earnings.
If our business is alleged or found to violate heath care or other applicable laws, our net revenue
and earnings could decrease.
We are subject to extensive federal, state and local regulation. The laws that apply to our
operations include, but are not limited to, the following:
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fraud and abuse prohibitions under state and federal health care laws; |
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prohibitions and limitations on patient referrals; |
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billing and reimbursement rules, including false claims prohibitions under health care reimbursement laws; |
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rules regarding the collection, use, storage and disclosure of patient health
information, including HIPAA, and state law equivalents of HIPAA; |
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facility licensure; |
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health and safety requirements; |
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environmental compliance; and |
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medical and toxic waste disposal. |
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Much of the regulation of our business, 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 through 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.
New regulations governing electronic transactions and the collection, use, storage, and
disclosure of health information impose significant administrative and financial obligations on our
business. If, after the required compliance date, we are found to have violated these regulations,
we could be subject to:
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criminal or civil penalties, including significant fines; |
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claims by people who believe their health information has been improperly used or disclosed; and |
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administrative penalties by payors. |
Government investigations could adversely affect Renal Care Group.
Government investigations of health care providers, including dialysis providers, have
continued to increase. We have been the subject of investigations in the past, we are involved in
current investigations, and the government may investigate our business in the future. One of our
competitors, DaVita, Inc., has announced that it is the subject of an investigation by the U.S.
Attorney for the Eastern District of Pennsylvania. In December 2004, another competitor, Gambro
Healthcare, Inc., settled matters related to an investigation by the U.S. Attorney’s Office in St.
Louis, Missouri and paid approximately $350.0 million in connection with the settlement.
In March 2005, the office of the United States Attorney for the Eastern District of Missouri
served a subpoena on DaVita, Inc. requiring the production of a broad range of documents. In April
2005, the office of the United States Attorney for the Eastern District of Missouri served a
similar subpoena on Fresenius Medical Care.
On August 9, 2005, we received a subpoena from the office of the United States Attorney for
the Eastern District of Missouri. The subpoena requires us to produce documents related to
numerous aspects of our business and operations. The subpoena includes specific requests for
documents related to our supply company, pharmaceutical and other
services we provide to patients (including the administration of EPO),
our relationships with pharmaceutical companies, our relationships with physicians, medical
director compensation, joint ventures with physicians and our purchases of dialysis equipment from
Fresenius Medical Care. The subpoena was issued in connection with a joint civil and criminal
investigation. We are cooperating with the government’s
investigation; we have produced numerous documents to the government
in response to this subpoena. We have incurred significant legal and other
expenses in responding to the subpoena and have experienced some distraction of management attention. Compliance with the subpoena will
require us to incur substantial additional legal expenses and will require further management
attention. To our knowledge, no proceedings have been initiated against Renal Care Group at this time, but we
cannot predict whether or when proceedings might be initiated. In
addition, we cannot predict the outcome of any proceedings that may
be initiated against us as a result of this investigation. Any such
proceeding could have a material adverse effect on our business,
financial condition results of operations.
On October 25, 2004, we received a subpoena from the office of the United States Attorney for
the Eastern District of New York. The subpoena requires us to provide documents related to numerous
aspects of our business and operations, including those of RenaLab, Inc., our laboratory. The
subpoena includes specific requests for documents related to testing for parathyroid hormone (PTH)
levels and vitamin D therapies. Our competitors DaVita, Fresenius Medical Care, and Gambro
Healthcare, as well as other participants in the dialysis industry, have announced that they have
received similar subpoenas. We are cooperating with the government’s investigation. We have produced numerous documents to the
government in response to this subpoena. We have incurred significant legal and other expenses
responding to the subpoena. Compliance with this subpoena will require us to incur additional
legal expenses and could distract management attention. To our knowledge, no proceedings have been
initiated against Renal Care Group at this time, but we cannot predict whether or when proceedings
might be initiated. We cannot predict the outcome of any proceedings that may be initiated against
us a result of this investigation. Any such proceedings could have a material adverse effect on
our business, financial condition and results of operations.
If any aspect of our operations is found to violate applicable laws, then we may be subject to
severe sanctions and we could be required to alter or discontinue the challenged conduct or both. If
sanctions are imposed on us, then there could be a material adverse effect on our business,
financial condition and results of operations. If we are required to alter or discontinue
practices, then we may not be able to do so successfully, which could have a material adverse
effect on our business, financial condition and results of operations.
If our joint ventures violate the law, our business could be damaged.
A number of the dialysis centers we operate are owned by joint ventures in which we hold a
controlling interest and one or more physicians or physician practice groups hold a minority
interest. The physician owners may also provide medical director services to those centers or other
centers we own and operate. Our joint venture arrangements do not satisfy all elements of any safe
harbor under
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the Anti-Kickback statutes. If one or more of our joint ventures were found to be in
violation of the Anti-Kickback Statute or the Stark Law, we could be required to restructure them
or refuse to accept referrals for designated health services from the physicians with whom those
particular joint venture centers have a relationship. We also could be required to repay to
Medicare amounts received by
the joint ventures pursuant to prohibited referrals, and we could be subject to monetary
penalties. If we are subject to any of these penalties, our business could be damaged.
Changes in the health care delivery, financing or reimbursement systems could adversely affect our
business.
The health care industry in the United States may be entering a period of 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 relationships with referring physicians. In addition, proposals to reform the health care
system have been considered by Congress. In light of the continued increases in the cost of health
care and the current economic situation coupled with the federal budget deficit, there may be new
proposals to change the health care system and control costs. These proposals, if enacted, could
further increase the government’s oversight role and 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.
If local physicians stop sending patients to our centers or were prohibited from doing so for
regulatory reasons, then our revenue and earnings would decline.
Our dialysis centers depend on local nephrologists sending patients to the centers. Typically,
one or a few physicians’ patients make up all or a significant portion of the patient base at each
of our dialysis centers, and the loss of the patient base of one or more of these physicians could
have a material adverse effect on the operations of that center. The loss of the patient base of a
significant number of local physicians could cause our revenue and earnings to decline. In many
instances, the primary referral sources for our centers are physicians who also serve as medical
directors of our centers and may be shareholders or minority participants in a joint venture. If
the medical director relationship, stock ownership or joint venture relationship were found to
violate applicable federal or state law, including fraud and abuse laws and laws prohibiting
self-referrals, then these physicians could be forced to stop referring patients to our centers.
A number of our medical director agreements will expire over the next three years, unless they
are renewed or renegotiated. We did not renew or renegotiate a small number of our medical director
agreements that expired in 2005, and we may not be able to renew or renegotiate expiring medical
director agreements successfully, or we may not be able to enforce the non-competition provisions
of some of our medical director or other agreements. Any of these factors could result in a loss of
patients, since dialysis patients are typically treated at a center where their physician, or a
member of his or her practice group serves as medical director. We believe that our future success
will depend in part on our ability to attract and retain qualified physicians to serve as medical
directors of our dialysis centers.
The dialysis business is highly competitive. If we do not compete effectively in our markets, then
we could lose market share and our rate of growth could slow.
The dialysis industry is largely consolidated, and the consolidation trend continues as large
providers acquire other providers. In October 2005, DaVita acquired Gambro Healthcare’s United
States dialysis services business. As a result there are now three large dialysis companies
(including Renal Care Group) that compete for the acquisition of outpatient dialysis centers and
the development of relationships with referring physicians. The other two competitors are
significantly larger companies, which may enable them to pay more or otherwise compete more
effectively for acquisitions. In addition Fresenius Medical Care also manufactures dialysis
equipment, which may allow it to benefit from lower equipment costs. We also face competition from
new entrants into the market, including centers established by former medical directors or other
referring physicians. We cannot assure you that we will be able to compete effectively with any of
our competitors.
If we are unable to make acquisitions in the future, then our rate of growth will slow.
Much of our historical growth has come from acquisitions. In May 2005 we announced the
definitive agreement under which Fresenius Medical Care has agreed to acquire Renal Care Group,
subject to several conditions. While this transaction is pending it is unlikely that we will be
able to complete acquisitions consistent with our historical practices, because of uncertainty
concerning Renal Care Group and restrictions in the merger agreement. We may be unable to identify
and complete suitable acquisitions at prices we are
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willing to pay, or we may be unable to obtain
the necessary financing. Further, due to the increased size of our business, the amount that
acquired businesses contribute to our revenue and profits will continue to be smaller on a
percentage basis. Also, we believe competition for acquisitions has intensified in light of the
smaller pool of available acquisition candidates and other market forces. As
a result, we believe it will be more difficult for us 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, then we may not
meet our growth expectations.
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 attempt to identify 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 the sellers of businesses we buy, unknown and contingent liabilities
may not be covered by indemnification or may exceed contractual limits or the financial capacity of
the indemnifying party.
We may not have sufficient cash flow from our business to pay our substantial debt.
As of December 31, 2005, we had total consolidated debt of approximately $576.1 million,
including a $20.8 million fair value premium on the 9.0% senior subordinated notes, and cash of
approximately $2.5 million. Also, subject to limitations, including those in our credit facility
and those included in the indenture for our 9.0% senior subordinated notes, we are not and will not
be prohibited from incurring additional debt.
Due to the large amount of our consolidated debt, we may not generate enough cash from our
operations to meet these obligations or to fund other liquidity needs. Our ability to generate cash
in the future is, to some extent, subject to risks and uncertainties that are beyond our control,
including those described in this “Risk Factors” section. If we are unable to meet our debt
obligations, we may need to refinance all or a portion of our indebtedness, sell assets or raise
funds in the capital markets. However, we cannot assure you that, if we are unable to pay our debt,
we will be able to refinance it, obtain additional equity capital or sell assets, in each case on
commercially reasonable terms, or at all, or otherwise be able to fund our liquidity needs.
If for any reason we are unable to meet our debt obligations, we would be in default under the
terms of the agreements governing our outstanding debt. If such a default were to occur, the
lenders under our credit facility could elect to declare all amounts outstanding under the credit
facility immediately due and payable, and the lenders would not be obligated to continue to advance
funds to us under our credit facility. In addition, if such a default were to occur, the 9.0%
senior subordinated notes would become immediately due and payable. If these debt obligations are
accelerated, we cannot assure you that our assets will be sufficient to repay the money we owe to
banks and other debt holders.
The large amount and terms of our outstanding debt may prevent us from taking actions we would
otherwise consider in our best interest.
The indenture governing our 9.0% senior subordinated notes and our credit facility contain
numerous financial and operating covenants that limit our ability to engage in activities such as:
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incurring additional debt; |
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acquiring and developing new dialysis centers; |
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making investments; |
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creating liens; |
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creating restrictions on the ability of our subsidiaries to pay dividends or other amounts to us; |
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disposing of assets; |
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paying dividends on our capital stock; |
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repurchasing our capital stock; |
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engaging in transactions with our affiliates; or |
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consolidating, merging or selling all or substantially all of our assets. |
Our credit facility also requires us to comply with financial covenants, including a net worth
test, a leverage ratio test and a fixed charge coverage ratio test. Our ability to comply with
these covenants may be affected by events beyond our control, including those described in this
“Risk Factors” section. A breach of any of the covenants contained in our credit facility or our
inability to comply with the required financial covenants could result in an event of default,
which would allow the lenders under our credit facility to declare all borrowings outstanding to be
due and payable, and triggering an event of default under the indenture governing our 9.0% senior
subordinated notes. In addition, our lenders could require us to apply all of our available cash to
repay our borrowings or they could prevent us from making debt service payments on our 9.0% senior
subordinated notes. If the amounts outstanding under our credit facility or these notes are
accelerated, we cannot assure you that our assets would be sufficient to repay in full the money we
owe the banks and our other debt holders.
The large amount of our outstanding debt and the limitations our credit facility impose on us
could have adverse consequences, including:
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having to use much of our cash flow for scheduled debt service rather than for
operations, future business opportunities or other purposes, such as funding working capital
and capital expenditures; |
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being unable to increase our borrowings under our credit facility or obtain other debt
financing for future working capital, capital expenditures, acquisitions or other corporate
purposes; |
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being less able to take advantage of significant business opportunities, including acquisitions or divestitures; |
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difficulty satisfying our obligations under our 9.0% senior subordinated notes; |
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• |
|
increasing our vulnerability to general adverse economic and industry conditions; and |
| |
| |
• |
|
causing us to be at a competitive disadvantage to competitors with less debt. |
If our costs of insurance and claims increase, then our earnings could decrease.
We currently maintain programs of general and professional liability insurance and directors’
and officers’ insurance with significant deductible or self-insured retention amounts on each
claim. In addition, we generally self-insure our employee health plan and workers’ compensation
program, while maintaining excess insurance for some very large claims. We have accepted higher
deductibles and self-insurance exposure in each of the last several years to offset part of the
increases in premiums for the programs. These deductibles and premiums increased substantially in
2002 and 2003. The rate of increase in deductibles and premiums has moderated somewhat, but there
have still been increases, and there may be larger increases in the future. Our earnings could be
materially and adversely affected by any of the following:
| |
• |
|
increases in premiums, deductibles and self-insurance retentions; |
| |
| |
• |
|
increases in the number of liability claims against us or the cost of settling or trying cases related to those claims; and |
| |
| |
• |
|
an inability to obtain one or more types of insurance on acceptable terms. |
If our board of directors does not approve an acquisition or change in control, then our
shareholders may not realize the full value of their stock.
We have agreed to be acquired by Fresenius Medical Care, subject to a number of conditions.
The merger agreement includes provisions that would make it difficult for a competing bidder to
acquire Renal Care Group. These provisions include our agreements not to solicit other offers and
not to provide information to a potential bidder, as well as our agreement to pay a termination fee
to Fresenius Medical Care if we terminate the merger agreement and complete another transaction. In
addition, our certificate of
25
incorporation and bylaws contain a number of provisions that may
delay, deter or inhibit a future acquisition or change in control that is not first approved by our
board of directors. This could occur even if our shareholders receive an attractive offer for their
shares or if a substantial number or even a majority of our shareholders believe the takeover is in
their best interest. These provisions are
intended to encourage any person interested in acquiring us to negotiate with and obtain
approval from our board of directors before pursuing a transaction. Provisions that could delay,
deter or inhibit a future acquisition or change in control 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 shareholders; |
| |
| |
• |
|
blank check preferred stock that may be issued by our board of directors without
shareholder approval and that may be substantially dilutive or contain preferences or rights
objectionable to an acquirer; and |
| |
| |
• |
|
a poison pill that would substantially dilute the interest sought by an acquirer. |
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 New York Stock Exchange. The market price of our common
stock has been volatile, ranging from a low closing price of $35.60 per share to a high closing
price of $47.44 per share during the year ended December 31, 2005. The market price for our common
stock could fluctuate substantially based on a variety of factors, including the following:
| |
• |
|
the failure to complete the transaction with Fresenius Medical Care; |
| |
| |
• |
|
future announcements concerning us, our competitors or the health care market; |
| |
| |
• |
|
the threat, commencement or outcome of litigation or government investigation; |
| |
| |
• |
|
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 annual report on Form 10-K represents 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
26
cause our actual results to differ materially from the expectations we describe in our
forward-looking statements. The SEC allows us to “incorporate by reference” the information we file
with them, which means we can disclose important information to you by referring you to those
documents. Before you invest in our common stock, you should be aware that the occurrence of any of
the
events described in the above risk factors, elsewhere in or incorporated by reference into
this quarterly report on Form 10-Q and other events that we have not predicted or assessed could
have a material adverse effect on our earnings, financial condition and business. If the events
described above or other unpredicted events occur, then the trading price of our common stock could
decline and you may lose all or part of your investment.
Item 1B.
Unresolved Staff Comments
None.
27
Item 2. Properties
PROPERTIES
As of December 31, 2005, we operated 456 outpatient dialysis centers in 34 states, of which
407 are located in leased facilities and 49 are owned. The following is a summary of our outpatient
dialysis centers by state:
OUTPATIENT FACILITIES BY STATE
| |
|
|
|
|
Alabama |
|
|
19 |
|
Alaska |
|
|
4 |
|
Arizona |
|
|
31 |
|
Arkansas |
|
|
11 |
|
Colorado |
|
|
3 |
|
Florida |
|
|
20 |
|
Georgia |
|
|
21 |
|
Idaho |
|
|
2 |
|
Illinois |
|
|
34 |
|
Indiana |
|
|
25 |
|
Iowa |
|
|
1 |
|
Kansas |
|
|
13 |
|
Kentucky |
|
|
9 |
|
Louisiana |
|
|
8 |
|
Massachusetts |
|
|
2 |
|
Michigan |
|
|
12 |
|
Mississippi |
|
|
35 |
|
Missouri |
|
|
26 |
|
Nebraska |
|
|
3 |
|
Nevada |
|
|
3 |
|
New Jersey |
|
|
16 |
|
New Mexico |
|
|
4 |
|
North Carolina |
|
|
1 |
|
Ohio |
|
|
29 |
|
Oklahoma |
|
|
7 |
|
Oregon |
|
|
10 |
|
Pennsylvania |
|
|
17 |
|
Rhode Island |
|
|
2 |
|
South Carolina |
|
|
3 |
|
Tennessee |
|
|
21 |
|
Texas |
|
|
48 |
|
Virginia |
|
|
4 |
|
Washington |
|
|
10 |
|
Wisconsin |
|
|
2 |
|
|
|
|
|
TOTAL |
|
|
456 |
|
|
|
|
|
Our leases generally have terms ranging from one to 15 years and typically contain renewal
options. The size of our centers ranges from approximately 1,000 to 25,000 square feet. We lease
office space in Nashville, Tennessee for our corporate headquarters under a lease that expires in
2009. We lease other office space in and around Nashville, Tennessee for certain billing and
computer operations. We consider our physical properties to be in good operating condition and
suitable for the purposes for which they are being used.
Expansion or relocation of our dialysis centers is subject to compliance with conditions
relating to participation in the Medicare ESRD program. In states that require a certificate of
need or permit of approval, approval of the required application is usually necessary for expansion
of an existing dialysis center or development of a new center.
We typically own the equipment used in our outpatient centers. We consider our equipment
generally to be in good operating condition and suitable for the purposes for which it is being
used.
28
Item 3. Legal Proceedings
On August 9, 2005, we received a subpoena from the office of the United States Attorney for
the Eastern District of Missouri. The subpoena requires the production of documents related to
numerous aspects of our business and operations. The subpoena includes specific requests for
documents related to our supply company, pharmaceutical and other
services we provide to patients (including the administration of EPO),
our relationships with pharmaceutical companies, our relationships with physicians, medical
director compensation, joint ventures with physicians and our purchases of dialysis equipment from
Fresenius Medical Care. The subpoena was issued in connection with a joint civil and criminal
investigation. We are cooperating with the government’s
investigation; we have produced numerous documents to the government
in response to the subpoena. We have incurred significant legal and
other expenses responding to the subpoena and have experienced
distraction of management attention. Compliance with the subpoena
will require us to incur substantial additional legal and other
expenses and will require further management attention. To our knowledge, no proceedings have been initiated against Renal Care Group at
this time, but we cannot predict whether or when proceedings might be initiated. We cannot predict the outcome of any proceedings that may
be initiated as a result of this investigation. Any such proceedings
could have a material adverse effect on our business, financial
condition and results of operation.
On October 25, 2004, we received a subpoena from the office of the United States Attorney for
the Eastern District of New York. The subpoena requires the production of documents related to
numerous aspects of our business and operations, including those of RenaLab, Inc., the Company’s
laboratory. The subpoena includes specific requests for documents related to testing for
parathyroid hormone (PTH) levels and vitamin D therapies. We are
cooperating with the government’s investigation. We have
produced numerous documents to the government in response to this
subpoena. We have incurred significant legal and other expenses
responding to the subpoena. Compliance with this subpoena will
require us to incur significant additional legal and other expenses
and could distract management attention. To our knowledge no proceedings have been
initiated against us at this time, but we cannot predict whether or when proceedings might be
initiated. We cannot predict the outcome of any proceedings that may
be initiated against us as a result of this investigation. Any such
proceedings could have a material adverse effect on our business
financial condition and results of operations.
On May 11, 2005, Renal Care Group was served with a complaint in the Chancery Court for the
State of Tennessee Twentieth Judicial District at Nashville styled Plumbers Local #65 Pension Fund,
on behalf of itself and all others similarly situated, Plaintiff, vs. Renal Care Group, Inc.,
William P. Johnston, Gary Brukardt, Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson, William V.
Lapham, Thomas A. Lowery, Stephen D. McMurray and C. Thomas Smith, Defendants. On May 26, 2005, we
were served with a complaint in the Chancery Court for the State of Tennessee Twentieth Judicial
District at Nashville styled Hawaii Structural Ironworkers Pension Trust Fund, on behalf of itself
and all others similarly situated, Plaintiff, vs. Renal Care Group, Inc., William P. Johnston, Gary
Brukardt, Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson, William V. Lapham, Thomas A. Lowery,
Stephen D. McMurray and C. Thomas Smith, Defendants. On May 31, 2005, we were served with a
complaint in the Chancery Court for the State of Tennessee Twentieth Judicial District at Nashville
styled Indiana State District Council of Laborers and Hod Carriers Pension Fund, on behalf of
itself and others similar situated, Plaintiff, vs. Renal Care Group, Inc., William P. Johnston,
Gary Brukardt, Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson, William V. Lapham, Thomas A.
Lowery, Stephen D. McMurray and C. Thomas Smith, Defendants. The original complaints in these three
lawsuits were substantially identical. Each complaint was brought by the plaintiff shareholder as a
purported class action on behalf of all shareholders similarly situated. The complaints allege that
Renal Care Group and its directors engaged in self-dealing and breached their fiduciary duties to
Renal Care Group’s shareholders in connection with the merger agreement between Renal Care Group
and Fresenius Medical Care because, among other things, Renal Care Group used a flawed process, the
existence of the previously disclosed subpoena from the Department of Justice, the lack of
independence of one of Renal Care Group’s financial advisors and the existence of Renal Care
Group’s supplemental executive retirement plan. Renal Care Group removed these cases to federal
court in June 2005.
The plaintiffs in the first two cases dismissed them without prejudice in July 2005, and the
third plaintiff filed an amended complaint. The amended complaint asserts the same grounds
articulated in the original complaint adding more specific allegations regarding the termination
fee, the no solicitation clause and the matching rights provision in the Merger Agreement, and it
adds allegations that the our Proxy Statement makes material misrepresentations and omissions
regarding the process by which the Merger Agreement was negotiated. Specifically, the Amended
Complaint asserts that the Proxy Statement makes material misstatements or omissions regarding: (1)
the reason why our management and Board engaged in a closed process of negotiating a potential
merger with Fresenius and did not solicit potential competing bids from alternative purchasers; (2)
the reason why our Board did not appoint a special committee to evaluate the fairness of the
merger; (3) the alternatives available to Renal Care Group, including potential alternative
transactions and other strategic business opportunities, which purportedly were considered by the
our Board during the strategic planning process the Board engaged in during the second half of
2004; (4) all information regarding conflicts of interest suffered by defendants and their
financial and legal advisors as alleged herein; (5) all information regarding past investment
banking services Bank of America has performed for Renal Care Group and Fresenius Medical Care and
the compensation Bank of America received for those services; (6) the forecasts and projections
prepared by our management for fiscal years 2005 through 2008 that were referenced in the fairness
opinions by Morgan Stanley; (7) the estimates of transaction synergies provided by our management
that were referenced in the fairness opinions by Morgan Stanley; and (8) information concerning the
amount of money Bank of America and Morgan Stanley will receive in connection with the Proposed
Acquisition. Renal Care Group believes that the allegations in the pending complaint are without
merit. Completion of the merger is subject to customary conditions, including the absence of any
order or injunction prohibiting the closing. The pending complaint seeks to enjoin and prevent the
parties from completing the Fresenius Medical Care transaction. The pending complaint was remanded
to Tennessee state court in September 2005.
29
We are involved in litigation and regulatory investigations arising in the ordinary course of
business. In the opinion of management, after consultation with legal counsel, management believes
these matters will be resolved without material adverse effect on Renal Care Group’s consolidated
financial position or results of operations.
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to
interpretation. We believe that we are in compliance with all applicable laws and regulations
governing the Medicare and Medicaid programs.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matter to a vote of our shareholders during the fourth quarter of 2005.
PART II
Item 5.
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the New York Stock Exchange under the symbol “RCI”. The
following table sets forth the quarterly high and low closing sales prices as reported on the New
York Stock Exchange for the last two fiscal years.
| |
|
|
|
|
|
|
|
|
| 2004 |
|
High |
|
Low |
First quarter |
|
$ |
31.43 |
|
|
$ |
27.55 |
|
Second quarter |
|
$ |
34.29 |
|
|
$ |
29.93 |
|
Third quarter |
|
$ |
33.24 |
|
|
$ |
30.09 |
|
Fourth quarter |
|
$ |
36.10 |
|
|
$ |
30.00 |
|
| |
|
|
|
|
|
|
|
|
| 2005 |
|
High |
|
Low |
First quarter |
|
$ |
40.00 |
|
|
$ |
35.60 |
|
Second quarter |
|
$ |
46.38 |
|
|
$ |
37.20 |
|
Third quarter |
|
$ |
47.32 |
|
|
$ |
46.15 |
|
Fourth quarter |
|
$ |
47.44 |
|
|
$ |
46.85 |
|
HOLDERS
As
of March 9, 2006, the approximate number of registered
stockholders was 131, and we had
approximately 40,500 beneficial owners.
DIVIDEND POLICY
We have never paid any cash dividend on our capital stock. We currently anticipate that all of
our earnings will be retained to finance the growth and development of our business or to
repurchase common stock. We currently do not anticipate that any cash dividend will be declared or
paid on our common stock in the foreseeable future. Any future declaration of dividends will be
subject to the discretion of our Board of Directors and its review of our earnings, financial
condition, capital requirements and surplus, contractual restrictions to pay such dividends and
other factors the Board of Directors deems relevant.
30
Item 6. Selected Financial Data
The selected financial data for the years ended December 31, 2001, 2002, 2003, 2004 and 2005
are derived from the audited consolidated financial statements of the Company and its subsidiaries.
The consolidated financial statements and related notes for the years ended December 31, 2003, 2004
and 2005, together with the related Reports of Independent Registered Public Accounting Firm are
included elsewhere in this annual report on Form 10-K. Please read the following data 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.
Selected Financial Data
(in thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
INCOME STATEMENT DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
755,082 |
|
|
$ |
903,387 |
|
|
$ |
1,005,319 |
|
|
$ |
1,345,047 |
|
|
$ |
1,570,226 |
|
Patient care costs |
|
|
489,271 |
|
|
|
589,696 |
|
|
|
653,307 |
|
|
|
893,478 |
|
|
|
1,039,268 |
|
General and administrative expenses |
|
|
64,530 |
|
|
|
78,079 |
|
|
|
90,249 |
|
|
|
106,823 |
|
|
|
141,210 |
|
Provision for doubtful accounts |
|
|
20,290 |
|
|
|
23,501 |
|
|
|
26,200 |
|
|
|
32,550 |
|
|
|
31,978 |
|
Depreciation and amortization |
|
|
38,945 |
|
|
|
40,432 |
|
|
|
44,905 |
|
|
|
58,349 |
|
|
|
71,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
613,036 |
|
|
|
731,708 |
|
|
|
814,661 |
|
|
|
1,091,200 |
|
|
|
1,283,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
142,046 |
|
|
|
171,679 |
|
|
|
190,658 |
|
|
|
253,847 |
|
|
|
286,370 |
|
Interest expense, net |
|
|
2,636 |
|
|
|
1,140 |
|
|
|
629 |
|
|
|
20,628 |
|
|
|
32,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and income taxes |
|
|
139,410 |
|
|
|
170,539 |
|
|
|
190,029 |
|
|
|
233,219 |
|
|
|
253,462 |
|
Minority interest |
|
|
15,478 |
|
|
|
21,410 |
|
|
|
25,431 |
|
|
|
35,169 |
|
|
|
35,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
123,932 |
|
|
|
149,129 |
|
|
|
164,598 |
|
|
|
198,050 |
|
|
|
217,625 |
|
Provision for income taxes |
|
|
47,331 |
|
|
|
56,669 |
|
|
|
62,542 |
|
|
|
76,217 |
|
|
|
87,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
76,601 |
|
|
$ |
92,460 |
|
|
$ |
102,056 |
|
|
$ |
121,833 |
|
|
$ |
129,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
1.06 |
|
|
$ |
1.26 |
|
|
$ |
1.40 |
|
|
$ |
1.80 |
|
|
$ |
1.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
72,170 |
|
|
|
73,467 |
|
|
|
72,719 |
|
|
|
67,581 |
|
|
|
68,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
1.01 |
|
|
$ |
1.21 |
|
|
$ |
1.37 |
|
|
$ |
1.74 |
|
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
75,650 |
|
|
|
76,151 |
|
|
|
74,753 |
|
|
|
69,892 |
|
|
|
70,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
BALANCE SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
104,047 |
|
|
$ |
110,481 |
|
|
$ |
122,667 |
|
|
$ |
126,965 |
|
|
$ |
140,191 |
|
Total assets |
|
|
651,049 |
|
|
|
740,123 |
|
|
|
819,873 |
|
|
|
1,429,585 |
|
|
|
1,662,033 |
|
Long-term debt |
|
|
3,776 |
|
|
|
10,161 |
|
|
|
2,652 |
|
|
|
479,645 |
|
|
|
533,923 |
|
Stockholders’ equity |
|
|
510,251 |
|
|
|
543,888 |
|
|
|
570,845 |
|
|
|
592,121 |
|
|
|
739,637 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis contains forward-looking statements about our plans and
expectations of what may happen in the future. Forward-looking statements are based on a number of
assumptions and estimates that are inherently subject to significant risks and uncertainties, and
our results could differ materially from the results anticipated by our forward-looking statements
as a result of many known or unknown factors, including, but not limited to, those factors
discussed on pages 18 to 27 under the heading “Risk Factors.” Also, please read the cautionary
notice regarding forward-looking statements set forth at the beginning of this annual report.
Please read the following discussion in conjunction with our consolidated financial statements
and the related notes contained elsewhere in this annual report on Form 10-K.
Overview
Renal Care Group provides dialysis services to patients with chronic kidney failure. As of
December 31, 2005, we provided dialysis and ancillary services to over 32,300 patients through 456
outpatient dialysis centers in 34 states, in addition to providing acute dialysis services to more
than 200 hospitals.
31
Our net revenue has been derived primarily from the following sources:
| |
• |
|
outpatient hemodialysis services; |
| |
| |
• |
|
ancillary services associated with outpatient dialysis, primarily the administration of EPO and other drugs; |
| |
| |
• |
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home dialysis services; |
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• |
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inpatient hemodialysis services provided to acute care hospitals and skilled nursing facilities; |
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• |
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laboratory services; and |
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• |
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management contracts with hospital-based medical university dialysis programs. |
Most patients with ESRD receive three dialysis treatments each week in an outpatient setting.
Reimbursement for these services is provided primarily by the Medicare ESRD program based on rates
established by CMS. For the year ended December 31, 2005, approximately 56% of our 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. Congress approved increases in
the composite rate of 1.6% for each of 2005 and 2006. The average revenue per treatment we receive
from Medicare and Medicaid is less than our average cost per treatment. Management expects this
situation to continue. Any reduction in Medicare and Medicaid payments or shift in our revenue mix
toward Medicare or Medicaid reimbursement could materially adversely affect our business and
financial condition.
The Medicare composite rate applies to a designated group of outpatient dialysis services,
including the dialysis treatment, supplies used for the treatment, certain laboratory tests and
medications, and most of the home dialysis services we provide. We receive separate reimbursement
outside the composite rate for some other services, drugs (including specific drugs such as EPO)
and some physician-ordered tests, including laboratory tests, provided to dialysis patients.
If a patient has private health insurance, then that patient’s treatment is typically
reimbursed at rates significantly higher than those paid by Medicare during the first 30 months of
care. 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 is usually
higher than Medicare rates. Because dialysis is a life-sustaining therapy to treat a chronic
disease, utilization is predictable and is not subject to seasonal fluctuations.
We derive a significant portion of our net revenue and net income from the administration of
EPO. EPO is manufactured by a single company, Amgen, Inc. In April 2002, Amgen implemented its
third EPO price increase of 3.9% in as many years. Because we were already under contract with
Amgen through 2002, this price increase did not affect our results of operations during 2002. Key
components of the 2002 pricing formula were maintained in our 2003 contract with Amgen. Therefore,
while the 2002 price increase had an adverse effect on our 2003 results of operations, we were able
to mitigate approximately 80% of the increase. Amgen did not implement a price increase in 2003,
but changes in our contract with Amgen for 2004 resulted in an increase in our cost of EPO. Changes
in our contract with Amgen for 2005 along with changes in Amgen’s packaging practices for EPO
resulted in an increase in our cost of EPO in 2005. Changes in our contract with Amgen for 2006 may
result in an increase in our cost of EPO in 2006.
In addition, Congress mandated a change in the way we are paid beginning in 2005 for some drugs, including EPO, that we bill for outside of the flat composite rate. This change will
result in lower reimbursement for these drugs and a higher composite rate. Under recently adopted
regulations, in 2006 we will be reimbursed for separately billable ESRD drugs at the rate of
average sales price plus 6.0%. In addition, the composite rate has
been increased by 14.7% in
2006 to account for the change in drug reimbursement. These
regulations also include geographic designations and wage indices
used to calculate to the composite rate as well as a
budget-neutrality adjustment. We believe these changes coupled with the 1.6% increase in the
Medicare composite rate approved for 2006 will have a positive effect on our revenue per treatment
and earnings in 2006.
32
Critical Accounting Policies
In accordance with SEC financial reporting release, FR-60, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies, we have identified accounting policies that we
consider critical to our business. Management identified these policies based on their importance
to our Consolidated Financial Statements and on the degrees of subjectivity and complexity involved
in these policies. In addition to these critical policies, a summary of significant accounting
policies is included in our consolidated financial statements and related notes, contained
elsewhere in this annual report on Form 10-K.
The
discussion and analysis of our financial condition and results of
operations in this annual report on Form 10-K are based
upon our Consolidated Financial Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, net revenues and expenses, and related disclosures of contingent assets and
liabilities. We regularly evaluate our critical accounting policies and estimates, including those
related to net revenue and contractual provisions and provision for doubtful accounts. We base our
estimates on historical experience and upon assumptions that we believe are reasonable under the
circumstances. The results of these estimates form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies require significant judgments and
estimates in the preparation of our consolidated financial statements.
Net Revenue and Contractual Provisions
We recognize revenue net of contractual provisions as services are provided and invoices for
those services are issued. Contractual provisions represent the difference between our gross billed
charges and the amount we expect to receive. Under the Medicare ESRD program, Medicare
reimbursement rates for outpatient dialysis treatments are fixed under a composite rate structure.
The composite rate applies to a designated group of outpatient dialysis services, including
dialysis treatment, supplies, some laboratory tests and some medications. There are other drugs,
laboratory tests and services that are eligible for separate reimbursement outside the composite
rate. Most state Medicaid plans follow reimbursement methodologies that are similar to the Medicare
program, but other payors, particularly private insurance plans and managed care payors, reimburse
us under contractual arrangements or based on our charges. Each of
these sources of revenues presents
unique challenges to the process of recording contractual provisions.
We have made significant investments in human resources and information systems to enable us
to estimate the appropriate amount of contractual provisions as we provide services. Actual levels
of reimbursement, however, are sometimes difficult to determine due to the complexity of the
applicable regulations or contracts. As a result, we may in fact collect more or less than the
amount we expected when we provided and billed for the services. In addition, regulations and
contracts may be changed, making system updates and maintenance necessary for estimating net
revenue accurately. As a result, management may make adjustments to the contractual provisions
estimated by the system based on actual collection experience and other factors.
Provision for Doubtful Accounts
Collecting outstanding accounts receivable is critical to our success. Our primary source of
collection risk is related to the portion of our charges for which the patient is responsible. For
Medicare patients, the patients’ responsibility is 20% of Medicare allowable charges, and for other
patients, the patients’ responsibility varies based on their health coverage. We record an estimate
of the provision 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
and monitors the net collectibility of accounts receivable based upon a variety of factors,
including the analysis of payor mix, subsequent collection analysis and review of detailed agings
of accounts receivable. Significant changes in our payor mix or business office operations could
have a significant impact on our results of operations and cash flows.
33
Self-Insurance Accruals
From time to time, we are subject to professional liability, general liability and workers
compensation claims or lawsuits in the ordinary course of business. To mitigate a portion of this
risk, we maintain insurance for professional liability and general liability claims exceeding
certain individual amounts and for workers compensation claims exceeding certain individual and
aggregate amounts. We estimate the self-insured retention portion of professional liability,
general liability and workers compensation risks using third-party actuarial calculations that
include historical claims data, demographic factors and other assumptions. The estimated accrual
for professional liability, general liability and workers compensation claims could be
significantly affected if current and future occurrences differ from historical claims trends.
While management monitors current claims closely and considers outcomes when estimating its
self-insurance accruals, the complexity of the claims, the wide range of potential outcomes and
changes in the legal climate often complicate our ability to make precise estimates.
Impairment of Goodwill and Long-Lived Assets
Pursuant to SFAS No. 142, Goodwill and Other Intangible Assets, we review goodwill for
impairment at a reporting unit level at least annually. Goodwill is tested for impairment between
annual tests if an event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. Goodwill is assigned to each reporting
unit based on the geographic location of assets. If the fair value of a reporting unit is
determined to be less than its carrying amount, then the Company compares the implied fair value of
the goodwill to its carrying value. If the implied fair value of the goodwill is less than its
carrying value, then an impairment loss is recognized for that difference. No goodwill impairment
losses were recognized during 2003, 2004 or 2005.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, when events, circumstances or operating results indicate that the carrying value of certain
long-lived assets and related identifiable intangible assets (excluding goodwill) that are expected
to be held and used, might be impaired, we evaluate such assets for impairment based on estimated
undiscounted cash flows expected to result from the use and eventual disposition of the assets. If
related long-lived assets are identified as impaired, the impairment is equal to the amount by
which the carrying value of the assets exceeds the fair value of those assets as determined by
independent appraisals or estimates of discounted future cash flows. Long-lived assets to be
disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Income Taxes
We account for income taxes under the asset and liability method and recognize deferred tax
assets and liabilities 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 for the change. Management identifies deferred tax assets that more likely than not
will not be realized and records a valuation allowance. We also establish accruals for tax
uncertainties that we deem to be probable of loss and that can be reasonably estimated.
Results of Operations
The following table sets forth results of operations (in thousands) for the periods indicated
and the percentage of net revenue represented by the financial line items shown:
| |
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Year Ended December 31, |
|
| |
|
2003 |
|
|
2004 |
|
|
2005 |
|
Net revenue |
|
$ |
1,005,319 |
|
|
|
100.0 |
% |
|
$ |
1,345,047 |
|
|
|
100.0 |
% |
|
$ |
1,570,226 |
|
|
|
100.0 |
% |
Patient care costs |
|
|
653,307 |
|
|
|
65.0 |
|
|
|
893,478 |
|
|
|
66.4 |
|
|
|
1,039,268 |
|
|
|
66.2 |
|
General and administrative expenses |
|
|
90,249 |
|
|
|
9.0 |
|
|
|
106,823 |
|
|
|
7.9 |
|
|
|
141,210 |
|
|
|
9.0 |
|
Provision for doubtful accounts |
|
|
26,200 |
|
|
|
2.6 |
|
|
|
32,550 |
|
|
|
2.4 |
|
|
|
31,978 |
|
|
|
2.0 |
|
Depreciation and amortization |
|
|
44,905 |
|
|
|
4.4 |
|
|
|
58,349 |
|
|
|
4.3 |
|
|
|
71,400 |
|
|
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4.5 |
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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Total operating costs and expenses |
|
|
814,661 |
|
|
|
81.0 |
|
|
|
1,091,200 |
|
|
|
81.1 |
|
|
|
1,283,856 |
|
|
|
81.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
190,658 |
|
|
|
19.0 |
|
|
|
253,847 |
|
|
|
18.9 |
|
|
|
286,370 |
|
|
|
18.2 |
|
Interest expense, net |
|
|
629 |
|
|
|
0.1 |
|
|
|
20,628 |
|
|
|
1.5 |
|
|
|
32,908 |
|
|
|
2.1 |
|
Minority interest |
|
|
25,431 |
|
|
|
2.5 |
|
|
|
35,169 |
|
|
|
2.6 |
|
|
|
35,837 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income before income taxes |
|
|
164,598 |
|
|
|
16.4 |
|
|
|
198,050 |
|
|
|
14.7 |
|
|
|
217,625 |
|
|
|
13.9 |
|
Provision for income taxes |
|
|
62,542 |
|
|
|
6.2 |
|
|
|
76,217 |
|
|
|
5.7 |
|
|
|
87,912 |
|
|
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5.6 |
|
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|
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|
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|
|
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|
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|
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Net income |
|
$ |
102,056 |
|
|
|
10.2 |
% |
|
$ |
121,833 |
|
|
|
9.1 |
% |
|
$ |
129,713 |
|
|
|
8.3 |
% |
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34
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net Revenue. Net revenue increased from $1,345.0 million for the year ended December 31, 2004
to $1,570.2 million for the year ended December 31, 2005, an increase of $225.2 million, or 16.7%.
This increase resulted primarily from a 14.1% increase in the number of treatments we performed
from 4,240,440 in 2004 to 4,837,565 in 2005 and a 2.2% increase in the average patient revenue per
dialysis treatment from $316 in 2004 to $323 in 2005. The increase was largely due to the impact of
price increases to our commercial payors and benefits from renegotiating certain managed care
contracts. In addition, revenue per treatment increased modestly as a result of the net impact of
Medicare’s 1.6% composite rate increase and changes in its reimbursement for separately billable
drugs, along with the case mix adjustment that became effective in April 2005, all of which
resulted from the Medicare Modernization Act. These favorable effects on our revenue per treatment
were partially offset by increases in the percentage of total net revenue that was derived from
reimbursement under the Medicare and Medicaid programs. We expect our 2006 patient service revenue
per dialysis treatment increases to be consistent with the increase experienced in 2006.
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 $893.5 million for the year ended December 31, 2004
to $1,039.3 million for the year ended December 31, 2005, an increase of 16.3%. This increase was
due principally 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 slightly from 66.4% in 2004 to 66.2% in 2005. Patient care
costs per treatment increased 1.9% from $211 in 2004 to $215 in 2005. The increase in patient care
costs per treatment was primarily due to increased labor costs, as we
utilized more contract labor in 2005 than we used in 2004 and as
labor and benefit costs rose generally. The effect of these increases
was partially offset by decreases in our accruals for self-insurance
liabilities and workers’ compensation liabilities.
General and Administrative Expenses. General and administrative expenses include corporate
office costs and other costs not directly related to the care of patients, including facility
administration, accounting, billing and information systems. General and administrative expenses
increased from $106.8 million for the year ended December 31, 2004 to $141.2 million for the year
ended December 31, 2005, an increase of 32.2%. The increase in general and administrative expenses
included $14.9 million of transaction costs that we incurred in connection with the agreement by
Fresenius Medical Care to acquire Renal Care Group. In addition, we experienced significant
increases in legal costs during 2005 as we responded to the investigations under the subpoenas we
received from the offices of the United States Attorney for the Eastern District of Missouri and
the United States Attorney for the Eastern District of New York. General and administrative
expenses as a percentage of net revenue increased from 7.9% in 2004 to 9.0% in 2005. Excluding the
effect of the $14.9 million of costs related to the transaction with Fresenius Medicare Care,
general and administrative costs as a percentage of revenue were 8.0% in 2005. Management believes
that we will continue to face significant increases in general and administrative expenses in connection with
both the Fresenius Medical Care transaction and compliance with the
Missouri and New York subpoenas.
Provision for Doubtful Accounts. Management determines the provision for doubtful accounts as
a function of payor mix, billing practices and other factors. We reserve for doubtful accounts in
the period when we recognize revenue based on management’s estimate of the net collectibility
of the accounts receivable. Management estimates the net collectibility of accounts receivable
based upon a variety of factors. These factors include, but are not limited to, analyzing revenues
generated from payor sources, performing subsequent collection testing and regularly reviewing
detailed accounts receivable agings. Management makes adjustments to the allowance for doubtful
accounts as necessary based on the results of management’s reviews of the net collectibility of
accounts receivable. The provision for doubtful accounts decreased
from $32.6 million in 2004 to
$32.0 million in 2005, a decrease of $572,000, or 1.8%. The provision for doubtful accounts as a
percentage of net revenue decreased from 2.4% in 2004 to 2.0% in 2005. The decrease in the
provision for doubtful accounts was the result of our collection of approximately $4.3 million
in Medicare cost report payments in the third quarter of 2005.
Specifically, during the third quarter of 2005 we recorded the of final determination of
significant Medicare cost report amounts related to acquired National Nephrology Associates
operations. Excluding the impact of any additional Medicare bad debt recoveries, management
expects the provision for doubtful accounts for 2006 to be in our historic range of between 2.0%
and 2.5% of net revenue.
Depreciation and Amortization. Depreciation and amortization increased from $58.3 million for
the year ended December 31, 2004 to $71.4 million for the year ended December 31, 2005, an increase
of 22.4%. This increase was due to the start-up of dialysis facilities, the normal replacement
costs of dialysis facilities and equipment, the purchase of information systems and the
amortization
35
of separately identifiable intangible assets associated with acquisitions. Depreciation and
amortization as a percentage of net revenue increased from 4.3% in 2004 to 4.5% in 2005.
Income from Operations. Income from operations increased from $253.8 million for the year
ended December 31, 2004 to $286.4 million for the year ended December 31, 2005, an increase of
12.8%. Income from operations as a percentage of net revenue decreased from 18.9% in 2004 to 18.2%
in 2005 period as a result of the combined effects of the factors
discussed above, principally the increase in general and
administrative expenses.
Interest Expense, Net. Interest expense increased from $20.6 million for the year-ended
December 31, 2004 to $32.9 million for the year ended December 31, 2005. This increase was the
result of higher average borrowings in 2005, which were primarily associated with the
recent acquisitions, our purchases of noncontrolling interests in
joint venture entities that we
consolidated. In addition, interest expense was higher as a result of
increases in the Company’s weighted average borrowing rate as
interest rates rose throughout 2005.
Minority Interest. Minority interest represents the proportionate equity interest of other
owners in consolidated entities that we do not wholly own. The financial results of those entities
are included in the Company’s consolidated results. Minority interest as a percentage of net
revenue decreased from 2.6% in 2004 to 2.3% in 2005. The reduction in minority interest expense as
a percentage of revenue was the result of our purchase of the interests of the minority partners in
some of our joint ventures coupled with a slight decrease in the profitability of some of the
facilities that we operate as joint ventures. During 2005, we purchased minority partner interests
in ten joint ventures. As of December 31, 2005, we were the majority and controlling owner in 64
joint ventures as compared to 70 as of December 31, 2004.
Provision for Income Taxes. Income tax expense increased from $76.2 million in 2004 to $87.9
million in 2005, an increase of $11.7 million or 15.3%. The increase is a result of increases in
pre-tax earnings and our effective tax rate. Our effective tax rate was 38.5% for the 2004 period
compared to 40.4% for the 2005 period. The increase is primarily
attributable to the fact that some of the transaction costs we incurred in connection
with the agreement with
Fresenius Medical Care to acquire Renal Care Group will not be
deductible for income tax purposes.
Net Income. Net income increased from $121.8 million in 2004 to $129.7 million in 2005, an
increase of $7.9 million or 6.5%. This increase was a result of the items discussed above.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net Revenue. Net revenue increased from $1,005.3 million for the year ended December 31, 2003
to $1,345.0 million for the year ended December 31, 2004, an increase of $339.7 million, or 33.8%.
This increase resulted primarily from a 30.3% increase in the number of treatments we performed
from 3,254,447 in 2003 to 4,240,440 in 2004 and a 2.6% increase in the average patient revenue per
dialysis treatment from $308 in 2003 to $316 in 2004. This growth in treatments was largely the
result of our acquisition of NNA in April 2004 and our other 2004 acquisitions, along with a 3.3%
increase in same-market treatments for 2004 over 2003. The increase in patient revenue per
treatment from 2003 was largely due to the impact of our annual price increase implemented in the
fourth quarter of 2003 along with favorable renegotiations of some of our managed care contracts,
increased utilization of some ancillary drugs, primarily EPO, and the favorable resolution of
several contractual issues with payors during 2004. This increase was partially offset by lower
revenue per treatment in the former NNA operations.
Patient Care Costs. Patient care costs increased from $653.3 million for the year ended December 31, 2003
to $893.5 million for the year ended December 31, 2004, an increase of 36.8%. This increase was due
principally 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 increased from 65.0% in 2003 to 66.4% in 2004. This increase was due to
generally higher salary and benefit costs, lease costs and routine supply costs experienced in the
former NNA facilities. Patient care costs per treatment increased 5.0% from $201 in 2003 to $211 in
2004. The increase in patient care costs per treatment was due to increases in the price and
utilization of EPO, increased labor costs, increases in the cost of insurance, increases in
self-insurance accruals, and changes in the utilization of certain ancillary drugs, as well as the
higher cost structure in the former NNA facilities.
General and Administrative Expenses. General and administrative expenses
increased from $90.2 million for the year ended December 31, 2003 to $106.8 million for the year
ended December 31, 2004, an increase of 18.4%. The increase in general and administrative expenses
over 2003 was due to increased costs associated with the acquisitions that we closed in 2004.
General and administrative expenses as percentage of revenue decreased from 9.0% in 2003 to 7.9% in
2004 as we leveraged our corporate functions over a larger base of revenue as a result of our
acquisitions in
36
2004 and because general and administrative expenses for 2004 did not include the $5.4 million
charge we incurred in the first quarter of 2003 for a retirement benefit plan for our former
chairman, chief executive officer and president. General and administrative expenses in the fourth
quarter of 2004 included write-offs of expenses incurred in connection with several acquisitions
that were not completed and the cost of complying with the subpoena we received from the United
States Attorney’s Office for the Eastern District of New York.
Provision for Doubtful Accounts. The provision for doubtful accounts increased from $26.2
million in 2003 to $32.6 million in 2004, an increase of $6.4 million, or 24.2%. The provision for
doubtful accounts as a percentage of net revenue decreased in 2004 to 2.4% from 2.6% in 2003
principally as a result of our improved collection experience.
Depreciation and Amortization. Depreciation and amortization increased from $44.9 million for
the year ended December 31, 2003 to $58.3 million for the year ended December 31, 2004, an increase
of 29.9%. 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 separately identifiable intangible assets associated with acquisitions.
Depreciation and amortization as a percentage of net revenue decreased from 4.5% in 2003 to 4.3% in
2004 principally as a result of NNA’s practice of leasing dialysis equipment under operating
leases, which resulted in lower depreciation and amortization and higher patient care costs.
Income from Operations. Income from operations increased from $190.7 million for the year
ended December 31, 2003 to $253.8 million for the year ended December 31, 2004, an increase of
33.1%. Income from operations as a percentage of net revenue decreased slightly from 19.0% in 2003
to 18.9% in 2004 period principally as a result of the acquisition of NNA, which had generally
lower margins than the Company as a result of NNA’s lower revenue per treatment and higher patient
care costs and other factors discussed above.
Interest Expense, Net. Interest expense increased from $629,000 for the year-ended December
31, 2003 to $20.6 million for the year ended December 31, 2004. This increase was the result of
substantially higher average borrowings in 2004, which were associated with the completion of our
program to repurchase $250.0 million in common stock between November 2003 and March 2004, our 2004
acquisitions and the assumption of NNA’s $160.0 million 9.0% senior subordinated notes.
Minority Interest. Minority interest as a percentage of net revenue increased to 2.6% in 2004
from 2.5% in 2003. The change in minority interest expense as a percentage of revenue occurred as
acquisitions in 2004 increased the percentage of our facilities that operate as joint ventures.
As of December 31, 2004, we were the majority and controlling owner in 70 joint ventures, as
compared to 50 as of December 31, 2003.
Provision for Income Taxes. Income tax expense increased from $62.5 million in 2003 to $76.2
million in 2004, an increase of $13.7 million or 21.9%. The increase is a result of increases in
pre-tax earnings and our effective tax rate. Our effective tax rate was 38.0% for the 2003 period
compared to 38.5% for the 2004 period. The increase reflects a higher overall effective rate
associated with the operations acquired from NNA.
Net Income. Net income increased from $102.1 million in 2003 to $121.8 million in 2004, an
increase of $19.8 million or 19.4%. This increase was a result of the items discussed above.
Liquidity and Capital Resources
We require capital primarily to acquire and develop dialysis centers, to purchase property and
equipment for existing centers, to repurchase shares of our common stock and to finance working
capital needs. At December 31, 2005, our working capital was $140.2 million; cash and cash
equivalents were $2.5 million; and our current ratio was 1.5 to 1.0.
Net cash provided by operating activities was $190.0 million for the year ended December 31,
2005. Cash provided by operating activities consists primarily 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 $285.5 million for the year ended December
31, 2005. Cash used in investing activities consisted primarily of $91.4 million of purchases of
property and equipment, $146.8 million of cash paid for acquisitions, net of cash acquired and
$51.0 million of cash paid for noncontrolling interests in consolidated subsidiaries. Net cash
provided by financing activities was $80.1 million for the year ended December 31, 2005. Cash
provided by financing activities primarily reflects proceeds from the issuance of
long-term debt, net of payments of $77.7 million, net proceeds of $17.0 million from the issuance of common stock,
offset by $9.4 million in repurchases of our common stock.
37
We are a party to a credit agreement with a group of banks totaling up to $700.0 million. The
credit agreement has a $150.0 million revolving credit facility, a $325.0 million term loan
facility, a $100.0 million second term loan, and a $125.0 million incremental term loan
facility. Borrowings under the incremental term loan facility are subject to obtaining commitments
from the banks and finalizing specific terms. In May 2005, we finalized the terms of a $100.0
million incremental term loan under the credit agreement, and we
refer to this loan as the second term loan. We used the proceeds of
this second term loan to finance some of our 2005 acquisitions. The revolving credit facility and the $425.0
million term loans have a final maturity of February 10, 2009. Each of our wholly-owned
subsidiaries has guaranteed all of our obligations under the credit agreement. Further, our
obligations under the credit agreement, and our subsidiaries’ obligations under their guarantees,
are secured by a pledge of the equity interests we hold in each of our subsidiaries. The credit
agreement includes financial covenants that are customary based on the amount and duration of the
agreement.
Borrowings under the $150.0 million revolving credit facility may be used for acquisitions,
repurchases of our stock, capital expenditures, working capital and general corporate purposes. As
of December 31, 2005, we can borrow up to $150.0 million under the revolving credit facility but
cannot borrow any additional amounts under the $325.0 million term loan facility, the $100.0
million second term loan, or the $125.0 million incremental term loan facility. At
December 31, 2005, our outstanding indebtedness was $576.1 million, including a remaining balance
of $290.5 million under the term loan facility, $100.0 million under the second term loan, $180.5
million of 9.0% senior subordinated notes assumed in our acquisition of NNA and $5.1 million of
other indebtedness, primarily capital leases.
Borrowings under our credit agreement bear interest at variable rates determined by our
leverage ratio. These variable rate debt instruments carry a degree of interest rate risk, and we
will face higher interest costs on this debt if interest rates rise.
Effective June 30, 2004, we entered into interest rate swap agreements to hedge the interest
rate risk on $150.0 million of our $325.0 million term loan
facility. Under these interest rate swap agreements we exchange
fixed and variable rate interest payments based on a $150.0 million notional principal amount
through March 30, 2007. The notional amount of $150.0 million and the interest rate of 3.5% are
fixed in the agreements. The changes in cash flows under these agreements are expected to offset
the changes in interest rate payments attributable to fluctuations in LIBOR. The hedge is
structured to qualify for the shortcut method; therefore, we record changes in the fair value of
the agreement directly in other comprehensive income. The interest payments under this agreement
are settled on a net basis each calendar quarter.
The
9.0% senior subordinated notes we assumed in the NNA transaction bear interest at the rate
of 9.0% on the face amount. As of December 31, 2005 these notes have a remaining face value of $159.7
million and are recorded at their carrying value of $180.5 million. These notes do not provide for
scheduled principal amortization and are scheduled to mature on November 1, 2011. Each of our
wholly-owned subsidiaries has guaranteed all of our obligations under these notes. The rights of
the noteholders and our obligations under these notes are set forth in an indenture we assumed in
connection with the NNA acquisition. The indenture includes customary financial covenants.
As
a result of our indebtedness, we will incur substantial interest expense in and after 2006.
Based on our outstanding funded indebtedness of $555.3 million, excluding the unamortized fair
value premium of $20.8 million on the 9.0% Senior Subordinated Notes, the aggregate maturities of
our borrowings are as follows: 2006 — $42.2 million; 2007 — $80.3 million; 2008 — $208.0 million;
2009 — $62.0 million; 2010 — $318,000; and thereafter
— $162.6 million.
We plan to make capital expenditures of between $90.0 million and $100.0 million in 2006,
primarily for equipment replacement, expansion of existing dialysis facilities and construction of
de novo facilities. We expect that these capital expenditures will be funded with cash provided by
operating activities and our existing credit facility. Management believes that capital resources
available to us will be sufficient to meet the needs of our business, both on a short- and
long-term basis.
We have a stock repurchase program. Pending the completion of the Fresenius Medical Care
transaction we do not plan to repurchase shares under this program. During 2004, we repurchased 4.6
million shares for $137.8 million, and in the first quarter of
38
2005, we repurchased 252,000 shares of common stock for approximately $9.4 million. As of
December 31, 2005, we had repurchased an aggregate of 14.8 million shares under our stock
repurchase plan, for a total of approximately $381.6 million.
SEC financial reporting release, FR-61, Commission Statement about Management’s Discussion and
Analysis of Financial Condition and Results of Operations encourages public companies to give
investors additional information about funds that will be required to operate their businesses in
the future under agreements that are in place today. In accordance with FR-61, the following table
gives information about our existing contractual obligations. At December 31, 2005, we had no
significant contingent commitments.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period (in thousands) |
|
| |
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
| Contractual Obligations |
|
Total |
|
|
year |
|
|
1 - 3 years |
|
|
3 - 5 years |
|
|
After 5 years |
|
Long-term debt |
|
$ |
550,695 |
|
|
$ |
42,260 |
|
|
$ |
287,031 |
|
|
$ |
61,719 |
|
|
$ |
159,685 |
|
Capital leases |
|
|
7,126 |
|
|
|
800 |
|
|
|
1,401 |
|
|
|
1,191 |
|
|
|
3,734 |
|
Operating leases |
|
|
302,306 |
|
|
|
47,961 |
|
|
|
86,376 |
|
|
|
66,054 |
|
|
|
101,915 |
|
Medical director fee obligations |
|
|
168,511 |
|
|
|
28,971 |
|
|
|
52,686 |
|
|
|
38,847 |
|
|
|
48,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
1,028,638 |
|
|
$ |
119,992 |
|
|
$ |
427,494 |
|
|
$ |
167,811 |
|
|
$ |
313,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newly Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised
2004), Share-Based Payment (SFAS No. 123(R)), which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123). SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees, and amended SFAS No. 95, Statement of Cash Flows. Generally, the
approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma disclosure is no
longer an alternative. We adopted SFAS No. 123(R) on January 1, 2006.
As
permitted by SFAS No. 123, for periods ended prior to January 1,
2006 we accounted for share-based payments to
employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognize no
compensation cost for employee stock options. We cannot predict the impact of adopting of SFAS No. 123(R) because it will depend on levels of share-based payments granted in the
future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would
have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income
and earnings per share in Note 9 to our consolidated financial statements. SFAS No. 123(R) also
requires the benefits of tax deductions in excess of recognized compensation cost to be reported as
a financing cash flow, rather than as an operating cash flow as required under current literature.
This requirement will reduce net operating cash flows and increase net financing cash flows in
periods after we adopt SFAS 123(R). While we cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees exercise stock options), the amount of
operating cash flows recognized in prior periods for such excess tax deductions were $13.6 million,
$11.3 million and $8.6 million in 2003, 2004, and 2005, respectively.
Impact of Inflation
A substantial portion of our net revenue is subject to reimbursement rates that are regulated
by the federal government and do not automatically adjust for inflation. We are unable to increase
the amount we receive for the services provided by our dialysis business that are reimbursed under
or by reference to the Medicare composite rate. Increased operating costs due to inflation, such as
labor and supply costs (including the cost of EPO), without a corresponding increase in
reimbursement rates, may adversely affect our results of operations, financial condition and
business.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Cash Balances
We maintain all cash in United States dollars in highly liquid, interest-bearing, investment
grade instruments with maturities of less than three months, which we consider cash equivalents;
therefore, we have no “market risk sensitive instruments.”
Outstanding Debt
As of December 31, 2005, we had outstanding debt of $576.1 million, including a $20.8 million
fair value premium on the 9.0% senior subordinated notes. This debt consisted of $290.5 million
outstanding under a term loan facility and $100.0 million
outstanding under a second term loan, $180.5 million of indebtedness relating to the 9.0% senior
subordinated notes due 2011 and approximately $5.1 million outstanding under various capital leases
and notes payable. Borrowings of $140.5 million under the term
loan facility and the $100.0 million under the second term loan bear interest at variable rates
based on LIBOR rates or the prime rate that are determined by our leverage ratio. The remaining
$150.0 million under the term loan are fixed at a rate of 3.5% plus an additional spread based on
the Company’s leverage ratio under interest rate swap agreements that became effective on June 30,
2004. Our weighted average borrowing rates under the term loan
facility and the second term loan as of
December 31, 2005, were 5.7% and 5.4%, respectively. We expect
these rates to rise in the future if
interest rates rise on the portion that bears interest at floating rates. Outstanding senior
subordinated notes bear nominal interest at 9.0% on the $159.7 million outstanding face amount of
the notes. The unamortized $20.8 million fair value premium is being recognized over the life of
the notes using the effective interest method and is recorded as a reduction to interest expense.
Accordingly, the effective interest rate on the notes was 6.4% as of December 31, 2005. At December
31, 2005, the fair value of our indebtedness under the credit facility and senior subordinated
notes approximated carrying value. At the December 31, 2005 borrowing levels and giving effect to
the impact of our interest rate swap agreements, if there had been a 1% increase in the variable
interest rates, then our pre-tax income would have decreased by approximately $5.3 million for the
year ended December 31, 2005.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and financial statement schedule in Part IV, Item 15(a)
(1) and (2) of the report are incorporated by reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of the period covered
by this report. Our Chief Executive Officer and Chief Financial Officer concluded that, as of the
end of the period covered by this report, we maintain disclosure controls and procedures that
provide reasonable assurance that information that we are required to disclose in the reports that
we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
There were no changes in our internal control over financial reporting that occurred during
the year ended December 31, 2005 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting set forth on Page F-1 in Part
IV, Item 15(a) of this report and the Attestation Report of the Registered Public Accounting Firm
set forth on Page F-3 are incorporated by reference into this
Item 9A.
Item 9B.
Other Information
None.
40
PART III
Item 10.
Directors and Executive Officers of the Registrant
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 2006 Annual Meeting of Stockholders.
We have adopted a code of ethics that applies to all of our directors, officers and employees.
This code is publicly available in the investor relations area of our website at
www.renalcaregroup.com. This code of ethics is not incorporated in this report by reference.
Copies of our code of ethics may also be requested in print by writing to Investor Relations at
Renal Care Group, Inc., 2525 West End Avenue, Suite 600, Nashville, Tennessee 37203.
Item 11. Executive Compensation
The information required by this item will appear in the section entitled “Executive
Compensation” included in the Company’s definitive Proxy Statement relating to the 2006 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 and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans (number of shares in thousands)
The following table summarizes our equity compensation plans as of December 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of Shares |
|
| |
|
|
|
|
|
|
|
|
|
Remaining Available |
|
| |
|
Number of Shares to |
|
|
Weighted-Average |
|
|
For Future Issuance |
|
| |
|
Be Issued Upon |
|
|
Exercise Price of |
|
|
Under Equity |
|
| |
|
Exercise of |
|
|
Outstanding |
|
|
Compensation Plans |
|
| |
|
Outstanding |
|
|
Options, |
|
|
(Excluding |
|
| |
|
Options, Warrants |
|
|
Warrants and |
|
|
Securities Reflected |
|
| |
|
And Rights |
|
|
Rights |
|
|
In Column (a)) |
|
| Plan Category (1) |
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation plans approved by stockholders |
|
|
7,893 |
|
|
$ |
20.83 |
|
|
|
7,116 |
|
Equity compensation plans not approved by stockholders (2) |
|
|
124 |
|
|
$ |
7.80 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
8,017 |
|
|
$ |
21.48 |
|
|
|
7,116 |
|
|
|
|
| (1) |
|
Renal Care Group currently has three option plans that were assumed in connection with a
merger, acquisition or other transaction. The first such plan was adopted by Renal Disease
Management by Physicians, Inc. in 1997, and there are 9 options issued and outstanding to
purchase shares at a weighted average exercise price of $15.16. The second plan was adopted by
Dialysis Centers of America, Inc. in 1995, and there are 18 options issued and outstanding to
purchase shares at a weighted average exercise price of $17.05. The third plan was adopted in
1994, and there are 13 options issued and outstanding under such plan to purchase shares at a
weighted average exercise price of $2.22. |
| |
| (2) |
|
These options were issued outside of our existing stock option plans to certain employees,
officers, directors, and other key persons. These options vest over various periods up to five
years and have a term of 10 years from the date of issuance. |
Further
information concerning these plans is incorporated by reference to Note 9 in the
Consolidated Financial Statements included in this annual report on Form 10-K.
The other 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 2006 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 2006 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services
The information required by this item will appear in, and is incorporated by reference from,
the section entitled “Auditors” included in the Company’s definitive Proxy Statement relating to
the 2006 Annual Meeting of Stockholders.
41
PART IV
Item 15.
Exhibits and Financial Statement Schedules
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Page |
(a)
|
|
|
|
|
|
Documents filed as part of this Report: |
|
|
|
|
|
(1 |
) |
|
Consolidated Financial Statements |
|
|
|
|
|
|
|
|
Management’s Report on Internal Control over Financial Reporting
|
|
F- 1 |
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F- 2 |
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
F- 3 |
|
|
|
|
|
|
Consolidated Balance Sheets at December 31, 2004 and 2005
|
|
F- 4 |
|
|
|
|
|
|
Consolidated Income Statements for the years ended December 31, 2003, 2004, and 2005
|
|
F- 6 |
|
|
|
|
|
|
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2003, 2004, and 2005
|
|
F- 7 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004, and 2005
|
|
F- 8 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
F-10 |
|
|
|
(2 |
) |
|
Consolidated Financial Statement Schedules |
|
|
|
|
|
|
|
|
Schedule II — Consolidated Schedule-Valuation and Qualifying Accounts
|
|
F-30 |
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
The Exhibits are listed in the Index of Exhibits Required by Item 601 of Regulation S-K included
herewith, which is incorporated by reference. |
|
|
|
|
|
|
|
|
|
|
|
(b)
|
|
|
|
|
|
None. |
|
|
42
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Renal Care Group, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange Act rules 13a-15(f).
The Company’s internal control over financial reporting is a process designed under the supervision
of the Company’s chief executive officer and chief financial officer to provide reasonable
assurance about the reliability of financial reporting and the preparation of the Company’s
financial statements for external reporting purposes in accordance with U.S. generally accepted
accounting principles.
As of December 31, 2005 management conducted an assessment of the effectiveness of the
Company’s internal control over financial reporting based on the framework established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management has determined that the Company’s internal
control over financial reporting as of December 31, 2005 is effective.
The Company’s internal control over financial reporting includes policies and procedures that
(1) pertain to the maintenance of records that accurately and fairly reflect transactions and
dispositions of assets in reasonable detail; (2) provide reasonable assurances that the Company
records transactions as necessary to permit preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that the Company makes receipts and expenditures
only in accordance with authorizations of management of the Company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the Company’s financial statements.
Management’s assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in that firm’s attestation report appearing on page F-3.
| |
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
Executive Vice President and Chief
Financial Officer |
|
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders of
Renal Care Group, Inc.
We have audited the accompanying consolidated balance sheets of Renal Care Group, Inc. as of
December 31, 2004 and 2005 and the related consolidated income statements, statements of
stockholders’ equity, and statements of cash flows for each of the three years in the period ended
December 31, 2005. Our audits also included the financial statement schedule listed in the Index
at Item 15(a). These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Renal Care Group, Inc. at December 31, 2004 and
2005 and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2005, in conformity with U. S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Renal Care Group, Inc.’s internal control over
financial reporting as of December 31, 2005, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 10, 2006 expressed an unqualified opinion thereon.
| |
|
|
Nashville, Tennessee
|
|
/s/ ERNST & YOUNG LLP |
March 10, 2006 |
|
|
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Renal Care Group, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting, that Renal Care Group, Inc. maintained effective
internal control over financial reporting as of December 31, 2005, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Renal Care Group, Inc. maintained effective internal
control over financial reporting as of December 31, 2005, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, Renal Care Group, Inc. maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2005,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets as of December 31, 2004 and 2005, and the
related consolidated income statements, statements of stockholders’ equity, and statements of cash
flows for each of the three years in the period ended December 31, 2005 of Renal Care Group, Inc.,
and our report dated March 10, 2006 expressed an unqualified opinion thereon.
| |
|
|
Nashville, Tennessee
|
|
/s/ ERNST & YOUNG LLP |
March 10, 2006 |
|
|
F-3
Renal Care Group, Inc.
Consolidated Balance Sheets
(in thousands)
| |
|
|
|
|
|
|
|
|
| |
|
December 31 |
|
| |
|
2004 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
17,931 |
|
|
$ |
2,511 |
|
Accounts receivable, less allowance for doubtful accounts of $45,131 in 2004 and $28,560 in 2005 |
|
|
275,373 |
|
|
|
297,983 |
|
Inventories |
|
|
23,359 |
|
|
|
34,801 |
|
Prepaid expenses and other current assets |
|
|
26,817 |
|
|
|
30,976 |
|
Income taxes receivable |
|
|
— |
|
|
|
3,700 |
|
Deferred income taxes |
|
|
29,604 |
|
|
|
32,989 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
373,084 |
|
|
|
402,960 |
|
Property, plant and equipment, net |
|
|
316,532 |
|
|
|
362,224 |
|
Intangible assets, net |
|
|
34,320 |
|
|
|
39,177 |
|
Goodwill |
|
|
694,264 |
|
|
|
849,879 |
|
Other assets |
|
|
10,780 |
|
|
|
7,793 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,428,980 |
|
|
$ |
1,662,033 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
Renal Care Group, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
| |
|
|
|
|
|
|
|
|
| |
|
December 31 |
|
| |
|
2004 |
|
|
2005 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
29,075 |
|
|
$ |
34,158 |
|
Accrued compensation |
|
|
54,129 |
|
|
|
62,335 |
|
Due to third-party payors |
|
|
80,007 |
|
|
|
60,156 |
|
Income taxes payable |
|
|
399 |
|
|
|
— |
|
Accrued expenses and other current liabilities |
|
|
56,326 |
|
|
|
63,922 |
|
Current portion of long-term debt |
|
|
23,969 |
|
|
|
42,198 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
243,905 |
|
|
|
262,769 |
|
Long-term debt, net of current portion |
|
|
479,645 |
|
|
|
533,923 |
|
Deferred income taxes |
|
|
51,419 |
|
|
|
55,827 |
|
Other long-term liabilities |
|
|
16,271 |
|
|
|
17,102 |
|
Minority interest |
|
|
45,619 |
|
|
|
52,775 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
836,859 |
|
|
|
922,396 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000 shares authorized, none issued |
|
|
— |
|
|
|
— |
|
Common stock, $0.01 par value, 150,000 shares authorized, 82,317 and
83,286 shares issued at December 31, 2004 and 2005, respectively |
|
|
823 |
|
|
|
833 |
|
Treasury stock, 14,514 and 14,766 shares of common stock at December
31, 2004 and 2005, respectively |
|
|
(372,249 |
) |
|
|
(381,635 |
) |
Additional paid-in capital |
|
|
411,888 |
|
|
|
437,478 |
|
Retained earnings |
|
|
551,863 |
|
|
|
681,576 |
|
Accumulated other comprehensive (loss) income, net of tax |
|
|
(204 |
) |
|
|
1,385 |
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
592,121 |
|
|
|
739,637 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
1,428,980 |
|
|
$ |
1,662,033 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
Renal Care Group, Inc.
Consolidated Income Statements
(in thousands, except per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31 |
|
| |
|
2003 |
|
|
2004 |
|
|
2005 |
|
Net revenue |
|
$ |
1,005,319 |
|
|
$ |
1,345,047 |
|
|
$ |
1,570,226 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Patient care costs |
|
|
653,307 |
|
|
|
893,478 |
|
|
|
1,039,268 |
|
General and administrative expenses |
|
|
90,249 |
|
|
|
106,823 |
|
|
|
141,210 |
|
Provision for doubtful accounts |
|
|
26,200 |
|
|
|
32,550 |
|
|
|
31,978 |
|
Depreciation and amortization |
|
|
44,905 |
|
|
|
58,349 |
|
|
|
71,400 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
814,661 |
|
|
|
1,091,200 |
|
|
|
1,283,856 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
190,658 |
|
|
|
253,847 |
|
|
|
286,370 |
|
Interest expense, net |
|
|
629 |
|
|
|
20,628 |
|
|
|
32,908 |
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest and income taxes |
|
|
190,029 |
|
|
|
233,219 |
|
|
|
253,462 |
|
Minority interest |
|
|
25,431 |
|
|
|
35,169 |
|
|
|
35,837 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
164,598 |
|
|
|
198,050 |
|
|
|
217,625 |
|
Provision for income taxes |
|
|
62,542 |
|
|
|
76,217 |
|
|
|
87,912 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
102,056 |
|
|
$ |
121,833 |
|
|
$ |
129,713 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.40 |
|
|
$ |
1.80 |
|
|
$ |
1.90 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.37 |
|
|
$ |
1.74 |
|
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
72,719 |
|
|
|
67,581 |
|
|
|
68,110 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
74,753 |
|
|
|
69,892 |
|
|
|
70,834 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
Renal Care Group, Inc.
Consolidated Statements of Stockholders’ Equity
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Comprehensive |
|
|
Total |
|
| |
|
Common Stock |
|
|
Treasury Stock |
|
|
Paid-In |
|
|
Retained |
|
|
(Loss)/Income |
|
|
Stockholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Net of Tax |
|
|
Equity |
|
Balance at December 31, 2002 |
|
|
76,764 |
|
|
$ |
768 |
|
|
|
4,475 |
|
|
$ |
(93,953 |
) |
|
$ |
309,099 |
|
|
$ |
327,974 |
|
|
$ |
— |
|
|
$ |
543,888 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
102,056 |
|
|
|
— |
|
|
|
102,056 |
|
Common stock issued and
related income tax benefit |
|
|
3,701 |
|
|
|
37 |
|
|
|
— |
|
|
|
— |
|
|
|
65,315 |
|
|
|
— |
|
|
|
— |
|
|
|
65,352 |
|
Repurchase of common stock held
in treasury |
|
|
— |
|
|
|
— |
|
|
|
5,487 |
|
|
|
(140,451 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(140,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
80,465 |
|
|
|
805 |
|
|
|
9,962 |
|
|
|
(234,404 |
) |
|
|
374,414 |
|
|
|
430,030 |
|
|
|
— |
|
|
|
570,845 |
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
121,833 |
|
|
|
— |
|
|
|
121,833 |
|
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(204 |
) |
|
|
(204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
121,833 |
|
|
|
(204 |
) |
|
|
121,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued and
related income tax benefit |
|
|
1,852 |
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
|
|
37,474 |
|
|
|
— |
|
|
|
— |
|
|
|
37,492 |
|
Repurchase of common stock
held in treasury |
|
|
— |
|
|
|
— |
|
|
|
4,552 |
|
|
|
(137,845 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(137,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
82,317 |
|
|
|
823 |
|
|
|
14,514 |
|
|
|
(372,249 |
) |
|
|
411,888 |
|
|
|
551,863 |
|
|
|
(204 |
) |
|
|
592,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
129,713 |
|
|
|
— |
|
|
|
129,713 |
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,589 |
|
|
|
1,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
129,713 |
|
|
|
1,589 |
|
|
|
131,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued and
related income tax benefit |
|
|
969 |
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
25,590 |
|
|
|
— |
|
|
|
— |
|
|
|
25,600 |
|
Repurchase of common stock
held in treasury |
|
|
— |
|
|
|
— |
|
|
|
252 |
|
|
|
(9,386 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
83,286 |
|
|
$ |
833 |
|
|
|
14,766 |
|
|
$ |
(381,635 |
) |
|
$ |
437,478 |
|
|
$ |
681,576 |
|
|
$ |
1,385 |
|
|
$ |
739,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
Renal Care Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31 |
|
| |
|
2003 |
|
|
2004 |
|
|
2005 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
102,056 |
|
|
$ |
121,833 |
|
|
$ |
129,713 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
44,905 |
|
|
|
58,349 |
|
|
|
71,400 |
|
Loss on sale of property and equipment |
|
|
886 |
|
|
|
1,123 |
|
|
|
589 |
|
Income applicable to minority interest |
|
|
25,431 |
|
|
|
35,169 |
|
|
|
35,837 |
|
Distributions to minority shareholders |
|
|
(24,634 |
) |
|
|
(26,073 |
) |
|
|
(21,966 |
) |
Deferred income taxes |
|
|
19,517 |
|
|
|
15,821 |
|
|
|
10,321 |
|
Changes in operating assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(20,253 |
) |
|
|
(56,284 |
) |
|
|
(21,488 |
) |
Inventories |
|
|
(2,754 |
) |
|
|
8,762 |
|
|
|
(10,929 |
) |
Prepaid expenses and other current assets |
|
|
(8,564 |
) |
|
|
4,208 |
|
|
|
(3,690 |
) |
Accounts payable |
|
|
3,140 |
|
|
|
(18,265 |
) |
|
|
4,271 |
|
Accrued compensation |
|
|
8,553 |
|
|
|
1,646 |
|
|
|
8,078 |
|
Due to third-party payors |
|
|
13,313 |
|
|
|
26,741 |
|
|
|
(19,851 |
) |
Accrued expenses and other current liabilities |
|
|
8,838 |
|
|
|
(15,673 |
) |
|
|
2,758 |
|
Income taxes |
|
|
10,217 |
|
|
|
13,696 |
|
|
|
5,376 |
|
Other long-term liabilities |
|
|
5,898 |
|
|
|
6,473 |
|
|
|
(447 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
186,549 |
|
|
|
177,526 |
|
|
|
189,972 |
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment |
|
|
2,270 |
|
|
|
4,569 |
|
|
|
483 |
|
Cash paid for acquisitions, net of cash acquired |
|
|
(14,154 |
) |
|
|
(297,885 |
) |
|
|
(146,809 |
) |
Cash paid for noncontrolling interests in consolidated subsidiaries |
|
|
— |
|
|
|
— |
|
|
|
(50,984 |
) |
Purchases of property and equipment |
|
|
(63,762 |
) |
|
|
(103,363 |
) |
|
|
(91,408 |
) |
Change in other assets |
|
|
(2,858 |
) |
|
|
(11,158 |
) |
|
|
3,205 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(78,504 |
) |
|
|
(407,837 |
) |
|
|
(285,513 |
) |
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of long-term debt |
|
|
— |
|
|
|
325,000 |
|
|
|
100,000 |
|
Payments on long-term debt |
|
|
(380 |
) |
|
|
(12,188 |
) |
|
|
(22,345 |
) |
Net payments under line of credit |
|
|
(7,080 |
) |
|
|
(1,831 |
) |
|
|
(5,148 |
) |
Net proceeds from issuance of common stock |
|
|
51,802 |
|
|
|
24,811 |
|
|
|
17,000 |
|
Repurchase of treasury shares |
|
|
(140,451 |
) |
|
|
(137,845 |
) |
|
|
(9,386 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(96,109 |
) |
|
|
197,947 |
|
|
|
80,121 |
|
Increase (decrease) in cash and cash equivalents |
|
|
11,936 |
|
|
|
(32,364 |
) |
|
|
(15,420 |
) |
Cash and cash equivalents, at beginning of year |
|
|
38,359 |
|
|
|
50,295 |
|
|
|
17,931 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of year |
|
$ |
50,295 |
|
|
$ |
17,931 |
|
|
$ |
2,511 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
Renal Care Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31 |
|
| |
|
2003 |
|
|
2004 |
|
|
2005 |
|
DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
922 |
|
|
$ |
19,198 |
|
|
$ |
36,548 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
32,808 |
|
|
$ |
47,588 |
|
|
$ |
69,548 |
|
|
|
|
|
|
|
|
|
|
|
DISCLOSURES OF BUSINESS ACQUISITIONS: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
$ |
14,388 |
|
|
$ |
567,576 |
|
|
$ |
150,486 |
|
Liabilities assumed |
|
|
234 |
|
|
|
269,691 |
|
|
|
3,677 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired |
|
$ |
14,154 |
|
|
$ |
297,885 |
|
|
$ |
146,809 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-9
Renal Care Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
December 31, 2005
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, 2005, the Company
provided dialysis and ancillary services to over 32,300 patients through 456 outpatient dialysis
centers in 34 states. In addition to its outpatient dialysis center operations, as of December 31,
2005, the Company provided acute dialysis services through contractual relationships with more than
200 hospitals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned
subsidiaries and its majority-owned subsidiaries and joint venture entities over which the Company
exercises majority-voting control and for which control is other than temporary. All significant
intercompany transactions and accounts are eliminated in consolidation.
Use of Estimates
Management 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 U.S. 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.
Inventories
Inventories consist of drugs, supplies and parts used 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 the
average cost method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Routine maintenance
and repairs are charged to expense as incurred. Depreciation is calculated on the straight-line
method over the useful lives of the related assets, ranging from three to thirty years. Leasehold
improvements are amortized using the straight-line method over the shorter of the related lease
terms or the useful lives.
Goodwill and Other Intangibles
The Company accounts for goodwill and other intangible assets in accordance with Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). For
all periods presented, the Company did not amortize goodwill or intangible assets with indefinite
lives in accordance with SFAS No. 142. As of December 31, 2004 and 2005, the carrying amount of
goodwill was $694,264 and $849,879, respectively.
For all periods presented, all separately identifiable intangible assets with definite lives were
amortized over their respective useful lives.
F-10
Due to Third-Party Payors
Amounts reflected as due to third-party payors include amounts received in excess of revenue
recognized for specific billed charges. These amounts are commonly referred to as overpayments.
Overpayments received from federally funded programs are reported to the federal program in
accordance with the program’s established procedures. For overpayments received from non-federally
funded payors, the Company uses various procedures to communicate and refund such amounts to the
payors. These amounts remain classified as due to third-party payors until
the Company makes a refund, the payor makes a recoupment or the amount is otherwise recognized based on final resolution with the payor.
Minority Interest
Minority interest represents the proportionate equity interest of other owners in the Company’s
consolidated entities that are not wholly owned. As of December 31, 2005, the Company was the
majority and controlling owner in 64 joint ventures.
Stock Based Compensation
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS No. 148”),
which amended SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), provides
alternative methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. These consolidated financial statements
and related notes include the disclosure requirements of SFAS No. 148. However, the Company has
elected to account for its stock-based compensation plans under the intrinsic value-based method of
accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB Opinion
No. 25”), and does not utilize the fair value method.
On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123
(revised 2004), Share-Based Payment (“SFAS No. 123(R)”), which is a revision of SFAS No. 123. SFAS
No. 123(R) supersedes APB Opinion No. 25 and amended SFAS No. 95, Statement of Cash Flows.
Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123.
However, SFAS No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. The Company adopted SFAS No. 123(R) on January 1, 2006.
As
permitted by SFAS No. 123, for periods ended prior to January 1,
2006, the Company has accounted for share-based payments to employees
using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. The impact of adopting of SFAS No. 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments in the future.
However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and
earnings per share in Note 9 to these consolidated financial statements. SFAS No. 123(R) also
requires the Company to recognize the benefits of tax deductions in excess of recognized compensation cost as
a financing cash flow, rather than as an operating cash flow as required under current literature.
This requirement will reduce net operating cash flows and increase net financing cash flows in
periods after the Company adopts SFAS 123(R). While the Company cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees exercise stock options), the amount of
operating cash flows recognized in prior periods for such excess tax deductions were $13,550,
$11,300 and $8,600 in 2003, 2004, and 2005, respectively.
Net Revenue
Net revenue is recognized as services are provided and invoiced at the estimated net realizable
amount from Medicare, Medicaid, commercial insurers and other third-party payors. The Company’s net
revenue is largely derived from the following sources:
| |
• |
|
Outpatient hemodialysis; |
| |
| |
• |
|
Ancillary services associated with outpatient dialysis, primarily the administration of erythropoietin (EPO) and other drugs; |
| |
| |
• |
|
Home dialysis services; |
| |
| |
• |
|
Inpatient hemodialysis services provided to acute care hospitals and skilled nursing facilities; |
F-11
| |
• |
|
Laboratory services; and |
| |
| |
• |
|
Management contracts with hospital-based medical university dialysis programs. |
The Medicare and Medicaid programs, along with certain third-party payors, reimburse the Company at
amounts that are different from the Company’s established rates. Contractual adjustments 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 is subject to regional differences based on various factors,
including labor costs. Some drugs and other ancillary services are reimbursed on a fee for service
basis.
Medicaid
Medicaid is a program funded by the federal and state governments. It is administered by the
states, with reimbursements varying by state. The Medicaid programs are separately administered in
each state in which the Company operates, and the state Medicaid programs reimburse the Company
predominantly on a prospective payment system for dialysis services rendered.
Third-Party
Settlements
During the
year ended December 31, 2005 the Company obtained final determination
of certain Medicare cost report settlements. Accordingly, during this
period the Company recognized a change in estimate of $2,611 (net of related
tax expense of $1,676) resulting in a reduction to the provision for
doubtful accounts.
Other
Payments from commercial insurers, other third-party payors and patients are received pursuant to a
variety of reimbursement arrangements. Generally payments from commercial insurers and other
third-party payors are greater than those received from the Medicare and Medicaid programs.
Reimbursements from Medicare and Medicaid approximated 55%, 53% and 56% of net revenue for the
years ended December 31, 2003, 2004 and 2005, respectively.
Provision for Doubtful Accounts
The provision for doubtful accounts is determined as a function of payor mix, billing practices and
other factors. The Company 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 and monitors the net collectibility of accounts receivable based upon a
variety of factors. These factors include, but are not limited to, analyzing revenues generated
from payor sources, performing subsequent collection testing and regularly reviewing detailed
accounts receivable agings.
Income Taxes
The Company accounts for income taxes under the asset and liability method. The Company recognizes
deferred tax assets and liabilities 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 for the change. The Company identifies deferred tax assets that
more likely than not will not be realized and records a valuation allowance. The Company also
establishes accruals for tax uncertainties that it deems to be probable of loss and that can be
reasonably estimated.
Self Insurance
The Company is subject to professional liability, general liability and workers compensation claims
or lawsuits in the ordinary course of business. Accordingly, the Company maintains insurance for
professional liability and general liability claims exceeding certain individual amounts.
Premiums paid under the Company’s professional liability policy
may be retrospectively adjusted depending upon claims experience
during the policy term. Similarly, the Company maintains workers compensation insurance for claims exceeding certain
individual and aggregate amounts. The Company estimates its self-insured retention portion of
professional liability, general liability and workers
F-12
compensation risks using third party actuarial calculations that include historical claims data,
demographic factors and other assumptions.
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 generally
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 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.
Receivables from Medicare and Medicaid represented 45% and 42% of gross accounts receivable at
December 31, 2004 and 2005, respectively. Concentration of credit risk relating to accounts
receivable is limited to some extent by the diversity of the number of patients and payors and the
geographic dispersion of the Company’s operations.
The Company administers EPO to most of its patients to treat anemia, a medical complication
frequently experienced by dialysis patients. Revenue from the administration of EPO was 24% of the
net revenue of the Company for the year ended December 31, 2003, 26% of the net revenue of the
Company for the year ended December 31, 2004 and 24% of the net revenue of the Company for the year
ended December 31, 2005. EPO is produced by a single manufacturer.
Impairment of Goodwill and Long-Lived Assets to be Disposed Of
Pursuant to SFAS No. 142, Goodwill and Other Intangible Assets, the Company reviews goodwill for
impairment at a reporting unit level at least annually. Goodwill is tested for impairment between
annual tests if an event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. Goodwill is assigned to each reporting
unit based on the geographic location of assets acquired. If the fair value of a reporting unit is
determined to be less than its carrying amount, then the Company compares the implied fair value of
the goodwill to its carrying value. If the implied fair value of the goodwill is less than its
carrying value, then an impairment loss is recognized for that difference. No goodwill impairment
losses were recognized during 2003, 2004 or 2005.
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
when events, circumstances or operating results indicate that the carrying value of certain
long-lived assets and related identifiable intangible assets (excluding goodwill) that are expected
to be held and used, might be impaired, the Company evaluates such assets for impairment based on
estimated undiscounted cash flows expected to result from the use and eventual disposition of the
assets. If related long-lived assets are identified as impaired, the impairment is equal to the
amount by which the carrying value of the assets exceeds the fair value of those assets as
determined by independent appraisals or estimates of discounted future cash flows. Long-lived
assets to be disposed of are reported at the lower of the carrying amount or fair value less costs
to sell.
Derivative Financial Instruments
The Company manages its interest rate risk by using interest rate swaps to achieve an overall
desired position on floating interest rates. Effective June 30, 2004, the Company entered into an
interest rate swap agreement to hedge the interest rate risk on $150,000 of our term loan. These
derivative financial instruments are not held or issued for trading purposes. The derivatives are
recognized as either assets or liabilities in the statement of financial position and measured at
fair value. The hedge is structured to qualify for the shortcut
F-13
method; therefore, changes in the fair value of the agreement are recorded as other comprehensive
income (loss). During 2005 the fair value of the interest rate swaps, net of a tax expense of $989,
increased by approximately $1,589 and was recognized as other comprehensive income.
Reclassifications
Certain prior year balances have been reclassified to conform to the current year
presentation. These reclassifications had no effect on the results of operations as previously
reported.
3. ACQUISITION BY FRESENIUS MEDICAL CARE AG
On
May 3, 2005 the Company entered into a definitive merger agreement with Fresenius Medical Care AG in
which Fresenius Medical Care agreed to acquire all of Renal Care Group’s outstanding stock.
Fresenius Medical Care will pay $48.00 for each of the Company’s outstanding shares of common stock.
Fresenius Medical Care will acquire Renal Care Group subject to its outstanding indebtedness, which
was approximately $576,121 as of December 31, 2005. In connection with the Fresenius Medical
Care transaction, the Company incurred general and administrative expenses of
approximately $14,925 pre-tax in the year ended December 31, 2005.
The
Company’s Board of Directors and the management and supervisory boards of Fresenius Medical Care
have approved the transaction, and on August 24, 2005 the
Company’s stockholders voted to approve the
transaction. Completion of the transaction is subject to customary conditions to closing,
including the termination or expiration of the waiting period under the Hart-Scott Rodino Antitrust
Improvements Act of 1976, as amended. In June 2005, the Company received a request for additional
information under the Hart-Scott Rodino Act from the Federal Trade
Commission. The Company is providing
information to the Federal Trade Commission to respond to this request. The Fresenius Medical Care
transaction may not be completed before 30 days after
certification by the Company and Fresenius Medical
Care of substantial compliance with the Federal Trade Commission’s request for additional
information or until earlier satisfaction by the Federal Trade Commission that the transactions
will not raise anticompetitive concerns. Management believes the transaction will close in the
first quarter of 2006.
On
February 15, 2006, the Company announced that the Company and
Fresenius Medical Care had entered into a definitive agreement to
sell approximately 100 dialysis centers to National Renal Institutes,
Inc., a wholly owned subsidiary of DSI Holding Company, Inc. The
divestiture of these centers is an important step toward concluding
the review by the United States Federal Trade Commission (FTC) of
Fresenius Medical Care’s acquisition of the Company. The
purchase price for the divested centers is approximately $450 million
to be paid in cash, subject to post-closing adjustments for working
capital and other routine matters. The sale of the centers is
expected to close shortly after the completion of the Company’s
acquisition by Fresenius Medical Care. Both the divestiture and the
transaction with Fresenius Medical Care remain subject to FTC approval.
On
May 11, 2005, the Company was served with a complaint in the Chancery Court for the
State of Tennessee Twentieth Judicial District at Nashville styled Plumbers Local #65 Pension Fund,
on behalf of itself and all others similarly situated, Plaintiff, vs. Renal Care Group, Inc.,
William P. Johnston, Gary Brukardt, Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson, William V.
Lapham, Thomas A. Lowery, Stephen D. McMurray and C. Thomas Smith, Defendants. On May 26, 2005,
the Company was served with a complaint in the Chancery Court for the State of Tennessee
Twentieth Judicial District at Nashville styled Hawaii Structural Ironworkers Pension Trust Fund,
on behalf of itself and all others similarly situated, Plaintiff, vs. Renal Care Group, Inc.,
William P. Johnston, Gary Brukardt, Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson, William V.
Lapham, Thomas A. Lowery, Stephen D. McMurray and C. Thomas Smith, Defendants. On May 31, 2005,
the Company was served with a complaint in the Chancery Court for the State of Tennessee Twentieth Judicial District at Nashville styled
Indiana State District Council of Laborers and Hod Carriers Pension Fund, on behalf of itself and
others similar situated, Plaintiff, vs. Renal Care Group, Inc., William P. Johnston, Gary Brukardt,
Peter J. Grua, Joseph C. Hutts, Harry R. Jacobson, William V. Lapham, Thomas A. Lowery, Stephen D.
McMurray and C. Thomas Smith, Defendants. The original complaints in these three lawsuits were
substantially identical. Each complaint was brought by the plaintiff shareholder as a purported
class action on behalf of all shareholders similarly situated. The
complaints allege that the Company and its directors engaged in
self-dealing and breached their fiduciary duties to the
Company’s shareholders in connection with the merger agreement
between the Company and
Fresenius Medical Care because, among other things, the Company used a flawed process, the
existence of the previously disclosed subpoena from the Department of Justice, the lack of
independence of one of the Company’s financial advisors and the
existence of the Company’s supplemental executive retirement plan. The Company removed these cases to federal
court in June 2005.
The plaintiffs in the first two cases dismissed them without prejudice in July 2005, and the
third plaintiff filed an amended complaint. The amended complaint asserts the same grounds
articulated in the original complaint adding more specific allegations regarding the termination
fee, the non-solicitation clause and the matching rights provision in the Merger Agreement, and it
adds allegations that our proxy statement makes material misrepresentations and omissions
regarding the process by which the merger agreement was negotiated.
Specifically, the amended
complaint asserts that the proxy statement makes material misstatements or omissions regarding: (1)
the reason the Company’s management and board engaged in a closed process of negotiating a
potential merger with Fresenius Medical Care and did not solicit potential competing bids from alternative
purchasers; (2) the reason the Company’s board did not appoint a special committee to evaluate
the fairness of the merger; (3) the alternatives available to
the Company including potential
alternative transactions and other strategic business opportunities, which purportedly were
considered by the Company’s board during the strategic
planning process the board engaged in
during the second half of 2004; (4) all information regarding conflicts of interest suffered by
defendants and their financial and legal advisors as alleged herein; (5) all information regarding
past investment banking services Bank of America has performed for
the Company and Fresenius Medical Care and the
compensation Bank of America received for those services; (6) the forecasts and projections
prepared by the Company’s management for fiscal years 2005 through 2008 that were referenced in the
fairness opinions by Morgan Stanley; (7) the estimates of
transaction synergies provided by the Company’s management that were referenced in the fairness opinions by Morgan Stanley; and (8)
information concerning the amount of money Bank of America and Morgan Stanley will receive in
connection with the proposed merger. The Company believes that the allegations in the
pending complaint are without merit. Completion of the merger is subject to customary conditions,
including the absence of any order or injunction prohibiting the closing. The pending complaint
seeks to enjoin and prevent the parties from completing the Fresenius Medical Care transaction.
The pending complaint was remanded to Tennessee state court in September 2005.
F-14
4. BUSINESS ACQUISITIONS
2005 Acquisitions
During
2005, the Company completed five acquisitions. The combined net assets acquired and resulting net
cash purchase price paid in these acquisitions were $146,809. The
purchase price in these transactions consisted exclusively of cash.
Each of the transactions involved the acquisition of one or more entities that provide care to ESRD
patients through owned dialysis facilities. The acquired businesses either strengthened existing
market share within a specific geographic area or provided an entrance into a new market. Goodwill resulting from these transactions amounted to $124,017, and
the Company expects that all of the goodwill will be deductible for income tax purposes.
Intangible assets typically represent the value assigned to certain contracts such as
non-competition agreements and acute dialysis service agreements entered into in the transactions.
These amounts are amortized over the lives of the contracts, which generally range from five to
fifteen years.
The following table summarizes the preliminarily estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition for the five
acquisitions the Company completed during 2005:
| |
|
|
|
|
Accounts receivable, net |
|
$ |
1,122 |
|
Inventory and other current assets |
|
|
807 |
|
Property, plant and equipment, net |
|
|
17,199 |
|
Intangible assets |
|
|
7,341 |
|
Goodwill |
|
|
124,017 |
|
|
|
|
|
Total assets acquired |
|
|
150,486 |
|
Total liabilities assumed, net |
|
|
(3,677 |
) |
|
|
|
|
Net assets acquired |
|
$ |
146,809 |
|
|
|
|
|
The
Company began recording the results of operations for each of these
acquired businesses at the effective date of the transaction.
In 2005
the Company purchased noncontrolling interests in 14 consolidated subsidiaries for an
aggregate purchase price of $50,984. As a result of these transactions approximately $9,998 of
minority interest liabilities were extinguished, and $40,986 of goodwill and other intangible assets
resulted from the transaction.
2004 Acquisitions
During
2004, the Company completed eight acquisitions. The combined net assets acquired and resulting net
cash purchase price paid in these acquisitions were $297,885. Our largest acquisition was the
purchase of National Nephrology Associates, Inc. (“NNA”) on April 2, 2004. The purchase price of
NNA consisted of a net cash payment of approximately $163,000 and the assumption of all of NNA’s
outstanding debt, including its $160,000, 9.0% senior subordinated notes. NNA provided dialysis
services to approximately 5,600 patients and operated 87 outpatient dialysis facilities in 15
states, as well as providing acute dialysis services to more than 50 hospitals.
Each of the eight transactions involved the acquisition of one or more entities that provide care
to ESRD patients through owned dialysis facilities. The acquired businesses either strengthened
existing market share within a specific geographic area or provided an entrance into a new market. Goodwill resulting from these transactions amounted to
$407,686, and approximately $225,856 of that goodwill is deductible for income tax purposes.
F-15
The following table summarizes the preliminarily estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition for the eight
acquisitions the Company completed during 2004:
| |
|
|
|
|
Accounts receivable, net |
|
$ |
45,410 |
|
Inventory and other current assets |
|
|
23,778 |
|
Property, plant and equipment, net |
|
|
50,713 |
|
Intangible assets |
|
|
20,646 |
|
Goodwill |
|
|
407,686 |
|
Other Assets |
|
|
19,343 |
|
|
|
|
|
Total assets acquired |
|
|
567,576 |
|
Total liabilities assumed |
|
|
(269,691 |
) |
|
|
|
|
Net assets acquired |
|
$ |
297,885 |
|
|
|
|
|
The
Company began recording the results of operations for each of these
acquired businesses at the effective date of the transaction.
Some of the estimated fair values of assets and liabilities were preliminary and were adjusted in
2005. The adjustments primarily included deferred tax assets and liabilities. As of December 31, 2005,
management does not anticipate any additional adjustments related to 2004 acquisitions. Intangible
assets primarily represent the value assigned to contracts such as non-competition agreements and
acute dialysis service agreements entered into in the transactions. Related amounts are amortized
over the lives of the contracts, which generally range from five to fifteen years.
2003 Acquisitions
During 2003, the Company completed three acquisitions, which were accounted for under the purchase
method of accounting. The combined purchase price paid in these acquisitions was $14,154 and
consisted exclusively of cash. Each of the transactions involved the acquisition of assets of
entities that provide care to ESRD patients through owned dialysis facilities. The acquired
businesses either strengthened the Company’s existing market share within a specific geographic
area or provided the Company with an entrance into a new market.
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition for the three acquisitions the
Company completed in 2003:
| |
|
|
|
|
Accounts receivable, net |
|
$ |
986 |
|
Inventory |
|
|
255 |
|
Property, plant and equipment, net |
|
|
1,579 |
|
Intangible assets |
|
|
656 |
|
Goodwill |
|
|
10,912 |
|
|
|
|
|
Total assets acquired |
|
|
14,388 |
|
Total liabilities assumed |
|
|
(234 |
) |
|
|
|
|
Net assets acquired |
|
$ |
14,154 |
|
|
|
|
|
The Company began recording the results of operations for each of these acquired businesses at the
effective date of the transaction.
Goodwill resulting from these transactions amounted to $10,912,
and the Company expects that all of that goodwill will be deductible for income tax purposes.
Intangible assets typically represent the value assigned to certain contracts such as
non-competition agreements and acute dialysis service agreements entered into in the transactions.
These amounts are amortized over the lives of the contracts, which generally range from five to ten
years.
F-16
Pro Forma Data (unaudited)
The following summary, prepared on a pro forma basis, combines the results of operations of the
Company and the acquired businesses, as if each of the 2005 acquisitions had been consummated as of
the beginning of each year below, giving effect to adjustments such as amortization of intangibles,
interest expense and related income taxes.
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2005 |
|
Pro forma net revenue |
|
$ |
1,419,259 |
|
|
$ |
1,595,441 |
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
130,807 |
|
|
$ |
132,444 |
|
|
|
|
|
|
|
|
Pro forma net income per share
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.94 |
|
|
$ |
1.94 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.87 |
|
|
$ |
1.87 |
|
|
|
|
|
|
|
|
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.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (including assets recorded under capital
leases) consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2004 |
|
|
2005 |
|
Medical equipment |
|
$ |
190,267 |
|
|
$ |
224,543 |
|
Computer software and equipment |
|
|
69,072 |
|
|
|
86,570 |
|
Furniture and fixtures |
|
|
34,011 |
|
|
|
38,858 |
|
Leasehold improvements |
|
|
145,882 |
|
|
|
179,705 |
|
Buildings |
|
|
45,132 |
|
|
|
53,033 |
|
Construction-in-progress |
|
|
16,341 |
|
|
|
15,462 |
|
|
|
|
|
|
|
|
|
|
|
500,705 |
|
|
|
598,171 |
|
Less accumulated depreciation |
|
|
(184,173 |
) |
|
|
(235,947 |
) |
|
|
|
|
|
|
|
|
|
$ |
316,532 |
|
|
$ |
362,224 |
|
|
|
|
|
|
|
|
Depreciation expense was $42,561, $53,538 and $64,952 for the years ended December 31, 2003, 2004
and 2005, respectively.
6. GOODWILL AND INTANGIBLE ASSETS
In accordance with the requirements of SFAS No. 142, the Company discontinued amortizing goodwill
effective January 1, 2002, and it is required to disclose goodwill separately from other intangible
assets in the balance sheet. Additionally, the Company must test goodwill for impairment on a
periodic basis. The Company completed its annual impairment testing and identified no impairments
as of December 31, 2005.
Changes in the carrying amount of goodwill for the years ended December 31, 2004 and 2005, are as
follows:
| |
|
|
|
|
Balance as of December 31, 2003 |
|
$ |
286,578 |
|
Goodwill acquired during the period |
|
|
407,686 |
|
|
|
|
|
Balance as of December 31, 2004 |
|
|
694,264 |
|
Goodwill acquired during the period |
|
|
124,017 |
|
Goodwill resulting from acquiring noncontrolling interests |
|
|
40,386 |
|
Purchase price allocation period adjustment |
|
|
(8,788 |
) |
|
|
|
|
Balance as of December 31, 2005 |
|
$ |
849,879 |
|
|
|
|
|
F-17
The Company’s separately-identifiable intangible assets, which consist primarily of non-competition
agreements and acute dialysis services agreements, are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2004 |
|
|
2005 |
|
Carrying amount |
|
$ |
49,012 |
|
|
$ |
59,737 |
|
Accumulated amortization |
|
|
(14,692 |
) |
|
|
(20,560 |
) |
|
|
|
|
|
|
|
Net |
|
$ |
34,320 |
|
|
$ |
39,177 |
|
|
|
|
|
|
|
|
Separately-identifiable intangible assets are being amortized over their useful lives, ranging from
five to fifteen years. Amortization expense was $2,344, $4,811 and $6,448 for the years ended
December 31, 2003, 2004 and 2005, respectively. Estimated amortization expense for each of the next
five fiscal years is as follows:
| |
|
|
|
|
| Year ending December 31, |
|
Amount |
|
2006 |
|
$ |
6,126 |
|
2007 |
|
|
5,456 |
|
2008 |
|
|
5,088 |
|
2009 |
|
|
3,857 |
|
2010 |
|
|
2,868 |
|
7. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 2004 and December 31, 2005:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2004 |
|
|
2005 |
|
Term loan facility, bearing interest at a variable rate (5.7% at December 31, 2005) |
|
$ |
312,813 |
|
|
$ |
290,469 |
|
Second term loan, bearing interest at a variable rate (5.4% at December 31, 2005) |
|
|
— |
|
|
|
100,000 |
|
9.0% senior subordinated notes |
|
|
159,685 |
|
|
|
159,685 |
|
Obligations under capital leases |
|
|
4,151 |
|
|
|
4,624 |
|
Other |
|
|
3,357 |
|
|
|
542 |
|
|
|
|
|
|
|
|
Total indebtedness, excluding fair value premium |
|
|
480,006 |
|
|
|
555,320 |
|
Add: 9.0% senior subordinated notes fair value premium |
|
|
23,608 |
|
|
|
20,801 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
503,614 |
|
|
|
576,121 |
|
Less: current portion |
|
|
23,969 |
|
|
|
42,198 |
|
|
|
|
|
|
|
|
|
|
$ |
479,645 |
|
|
$ |
533,923 |
|
|
|
|
|
|
|
|
Credit Agreements
The
Company is a party to a credit agreement (the 2004 Agreement) with a group of banks totaling up to
$700,000. The 2004 agreement has a $150,000 revolving credit facility, a $325,000 term loan
facility, a $100,000 second term loan facility and a $125,000 incremental term loan facility. In
May 2005, the Company completed an incremental term loan of
$100,000 under the 2004 Agreement. The Company used the
proceeds of this incremental term loan to finance some of its 2005 acquisitions. The revolving
credit facility, the $425,000 term loan facilities have a final maturity of February 10, 2009. Each
of the Company’s wholly-owned subsidiaries has guaranteed all of
its obligations under the 2004 Agreement.
Further, the Company obligations under the 2004 Agreement, and its subsidiaries’ obligations under their
guarantees, are secured by a pledge of the equity interests the
Company holds in each of its subsidiaries.
The 2004 Agreement includes financial covenants that are customary based on the amount and duration
of the agreement.
The revolving credit facility under the 2004 Agreement may be used for acquisitions, repurchases of
Company common stock, capital expenditures, working capital and general corporate purposes.
Borrowings under the 2004 Agreement accrue interest at variable rates determined by the Company’s
leverage ratio. Effective June 30, 2004, the Company entered into interest rate swap agreements to hedge
interest rate risk on $150,000 of our term loan (See “Interest Rate Swap” below). The portion of
the Company’s borrowings that is subject to variable rates carries a degree of interest rate risk.
Specifically, the Company will face higher interest costs on this debt if interest rates rise.
9.0% Senior Subordinated Notes
With the
acquisition of NNA, the Company assumed all of NNA’s outstanding debt
including its 9.0% senior
subordinated notes (the “Notes”), due 2011. The Company recorded the Notes at the face value of $160,000
plus an additional $25,600 representing the difference between the fair
F-18
value of the Notes and the face amount on the date of acquisition. Accordingly, the Notes were
recorded at the estimated fair value of $185,600. As of December 31, 2005, the carrying value of
the Notes was $180,486.
The Notes
bear interest at the rate of 9.0% per annum on the face amount. The fair value premium is
being recognized over the life of the Notes using the effective interest method and is recorded as
a reduction to interest expense. Accordingly, the effective interest rate on the Notes as of
December 31, 2005 was 6.4%. Each of the Company’s
wholly-owned subsidiaries has guaranteed all of the Company’s
obligations under these notes. The rights of the noteholders and the
Company’s obligations under these notes
are set forth in an indenture that NNA entered into in
October 2003, which the Company assumed in connection
with the NNA acquisition. The indenture includes customary financial covenants.
Interest Rate Swap
Effective June 30, 2004, the Company entered into interest rate swap agreements to hedge the
interest rate risk on $150,000 of its term loan. Under these interest
rate swap agreements the Company will
exchange fixed and variable rate interest payments based on a $150,000 notional principal amount
through March 30, 2007. The notional amount of $150,000 and interest payments of 3.5% are fixed in
the agreements. The interest payments are subject to adjustment based on our leverage ratio. The
changes in cash flows under these agreements are expected to offset the changes in interest rate
payments attributable to fluctuations in LIBOR. The hedge is structured to qualify for the shortcut
method as prescribed by Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities; therefore, the
Company will record changes in the fair value
of the agreement directly in comprehensive income. As of December 31, 2005, the notional amount of
the swap agreements was $150,000 and its fair value was a $2,247 asset, resulting in other
comprehensive income during 2005 of $1,589 (net of a related tax expense of $989).
Obligations Under Capital Leases
Obligations under capital leases consist primarily of capital leases for buildings and equipment
maturing at various times through May 2020. See the maturity schedule for capital leases included
at Note 10.
Other
The other long-term debt consists primarily of notes maturing at various times through February
2009.
Maturities of Long-Term Debt
The aggregate maturities of long-term debt, excluding the fair value premium, at December 31, 2005
are as follows:
| |
|
|
|
|
2006 |
|
$ |
42,198 |
|
2007 |
|
|
80,250 |
|
2008 |
|
|
207,977 |
|
2009 |
|
|
61,993 |
|
2010 |
|
|
318 |
|
Thereafter |
|
|
162,584 |
|
|
|
|
|
|
|
$ |
555,320 |
|
|
|
|
|
F-19
Guarantor Information
Our wholly-owned subsidiaries have guaranteed the Notes as well as our obligations under the 2004
Agreement. The Company conducts substantially all of its business through subsidiaries. Presented below is
condensed consolidating financial information as of December 31, 2004 and 2005 and for each of the
three years in the period ended December 31, 2005. The information segregates Renal Care Group,
Inc. (the “parent company”), the combined wholly-owned subsidiary guarantors and the combined
non-guarantor subsidiaries and reflects consolidating adjustments. All of the subsidiary guarantees
are both full and unconditional, and joint and several.
Condensed Consolidating Balance Sheets
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
Consolidated |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
As of December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
31,945 |
|
|
$ |
(14,014 |
) |
|
$ |
17,931 |
|
Accounts receivable, net |
|
|
— |
|
|
|
198,778 |
|
|
|
76,595 |
|
|
|
— |
|
|
|
275,373 |
|
Other current assets |
|
|
45,749 |
|
|
|
23,320 |
|
|
|
10,711 |
|
|
|
— |
|
|
|
79,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
45,749 |
|
|
|
222,098 |
|
|
|
119,251 |
|
|
|
(14,014 |
) |
|
|
373,084 |
|
Property, plant and equipment, net |
|
|
29,542 |
|
|
|
189,434 |
|
|
|
96,408 |
|
|
|
1,148 |
|
|
|
316,532 |
|
Goodwill |
|
|
1,483 |
|
|
|
574,815 |
|
|
|
117,666 |
|
|
|
300 |
|
|
|
694,264 |
|
Other assets |
|
|
10,828 |
|
|
|
99,033 |
|
|
|
7,436 |
|
|
|
(72,197 |
) |
|
|
45,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
87,602 |
|
|
$ |
1,085,380 |
|
|
$ |
340,761 |
|
|
$ |
(84,763 |
) |
|
$ |
1,428,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (including intercompany assets and liabilities) |
|
$ |
(699,042 |
) |
|
$ |
813,091 |
|
|
$ |
157,344 |
|
|
$ |
(27,488 |
) |
|
$ |
243,905 |
|
Long-term debt |
|
|
476,184 |
|
|
|
(259 |
) |
|
|
3,720 |
|
|
|
— |
|
|
|
479,645 |
|
Long-term liabilities |
|
|
64,976 |
|
|
|
2,253 |
|
|
|
461 |
|
|
|
— |
|
|
|
67,690 |
|
Minority interest |
|
|
— |
|
|
|
39,610 |
|
|
|
5,989 |
|
|
|
20 |
|
|
|
45,619 |
|
Stockholders’ equity |
|
|
245,484 |
|
|
|
230,685 |
|
|
|
173,247 |
|
|
|
(57,295 |
) |
|
|
592,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
87,602 |
|
|
$ |
1,085,380 |
|
|
$ |
340,761 |
|
|
$ |
(84,763 |
) |
|
$ |
1,428,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
Consolidated |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
As of December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
24,006 |
|
|
$ |
(21,495 |
) |
|
$ |
2,511 |
|
Accounts receivable, net |
|
|
— |
|
|
|
230,013 |
|
|
|
69,154 |
|
|
|
(1,184 |
) |
|
|
297,983 |
|
Other current assets |
|
|
50,919 |
|
|
|
35,516 |
|
|
|
12,332 |
|
|
|
3,699 |
|
|
|
102,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
50,919 |
|
|
|
265,529 |
|
|
|
105,492 |
|
|
|
(18,980 |
) |
|
|
402,960 |
|
Property, plant and equipment, net |
|
|
35,000 |
|
|
|
236,315 |
|
|
|
86,094 |
|
|
|
4,815 |
|
|
|
362,224 |
|
Goodwill |
|
|
1,483 |
|
|
|
734,116 |
|
|
|
113,980 |
|
|
|
300 |
|
|
|
849,879 |
|
Other assets |
|
|
9,885 |
|
|
|
104,985 |
|
|
|
6,066 |
|
|
|
(73,966 |
) |
|
|
46,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
97,287 |
|
|
$ |
1,340,945 |
|
|
$ |
311,632 |
|
|
$ |
(87,831 |
) |
|
$ |
1,662,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (including intercompany assets and liabilities) |
|
$ |
(694,545 |
) |
|
$ |
920,339 |
|
|
$ |
81,436 |
|
|
$ |
(44,461 |
) |
|
$ |
262,769 |
|
Long-term debt |
|
|
529,236 |
|
|
|
265 |
|
|
|
4,422 |
|
|
|
— |
|
|
|
533,923 |
|
Long-term liabilities |
|
|
63,098 |
|
|
|
6,558 |
|
|
|
1,888 |
|
|
|
1,385 |
|
|
|
72,929 |
|
Minority interest |
|
|
— |
|
|
|
42,713 |
|
|
|
10,114 |
|
|
|
(52 |
) |
|
|
52,775 |
|
Stockholders’ equity |
|
|
199,498 |
|
|
|
371,070 |
|
|
|
213,772 |
|
|
|
(44,703 |
) |
|
|
739,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
97,287 |
|
|
$ |
1,340,945 |
|
|
$ |
311,632 |
|
|
$ |
(87,831 |
) |
|
$ |
1,662,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
Condensed Consolidating Income Statements
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
Consolidated |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
For the year ended December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
1,524 |
|
|
$ |
688,379 |
|
|
$ |
319,680 |
|
|
$ |
(4,264 |
) |
|
$ |
1,005,319 |
|
Total operating costs and expenses |
|
|
43,611 |
|
|
|
520,870 |
|
|
|
254,444 |
|
|
|
(4,264 |
) |
|
|
814,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(42,087 |
) |
|
|
167,509 |
|
|
|
65,236 |
|
|
|
— |
|
|
|
190,658 |
|
Interest expense, net |
|
|
629 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
629 |
|
Minority interest |
|
|
— |
|
|
|
23,853 |
|
|
|
1,578 |
|
|
|
— |
|
|
|
25,431 |
|
Provision (benefit) for income taxes |
|
|
(16,231 |
) |
|
|
54,584 |
|
|
|
24,189 |
|
|
|
— |
|
|
|
62,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(26,485 |
) |
|
$ |
89,072 |
|
|
$ |
39,469 |
|
|
$ |
— |
|
|
$ |
102,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
Consolidated |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
For the year ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
2,224 |
|
|
$ |
926,046 |
|
|
$ |
422,419 |
|
|
$ |
(5,642 |
) |
|
$ |
1,345,047 |
|
Total operating costs and expenses |
|
|
48,077 |
|
|
|
731,419 |
|
|
|
317,346 |
|
|
|
(5,642 |
) |
|
|
1,091,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(45,853 |
) |
|
|
194,627 |
|
|
|
105,073 |
|
|
|
— |
|
|
|
253,847 |
|
Interest expense, net |
|
|
16,966 |
|
|
|
2,630 |
|
|
|
1,032 |
|
|
|
— |
|
|
|
20,628 |
|
Minority interest |
|
|
— |
|
|
|
32,418 |
|
|
|
2,751 |
|
|
|
— |
|
|
|
35,169 |
|
Provision (benefit) for income taxes |
|
|
(24,174 |
) |
|
|
61,411 |
|
|
|
38,980 |
|
|
|
— |
|
|
|
76,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(38,645 |
) |
|
$ |
98,168 |
|
|
$ |
62,310 |
|
|
$ |
— |
|
|
$ |
121,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
Consolidated |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
For the year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
2,990 |
|
|
$ |
1,132,875 |
|
|
$ |
441,025 |
|
|
$ |
(6,664 |
) |
|
$ |
1,570,226 |
|
Total operating costs and expenses |
|
|
78,655 |
|
|
|
876,422 |
|
|
|
335,443 |
|
|
|
(6,664 |
) |
|
|
1,283,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(75,665 |
) |
|
|
256,453 |
|
|
|
105,582 |
|
|
|
— |
|
|
|
286,370 |
|
Interest expense (income), net |
|
|
36,433 |
|
|
|
(4,433 |
) |
|
|
908 |
|
|
|
— |
|
|
|
32,908 |
|
Minority interest |
|
|
— |
|
|
|
32,727 |
|
|
|
3,110 |
|
|
|
— |
|
|
|
35,837 |
|
Provision (benefit) for income taxes |
|
|
(38,933 |
) |
|
|
87,774 |
|
|
|
39,071 |
|
|
|
— |
|
|
|
87,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(73,165 |
) |
|
$ |
140,385 |
|
|
$ |
62,493 |
|
|
$ |
— |
|
|
$ |
129,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
Condensed Consolidating Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
Consolidated |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
For the year ended December 31, 2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(26,485 |
) |
|
$ |
89,072 |
|
|
$ |
39,469 |
|
|
$ |
— |
|
|
$ |
102,056 |
|
Changes in operating and intercompany assets
and liabilities and non-cash items included in
net income |
|
|
136,739 |
|
|
|
(53,679 |
) |
|
|
10,517 |
|
|
|
(9,084 |
) |
|
|
84,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
110,254 |
|
|
|
35,393 |
|
|
|
49,986 |
|
|
|
(9,084 |
) |
|
|
186,549 |
|
Net cash used in investing activities |
|
|
(9,985 |
) |
|
|
(35,231 |
) |
|
|
(34,052 |
) |
|
|
764 |
|
|
|
(78,504 |
) |
Net cash used in financing activities |
|
|
(80,112 |
) |
|
|
— |
|
|
|
(24,633 |
) |
|
|
8,636 |
|
|
|
(96,109 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
20,157 |
|
|
|
162 |
|
|
|
(8,699 |
) |
|
|
316 |
|
|
|
11,936 |
|
Cash and cash equivalents, at beginning of period |
|
|
— |
|
|
|
2,484 |
|
|
|
36,191 |
|
|
|
(316 |
) |
|
|
38,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of period |
|
$ |
20,157 |
|
|
$ |
2,646 |
|
|
$ |
27,492 |
|
|
$ |
— |
|
|
$ |
50,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
Consolidated |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
For the year ended December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(38,645 |
) |
|
$ |
98,168 |
|
|
$ |
62,310 |
|
|
$ |
— |
|
|
$ |
121,833 |
|
Changes in operating and intercompany assets
and liabilities and non-cash items included in
net income |
|
|
(83,456 |
) |
|
|
100,204 |
|
|
|
9,845 |
|
|
|
29,100 |
|
|
|
55,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) operating activities |
|
|
(122,101 |
) |
|
|
198,372 |
|
|
|
72,155 |
|
|
|
29,100 |
|
|
|
177,526 |
|
Net cash used in investing activities |
|
|
(167,881 |
) |
|
|
(200,068 |
) |
|
|
(41,478 |
) |
|
|
1,590 |
|
|
|
(407,837 |
) |
Net cash provided by (used in) financing activities |
|
|
269,825 |
|
|
|
(950 |
) |
|
|
(26,224 |
) |
|
|
(44,704 |
) |
|
|
197,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(20,157 |
) |
|
|
(2,646 |
) |
|
|
4,453 |
|
|
|
(14,014 |
) |
|
|
(32,364 |
) |
Cash and cash equivalents, at beginning of period |
|
|
20,157 |
|
|
|
2,646 |
|
|
|
27,492 |
|
|
|
— |
|
|
|
50,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
31,945 |
|
|
$ |
(14,014 |
) |
|
$ |
17,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
Consolidating |
|
|
Consolidated |
|
| |
|
Company |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Adjustments |
|
|
Total |
|
For the year ended December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(73,165 |
) |
|
$ |
140,385 |
|
|
$ |
62,493 |
|
|
$ |
— |
|
|
$ |
129,713 |
|
Changes in operating and intercompany assets
and liabilities and non-cash items included in
net income |
|
|
10,123 |
|
|
|
107,500 |
|
|
|
(40,958 |
) |
|
|
(16,406 |
) |
|
|
60,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by (used in) operating activities |
|
|
(63,042 |
) |
|
|
247,885 |
|
|
|
21,535 |
|
|
|
(16,406 |
) |
|
|
189,972 |
|
Net cash used in investing activities |
|
|
(25,229 |
) |
|
|
(248,409 |
) |
|
|
(8,208 |
) |
|
|
(3,667 |
) |
|
|
(285,513 |
) |
Net cash provided by (used in) financing activities |
|
|
88,271 |
|
|
|
524 |
|
|
|
(21,266 |
) |
|
|
12,592 |
|
|
|
80,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
— |
|
|
|
— |
|
|
|
(7,939 |
) |
|
|
(7,481 |
) |
|
|
(15,420 |
) |
Cash and cash equivalents, at beginning of period |
|
|
— |
|
|
|
— |
|
|
|
31,945 |
|
|
|
(14,014 |
) |
|
|
17,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
24,006 |
|
|
$ |
(21,495 |
) |
|
$ |
2,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
8. INCOME TAXES
The provision for income taxes consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2003 |
|
|
2004 |
|
|
2005 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
38,716 |
|
|
$ |
52,274 |
|
|
$ |
66,910 |
|
State and local |
|
|
4,309 |
|
|
|
8,020 |
|
|
|
10,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,025 |
|
|
|
60,294 |
|
|
|
77,591 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
17,152 |
|
|
|
14,062 |
|
|
|
9,580 |
|
State and local |
|
|
2,365 |
|
|
|
1,861 |
|
|
|
741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,517 |
|
|
|
15,923 |
|
|
|
10,321 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
62,542 |
|
|
$ |
76,217 |
|
|
$ |
87,912 |
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2005, the Company had net operating loss carryforwards of approximately $249,000
for state income tax purposes that expire in years 2006 through 2023, and a capital loss
carryforward of approximately $2,245, the majority of which expires in 2006. The utilization of the
state net operating loss carryforwards in future years is dependent upon the profitability of
certain subsidiary corporations. The utilization of the capital loss carryforward requires capital
gain income in the future. Therefore, the Company has recorded a valuation allowance of $8,323
against the deferred tax asset attributable to the state net operating loss carryforwards and the
capital loss carryforward, which represents a decrease in the valuation allowance of $2,036 in
2005.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes.
Components of the Company’s deferred tax liabilities and assets are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2004 |
|
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
9,531 |
|
|
$ |
7,539 |
|
Capital loss carryforward |
|
|
828 |
|
|
|
853 |
|
Allowance for doubtful accounts |
|
|
6,973 |
|
|
|
9,999 |
|
Accrued vacation and other accrued liabilities |
|
|
28,243 |
|
|
|
29,165 |
|
Notes revaluation |
|
|
8,971 |
|
|
|
7,904 |
|
Investment in partnerships |
|
|
226 |
|
|
|
1,205 |
|
Other |
|
|
781 |
|
|
|
114 |
|
Less: valuation allowance |
|
|
(10,359 |
) |
|
|
(8,323 |
) |
|
|
|
|
|
|
|
|
|
|
45,194 |
|
|
|
48,456 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
25,967 |
|
|
|
19,843 |
|
Amortization |
|
|
41,042 |
|
|
|
51,451 |
|
|
|
|
|
|
|
|
|
|
|
67,009 |
|
|
|
71,294 |
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
21,815 |
|
|
$ |
22,838 |
|
|
|
|
|
|
|
|
In addition to the provision for income taxes included in the accompanying statements of
operations, a deferred tax expense of $989 related to the interest rate swap agreement has been
reflected in the accumulated other comprehensive income as reported
in stockholders’ equity for the
year ended December 31, 2005.
F-23
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
consolidated financial statements:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2003 |
|
|
2004 |
|
|
2005 |
|
U.S. federal income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income tax, net of federal income tax benefit |
|
|
1.7 |
|
|
|
2.5 |
|
|
|
4.2 |
|
Decrease in valuation allowances |
|
|
1.0 |
|
|
|
0.7 |
|
|
|
(0.8 |
) |
Nondeductible merger-related costs |
|
|
— |
|
|
|
— |
|
|
|
1.8 |
|
Other |
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
38.0 |
% |
|
|
38.5 |
% |
|
|
40.4 |
% |
|
|
|
|
|
|
|
|
|
|
9. STOCKHOLDERS’ EQUITY (numbers of shares in thousands)
Stock Option Plans
As of December 31, 2005, the Company had seven stock option plans. The Company has also issued
options, referred to in these financial statements as Free Standing Options outside of these plans.
Options issued as Free Standing Options 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 2004, 1999 and 1996 Employee Plans have similar terms and purposes.
Specifically, options under each of these plans are available for grant to eligible employees and
other key persons, the options generally vest over four to five years and have a term of ten years
from the date of issuance. These plans were adopted in 2004, 1999 and 1996, and have 6,750, 11,250,
and 9,000 shares of common stock reserved for issuance, respectively.
Options
issued under the Equity Compensation Plan (“Equity Plan”),
adopted by Dialysis Centers of America, Inc. (“DCA”) in
1995, 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. There are 525 shares of common stock reserved for issuance. The Company merged with DCA
in a pooling-of-interests transaction in February 1999.
Options issued under the 1994 Stock Option Plan (“1994 Plan”) are for directors, officers and other
key persons. These options vest over four years, and have a term of ten years from the date of
issuance. This plan was adopted in 1994, and there are 1,080 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 337 shares of common stock reserved for issuance.
Options
issued under the RDM Plan, adopted by Renal Disease Management by
Physicians, Inc. (“RDM”) in 1997, are for directors, officers, and other key persons. These options
vest immediately upon grant and have a term of 5 to 10 years
from the date of issuance. There are 163
shares of common stock reserved for issuance. The Company merged with RDM in a pooling-of-interests
transaction in April 2000.
The Company has adopted the disclosure-only provisions of SFAS No. 123 and SFAS No. 148, but
applies APB 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.
F-24
The following is a summary of option transactions during the period from January 1, 2003 through
December 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Free
Standing |
|
|
2004
Employee
Plan |
|
|
1999
Employee
Plan |
|
|
1996
Employee
Plan |
|
|
Equity
Plan |
|
|
1994
Plan |
|
|
Directors
Plan |
|
|
RDM
Plan |
|
|
Exercise
Price
Range |
|
|
Weighted
Average
Exercise
Price |
|
Balance at
December 31, 2002 |
|
|
926 |
|
|
|
— |
|
|
|
6,600 |
|
|
|
2,896 |
|
|
|
25 |
|
|
|
13 |
|
|
|
110 |
|
|
|
20 |
|
|
$ |
2.22–$21.80 |
|
|
$ |
14.44 |
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
2,868 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
43 |
|
|
|
— |
|
|
|
20.00 – 25.21 |
|
|
|
22.97 |
|
Exercised |
|
|
(344 |
) |
|
|
— |
|
|
|
(1,986 |
) |
|
|
(1,200 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
2.22 – 19.35 |
|
|
|
13.87 |
|
Forfeited |
|
|
(52 |
) |
|
|
— |
|
|
|
(817 |
) |
|
|
(92 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10.63 – 23.10 |
|
|
|
18.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2003 |
|
|
530 |
|
|
|
— |
|
|
|
6,665 |
|
|
|
1,604 |
|
|
|
24 |
|
|
|
13 |
|
|
|
153 |
|
|
|
13 |
|
|
|
2.22 – 25.21 |
|
|
|
17.13 |
|
Granted |
|
|
— |
|
|
|
1,639 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
93 |
|
|
|
— |
|
|
|
27.92 – 33.16 |
|
|
|
31.57 |
|
Exercised |
|
|
(189 |
) |
|
|
— |
|
|
|
(847 |
) |
|
|
(546 |
) |
|
|
(6 |
) |
|
|
— |
|
|
|
(34 |
) |
|
|
(4 |
) |
|
|
2.22 – 23.10 |
|
|
|
14.02 |
|
Forfeited |
|
|
(34 |
) |
|
|
(5 |
) |
|
|
(114 |
) |
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10.63 – 31.57 |
|
|
|
20.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2004 |
|
|
307 |
|
|
|
1,634 |
|
|
|
5,704 |
|
|
|
1,053 |
|
|
|
18 |
|
|
|
13 |
|
|
|
212 |
|
|
|
9 |
|
|
|
2.22 – 33.16 |
|
|
|
20.44 |
|
Granted |
|
|
— |
|
|
|
100 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
59 |
|
|
|
— |
|
|
|
39.49 – 46.36 |
|
|
|
42.04 |
|
Exercised |
|
|
(183 |
) |
|
|
(50 |
) |
|
|
(338 |
) |
|
|
(220 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
5.33 – 31.57 |
|
|
|
14.94 |
|
Forfeited |
|
|
— |
|
|
|
(28 |
) |
|
|
(247 |
) |
|
|
(9 |
) |
|
|
(1 |
) |
|
|
(13 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
2.22 – 31.57 |
|
|
|
21.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2005 |
|
|
124 |
|
|
|
1,656 |
|
|
|
5,119 |
|
|
|
824 |
|
|
|
16 |
|
|
|
— |
|
|
|
271 |
|
|
|
7 |
|
|
$ |
2.22–$46.36 |
|
|
$ |
21.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at
December 31, 2005 |
|
|
— |
|
|
|
5,056 |
|
|
|
1,684 |
|
|
|
367 |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
December 31, 2003 |
|
|
441 |
|
|
|
— |
|
|
|
1,560 |
|
|
|
1,499 |
|
|
|
24 |
|
|
|
13 |
|
|
|
152 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
December 31, 2004 |
|
|
289 |
|
|
|
25 |
|
|
|
2,499 |
|
|
|
1,038 |
|
|
|
18 |
|
|
|
13 |
|
|
|
212 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at
December 31, 2005 |
|
|
124 |
|
|
|
1,656 |
|
|
|
5,119 |
|
|
|
824 |
|
|
|
16 |
|
|
|
— |
|
|
|
271 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair value of options granted during 2003, 2004 and 2005 is $8.99, $12.12
and $16.14, respectively.
The following table summarizes information about stock options outstanding at December 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number |
|
Weighted |
|
|
|
|
|
Number |
|
|
| |
|
Outstanding as |
|
Average |
|
Weighted |
|
Exercisable as |
|
Weighted |
| |
|
of |
|
Remaining |
|
Average |
|
of |
|
Average |
| Range of |
|
December 31, |
|
Contractual |
|
Exercise |
|
December 31, |
|
Exercise |
| Exercise Prices |
|
2005 |
|
Life |
|
Price |
|
2005 |
|
Price |
$2.22 — $18.68
|
|
|
2,298 |
|
|
|
3.70 |
|
|
$ |
13.11 |
|
|
|
2,298 |
|
|
$ |
13.11 |
|
$18.87 — $23.10
|
|
|
3,597 |
|
|
|
7.06 |
|
|
|
21.01 |
|
|
|
3,597 |
|
|
|
21.01 |
|
$23.26 — $39.49
|
|
|
2,063 |
|
|
|
8.48 |
|
|
|
30.92 |
|
|
|
2,063 |
|
|
|
30.92 |
|
$46.36 — $46.36
|
|
|
59 |
|
|
|
9.44 |
|
|
|
46.36 |
|
|
|
59 |
|
|
|
46.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.22 — $46.36
|
|
|
8,017 |
|
|
|
6.48 |
|
|
$ |
21.48 |
|
|
|
8,017 |
|
|
$ |
21.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma information regarding net income and net income per share is required by SFAS No.
123 and SFAS No. 148, 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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
|
| |
|
2003 |
|
|
2004 |
|
|
2005 |
|
Expected volatility |
|
|
39 |
% |
|
|
37 |
% |
|
|
35 |
% |
Expected dividend yield |
|
None |
|
|
None |
|
|
None |
|
Risk-free interest rate |
|
|
3.25 |
% |
|
|
3.70 |
% |
|
|
4.20 |
% |
Expected life of options |
|
5 years |
|
|
4 years |
|
|
4 years |
|
F-25
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 that are
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.
All outstanding stock options and all of the outstanding nonvested stock awards became fully vested
on August 24, 2005, as a result of the stockholders’ vote to approve Fresenius Medical Care’s
acquisition of Renal Care Group, which represented a change of control under the applicable
provisions of the Company’s stock-based compensation plans. The information set forth below
reflects the estimated pro-forma after tax charge the Company would have incurred during each
period presented. As a result of the accelerated vesting of stock options all remaining unamortized
stock option expense is reflected in the 2005 period.
The following table presents the pro forma effect on net income and net income per share as if we
had applied the fair value based method and recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based compensation to employees and directors:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31 |
|
| |
|
2003 |
|
|
2004 |
|
|
2005 |
|
Net income, as reported |
|
$ |
102,056 |
|
|
$ |
121,833 |
|
|
$ |
129,713 |
|
Add: stock-based
compensation expense, net
of related tax effects,
included in the
determination of net income
as reported |
|
|
424 |
|
|
|
244 |
|
|
|
431 |
|
Less: stock-based
compensation expense, net
of related tax effects,
determined by the fair
value-based method |
|
|
(8,663 |
) |
|
|
(10,365 |
) |
|
|
(23,236 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
93,817 |
|
|
$ |
111,712 |
|
|
$ |
106,908 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported |
|
$ |
1.40 |
|
|
$ |
1.80 |
|
|
$ |
1.90 |
|
|
|
|
|
|
|
|
|
|
|
Basic, pro forma |
|
$ |
1.29 |
|
|
$ |
1.65 |
|
|
$ |
1.57 |
|
|
|
|
|
|
|
|
|
|
|
Diluted, as reported |
|
$ |
1.37 |
|
|
$ |
1.74 |
|
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
|
|
Diluted, pro forma |
|
$ |
1.26 |
|
|
$ |
1.60 |
|
|
$ |
1.51 |
|
|
|
|
|
|
|
|
|
|
|
The effect of applying SFAS No. 123 and SFAS No. 148 for providing pro forma disclosure is not
likely to be representative of the effect on reported net income for future years.
Stock Split
On April 27, 2004, the Company announced a three-for-two stock split in the form of a stock
dividend distributed to shareholders of record as of May 7, 2004. On May 24, 2004 the Company
issued one share for every two shares held by shareholders as of the record date. The par value of
our common stock remained unchanged at $0.01. All share amounts in these financial statements have
been restated to reflect the stock split.
Authorized Shares
On
June 9, 2004, the Company’s shareholders approved an amendment to the certificate of incorporation
increasing the number of authorized shares of common stock from 90,000 to 150,000.
F-26
10. LEASES
The
Company rents office space and space for its dialysis facilities under lease agreements that are
classified as operating leases for financial statement purposes. The Company’s capital leases are
primarily for buildings and equipment. At December 31, 2005, future minimum rental payments for
non-cancelable operating leases with terms of one year or more, and capital leases consisted of the
following:
| |
|
|
|
|
|
|
|
|
| |
|
Operating |
|
|
Capital |
|
| |
|
Leases |
|
|
Leases |
|
2006 |
|
$ |
47,961 |
|
|
$ |
800 |
|
2007 |
|
|
45,417 |
|
|
|
743 |
|
2008 |
|
|
40,959 |
|
|
|
658 |
|
2009 |
|
|
35,226 |
|
|
|
588 |
|
2010 |
|
|
30,828 |
|
|
|
603 |
|
Thereafter |
|
|
101,915 |
|
|
|
3,734 |
|
|
|
|
|
|
|
|
Less: portion representing interest |
|
|
|
|
|
|
(2,502 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
302,306 |
|
|
$ |
4,624 |
|
|
|
|
|
|
|
|
Certain leases of the Company contain escalating payments and are recorded on a straight-line
basis. Rent expense was $30,729, $45,055 and $52,040 for the years ended December 31, 2003, 2004
and 2005, respectively.
11. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company has qualified defined contribution plans covering substantially all employees that
permit participants to make voluntary contributions. The Company pays all general and
administrative expenses of the plans and makes matching contributions on behalf of the employees.
The Company made contributions relating to these plans totaling $2,978, $3,294 and $3,541 for the
years ended December 31, 2003, 2004 and 2005, respectively.
Defined Benefit Plans
On January 1, 2005, the Company adopted a Supplemental Executive Retirement Plan (SERP) that
provides retirement benefits to the Company’s executive officers. The SERP is accounted for as a
defined benefit plan under SFAS No. 87, Employers’ Accounting for Pensions. For the year ended
December 31, 2005, the Company has recognized pension costs of $1,354. As of December 31, 2005 the
Company has recorded an accrued pension liability of $2,864 and an intangible asset of $1,510.
Effective January 29, 2003, the Company implemented a retirement benefit plan for Sam A. Brooks,
the Company’s former Chairman, Chief Executive Officer and President. Mr. Brooks died March 20,
2003. The plan provides that the Company will make 120 monthly payments of $54 each to Mr. Brook’s
beneficiary, beginning in April 2003. As a result, the Company recorded a $5,350 charge
representing the pre-tax net present value of such payments during the first quarter of 2003. As of
December 31, 2005 the Company has accrued liabilities totaling $4,085 related to this defined
benefit plan.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (“Stock Purchase Plan”) that provides 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, the participant’s
December 31 account balance is used to purchase shares of stock at the lesser of 85% of the fair
market value of shares at the beginning of the year or December 31. On May 14, 2005 the Company
discontinued employee contributions to the Employee Stock Purchase Plan as a result of the pending
Fresenius Medical Care transaction. At December 31, 2004 and 2005, $4,511 and $2,036,
respectively, were included in accrued wages and benefits relating to the Stock Purchase Plan.
12. EARNINGS PER SHARE
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 calculated using
the treasury stock method.
F-27
The following table sets forth the computation of basic and diluted net income per share.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 |
|
|
2004 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted net income per share |
|
$ |
102,056 |
|
|
$ |
121,833 |
|
|
$ |
129,713 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share weighted-average shares |
|
|
72,719 |
|
|
|
67,581 |
|
|
|
68,110 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
2,034 |
|
|
|
2,311 |
|
|
|
2,724 |
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share-adjusted
weighted-average shares and assumed conversions |
|
|
74,753 |
|
|
|
69,892 |
|
|
|
70,834 |
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
1.40 |
|
|
$ |
1.80 |
|
|
$ |
1.90 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
1.37 |
|
|
$ |
1.74 |
|
|
$ |
1.83 |
|
|
|
|
|
|
|
|
|
|
|
13. COMMITMENTS AND CONTINGENCIES
On August 9, 2005, the Company received a subpoena from the office of the United States Attorney
for the Eastern District of Missouri. The subpoena requires the Company to produce documents
related to numerous aspects of our business and operations. The subpoena includes specific
requests for documents related to the Company’s supply company, pharmaceutical and other ancillary
services the Company provides to patients (including the administration of EPO), the Company’s
relationships with pharmaceutical companies, the Company’s relationships with physicians, medical
director compensation, joint ventures with physicians and the Company’s purchases of dialysis
equipment from Fresenius Medical Care. The subpoena was issued in
connection with a joint civil and criminal investigation. The Company is cooperating with the government’s
investigation; the Company has produced numerous documents to the
government in response to this subpoena. The Company has incurred significant legal
and other expenses responding to the subpoena and has experienced distraction of management
attention. Compliance with the subpoena will require the Company to incur substantial additional
legal and other expenses and will require further management attention. To the Company’s
knowledge, no proceedings have been initiated against it at this time, but the
Company cannot predict whether or when proceedings might be initiated. In addition, the Company
cannot predict the outcome of any proceedings that may be initiated against the Company as a result
of this investigation. Any such proceedings could have a material adverse effect on the Company’s
business, financial condition and results of operations.
On October 25, 2004, the Company received a subpoena from the office of the United States Attorney
for the Eastern District of New York. The subpoena requires the Company to produce documents
related to numerous aspects of our business and operations, including those of RenaLab, Inc., the
Company’s laboratory. The subpoena includes specific requests for documents related to testing for
parathyroid hormone (PTH) levels and vitamin D therapies. The Company is cooperating with the
government’s investigation. The Company has produced numerous documents to the government in
response to this subpoena. The Company has incurred significant legal and other expenses
responding to the subpoena. Compliance with this subpoena will require the Company to incur
additional legal expenses and could distract management attention. To the Company’s knowledge, no
proceedings have been initiated against the Company at this time, but the Company cannot predict
whether or when proceedings might be initiated. The Company cannot predict the outcome of any
proceedings that may be initiated against it as a result of this investigation. Any such
proceedings could have a material adverse effect on the Company’s business, financial condition and
results of operations.
If any aspect of the Company’s operations is found to violate applicable laws, then the
Company may be subject to severe sanctions, and the Company could be required to alter or discontinue
the challenged conduct or both. If sanctions are imposed on the Company, then there could be a
material adverse effect on the Company’s business, financial condition and results of operations.
If the Company is required to alter or discontinue practices, then the Company may not be able to
do so successfully, which could have a material adverse effect on the Company’s business, financial
condition and results of 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 governing the Medicare and Medicaid programs. Compliance with such laws and
regulations can be subject to additional government review and interpretation as well as significant
regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid
programs.
The Company is involved in other 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.
The Company generally engages practicing board-certified or board-eligible nephrologists to serve
as medical directors for its centers. Medical directors are responsible for the administration and
monitoring of the Company’s patient care policies, including patient education, administration of
dialysis treatment, development programs and assessment of all patients. The Company pays medical
director fees that are consistent with the fair market value of the required supervisory services.
Such medical director agreements typically have a term of five to ten years with renewal options of
two or three years. As of December 31, 2005, estimated commitments for medical director fees for
the year 2006 are $28,971 and are $139,540 over the remaining lives of the agreements.
F-28
14. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
The following tables include, for 2004 and 2005, 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
included therein. The operating results for any quarter are not necessarily indicative of results
for any future period.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
| |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
| |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
Net revenue |
|
$ |
278,028 |
|
|
$ |
340,854 |
|
|
$ |
356,111 |
|
|
$ |
370,054 |
|
Operating expenses |
|
|
209,158 |
|
|
|
265,239 |
|
|
|
274,200 |
|
|
|
284,254 |
|
Depreciation and amortization |
|
|
12,163 |
|
|
|
14,900 |
|
|
|
15,344 |
|
|
|
15,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
56,707 |
|
|
|
60,715 |
|
|
|
66,567 |
|
|
|
69,858 |
|
Interest expense, net |
|
|
965 |
|
|
|
5,765 |
|
|
|
6,869 |
|
|
|
7,029 |
|
Minority interest |
|
|
7,214 |
|
|
|
7,690 |
|
|
|
10,158 |
|
|
|
10,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
48,528 |
|
|
|
47,260 |
|
|
|
49,540 |
|
|
|
52,722 |
|
Provision for income taxes |
|
|
18,441 |
|
|
|
18,077 |
|
|
|
19,072 |
|
|
|
20,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
30,087 |
|
|
$ |
29,183 |
|
|
$ |
30,468 |
|
|
$ |
32,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.43 |
|
|
$ |
0.44 |
|
|
$ |
0.45 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.42 |
|
|
$ |
0.42 |
|
|
$ |
0.44 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2005 |
|
| |
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
| |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
Net revenue |
|
$ |
373,509 |
|
|
$ |
384,329 |
|
|
$ |
402,230 |
|
|
$ |
410,158 |
|
Operating expenses |
|
|
285,413 |
|
|
|
299,862 |
|
|
|
307,560 |
|
|
|
319,621 |
|
Depreciation and amortization |
|
|
16,787 |
|
|
|
17,775 |
|
|
|
18,173 |
|
|
|
18,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
71,309 |
|
|
|
66,692 |
|
|
|
76,497 |
|
|
|
71,872 |
|
Interest expense, net |
|
|
7,261 |
|
|
|
7,981 |
|
|
|
8,715 |
|
|
|
8,951 |
|
Minority interest |
|
|
9,362 |
|
|
|
9,132 |
|
|
|
9,915 |
|
|
|
7,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
54,686 |
|
|
|
49,579 |
|
|
|
57,867 |
|
|
|
55,493 |
|
Provision for income taxes |
|
|
21,054 |
|
|
|
21,362 |
|
|
|
22,636 |
|
|
|
22,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
33,632 |
|
|
$ |
28,217 |
|
|
$ |
35,231 |
|
|
$ |
32,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.50 |
|
|
$ |
0.41 |
|
|
$ |
0.52 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.48 |
|
|
$ |
0.40 |
|
|
$ |
0.50 |
|
|
$ |
0.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
Schedule II
Renal Care Group, Inc.
Consolidated Schedule — Valuation and Qualifying Accounts
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance |
|
|
|
|
|
Amount |
|
|
|
|
|
Balance |
| |
|
Beginning |
|
Allowances |
|
Charged to |
|
|
|
|
|
End of |
| |
|
of Period |
|
Acquired |
|
Expense |
|
Write-Offs |
|
Period |
Allowance for doubtful accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
$ |
43,677 |
|
|
$ |
— |
|
|
$ |
26,200 |
|
|
$ |
(37,716 |
) |
|
$ |
32,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$ |
32,161 |
|
|
$ |
19,651 |
|
|
$ |
32,550 |
|
|
$ |
(39,231 |
) |
|
$ |
45,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$ |
45,131 |
|
|
$ |
— |
|
|
$ |
31,978 |
|
|
$ |
(48,549 |
) |
|
$ |
28,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
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
13th day of March, 2006.
RENAL CARE GROUP, INC.
| |
|
|
|
|
By:
|
|
/s/ Gary A. Brukardt |
|
|
|
|
|
|
|
|
|
Gary A. Brukardt
President and Chief Executive
Officer
|
|
|
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Gary A. Brukardt and David M. Dill 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.
| |
|
|
|
|
/s/ Gary A. Brukardt
Gary A. Brukardt
|
|
President, Chief Executive
Officer
and Director
(Principal Executive
Officer)
|
|
March 13, 2006 |
|
|
|
|
|
/s/ David M. Dill
David M. Dill
|
|
Executive Vice President,
Chief
Financial Officer and
Treasurer
(Principal
Financial and Accounting
Officer)
|
|
March 13, 2006 |
|
|
|
|
|
/s/ Peter J. Grua
Peter J. Grua
|
|
Director
|
|
March 13, 2006 |
|
|
|
|
|
/s/ Joseph C. Hutts
Joseph C. Hutts
|
|
Director
|
|
March 13, 2006 |
|
|
|
|
|
/s/ Harry R. Jacobson, M.D.
Harry R. Jacobson, M.D.
|
|
Director
|
|
March 13, 2006 |
|
|
|
|
|
/s/ William P. Johnston
William P. Johnston
|
|
Chairman of the Board Director
|
|
March 13, 2006 |
|
|
|
|
|
/s/ William V. Lapham
William V. Lapham
|
|
Director
|
|
March 13, 2006 |
|
|
|
|
|
/s/ Thomas A. Lowery, M.D.
Thomas A. Lowery, M.D.
|
|
Director
|
|
March 13, 2006 |
|
|
|
|
|
/s/ Stephen D. McMurray, M.D.
Stephen D. McMurray, M.D.
|
|
Director
|
|
March 13, 2006 |
|
|
|
|
|
/s/ C. Thomas Smith
C. Thomas Smith
|
|
Director
|
|
March 13, 2006 |
43
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
2.1
|
|
Agreement and Plan of Merger dated February 2, 2004 by and among Renal Care Group, Inc., Titan Merger
Subsidiary, Inc., National Nephrology Associates, Inc. and certain equity holders of National Nephrology
Associates, Inc.(24) |
|
|
|
2.1.1
|
|
Agreement, dated May 3, 2005, by
and among Renal Care Group, Inc., Fresenius Medical Care AG,
Fresenius Medical Care Holdings, Inc. and Florence Acquisitions, Inc.(28) |
|
|
|
2.1.2
|
|
Letter Agreement among Fresenius
AG, Fresenius Medical Care AG, Fresenius Medical Care Holdings, Inc.
and Renal Care Group, Inc., dated May 3, 2005(28) |
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of the Company (1) |
|
|
|
3.1.1
|
|
Certificate of Amendment of Certificate of Incorporation of the Company(2) |
|
|
|
3.1.2
|
|
Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of
the Company (2) |
|
|
|
3.1.3
|
|
Certificate of Amendment of Amended and Restated Certification of Incorporation of the Company(10) |
|
|
|
3.1.4
|
|
Certificate of Amendment of Amended
and Restated Certificate of Incorporation of the Company (26) |
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Company (1) |
|
|
|
4.1
|
|
Indenture, dated as of October 22, 2003, by and among National Nephrology Associates, Inc., the
Guarantors named therein, and Wells Fargo Bank Minnesota, N.A.(24) |
|
|
|
4.2
|
|
First Supplemental Indenture, dated as of April 2, 2004, by and among Renal Care Group, Inc., the
Guarantors named therein and Wells Fargo Bank, N.A.(24) |
|
|
|
4.3
|
|
Reserved |
|
|
|
4.4
|
|
Purchase Agreement, dated as of October 16, 2003, by and among National Nephrology Associates, Inc., the
Guarantors named therein and the Initial Purchasers named therein(24) |
|
|
|
4.5
|
|
Registration Rights Agreement dated as of October 22, 2003, by and among National Nephrology Associates,
Inc., the Guarantors named herein and the Initial Purchasers named herein(24) |
|
|
|
4.6
|
|
Form of 9.0% Senior Subordinated Note Due 2011, including Form of Guarantee (included in Exhibit 4.1) |
|
|
|
4.7
|
|
First Amendment, dated as of May 3,
2005, to the Shareholder Protection Rights Agreement dated as of May
2, 1990 between Renal Care Group, Inc. and Wachovia Bank, National
Association, as rights agent (incorporated by reference from Exhibit
4.1 to the Company’s current report on Form 8-K filed on May 3,
2005) |
|
|
|
10.1
|
|
Employment Agreement, effective as of December 15, 2003, between the Company and Raymond Hakim, M.D.(22)* |
|
|
|
10.2
|
|
Medical Director Services Agreement, dated February 12, 1996, between the Company and Indiana Dialysis
Management, P.C. (4) |
|
|
|
10.2.1
|
|
Amendment Number 1, to Medical Director Services Agreement, effective as of January 1, 1999, between the
Company and Indiana Dialysis Management, P.C.(22) |
|
|
|
10.2.2
|
|
Amendment Number 2 to Medical Director Services Agreement, effective as of February 12, 2002, between the
Company and Indiana Dialysis Management.(22) |
|
|
|
10.3
|
|
Medical Director Services Agreement, effective as of February 12, 2003, between the Company and Tyler
Nephrology Associates, P.A.(22) |
|
|
|
10.4
|
|
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 (4) |
|
|
|
10.5
|
|
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 (4) |
|
|
|
10.6
|
|
Sublease Agreement, dated February 12, 1996, with Tyler Nephrology Associates, Inc. (4) |
|
|
|
10.7
|
|
Dialysis Center Management Agreement, effective as of July 1, 2001, between Renal Group, Inc. and
Vanderbilt University (22) |
44
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
10.8
|
|
1996 Stock Option Plan for Outside Directors (1)* |
|
|
|
10.9
|
|
Fourth Amended and Restated 1996 Stock Incentive Plan (5)* |
|
|
|
10.10
|
|
Amended and Restated Employee Stock Purchase Plan (2)* |
|
|
|
10.11
|
|
Employment Agreement, April 28, 2003, between the Company and Gary Brukardt (20)* |
|
|
|
10.12
|
|
Credit Agreement, dated as of February 10, 2004, by and among Renal Care Group, Inc., the Guarantors (as
defined therein), the Lenders (as defined therein) and Bank of America, N.A. as Administrative Agent (16) |
|
|
|
10.12.1
|
|
Incremental Term Loan Commitment
Agreement, dated as of May 27, 2005, by and among Renal Care Group,
Inc., Guarantors (as defined therein) and Bank of America, N.A. (29) |
|
|
|
10.13
|
|
Stock Option Agreement, dated April 30, 1997, between the Company and Gary Brukardt (2)* |
|
|
|
10.14
|
|
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. (6) |
|
|
|
10.15
|
|
Stock Option Agreement, dated May 22, 1998, between the Company and Gary A. Brukardt (7)* |
|
|
|
10.16
|
|
Stock Option Agreement, dated May 22, 1998, between the Company and Raymond Hakim, M.D. (7)* |
|
|
|
10.17
|
|
Stock Option Agreement, dated June 5, 1998, between the Company and Joseph C. Hutts (7)* |
|
|
|
10.18
|
|
Stock Option Agreement, dated June 5, 1998, between the Company and Harry R. Jacobson, M.D. (7)* |
|
|
|
10.19
|
|
Agreement No. 20060024, between Renal Care Group, Inc. and Amgen Inc. (The Company has requested
confidential treatment of certain portions of this Exhibit.) |
|
|
|
10.20
|
|
Restricted Stock Award Agreement, dated January 25, 1999, between the Company and Harry R. Jacobson (8)* |
|
|
|
10.21
|
|
Restricted Stock Award Agreement, dated January 25, 1999, between the Company and Stephen D. McMurray (8)* |
|
|
|
10.22
|
|
Renal Care Group, Inc. 1999 Long-Term Incentive Plan (9)* |
|
|
|
10.22.1
|
|
Amendment to the Renal Care Group, Inc. 1999 Long-Term Incentive Plan (12)* |
|
|
|
10.22.2
|
|
Amended and Restated Renal Care Group, Inc. 1999 Long-Term Incentive Plan (19)* |
|
|
|
10.23
|
|
Stock Option Agreement, dated August 30, 1999, between the Company and Gary A. Brukardt (11)* |
|
|
|
10.24
|
|
Stock Option Agreement, dated August 30, 1999, between the Company and Raymond Hakim, M.D. (11)* |
|
|
|
10.25
|
|
Stock Option Agreement, dated June 2, 1999, between the Company and Joseph C. Hutts (11)* |
45
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
10.26
|
|
Stock Option Agreement, dated June 2, 1999, between the Company and Harry R. Jacobson, M.D. (11)* |
|
|
|
10.27
|
|
Stock Option Agreement, dated July 22, 1999, between the Company and William V. Lapham (11)* |
|
|
|
10.28
|
|
Stock Option Agreement, dated June 8, 2000, between the Company and Joseph C. Hutts (13)* |
|
|
|
10.29
|
|
Stock Option Agreement, dated June 8, 2000, between the Company and Harry R. Jacobson, M.D.(13)* |
|
|
|
10.30
|
|
Stock Option Agreement, dated June 8, 2000, between the Company and William V. Lapham(13)* |
|
|
|
10.31
|
|
Stock Option Agreement, dated September 19, 2000, between the Company and Gary A. Brukardt(13)* |
|
|
|
10.32
|
|
Stock Option Agreement, dated September 19, 2000, between the Company and Raymond Hakim, M.D.(13)* |
|
|
|
10.33
|
|
Stock Option Agreement dated August 2, 2001 between the Company and Gary Brukardt(14)* |
|
|
|
10.34
|
|
Stock Option Agreement dated August 2, 2001 between the Company and Raymond Hakim(14)* |
|
|
|
10.35
|
|
Stock Option Agreement dated June 7, 2001 between the Company and Joseph C. Hutts(15)* |
|
|
|
10.36
|
|
Stock Option Agreement dated June 7, 2001 between the Company and William V. Lapham(15)* |
|
|
|
10.37
|
|
Form of Stock Option Agreement for stock option grants to executive employees under the Company’s 1999
Long-Term Incentive Plan(17) |
|
|
|
10.38
|
|
Form of Stock Option Agreement for stock option grants to non-management directors under the Company’s
1996 Stock Option Plan for Outside Directors(17) |
|
|
|
10.39
|
|
Medical Director Services Agreement, dated May 1, 2002, between the Company and Tyler Nephrology
Associates, P.A.(18) |
|
|
|
10.40
|
|
Medical Director Services Agreement, dated July 11, 2002 between the Company and Tyler Nephrology
Associates, P.A.(18) |
|
|
|
10.41
|
|
Renal Care Group Supplemental Benefit Plan(19)* |
|
|
|
10.42
|
|
[RESERVED] |
|
|
|
10.43
|
|
Form of Indemnity Agreement between the Company and directors and certain officers(19) |
|
|
|
10.44
|
|
Employment Agreement, effective as of November 3, 2003, between the Company and David M. Dill(22)* |
|
|
|
10.45
|
|
Employment Agreement, effective as of November 30, 2003, between the Company and Timothy P. Martin(22)* |
|
|
|
10.46
|
|
Employment Agreement effective as of December 31, 2003 between the Company and Douglas B. Chappell(22)* |
|
|
|
10.47
|
|
2004 Stock and Incentive Compensation Plan(23) |
|
|
|
10.48
|
|
Form of Stock Option Agreement for stock option grants to executive employees under the Company’s 2004
Stock and Incentive Compensation Plan(25) |
|
|
|
10.49
|
|
Employment Agreement, effective as
of February 3, 2005, between the Company and David M. Maloney(26)* |
|
|
|
10.50
|
|
Supplemental Executive Retirement
Plan for certain executive officers effective January 1, 2005(27) |
|
|
|
10.51
|
|
Limited Liability Company Agreement
for Maumee Dialysis Services, LLC effective December 1, 2001(27) |
|
|
|
10.51.1
|
|
Management Agreement dated December
1, 2001 between Maumee Dialysis Services, LLC and DMN of Indiana
Corporation(27) |
|
|
|
10.51.2
|
|
Amendment Number 1 to Limited
Liability Company Agreement dated July 1, 2002 between Maumee
Dialysis Services LLC, RCG Indiana, LLC and Indiana Dialysis Management,
P.C.(27) |
46
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibits |
10.52
|
|
Limited Liability Company Agreement
for Three Rivers Dialysis Services, LLC effective March 31, 2001(27) |
|
|
|
10.52.1
|
|
Management Agreement dated March
31, 2001 between Three Rivers Dialysis Services, LLC and DMN of
Indiana Corporation(27) |
|
|
|
10.52.2
|
|
Amendment Number 1 to Limited
Liability Company Agreement dated July 1, 2002 between Three Rivers
Dialysis Services, LLC, RCG Indiana, LLC and Indiana Dialysis
Management, P.C.(27) |
|
|
|
21.1
|
|
List of subsidiaries of the Company |
|
|
|
23.1.1
|
|
Consent of Ernst & Young LLP |
|
|
|
23.1.2
|
|
Consent of Ernst & Young LLP |
|
|
|
24.1
|
|
Power of Attorney (contained on the signature page of this report) |
|
|
|
31.1
|
|
Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.1* *
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
32.2* *
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
| (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-Q for the quarter ended March 31, 1996
(Commission File No. 0-27640). |
| |
| (5) |
|
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). |
| |
| (6) |
|
Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 1996
(Commission File No. 0-27640). |
| |
| (7) |
|
Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 1998
(Commission File No. 0-27640). |
| |
| (8) |
|
Incorporated by reference to the Company’s Form 10-Q for the quarter ended March 31, 1999
(Commission File No. 0-27640). |
| |
| (9) |
|
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). |
| |
| (10) |
|
Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 1999
(Commission File No. 0-27640). |
| |
| (11) |
|
Incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 1999
(Commission File No. 0-27640). |
| |
| (12) |
|
Incorporated by reference to the Company’s definitive Proxy Statement filed April 28, 2000
relating to the 2001 Annual Meeting of Stockholders (Commission File No. 0-27640). |
| |
| (13) |
|
Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2000
(Commission File No. 0-27640). |
| |
| (14) |
|
Incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2001
(Commission File No. 0-27640). |
| |
| (15) |
|
Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2001
(Commission File No. 0-27640). |
| |
| (16) |
|
Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 2002
(Commission File No. 0-27640). |
| |
| (17) |
|
Incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2002
(Commission File No. 0-27640). |
| |
| (18) |
|
Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2002
(Commission File No. 0-27640). |
| |
| (19) |
|
Incorporated by reference to the Company’s Form 10-Q for the quarter ended March 31, 2003
(Commission File No. 0-27640). |
| |
| (20) |
|
Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 2003
(Commission File No. 0-27640). |
| |
| (21) |
|
Incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2003
(Commission File No. 0-27640). |
| |
| (22) |
|
Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 2003
(Commission File No. 0-27640). |
| |
| (23) |
|
Incorporated by reference to the Company’s definitive Proxy Statement filed May 6, 2004
relating to the 2004 Annual Meeting of Stockholders (Commission File No. 0-27640). |
| |
| (24) |
|
Incorporated by reference to the Company’s Form 8-K dated as of April 26, 2004 (Commission
File No. 0-27640). |
| |
| (25) |
|
Incorporated by reference to the Company’s Form 10-Q for the quarter ended September 30, 2004
(Commission File No. 0-27640). |
| |
| (26) |
|
Incorporated by reference to the Company’s Form 10-K for
the year ended December 31, 2005
(Commission File No. 0-27640). |
| |
| (27) |
|
Incorporated by reference to the Company’s Form 10-Q for
the quarter ended March 31, 2005
(Commission File No. 0-27640). |
| |
| (28) |
|
Incorporated by reference to the Company’s Form 8-K
dated as of May 3, 2005 (Commission File No. 000-27640). |
47