<PAGE> 1
As filed with the Securities and Exchange Commission on September 9, 1997
Registration No. 333-32611
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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RENEX CORP.
(Exact name of registrant as specified in its charter)
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<TABLE>
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FLORIDA 8092 65-0422087
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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2100 PONCE DE LEON BOULEVARD, SUITE 950, CORAL GABLES, FLORIDA 33134 (305)
448-2044
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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JAMES P. SHEA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
RENEX CORP.
2100 PONCE DE LEON BOULEVARD, SUITE 950
CORAL GABLES, FLORIDA 33134 (305) 448-2044
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<S> <C>
BRYAN W. BAUMAN, ESQ. RODD M. SCHREIBER, ESQ.
WALLACE, BAUMAN, FODIMAN & SHANNON, P.A. SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
2222 Ponce de Leon Boulevard, Sixth Floor 333 West Wacker Drive, Suite 2100
Coral Gables, Florida 33134 Chicago, Illinois 60606
(305) 444-9991 (312) 407-0700
ANDREW J. BECK, ESQ.
HAYTHE & CURLEY
237 Park Avenue
New York, New York 10017
(212) 880-6000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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=================================================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value per share.......... 3,450,000 $9.00 $31,050,000 $9,409
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Representatives' Warrants(3)..................... 300,000 $.0001 $30 $.01
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Common Stock, $.001 par value per share(4)....... 300,000 $9.63 $2,889,000 $876
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Total registration fee....................................................................................... $10,285.01(5)
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</TABLE>
(1) Includes 450,000 shares which the Underwriters have the option to purchase
from the Company to cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Each Representatives' Warrant entitles the holder to purchase one share of
Common Stock at an exercise price of 107% of the initial public offering
price per share.
(4) Such shares are issuable upon exercise of the Representatives' Warrants.
(5) The Registrant previously paid a registration fee of $9,409.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 9, 1997
PROSPECTUS
3,000,000 SHARES
RENEX LOGO
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby are being sold
by Renex Corp. ("Renex" or the "Company"). Prior to the Offering, there has been
no public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $7.00 and $9.00 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The Company has applied to list
the Common Stock for quotation on the Nasdaq National Market under the symbol
"RENX."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share.............................. $ $ $
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Total(3)............................... $ $ $
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</TABLE>
(1) Excludes the issuance of warrants to the Representatives of the Underwriters
(the "Representatives") to purchase 300,000 shares of Common Stock,
exercisable for a period of five years commencing on the date of this
Prospectus, at an exercise price of 107% of the initial public offering
price set forth above. Holders of such warrants have been granted certain
registration rights under the Securities Act of 1933, as amended, with
respect to the securities issuable upon exercise of such warrants. The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $480,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock on the same terms and conditions
set forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ ,
and $ , respectively. See "Underwriting."
---------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made at the
offices of the agent of Vector Securities International, Inc., in New York, New
York, on or about , 1997.
---------------------
Vector Securities International, Inc. Needham & Company, Inc.
, 1997
<PAGE> 3
(Map depicting location of Company's facilities and other
services, together with pictures of inside and outside of a
representative facility.)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE
IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT
THE PRICE OF THE COMMON STOCK OF THE COMPANY, INCLUDING BY
ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
"Renex(R)" is a tradename of Renex Corp.
2
<PAGE> 4
Top Photo: Renex outpatient dialysis facility located in Tampa, Florida.
Middle Photo: Dialysis station area at one of Renex' twelve outpatient dialysis
facilities.
Bottom Photo: Renex patient care professionals administering life sustaining
hemodialysis to an end stage renal disease patient.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus,
including information under "Risk Factors." Throughout this Prospectus, except
where the context otherwise requires, reference to the "Company" or "Renex"
means the Company and its subsidiaries. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in these forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
THE COMPANY
Renex Corp., operating through its wholly-owned subsidiaries, is a high
quality provider of dialysis and ancillary services to patients suffering from
chronic kidney failure, generally referred to as end stage renal disease
("ESRD"). The Company has grown primarily through the development of new
facilities ("de novo" development) and more recently through acquisitions, and
seeks to distinguish itself on the basis of quality patient care and
responsiveness to the professional needs of its referring nephrologists. The
Company currently provides dialysis services to approximately 800 patients in
seven states, through twelve outpatient dialysis facilities and two staff
assisted home dialysis programs. Additionally, the Company provides inpatient
dialysis services at five hospitals. The Company intends to accelerate the
penetration of its existing markets through a combination of acquisitions and de
novo development and to enter new markets, primarily through acquisitions, in
which the Company believes it can establish significant market share over time.
ESRD is the state of advanced chronic kidney disease characterized by the
irreversible loss of kidney function. A normal human kidney removes waste
products and excess water from the blood, preventing water overload, toxin
buildup and eventual poisoning of the body. Chronic kidney disease can be caused
by a number of conditions, including inherited diseases, diabetes, hypertension
and other illnesses. Patients suffering from ESRD require routine dialysis
treatments or kidney transplantation to sustain life. According to the Health
Care Financing Administration ("HCFA"), the number of patients requiring chronic
kidney dialysis services in the United States has increased from 66,000 patients
in 1982 to over 200,000 patients in 1995. According to the National Institutes
of Health, the number of ESRD patients is projected to reach 300,000 by the year
2000. According to HCFA, total spending for ESRD in the United States in 1995
was an estimated $13.1 billion. Of this amount, the Company estimates $6.0
billion was spent for dialysis treatment and ancillary services.
Patients with ESRD generally receive dialysis treatments through a dialysis
facility, which may be a free-standing or a hospital-based outpatient facility.
The primary function of dialysis facilities is to provide ESRD patients with
life sustaining kidney dialysis, including both hemodialysis and peritoneal
dialysis. HCFA estimates that as of December 31, 1995, approximately 84% of ESRD
patients in the United States were receiving hemodialysis treatments (83% in
outpatient facilities and 1% in the home) and that approximately 16% of all ESRD
patients were receiving peritoneal dialysis in the home, under the supervision
of an outpatient facility. ESRD patients are generally under the care of a
nephrologist, who serves as the primary gatekeeper of ESRD patients and, in
consultation with the patient, plays a significant role in determining which
dialysis facility and hospital will be used for such patient. The nephrologist
is typically supported by a team of dialysis professionals, including patient
care personnel, dieticians and social workers. Most dialysis facilities offer a
range of services to ESRD patients, including: dialysis treatments; provision of
supplies and equipment; patient, family and community training and education;
insurance counseling; billing services; dietary counseling; and social services
support.
As of August 31, 1997, the Company operated twelve outpatient dialysis
facilities, with a total of 187 certified dialysis stations. The Company has
four additional facilities under development located in North Andover,
Massachusetts; Union, Missouri; Maplewood, Missouri; and Bloomfield, New Jersey.
The North Andover facility is near completion and is scheduled to open in
October 1997. The Union facility's building is under construction, and the
Maplewood and Bloomfield facilities are in the pre-construction phase. The
Maplewood facility is expected to open in December 1997, and the Union
3
<PAGE> 6
and Bloomfield facilities are expected to open in the first quarter of 1998. The
Company's dialysis facilities are designed specifically for outpatient
hemodialysis and for the training of peritoneal dialysis and home hemodialysis
patients. Each facility has between eight and 21 dialysis stations and many
facilities are designed to accommodate additional stations as patient census
increases. All of the Company's facilities contain state-of-the-art equipment
and modern accommodations and are typically located near public transportation.
The facilities are designed to provide a pleasant and comfortable environment
for each patient and include such amenities as color television sets for each
patient station, VCRs for patient education and entertainment, and portable
telephones. In addition to the Company's outpatient dialysis facilities, the
Company provides staff-assisted home hemodialysis services in St. Louis,
Missouri and Tampa, Florida, and provides inpatient dialysis services to five
hospitals pursuant to contracts negotiated with the hospitals for per-treatment
rates paid directly by the hospitals. The Company also provides a full range of
ancillary services to ESRD patients.
The Company's goal is to continue expanding its geographic coverage and
market penetration while maintaining high quality patient care and physician
satisfaction with its services. The Company's growth strategy is focused on
establishing local clusters of dialysis facilities in order to create strong
regional networks. Renex has targeted seven markets, in which it has operations,
for the development of regional networks. The Company intends to continue to
grow these regional networks through a combination of strategic acquisitions and
de novo development. Additionally, Renex seeks to enter new markets in which it
believes that it can establish significant market share over time. The Company
also intends to continue to establish alliances with hospitals and managed care
organizations, and to capitalize on its relationships with nephrologists by
emphasizing high quality patient care and sensitivity to physicians'
professional concerns.
Renex Corp. was incorporated in Florida on July 7, 1993. The Company's
executive offices are located at 2100 Ponce de Leon Boulevard, Suite 950, Coral
Gables, Florida 33134, and its telephone number is (305) 448-2044.
THE OFFERING
Common Stock offered......................... 3,000,000 shares
Common Stock to be outstanding after the
Offering..................................... 6,974,247 shares(1)
Use of proceeds.............................. For repayment of indebtedness,
including redemption of a warrant issued in connection with a portion of such
indebtedness; capital
expenditures associated with
facilities under development;
acquisitions; de novo facility
development; and working
capital and other general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... RENX
- ---------------
(1) Excludes: (i) 355,064 shares issuable upon exercise of options granted
pursuant to the Company's stock option plans, at a weighted average exercise
price of $6.96 per share; (ii) an aggregate of 478,270 shares reserved for
issuance for future grants of options under the Company's stock option
plans; (iii) 49,169 shares issuable upon exercise of options granted to two
of the Company's directors and three other individuals, at a weighted
average exercise price of $6.51 per share; (iv) 441,621 shares reserved for
issuance upon exercise of outstanding warrants at a weighted average
exercise price of $6.88 per share; and (v) 300,000 shares issuable upon
exercise of warrants issued to the Representatives at an exercise price of
107% of the initial public offering price per share (the "Representatives'
Warrants"). See "Management," "Certain Transactions," "Description of
Securities" and "Underwriting."
---------------------
Except as otherwise noted, all information in this Prospectus, including
financial information, share and per share data assumes: (i) an initial public
offering price of $8.00 per share; (ii) no exercise of the Underwriters'
over-allotment option; and (iii) a 1-for-3 reverse stock split of the Common
Stock effected as of April 21, 1997. See "Description of Securities" and
"Underwriting."
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 7, 1993) SIX MONTHS ENDED
TO YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------------------------ -----------------------
1993 1994 1995 1996 1996 1997
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STATEMENTS OF OPERATIONS DATA:
Net revenues...................... $ -- $2,746 $ 8,794 $18,569 $8,320 $12,432
Operating expenses................ 357 3,649 9,495 20,241 8,655 12,263
Operating income (loss)........... (357) (903) (701) (1,672) (335) 169
Net interest income (expense)..... 35 61 (360) (915) (419) (537)
Net (loss)........................ (322) (842) (1,187) (2,449) (862) (503)
Net (loss) per share(1)........... $(.13) $ (.31) $ (.40) $ (.66) $ (.25) $ (.12)
Weighted average number of shares
outstanding..................... 2,395,835 2,759,884 2,963,193 3,693,617 3,503,664 4,067,747
PRO FORMA DATA:
Pro forma net (loss)(2)........... $(3,693) $(1,738)
Pro forma net (loss) per common
share(2)........................ $ (.76) $ (.33)
Shares used in computation of pro
forma net (loss) per common
share(3)........................ 4,861,062 5,235,192
OPERATING DATA:
Patients (at period end)(4)....... 142 319 691 530 791
Treatments(5)..................... 10,260 33,702 77,919 34,877 52,964
Number of facilities (at period
end)(6)......................... 4 7 12 10 12
</TABLE>
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JUNE 30, 1997
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PRO FORMA
ACTUAL AS ADJUSTED(7)
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BALANCE SHEET DATA:
Working capital........................................... $ 3,271 $14,930
Total assets.............................................. 17,095 28,893
Total debt................................................ 9,399 1,007
Total shareholders' equity................................ 3,826 24,016
</TABLE>
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(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of net (loss) per share.
(2) Pro forma statements of operations information is presented to give effect
to the sale of the 3,000,000 shares offered hereby and the receipt and
application of approximately $9.0 million of the net proceeds therefrom for
repayment of certain indebtedness, including $422,000 for redemption of a
warrant issued in connection with a portion of such indebtedness. The
redemption of this warrant, together with the non-cash write-off of deferred
financing costs related to repayment of certain of the indebtedness will
result in a one-time charge of approximately $1.5 million. See "Use of
Proceeds."
(3) Includes the weighted average number of shares of Common Stock outstanding
at such date and 1,167,445 of the 3,000,000 shares offered hereby, the
proceeds of which will be used for repayment of indebtedness.
(4) Number of ESRD patients under care, including patients receiving dialysis
treatments in the Company's outpatient facilities and in the patients'
homes. Data for the year ended December 31, 1995 excludes patients of three
facilities acquired on December 29, 1995. See "Business -- Operations."
(5) Treatments include all dialysis treatments provided in outpatient
facilities, patients' homes and hospitals. Peritoneal dialysis treatments
are stated in hemodialysis equivalents. See "Business -- Operations."
(6) Data for the year ended December 31, 1995 excludes three facilities acquired
on December 29, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and
"Business -- Operations."
(7) Pro forma as adjusted to give effect to the receipt and application of the
estimated net proceeds from the sale of the 3,000,000 shares offered hereby.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
5
<PAGE> 8
RISK FACTORS
PROSPECTIVE INVESTORS IN THE SHARES OF COMMON STOCK OFFERED HEREBY SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
HISTORY OF LOSSES; NO ASSURANCE OF PROFITABILITY. The Company has no
history of earnings upon which to base an evaluation of its future operating
efficiency or financial condition. The Company has experienced significant
losses since its inception in July 1993 and had an accumulated deficit of $5.3
million through June 30, 1997. Net losses for the years ended December 31, 1994,
1995 and 1996 were $842,000, $1.2 million and $2.4 million, respectively. Net
losses for the six months ended June 30, 1996 and 1997 were $862,000 and
$503,000, respectively. The Company expects its operating losses to continue at
least through 1997 as it continues to expend substantial resources to develop
its existing facilities, as well as to acquire and build new facilities. The
Company's ability to achieve profitability is largely dependent upon increased
utilization of its existing facilities, the acquisition and development of
additional dialysis facilities and the continued availability of adequate
third-party reimbursement for its services. There can be no assurance that the
Company will achieve or sustain profitability or positive cash flow from
operating activities, in which case it may not be able to meet its debt service
or working capital requirements. The Company's future performance will depend,
among other things, upon the Company's ability to develop and manage dialysis
facilities not yet in existence, and to acquire facilities and successfully
integrate such facilities into the Company's operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Business Strategy," "Business -- Sources of Reimbursement" and
"Business -- Government Regulation."
NEED FOR SUBSTANTIAL WORKING CAPITAL. The Company requires substantial
working capital to fund its accounts receivable. Like other health care
providers, the Company relies on third-party payors, primarily Medicare, for
payment of a substantial portion of its billings. The Company must finance its
receivable balances between the time services are provided and collection. The
Company's net accounts receivable balance as of June 30, 1997 was $5.9 million.
Since inception, the Company has not generated positive cash flow due to, among
other things, continued losses, increases in its receivable balances and capital
expenditures for expansion. The Company does not expect that internally
generated funds will satisfy its working capital requirements and will continue
to rely on external sources of debt or equity financings to meet its cash needs.
There can be no assurance that external sources of financing will be available,
or if available, on terms acceptable to the Company. If the Company is unable to
obtain external sources of financing, it would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DEPENDENCE UPON PROCEEDS OF OFFERING; POSSIBLE NEED FOR ADDITIONAL
CAPITAL. In order to implement its growth strategy, the Company intends to
expend substantial funds for acquisitions and de novo development of dialysis
facilities following completion of this Offering. The Company believes that the
net proceeds of this Offering, together with existing debt financing
arrangements and internally generated funds, will be sufficient to fund the
Company's operations and to finance the Company's proposed growth strategy
through the next 18 months. However, there can be no assurance that the Company
will not require substantial additional funds prior to such time. The Company's
future liquidity and capital requirements will be dependent on numerous factors,
including results of the Company's operations, the cost and timing of potential
acquisitions and de novo developments, the ability of the Company to integrate
such new facilities, developments related to government and other third-party
reimbursement matters, and other factors. If additional financing is needed, the
Company may seek additional funds from public and private equity or debt
financings or other arrangements.
6
<PAGE> 9
The Company currently has no commitments with respect to any other sources of
financing and there can be no assurance such financing sources would be
available, if needed, on terms acceptable to the Company, or at all. The failure
of the Company to obtain adequate financing could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LACK OF FULL FACILITY UTILIZATION. The profitability of the Company is
partially dependent on the utilization of its facilities. The average
utilization of the Company's facilities, taken as a whole, was approximately
41%, 46%, 61% and 72% as of December 31, 1994, 1995, 1996 and June 30, 1997,
respectively. Each facility has significant fixed costs which could cause such
facility to incur losses if utilization does not reach a sufficient level. As a
result, if utilization does not reach appropriate levels, net revenues would not
be sufficient to meet such facilities' operating expenses. Such underutilization
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company may find it
necessary to sell or close underutilized facilities, which could result in a
loss of some or all of the Company's investment in such facilities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE UPON GOVERNMENT REIMBURSEMENT. The Company estimates that
approximately 65%, 59% and 67% of its net revenues for the years ended December
31, 1994, 1995 and 1996, respectively, and approximately 67% and 76% of its net
revenues for the six months ended June 30, 1996 and 1997, respectively, were
derived from reimbursement under the federal Medicare and state Medicaid
programs, which cover virtually all patients with ESRD, regardless of age. The
maximum allowable charge (the"Composite Rate") for dialysis treatment of
Medicare patients is fixed by law. Once a patient becomes eligible for Medicare
reimbursement, Medicare reimburses the Company at 80% of the Composite Rate. The
Company is responsible for collecting the balance of the Composite Rate from the
patient, Medicaid or non-governmental payors, if any. The initial Composite Rate
for outpatient dialysis treatments was established in 1972 and remained
unchanged until 1983, when the Composite Rate was reduced from $138 per
treatment to $127 per treatment, on average. The Composite Rate was reduced
again in 1986 to $125 per treatment on average. The Composite Rate was increased
to $126 per treatment on average effective January 1, 1991. There can be no
assurance that this increase will remain in effect or that rates will not
decrease in the future. Recent cost containment initiatives by Medicare have
been aimed at reducing the cost of delivering services at non-hospital sites.
The Company is unable to predict what changes, if any, may occur in the
Composite Rate. Because of the Company's dependence on Medicare revenue, any
future rate reduction could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, increases
in operating costs that are subject to inflation, such as labor and supply
costs, without a compensatory increase in prescribed rates, may adversely affect
the Company's results of operations in the future.
The Company is also unable to predict whether certain services, for which
the Company is separately reimbursed, may in the future be included in the
Composite Rate. Since June 1, 1989, the Medicare program has provided separate
reimbursement for the physician prescribed administration to dialysis patients
of bioengineered erythropoietin ("EPO"). Net revenues from the administration of
EPO (the substantial majority of which is reimbursed through Medicare and
Medicaid programs) were approximately $626,000, $1.9 million and $3.7 million,
or 22.8%, 21.7% and 19.9% of the Company's net revenues, for each of the years
ended December 31, 1994, 1995 and 1996, respectively. For the six months ended
June 30, 1996 and 1997, net revenues from the administration of EPO were
approximately $1.6 million and $2.6 million, or 19.0% and 20.9% of net revenues,
respectively. EPO reimbursements significantly affect the Company's earnings.
Effective January 1, 1994, the Medicare reimbursement rate was reduced from $11
to $10 per 1,000 units of EPO. In addition, Medicare will only reimburse for the
administration of EPO to patients whose hematocrit is below specified levels.
Any decrease in the hematocrit levels for which EPO administration is reimbursed
could have a material adverse effect on the Company's net revenues and earnings.
In its Fiscal Year 1997 Work Plan, the Office of Inspector General ("OIG") of
the Department of Health and Human Services ("HHS") stated that it may recommend
cuts in reimbursement rates for EPO because preliminary results of its
7
<PAGE> 10
study of EPO indicated that dialysis facilities' purchase price of EPO is less
than the current reimbursement rate. The Company is unable to predict future
changes in the reimbursement rate for the administration of EPO, the future
reimbursement dosage limit per administration, or the cost of the drug. Any
material reduction in such rates or limits, or an increase in costs could have a
material adverse effect on the Company's business, financial condition and
results of operations.
All of the Company's facilities are located in states which provide
Medicaid or comparable benefits for dialysis patients. Such benefits supplement
Medicare benefits or in some cases are the primary source of reimbursement.
Approximately 3% to 6% of the Company's net revenues for the years ended
December 31, 1994, 1995 and 1996 and for the six months ended June 30, 1996 and
1997 were derived from Medicaid or comparable state programs. Each state
Medicaid program is subject to statutory or regulatory changes, administrative
rulings, interpretations of policy and governmental findings at the state level.
All of these factors could have the effect of decreasing Medicaid payments,
increasing costs or requiring the Company to modify its operations, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Sources of Reimbursement."
DEPENDENCE UPON OTHER SOURCES OF REIMBURSEMENT. Approximately 35%, 41% and
33% of the Company's net revenues for the years ended December 31, 1994, 1995
and 1996, respectively and 33% and 24% for the six months ended June 30, 1996
and 1997, respectively, were from sources other than Medicare and Medicaid.
These sources include payments from third-party non-governmental payors and
hospitals at rates that generally exceed Medicare and Medicaid rates. The
recently enacted Balanced Budget Act of 1997 expands the period in which
employer-based group health plans are primary payors for the ESRD population
from 18 months to 30 months. The Company believes that if Medicare reimbursement
for dialysis treatment is reduced in the future, these private payors may be
required to assume a greater percentage of the costs of dialysis care and, as a
result, may focus on reducing dialysis payments as their overall costs increase.
Notwithstanding any legislative action, the Company expects that
non-governmental payors will reduce payments for dialysis services. In addition,
as managed care organizations expand, they will aggressively seek to reduce
amounts paid for dialysis treatments. If third-party non-governmental payor
rates are reduced or are no longer subject to price increases or their payment
obligation period is shortened, the Company's business, financial condition and
results of operations would be materially and adversely affected. The Company is
unable to predict the degree of the risk, if any, of reductions in payments from
these sources. In addition, any restriction or reduction of the Company's
ability to charge non-governmental payors for its services at rates in excess of
those paid by Medicare would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Sources of Reimbursement."
OPERATIONS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION. The Company's
operations are subject to extensive and frequently changing regulation by
federal, state and local governments, regarding among other things, licensing,
certifications, financial relationships, fraud and abuse, referrals, direct
employment of health care providers by business corporations, reimbursement and
certain capital expenditures. Some of these laws may restrict or prohibit
business in certain states. See "Business -- Sources of Reimbursement" and
"Business -- Government Regulation."
The Company is subject to the illegal remuneration provisions (the
"anti-kickback statute") of the Social Security Act ("SSA") and similar state
laws which prohibit individuals or entities from offering, paying, soliciting or
receiving remuneration, directly or indirectly, in return for referring an
individual for the furnishing of any item or treatment reimbursed, in whole or
in part, under Medicare, Medicaid or similar state health care programs.
Violations of the anti-kickback statute are punishable by criminal or civil
penalties, which may include, among other things, exclusion or suspension of a
provider from participation in Medicare and Medicaid programs, as well as
substantial fines. In July 1991 and in November 1992, the federal government
published regulations that provide safe harbors for certain business
transactions. Transactions that are structured within the safe harbor provisions
are deemed not to violate the anti-kickback statute. Transactions that do not
satisfy all elements of a relevant safe harbor do not necessarily violate the
statute, but may be subject to greater scrutiny by enforcement
8
<PAGE> 11
agencies. The Company endeavors to structure its arrangements with its
physicians and other providers and suppliers to substantially comply with the
anti-kickback statute and similar state laws. However, there can be no assurance
that the relevant enforcement agencies would not take a contrary position. In
addition, certain of the Company's medical directors from whom the Company has
acquired dialysis facilities have received shares of the Company's Common Stock
as consideration for such acquisitions, and such security ownership does not
fall within any of the safe harbors. Although the Company has never been
challenged under these statutes, there can be no assurance that the Company will
not be required to change its practices or relationships with its medical
directors. In the event that any of the Company's relationships with its medical
directors or other referring nephrologists are determined to violate any of
these applicable laws or regulations, or the Company is required to change its
practices or relationships with such nephrologists, there could be a material
adverse effect on the Company's business, financial condition and results of
operations.
The Office of Inspector General (the "OIG") of the Department of Health and
Human Services ("HHS") has previously published warnings that the industry-wide
practices of obtaining discounts on certain laboratory charges and receiving
remuneration from intradialytic parenteral nutrition ("IDPN") suppliers for
services connected with the administration of IDPN therapy at dialysis centers
may violate certain statutory provisions. The Company, like all other dialysis
providers, arranges for laboratory tests and IDPN therapy. Although the
provision of IDPN therapy at the Company's facilities generates only a nominal
amount of revenue, if the OIG were to determine that the Company was in
violation of any of the aforementioned statutory provisions, the Company could
be subject to substantial criminal and civil fines, as well as expulsion or
suspension from the Medicare and Medicaid programs. Such determinations by the
OIG could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Omnibus Budget Reconciliation Act of 1993 includes certain provisions
("Stark II") that restrict physician referrals for certain designated health
services to entities with which the physician or an immediate family member has
a financial relationship. Stark II does not specifically include dialysis
services within the designated health services and the Company believes that the
language and legislative history of Stark II indicate that Congress did not
intend to include dialysis services and certain services and items provided
incident to dialysis services within the legislative prohibition. However,
certain services provided by the Company, including the provision of outpatient
prescription drugs such as EPO, could be construed as designated health services
within the meaning of Stark II. Violations of Stark II are punishable by
repayment of amounts received pursuant to a prohibited referral and civil
penalties, which may include exclusion or suspension of the provider from future
participation in Medicare and Medicaid programs, as well as substantial fines.
Due to the breadth of the statutory provisions and the absence of regulations or
court decisions interpreting the statute, it is possible that the Company's
practices could be challenged under these laws. If Stark II is broadly
interpreted by HCFA to apply to the Company and the Company cannot achieve
compliance, the Company would be subject to the penalties enumerated above,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance that
federal or state governments will not impose additional restrictions which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The health care industry in the United States is subject to changing
political, economic and regulatory influences that may impact the Company's
operations and profitability. The Company is unable to predict the effect of any
such changes on its future operations. It is uncertain what legislation or
health care reform will ultimately be implemented or whether other changes in
the administration or interpretation of government health care programs will
occur. There can be no assurance that such changes will not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Government Regulation."
RISKS INHERENT IN GROWTH STRATEGY. The successful implementation of the
Company's business strategy depends, in part, on the Company's ability to
acquire and develop additional dialysis facilities. Competition for acquisitions
and the recruitment of nephrologists to serve as medical directors for
9
<PAGE> 12
de novo facilities in the dialysis industry has increased significantly in
recent years, and as a result, the cost of acquiring or developing dialysis
facilities has increased. No assurance can be given that the Company will make
any additional acquisitions or develop any additional facilities. The Company's
strategy is dependent on: (i) the continued availability of suitable acquisition
candidates, which subjects the Company to the risks inherent in assessing the
value, strengths and weaknesses of acquisition candidates; (ii) identifying
suitable locations and medical directors for de novo facilities; and (iii)
successfully integrating and managing the operations of any acquired companies
and developed facilities. In connection with its acquisition and development
activities, the Company is competing with companies which have significantly
greater financial and management resources. In addition, the Company has limited
experience in completing acquisitions and integrating their operations. The
Company has limited resources and financing available to it and there can be no
assurance that the Company will be able to obtain the necessary financing to
implement its growth strategy on acceptable terms, or at all, or that the
Company would otherwise be successful in acquiring or developing new facilities.
Acquisitions involve a number of special risks, including possible adverse
effects on the Company's operating results, diversion of management's attention,
failure to retain key personnel of the acquired companies, amortization of
acquired intangible assets and risks related to unanticipated events or
liabilities. A failure to implement its growth strategy could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Business Strategy."
DEPENDENCE ON SOLE SUPPLIER FOR EPO. A significant portion of the
Company's revenues are derived from the administration of EPO. EPO is produced
by only one manufacturer. Although the Company has not experienced any
difficulty in obtaining supplies of EPO, there can be no assurance that the
Company will be able to obtain sufficient supplies at reasonable prices or at
all. The interruption of supplies of EPO or a material increase in the cost of
EPO could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Operations."
DEPENDENCE UPON PHYSICIAN REFERRALS. The success of the Company's dialysis
facilities is dependent upon referrals of ESRD patients by nephrologists who
practice in the communities served by these dialysis facilities. It is customary
in the dialysis industry that one or a few physicians account for all or a
significant portion of a facility's patient referral base. The loss of one or
more key referring physicians at a particular facility could have a material
adverse effect on the operations of that facility and could adversely affect the
Company's overall results of operations. Financial relationships with physicians
and other referral sources are highly regulated. The anti-kickback and
self-referral provisions of the SSA, as well as similar state laws, prohibit the
offering, paying and receiving of any remuneration for either making a referral
for a covered service or item, or ordering any such covered service or item, and
prohibit physicians, subject to certain exceptions, from making referrals for
certain health services to entities with which they have a financial
relationship. In the event that any of the Company's relationships with its
referring nephrologists are determined to violate any of these federal
anti-kickback or self-referral provisions, the Company could be subject to
criminal and civil fines, as well as expulsion or suspension from the Medicare
and Medicaid programs. Such result would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Business Strategy," "Business -- The Dialysis Industry,"
"Business -- Medical Directors" and "Business -- Government Regulation."
INTENSE COMPETITION WITHIN INDUSTRY. The dialysis industry is fragmented
and highly competitive. The Company competes in the dialysis industry for the
acquisition of existing facilities, development of relationships with referring
physicians and development of relationships with nephrologists to serve as
medical directors for de novo facilities. The Company competes with national and
regional health care providers, many of which are larger and have significantly
greater financial and marketing resources than the Company. In addition, there
are also many local independent facilities owned by community physicians,
hospitals and other persons or entities which compete with the Company. The
Company may also experience competition from former medical directors or
referring physicians who open their own dialysis facilities. There can be no
assurance that the Company will be able to compete
10
<PAGE> 13
effectively with any such providers. Competition has increased the cost of
acquiring existing facilities and there can be no assurance that these costs
will not continue to increase as a result of future industry consolidation, or
that the Company will be able to compete effectively for such acquisitions.
Furthermore, the Company's dialysis facilities are generally in metropolitan
areas where there are many competing facilities in close proximity. If the
Company is unable to compete for acquisitions or in the recruitment of
nephrologists to serve as medical directors for its facilities, the Company's
growth strategy would be impaired, which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Competition."
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent upon the services
and management skills of its executives and its medical directors. Although the
Company has entered into employment agreements with its key executives which
include confidentiality and non-competition provisions, there can be no
assurance such individuals will continue in their present capacities with the
Company for any particular period of time, or that the non-competition
provisions will be enforceable or free from limitations under the laws of the
appropriate jurisdictions. The success of the Company and its growth strategy,
will also be dependent on the Company's ability to attract and retain additional
key management, marketing and operating personnel, as well as medical directors
for its dialysis facilities. The Company's facilities are staffed by
professionals with significant experience in the treatment of ESRD. Such persons
are in high demand and are often subject to offers from competitors. There can
be no assurance that the Company will be able to attract and retain such
qualified personnel. The Company does not have, or intend to maintain, key-man
life insurance on any of its personnel. The loss by the Company of any of its
key executives, or the inability to attract and retain qualified management
personnel and medical directors, could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Competition" and "Management."
DISCRETION IN USE OF PROCEEDS. Following the Offering and after repayment
of certain indebtedness and the funding of planned capital expenditures for the
four facilities under development, the Company will have approximately $11.2
million (approximately $14.5 million if the Underwriters' over-allotment option
is exercised in full) of the net proceeds of the Offering available for
acquisitions, de novo facility development and other unspecified purposes. The
Company's management, subject to approval by the Board of Directors, will have
broad discretion with respect to the use of such proceeds. See "Use of
Proceeds."
POSSIBLE INABILITY TO OBTAIN ADEQUATE INSURANCE. The operation of dialysis
facilities entails certain liability risks. The Company maintains property and
general liability insurance, professional liability insurance on its
professional staff and other insurance which the Company believes to be
appropriate for its operations. There can be no assurance that the Company's
current coverage is adequate or that the Company will be able to maintain such
insurance in the future. Any claim in excess of such insurance coverage could
have a material adverse effect on the Company's business, financial condition
and results of operations. Further, professional liability insurance is
expensive and becoming increasingly difficult to obtain. See
"Business -- Insurance."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BY-LAW PROVISIONS. Certain
provisions of the Company's Articles of Incorporation and By-laws may have the
effect of making more difficult or delaying attempts by others to obtain control
of the Company, even when these attempts may be in the best interests of the
shareholders. These provisions include advance notice provisions, provisions
that establish a classified Board of Directors, and provisions that enable the
Board of Directors to issue up to 5,000,000 shares of preferred stock in one or
more series, having terms fixed by the Board of Directors, without shareholder
vote. In addition, Florida has enacted legislation that may deter or inhibit
takeovers of the Company. The Florida Control Share Act generally provides that
in certain circumstances, shares acquired in excess of certain specified
thresholds, starting at 20%, will not possess any voting rights unless such
voting rights are approved by a majority vote of a corporation's disinterested
shareholders. The Florida Affiliated Transactions Act generally requires
super-majority approval by disinterested directors or shareholders of certain
specified transactions between a corpora-
11
<PAGE> 14
tion and holders of more than 10% of the outstanding shares of the corporation
or their affiliates. See "Description of Securities -- Anti-Takeover
Provisions."
CONTROL BY EXISTING MANAGEMENT; CONCENTRATION OF OWNERSHIP. Following the
consummation of this Offering, the Company's directors, officers and their
respective affiliates will beneficially own 32.7% of the Company's voting
securities. Although these persons do not have any agreements or understandings
to act or vote in concert, any such agreement, understanding or acting in
concert would make it difficult for others to elect the entire Board of
Directors, or to control the disposition of any matter submitted to a vote of
shareholders. See "Principal Shareholders" and "Description of Securities."
NO PRIOR PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK; POTENTIAL VOLATILITY
OF STOCK PRICE. Prior to this Offering, there has been no public market for the
Company's Common Stock, and there can be no assurance that a liquid trading
market for the Common Stock will develop or, if one develops, that it will be
sustained after the Offering. The initial public offering price of the Common
Stock will be determined by negotiations among the Company and the
representatives of the Underwriters and may not be indicative of the prices that
will prevail in the public market. See "Underwriting." Future trading prices for
the Company's Common Stock will depend on many factors, including, among other
things, the Company's operating results and the market for similar securities.
The market prices for securities of health care services companies, including
companies in the dialysis services sector, have been highly volatile and the
market from time to time has experienced significant price and volume
fluctuations that are unrelated to the operating performance of such companies.
It is likely that the market price of the Company's Common Stock will be highly
volatile. Factors such as announcements of acquisitions or the de novo
development of new dialysis facilities, changes in the Composite Rate, changes
in reimbursement rates charged by the Company to third-party non-governmental
payors and hospitals, changes in the political, economic and regulatory
environment in which the Company operates, releases of reports by security
analysts, as well as period-to-period fluctuations in the Company's operating
results and general market conditions may have a significant impact on the
future price of the Company's Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS. Investors purchasing
shares of Common Stock in the Offering will experience immediate and substantial
dilution in the net tangible book value of their shares of approximately $4.73
per share. Additional dilution may occur upon the exercise of outstanding
options and warrants. In the event the Company issues additional Common Stock in
connection with future acquisitions or other financing needs, investors in the
Offering may experience further dilution. See "Dilution" and "Shares Eligible
For Future Sale."
ABSENCE OF DIVIDENDS. The Company currently anticipates that it will
retain all future earnings for use in the operation of the business and does not
anticipate paying any dividend on the Common Stock in the foreseeable future.
See "Dividend Policy."
POTENTIAL ADVERSE IMPACT ON FUTURE MARKET PRICE FROM SHARES ELIGIBLE FOR
FUTURE SALE. Sales of substantial amounts of Common Stock (including shares
issuable upon exercise of outstanding options and warrants) in the public market
after this Offering could adversely affect the market price of the Common Stock.
Such sales could also make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
the Company deems appropriate. Upon completion of this Offering, the Company
will have outstanding an aggregate of 6,974,247 shares of Common Stock. In
addition, the Company has reserved for issuance 1,145,854 shares issuable upon
exercise of outstanding options and warrants, including the Representatives'
Warrants. The 3,000,000 shares of Common Stock offered hereby will be freely
transferable without restriction or further registration under the Securities
Act of 1933, as amended (the "Securities Act"), except for shares which may be
acquired by affiliates of the Company as that term is defined in Rule 144 under
the Securities Act. The remaining 3,974,247 shares of Common Stock held by
existing shareholders are "restricted securities" as that term is defined in
Rule 144. Restricted securities may be sold in the public market only if they
are registered or if they qualify for exemption from registration under
12
<PAGE> 15
Rules 144 or 701 under the Securities Act. Pursuant to certain "lock-up"
agreements, the Company's officers, directors and certain of its shareholders
who collectively hold an aggregate of 3,894,659 shares of Common Stock, together
with the Company, have agreed, for a period of 180 days following the date of
this Prospectus, not to offer, pledge, sell, contract to sell, grant any option
for the sale of, or otherwise dispose of, directly or indirectly, any shares of
Common Stock without the prior written consent of Vector Securities
International, Inc. Following the 180-day period, approximately 1,534,498 shares
of Common Stock will be eligible for sale in the public market without
restriction under Rule 144(k) and an additional 2,360,161 shares will be
eligible for sale subject to certain volume, manner of sale and other
restrictions of Rule 144. Of the approximately 79,588 restricted shares of
Common Stock held by existing shareholders not subject to lock-up agreements,
77,422 shares will be eligible for immediate sale in the public market without
restriction under Rule 144(k). The remaining 2,166 shares of Common Stock not
subject to lock-up agreements will become eligible for sale, subject to volume,
manner of sale and other limitations under Rule 144 commencing 90 days following
the date of this Prospectus. In addition, holders of stock options or warrants,
including the Representatives' Warrants, exercisable for an aggregate of
1,145,854 shares of Common Stock have entered into agreements prohibiting the
sale of the underlying Common Stock for 180 days following the date of this
Prospectus. In addition, the Representatives' are generally prohibited from
selling or otherwise transferring the Representatives' Warrants for twelve
months from the date of this Prospectus. See "Principal Shareholders," "Shares
Eligible for Future Sale" and "Underwriting."
13
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $21.8 million
($25.2 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $8.00 per share and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company.
The Company intends to use approximately $9.0 million of the net proceeds
of this Offering for the repayment of indebtedness, including: (i) $6.4 million
for the repayment of certain indebtedness incurred under the Company's Senior
Subordinated Secured Loan (the "Subordinated Loan"), including interest and a
prepayment penalty of approximately $63,000; (ii) $2.2 million of certain
indebtedness consisting of $1.5 million under a lease line of credit with an
equipment financing company (the "Lease Line") and $700,000 under other capital
leases; and (iii) approximately $422,000 to redeem a warrant issued in
connection with the Subordinated Loan.
Borrowings under the Subordinated Loan bear interest at the rate of 13% per
annum, payable quarterly. Principal payments are amortized over a three-year
period, payable quarterly, commencing September 30, 1999 with payment in full by
June 30, 2002. The Subordinated Loan is required to be satisfied in full upon
completion of this Offering and will not be available thereafter. The Lease Line
is a credit facility with maximum availability of $6.0 million and is used
primarily to finance dialysis related equipment. Interest accrues at the
five-year U. S. Treasury bond yield rate plus 3.91% (10.12% as of the date of
this Prospectus). Principal and interest are amortized over a five-year period
and payable monthly. The Lease Line will continue to be available to the Company
through its expiration in August 2001. The other capital leases being paid out
of the proceeds of the Offering have similar terms and interest rates as the
Lease Line.
The Company intends to use approximately $1.6 million of the net proceeds
of this Offering to fund leasehold improvements at four dialysis facilities
presently under development. The balance of the net proceeds, approximately
$11.2 million, will be used for acquisitions, de novo facility development,
working capital, including working capital for the facilities under development,
and general corporate purposes. See "Risk Factors -- Discretion in Use of
Proceeds."
Other than as described above, the Company has no current specific plan for
the net proceeds of this Offering. The principal purposes for conducting this
Offering are to: (i) obtain additional capital to permit the Company to pursue
acquisition and de novo development opportunities; (ii) increase the Company's
financial flexibility; (iii) create a public market for the Company's Common
Stock; and (iv) increase the Company's working capital. The Company continually
reviews and evaluates acquisition candidates as part of its growth strategy and
is at various stages of discussion or negotiation with a number of such
candidates. However, as of the date of this Prospectus, the Company has not
entered into an agreement or letter of intent as to any such potential
acquisition.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds from the sale of the Common Stock offered hereby, based upon
the current state of its business operations, its current plans for expansion
and the current economic and industry conditions. Such estimate is subject to
reallocation among the categories stated above. The amount or timing of actual
expenditures will depend on numerous factors, including profitability of the
Company, the availability of alternative financing for acquisitions, the
Company's business development activities and competition. See "Risk
Factors -- Need for Substantial Working Capital" and "Risk Factors -- Dependence
upon Proceeds of Offering; Possible Need for Additional Capital."
Pending such uses set forth above, the Company will invest the net proceeds
of this Offering in short-term, interest bearing, investment-grade securities.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
since inception. The Company currently intends to retain any future earnings to
finance the growth and development of its business and, therefore, does not
anticipate that any cash dividends will be declared or paid on the Common Stock
in the foreseeable future. Any future determination to pay cash dividends will
be at the discretion of the Board of Directors and will be dependent upon the
Company's financial condition, results of operations, capital requirements,
restrictions under any existing indebtedness and such other factors as the Board
of Directors deems relevant.
The Company's loan agreement with respect to the Line of Credit contains
restrictions on the payment of cash dividends without the lender's prior written
consent.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1997 and the Company's capitalization as adjusted to reflect the issuance of
3,000,000 shares of Common Stock offered hereby and the receipt and application
of the estimated net proceeds therefrom, assuming an initial public offering
price of $8.00 per share and after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by the Company. This
table should be read in conjunction with the Consolidated Financial Statements
of the Company and the Notes thereto, included elsewhere in this Prospectus. See
"Use of Proceeds" and "Description of Securities."
<TABLE>
<CAPTION>
JUNE 30, 1997(1)
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Current portion of long-term debt and capital lease
obligations............................................ $ 410 $ 7
Line of credit............................................ 1,000 1,000
Long-term debt, excluding current portion................. 6,193 --
Capital lease obligations, excluding current portion...... 1,796 --
Shareholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding, actual
and pro forma as adjusted.............................. -- --
Common Stock, $.001 par value; 30,000,000 shares
authorized; 3,974,247 shares issued and outstanding,
actual; 6,974,247 shares issued and outstanding, pro
forma as adjusted...................................... 3 6
Additional paid-in capital................................ 9,163 31,000
Accumulated deficit....................................... (5,340) (6,990)
------- -------
Total shareholders' equity............................. 3,826 24,016
------- -------
Total capitalization.............................. $13,225 $25,023
======= =======
</TABLE>
- ---------------
(1) Excludes: (i) 355,064 shares issuable upon exercise of options granted
pursuant to the Company's stock option plans, at a weighted average exercise
price of $6.96 per share; (ii) an aggregate of 478,270 shares reserved for
issuance for future grants of options under the Company's stock option
plans; (iii) 49,169 shares issuable upon exercise of options granted to two
of the Company's directors and three other individuals, at a weighted
average exercise price of $6.51 per share; (iv) 441,621 shares reserved for
issuance upon exercise of warrants at a weighted average exercise price of
$6.88 per share; and (v) 300,000 shares issuable upon the exercise of the
Representatives' Warrants. See "Management," "Certain Transactions,"
"Description of Securities" and "Underwriting."
(2) Pro forma as adjusted to give effect to the receipt and application of the
estimated net proceeds from the sale of the 3,000,000 shares offered hereby.
See "Use of Proceeds."
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<PAGE> 18
DILUTION
The net tangible book value of the Company as of June 30, 1997 was $1.6
million or $0.40 per share of Common Stock. Net tangible book value per share
represents the amount of the Company's total tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding. Without
taking into account any other changes in net tangible book value other than to
give effect to the sale by the Company of the 3,000,000 shares of Common Stock
offered hereby (assuming an initial public offering price of $8.00 per share)
and the receipt and application of the net proceeds therefrom, the pro forma net
tangible book value of the Company as of June 30, 1997 would have been $22.8
million, or $3.27 per share of Common Stock. This represents an immediate
increase in net tangible book value per share of $2.87 to existing shareholders
and an immediate dilution in net tangible book value of $4.73 per share to
investors in the Offering.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 8.00
Net tangible book value per share as of June 30, 1997..... $0.40
Increase per share attributable to new investors.......... 2.87
-----
Pro forma net tangible book value per share after the
Offering.................................................. 3.27
------
Dilution per share to new investors......................... $ 4.73
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing shareholders and by new investors, assuming an initial public offering
price of $8.00 per share and before deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders..... 3,974,247 57.0% $ 9,166,000 27.6% $ 2.31
New investors............. 3,000,000 43.0 24,000,000 72.4 8.00
--------- ----- ----------- -----
Total........... 6,974,247 100.0% $33,166,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
option or shares underlying outstanding options or warrants. As of the date of
this Prospectus, there were: (i) 355,064 shares issuable upon exercise of
options granted pursuant to the Company's stock option plans, at a weighted
average exercise price of $6.96 per share; (ii) an aggregate of 478,270 shares
reserved for issuance for future grants of options under the Company's stock
option plans; (iii) 49,169 shares issuable upon exercise of options granted to
two of the Company's directors and three other individuals, at a weighted
average exercise price of $6.51 per share; (iv) 441,621 shares reserved for
issuance upon exercise of warrants at a weighted average exercise price of $6.88
per share; and (v) 300,000 shares issuable upon the exercise of the
Representatives' Warrants. See "Management," "Certain Transactions,"
"Description of Securities" and "Underwriting."
16
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data of the
Company are qualified in their entirety by, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this Prospectus. The statement of operations data
for the years ended December 31, 1994, 1995 and 1996 and the balance sheet data
as of December 31, 1995 and 1996 are derived from the audited Consolidated
Financial Statements included elsewhere in this Prospectus. The statement of
operations data for the period from inception to December 31, 1993 and the
balance sheet data as of December 31, 1993 and 1994 are derived from audited
consolidated financial statements not included in this Prospectus. The
consolidated statements of operations data for the six months ended June 30,
1996 and 1997 and the consolidated balance sheet data at June 30, 1997 have been
derived from unaudited interim financial statements and include all adjustments
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the financial position and results of
operations at that date and for such periods. The operating results for the six
months ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full year or for any future period. Comparability of the
information presented below as to each period is substantially affected by the
timing of acquisitions and opening of de novo facilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 7, 1993) SIX MONTHS ENDED
TO YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, --------------------------------- ---------------------
1993 1994 1995 1996 1996 1997
-------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues......................... $ -- $2,746 $ 8,794 $18,569 $8,320 $12,432
Operating expenses:
Facilities......................... -- 2,405 6,809 14,625 6,354 9,679
General and administrative......... 355 1,025 1,682 2,681 1,163 1,304
Provision for doubtful accounts.... -- 93 495 1,293 561 493
Depreciation and
amortization..................... 2 126 509 1,642 577 787
--------- --------- --------- --------- --------- ---------
Operating income (loss)....... (357) (903) (701) (1,672) (335) 169
--------- --------- --------- --------- --------- ---------
Other income (expenses):
Gain (loss) on sale of assets...... -- -- -- 364 -- (27)
Net interest income
(expense)........................ 35 61 (360) (915) (419) (537)
Amortization of deferred financing
costs............................ -- -- (126) (226) (108) (108)
--------- --------- --------- --------- --------- ---------
Net (loss)........................... $(322) $ (842) $(1,187) $(2,449) $ (862) $ (503)
========= ========= ========= ========= ========= =========
Net (loss) per common share(1)....... $ (.13) $ (.31) $ (.40) $ (.66) $ (.25) $ (.12)
========= ========= ========= ========= ========= =========
Weighted average number of shares
outstanding........................ 2,395,835 2,759,884 2,963,193 3,693,617 3,503,664 4,067,747
========= ========= ========= ========= ========= =========
PRO FORMA DATA:
Pro forma net (loss)(2).............. $(3,693) $(1,738)
========= =========
Pro forma net (loss) per common
share(2)........................... $ (.76) $ (.33)
========= =========
Shares used in computation of pro
forma net (loss) per common
share(3)........................... 4,861,062 5,235,192
========= =========
OPERATING DATA:
Patients (at period end)(4).......... -- 142 319 691 530 791
Treatments(5)........................ -- 10,260 33,702 77,919 34,877 52,964
Number of facilities (at period
end)(6)............................ -- 4 7 12 10 12
</TABLE>
(Footnotes on following page)
17
<PAGE> 20
<TABLE>
<CAPTION>
JUNE 30, 1997
DECEMBER 31, ------------------------
----------------------------------- PRO FORMA
1993 1994 1995 1996 ACTUAL AS ADJUSTED(7)
------ ------ ------- ------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets............................. $3,543 $2,527 $ 5,234 $ 6,059 $ 7,551 $18,807
Working capital............................ 3,503 2,136 3,051 2,389 3,271 14,930
Total assets............................... 3,642 4,020 11,815 15,161 17,095 28,893
Total debt................................. -- 220 6,375 7,743 9,399 1,007
Total shareholders' equity................. 3,603 3,482 4,164 4,317 3,826 24,016
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of net (loss) per share.
(2) Pro forma statement of operations information is presented to give effect to
the sale of the 3,000,000 shares offered hereby and the receipt and
application of approximately $9.0 million of the net proceeds therefrom for
repayment of certain indebtedness, including $422,000 for redemption of a
warrant issued in connection with a portion of such indebtedness. The
redemption of this warrant, together with the non-cash write-off of deferred
financing costs related to repayment of certain of the indebtedness will
result in a one-time charge of approximately $1.5 million. See "Use of
Proceeds."
(3) Includes the weighted average number of shares of Common Stock outstanding
at such date and 1,167,445 of the 3,000,000 shares offered hereby, the
proceeds of which will be used for repayment of indebtedness.
(4) Number of ESRD patients under care, including patients receiving dialysis
treatments in the Company's outpatient facilities and in the patients'
homes. Data for the year ended December 31, 1995 excludes patients of three
facilities acquired on December 29, 1995. See "Business -- Operations."
(5) Treatments include all dialysis treatments performed in outpatient
facilities, patients' homes and hospitals. Peritoneal dialysis treatments
are stated in hemodialysis equivalents. See "Business -- Operations."
(6) Data for the year ended December 31, 1995 excludes three facilities acquired
on December 29, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and
"Business -- Operations."
(7) Pro forma as adjusted to give effect to the receipt and application of the
estimated net proceeds from the sale of the 3,000,000 shares offered hereby.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH "SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA" AND THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN.
OVERVIEW
Renex, which was established in July 1993 and operates through its
wholly-owned subsidiaries, is a high quality provider of dialysis and ancillary
services to patients with ESRD. Since inception, the Company has implemented an
aggressive growth strategy designed to build the Company's presence in selected
regional markets. A key element of the Company's growth strategy has been to
establish local clusters of dialysis facilities within strong regional networks
through de novo development. To date, Renex has grown primarily through de novo
development because the Company believes such a strategy minimizes the initial
capital outlay. However, de novo facilities achieve profitability only when they
reach sufficient utilization, which historically does not occur prior to twelve
to fourteen months following opening. The Company has increased utilization in
its existing facilities from an average of 41% at December 31, 1994 to an
average of 72% at June 30, 1997 primarily through marketing efforts directed at
local nephrologists, patients and managed care organizations. See "Risk
Factors -- Lack of Full Facility Utilization."
Additionally, Renex has grown through acquisitions and hospital alliances.
In the future, the Company believes that its growth will be through a
combination of acquisitions and de novo development, which will allow expansion
of its regional market presence and provide entry into new regional markets.
As of August 31, 1997, the Company operated twelve outpatient dialysis
facilities, of which eight were opened between 1994 and 1996 through de novo
development. In addition, the Company acquired three facilities in December
1995. In April 1996, the Company acquired the assets of two facilities under
development. The Company opened one of these facilities during the first quarter
of 1997 and the second facility is expected to open during the first quarter of
1998, subject to receipt of applicable state approvals. The Company sold an
additional de novo facility, not included above, in September 1996 because it
did not satisfy the Company's strategic objectives.
SOURCES OF NET REVENUES
The Company's net revenue is derived primarily from five sources: (i)
outpatient hemodialysis services; (ii) the administration of EPO and, to a
lesser extent, other ancillary services; (iii) peritoneal dialysis services;
(iv) home hemodialysis services; and (v) inpatient hemodialysis services to
hospitalized patients. Services generally include the provision of equipment and
supplies. The Company's dialysis and ancillary services are reimbursed primarily
under the Medicare ESRD program in accordance with rates established by HCFA.
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. Payments are also provided by Medicaid,
patients and non-governmental third-party payors for the first three to 33
months of treatment as mandated by law. Payments made by non-governmental
third-party payors are generally at rates higher than the Composite Rate. Rates
paid for services provided to hospitalized patients are negotiated with
individual hospitals. For the year ended December 31, 1996 and the six months
ended June 30, 1997, approximately 67% and 76%, respectively of the Company's
net revenues were derived from reimbursement by Medicare and Medicaid. The
Company will continue to be dependent upon revenue from Medicare and Medicaid.
Since dialysis is an ongoing, life sustaining therapy used to treat a chronic
condition, use of the Company's services is generally predictable and not
subject to seasonal or economic fluctuation.
19
<PAGE> 22
However, the Company's interim and annual results of operations may be
significantly affected by the timing and costs of any acquisitions or de novo
facilities. See "Risk Factors -- Dependence upon Government Reimbursement."
In connection with the Offering the Company will redeem warrants issued in
connection with the Subordinated Loan which together with the non-cash write-off
of deferred financing costs related to the repayment of such loan will result in
a one time charge of approximately $1.5 million.
RESULTS OF OPERATIONS
The following table sets forth certain income statement items expressed as
a percentage of net revenues for the years ended December 31, 1994, 1995 and
1996 and for the six months ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ ---------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------
Facilities expenses.................................. 87.6 77.4 78.8 76.4 77.9
General and administrative expenses.................. 37.3 19.1 14.4 14.0 10.5
Provision for doubtful accounts...................... 3.4 5.6 7.0 6.7 4.0
Depreciation and amortization expenses............... 4.6 5.8 8.8 6.9 6.3
Operating income (loss).............................. (32.9) (8.0) (9.0) (4.0) 1.4
Net interest income (expense)........................ 2.2 (4.1) (4.9) (5.0) (4.3)
Net (loss)........................................... (30.7) (13.5) (13.2) (10.4) (4.1)
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NET REVENUES. Net revenues for the six months ended June 30, 1997 were
$12.4 million compared to $8.3 million for the same period in 1996, representing
an increase of 49.4%. The increase in net revenues of $4.1 million was primarily
attributable to the continued growth at existing facilities of $2.2 million and
to a full six months' net revenues totalling $1.9 million in 1997 for the two
facilities opened during the fourth quarter of 1996.
FACILITIES EXPENSES. Facilities expenses primarily consist of costs and
expenses specifically attributable to the operation of the dialysis facilities,
including operating and maintenance costs of such facilities and all labor,
supplies and service costs related to patient care. Facilities expenses for the
six months ended June 30, 1997 were $9.7 million compared to $6.4 million for
the same period in 1996, representing an increase of 52.3%. The increase in
facilities expenses was due to the greater number of facilities in operation in
1997. As a percentage of net revenues, facilities expenses increased to 77.8%
for the six months ended June 30, 1997 from 76.4% for the same period in 1996.
The increase as a percentage of net revenues was due to low patient utilization
at one of the Company's newer facilities and a change in the payor mix related
to peritoneal dialysis patients.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist of headquarter expenses including marketing, finance, operations
management, legal, quality assurance, information systems, billing and
collections and centralized accounting support. General and administrative
expenses for the six months ended June 30, 1997 were $1.3 million compared to
$1.2 million for the same period in 1996, representing an increase of 12.1%. The
increase in general and administrative expenses was due to increased personnel
and related expenses to support the greater number of facilities in operation.
As a percentage of net revenues, general and administrative expenses decreased
to 10.5% for the six months ended June 30, 1997 from 14.0% for the same period
in 1996. The decrease as a percentage of net revenues was due to an increase in
net revenues from increased utilization of existing facilities which did not
require a proportionate increase in corporate overhead.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts is a
function of patient payor mix, collection experience and other factors. It is
the Company's practice to reserve for doubtful accounts in the period in which
revenue is recognized based on management's estimate of the net collectibility
of accounts receivable. The provision for doubtful accounts for the six months
ended June 30, 1997 was $493,000 compared to $561,000 for the same period in
1996, representing a decrease
20
<PAGE> 23
of 12.1%. As a percentage of net revenues, the provision for doubtful accounts
decreased to 4.0% for the six months ended June 30, 1997 from 6.7% for the same
period in 1996. The decrease was primarily due to an improved account evaluation
process and an increased emphasis upon collections of aged amounts.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the six months ended June 30, 1997 were $787,000 compared to
$577,000 for the same period in 1996, representing an increase of 36.4%. The
increase was due to capital expenditures related to the opening of two
facilities and the addition of reuse capabilities at the majority of the
existing facilities. As a percentage of net revenues, depreciation and
amortization expenses decreased to 6.3% for the six months ended June 30, 1997
from 6.9% for the same period in 1996. The decrease as a percentage of revenues
was due to increased revenues at existing facilities without a corresponding
increase in capital expenditures.
NET INTEREST INCOME (EXPENSE). Net interest expense for the six months
ended June 30, 1997 was $537,000 compared to $419,000 for the same period in
1996, representing an increase of 28.2%. The increase of $82,000 was primarily
due to the increase in the Company's borrowings for working capital purposes. In
June 1995, the Company entered into the Subordinated Loan, which permitted
borrowings, under certain circumstances, of up to $12.5 million, of which the
initial borrowing was $4.8 million and in May 1996 an additional $1.5 million
was borrowed. As of June 30, 1997 and 1996, $6.3 million was outstanding.
NET (LOSS). The Company had a net loss of $503,000 for the six months
ended June 30, 1997 compared to a net loss of $862,000 for the same period in
1996, a decrease of $359,000, or 41.7%.
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET REVENUES. Net revenues for the year ended December 31, 1996 were $18.6
million compared to $8.8 million for the same period in 1995, representing an
increase of 111.2%. The increase in net revenues of $9.8 million was primarily
attributable to a full year's net revenues of $4.3 million in 1996 for three
facilities opened in 1995 which only had $900,000 of revenues in 1995, the
acquisition in December 1995 of three facilities representing $3.6 million and
the continued growth at existing facilities of $2.7 million.
FACILITIES EXPENSES. Facilities expenses for the year ended December 31,
1996 were $14.6 million compared to $6.8 million for the same period in 1995,
representing an increase of 114.8%. The increase was due to the greater number
of facilities in operation in 1996. As a percentage of net revenues, facilities
expenses increased to 78.8% for the year ended December 31, 1996 from 77.4% for
the same period in 1995. The increase as a percentage of revenues was due to the
lack of full patient utilization in 1996 at the facilities opened in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended December 31, 1996 were $2.7 million compared to $1.7 million
for the same period in 1995, representing an increase of 59.4%. The increase was
due to increased personnel and related expenses to support the greater number of
facilities in operation. As a percentage of net revenues, general and
administrative expenses decreased to 14.4% for the year ended December 31, 1996
from 19.1% for the same period in 1995. The decrease as a percentage of revenues
was due to an increase in net revenues from increased utilization of existing
facilities which did not require a proportionate increase in corporate overhead.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts for
the year ended December 31, 1996 was $1.3 million compared to $495,000 for the
same period in 1995, representing an increase of 161.2%. As a percentage of net
revenues, the provision for doubtful accounts increased to 7.0% for the year
ended December 31, 1996 from 5.6% for the same period in 1995. This increase was
due to increased revenue, a continuing evaluation of the collectible amounts
outstanding and an increase in Medicare patients without secondary insurance
resulting from the acquisition of three facilities in December 1995.
21
<PAGE> 24
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the year ended December 31, 1996 were $1.6 million compared to
$509,000 for the same period in 1995, representing an increase of 222.6%. As a
percentage of net revenues, depreciation and amortization expenses increased to
8.8% for the year ended December 31, 1996 from 5.8% for the same period in 1995.
This increase was due to the amortization and write-off of certain intangible
assets associated with the acquisition in 1996 of two facilities under
development and the acquisition and opening of new facilities in 1995.
NET INTEREST INCOME (EXPENSE). Net interest expense for the year ended
December 31, 1996 was $915,000 compared to $360,000 for the same period in 1995,
representing an increase of 154.2%. The increase of $555,000 was primarily due
to the increase in the Company's borrowings for working capital purposes.
Pursuant to the Subordinated Loan, $6.3 million and $4.8 million were
outstanding as of December 31, 1996 and 1995, respectively.
NET (LOSS). The Company had a net loss of $2.4 million for the year ended
December 31, 1996 compared to a net loss of $1.2 million for the same period in
1995, an increase of $1.2 million, or 106.3%.
YEARS ENDED DECEMBER 31, 1995 AND 1994
NET REVENUES. Net revenues for the year ended December 31, 1995 were $8.8
million compared to $2.7 million for the same period in 1994, an increase of
220.3%. The increase in net revenues of $6.1 million was primarily attributable
to an increase in utilization at facilities opened in 1994 totalling $4.9
million and facilities opened in 1995 totalling $1.1 million.
FACILITIES EXPENSES. Facilities expenses for the year ended December 31,
1995 were $6.8 million compared to $2.4 million for the same period in 1994,
representing an increase of 183.1%. The increase was due to the greater number
of facilities in operation in 1995. As a percentage of net revenues, facilities
expenses decreased to 77.4% for the year ended December 31, 1995 from 87.6% for
the same period in 1994. The decrease as a percentage of revenues was primarily
due to increased patient utilization at existing facilities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended December 31, 1995 were $1.7 million compared to $1.0 million
for the same period in 1994, representing an increase of 64.1%. The increase was
due to increased personnel and related expenses to support the greater number of
facilities in operation. As a percentage of net revenues, general and
administrative expenses decreased to 19.1% for the year ended December 31, 1995
from 37.3% for the same period in 1994. The decrease as a percentage of revenues
was primarily due to increases in net revenues from increased patient
utilization of existing facilities which did not require a proportionate
increase in corporate overhead.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts for
the year ended December 31, 1995 was $495,000 compared to $93,000 for the same
period in 1994, representing an increase of 432.3% . As a percentage of net
revenues, the provision for doubtful accounts increased to 5.6% for the year
ended December 31, 1995 from 3.4% for the same period in 1994. This increase was
due to increased revenues and the Company's evaluation of the collectible
amounts outstanding.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the year ended December 31, 1995 were $509,000 compared to $126,000
for the same period in 1994, representing an increase of 304.0%. As a percentage
of net revenues, depreciation and amortization expenses increased to 5.8% for
the year ended December 31, 1994 from 4.6% for the same period in 1994. This
increase was due to increased depreciation expenses resulting from the
development and opening of four facilities in 1995.
NET INTEREST INCOME (EXPENSE). Net interest expense for the year ended
December 31, 1995 was $360,000 compared to net interest income of $61,000 for
the same period in 1994, representing an increase of 690.2%. The increase of
$421,000 was primarily due to the increase in the Company's
22
<PAGE> 25
borrowings for working capital and expansion purposes. The Company entered into
the Subordinated Loan in June 1995. At December 31, 1995, the Company had
borrowed $4.8 million on such loan.
NET (LOSS). The Company had a net loss of $1.2 million for the year ended
December 31, 1995 compared to a net loss of $842,000 for the same period in
1994, an increase of $345,000, or 41.0%.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital for maintenance, refurbishing and expansion of
existing facilities, acquisitions, de novo developments, the integration of
newly developed and acquired facilities and working capital and general
corporate purposes. As of June 30, 1997, the Company had working capital of
approximately $3.3 million, of which $781,000 consisted of cash and cash
equivalents, compared to working capital and cash and cash equivalents of $2.4
million and $952,000 respectively at December 31, 1996. The Company intends to
finance its working capital requirements, as well as purchases of additional
equipment and leasehold improvements, from cash generated from operations, the
Company's secured line of credit ("Line of Credit"), the Lease Line, and through
the net proceeds of the Offering.
Net cash used in operating activities was $238,000 and $956,000 for the six
months ended June 30, 1997 and for the year ended December 31, 1996,
respectively. Net cash used in operating activities consists of the Company's
net loss, decreased by non-cash expenses such as depreciation, amortization and
the provision for doubtful accounts and adjusted by changes in components of
working capital, primarily accounts receivable. During 1996, the Company
performed an extensive review of its aged accounts receivable, including those
of acquired facilities, and adjusted amounts to expected collectibility, causing
the allowance for doubtful accounts to increase to 22% of gross receivables at
December 31, 1996 from 10% at December 31, 1995. Furthermore, an increased
emphasis upon collections of aged amounts resulted in the Company improving its
days sales outstanding from 125 to 114 to 106 days for the years ended December
31, 1995, 1996 and the six months ended June 30, 1997, respectively.
Once a de novo facility is operational, the Company is unable to bill for
services until it receives a Medicare provider number and the Medicare
intermediary installs its electronic billing software at the facility. For these
reasons, there is generally a 90-day delay before the Company will receive
payment on its initial services at such facility. The dialysis industry is
characterized by long collection cycles because Medicaid and private insurance
carriers require substantial documentation to support reimbursement claims and
often take a substantial amount of time to process claims. As a result, the
Company requires significant working capital to cover expenses during the
collection process. See "Risk Factors -- Need for Substantial Working Capital."
Net cash used in investing activities was $587,000 and $1.6 million for the
six months ended June 30, 1997 and the year ended December 31, 1996,
respectively. The Company's principal uses of cash in investing activities have
been related to purchases of new equipment and leasehold improvements for the
Company's existing facilities and the cost of development of additional
facilities. Currently, the four de novo facilities under various stages of
development have planned openings between the fourth quarter of 1997 and the
first quarter of 1998. These facilities require substantial cash outlay for
construction of leasehold improvements. The Company estimates that this
construction will cost approximately $1.8 million, of which the Company
anticipates using $1.6 million from the net proceeds of this Offering. The
balance of the cost of leasehold improvements will be obtained from borrowings
under the Company's Line of Credit. Additionally, the Company estimates that it
will finance approximately $1.2 million in equipment for these four facilities
through its Lease Line. See "Business -- Operations."
Net cash provided by financing activities for the six months ended June 30,
1997 was $654,000. This consisted primarily of $1.0 million from the Company's
Line of Credit, offset by payments on capital lease obligations. Net cash
provided by financing activities for the year ended December 31, 1996 was $2.3
million. The principal sources of cash from financing activities were $1.5
million in
23
<PAGE> 26
proceeds from the Company's Subordinated Loan and equity financings aggregating
$1.8 million through the sale of Series B Preferred Stock (net of redemptions)
and Common Stock in the year ended December 31, 1996. The proceeds from these
financings were reduced by payments of various debt obligations.
The Company has a Subordinated Loan which bears interest at 13.0% and
permitted borrowings of up to $12.5 million under certain circumstances during
the first two years of the term. The term for additional borrowing expired on
June 5, 1997. The Subordinated Loan contains certain restrictive covenants,
including financial covenants as to minimum net worth, leverage, and cash flows.
The Company was in default of the minimum net worth and cash flows covenants as
of December 31, 1995 and obtained a waiver of these defaults through April 30,
1996. Effective May 1, 1996, the Subordinated Loan agreement was revised as to
the minimum net worth and cash flows covenants. The Company was in default of
the cash flows covenant as of December 31, 1996 and obtained a waiver of this
default through December 31, 1996. Effective January 1, 1997, the Subordinated
Loan agreement was further revised as to the minimum net worth and cash flows
covenants. As of June 30, 1997, the Company was in compliance with the financial
covenants of the revised Subordinated Loan agreement. As of June 30, 1997 and
December 31, 1996, the Company had borrowed approximately $6.3 million on the
Subordinated Loan which will be repaid out of the net proceeds of the Offering.
Upon completion of this Offering, the outstanding balance and accrued interest
of the Subordinated Loan is required to be satisfied and the Subordinated Loan
will be terminated. See "Use of Proceeds."
The Company has a $4.0 million secured Line of Credit. Borrowings under the
Line of Credit are limited to 80% of the net collectible value of eligible
accounts receivable. As of June 30, 1997 and August 31, 1997, the borrowing base
availability was approximately $3.0 million, of which $1.0 million was
outstanding. The Line of Credit bears interest on the outstanding balance at the
prime rate, plus 2.0% (10.5% as of the date of this Prospectus). The Line of
Credit is for the development of dialysis facilities and for working capital and
general corporate purposes and is secured by the Company's accounts receivable.
The Line of Credit contains financial covenants relating to the maintenance of a
minimum net worth and specified net worth to debt ratios. These covenants do not
permit the sum of subordinated debt plus tangible net worth to be less than
$6,000,000 and do not permit the ratio of total liabilities minus subordinated
debt divided by tangible net worth plus subordinated debt to be greater than
1.2:1. As of June 30, 1997, the Company was in compliance with the financial
covenants contained in the Line of Credit. The Line of Credit also requires the
lender's approval for any acquisitions in excess of $5,000,000 in the aggregate
in any calendar year and for the payment of cash dividends. The Line of Credit
will continue to be available following completion of this Offering through its
expiration in August 1998.
The Company also has available a $6.0 million Lease Line with an equipment
financing company. The Lease Line is used primarily to finance dialysis related
equipment and furnishings at the Company's facilities and bears interest at the
five year U. S. Treasury bond yield rate plus 3.91% (10.12% as of the date of
this Prospectus). As of June 30, 1997 and December 31, 1996, the Company had
borrowed approximately $1.5 million on the Lease Line. The outstanding balance
on the Lease Line will be repaid out of the net proceeds of the Offering.
However, the Lease Line will continue to be available to the Company through its
expiration in August 2001.
The Company's long-term capital requirements will depend on numerous
factors, including the rate at which the Company develops or acquires new
facilities. In addition, the Company has various on-going needs for capital,
including: (i) working capital for operations (including financing receivables
as previously described); and (ii) routine capital expenditures for the
maintenance of facilities, and equipment and leasehold improvements. In order to
implement the Company's long-term growth strategy, the Company anticipates that
capital requirements will increase substantially from historical levels.
The Company anticipates that the consideration paid for the acquisition of
new facilities will consist of cash, promissory notes, assumption of liabilities
and/or the issuance of Common Stock or securities convertible into Common Stock.
The Company believes that the net proceeds of the Offering,
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<PAGE> 27
together with the Line of Credit, the Lease Line and internally generated funds,
will be sufficient to fund the Company's operations and to finance the Company's
growth strategy through the next 18 months. However, there can be no assurance
that the Company will not require substantial additional funds prior to such
time. See "Risk Factors -- Dependence upon Proceeds of Offering; Possible Need
for Additional Capital."
INCOME TAX LOSS CARRYFORWARDS
As of December 31, 1996, the Company had approximately $6.7 million of net
operating loss carryforwards that may be available to offset future taxable
income for federal income tax purposes. These net operating loss carryforwards
begin to expire in 2008. The Common Stock to be issued in connection with the
Offering should not materially limit the Company's utilization of its net
operating loss carryforwards.
POTENTIAL IMPACT OF INFLATION
A majority of the Company's net revenue is subject to reimbursement rates
which are regulated by the federal government and do not automatically adjust
for inflation. These reimbursement rates are adjusted periodically based on
certain factors, including Congressional budget limitations, inflation, consumer
price indexes and costs incurred in rendering the services. Historically,
adjustments to reimbursement rates have had little relation to the actual cost
of doing business.
The Company is not able to increase the amounts it bills for services
provided by its operations that are subject to Medicare and Medicaid
reimbursement rates. Operating costs, such as labor and supply costs, are
subject to inflation without corresponding increases in reimbursement rates.
Such increases may be significant and have a material adverse effect on the
Company's results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This statement is effective for financial statements issued for
periods ending after December 15, 1997, and earlier application is not
permitted. This statement requires restatement of all prior-period EPS data
presented. The Company will adopt SFAS 128 in the fourth quarter of the year
ending December 31, 1997. The pro forma basic (loss) per share and diluted
(loss) per share calculated in accordance with SFAS 128 for the fiscal years
ended December 31, 1994, 1995 and 1996, and the six months ended June 30, 1997,
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- --------------
1994 1995 1996 1996 1997
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Pro forma basic (loss) per share............. $(.48) $(.61) $(.84) $(.35) $(.13)
Pro forma diluted (loss) per share........... $(.48) $(.61) $(.84) $(.35) $(.13)
</TABLE>
Other recently issued accounting standards may affect the Company's
Consolidated Financial Statements in the future. See Consolidated Financial
Statements and Notes thereto.
25
<PAGE> 28
BUSINESS
Renex Corp. ("Renex" or the "Company"), which was established in July 1993,
is a high quality provider of dialysis and ancillary services to patients
suffering from chronic kidney failure, generally referred to as end stage renal
disease ("ESRD"). The Company has grown primarily through de novo development
and more recently through acquisitions, and seeks to distinguish itself on the
basis of quality patient care and responsiveness to the professional needs of
its referring nephrologists. The Company currently provides dialysis services to
approximately 800 patients in seven states, through twelve outpatient dialysis
facilities and two staff-assisted home dialysis programs. Each outpatient
facility is operated through a separate wholly-owned subsidiary. Additionally,
the Company provides inpatient dialysis services at five hospitals. The Company
intends to accelerate the penetration of its existing markets through a
combination of acquisitions and de novo development and to enter new markets,
primarily through acquisitions, in which the Company believes it can establish
significant market share over time.
THE DIALYSIS INDUSTRY
END STAGE RENAL DISEASE
ESRD is the state of advanced chronic kidney disease that is characterized
by the irreversible loss of kidney function. A normal human kidney removes waste
products and excess water from the blood, preventing water overload, toxin
buildup and eventual poisoning of the body. Chronic kidney disease can be caused
by a number of conditions, including inherited diseases, diabetes, hypertension
and other illnesses. Patients suffering from ESRD require routine dialysis
treatments or kidney transplantation to sustain life. Transplantation is
severely limited due to scarcity of suitable organ donors, the incidence of
organ transplant rejection and the ineligibility of many ESRD patients for
transplantation due to health and age. As a result, the vast majority of ESRD
patients must rely on dialysis for the remainder of their lives.
According to the Health Care Financing Administration ("HCFA"), the number
of patients requiring chronic kidney dialysis services in the United States has
increased from 66,000 patients in 1982 to over 200,000 patients in 1995.
According to the National Institutes of Health, the number of ESRD patients is
projected to reach 300,000 by the year 2000. HCFA estimates that the national
incidence rate of new cases of ESRD in 1995 was approximately 253 patients per
million when considering all age groups, but was 1,097 patients per million in
individuals age 65 to 74, and 1,035 patients per million in individuals age 75
and over. The Company attributes the growth in the number of ESRD patients
principally to: (i) the aging of the U.S. population; (ii) better treatment and
longer survival of patients suffering from diabetes, hypertension, and other
illnesses that lead to ESRD; and (iii) improved dialysis technology which has
enabled dialysis to be provided to older patients and patients who previously
could not tolerate dialysis due to their physical condition.
According to HCFA, total spending for ESRD in the United States in 1995 was
an estimated $13.1 billion, of which Medicare paid an estimated $9.7 billion.
The Company estimates that approximately $6.0 billion of the $13.1 billion was
spent on dialysis and ancillary services. Since 1972, most ESRD patients in the
United States have been entitled to Medicare benefits, regardless of age or
financial circumstances. Currently, 93% of all ESRD patients in the United
States are receiving Medicare reimbursement for treatment.
NEPHROLOGISTS
Nephrology is a subspecialty within the specialty of internal medicine.
Nephrologists specialize in the management of all forms of kidney-related
ailments and the administration of related services. Nephrologists typically are
the primary care physicians for ESRD patients. As specialists, nephrologists
provide consultation services to other physicians' patients who suffer from
kidney-related ailments. They also examine and treat pre-ESRD patients.
Nephrologists serve as the primary gatekeepers of ESRD patients and, in
consultation with their patients, play a significant role in determining which
dialysis facilities and hospitals will be used by such patients. While managed
care directs a small
26
<PAGE> 29
minority of these patients (estimated by HCFA at 3% in 1995), nephrologists
direct the vast majority of patients.
DIALYSIS FACILITIES; TREATMENTS AND STAFF
FACILITIES. Patients with ESRD generally receive dialysis treatment
through a dialysis facility, which may be a free-standing or a hospital-based
outpatient facility. Most dialysis facilities offer a range of services to ESRD
patients, including: dialysis treatments; provision of supplies and equipment;
patient, family and community training and education; insurance counseling;
billing services; dietary counseling and social services support. In 1995, there
were over 2,800 dialysis facilities in the United States, of which approximately
71% were free-standing and approximately 29% were hospital-based outpatient
facilities. The primary function of dialysis facilities is to provide ESRD
patients with life sustaining kidney dialysis, including both hemodialysis and
peritoneal dialysis. Patient care is provided by a team of dialysis
professionals.
HEMODIALYSIS. HCFA estimates that as of December 31, 1995, approximately
84% of ESRD patients in the United States were receiving hemodialysis treatments
(83% in outpatient facilities and 1% in the home). Hemodialysis uses an
artificial kidney, called a dialyzer, to remove certain toxins and fluid from
the patient's blood and a machine to control external blood flow and to monitor
certain vital signs of the patient. Hemodialysis patients are connected to a
dialysis machine via a vascular access device. The dialysis process occurs
across a semipermeable membrane that divides the dialyzer into two distinct
chambers. While the blood is circulated through one chamber, a premixed
dialysate solution is circulated through the other chamber. The toxins and
excess fluid from the blood cross the membrane into the dialysate solution. A
typical hemodialysis treatment lasts three to four hours and is administered
three times per week. During the dialysis procedure, patients generally remain
seated next to the hemodialysis machine, but are able to read, watch television
(if available) or converse with other patients or clinic staff. Most clinics
provide some flexibility in scheduling (such as evening and weekend hours) to
minimize disruption to the patients' lives. In certain cases, hemodialysis may
also be performed at home for patients who are medically suitable and have a
willing and capable assistant. Home hemodialysis requires training for both the
patient and the caregiver, and requires monitoring by a designated outpatient
facility.
PERITONEAL DIALYSIS. As of December 31, 1995, HCFA estimates that
approximately 16% of all ESRD patients were receiving peritoneal dialysis in the
home, under the supervision of an outpatient facility. There are several
variations of peritoneal dialysis. The most common forms are continuous
ambulatory peritoneal dialysis ("CAPD") and continuous cycling peritoneal
dialysis ("CCPD"). All forms of peritoneal dialysis use the patient's peritoneal
(abdominal) cavity to eliminate fluid and toxins from the patient's blood. CAPD
utilizes a sterile, pharmaceutical grade dialysate solution, which is introduced
into the patient's peritoneal cavity through a surgically implanted catheter.
Toxins in the blood continuously cross the peritoneal membrane into the
dialysate solution. After several hours, the patient must drain and replace the
fluid. CCPD is performed in a manner similar to CAPD but utilizes a mechanical
device to cycle the dialysate solution while the patient is sleeping. Peritoneal
dialysis patients are closely monitored by the designated dialysis facility,
either through periodic (at least monthly) visits to the facility or through
visits to the patient's home by a dialysis facility nurse.
PATIENT CARE PROFESSIONALS. ESRD patients are generally under the care of
a nephrologist, who is typically supported by a team of dialysis professionals,
including:
Patient Care Personnel. Patient care personnel include registered nurses
and patient care technicians who work under the supervision of registered
nurses. Patient care personnel administer the dialysis treatment in accordance
with the nephrologist's prescriptions. Nurses also assess the patient's
condition throughout treatment, administer all medication, provide psycho-social
assessments, and educate patients regarding their treatment.
Dieticians. Dialysis patients in general, and hemodialysis patients in
particular, must follow a restricted diet. The effectiveness and the efficiency
of each patient's dialysis treatment is influenced by
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<PAGE> 30
the patient's compliance with these dietary restrictions. In addition, many
dialysis patients receive a complex regimen of nutritional supplements to
augment their diet. Dialysis facilities generally employ dieticians who are
responsible for designing a patient's diet, educating and training the patient
about the importance of the diet, and continually monitoring the patient's
nutritional status and compliance with dietary guidelines.
Social Workers. Federal regulations require that a social worker, having a
masters degree in social work and a background in clinical practice, provide
assessment and counseling to ESRD patients and their families. Social workers
are also required to assist ESRD patients in obtaining transportation to and
from the dialysis facility, financial support services from government and
private sources when needed, insurance and dialysis services when traveling away
from home.
BUSINESS STRATEGY
The Company's goal is to continue expanding its geographic coverage and
market penetration while maintaining high quality patient care and physician
satisfaction with its services. Renex intends to enter new markets primarily
through acquisitions and to penetrate existing markets primarily through de novo
development, same facility growth and the establishment of alliances with
hospitals and managed care organizations. The key elements of the Company's
strategy include the following:
CREATE AND EXPAND REGIONAL NETWORKS
The Company's growth strategy is focused on establishing local clusters of
dialysis facilities in order to create strong regional networks. Renex has
targeted seven markets, in which the Company currently has operations, for the
development of regional networks. The Company intends to continue to grow these
regional networks through a combination of strategic acquisitions and de novo
development. Additionally, Renex intends to enter new markets, primarily through
acquisitions, where it believes it can establish significant market share over
time.
ACQUISITIONS. While the dialysis industry is undergoing significant
patient and facility growth, it is also undergoing consolidation in the number
of providers. The Company believes that many physician-owners are selling their
facilities to gain relief from the administrative burdens associated with
changing government regulations and changing patterns of reimbursement, to focus
their efforts on patient care and to realize a more immediate return on their
investment. In addition, increasing pressures within the hospital industry,
which is also undergoing consolidation, are motivating hospitals to sell or
outsource the management of their dialysis facilities as they re-focus on their
core businesses. Renex seeks to capitalize on these trends by acquiring both
physician-owned and hospital-based outpatient dialysis facilities.
The Company evaluates potential acquisitions on the basis of historical and
projected patient volumes and profitability, the state of the local competitive
environment, the nephrologist's reputation for quality and the willingness of
the physician-owner to remain actively involved as medical director. The Company
intends to focus primarily on acquisitions of facilities with 70 or more
patients owned by mid-career nephrologists who intend to continue to build their
nephrology practices. The purchase price is based on projected earnings of the
acquired facility under the Company's management and the consideration will
generally be paid in a combination of cash and stock. Renex believes that this
combination meets the nephrologists' immediate cash needs and offers the
nephrologists a possible greater overall long-term return through the potential
appreciation in the value of the stock.
DE NOVO DEVELOPMENT. Since inception, the Company has grown primarily
through an aggressive de novo development strategy. This strategy has led to the
development of eight dialysis facilities in five markets. The Company intends to
continue using this strategy primarily in its existing markets, where its
reputation attracts additional referring nephrologists.
In establishing de novo facilities, the Company first seeks to attract one
or more nephrologists whose existing patient base and projected growth supports
the establishment of a new facility. The
28
<PAGE> 31
Company will not develop a facility unless it has a written agreement with a
local nephrologist to serve as medical director for a minimum of five years.
Because one or a few nephrologists account for all or a significant portion of a
facility's patients, the Company's selection of a specific site is determined,
in part, by the location of the physician selected as the facility's medical
director. The Company also analyzes patient density and locations of competing
facilities by postal zip code to identify the best location to service the
medical director's patients and to attract additional patients who may be
traveling longer distances to receive treatment at competitors' facilities. Once
an appropriate site has been obtained, the Company employs its knowledge and
experience to design and build a new facility within a few months.
SAME-FACILITY GROWTH. The Company seeks to achieve same-facility growth in
excess of the growth rate of the ESRD patient population by marketing its
services to additional community and hospital-based nephrologists. Marketing
emphasis is placed on the quality of services provided, convenience of locations
and commitment to meeting the professional needs of nephrologists. In order to
facilitate the transfer to, and enrollment and care of, patients at its
facilities, the Company continually strives to simplify its processes for
admitting new patients, monitoring patient progress and updating patient
treatment orders. The Company also attracts patients through patient-to-patient
referrals, local print and other advertising and open house events. The
Company's attention to facility design, equipment selection and patient
amenities, such as individual television sets at each patient treatment station,
VCR equipment for patient education and entertainment and portable telephones,
are important factors in retaining patients and fostering patient-to-patient
referrals.
ESTABLISH ALLIANCES WITH HOSPITALS AND MANAGED CARE ORGANIZATIONS
Although the vast majority of ESRD patients receive dialysis on an
outpatient basis, hemodialysis is also performed by hospitals on an inpatient
basis, generally in an acute care setting. The Company's strategy is to leverage
its relationships with nephrologists to identify hospitals which are: (i)
seeking to outsource their existing dialysis programs; (ii) interested in
establishing inpatient dialysis programs; or (iii) dissatisfied with their
current dialysis contractors. The Company's facility administrators are
responsible for marketing to local hospitals on the basis of quality, service
and price. The Company has two hospital contracts in Mississippi and, in 1996,
established two new hospital inpatient programs, one each in Massachusetts and
Pennsylvania. The Company recently signed a contract to establish a new
inpatient dialysis program in a community hospital in New Jersey, subject to the
hospital's receipt of regulatory approval.
Renex believes that managed care programs will have an increasing influence
on the ESRD market. The Company is committed to establishing managed care
relationships through non-exclusive and semi-exclusive managed care contracts in
its markets. The Company believes that its strategy of clustering facilities,
and thus providing multiple sites to serve managed care patients, will enhance
the Company's ability to compete for managed care contracts. The Company's
facility administrators are responsible for identifying and negotiating managed
care contracts. The Company currently has non-exclusive managed care contracts
in most of its markets.
CAPITALIZE ON RELATIONSHIPS WITH NEPHROLOGISTS
Renex believes that its success is attributable to the Company's efforts to
identify and cultivate relationships with those nephrologists who have a rapidly
expanding patient base and who are seeking an association with a company known
for high quality patient care and sensitivity to physicians' professional
concerns. Since inception, Renex has managed its business based on a set of
guiding principles that recognize nephrologists as the Company's primary
customer and high quality patient care as the nephrologist's primary concern.
These principles include: (i) involving the nephrologist in all aspects of
designing, equipping, staffing and planning the clinical operating policies and
procedures of a Renex facility; (ii) avoiding corporate interference in the
nephrologist's medical decisions; (iii) treating the nephrologist's patients
with dignity and respect; (iv) assessing and responding to the nutritional,
psychological and social needs of patients; (v) creating an environment which
fosters
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<PAGE> 32
patient wellness and safety; and (vi) developing long-term care plans with an
emphasis on returning the nephrologist's patients to the community at the
patient's highest level of independent living.
Renex believes that its guiding principles appeal to nephrologists and help
facilitate their recruitment as medical directors. The Company has developed
marketing materials based on these principles and actively markets to
nephrologists through journal advertising, direct mail and personal networking,
including third-party introductions by the Company's existing medical directors.
OPERATIONS
OUTPATIENT FACILITIES
As of August 31, 1997, the Company operated twelve outpatient dialysis
facilities, with a total of 187 certified dialysis stations. All of the
facilities are operated through wholly-owned subsidiaries and are located in
leased premises. The following table sets forth selected information regarding
the Company's dialysis facilities:
<TABLE>
<CAPTION>
NUMBER OF TREATMENTS(1)
--------------------------------------------
SIX MONTHS
DATE OF CURRENT YEARS ENDED DECEMBER 31, ENDED
OPENING/ NUMBER OF -------------------------- JUNE 30,
LOCATION OF FACILITY ACQUISITION STATIONS 1994 1995 1996 1997
- -------------------------- ------------- --------- ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
University City, MO March 1994 21 7,252 14,462 17,251 9,807
Pittsburgh, PA May 1994 20 1,357 4,673 6,941 4,557
Tampa, FL August 1994 14 1,481 6,455 8,730 4,248
Creve Coeur, MO November 1994 17 170 4,058 7,342 4,231
Amesbury, MA May 1995 16 -- 2,692 7,473 5,328
Philadelphia, PA August 1995 17 -- 741 6,217 4,013
Bridgeton, MO August 1995 13 -- 621 5,652 3,760
Jackson, MS(2) December 1995 18 -- -- 6,864 3,755
Delta, LA(2) December 1995 9 -- -- 8,008 3,599
Port Gibson, MS(2) December 1995 8 -- -- 2,719 1,608
Orange, NJ(2) November 1996 20 -- -- 593 5,685
Woodbury, NJ December 1996 14 -- -- 129 2,373
--- ------ ------ ------ ------
TOTAL 187 10,260 33,702 77,919 52,964
=== ====== ====== ====== ======
</TABLE>
- ---------------
(1) Treatments listed opposite a facility include all outpatient hemodialysis
treatments, home hemodialysis treatments, acute care treatments provided at
hospitals located near such facilities and peritoneal dialysis treatments.
Peritoneal dialysis treatments are stated in hemodialysis equivalents.
Excludes treatments provided by a facility sold by the Company in September
1996.
(2) Facilities acquired by the Company. Only treatments rendered after
acquisition of the facility are included in the table.
The Company has four additional facilities under development located in
North Andover, Massachusetts; Union, Missouri; Maplewood, Missouri; and
Bloomfield, New Jersey. Construction of leasehold improvements for the North
Andover facility is near completion and is scheduled to open in October 1997.
The building in which the Union facility will be located is under construction,
with leasehold improvements scheduled to be constructed during the fourth
quarter of 1997, and the Maplewood and Bloomfield facilities are in the
pre-construction phase with architectural drawings for the locations being
completed. The Maplewood facility is scheduled to open in December 1997, and the
Union and Bloomfield facilities are scheduled to open during the first quarter
of 1998. The Company estimates that it will require cash outlays of $1.8 million
for the construction of leasehold improvements and expects to use $1.6 million
from the proceeds of this Offering and the remainder from its Line of Credit.
The Company expects to finance approximately $1.2 million in equipment for these
facilities through its Lease Line. See "Use of Proceeds", "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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<PAGE> 33
OPERATION OF FACILITIES
The Company's dialysis facilities are designed specifically for outpatient
hemodialysis and for the training of peritoneal dialysis and home hemodialysis
patients. Each facility has between eight and 21 dialysis stations and many
facilities are designed to accommodate additional stations as patient census
increases. In addition, each facility generally contains a reception room, a
patient preparation area, a nurse's station, a patient examination room, a
patient training room, a water treatment room, a dialyzer reprocessing room,
staff work areas, offices, a kitchen, a supply room, and a lounge. All of the
Company's facilities contain state-of-the-art equipment and modern
accommodations and are typically located near public transportation. The
facilities are designed to provide a pleasant and comfortable environment for
each patient and include such amenities as color television sets for each
patient station, VCRs for patient education and entertainment, and portable
telephones.
Each facility is managed by a full time professional administrator with
experience in the dialysis industry. Each administrator is supported by a
director of nursing, nursing professionals, social workers, dieticians,
technicians and clerical support staff. In accordance with Medicare regulations,
each facility is supervised by a practicing physician, typically a nephrologist,
who serves as medical director. The medical director is responsible for
implementing the Company's policies and procedures to assure high quality
patient care. The medical director's responsibilities also include patient
education, recommendation of appropriate equipment, development of staff
training programs and community relations.
The Company also offers peritoneal dialysis, both CAPD and CCPD, at all of
its facilities. Such services consist of patient training, the provision of
equipment and supplies, patient monitoring and follow-up assistance to patients
who prefer and are able to receive this form of dialysis. Patients and their
families or other caregivers are trained over a two week period by a registered
nurse to perform peritoneal dialysis.
STAFF-ASSISTED HOME HEMODIALYSIS SERVICES
In addition to the Company's outpatient dialysis facilities, the Company
provides staff-assisted home hemodialysis services in St. Louis, Missouri and
Tampa, Florida. In these programs, the Company provides dialysis equipment,
supplies and a fully qualified nurse or technician who administers the
hemodialysis treatments in the patient's home three times per week on a schedule
convenient to the patient.
INPATIENT DIALYSIS SERVICES
The Company provides inpatient dialysis services to five hospitals pursuant
to contracts negotiated with the hospitals for per-treatment rates paid directly
by the hospitals. The Company also has one additional contract with a hospital
to provide acute dialysis services once the hospital receives state approval for
the program. In most instances, the Company provides the dialysis equipment and
supplies to the hospital and administers the dialysis treatment when requested.
Examples of cases in which inpatient services are required include patients with
acute kidney failure resulting from trauma or other causes, newly diagnosed but
clinically unstable ESRD patients and ESRD patients who require hospitalization.
ANCILLARY SERVICES
The Company provides a full range of ancillary services to ESRD patients,
the most prominent of which is the physician prescribed administration of
bioengineered erythropoietin ("EPO"). EPO is a substitute for the natural
protein, erythropoietin, which is secreted by the kidneys and stimulates the
production and development of red blood cells. Low levels of erythropoietin in a
patient's blood often result in anemia. EPO is useful in the treatment of anemia
associated with ESRD and reduces the need for blood transfusions. Substantially
all ESRD patients receive EPO in dosages varying with a patient's weight and
blood count. Overall, the Company derived approximately one-third of its net
revenues for
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<PAGE> 34
the year ended December 31, 1996 from the provision of ancillary services. The
majority of such net revenues were from the administration of EPO. EPO is
produced by only one manufacturer. Although the Company has not experienced any
difficulty in obtaining supplies of EPO, there can be no assurance that the
Company will be able to obtain sufficient supplies at reasonable prices, or at
all. See "Risk Factors -- Dependence on Sole Supplier for EPO."
Other ancillary services that the Company provides to its ESRD patients
include electrocardiograms, bone densitometry studies, nerve conduction studies,
chest x-rays, blood transfusions and the administration of pharmaceutical
products specific to ESRD, such as iron dextran (an intravenous iron
supplement), calcitriol (an intravenous calcium supplement) and intradialytic
parenteral nutrition ("IDPN"). Effective July 1, 1997, routine coverage by
Medicare for electrocardiograms, bone densitometry studies, nerve conduction
studies and chest x-rays was eliminated. Medicare continues to pay for these
tests only when there is documentation of medical necessity. These specific
ancillary services represented approximately 2% of the Company's net revenues
for each of the years ended December 31, 1994, 1995 and 1996 and for the six
months ended June 30, 1996 and 1997. The Company does not anticipate a
significant reduction in these net revenues as a result of the change requiring
medical necessity documentation. See "Risk Factors -- Dependence upon Government
Reimbursement."
MEDICAL DIRECTORS
Medicare regulations mandate that, in order to receive reimbursement under
the Medicare ESRD program, the dialysis facility must be "under the general
supervision of a Director who is a physician." Generally, the medical director
must be certified or board eligible in internal medicine, with at least twelve
months of training or experience in the care of ESRD patients at dialysis
facilities. Some facilities may also have associate medical directors.
Medical directors and associate medical directors enter into written
agreements with the Company which specify their duties and establish their
compensation. Compensation is fixed for periods of one year or more, is
separately negotiated for each facility, and generally depends upon competitive
factors in the local market and the medical director's professional
qualifications and responsibilities. Agreements between the Company and its
medical directors have a minimum term of five years and may extend for as much
as ten years. Under these agreements, the Company pays its medical directors a
base monthly compensation. Medical director agreements, to the extent permitted
by law, restrict the medical director from acting as a medical director, owner
or equity holder in competing dialysis facilities within a specific geographic
area, but do not prohibit the physician from providing direct patient care
services at other locations and do not require, or otherwise compensate the
physician for referrals of patients to the facility.
In connection with acquisitions, the Company generally requires
non-competition agreements from the sellers, whether physicians or otherwise.
Such non-competition agreements prohibit such sellers from owning, operating,
maintaining or otherwise participating in competing facilities within specific
geographic areas, and extend for periods of two to ten years. See "Risk
Factors -- Operations Subject to Extensive Government Regulation" and "Risk
Factors -- Dependence upon Physician Referrals."
QUALITY ASSURANCE
Renex has established a system-wide quality assurance process, which
includes its Continuous Quality Improvement ("CQI") program, to ensure that a
high standard of care is provided to all of the Company's patients. The CQI
program is modeled after the Joint Commission on Accreditation of Healthcare
Organization's ten step process. The CQI program is implemented at the facility
level by the medical director, clinic administrator and director of nursing.
This process involves the continuous collection and analysis of patient care
data to identify areas for improvement and to monitor progress of previously
implemented measures. Each facility regularly audits its quality of care and
equipment to ensure that all aspects of patient care meet the standards set by
the Company's corporate office. The Company manages the CQI program at the
corporate level through the compilation and analysis of all facilities'
statistical data. These data are used to compare the Company's overall
performance and each
32
<PAGE> 35
facility's specific performance to the national core indicators established for
the dialysis industry by HCFA and the regional ESRD networks. Results of these
comparisons are used to effect Company-wide improvements.
Additional quality assurance support is provided by the Company's corporate
office through a quality assurance department. The department develops, monitors
and audits the quality standards of each dialysis facility on an ongoing basis
through reporting mechanisms and site inspections to ensure the facilities meet
the regulations of HCFA and the Occupational Safety and Health Administration.
SOURCES OF REIMBURSEMENT
The following table provides information regarding the percentage of net
revenues received by the Company by source:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
----------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Medicare/Medicaid.................................... 65.0% 58.5% 67.2% 67.4% 76.2%
Private/Managed Care Payors.......................... 35.0 41.5 30.9 31.2 20.9
Hospital Inpatient Dialysis Services................. -- -- 1.9 1.4 2.9
----- ----- ----- ----- -----
Total....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The Company obtains a substantial portion of its reimbursement under a
prospective Medicare reimbursement system for dialysis services provided to ESRD
patients. The Social Security Act ("SSA") provides Medicare coverage for
individuals who are medically determined to have ESRD. ESRD is currently defined
in federal regulations as that stage of kidney impairment that appears
irreversible and permanent and requires a regular course of dialysis or kidney
transplantation to maintain life. Once an individual is medically determined to
have ESRD, the SSA specifies that one of two conditions must be met before
entitlement begins: (i) a regular course of dialysis must begin; or (ii) a
kidney transplant must be performed. The SSA provides that entitlement begins 90
days after the month in which a regular course of dialysis is initiated.
Under the Medicare ESRD program, reimbursement rates per treatment are
fixed in advance and have been adjusted from time to time by the U.S. Congress.
Payment for dialysis services is based on a prospective system which was
implemented by HCFA in 1972. Providers are paid a base reimbursement rate per
dialysis treatment (the "Composite Rate"). The Composite Rate constitutes
payment for all routinely provided supplies, drugs, tests and services incident
to dialysis. Other dialysis related ancillary services, including certain drugs
(such as EPO), blood transfusions and certain tests ordered by physicians, are
separately reimbursed in accordance with Medicare's reimbursement policies.
Although this form of reimbursement limits the allowable charge per treatment,
it provides the Company with predictable and recurring per treatment net
revenue. Medicare, through its carriers, pays 80% of the amounts set by the
Medicare prospective reimbursement system. The remaining 20% is paid by
Medicaid, secondary private insurance coverage, if any, and/or the patient.
From time to time, the U.S. Congress adjusts the applicable Composite Rate
and fees based upon a review of several factors, including provider cost data
from prior years. Prior to 1983, the average Composite Rate was established at
$138 per treatment. In 1983, the average Composite Rate was reduced to $127 per
treatment for free-standing outpatient dialysis facilities. In 1986, the average
Composite Rate was further reduced to $125 per treatment. In January 1991, the
average composite rate was increased to $126, the current level. The Composite
Rate varies from region to region based on regional wage variations.
The Composite Rate has been the subject of a number of reports and studies.
In April 1991, the Institute of Medicine, an organization chartered by the
National Academy of Sciences and an advisor to the federal government, released
a report recommending that the Composite Rate be adjusted for the effects of
inflation. In March 1996, after conducting a study on dialysis costs and
reimbursement at
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<PAGE> 36
the request of the U.S. Congress, the Prospective Payment Assessment Commission
recommended a 2% increase be made in the Composite Rate. The U.S. Congress is
not required to implement either of these recommendations and can either raise
or lower the reimbursement rate. The Company is unable to predict what, if any,
future changes may occur in the Composite Rate. Any reductions in the Composite
Rate could have a material adverse effect on the Company's business, financial
condition and results of operations.
One ancillary item that provides the Company with significant net revenues
is the provision of EPO. In June 1989, Medicare started reimbursement for EPO
treatments at the rate of $40 per treatment up to 10,000 units and $70 for
treatments in excess of 10,000 units. In January 1991, Medicare reimbursement
rates were changed to $11 per 1,000 units with no maximum and later reduced to
$10 per 1,000 units in 1993. Currently, the administration of EPO is reimbursed
only for patients whose average hematocrit levels over a 90 day period are 36%
or less, which include the vast majority of dialysis patients. Hematocrit is the
measurement of the concentration of oxygen-carrying red blood cells in a
patient's bloodstream. The EPO Medicare reimbursement rate may be adjusted
annually to reflect cost of living changes.
In its Fiscal Year 1997 Work Plan, the Office of Inspector General ("OIG")
of the Department of Health and Human Services ("HHS") stated that it may
recommend cuts in reimbursement rates for EPO because preliminary results of its
study of EPO indicated that dialysis facilities' purchase price of EPO is less
than the current reimbursement rate. The Company cannot predict future changes
in the reimbursement rate for the administration of EPO, the future
reimbursement dosage limit per administration, or the cost of the drug. Any
reductions in reimbursement, dosage limitations, or increases in the cost of the
drug could have a material adverse effect on the Company's business, financial
condition and results of operations.
In March 1996, HCFA published a request for proposals ("RFP"), requesting
bids from managed care companies to participate in a three year test program for
the comprehensive treatment of ESRD patients, including dialysis, kidney
transplantation, physician and hospital services. Currently, managed care
companies are only permitted to arrange for the treatment of existing members of
their programs who develop ESRD subsequent to their enrollment in the managed
care plan. HCFA selected four managed care companies that will be allowed to
recruit ESRD patients beginning in mid-1997 in a test program. One managed care
company subsequently withdrew from the test program and will not be replaced.
The results of the test program will determine whether HCFA will open up the
market to additional managed care companies. The RFP includes a proposed
capitation payment scale for ESRD patients. HCFA will also require that the
managed care companies offer certain extra services including rehabilitation
counseling, free transportation to physicians' offices and discounted
prescription drugs to all ESRD patients. The Company is unable to predict
whether the HCFA test program will be successful and result in large numbers of
ESRD patients enrolling in managed care programs, or the impact, if any, of such
enrollment on the Company's operations. The widespread introduction of managed
care to the dialysis industry could result in a change of the reimbursement
rates for the Company's services, which could have a material effect on the
Company's business, financial condition and results of operations.
MEDICARE ELIGIBILITY. Medicare laws provide that any individual,
regardless of age, who has no primary insurance coverage from a private
insurance company and is diagnosed as having ESRD is automatically covered under
Medicare if he or she is Medicare eligible and applies for coverage. Coverage
varies depending upon the age of the patient and the status of other insurance
coverage. For ESRD patients over age 65, who are not covered by an employer
group health insurance plan, Medicare coverage commences immediately. For ESRD
patients over age 65 who are covered by an employer group health plan, Medicare
coverage begins after an 18 month coordination of benefits period.
For ESRD patients under age 65 who are not covered by an employer group
health insurance plan, Medicare coverage begins 90 days following the month in
which the patient begins dialysis. During the first 90 days, Medicaid (if the
patient is eligible), private insurance, or the patient is responsible for
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<PAGE> 37
payment for dialysis services. If an ESRD patient who is not covered by an
employer group health plan begins home dialysis training during the first 90
days of dialysis, Medicare immediately becomes the primary payor.
Effective August 5, 1997, as part of the Balanced Budget Act of 1997, ESRD
patients under age 65 who are covered by an employer group health insurance plan
must wait 33 months (consisting of the three months' entitlement waiting period
described above and an additional 30 months coordination of benefits period)
before Medicare becomes the primary payor. During the 33 month period, the
employer group health plan is responsible for paying primary benefits at its
negotiated rate or, in the absence of such a rate, at the Company's usual and
customary charges. Medicare generally pays the difference between what is paid
by the employer group health plan and the gross amount payable by Medicare.
Following such 33 month period, Medicare becomes the primary coverage and the
group insurance becomes secondary. If an ESRD patient who is covered by an
employer group health plan elects home dialysis training during the first 90
days of dialysis, Medicare becomes the primary payor after 30 months.
MEDICAID REIMBURSEMENT. Medicaid programs are state administered programs
partially funded by the federal government. These programs are intended to
provide coverage for patients whose income and assets fall below state defined
levels and who are otherwise uninsured. In certain states, Medicaid serves as
the primary payor for patients who are not eligible for Medicare benefits. The
programs also serve as supplemental insurance programs for the Medicare
co-insurance portion and provide coverage for certain services that are not
covered by Medicare. State regulations generally follow Medicare reimbursement
levels and coverages without any co-insurance amounts. Certain states, however,
require beneficiaries to pay a monthly share of the cost based upon levels of
income or assets. The Company is a licensed ESRD Medicaid provider in all states
in which it does business.
PRIVATE PAYOR REIMBURSEMENT/ACUTE CARE CONTRACTS. The Company receives
reimbursement from private payors for ESRD treatments and ancillary services
prior to Medicare becoming the primary payor, at rates which can be
significantly higher than the per treatment rate set by Medicare. After Medicare
becomes a patient's primary payor, private payors become secondary payors and
generally reimburse the Company for the 20% of the Medicare allowable rate not
paid by Medicare. The Company has also negotiated non-exclusive managed care
contracts in certain markets with certain payors at rates which range from the
Medicare composite rate to significantly higher amounts. The Company also
receives payments for the provision of dialysis services from several hospitals
under acute care contracts at rates significantly higher than the Medicare
composite rate.
GOVERNMENT REGULATION
GENERAL
The Company's operations are subject to extensive government regulation at
the federal, state and local levels. These government regulations require, among
other things, that the Company meet various standards governing the construction
and management of facilities, personnel, maintenance of proper records,
equipment and quality assurance programs. In order to receive Medicare
reimbursement, dialysis facilities must be certified by HCFA and are subject to
periodic inspection to assure compliance with applicable regulations. HCFA's
approval is also required for the addition of dialysis stations at existing
facilities. All of the Company's facilities are certified by HCFA.
All states have specific regulations governing dialysis services. These
regulations vary from state to state and many include approval of owners and
construction plans, licensure of facilities, inspections or certificates of need
("CON"). Except for its facilities located in Mississippi and Missouri, the
Company does not presently operate in any state which has an applicable CON law.
However, the Company may in the future acquire or develop facilities in such
states. In such event, the Company would apply for approval through the
applicable CON process and comply with all applicable licensing requirements.
35
<PAGE> 38
Any loss by the Company of its federal certifications, its authorization to
participate in the Medicare or Medicaid programs or its licenses under the laws
of any state or other governmental authority from which a substantial portion of
its net revenues is derived or a change resulting from health care reform
reducing dialysis reimbursement or reducing or eliminating coverage for dialysis
services would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that the
health care services industry will continue to be subject to intense regulation
at the federal, state and local levels, the scope and effect of which cannot be
predicted. No assurance can be given that the activities of the Company will not
be reviewed and challenged by government regulators or that health care reform
or budget initiatives will not result in a material adverse change to the
Company.
FRAUD AND ABUSE
ANTI-KICKBACK STATUTE. The Company's operations are subject to the illegal
remuneration provisions of the federal SSA governing federally funded health
care programs, including Medicare and Medicaid, and similar state laws that
impose criminal penalties and civil sanctions on persons who knowingly and
willfully solicit, offer, receive or pay any remuneration, whether directly or
indirectly, in return for, or to induce, the referral of a patient for
treatment, or, among other things, the ordering, purchasing, or leasing of items
or services that may be paid for in whole or in part by Medicare, Medicaid or
similar state programs. Violations of the federal anti-kickback statute are
punishable by criminal penalties, including imprisonment, fines, freezing of
assets, asset forfeiture and exclusion of the provider from future participation
in the Medicare or Medicaid programs. Civil penalties for violations of the
federal anti-kickback statute include assessments of $10,000 per improper claim
for payment, plus three times the amount of such claim and suspension from
future participation in the Medicare or Medicaid programs. Civil suspension from
participation in Medicare or Medicaid for anti-kickback violations also can be
imposed through an administrative process, without the imposition of civil
monetary penalties. Some state statutes also include criminal penalties.
To provide guidance regarding the federal anti-kickback statute, the OIG
has published regulations that create exceptions or "safe harbors" for certain
business transactions. The safe harbors are narrowly drafted and many lawful
transactions fall outside their scope. Transactions that satisfy the criteria
under applicable safe harbors will be deemed not to violate the federal
anti-kickback statute. Transactions that do not satisfy all elements of a
relevant safe harbor do not necessarily violate the statute, although such
transactions may be subject to scrutiny by enforcement agencies.
Since the federal anti-kickback statute has been broadly interpreted by the
government and through court decisions, it could limit the manner in which the
Company conducts its business. The Company seeks to structure its various
business arrangements, including its relationship with physicians, to comply
with the federal provisions. However, there can be no assurance that the
Company's arrangements with physicians and other business arrangements comply in
all material respects with the federal anti-kickback statute and all other
applicable related laws and regulations. Because of the broad provisions of the
federal anti-kickback statute the OIG or other governmental agency may require
the Company to change its practices or experience a material adverse effect on
its business, financial condition and results of operations.
LEASES WITH PHYSICIANS. Certain of the Company's dialysis facilities are
leased from entities in which physicians who refer patients to the Company hold
interests. Because of the referral of patients by these physicians, the federal
anti-kickback statute may apply. HHS has promulgated a safe harbor relevant to
such arrangements relating to space rental. However, there can be no assurance
that the Company's leases satisfy the space rental safe harbor.
MEDICAL DIRECTOR RELATIONSHIPS. Because the Company's medical directors
refer patients to the Company's facilities, the federal anti-kickback statute
could apply to such referrals. The Company seeks to comply with the requirements
of the federal anti-kickback statute, or if applicable, the personal services or
employment safe harbor provisions, when entering into agreements or contracts
36
<PAGE> 39
with its medical directors and other physicians. However, there can be no
assurance that the Company's contractual arrangements with its medical directors
are in compliance with the federal anti-kickback statute.
ACUTE DIALYSIS SERVICES. Under the Company's acute inpatient dialysis
service arrangements, the Company agrees to provide a hospital with supervised
emergency or acute dialysis services, including qualified nursing, technical
personnel and services, and, in most cases, equipment. Because physicians under
contract with the Company may refer patients to hospitals with which the Company
has an acute dialysis service arrangement, the federal anti-kickback statute
could apply. There can be no assurance that the Company's contractual
arrangements with hospitals for acute inpatient dialysis services are in
compliance with the federal anti-kickback statute.
CERTAIN RELATIONSHIPS WITH LABORATORIES AND IDPN SUPPLIERS. The Company
enters into arrangements with laboratories for purposes of obtaining laboratory
services. Such services include testing currently reimbursed under the Composite
Rate, as well as testing reimbursed separately from the Composite Rate. In
October 1994, the OIG published a Special Fraud Alert which stated that the
federal anti-kickback statute could be violated when a dialysis facility obtains
discounts from a laboratory for testing encompassed within the Composite Rate in
return for referring all or most of the dialysis facility's non-composite rate
testing to the laboratory. In addition, the Company has arrangements with
suppliers of IDPN. In May 1993, the OIG issued a report indicating its belief
that many ESRD patients receive IDPN although they do not meet Medicare coverage
guidelines for the treatment. Furthermore, in July 1993, the OIG issued a
Management Advisory Report indicating that "administration fees" paid by IDPN
suppliers to dialysis facilities for administering IDPN to patients during
dialysis could violate the federal anti-kickback statute when the payments made
to the dialysis facilities are unreasonably high.
There can be no assurance that the Company's current arrangements with
laboratories, IDPN suppliers, and other persons or entities who either refer
patients to the Company or from whom the Company purchases items or services are
in material compliance with the federal anti-kickback statute or that the
Company's future arrangements will not be challenged, required to be changed, or
result in sanctions. Furthermore, there can be no assurance that the Company
will not be challenged or subject to sanctions for any of its past arrangements.
Any such challenge or change, including any related sanctions which might be
assessed, could have a material adverse effect on the Company's business,
financial condition and results of operations.
STARK LAW. Stark II restricts physician referrals for certain "designated
health services" to entities with which a physician or an immediate family
member has a "financial relationship." The entity is prohibited from claiming
payment under the Medicare or Medicaid programs for services rendered pursuant
to a prohibited referral and is liable for the refund of amounts received
pursuant to prohibited claims. The entity also can incur civil penalties of up
to $15,000 per improper claim and can be excluded from participation in the
Medicare or Medicaid programs. Stark II provisions became effective on January
1, 1995. Comparable provisions applicable to clinical laboratory services
("Stark I") became effective in 1992.
A "financial relationship" under the Stark provisions is defined as an
ownership or investment interest in, or a compensation arrangement between, the
physician (or an immediate family member) and the entity. The Company has
entered into compensation agreements with its medical directors or their
respective professional associations, and in one case a medical director is a
general partner of a partnership which leases real property to the Company.
Certain medical directors also own shares of the Company's Common Stock, and/or
options to purchase shares of Common Stock. Accordingly, such medical directors
have a "financial relationship" with the Company which may be applicable to the
Stark provisions.
For purposes of Stark II, "designated health services" include, among other
things: clinical laboratory services; parenteral and enteral nutrients,
equipment and supplies, including IDPN; prosthetics, orthotics and prosthetic
devices and supplies; physical and occupational therapy services; outpatient
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<PAGE> 40
prescription drugs; durable medical equipment, and inpatient and outpatient
hospital services. Kidney dialysis is not a designated health service under
Stark II. However, the Stark definition of "designated health services" includes
items and services that are components of dialysis or that may be provided to a
patient in connection with dialysis, if such items and services were considered
separately rather than collectively as dialysis. The Stark I regulations provide
an exception for certain clinical laboratory services reimbursed under the
Medicare composite rate for dialysis. Because HHS has not yet issued regulations
under Stark II, it is unclear whether ancillary services administered in
conjunction with dialysis treatments, but which are not included in the
Composite Rate, such as EPO, non-routine parenteral items and non-routine
laboratory services, constitute separate services or are considered part of the
dialysis treatment. If such services are considered separate services, Stark II
would apply.
Stark II contains exceptions for ownership or compensation arrangements
that meet certain specific criteria set forth in the statute or in forthcoming
regulations. With respect to ownership, certain qualifying in-office physician
or ancillary services provided by or under the supervision of physicians in a
single group practice are exempt from both ownership and compensation
arrangement restrictions. With respect to compensation arrangements, exceptions
are available for certain qualifying arrangements in the following areas: (i)
bona fide employment relationships; (ii) personal services contracts; (iii)
space and equipment leasing arrangements; (iv) certain group practice
arrangements with a hospital that were in existence prior to December 1989; and
(v) purchases by physicians of laboratory services, or of other items and
services at fair market value. In order to be exempt from the Stark II
self-referral prohibition, it is necessary to meet all of the criteria of a
particular exception for each financial relationship existing between an entity
and a referring physician. Although the Company does not believe Stark II
applies to its operations, the Company believes that several of its financial
relationships with referring physicians meet the criteria for an exception. For
example, the Company believes, based on the language of Stark II, that its
agreements with its medical directors or their professional associations satisfy
the exceptions for compensation pursuant to employment relationships, personal
services contracts or space leasing arrangements.
With respect to physician ownership/investments in the Company, Stark II
includes an exception for a physician's ownership or investment interest in
securities listed on an exchange or quoted on the Nasdaq Stock Market which, in
either case, meet certain criteria. Such criteria include a requirement that the
issuer of such securities have at least $75 million in stockholder equity at the
end of the issuer's most recent fiscal year or on average during the previous
three fiscal years. The Company is not currently eligible to rely on this
exception and will not be eligible following this Offering. Therefore, if the
regulations interpreting Stark II are issued, and in the event that ancillary
services provided by the Company in conjunction with dialysis treatments are
determined to be designated health services, then either the physicians who have
an ownership interest in the Company will have to divest such ownership, the
Company will have to meet the above described ownership exception or the
physicians will have to cease referrals to the Company. There can be no
assurance that if Stark II is interpreted to apply to the Company's operations,
the Company will be able to bring its financial relationships with referring
physicians into compliance with the provisions of Stark II, including relevant
exceptions. If the Company cannot achieve such compliance and Stark II is
broadly interpreted by HCFA to apply to the Company, such application of Stark
II could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, there can be no assurance that
the Company will not be challenged or subjected to sanctions for any of its past
arrangements, including repayment of amounts made pursuant to a prohibited
referral. Any such challenge, including any related sanctions which might be
assessed, may cause a change in the Company's operations and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Because physicians under contract with the Company may refer patients to
hospitals with which the Company has an acute inpatient dialysis service
arrangement, Stark II may be interpreted by the federal government to apply to
the Company's acute dialysis arrangements with hospitals. However, Stark II
contains exceptions for certain equipment rental and personal services
arrangements. There
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<PAGE> 41
can be no assurance that the Company's contractual arrangements with hospitals
for acute inpatient dialysis services are in compliance with the requirements of
such exceptions to Stark II.
STATE REFERRAL REGULATIONS. Several states have enacted statutes
prohibiting physicians from holding financial interests in various types of
medical facilities to which they refer patients. The Company believes, based on
its understanding of such state laws, that its arrangements with physicians are
in material compliance with such laws. However, given the recent enactment of
such state laws, there is an absence of definitive interpretative guidance in
many areas and there can be no assurance that one or more of the practices of
the Company might not be subject to challenge under such state laws. If one or
more of such state laws are interpreted to apply to the Company and the Company
is determined to be liable for violations of such state laws, the application of
such state laws could have a material adverse effect on the Company's business,
financial condition and results of operations.
THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 AND THE
BALANCED BUDGET ACT OF 1997. In August 1996, President Clinton signed the
Health Insurance Portability and Accountability Act ("HIPAA") which requires,
among other things, that the Secretary of HHS issue advisory opinions regarding
what constitutes a violation under the federal anti-kickback statute and whether
an arrangement satisfies a statutory exception or regulatory safe harbor to the
federal anti-kickback statute. Prior to HIPAA's enactment, advisory opinions
regarding the federal anti-kickback statute could not be obtained from the OIG.
The OIG recently issued regulations regarding the procedures for obtaining
advisory opinions. The Company has not sought any advisory opinions from the OIG
to date.
The recently enacted Balanced Budget Act of 1997 also includes numerous
health fraud provisions, including: (i) new exclusion authority for the transfer
of ownership or control interest in an entity to an immediately family or
household member in anticipation of, or following, a conviction, assessment, or
exclusion; (ii) increased mandatory exclusion periods for multiple health fraud
convictions, including permanent exclusion for those convicted of three health
care-related crimes; (iii) authority for the Secretary of HHS to refuse to enter
into Medicare agreements with convicted felons; (iv) new civil money penalties
for contracting with an excluded provider or violating the Medicare and Medicaid
anti-kickback statute; (v) new surety bond and information disclosure
requirements for certain providers and suppliers; and (vi) an expansion of the
mandatory and permissive exclusions added by HIPAA to any federal health care
program (other than the Federal Employees Health Benefits Program).
FALSE CLAIMS. The Company is also subject to federal and state laws
prohibiting an individual or entity from knowingly and willfully presenting
claims for payment by Medicare, Medicaid or other third party payors that
contain false or fraudulent information. These laws provide for both criminal
and civil penalties. Furthermore, providers found to have submitted claims which
they knew or should have known were false, fraudulent, or for items or services
that were not provided as claimed, may be excluded from Medicare and Medicaid
participation, required to repay previously collected amounts, and/or subject to
substantial civil monetary penalties. In addition, the OIG has taken the
position that violations of the anti-kickback statute and the Stark law
constitute false claims. Although dialysis facilities are generally reimbursed
by Medicare based upon prospectively determined composite rates, the submission
of Medicare cost reports and other requests for payment by dialysis facilities
are covered by these laws. The Company believes that it has procedures to ensure
the accurate completion of cost reports and other requests for payment. However,
there can be no assurance that cost reports or other requests for payment filed
by the Company's dialysis facilities will be materially accurate or will not be
subject to challenge under these laws. Such challenge, if successful, could have
a material adverse effect on the Company's business, financial condition and
results of operations.
HEALTH CARE LEGISLATION. Because the Medicare program represents a
substantial portion of the federal budget, Congress takes action in almost every
legislative session to modify the Medicare program for the purpose of reducing
the amounts otherwise payable by the program to health care providers in order
to achieve deficit reduction targets, or to establish new quality standards,
among other reasons. In that regard, the Conference Report to the Balanced
Budget Act of 1997 requires the
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<PAGE> 42
Secretary of HHS to audit cost reports for each renal dialysis provider at least
once every three years, beginning with costs reports for 1996, and requires the
Secretary to develop, not later than January 1, 1999, a method to measure and
report quality of Medicare renal dialysis services. The method must be
implemented by January 1, 2000. Legislation or regulations may be enacted in the
future that may significantly modify the Medicare ESRD program or substantially
reduce the amount paid for the Company's services. Furthermore, statutes or
regulations may be enacted which impose additional requirements on the Company
to maintain eligibility to participate in the federal and state payment
programs. Such new legislation or regulations may have a material adverse effect
on the Company's business, financial condition and results of operations.
OTHER REGULATIONS. The Company's operations are subject to various state
medical waste disposal laws. Recently promulgated regulations under the
Occupational Safety and Health Act ("OSHA") attempt to limit occupational
exposure to blood and other potentially infectious materials. These regulations
apply to all industries in which employees could reasonably be expected to come
in contact with blood pathogens, including dialysis facilities. The regulations
require employers to provide Hepatitis B vaccinations and personal protective
equipment. Employers must establish policies and procedures for infection
control, hazardous waste disposal techniques and other matters to minimize risk
of contamination. Employers also have specific record maintenance requirements.
The Company believes it is in compliance with the OSHA regulations.
No assurance can be made that in the future the Company's business
arrangements, past or present, will not be the subject of an investigation or
prosecution by a federal or state governmental authority. The Company believes
that the health care services industry will continue to be subject to
substantial regulation at the federal and state levels, the scope and effect of
which cannot be predicted by the Company. Any loss by the Company of its various
federal certifications, its authorization to participate in the Medicare and
Medicaid programs or its licenses under the laws of any state or other
governmental authority from which a substantial portion of its net revenues is
derived would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Operations
Subject to Extensive Government Regulation."
COMPETITION
The dialysis industry is fragmented and highly competitive, particularly
with respect to the acquisition of existing dialysis facilities. Competition for
qualified nephrologists to act as medical directors is also intense. According
to HCFA, as of December 31, 1995, there were in excess of 2,800 dialysis
facilities in the United States. According to industry estimates, as of May 31,
1997, 52% of all ESRD patients were treated by the six largest outpatient
dialysis providers. The largest multi-facility provider is Fresenius Medical
Care AG. Other large publicly owned dialysis companies include Gambro Health
Care Patient Services, Inc. (a subsidiary of Incentive AB), Renal Treatment
Centers, Inc., Total Renal Care, Inc. and Renal Care Group, Inc. An additional
multi-facility provider, Dialysis Clinics, Inc., is a not-for-profit entity.
Many of the Company's competitors have substantially greater financial resources
than the Company and may compete with the Company for acquisitions, development
and/or management of dialysis facilities. The Company may also experience
competition from facilities established by former medical directors or other
referring physicians. In addition, there are also a number of health care
providers that have substantially greater financial resources than the Company
who may decide to enter the dialysis industry. The Company believes that
competition for acquisitions increases the cost of acquiring dialysis facilities
and there can be no assurance that the Company will be able to compete
effectively with such competitors either for acquisitions or generally.
The Company believes that other important competitive factors in the
dialysis industry are the development of relationships with physicians, quality
of patient care and service and location and convenience of facilities.
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INSURANCE
The Company maintains property and general liability insurance,
professional liability insurance on its professional staff and other insurance
appropriate for its operations. The Company believes that its current levels of
such insurance are adequate in amounts and coverage. However, there can be no
assurance that any future claims will not exceed applicable insurance coverage.
Furthermore, no assurance can be given that malpractice and other liability
insurance will be available in the future at a reasonable cost, or that the
Company will be able to maintain adequate levels of malpractice insurance
coverage in the future. Each medical director and each other physician with
staff privileges at the Company's facilities is required to maintain his or her
own malpractice insurance for patient care activities at the facilities.
EMPLOYEES
As of June 30, 1997, the Company had 225 full-time and 33 part-time
employees in its dialysis operations and an additional 29 full-time and two
part-time employees in its corporate office. The Company's employees are not
represented by a labor union or covered by a collective bargaining agreement.
The Company considers its employee relations to be good.
PROPERTIES
The Company maintains its principal executive offices in Coral Gables,
Florida. The Company's facilities generally occupy between 4,000 and 10,000
square feet of leased space, with lease terms of five to ten years, typically
renewable for at least five years. The Company considers its properties to be in
good operating condition and suitable for the purposes for which they are being
used.
Expansion or relocation of the Company's dialysis facilities would be
subject to compliance with conditions relating to participation in the Medicare
ESRD program and certain states' health department requirements. In states that
require a CON, approval of an application submitted by the Company would be
necessary for expansion or development of a new dialysis facility. See
"Business -- Government Regulation."
LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business, including those arising from patient treatments, which the Company
believes are covered by insurance. The Company is not involved in any material
litigation and is not aware of any potential claims which would give rise to
material liability.
41
<PAGE> 44
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of August 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- -------------------------------------------------------
<S> <C> <C>
Milton J. Wallace(1).............. 61 Chairman of the Board
Arthur G. Shapiro, M.D.(1)........ 58 Vice Chairman of Board, Director of Medical Affairs
James P. Shea(1).................. 56 President, Chief Executive Officer, Director
Orestes L. Lugo................... 39 Vice President -- Finance, Chief Financial Officer
Patsy L. Anders................... 53 Vice President -- Business Development
Mignon B. Early................... 34 Vice President -- Operations
Jeffery C. Finch.................. 36 Vice President
Eugene P. Conese, Sr.(2).......... 67 Director
C. David Finch, M.D............... 38 Director
John E. Hunt, Sr.(2).............. 79 Director
Charles J. Simons(2)(3)........... 79 Director
Mark D. Wallace................... 29 Director, Secretary
Jeffrey H. Watson(3).............. 39 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Compensation and Stock Option Committee.
(3) Member of the Audit Committee.
MILTON J. WALLACE is a co-founder of the Company and has been Chairman of
the Board of the Company since its inception in July 1993. Mr. Wallace has been
a practicing attorney in Miami for over 30 years, and is currently a shareholder
in the law firm of Wallace, Bauman, Fodiman & Shannon, P.A. He was a co-founder
and a member of the Board of Directors of Home Intensive Care, Inc., a provider
of home infusion and dialysis services, serving as Chairman of its Executive
Committee from 1985 through July 1993 and Chairman of the Board from December
1989 until July 1993. Home Intensive Care, Inc. was acquired by W.R. Grace & Co.
in July 1993. Mr. Wallace is Chairman of the Board of Med/Waste, Inc., a
provider of medical waste management services. He is a director of several
private companies and is Chairman of the Dade County Florida, Housing Finance
Authority. From August 1987 through July 1989, Mr. Wallace was a director of
Centrust Savings Bank ("Centrust"), a federally insured savings and loan
institution which was placed under federal conservatorship in 1990. A lawsuit
was brought against the directors of Centrust by the Resolution Trust
Corporation (the "RTC"), alleging that the Centrust directors breached their
fiduciary duties. Mr. Wallace reached a settlement with the RTC in late 1995
without admitting any wrongdoing. Mr. Wallace is the father of Mark D. Wallace,
a Director of the Company.
ARTHUR G. SHAPIRO, M.D. is a co-founder of the Company and has been Vice
Chairman of the Company's Board and Director of Medical Affairs since the
Company's inception in July 1993. Dr. Shapiro has held an appointment to the
University of Miami School of Medicine as a professor of clinical obstetrics and
gynecology since January 1995. From 1985 until 1995, he was engaged in the
private practice of medicine. He is board certified in obstetrics and
gynecology, reproductive endocrinology and laser surgery. He is a Fellow in the
American College of Obstetrics and Gynecology and the American College of
Endocrinology. Dr. Shapiro was a co-founder of Home Intensive Care, Inc. and
served on its Board of Directors from 1985 until July 1993. Dr. Shapiro also
served as Home Intensive Care, Inc.'s Medical Director from 1990 until July
1993. He serves as Chairman of the Board of Bankers Savings Bank, Coral Gables,
Florida and as a Director of Med/Waste, Inc.
JAMES P. SHEA has been President and Chief Executive Officer of the Company
since August 1993 and a Director since December 1993. From July 1992 until June
1993, he served as Director General for
42
<PAGE> 45
Home Intensive Care, Inc.'s international division. From 1986 to 1990, he was
Senior Vice President of Protocare, Inc., an infusion therapy and respiratory
care provider, which he helped establish. From 1985 to 1986, he was General
Manager of the health care products division of The Norton Company, a
manufacturer of engineered materials. From 1983 to 1985, he was President of the
infusion division of National Medical Care, Inc., a kidney dialysis and infusion
therapy provider, which is now owned by Fresenius Medical Care AG.
ORESTES L. LUGO has served as the Company's Vice President -- Finance and
Chief Financial Officer since August 1995. From March 1994 until August 1995, he
was Chief Financial Officer of PacifiCare of Florida, a health maintenance
organization and subsidiary of PacifiCare Health Systems, Inc. From September
1993 until March 1994, he was Chief Financial Officer of Supreme International,
Inc., a clothing manufacturer. From July 1989 until September 1993, Mr. Lugo
served as Vice President of Finance for Home Intensive Care, Inc. From 1980 to
1989, Mr. Lugo was employed by the public accounting firm of Touche Ross, last
as a senior manager. Mr. Lugo is a Certified Public Accountant.
PATSY L. ANDERS has served as the Company's Vice President -- Business
Development since January 1996. From the Company's inception in July 1993
through January 1996, she served as the Company's Director of Business
Development. From 1990 until July 1993, Ms. Anders was the Physician Liaison for
Quality Care Dialysis Centers, Inc., the wholly-owned dialysis facility
subsidiary of Home Intensive Care, Inc. From 1986 through 1990, Ms. Anders was
Director of Physician Relations for Home Intensive Care, Inc. In 1989, Ms.
Anders founded Anders and Associates, a physician placement firm specializing in
the placement of nephrologists, and has served as its President since its
inception.
MIGNON B. EARLY, RN, BSN has been the Company's Vice
President -- Operations since January 1997. From July 1995 until January 1997,
she was the Company's Director of Training and Development. From January 1994
until July 1995, she served as a clinic administrator for the Company in the St.
Louis, Missouri region. From December 1990 until January 1994, Ms. Early was a
clinic administrator for Quality Care Dialysis Centers, Inc. Ms. Early is a
registered nurse.
JEFFERY C. FINCH has been a Vice President of the Company since December
1995. From June 1990 until December 1995, Mr. Finch served as Chief Executive
Officer of Dialysis Facilities, Inc., a dialysis company which owned three
dialysis facilities purchased by the Company in December 1995, which Mr. Finch
co-founded in 1990. He is a principal of JCD Partnership, a real estate and
property management firm. Mr. Finch is the brother of C. David Finch, M.D., a
Director of the Company.
EUGENE P. CONESE, SR. has been a Director of the Company since November
1996. Since 1987, he has been Chairman of the Board of Directors and Chief
Executive Officer of Greenwich Air Services, Inc., a provider of repair and
overhaul services for gas turbine aircraft engines. Mr. Conese is a Director of
Trans World Airlines, Inc. and is a member of the Board of Trustees of Iona
College.
C. DAVID FINCH, M.D. has been a Director of the Company since December
1995, when the Company acquired Dialysis Facilities, Inc., a dialysis company he
co-founded in 1990. He is a board certified nephrologist and maintains a private
practice of medicine in nephrology and hypertension in Jackson, Mississippi. Dr.
Finch serves as the Medical Director of the Company's dialysis facilities in the
Jackson, Mississippi area. He also serves as Director of Dialysis at Vicksburg
Medical Center and Parkview Regional Medical Center. He is a principal in JCD
Partnership, a real estate and property management firm, and the brother of
Jeffery C. Finch, a Vice President of the Company.
JOHN E. HUNT, SR. has been a Director of the Company since its inception in
July 1993. Since August 1983, Mr. Hunt has been Chairman of the Board of Hunt
Insurance Group, Inc., an insurance agency holding company. For the previous 40
years, Mr. Hunt was President of John E. Hunt & Associates, a Tallahassee and
Miami, Florida insurance agency. For the past 13 years, he has also been
President of Insurance Consultants and Analysis, Inc., an insurance consulting
firm. Mr. Hunt serves as Chairman of the Board of Trustees of the Florida Police
Chiefs' Education and Research Foundation, Inc., and as a trustee of Florida
Southern College. Mr. Hunt was a Director of Home Intensive Care, Inc. from 1985
until July 1993.
43
<PAGE> 46
CHARLES J. SIMONS has been a Director of the Company since its inception in
July 1993. Mr. Simons is the Chairman of the Board of G.W. Plastics, Inc., a
plastics manufacturer, and is an independent management and financial
consultant. From 1940 to 1981, he was employed by Eastern Airlines, last serving
as Vice Chairman, Executive Vice President and as a Director. Mr. Simons is a
Director of Arrow Air, Inc., a cargo air carrier; Bessemer Trust of Florida, an
investment management firm; Greenwich Air Services, Inc.; Calspan Corporation,
an aerospace company; and a number of private companies. He was also a Director
of Home Intensive Care, Inc. from 1988 until July 1993. Mr. Simons is the
Chairman of the Board of the Matthew Thornton Health Plan. From 1985 until 1992,
he was a Director of General Development Corp., now known as Atlantic Gulf
Development Corp., a real estate development company, and became Chairman of the
Board and Chief Executive Officer just prior to that company's Chapter 11
bankruptcy filing in April 1990. Mr. Simons resigned all positions prior to that
company's emergence from bankruptcy in 1992.
MARK D. WALLACE has been Secretary and a Director of the Company since the
Company's inception in July 1993. Since July 1992, Mark Wallace has been a
practicing attorney and is currently a partner at the law firm of Stack,
Fernandez and Anderson, P.A. Mr. Wallace is the son of Milton J. Wallace,
Chairman of the Board of the Company.
JEFFREY H. WATSON has been a Director of the Company since July 1994. Since
December 1995, he has been Chairman of the Board and President of J. Watson &
Co., a government relations and business consulting firm. From June 1994 until
December 1995, he was Vice President for Government Relations of the Jefferson
Group, an independent public affairs firm. From January 1993 until June 1994,
Mr. Watson served as Deputy Assistant for Inter-Governmental Affairs for the
Clinton Administration. From December 1991 through November 1992, Mr. Watson was
employed by the election campaign for President Clinton. From 1989 until
November 1991, Mr. Watson served as Finance Administrator for the City of Miami,
Florida's Department of Development and Housing Conservation. From 1986 until
January 1989, he served as an Administrative Assistant for the Mayor of Miami,
Florida. From September 1985 through March 1986, he was a Managing Partner and
Chief Financial Manager of J. Howard Industries, a company involved in
low-income housing redevelopment and construction.
BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes. The members
of each class serve for staggered three year terms, including three Class I
directors (Charles J. Simons, Jeffrey H. Watson and Eugene P. Conese, Sr.),
three Class II directors (Mark D. Wallace, John E. Hunt, Sr. and James P. Shea)
and three Class III directors (Milton J. Wallace, Arthur G. Shapiro and C. David
Finch). Class I, II and III director terms expire upon the election of directors
at the annual meeting of shareholders to be held in 1997, 1998 and 1999,
respectively. Directors hold office until the expiration of their respective
terms and until their successors are elected, or until death, resignation or
removal. Each officer serves at the discretion of the Board of Directors,
subject to certain contractual rights described below.
Following the consummation of the Offering, the Company intends to increase
the size of the Board of Directors by adding two additional non-employee
directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established standing Executive, Audit and
Compensation and Stock Option Committees. The Executive Committee consists of
Milton J. Wallace, Arthur G. Shapiro and James P. Shea. When the Board of
Directors is not in session, the Executive Committee possesses all of the powers
of the Board. Although the Executive Committee has broad powers, in practice it
meets infrequently to take formal action on a specific matter when it would be
impractical to call a meeting of the full Board.
The Audit Committee consists of Charles J. Simons and Jeffrey H. Watson.
The functions of the Audit Committee are to recommend to the Board the
appointment of independent public accountants for the annual audit of the
Company's financial statements; review the scope of the annual audit and
44
<PAGE> 47
other services the auditors are asked to perform; review the report on the
Company's financial statements following the audit; review the accounting and
financial policies of the Company; and review management's procedures and
policies with respect to the Company's internal accounting controls.
The Compensation and Stock Option Committee consists of Eugene P. Conese,
Sr., John E. Hunt, Sr. and Charles J. Simons. The functions of the Compensation
and Stock Option Committee are to review and approve salaries, benefits and
bonuses for all executive officers of the Company; to review and recommend to
the Board matters relating to employee compensation and benefit plans; and to
administer the Company's 1994 Employee Stock Option Plan.
DIRECTOR COMPENSATION
Directors who are officers or employees of the Company receive no
additional compensation for their services as members of the Board of Directors.
Prior to the Offering, non-employee directors did not receive any cash
compensation for service on the Board of Directors, but received reimbursement
of expenses. Following the Offering, non-employee directors of the Company will
receive such compensation for their services as the Board of Directors may from
time to time determine. Non-employee directors receive annual grants of options
under the Directors Stock Option Plan ("Directors Plan") described below. In
addition, Milton J. Wallace and Dr. Shapiro, as compensation for services
rendered to the Company, each received options to purchase 16,667 shares of
Common Stock in April 1995. Such options have an exercise price of $6.00 per
share and are exercisable through April 2000.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION. The following table summarizes the
compensation earned by, and paid to, the Company's President and Chief Executive
Officer and each other executive officer for the year ended December 31, 1996
who received compensation in excess of $100,000 for such period (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARD
----------------------------------------- ---------------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITION SALARY(1) BONUS COMPENSATION UNDERLYING OPTIONS(#)
- --------------------------------------------- ------------ -------- --------------- ---------------------
<S> <C> <C> <C> <C>
James P. Shea................................ $110,000 -- $5,160 13,334
President and Chief Executive Officer
Orestes L. Lugo.............................. 102,500 $4,000 $5,160 11,667
Vice President -- Finance and Chief
Financial Officer
</TABLE>
- ---------------
(1) The Company provides its officers with certain non-cash group life and
health benefits generally available to all salaried employees. Such benefits
are not included in the above table pursuant to applicable Securities and
Exchange Commission rules. No Named Executive Officer received aggregate
personal benefits or perquisites that exceed the lesser of $50,000 or 10% of
his total annual salary and bonus for such year. Following the Offering, the
Named Executive Officers' salaries will be increased. See "Employment
Agreements" below.
45
<PAGE> 48
STOCK OPTION GRANTS. The following table sets forth information concerning
grants of stock options to each of the Named Executive Officers during the year
ended December 31, 1996:
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES
---------------------------------------------------------------------- OF STOCK PRICE
NUMBER OF % OF TOTAL OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OPTION TERM($)(3)
UNDERLYING OPTIONS EMPLOYEES IN FISCAL PRICE PER -----------------
NAME GRANTED(#)(1) YEAR(2) SHARE EXPIRATION DATE 5% 10%
- ---------------------- ------------------ ------------------- --------- --------------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
James P. Shea......... 13,334 17.2% $6.00 4/27/01 $-0- $-0-
Orestes L. Lugo....... 11,667 15.1% $6.00 4/27/01 -0- -0-
</TABLE>
- ---------------
(1) All such options were granted pursuant to the 1994 Employee Stock Option
Plan. Options granted during fiscal year 1996 vest over three years, with
25% of such options vesting six months following the date of grant, 25% on
the first anniversary from the date of grant and 25% at the end of each
succeeding year from the grant date.
(2) Based on an aggregate of 77,510 options granted to employees in 1996,
including the Named Executive Officers.
(3) The exercise price on the date of grant was greater than the fair market
value of the underlying Common Stock by 153%. The potential realizable value
is calculated by assuming that the stock option price on the date of grant
appreciates at the indicated annual rate compounded annually for the entire
term of the options (5 years) and the option is exercised and the underlying
Common Stock sold on the last day of its term for the appreciated stock
price. The 5% and 10% assumed rates of appreciation are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future Common Stock price. Based on
the assumed initial offering price of $8.00 per share, the potential
realizable values of the options for Mr. Shea would be $49,600 (5%) and
$76,100 (10%), and for Mr. Lugo would be $43,400 (5%) and $66,600 (10%).
YEAR-END OPTION HOLDINGS. The following table sets forth certain
aggregated option information for the Named Executive Officers for the year
ended December 31, 1996:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS(#) OPTIONS(2)
--------------------------- ---------------------------
NAME(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James P. Shea........................................ 15,419 17,916 $30,838 $35,832
Orestes L. Lugo...................................... 7,085 12,916 $14,710 $25,832
</TABLE>
- ---------------
(1) No options were exercised by the above Named Executive Officers during the
fiscal year ended December 31, 1996.
(2) The value of unexercised options represents the difference between the
exercise price of the options and an assumed initial public offering price
of $8.00 per share herein.
EMPLOYMENT AGREEMENTS
In April 1997, the Company entered into two year employment agreements with
James P. Shea, the Company's President and Chief Executive Officer, and Orestes
L. Lugo, Vice President -- Finance and Chief Financial Officer. The employment
agreements provide for base salaries of $110,000 and $102,500 for Mr. Shea and
Mr. Lugo, respectively, with automatic increases to $190,000 and $155,000,
respectively, upon the earlier of the date of this Prospectus or a "change of
control" as defined below. Base salary for each officer is increased on January
1 of each year during the term by a minimum of 6%. Each officer receives an
automobile allowance and certain other non-cash benefits, including life, health
and disability insurance. Each employment agreement is automatically renewed for
two years at the end of the initial term and each extended term, unless either
party provides notice of termination at least 90 days prior to the expiration of
such term. If either officer is terminated without cause during the term of
their respective agreements, such officer will be entitled to severance equal to
the greater of the remaining base salary due under the agreement or one year's
base salary.
46
<PAGE> 49
Both Mr. Shea and Mr. Lugo are entitled to receive bonuses in each fiscal
year during the term of their agreements. Such agreements require the Board of
Directors to establish incentive bonus plans for each fiscal year which would
provide a means for each officer to earn a bonus up to 100% of their respective
base salaries upon the achievement of established goals and criteria.
The respective employment agreements grant to each of Mr. Shea and Mr. Lugo
the right to terminate his employment agreement within 90 days following a
"change of control," and to receive an amount equal to the greater of: (i) base
salary due for the remainder of the term of the agreement had it not been
terminated; or (ii) two years base salary. Such change of control severance is
payable 50% in cash on the effective date of such termination, with the balance
payable over a six month period. For the purposes of the employment agreements,
"change of control" is defined as: (i) the acquisition, other than from the
Company directly, by any person, entity or group, within the meaning of
sec. 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"),
of beneficial ownership of 25% or more of the outstanding Common Stock; (ii) if
the individuals who serve on the Board as of the date of the employment
agreement, no longer constitute a majority of the members of the Board;
provided, however, any person who becomes a director subsequent to such date,
who was elected to fill a vacancy by a majority of the individuals then serving
on the Board, shall be considered as if a member prior to such date; (iii)
approval by a majority of the voting stock of the Company of a merger,
reorganization or consolidation whereby the shareholders of the Company
immediately prior to such approval do not, immediately after consummation of
such reorganization, merger or consolidation own more than 50% of the voting
stock of the surviving entity; or (iv) a liquidation or dissolution of the
Company, or the sale of all or substantially all of the Company's assets.
STOCK OPTION PLANS
EMPLOYEE PLAN
In April 1994, the Company's shareholders approved a 1994 Employee Stock
Option Plan ("Employee Plan"). The Employee Plan is designed as an incentive
program to cause employees to increase their interest in the Company's
performance and to attract and retain qualified personnel. Subject to certain
anti-dilution provisions, the Employee Plan consists of 666,667 shares of Common
Stock reserved for issuance upon the exercise of options which may be granted,
including 325,048 shares subject to outstanding options.
The Employee Plan is administered by the Compensation and Stock Option
Committee. The Compensation and Stock Option Committee has the discretion, among
other things, as to whom to grant options, the amount of options, the terms of
options and the exercise prices. All employees of the Company are eligible to
receive options under the Employee Plan. Such employees are eligible to receive
either "incentive" or "nonqualified" stock options, subject to the limitations
of the Internal Revenue Code of 1986, as amended (the "Code"). The exercise
price of an incentive stock option may not be less than 100% of the market price
of the underlying Common Stock as of the date of grant. No option may be granted
which has a term longer than 10 years. Stock options may have vesting
requirements as established by the Compensation and Stock Option Committee, but,
except in the case of an employee's death or permanent disability, in no event
may the options be exercisable until six months after grant. All vested options
under the Employee Plan become immediately vested in full upon a change of
control of the Company, as such term is defined in the Employee Plan.
Upon termination of an optionee's employment with the Company for any
reason, all options granted to such employee under the Employee Plan would
terminate immediately, except that the Compensation and Stock Option Committee
has the discretion to permit such holder to exercise vested options for a period
of 90 days after termination. Options granted under the Employee Plan may not be
transferred and are not exercisable except by the employee.
The Employee Plan provides for the automatic grant of "reload" options to
an employee, who pays all, or a portion of, an exercise price by delivery of
shares of Common Stock then owned by such employee. Reload options are granted
for each share of Common Stock so tendered. The exercise price of such reload
option is the then fair market value of the Common Stock. All other terms of the
reload
47
<PAGE> 50
options would be identical to the original options; provided, however, that if
the expiration date is less than one year, the expiration date is extended to
one year from the date of issuance of the reload options.
As of June 30, 1997, options to purchase a total of 325,048 shares of
Common Stock, with a weighted average exercise price of $6.98, have been granted
to executive officers and other employees of the Company. Each option granted
has a term of five years. Options are not exercisable until six months after the
date of grant and vest 25% at the end of six months and 25% on each anniversary
of such grant until 100% are vested.
DIRECTORS PLAN
In April 1994, the Company's shareholders adopted the Directors Plan.
Subject to certain anti-dilution provisions in the Plan, there are 166,667
shares of Common Stock reserved for issuance upon the exercise of options which
may be granted pursuant to the Directors Plan, including 30,016 shares subject
to outstanding options. All non-employee directors are eligible to receive
grants of options ("Eligible Directors"). Each Eligible Director receives
automatic, non-discretionary grants of options based upon specific criteria set
forth in the Directors Plan. On April 27 of each year, each Eligible Director
receives non-qualified options to purchase 834 shares of Common Stock for
service on the Board of Directors and additional options to purchase 334 shares
for service on each committee of the Board, other than the Executive Committee,
for which members would receive options to purchase 834 shares. Also, additional
options to purchase 334 shares are granted to Eligible Directors who serve as a
chairman of each standing committee of the Board, other than the chairman of the
Executive Committee, who would receive options to purchase 834 shares.
The exercise price of each option granted under the Directors Plan is equal
to the fair market value of the Common Stock on the date of grant as determined
in accordance with the provisions of the Directors Plan. All options granted
have a term of five years, but, except in the case of an Eligible Director's
death or permanent disability, are not exercisable until six months after the
date of grant. No option is transferable by the Eligible Director, except by the
laws of descent and distribution. If the Eligible Director's membership on the
Board terminates, including by reason of death, such options are exercisable for
the lesser of the remaining term of such option, or one year.
The Directors Plan provides for the automatic grant of "reload" options to
an Eligible Director, who pays all, or a portion of, an exercise price by
delivery of shares of Common Stock then owned by such Eligible Director. Reload
options are granted for each share of Common Stock so tendered. The exercise
price of such reload option is the then fair market value of the Common Stock.
All other terms of the reload options, including the expiration date, would be
identical to the original options, provided, however, that if the expiration
date is less than one year, the expiration date is extended to one year from the
date of issuance of the reload options.
As of June 30, 1997, options to purchase 30,016 shares of Common Stock,
with a weighted average exercise price of $6.71 per share, have been
automatically granted to Eligible Directors as a group.
401(K) PLAN
As of January 1997, the Company adopted a tax-qualified employee savings
and retirement plan (the "401(k) Plan") covering the Company's employees.
Pursuant to the 401(k) Plan, eligible employees may elect to contribute to the
401(k) Plan up to the lesser of 15% of their annual compensation or the
statutorily prescribed annual limit ($9,500 in 1996). The Company matches 25% of
the contributions of employees up to 4% of each employee's salary. All employees
who were employed at December 31, 1996 and new hires who thereafter attain at
least one year's service are eligible to participate in the 401(k) Plan.
The Trustees of the 401(k) Plan, at the direction of each participant,
invest the assets of the 401(k) Plan in designated investment options. The
401(k) Plan is intended to qualify under Section 401 of the Code, so that
contributions to the 401(k) Plan, and income earned on the 401(k) Plan
contributions are not taxable until withdrawn. Matching contributions by the
Company are deductible when made.
48
<PAGE> 51
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of August 31, 1997,
with respect to the beneficial ownership of the Company's Common Stock by: (i)
each person who is known by the Company to own more than 5% of such shares of
Common Stock; (ii) each Named Executive Officer; (iii) each of the Company's
directors; and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
-------------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OFFERING(3) OFFERING(4)
- --------------------------------------- --------------------- ----------- -----------
<S> <C> <C> <C>
Arthur G. Shapiro, M.D.(5)........................... 769,759 19.4% 11.0%
Milton J. Wallace(6)................................. 743,558 18.7 10.7
James P. Shea(7)..................................... 216,688 5.5 3.2
C. David Finch, M.D.(8).............................. 195,947 4.9 2.8
John E. Hunt, Sr.(9)................................. 80,987 2.0 1.2
Orestes L. Lugo(10).................................. 60,403 1.5 *
Charles J. Simons(11)................................ 34,187 * *
Eugene P. Conese, Sr.(12)............................ 22,334 * *
Mark D. Wallace(13).................................. 15,336 * *
Jeffrey H. Watson(14)................................ 7,002 * *
All executive officers and directors as group
(13 persons)(15)................................... 2,283,666 57.5% 32.7%
</TABLE>
- ---------------
* Less than one percent.
(1) Unless otherwise indicated, the address for each beneficial owner is c/o
the Company at 2100 Ponce de Leon Boulevard, Suite 950, Coral Gables,
Florida 33134.
(2) Except as set forth herein, all securities are directly owned and the sole
investment and voting power are held by the person named. A person is
deemed to be the beneficial owner of securities that can be acquired by
such person within 60 days of June 30, 1997 upon the exercise of options or
warrants.
(3) Based upon 3,974,247 shares of Common Stock issued and outstanding. Each
beneficial owner's percentage is determined by assuming that all such
exercisable options or warrants that are held by such person (but not those
held by any other person) have been exercised.
(4) Based upon 6,974,247 shares of Common Stock issued and outstanding
following the Offering.
(5) Except as set forth herein, all shares of Common Stock are owned jointly by
Dr. Shapiro and his wife. Includes: (i) 17,234 shares of Common Stock owned
by Dr. Shapiro's Individual Retirement Account; (ii) 21,669 shares of
Common Stock issuable upon exercise of stock options; (iii) 106,122 shares
of Common Stock (including 8,655 shares of Common Stock issuable upon
exercise of warrants and Series B Warrants) owned by a corporation, of
which Dr. Shapiro is an officer and director; and (iv) 3,750 shares of
Common Stock issuable upon exercise of Series B Warrants owned by Dr.
Shapiro's Individual Retirement Account.
(6) Mr. Wallace's address is 2222 Ponce de Leon Boulevard, Coral Gables,
Florida 33134. Except as set forth herein, all shares of Common Stock are
owned jointly by Mr. Wallace and his wife. Includes: (i) 12,000 shares of
Common Stock owned by Milton J. Wallace and his wife as custodian for a
minor child; (ii) 35,600 shares of Common Stock owned by Mr. Wallace's
Individual Retirement Account; (iii) 106,122 shares of Common Stock
(including 8,655 of Common Stock issuable upon exercise of warrants and
Series B Warrants) owned by a corporation, of which Mr. Wallace is an
officer, director and controlling stockholder, (iv) 20,836 shares of Common
Stock issuable upon exercise of stock options; and (v) 15,000 shares of
Common Stock issuable upon exercise of Series B Warrants owned by his
Individual Retirement Account.
(7) Except as set forth herein all shares are owned jointly by Mr. Shea and his
wife. Includes: (i) 32,087 shares of Common Stock issuable upon exercise of
stock options; (ii) 33,334 shares of Common Stock issuable upon exercise of
warrants; and (iii) 15,000 shares of Common Stock issuable upon exercise of
Series B Warrants.
(8) Includes 3,750 shares of Common Stock issuable upon exercise of stock
options.
(9) Includes: (i) 3,669 shares of Common Stock issuable upon exercise of stock
options; (ii) 6,667 shares of Common Stock issuable upon exercise of
warrants; (iii) 11,667 shares of Common Stock owned by Mr. Hunt's spouse;
(iv) 1,667 shares of Common Stock issuable upon exercise of warrants owned
by his spouse; and (v) 3,750 shares of Common Stock issuable upon exercise
of Series B Warrants. Mr. Hunt disclaims beneficial ownership of the shares
owned by his spouse.
(10) Includes: (i) 18,752 shares of Common Stock issuable upon exercise of stock
options; (ii) 3,334 shares of Common Stock issuable upon exercise of
warrants; and (iii) 3,750 shares of Common Stock issuable upon exercise of
Series B Warrants.
(11) Includes: (i) 5,002 shares of Common Stock issuable upon exercise of stock
options; (ii) 1,667 shares of Common Stock issuable upon exercise of
warrants; and (iii) 7,500 shares of Common Stock issuable upon exercise of
Series B Warrants.
(12) Includes: (i) 2,334 shares of Common Stock issuable upon exercise of stock
options; and (ii) 5,000 shares of Common Stock issuable upon exercise of
warrants.
(13) Includes 3,336 shares of Common Stock issuable upon exercise of stock
options.
(14) Includes 4,002 shares of Common Stock issuable upon exercise of stock
options.
(15) Includes: (i) 148,357 shares of Common Stock issuable upon exercise of
options; (ii) 58,336 shares of Common Stock issuable upon exercise of
warrants; and (iii) 54,488 shares of Common Stock issuable upon exercise of
Series B Warrants.
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<PAGE> 52
CERTAIN TRANSACTIONS
In connection with the Company's formation in 1993, the Company issued an
aggregate of 1,000,000 shares of Series A Preferred Stock at $1.00 per share.
The following current directors and officers beneficially purchased Series A
Preferred Stock: Milton J. Wallace, 432,000 shares; Arthur G. Shapiro, 400,000
shares; James P. Shea, 20,000 shares; John E. Hunt, Sr., 8,000 shares; Charles
J. Simons, 8,000 shares; Mark D. Wallace, 8,000 shares and Patsy L. Anders,
8,000 shares. In August 1996, the Company authorized the redemption of all
1,000,000 shares of Series A Preferred Stock. All officers and directors set
forth above converted their shares of Series A Preferred Stock prior to the time
for redemption and received an aggregate of 589,334 shares of Common Stock. The
holders of Series A Preferred Stock received one share of Common Stock for every
1.5 shares of Series A Preferred Stock converted.
In April 1995, the Company issued options to purchase 16,667 shares of
Common Stock to each of Mr. Wallace and Dr. Shapiro, the Chairman and Vice
Chairman of the Company, respectively, as special compensation for services
rendered to the Company. The options are exercisable until April 2000 at $6.00
per share.
In December 1995, the Company purchased 100% of the capital stock of
Dialysis Facilities, Inc. ("DFI"), which was owned by C. David Finch, M.D.,
Charles D. Finch, Sr., and Jeffery Finch. In connection with the acquisition,
which was accounted for under the purchase method of accounting, the Company
issued 376,857 shares of Common Stock with an estimated value of $1.1 million in
the amounts, of which, 192,197, 90,446 and 94,214 shares of Common Stock were
issued to C. David Finch, M.D., Charles D. Finch, Sr. and Jeffery Finch,
respectively. C. David Finch and Jeffery Finch became a director and vice
president of the Company, respectively, effective upon consummation of the
acquisition of DFI. C. David Finch, M.D. also serves as the medical director of
the Company's three facilities acquired in the DFI transaction pursuant to a ten
year medical director employment agreement.
JCD Partnership, a real estate holding and property management firm, of
which C. David Finch, M.D., Jeffery Finch and Charles D. Finch, Sr. are the
principals, owns the real property and improvements at the Company's dialysis
facilities at Jackson, Mississippi and Delta, Louisiana. JCD Partnership leases
the properties to the Company pursuant to ten year leases, in which the Company
pays annual rent of $92,400 and $82,500, respectively. In connection with the
lease agreements, JCD Partnership, at its own expense, was required to construct
new buildings for the relocation of the dialysis facilities. The Company was
obligated to pay for the cost of leasehold improvements to be installed by JCD
Partnership. The Jackson, Mississippi and Delta, Louisiana buildings and
leasehold improvements were completed in November 1996 and May 1997,
respectively. The Company paid $282,000 and $313,000 to JCD Partnership in
connection with such improvements at each facility.
DFI owned a small parcel of property adjacent to the Delta, Louisiana
facility, which the Company sold to JCD Partnership in July 1996 for the book
value of $30,000.
C. David Finch, M.D. owed DFI approximately $85,000 at the time of DFI's
acquisition by the Company evidenced by a note. C. David Finch, M.D. is
obligated to repay the Company over a three-year period with interest at the
rate of 8% per annum. Such repayments are expected to come from any bonuses C.
David Finch, M.D. may earn in connection with his employment as a medical
director with the Company. The balance of the note, if not then paid, will be
payable upon demand by the Company at the end of three years. As of December 31,
1996 and August 31, 1997, approximately $85,000 in principal remained unpaid,
together with accrued interest of $6,800 and $11,333 as of such dates,
respectively.
On July 31, 1996, the Company completed a bridge financing incident to a
shareholders' rights offering commenced in August 1996, and issued an aggregate
of 1,050,000 shares of Series B Preferred Stock and Series B Warrants to
purchase 78,751 shares of Common Stock. The Company received gross proceeds of
$1,050,000 in connection with the Series B Preferred financing. The following
directors and officers beneficially purchased Series B Preferred Stock and
Series B Warrants: Milton J. Wallace,
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<PAGE> 53
226,500 shares and 16,988 Series B Warrants; Dr. Arthur Shapiro, 126,500 shares
and 9,488 Series B Warrants; James P. Shea, 200,000 shares and 15,000 Series B
Warrants; John E. Hunt, Sr., 50,000 shares and 3,750 Series B Warrants; Charles
J. Simons, 100,000 shares and 7,500 Series B Warrants; and Orestes L. Lugo,
50,000 shares and 3,750 Series B Warrants. The Series B Preferred Stock was
called for redemption in November 1996. In connection with such redemption, the
holders thereof converted an aggregate of 775,000 shares of Series B Preferred
Stock into 268,250 shares of Common Stock including accrued dividends and the
Company redeemed 275,000 shares of Series B Preferred Stock for $275,000, plus
accrued dividends. The holders of the Series B Preferred Stock were entitled to
receive one share of Common Stock for every three shares of Series B Preferred
Stock converted, as well as one share of Common Stock for every $3.00 in accrued
dividends, in lieu of cash. The shares of Common Stock received upon conversion
of the Series B Preferred Stock were at the same price as the Common Stock sold
in the shareholders' rights offering.
Milton J. Wallace, Chairman of the Board of Directors of the Company, is a
shareholder of the law firm of Wallace, Bauman, Fodiman & Shannon, P.A. The law
firm serves as general counsel to the Company for which the firm received
$133,000 during 1996.
John E. Hunt, Sr., a Director of the Company, is Chairman of the Board of
Directors of Hunt Insurance Group, Inc., an insurance agency. Hunt Insurance
Group, Inc. arranges for various types of insurance policies for the Company and
receives commissions as a result of such policies.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, $.001 par value, and 5,000,000 shares of preferred stock, $.01
par value. As of the date of this Prospectus, there were 3,974,247 shares of
Common Stock presently issued and outstanding, held of record by 239
shareholders. Upon completion of this Offering, there will be 6,974,247 shares
of Common Stock issued and outstanding. No shares of preferred stock are
outstanding.
COMMON STOCK
Each outstanding share of Common Stock is entitled to one vote, either in
person or by proxy, in all matters that can be voted upon by the owners thereof
at meetings of shareholders. The holders of Common Stock: (i) have equal ratable
rights to dividends from funds legally available therefore when, as and if
declared by the board of directors of the Company; (ii) are entitled to share
ratably in all of the assets of the Company available for distribution to
holders of Common Stock upon liquidation, dissolution or winding up of the
affairs of the Company; (iii) do not have preemptive, subscription or conversion
rights, or redemption or sinking fund provisions applicable thereto; and (iv)
are entitled to one non-cumulative vote per share in all matters on which
shareholders may vote at all meetings of shareholders.
PREFERRED STOCK
The Board of Directors is authorized by the Company's Articles of
Incorporation, without any action of the shareholders, to issue one or more
class or series of preferred stock and to determine the dividend rights,
dividend rates, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, sinking fund provisions and designations of such class
or series. The Company has no present intention to issue any shares of preferred
stock.
The Company's Board of Directors could issue a series of preferred stock,
the terms of which, subject to certain limitations imposed by securities laws,
may impede the completion of a merger, tender offer or other takeover attempt.
The Company's Board of Directors will make any determination to issue such
shares based on its judgment as to the best interest of the Company and its
shareholders at the time of issuance. The Company's Board of Directors, in so
acting, could issue preferred stock having terms which could discourage an
acquisition attempt or other transaction that
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<PAGE> 54
some, or a majority, of the shareholders might believe to be in their best
interests or in which shareholders might receive a premium for their stock over
the then market price of such stock.
WARRANTS
Upon completion of the Offering, the Company will have four different
classes of warrants: (i) warrants to purchase 246,201 shares of Common Stock
exercisable until December 9, 1998 at an exercise price of $9.00 per share (the
"Warrants"); (ii) warrants to purchase 78,751 shares of Common Stock exercisable
until July 31, 1999 at an exercise price of $6.00 per share (the "Series B
Warrants"); (iii) warrants to purchase 116,669 shares of Common Stock
exercisable until November 15, 1999 at an exercise price of $3.00 per share (the
"Advisor Warrants"); and (iv) the Representatives' Warrants. A warrant to
purchase 211,023 shares of Common Stock issued in connection with certain
indebtedness will be redeemed upon consummation of this Offering. See "Use of
Proceeds."
The Company is not required to issue fractional shares upon exercise of any
warrants, but may make cash payments thereof, based on the then market price of
the Common Stock. No holder of any warrants will be entitled to vote, receive
dividends, or be deemed the holder of the Common Stock until such time as the
warrants shall have been duly exercised and payment of the purchase price shall
have been made. Shares of Common Stock issued upon the exercise of the warrants
and on payment of the purchase price will be legally issued, fully paid and
non-assessable.
WARRANTS
The Warrants were issued in December 1994. No adjustments as to dividends,
except stock dividends, will be made upon the exercise of the Warrants. The
Warrants are subject to equitable adjustment upon certain events, which include:
(i) the issuance of Common Stock as a dividend on the outstanding Common Stock;
(ii) subdivisions, combinations, and reclassifications of Common Stock; and
(iii) mergers, consolidations and similar events. The Warrants are redeemable at
the option of the Company in whole at any time or in part from time to time upon
30 days written notice to the holders of the Warrants at the redemption price of
$.30 per Warrant.
SERIES B WARRANTS
The Series B Warrants were issued in connection with the Company's sale of
1,050,000 shares of Series B Preferred Stock completed as of July 31, 1996. See
"Certain Transactions." No adjustments as to dividends, except stock dividends,
will be made upon the exercise of the Series B Warrants. The Series B Warrants
are subject to equitable adjustment upon certain events, which include: (i) the
issuance of Common Stock as a dividend on the outstanding Common Stock; (ii)
subdivisions, combinations, and reclassifications of Common Stock; and (iii)
mergers, consolidations and similar events. The holders of the Series B Warrants
have certain piggy-back registration rights, which have been waived in
connection with this Offering. See "Description of Securities -- Registration
Rights."
ADVISOR WARRANTS
The Advisor Warrants were issued to a financial advisor of the Company in
November 1996 in connection with services to be performed under a six month
advisory agreement. No adjustment as to dividends, except stock dividends, will
be made upon exercise of the Advisor Warrants. The Advisor Warrants are subject
to equitable adjustment upon certain events, including: (i) the issuance of
Common Stock for a price less than the exercise price of $3.00 per share; (ii)
subdivisions, combinations and reclassifications of the Common Stock; and (iii)
mergers, consolidations and similar events. The holder of the Advisor Warrants
has certain demand registration rights commencing six months following the
completion of the Offering and certain piggy-back registration rights, which
have been waived by the holders in connection with this Offering. See
"Description of Securities -- Registration Rights."
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<PAGE> 55
REPRESENTATIVES' WARRANTS
The Company has agreed to issue to the Representatives warrants to purchase
an aggregate of 300,000 shares of Common Stock at an exercise price equal to
107% of the initial public offering price set forth on the cover page of this
Prospectus. The Representatives' Warrants are exercisable for a period of five
years, beginning on the date of this Prospectus. The Company has granted the
holders of the Representatives' Warrants certain demand and piggy-back
registration rights with respect to the shares of Common Stock issuable upon the
exercise of such warrants. See "Description of Securities -- Registration
Rights" and "Underwriting."
ANTI-TAKEOVER PROVISIONS
Certain portions of the Company's Articles of Incorporation and By-laws may
make more difficult the acquisition of control of the Company by various means,
such as a tender offer, a proxy contest or otherwise. These provisions encourage
persons seeking to acquire control of the Company to consult first with the
Company's Board of Directors to negotiate the terms of any proposed business
combination or offer. The provisions are designed to reduce the vulnerability of
the Company to an unsolicited proposal for a takeover that does not contemplate
the acquisition of all outstanding shares of capital stock or which is otherwise
unfair to shareholders of the Company.
CLASSIFIED BOARD OF DIRECTORS
The Company's Articles of Incorporation provide for the Company's Board of
Directors to be divided into three classes, as nearly equal in number as is
reasonably possible, serving three year staggered terms, so that directors'
terms expire either at the 1997, 1998 or 1999 annual meeting of the Company's
shareholders. See "Management."
ADVANCE NOTICE
The Company's By-laws contain provisions relating to notice of shareholder
meetings, which would prohibit a shareholder from nominating a person to the
Board of Directors or proposing certain actions relating to the Company's
business without advance written notice to the Company. Such written notice must
be received a minimum of 90 days prior to a shareholders' meeting and must
contain specific information about the nominee and the shareholder who makes
such nomination or proposal.
ANTI-TAKEOVER PROVISIONS OF FLORIDA LAW
The Company is subject to the anti-takeover provisions of Section 607.0901
of the Florida Business Corporation Act (the "Affiliated Transaction Statute").
In general, the Affiliated Transaction Statute requires the approval of the
holders of two-thirds of the voting shares of a corporation, other than shares
owned by an "interested shareholder," in order to effect an "affiliated
transaction," such as a merger, sale of assets, or sale of shares, between a
corporation and an interested shareholder. An "interested shareholder" is
defined as a beneficial owner of 10% or more of the outstanding voting
securities of the corporation. Such approval is not required where: (i) the
affiliated transaction is approved by a majority of the disinterested directors;
(ii) the interested shareholder owns 90% or more of the corporation's
outstanding voting stock, or has owned 80% or more for five years; or (iii) the
consideration paid in connection with the affiliated transaction satisfies the
statutory "fair price" formula and the transaction meets certain other
requirements. A corporation may elect, by the vote of a majority of the
outstanding voting securities of the corporation (not including shares held by
an interested shareholder), or by amendment to the articles or by-laws of the
corporation, not to be subject to the provisions of the Affiliated Transaction
Statute. The election will not be effective until 18 months after it is made,
and will not apply to any affiliated transaction between the corporation and
someone who was an interested shareholder prior to the effective date of the
election.
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<PAGE> 56
The Company may also be subject to the provisions of Section 607.0902 of
the Florida Business Corporation Act (the "Control Share Acquisition Statute").
Under such statute, "control shares" of certain corporations acquired in a
"control share acquisition," with certain exceptions, have no voting rights
unless such rights are granted pursuant to a vote of the holders of a majority
of the corporation's voting securities (excluding all "interested shares").
"Control shares" are shares that, when added to all other shares which a person
owns or has the power to vote, would give that person any of the following
grants of voting power: (i) one-fifth or more but less than one-third of the
voting power; (ii) one-third or more but less than a majority of the voting
power; and (iii) more than a majority of the voting power. A "control share
acquisition" is the acquisition of ownership of, or the power to vote,
outstanding control shares. Shares acquired within 90 days, or as part of a plan
to effect a control share acquisition, are deemed to have been acquired in the
same transaction. "Interested shares" include shares held by the person
attempting to effect the control share acquisition, and shares held by
employee-directors or officers of the corporation. A corporation may elect not
to be subject to the Control Share Acquisition Statute by amendment to its
articles or by-laws.
REGISTRATION RIGHTS
The holders of 333,334 shares of Common Stock (the "Holders") are entitled
to certain rights with respect to the registration of such shares under the
Securities Act of 1933, as amended (the "Securities Act"). Under the terms of an
agreement between the Company and such Holders, such Holders, commencing two
years following receipt of Medicare certification of a proposed dialysis
facility in New Jersey (which the Company expects to receive by the end of the
first quarter of 1998), may require the Company to file a registration statement
covering such shares under the Securities Act, at the Company's expense.
However, such registration rights will not be exercisable if the provisions of
Rule 144 would allow the sale of such shares. In addition, following the
Offering, if the Company thereafter proposes to register any of its Common
Stock, subject to certain exceptions, the Holders are entitled to include their
shares of Common Stock in such registration, at the Company's expense.
Holders of the Series B Warrants have certain rights with respect to the
registration of 78,751 shares of Common Stock underlying the Series B Warrants.
If the Company proposes to register any of its Common Stock, the holders of the
Series B Warrants are entitled to include, subject to such limitations imposed
by the managing underwriters of such offering, their shares of Common Stock in
such registration, at the Company's expense. All of the holders of the Series B
Warrants have waived their right to be included in the Offering.
Holders of the Advisor Warrants also have certain rights with respect to
the registration of the 116,669 shares of Common Stock underlying the Advisor
Warrants. If the Company proposes to register any of its Common Stock, the
holders of the Advisor Warrants are entitled to include, subject to such
limitations imposed by the managing underwriters of such offering, their shares
of Common Stock in such registration, at the Company's expense. All of the
holders of the Advisor Warrants have waived their right to be included in the
Offering. In addition, the holders of the Advisor Warrants have demand
registration rights commencing six months following the completion of this
Offering.
The Company has also granted certain demand and piggy-back registration
rights to the Representatives with respect to the Common Stock issuable upon
exercise of the Representatives' Warrants. See "Underwriting."
TRANSFER AGENT
The Transfer Agent for the Common Stock of the Company is Continental Stock
Transfer and Trust Company, New York, New York.
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<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Common Stock by the Company's current
shareholders could adversely affect the market price of the Common Stock. Upon
completion of the Offering, the Company will have outstanding an aggregate of
6,974,247 shares of Common Stock. In addition, the Company has reserved for
issuance 1,145,854 shares issuable upon exercise of outstanding options and
warrants, including the Representatives' Warrants. The 3,000,000 shares of
Common Stock offered hereby will be freely transferable without restriction or
further registration under the Securities Act, except for such shares acquired
by affiliates of the Company. Shares purchased by affiliates of the Company
would be subject to certain volume and other restrictions upon resale as
described below.
The remaining 3,947,247 shares of Common Stock held by existing
shareholders are "restricted securities" as that term is defined by Rule 144
under the Securities Act. Pursuant to certain "lock-up" agreements, the
Company's directors, officers and certain of its shareholders who collectively
hold an aggregate of 3,894,659 shares of Common Stock, together with the
Company, have agreed that they will not offer, pledge, sell, contract to sell,
grant any option for the sale of, or otherwise dispose of, directly or
indirectly, any shares of Common Stock without the prior written consent of
Vector Securities International, Inc. for a period of 180 days following the
date of this Prospectus. Following the 180-day period, approximately 1,534,498
shares of Common Stock will be eligible for sale in the public market without
restriction pursuant to Rule 144(k), and an additional 2,360,161 shares will be
eligible for sale under Rule 144, subject to certain volume, manner of sale and
other restrictions of Rule 144. Of the 79,588 shares of restricted Common Stock
held by existing shareholders of the Company not subject to lock-up agreements,
77,422 shares will be eligible for immediate sale in the public market without
restriction under Rule 144(k). The remaining 2,166 shares of Common Stock not
subject to lock-up agreements will become eligible for sale, subject to certain
volume, manner of sale and other limitations under Rule 144 commencing 90 days
following the date of this Prospectus. In addition, holders of stock options or
warrants, including the Representatives' Warrants, exercisable for an aggregate
of 1,145,854 shares of Common Stock have entered into agreements prohibiting the
sales of the underlying Common Stock for 180 days following the date of this
Prospectus. In addition, the Representatives' are generally prohibited from
selling or otherwise transferring the Representatives' Warrants for twelve
months from the date of this Prospectus. See "Principal Shareholders" and
"Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, any person who has beneficially owned restricted
securities for at least one year will be entitled to sell in any three-month
period a number of shares that does not exceed the greater of: (i) one percent
of the then outstanding shares of the Company's Common Stock (approximately
69,000 shares immediately after the Offering); or (ii) the average weekly
trading volume of the Company's Common Stock in the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission. Sales pursuant to
Rule 144 are subject to certain requirements relating to manner of sale, notice
and availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the 90 days immediately preceding the sale and
who has beneficially owned the shares proposed to be sold for at least two years
is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Employee
Plan. Based on the options outstanding and shares reserved for issuance as of
the date of this Prospectus, such registration statement would cover
approximately 325,048 shares. Such registration statement is expected to be
filed and to become effective as soon as practicable after the date of this
Prospectus. Shares registered in such registration will, subject to Rule 144
volume limitations applicable to affiliates, be available for sale in the open
market upon expiration of the contractual restrictions discussed above. Holders
of warrants to purchase an aggregate of 495,420 shares of Common Stock including
the Representatives' Warrants have been granted certain registration rights. See
"Management" and "Description of Securities -- Registration Rights."
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<PAGE> 58
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Vector Securities
International, Inc. and Needham & Company, Inc. are acting as representatives
(the "Representatives"), have severally agreed to purchase, subject to the terms
and conditions of the Underwriting Agreement, and the Company has agreed to sell
to the Underwriters, the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Vector Securities International, Inc. ......................
Needham & Company, Inc. ....................................
---------
Total............................................. 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby, if any of such shares are
purchased. The Underwriting Agreement contains certain provisions whereby if any
Underwriter defaults in its obligation to purchase shares, and the aggregate
obligations of the Underwriters so defaulting do not exceed 10% of the shares
offered hereby, the remaining Underwriters, or some of them, must assume such
obligations.
The Underwriters propose to offer the shares of Common Stock directly to
the public at the offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not in excess of
$ per share. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per share to certain other dealers.
After the public offering of the shares of Common Stock, the offering price and
other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable at any
time during the 30-day period no later than 30 days after the date of this
Prospectus, to purchase up to 450,000 additional shares of Common Stock at the
public offering price set forth on the cover page of this Prospectus, less
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, in connection
with the Offering. To the extent such option is exercised, each Underwriter will
be obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares of Common Stock set
forth next to such Underwriter's name in the preceding table bears to the total
number of shares listed in the table. The Company will be obligated, pursuant to
the option, to sell such shares to the Underwriters to the extent the option is
exercised.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members in
the Offering, if the syndicate repurchases previously distributed Common Stock
in syndicate covering transactions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the Common
Stock above independent market levels. The Underwriters are not required to
engage in these activities, and may end any of these activities at any time.
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<PAGE> 59
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Company has agreed to issue to the Representatives warrants to purchase
up to an aggregate of 300,000 shares of Common Stock, exercisable for a period
of five years commencing on the date of this Prospectus, at a price equal to
107% of the initial public offering price set forth on the cover page of this
Prospectus. The Representatives' Warrants contain provisions providing for
adjustment of the exercise price and the number and type of securities issuable
upon the exercise thereof upon the occurrence of certain events, including the
issuance of any shares of Common Stock or other securities convertible into or
exercisable for shares of Common Stock at a price per share less than the
exercise price, or the market price of the Common Stock, or in the event of any
stock dividend, stock split, stock combination or similar transaction. Holders
of the Representatives' Warrants have been granted certain demand and piggy-back
registration rights under the Securities Act with respect to the securities
issuable upon exercise of the Representatives' Warrants. For a period of twelve
months from the date of this Prospectus, the Representatives are generally
prohibited from selling or otherwise transferring the Representatives' Warrants
or the Common Stock underlying the Representatives' Warrants. Thereafter, the
Representatives' Warrants will be transferable subject to compliance with the
Securities Act. See "Description of Securities -- Registration Rights" and
'Shares Eligible For Future Sale."
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The officers, directors and certain other shareholders of the Company have
agreed, that they will not, without the prior written consent of Vector
Securities International, Inc., offer, sell or otherwise dispose of any shares
of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock owned by
them for a period of 180 days after the date of this Prospectus. The Company has
agreed that it will not, without the prior written consent of Vector Securities
International, Inc., offer, sell or otherwise dispose of any shares of Common
Stock, options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock for a period of 180
days after the date of this Prospectus. See "Shares Eligible For Future Sales."
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the shares of Common
Stock included in the Offering will be determined by negotiations between the
Company and the Representatives. Among the factors to be considered in
determining such price will be: the history of, and the prospects for, the
Company's business and the industry in which it competes; an assessment of the
Company's management and the present state of the Company's development; the
past and present revenues and earnings of the Company; the prospects for growth
of the Company's revenues and earnings; the current state of the economy in the
United States; and the current level of economic activity in the industry in
which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
market valuations of publicly traded companies that are comparable to the
Company.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
and certain other legal matters will be passed upon for the Company by Wallace,
Bauman, Fodiman & Shannon, P.A., Coral Gables, Florida and Haythe & Curley, New
York, New York. Milton J. Wallace, Chairman of the Board of the Company, is a
shareholder of Wallace, Bauman, Fodiman & Shannon, P.A. and beneficially owns
743,558 shares of Common Stock. Other shareholders of such firm beneficially own
an aggregate of 22,197 shares of Common Stock. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois. Haythe &
Curley and Skadden, Arps, Slate, Meagher & Flom (Illinois) will rely on the
opinion of Wallace, Bauman, Fodiman & Shannon, P.A., as to matters of Florida
law.
57
<PAGE> 60
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996, and for the years ended December 31, 1995 and 1996, included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of the Company for the year ended
December 31, 1994 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent certified public accountants, as
set forth in their report therein appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The statements of law in this Prospectus under the captions "Risk
Factors -- Dependence upon Government Reimbursement," "Risk
Factors -- Operations Subject to Extensive Government Regulation,"
"Business -- Sources of Reimbursement" and "Business -- Government Regulation"
have been reviewed and approved by Lashly & Baer, health care counsel for the
Company, as experts on such matters, and are included herein in reliance upon
that review and approval.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto,
relating to the Common Stock offered by the Company has been filed with the
Securities and Exchange Commission, Washington, D.C. 20549 ("Commission"). This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules thereto. A copy of the Registration Statement may be
inspected by anyone without charge at the public reference facilities maintained
by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
any part thereof may be obtained from such offices, upon payment of certain fees
prescribed by the Commission. The Commission maintains a World Wide Website that
contains reports, proxy and information statements and other information filed
electronically with the Commission. The address of the Commission's World Wide
Website is http://www.sec.gov.
Following the effective date of the Registration Statement, the Company
will be subject to the information requirements of the Securities Exchange Act
of 1934, and in accordance therewith will file reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission in Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 or through the Commission's World Wide Website.
58
<PAGE> 61
RENEX CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Report of Independent Certified Public Accountants.......... F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996
and June 30, 1997 (unaudited)............................. F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996 and the Six Months Ended
June 30, 1996 and 1997 (unaudited)........................ F-5
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1994, 1995 and 1996 and the Six
Months Ended June 30, 1996 and 1997 (unaudited)........... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996 and the Six Months Ended
June 30, 1996 and 1997 (unaudited)........................ F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Renex Corp. and Subsidiaries
Miami, Florida:
We have audited the accompanying consolidated balance sheets of Renex Corp.
and Subsidiaries (the "Company") as of December 31, 1995 and 1996 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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, such 1995 and 1996 consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the two years then ended in conformity with generally accepted
accounting principles.
DELOITTE AND TOUCHE LLP
Miami, Florida
April 18, 1997, except for Note 18
for which the date is April 22, 1997
F-2
<PAGE> 63
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Renex Corp. and Subsidiaries
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Renex Corp. and Subsidiaries (the
"Company") for the year ended December 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated result of operations and cash flows
of the Company for the year ended December 31, 1994 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Miami, Florida
March 8, 1995
F-3
<PAGE> 64
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,234,000 $ 952,000 $ 781,000
Accounts receivable (net of allowance for doubtful
accounts of $393,000 in 1995, $1,261,000 in 1996 and
$1,336,000 as of June 30, 1997)......................... 3,693,000 4,535,000 5,907,000
Inventories............................................... 272,000 347,000 390,000
Prepaids and other........................................ 35,000 225,000 473,000
----------- ----------- -----------
Total current assets............................... 5,234,000 6,059,000 7,551,000
Fixed assets, net........................................... 3,774,000 6,042,000 6,526,000
Intangible assets, net...................................... 1,058,000 1,309,000 1,196,000
Notes receivable from affiliates (interest rate at 9%
(1995), 8% (1996)
and 8% (June 30, 1997))................................... 112,000 85,000 85,000
Other assets, including $1,384,000 in 1995, $1,168,000 in
1996 and $1,058,000 as of June 30, 1997 of deferred
financing costs........................................... 1,637,000 1,666,000 1,737,000
----------- ----------- -----------
TOTAL ASSETS....................................... $11,815,000 $15,161,000 $17,095,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 756,000 $ 708,000 $ 1,517,000
Accrued expenses and other................................ 520,000 2,393,000 2,353,000
Note payable to bank...................................... 337,000 -- --
Notes payable to affiliates............................... 94,000 -- --
Current portion of long-term debt......................... 113,000 46,000 7,000
Current portion of capital lease obligations.............. 363,000 523,000 403,000
----------- ----------- -----------
Total current liabilities.......................... 2,183,000 3,670,000 4,280,000
----------- ----------- -----------
Line of credit.............................................. 1,000,000
-----------
Long-term debt, less current portion........................ 4,810,000 6,184,000 6,193,000
----------- ----------- -----------
Capital lease obligations, less current portion............. 658,000 990,000 1,796,000
----------- ----------- -----------
Shareholders' equity:
Series A redeemable preferred stock, $.01 par value,
5,000,000 shares authorized, 1,000,000 shares issued and
outstanding (1995)...................................... 10,000 -- --
Common stock, $.001 par value, 30,000,000 shares
authorized, 2,358,857 shares (1995), 3,970,114 shares
(1996) and 3,974,247 shares (June 30, 1997) issued and
outstanding............................................. 2,000 3,000 3,000
Additional paid-in capital.................................. 6,503,000 9,151,000 9,163,000
Accumulated deficit......................................... (2,351,000) (4,837,000) (5,340,000)
----------- ----------- -----------
Total shareholders' equity......................... 4,164,000 4,317,000 3,826,000
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $11,815,000 $15,161,000 $17,095,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 65
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................................ $2,746,000 $ 8,794,000 $18,569,000 $8,320,000 $12,432,000
Operating expenses:
Facilities................................ 2,405,000 6,809,000 14,625,000 6,354,000 9,679,000
General and administrative................ 1,025,000 1,682,000 2,681,000 1,163,000 1,304,000
Provision for doubtful accounts........... 93,000 495,000 1,293,000 561,000 493,000
Depreciation and amortization............. 126,000 509,000 1,642,000 577,000 787,000
---------- ----------- ----------- ---------- -----------
Operating income (loss)................. (903,000) (701,000) (1,672,000) (335,000) 169,000
Other income (expenses):
Gain (loss) on sale of assets............. -- -- 364,000 -- (27,000)
Net interest income (expense)............. 61,000 (360,000) (915,000) (419,000) (537,000)
Amortization of deferred financing
costs................................... -- (126,000) (226,000) (108,000) (108,000)
---------- ----------- ----------- ---------- -----------
Net (loss).................................. $ (842,000) $(1,187,000) $(2,449,000) $ (862,000) $ (503,000)
========== =========== =========== ========== ===========
Net (loss) per share........................ $ (.31) $ (.40) $ (.66) $ (.25) $ (.12)
========== =========== =========== ========== ===========
Weighted average number of common shares and
equivalents outstanding................... 2,759,884 2,963,193 3,693,617 3,503,664 4,067,747
========== =========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 66
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
REDEEMABLE REDEEMABLE ------------------- COMMON
PREFERRED STOCK PREFERRED STOCK NUMBER OF ADDITIONAL STOCK
SERIES A SERIES B SHARES AMOUNT PAID-IN CAPITAL SUBSCRIBED
--------------- --------------- --------- ------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994............ $ 10,000 1,733,333 $2,000 $3,913,000
Sale of common stock through
exercise of warrants (net of
expenses of $15,000).............. 111,667 655,000 $ 290,000
Repurchase of warrants.............. (72,000)
Sale of common stock................ 23,000 139,000
Net loss............................
-------- ------- --------- ------ ---------- ---------
Balance at December 31, 1994.......... 10,000 1,868,000 2,000 4,635,000 290,000
Sale of common stock through
exercise of warrants (net of
expenses of $9,000)............... 45,000 261,000 (290,000)
Sale of common stock................ 64,333 386,000
Stock warrants issued with debt..... 150,000
Issuance of common stock............ 4,667 20,000
Issuance of common stock for
acquisition....................... 376,857 1,051,000
Net loss............................
-------- ------- --------- ------ ---------- ---------
Balance at December 31, 1995.......... 10,000 2,358,857 2,000 6,503,000
Issuance of common stock for
acquisition....................... 333,333 790,000
Sale of common stock (net of
expenses of $21,000).............. 351,007 1,058,000
Issuance of preferred stock......... $11,000 1,039,000
Conversion of preferred stock....... (10,000) (8,000) 926,917 1,000 47,000
Redemption of preferred stock....... (3,000) (286,000)
Net loss............................
-------- ------- --------- ------ ---------- ---------
Balance at December 31, 1996.......... 3,970,114 3,000 9,151,000
Sale of common stock (unaudited).... 4,133 12,000
Net loss (unaudited)................
-------- ------- --------- ------ ---------- ---------
Balance at June 30, 1997
(unaudited)......................... $ $ 3,974,247 $3,000 $9,163,000 $
======== ======= ========= ====== ========== =========
<CAPTION>
SUBSCRIPTIONS
RECEIVABLE FROM
EXERCISE OF ACCUMULATED
WARRANTS DEFICIT TOTAL
--------------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1, 1994............ $ (322,000) $ 3,603,000
Sale of common stock through
exercise of warrants (net of
expenses of $15,000).............. $(290,000) 655,000
Repurchase of warrants.............. (72,000)
Sale of common stock................ 139,000
Net loss............................ (842,000) (842,000)
--------- ----------- -----------
Balance at December 31, 1994.......... (290,000) (1,164,000) 3,483,000
Sale of common stock through
exercise of warrants (net of
expenses of $9,000)............... 290,000 261,000
Sale of common stock................ 386,000
Stock warrants issued with debt..... 150,000
Issuance of common stock............ 20,000
Issuance of common stock for
acquisition....................... 1,051,000
Net loss............................ (1,187,000) (1,187,000)
--------- ----------- -----------
Balance at December 31, 1995.......... (2,351,000) 4,164,000
Issuance of common stock for
acquisition....................... 790,000
Sale of common stock (net of
expenses of $21,000).............. 1,058,000
Issuance of preferred stock......... 1,050,000
Conversion of preferred stock....... (30,000)
Redemption of preferred stock....... (7,000) (296,000)
Net loss............................ (2,449,000) (2,449,000)
--------- ----------- -----------
Balance at December 31, 1996.......... (4,837,000) 4,317,000
Sale of common stock (unaudited).... 12,000
Net loss (unaudited)................ (503,000) (503,000)
--------- ----------- -----------
Balance at June 30, 1997
(unaudited)......................... $ $(5,340,000) $ 3,826,000
========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 67
RENEX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss............................................... $ (842,000) $(1,187,000) $(2,449,000) $ (862,000) $ (503,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provisions for doubtful accounts..................... 93,000 495,000 1,293,000 561,000 493,000
Depreciation and amortization........................ 126,000 509,000 1,642,000 577,000 787,000
Amortization of deferred financing costs............. -- 126,000 226,000 108,000 108,000
Loss on sale of fixed assets......................... -- -- 100,000 -- 27,000
Gain from sale of facility........................... -- -- (364,000) -- --
Changes in operating assets and liabilities:
Increase in accounts receivable.................... (1,438,000) (2,171,000) (2,135,000) (1,276,000) (1,865,000)
(Increase) decrease in inventories................. (63,000) (110,000) (75,000) (69,000) (43,000)
(Increase) decrease in prepaids and other current
assets........................................... (98,000) 78,000 (190,000) (100,000) (248,000)
(Increase) decrease in other assets................ (96,000) (302,000) (245,000) 27,000 (185,000)
Increase in accounts payable and accrued
expenses......................................... 231,000 316,000 1,241,000 500,000 1,191,000
----------- ----------- ----------- ---------- -----------
Net cash used in operating activities............ (2,087,000) (2,246,000) (956,000) (534,000) (238,000)
----------- ----------- ----------- ---------- -----------
Cash Flows from Investing Activities:
Purchases of fixed assets.............................. (1,201,000) (1,505,000) (2,396,000) (545,000) (623,000)
Cash acquired in acquisitions.......................... -- 130,000 -- -- --
Proceeds from the sale of fixed assets................. -- -- 776,000 -- 36,000
----------- ----------- ----------- ---------- -----------
Net cash used in investing activities............ (1,201,000) (1,375,000) (1,620,000) (545,000) (587,000)
----------- ----------- ----------- ---------- -----------
Cash Flows from Financing Activities:
Net change in notes receivable from affiliates......... -- -- 27,000 -- --
Repayment of note payable to bank...................... -- -- (337,000) (18,000) --
Payments on capital lease obligations.................. (3,000) (225,000) (353,000) (226,000) (328,000)
Proceeds from long-term debt........................... -- 5,600,000 1,500,000 1,500,000 --
Proceeds from stock warrants........................... -- 150,000 -- -- --
Proceeds from line of credit........................... -- -- -- -- 1,500,000
Net change in notes payable to affiliates.............. -- -- (94,000) -- --
Repayments of long-term debt........................... -- (800,000) (261,000) (1,000) (30,000)
Payments on line of credit............................. -- -- -- -- (500,000)
Proceeds from sale of stock through exercise of
warrants............................................. 654,000 261,000 -- --
Proceeds from sale of stock............................ 139,000 386,000 2,108,000 -- 12,000
Repurchase of warrants................................. (25,000) (26,000) -- -- --
Payment of deferred financing costs.................... -- (1,510,000) -- -- --
Redemption of preferred stock.......................... -- -- (296,000) -- --
----------- ----------- ----------- ---------- -----------
Net cash provided by financing activities........ 765,000 3,836,000 2,294,000 1,255,000 654,000
----------- ----------- ----------- ---------- -----------
(Decrease) Increase in Cash and Cash Equivalents......... (2,523,000) 215,000 (282,000) 176,000 (171,000)
Cash and cash equivalents, beginning of period........... 3,542,000 1,019,000 1,234,000 1,234,000 952,000
----------- ----------- ----------- ---------- -----------
Cash and cash equivalents, end of period................. $ 1,019,000 $ 1,234,000 $ 952,000 $1,410,000 $ 781,000
=========== =========== =========== ========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest................................. $ 1,000 $ 446,000 $ 971,000 $ 439,000 $ 555,000
=========== =========== =========== ========== ===========
Non-Cash Investing and Financing Activities:
Equipment acquired through capital lease obligations... $ 223,000 $ 970,000 $ 1,267,000 $ 431,000 $ 592,000
Lease equipment liability.............................. -- 422,000 -- --
Conversion of preferred stock.......................... -- -- 48,000 -- --
Stock issued for acquisition........................... -- 1,051,000 790,000 -- --
Issuance of Common Stock............................... -- 20,000 -- -- --
Stock subscriptions receivable for Common Stock
subscribed........................................... 290,000 -- -- -- --
Warrant redemption payable for repurchase of
warrants............................................. 47,000 -- -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 68
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
(UNAUDITED) SIX MONTHS ENDED JUNE 30, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION. Renex Corp., a Florida corporation, was incorporated on July
7, 1993. Renex Corp. and its subsidiaries (the "Company") provide kidney
dialysis services to patients suffering from end-stage renal disease. The
Company currently operates, through wholly-owned subsidiaries, twelve dialysis
facilities and two home dialysis programs in seven states. Additionally, the
Company has entered into patient dialysis service agreements with several
hospitals to provide dialysis treatments on an inpatient basis.
The Company has a limited operating history and had an accumulated deficit
of $4,837,000 through December 31, 1996 and is subject to all the risks inherent
in the establishment of a new business enterprise. The Company's ability to
achieve profitability is dependent upon increased utilization of its existing
facilities, controlling operating costs and its ability to develop or acquire
and manage additional dialysis facilities. The Company has availability in its
lines of credit and will continue to rely on external financing to meet its cash
needs.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its subsidiaries, all of which are wholly-owned.
All intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION (UNAUDITED). The unaudited interim financial
statements as of June 30, 1997 and for the six months ended June 30, 1996 and
1997 have been prepared on the same basis as the audited financial statements
included herein. In the opinion of management, such unaudited interim financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the results for such periods. The
operating results for the six months ended June 30, 1997 are not necessarily
indicative of the operating results to be expected for the full fiscal year or
for any future period.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of the revenues and expenses
during the reporting period. Actual results could differ from those estimates.
NET REVENUES. The Company has agreements with third-party payors that
provide for payments to the Company at amounts different from its established
rates. These third-party payors include Medicare, Medicaid, commercial insurance
carriers, health maintenance organizations and preferred provider organizations.
The basis for payment to the Company under these agreements primarily includes
prospectively determined rates and discounts from established charges. The
Company's net revenues are recorded at the estimated realizable amounts from
third-party payors. The Company provides an allowance for doubtful accounts
based on historical experience of amounts that result to be uncollectible.
Amounts written off are charged against the allowance.
During the years ended December 31, 1994, 1995 and 1996, the Company
received approximately 65%, 59% and 67%, respectively, of its dialysis revenues
from Medicare and Medicaid programs. The remaining balance of dialysis revenues
was from insurance companies and private and other third-party payors.
Revenues associated with the administration of erythropoietin ("EPO") are a
significant source of revenue for the Company. The Company is unable to predict
future changes in the reimbursement rate for EPO treatments, the typical dosage
per administration, or the cost of the medication. In addition,
F-8
<PAGE> 69
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EPO is produced by only one manufacturer. The interruption of supplies of EPO to
the Company would have a material adverse effect on the Company's business,
financial condition and results of operations.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out) or market.
FIXED ASSETS. Fixed assets are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
ranging from five to ten years for medical and other equipment, and furniture
and fixtures, and twenty years for buildings. Leasehold improvements are
amortized over the lease term or the useful life of the assets, whichever is
lower.
Equipment held under capital lease obligations has been capitalized at the
present value of the minimum lease payments. Depreciation of assets capitalized
under lease obligations is computed under the straight-line method over the
lives of the assets or leases, whichever is appropriate, and is included in
depreciation expense.
INTANGIBLE ASSETS.
NON-COMPETE AGREEMENTS. Non-compete agreements are being amortized
over the terms of the agreements, typically from 2 to 10 years, using the
straight-line method.
PATIENT LISTS. Patient lists are amortized over 5 years, using the
straight-line method.
GOODWILL. Goodwill, the excess of the aggregate purchase price over
the fair value of net assets acquired, is amortized over 20 years using the
straight-line method.
Management evaluates intangible assets for possible impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. This evaluation is based on certain financial
indicators, such as estimated future undiscounted cash flows.
INCOME TAXES. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE. Net loss per common and
common equivalent share amounts are based on the average number of common shares
outstanding for each period, after giving effect to the reverse stock split
discussed in Note 18. In accordance with Securities and Exchange Commission
requirements, common stock equivalent shares issued during the twelve month
period prior to the proposed initial public offering have been included in the
calculation as if they were outstanding for all periods, using the treasury
stock method.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments
include receivables, payables, debt and credit lines. The fair values of such
financial instruments have been determined based on market interest rates as of
December 31, 1996. The fair values were not materially different than their
carrying values.
STOCK BASED COMPENSATION. Statement of Financial Accounting Standards No.
123, Accounting for Stock Based Compensation ("SFAS 123") encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to
F-9
<PAGE> 70
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
continue to account for stock-based compensation to employees using the
intrinsic value method as prescribed by Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, compensation cost for stock options issued to
employees is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay for
the stock. Compensation cost related to stock options of non-employees is
recorded at fair value.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS. In March 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
Earnings per Share ("SFAS 128"). This statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. This statement is
effective for financial statements issued for periods ending after December 15,
1997 and earlier application is not permitted. This statement requires
restatement of all prior period EPS data presented. The Company will adopt SFAS
128 in the fourth quarter of the fiscal year ending December 31, 1997. The pro
forma basic (loss) per share and diluted (loss) per share calculated in
accordance with SFAS 128 for the fiscal years ended December 31, 1994, 1995 and
1996, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Pro forma basic (loss) per share............................ $(.48) $(.61) $(.84)
Pro forma diluted (loss) per share.......................... $(.48) $(.61) $(.84)
</TABLE>
During February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129"). SFAS 129 requires entities to explain, in
summary form within their financial statements, the pertinent rights and
privileges of the various securities outstanding. Information that shall be
disclosed should include dividend and liquidation preferences, participation
rights, call prices and dates, conversion or exercise prices or rates and
pertinent dates, sinking fund requirements, unusual voting rights, and
significant terms of contracts to issue additional shares. SFAS 129 is effective
for periods ending after December 15, 1997. The adoption of this accounting
standard is not expected to have a material impact on the financial statements.
2. BUSINESS COMBINATIONS
In April 1996, the Company, through two wholly owned subsidiaries, acquired
two limited liability companies, Central Dialysis Center, L.L.C. and
Metropolitan Dialysis Center, L.L.C., each with an interest in two facilities
under development. The acquisitions have been accounted for under the purchase
method.
Central Dialysis Center, L.L.C. was acquired for 166,667 shares valued at
$395,000 and assumed liabilities of $121,000. The Company entered into
non-compete agreements with a group of nephrologists for a period of two and
one-half years and completed the build-out of the facility, which began
operations in October 1996. The purchase price of $516,000 was allocated to the
non-compete agreements.
Metropolitan Dialysis Center, L.L.C. was also acquired for 166,667 shares
valued at $395,000 and assumed liabilities of $42,000. The Company also entered
into non-compete agreements with a similar group of nephrologists. However, this
facility was not completed due to the zoning variance request being denied. The
Company is in the process of finding a suitable location to build the new
facility.
F-10
<PAGE> 71
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based on the Company's inability to generate revenue without a facility and the
uncertainty that a location will be found, the Company has determined the assets
to be impaired and, accordingly, has written off the intangible assets of
$437,000.
In December 1995, Dialysis Facilities, Inc. ("DFI"), which operates three
dialysis facilities and two acute dialysis programs in Mississippi and
Louisiana, was acquired by the Company through a wholly owned subsidiary. The
Company issued 376,857 shares of the Company's common stock with an estimated
value of $1,051,000 to DFI shareholders in exchange for all of the outstanding
common stock of DFI. The transaction was accounted for using the purchase method
of accounting. Accordingly, a portion of the purchase price was allocated to the
net assets acquired based on their estimated fair values. The balance of the
purchase price, $846,000, was recorded as goodwill.
The following table reflects pro forma combined results of operations of
Renex and DFI on the basis that the acquisition had taken place and was recorded
at the beginning of the fiscal years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- -----------
<S> <C> <C>
Net revenues:
Renex..................................................... $2,746,000 $ 8,794,000
DFI....................................................... 2,116,000 3,111,000
---------- -----------
$4,862,000 $11,905,000
========== ===========
Net income (loss):
Renex..................................................... $ (842,000) $(1,187,000)
DFI....................................................... 33,000 (11,000)
---------- -----------
$ (809,000) $(1,198,000)
========== ===========
</TABLE>
3. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the Company's allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
------- -------- ----------
<S> <C> <C> <C>
Beginning balance........................................... $ -- $ 93,000 $ 393,000
Provision for doubtful accounts............................. 93,000 495,000 1,293,000
Write-offs.................................................. -- (195,000) (425,000)
------- -------- ----------
Ending balance.............................................. $93,000 $393,000 $1,261,000
======= ======== ==========
</TABLE>
The Company grants credit without collateral to its patients, most of whom
are insured under third party payor agreements, including Medicare and Medicaid,
which represent the significant portion of the balance of receivables. The
remaining receivables are primarily due from third party payors, including
managed care companies, commercial and insurance. The Company also has
receivables due from patients who are self-payors or owe co-payments.
F-11
<PAGE> 72
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FIXED ASSETS
Fixed assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- -----------
<S> <C> <C>
Land........................................................ $ 24,000 $ --
Building and leasehold improvements......................... 2,234,000 4,008,000
Medical equipment........................................... 859,000 872,000
Equipment, furniture and fixtures........................... 581,000 656,000
Equipment, under capital lease obligations.................. 944,000 2,170,000
---------- -----------
Total.............................................. 4,642,000 7,706,000
Less accumulated depreciation and amortization.............. (868,000) (1,664,000)
---------- -----------
Fixed assets -- net......................................... $3,774,000 $ 6,042,000
========== ===========
</TABLE>
5. MEDICAL MALPRACTICE INSURANCE
The Company maintains general liability and professional malpractice
liability insurance on its staff and other insurance appropriate for its
operations. The general liability policy provides coverage of $2,000,000 per
occurrence and $2,000,000 in the aggregate. The professional liability policy
provides coverage for professional (medical) activities of the Company's
employees. This policy provides coverage of $1,000,000 per occurrence and
$3,000,000 in the aggregate.
6. NOTE PAYABLE TO BANK
Consisted of borrowings under a line of credit the Company had with a bank,
with interest at prime plus 1%, and that were collateralized by certain accounts
receivable. The line of credit was paid in full in September 1996.
7. NOTES PAYABLE TO AFFILIATES
Consisted of two unsecured 9% demand notes in 1995. These notes were paid
in full in 1996.
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
Senior subordinated debt (a), net of warrants............... $4,650,000 $6,184,000
Note payable to bank, collateralized by certain fixed assets
and inventory accruing interest at 9.75%, due in monthly
installments, maturing November 1998...................... 170,000 11,000
Various notes payable to banks, collateralized by certain
medical and other equipment, accruing interest at rates
ranging from 7.5% to 10%, due in monthly installments,
with maturities ranging from February 1997 to April
1998...................................................... 103,000 35,000
---------- ----------
$4,923,000 $6,230,000
========== ==========
</TABLE>
F-12
<PAGE> 73
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The maturity schedule of long-term debt as of December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
YEAR ENDING TOTAL
- ----------- ----------
<S> <C>
1997........................................................ $ 26,000
1998........................................................ 20,000
1999........................................................ 1,008,000
2000........................................................ 2,016,000
2001........................................................ 2,142,000
Thereafter.................................................. 1,134,000
----------
$6,346,000
Amount representing warrants................................ (116,000)
----------
Total....................................................... $6,230,000
==========
</TABLE>
(a) On June 5, 1995, the Company entered into a senior subordinated secured
loan agreement for $12,500,000 with a lender. This loan bears interest at 13%
and is collateralized by the capital stock of the subsidiaries of the Company.
The Company took an initial advance of $4,800,000 and must make quarterly
interest only payments through June 30, 1999 and principal and interest payments
beginning September 30, 1999 through June 30, 2002, the maturity date. In
connection with this debt, the Company issued 211,023 warrants to the lender.
Management has allocated $150,000 as the value of these warrants to additional
paid in capital and as a reduction of long-term debt. In connection with the
loan agreement, the Company recorded approximately $1,510,000 of deferred
financing costs. Such costs are amortized over the seven year term of the
related debt.
The loan contains certain restrictive covenants, including financial
covenants as to minimum net worth, leverage, and cash flows. The Company was in
default of the minimum net worth and cash flows covenants as of December 31,
1995 and has obtained a waiver of these defaults through April 30, 1996.
Effective May 1, 1996, the loan agreement was revised as to the minimum net
worth and cash flows covenants. The Company was in default of the cash flows
covenant as of December 31, 1996 and has obtained a waiver of this default
through December 31, 1996. Effective January 1, 1997, the loan agreement was
revised as to the minimum net worth and cash flows covenants. As of June 30,
1997, the Company was in compliance with the financial covenants of the revised
loan agreement.
9. LINE OF CREDIT
The Company has available a $4,000,000 revolving line of credit ("Line of
Credit") maturing on August 24, 1998 with interest payable monthly at 2% over
the bank's prime lending rate (10.25% at December 31, 1996). The initial drawing
amount is limited to 80% of the net collectible value of eligible receivables
less than 180 days, aged from the date of service (approximately $2,800,000 at
December 31, 1996). As of December 31, 1996, the Company had not borrowed under
this agreement. The Line of Credit contains financial covenants relating to the
maintenance of a minimum net worth and specified net worth to debt ratios. The
Line of Credit also requires the lender's approval for any acquisitions in
excess of $5,000,000 in the aggregate in any calendar year and for the payment
of cash dividends. As of June 30, 1997, the Company was in compliance with the
financial covenants of the Line of Credit.
F-13
<PAGE> 74
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. CAPITAL LEASE OBLIGATIONS
The Company has various capital lease obligations related to purchase of
equipment for its various facilities under a $6,000,000 lease line of credit.
Maturities of capital lease obligations for each of the five years ending
December 31 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING TOTAL
- ----------- ----------
<S> <C>
1997........................................................ $ 646,000
1998........................................................ 445,000
1999........................................................ 345,000
2000........................................................ 249,000
2001........................................................ 124,000
----------
1,809,000
Less amount representing interest .......................... (296,000)
----------
Total....................................................... $1,513,000
==========
</TABLE>
11. PREFERRED STOCK
SERIES A:
On August 2, 1996, the Company notified all shareholders of the redemption
of all the issued and outstanding shares of the Series A on September 1, 1996
(the "Redemption Date"). Each share of Series A was convertible to common stock
at $1.50 per common share. At the Redemption Date, any non-converted shares of
Series A were redeemed by the Company at a redemption price of $1.00 per share
plus accrued and unpaid cumulative dividends of $.0462 per share.
As a result of the redemption, 988,000 shares of Series A were converted to
658,667 shares of common stock, $.001 par value. The remaining 12,000 shares
were redeemed by the Company, resulting in the payment of $544 in dividends.
SERIES B:
In July 1996, the Company authorized the issuance and sale of 1,050,000
shares of Series B preferred stock, $.10 redeemable convertible series ("Series
B"), $.01 par value at $1.00 per share.
The Series B provided for conversion to common stock on November 15, 1996
if not otherwise redeemed by such date. On November 15, 1996, the Company
notified all shareholders of the redemption of all issued and outstanding shares
of Series B on November 27, 1996. Each share of Series B was convertible to
common stock at the conversion price of $3.00 per share, plus accrued and unpaid
cumulative dividends through the Series B redemption date of $.034 per share.
As a result of the redemption, 775,000 shares of Series B were converted to
268,250 shares of common stock, $.001 par value. The remaining 275,000 shares
were redeemed by the Company, resulting in the payment of $36,000 in dividends.
12. WARRANTS TO PURCHASE COMMON STOCK
During 1993, the Company completed its initial private placement of 120
units, each consisting of 7,500 shares of its common stock and 3,333 Common
Stock Purchase Warrants (the "Warrants") at the offering price of $22,500 per
unit. The proceeds received by the Company amounted to $2,675,000 (net of
expenses of $25,000). Each Warrant entitled the holder thereof to purchase one
share of common stock at an exercise price of $6.00 per share for three years
after issuance.
F-14
<PAGE> 75
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 1, 1994, the Company's Board of Directors approved the
redemption of all outstanding Warrants at the redemption price of $.30 per
Warrant with a redemption date set at December 9, 1994. The following table
summarizes the activity for the original $6.00 warrants issued in connection
with the private placement:
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
WARRANTS CAPITAL
--------- ----------
<S> <C> <C>
Original warrants issued 1993............................... 400,000 $ --
Warrants exercised and paid 1994 (net of expenses of
$15,000).................................................. (111,667) 655,000
Warrants redeemed by the Company 1994....................... (240,000) (72,000)
-------- --------
Warrants exercised and receivable at December 31, 1994...... 48,333 583,000
Warrants exercised and paid 1995 (net of expenses of
$9,000)................................................... (45,000) 261,000
Lapsed warrants (pending redemption)........................ (3,333) --
-------- --------
Original warrants outstanding at December 31, 1995.......... -0- --
========
Net proceeds on exercise of original warrants............... $844,000
========
</TABLE>
For warrants that were not exercised, the Company authorized the sale of
additional shares of common stock to existing shareholders and others.
In connection with the December 9, 1994 Warrant redemption, the Company
authorized the issuance of new Common Stock Purchase Warrants (the "New
Warrants"). All warrants exercised at December 9, 1994, as well as additional
shares purchased to the extent that Warrants were not exercised, entitled the
shareholder to one New Warrant for each share purchased. Each New Warrant
entitles the holder thereof to purchase one share of common stock at an exercise
price of $9.00 per share for four years after issuance. The New Warrants are
redeemable by the Company after December 9, 1996 at a redemption price of $.30
per New Warrant. A total of 246,201 shares of the Company's common stock have
been reserved for the exercise of the New Warrants. At December 31, 1995 and
1996, none of the New Warrants had been exercised and were outstanding.
In June 1995, the Company issued 211,023 warrants to a lender as an
additional cost of financing. Each warrant entitles the holder to purchase one
share of common stock at an exercise price of $6.00 per share for fifteen years
after issuance. Such warrants are callable by the Company, but in no event
earlier than June 30, 2002 or full payment of the senior subordinated secured
loan (See Note 8). The call price would be the "fair value" of the underlying
common stock at the time of the call. The call price is also protected for a
twelve month period in the event the Company enters into an agreement for sale
or merger for a consideration in excess of the call price. At December 31, 1995
and 1996, none of these warrants had been exercised and were outstanding.
In July 1996, the Company issued 78,751 warrants in connection with the
sale of 1,050,000 shares of Series B preferred stock. Each warrant entitles the
holder to purchase one share of common stock at an exercise price of $6.00 per
share for three years from the date of issuance. At December 31, 1996, none of
these warrants have been exercised and were outstanding.
In November 1996, the Company issued 116,669 warrants to a financial
advisor in connection with a six month advisory agreement. Each warrant entitles
the holder to purchase one share of common stock at an exercise price of $3.00
per share for three years from the date of issuance. Compensation expense of
$26,600 has been recorded to reflect the fair value of the warrants. At December
31, 1996, none of these warrants have been exercised and were outstanding.
F-15
<PAGE> 76
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. STOCK OPTIONS
The Company has employee and director stock option plans. The employee plan
permits the grant of options to purchase up to 250,000 shares of common stock.
The director plan permits the grant of options to purchase up to 166,667 shares
of common stock. Subsequent to year end, the number of options permitted to be
granted under the employee plan was increased to 666,667, subject to shareholder
approval.
Under the director plan, each non-employee director receives automatic
non-discretionary grants of options each year (the "Annual Grant"). The Annual
Grant date is the annual anniversary date of shareholders' approval of the
director plan. The initial grant date was April 27, 1994. On each grant date
commencing April 27, 1994, each non-employee director received options to
purchase 834 shares of common stock for service on the board, additional options
to purchase 334 shares of common stock for service on each committee of the
board, other than the executive committee, and additional options to purchase
334 shares for service as chairman of a committee other than the executive
committee. Non-employee directors receive options to purchase 834 shares for
service on the executive committee and an additional 834 as chairman of the
executive committee. The term of the options granted under the director plan is
five years and the options vest 100% immediately but are not exercisable for six
months from date of grant.
All officers and employees are eligible for grants of options under the
employee plan (the "Plan") which includes incentive stock options granted for
employees' current services to the Company and non-statutory stock options
granted for special services which employees provide the Company, as determined
by the Plan. The Plan is administered by a stock option committee which has the
discretion to determine to whom, the amount, exercise prices, exercise terms and
all other matters relating to the grant of options under the employee plan. The
Plan prohibits the grant of incentive stock options under the Plan or any other
plan of the Company to any individual in any calendar year for common stock
having an aggregate fair market value determined at the time the option is
granted in excess of $100,000. All options granted under the employee plan to
date vest 25% six months after the date of grant and 25% on each anniversary of
the date of grant thereafter so long as the individual remains employed by the
Company. All options granted have a five-year term, but are not exercisable for
six months from the date of grant.
Both the director and employee plans provide for the automatic grant of
reload options to an optionee who would pay all, or part of, the option exercise
price by delivery of shares of common stock already owned by such optionee.
The following table summarizes stock options activity:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1994 1995 1996
----------------------- ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DIRECTORS PLAN SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- -------------- ------ -------------- ------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
period........................ -- 5,838 $6.00 11,676 $6.00
Granted....................... 5,838 $6.00 5,838 6.00 7,671 6.00
----- ----- ------ ----- ------ -----
Outstanding, end of period...... 5,838 $6.00 11,676 $6.00 19,347 $6.00
----- ----- ------ ----- ------ -----
Options exercisable, end of
period........................ 5,004 11,676 18,513
----- ------ ------
<CAPTION>
JUNE 30, 1997
-----------------------
WEIGHTED
AVERAGE
DIRECTORS PLAN SHARES EXERCISE PRICE
- -------------- ------ --------------
<S> <C> <C>
Outstanding, beginning of
period........................ 19,347 $6.00
Granted....................... 10,669 8.00
------ -----
Outstanding, end of period...... 30,016 $6.71
------ -----
Options exercisable, end of
period........................ 19,347
</TABLE>
F-16
<PAGE> 77
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------- JUNE 30
1994 1995 1996 1997
----------------------- ------------------------ ------------------------ -------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EMPLOYEE PLAN SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES
- ------------- ------ -------------- ------- -------------- ------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
period..................... 50,334 $ 6.00 94,501 $6.00 165,344
Granted.................... 50,334 $6.00 54,167 6.00 77,510 6.00 159,704
Cancelled.................. -- -- (10,000) (6.00) (6,667) -- --
------ ----- ------- ------ ------- ----- -------
Outstanding, end of period... 50,334 $6.00 94,501 $ 6.00 165,344 $6.00 325,048
------ ----- ------- ------ ------- ----- -------
Options exercisable at end of
period..................... 3,751 23,716 78,184 97,145
------ ------- -------
<CAPTION>
JUNE 30,
1997
--------------
WEIGHTED
AVERAGE
EMPLOYEE PLAN EXERCISE PRICE
- ------------- --------------
<S> <C>
Outstanding, beginning of
period..................... $6.00
Granted.................... 8.00
Cancelled.................. $ --
-----
Outstanding, end of period... 6.98
-----
Options exercisable at end of
period.....................
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------- JUNE 30,
1994 1995 1996 1997
----------------------- ----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
OTHER SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ----- ------ -------------- ------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
the period.............. 3,334 $6.00 36,669 $6.00 36,669 $6.00
Granted................. 3,334 $6.00 33,335 6.00 -- 6.00 12,501 8.00
----- ----- ------ ----- ------ ----- ------ -----
Outstanding, end of the
period.................. 3,334 $6.00 36,669 $6.00 36,669 $6.00 49,170 $6.51
----- ----- ------ ----- ------ ----- ------ -----
Options exercisable at end
of period............... 3,334 36,669 36,669 36,669
----- ------ ------ ------
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting
for its stock option plans as described in Note 1. Accordingly, no compensation
cost has been recognized in 1995 or 1996 related to these plans. The fair value
of each option granted is determined on the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: no
dividend yield, expected volatility of .001, risk-free interest rate of 6.13%
and expected option life of three years. The fair value of the options was
determined to be zero.
14. INCOME TAXES
At December 31, 1996, the Company has tax net operating loss carryforwards
of $6.7 million that expire beginning in 2008 and ending in 2010.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December 31,
1995 and 1996 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss carry forwards......................... $1,791,000 $ 2,542,000
Other..................................................... 116,000 72,000
---------- -----------
Total deferred tax assets.......................... 1,907,000 2,614,000
Deferred tax liability
Use of cash method of accounting for income tax
purposes................................................ 977,000 908,000
---------- -----------
Net deferred tax asset (before valuation allowance)......... 930,000 1,706,000
Less valuation allowance.................................... (930,000) (1,706,000)
---------- -----------
Net deferred tax asset...................................... $ -0- $ -0-
========== ===========
</TABLE>
F-17
<PAGE> 78
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. EMPLOYEE BENEFIT PLANS
As of January 1, 1997, the Company adopted a tax qualified employee savings
and retirement plan (the "401(k) Plan") covering the Company's employees.
Pursuant to the 401(k) Plan, eligible employees may elect to contribute to the
401(k) Plan up to the lesser of 15% of their annual compensation or the
statutorily prescribed annual limit ($9,500 in 1996). The Company matches 25% of
the contributions of employees, up to 4% of each employee's salary. All
employees who were employed at December 31, 1996, and new hires who thereafter
attain at least one year's service, are eligible to participate in the 401(k)
Plan.
The Trustees of the 401(k) Plan, at the direction of each participant,
invest the assets of the 401(k) Plan in designated investment options. The
401(k) Plan is intended to qualify under Section 401 of the Code, so that
contributions to the 401(k) Plan, and income earned on the 401(k) Plan
contributions, are not taxable until withdrawn. Matching contributions by the
Company are deductible when made.
16. RELATED PARTY TRANSACTIONS
The Company is a party to the following transactions with related parties
by virtue of common ownership:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Legal fees.................................................. $59,000 $82,000 $133,000
Insurance expense........................................... 30,000 50,000 6,000
Rent expense................................................ 36,000 46,000 59,000
</TABLE>
17. COMMITMENTS AND CONTINGENCIES
COMMITMENTS. The Company leases facility space and equipment under
noncancelable operating leases. Minimum annual lease payments under these leases
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AMOUNT
- ----------- ----------
<S> <C>
1997........................................................ $1,160,000
1998........................................................ 959,000
1999........................................................ 768,000
2000........................................................ 563,000
2001........................................................ 479,000
Thereafter.................................................. 1,753,000
----------
Total....................................................... $5,682,000
==========
</TABLE>
Rental expense under these operating leases was $362,000, $753,000 and
$1,046,000 (of which $146,000, $245,000 and $257,000, respectively, relate to
equipment leases for patient care and are included in facilities expenses) for
the years ended December 31, 1994, 1995 and 1996, respectively.
A partnership owned by three shareholders is in the process of completing
construction of two facilities and the related leasehold improvements for the
Company. The Company is committed for leasehold improvements for approximately
$400,000. The Company will lease these buildings from the partnership for ten
years at amounts deemed to be fair value.
LITIGATION. The Company is subject to claims and suits in the ordinary
course of business, including those arising from patient treatments, which the
Company believes are covered by insurance. The Company is not involved in any
material litigation and is not aware of any potential claims which would give
rise to material liability.
F-18
<PAGE> 79
RENEX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENTS
The Company's Board of Directors authorized and effected a one-for-three
reverse common stock split to shareholders of record on April 21, 1997.
Shareholders' equity has been changed to give retroactive recognition to the
stock split in prior periods. All references in the consolidated financial
statements to number of shares, per share amounts, stock options and warrant
data of the Company's common stock have been changed to reflect the reverse
stock split.
On April 22, 1997, the Company entered into two year employment agreements
with James P. Shea, the Company's President and Chief Executive Officer, and
Orestes L. Lugo, Vice President -- Finance and Chief Financial Officer. Such
agreements became effective immediately, except that the base salaries will
become effective upon completion of the contemplated public offering. The
employment agreements provide for base salaries of $190,000 and $155,000 for Mr.
Shea and Mr. Lugo, respectively. The base salary for each officer is increased
on January 1, of each year during the term by a minimum of 6%. Each officer
receives an automobile allowance and certain other non-cash benefits, including
life, health and disability insurance. Each employment agreement is
automatically renewed for two years at the end of the initial term and each
extended term, unless either party provides notice of termination at least 90
days prior to the expiration of such term. If any officer is terminated without
cause or there is a change of control during the term of their respective
agreements, such officer will be entitled to severance equal to the greater of
the remaining base salary due under the agreement or one and two year's base
salary, respectively.
During 1997, the Company entered into three operating lease agreements for
three facilities which will be constructed. These lease agreements have terms
ranging from five to twenty years and the minimum annual lease payments under
these agreements range from $181,000 to $319,000.
F-19
<PAGE> 80
=========================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON IS AUTHORIZED IN
CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................ 3
Risk Factors.................................. 6
Use of Proceeds............................... 14
Dividend Policy............................... 14
Capitalization................................ 15
Dilution...................................... 16
Selected Consolidated Financial and Operating
Data........................................ 17
Management's Discussion and Analysis of
Financial Condition and Results
of Operations............................... 19
Business...................................... 26
Management.................................... 42
Principal Shareholders........................ 49
Certain Transactions.......................... 50
Description of Securities..................... 51
Shares Eligible for Future Sale............... 55
Underwriting.................................. 56
Legal Matters................................. 57
Experts....................................... 58
Additional Information........................ 58
Consolidated Financial Statements............. F-1
</TABLE>
---------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
=========================================================
=========================================================
3,000,000 SHARES
[RENEX LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
Vector Securities International, Inc.
Needham & Company, Inc.
, 1997
=========================================================
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the
issuance and distribution of the Common Stock being registered. All amounts
shown are estimates, except for the SEC Registration Fee and the NASD Filing
Fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 10,285.01
NASD filing fee............................................. 3,605.00
NASDAQ National Market listing fee.......................... 34,935.62
Legal fees and expenses..................................... 150,000.00*
Printing and engraving expenses............................. 90,000.00
Accounting fees and expenses................................ 150,000.00*
Blue Sky fees and expenses.................................. 2,500.00*
Transfer agent and registrar fees and expenses.............. 10,000.00*
Travel expenses............................................. 25,000.00*
Miscellaneous............................................... 3,674.37
-----------
Total.............................................. $480,000.00*
===========
</TABLE>
- ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Florida Business Corporation Act. Section 607.0850(1) of the Florida
Business Corporation Act (the "FBCA") provides that a Florida corporation, such
as the Company, shall have the power to indemnify any person who was or is a
party to any proceeding (other than an action by, or in the right of, the
corporation), by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise against liability
incurred in connection with such proceeding, including any appeal thereof, if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Section 607.0850(2) of the FBCA provides that a Florida corporation shall
have the power to indemnify any person, who was or is a party to any proceeding
by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee, or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses and amounts paid in
settlement not exceeding, in the judgment of the board of directors, the
estimated expense of litigating the proceeding to conclusion, actually and
reasonably incurred in connection with the defense or settlement of such
proceeding, including any appeal thereof. Such indemnification shall be
authorized if such person acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the corporation,
except that no indemnification shall be made under this subsection in respect of
any claim, issue, or matter as to which such person shall have been adjudged to
be liable unless, and only to the extent that, the court in which such
proceeding was brought, or any other court of competent jurisdiction, shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
II-1
<PAGE> 82
Section 607.850 of the FBCA further provides that: (i) to the extent that a
director, officer, employee or agent of a corporation has been successful on the
merits or otherwise in defense of any proceeding referred to in subsection (1)
or subsection (2), or in defense of any claim, issue, or matter therein, he
shall be indemnified against expense actually and reasonably incurred by him in
connection therewith; (ii) indemnification provided pursuant to Section 607.0850
is not exclusive; and (iii) the corporation may purchase and maintain insurance
on behalf of a director or officer of the corporation against any liability
asserted against him or incurred by him in any such capacity or arising out of
his status as such whether or not the corporation would have the power to
indemnify him against such liabilities under Section 607.0850.
Notwithstanding the foregoing, Section 607.0850 of the FBCA provides that
indemnification or advancement of expenses shall not be made to or on behalf of
any director, officer, employee or agent if a judgment or other final
adjudication establishes that his actions, or omissions to act, were material to
the cause of action so adjudicated and constitute: (i) a violation of the
criminal law, unless the director, officer, employee or agent had reasonable
cause to believe his conduct was lawful or had no reasonable cause to believe
his conduct was unlawful; (ii) a transaction from which the director, officer,
employee or agent derived an improper personal benefit; (iii) in the case of a
director, a circumstance under which the liability provisions regarding unlawful
distributions are applicable; or (iv) willful misconduct or a conscious
disregard for the best interests of the corporation in a proceeding by or in the
right of the corporation to procure a judgment in its favor or in a proceeding
by or in the right of a shareholder.
Section 607.0831 of the FBCA provides that a director of a Florida
corporation is not personally liable for monetary damages to the corporation or
any other person for any statement, vote, decision, or failure to act, regarding
corporate management or policy, by a director, unless: (i) the director breached
or failed to perform his duties as a director; and (ii) the director's breach
of, or failure to perform, those duties constitutes: (A) a violation of criminal
law, unless the director had reasonable cause to believe his conduct was lawful
or had no reasonable cause to believe his conduct was unlawful; (B) a
transaction from which the director derived an improper personal benefit, either
directly or indirectly; (C) a circumstance under which the liability provisions
regarding unlawful distributions are applicable; (D) in a proceeding by or in
the right of the corporation to procure a judgment in its favor or by or in the
right of a shareholder, conscious disregard for the best interest of the
corporation, or willful misconduct; or (E) in a proceeding by or in the right of
someone other than the corporation or a shareholder, recklessness or an act or
omission which was committed in bad faith or with malicious purpose or in a
manner exhibiting wanton and willful disregard of human rights, safety, or
property.
ARTICLES AND BYLAWS. The Company's Articles of Incorporation and the
Company's Bylaws provide that the Company shall, to the fullest extent permitted
by law, indemnify all directors of the Company, as well as any officers or
employees of the Company to whom the Company has agreed to grant
indemnification.
UNDERWRITING AGREEMENT. Reference is made to the Underwriting Agreement,
the proposed form of which is to be filed as Exhibit 1.1 hereto, which provides
for indemnification by the Underwriters of directors, officers and controlling
persons of the Registrant against certain liabilities, including liabilities
under the Securities Act, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
All share totals set forth herein have been adjusted based upon an assumed
one for three reverse stock split to be effected prior to the effective date of
the offering.
In November 1994, the Registrant called for redemption an aggregate of
400,000 warrants which were issued in a private placement completed in 1993 to
the Company's shareholders. The redemption price of each warrant was $.30 per
warrant. Each warrant entitled the holder to purchase one share of Common Stock
for $6.00 per share. In connection with the redemption, an aggregate of 156,667
warrants were exercised by the holders thereof, prior to the redemption date for
aggregate consideration of $940,002. The Registrant issued 156,667 shares of
Common Stock in connection with such
II-2
<PAGE> 83
exercises. In addition, the Company sold 89,534 additional shares of Common
Stock underlying warrants that were redeemed by the Company to certain directors
or officers of the Company or individuals who had a prior personal or business
relationship with certain directors of the Company, at an aggregate
consideration of $537,204. In order to encourage exercise, the Company offered
to such warrant holders and other stockholders who purchased additional common
stock a new warrant for each old warrant exercised. Accordingly, 246,201 new
warrants were so issued. Each new warrant entitles the holder thereof to
purchase one share of Common Stock at $9.00 per share until December 9, 1998.
The Registrant sold such securities in reliance on sec. 4(2) of the Securities
Act of 1933 as not involving a public offering of its securities.
In June 1995, in connection with the receipt of a $12,500,000 subordinated
loan, the Registrant issued to such lender, for no additional consideration,
warrants to purchase 211,023 shares of Common Stock. Such warrants are
exercisable at $6.00 per share until June 30, 2010. The Registrant issued such
securities in reliance on sec. 4(2) of the Securities Act of 1933 as not
involving a public offering of its securities.
In December 1995, the Registrant issued an aggregate of 376,857 shares of
Common Stock to three shareholders of Dialysis Facilities, Inc. ("DFI") in
exchange for 100% of the capital stock of DFI pursuant to a merger between DFI
and a wholly-owned subsidiary of the Registrant. The shares of Common Stock had
a fair value of $1,051,000 at the time of issuance. DFI become a wholly-owned
subsidiary of the Registrant as of December 29, 1995. The Registrant issued such
shares in reliance upon sec. 4(2) of the Securities Act of 1933 as not involving
a public offering of its securities. The Company paid a finders fee of 4,000
shares of Common Stock to an individual in connection with the acquisition.
In April 1996, the Registrant issued an aggregate of 166,667 shares of
Common Stock to 11 members of Central Dialysis Center, L.L.C. ("Central") in
exchange for 100% of the membership interests of Central. The Common Stock had a
fair value at the time of issuance of $395,000. In connection therewith, Central
merged with and into a wholly-owned subsidiary of the Registrant. The Registrant
issued such shares in reliance upon sec. 4(2) of the Securities Act of 1933, as
not involving a public offering of its securities.
In April 1996, the Registrant issued an aggregate of 166,667 shares of
Common Stock to 10 members of Metropolitan Dialysis Center, L.L.C.
("Metropolitan") in exchange for 100% of the membership interests of
Metropolitan. Each of the members of Metropolitan were also members of Central.
The Common Stock had a fair value at the time of issuance of $395,000. In
connection therewith, Metropolitan merged with and into a wholly-owned
subsidiary of the Registrant. The Registrant issued such shares in reliance upon
sec. 4(2) of the Securities Act of 1933, as not involving a public offering of
its securities.
In July 1996, the Registrant issued an aggregate of 1,050,000 shares of
Series B Preferred Stock and 78,751 Series B Warrants to 14 accredited
investors, who were either directors or officers of the Registrant or who had
prior personal or business relationships with such directors and/or officers.
The Registrant received gross proceeds of $1,050,000. Each Series B Warrant
entitles the holder thereof to purchase one share of Common Stock at an exercise
price of $6.00 per share until July 31, 1999. The Registrant issued such
securities in reliance upon sec. 4(2) of the Securities Act of 1933, as not
involving a public offering of its securities.
In August 1996, the Registrant commenced a rights offering to its common
shareholders, completed in December 1996, whereby each common shareholder had
the right to purchase one share of common stock for each five shares then held.
The Registrant issued 338,840 shares of Common Stock for aggregate proceeds of
$1,046,000 to approximately 75 shareholders. The Registrant issued such shares
in reliance on sec. 4(2) of the Securities Act of 1933, as not involving a
public offering.
In August 1996, the Registrant approved the redemption of 1,000,000 shares
of Series A Preferred Stock then outstanding. Such shares of Series A Preferred
Stock were issued in July 1993 in connection
II-3
<PAGE> 84
with the formation of the Company. The shares of Series A Preferred Stock were
issued to approximately 15 individuals consisting of directors or officers of
the Company or individuals or entities who had a prior personal or business
relationship with such directors or officers. In connection with such
redemption, the holders of the Series A Preferred Stock converted such Series A
Preferred Stock into an aggregate of 658,667 shares of Common Stock and the
Company redeemed 12,000 shares of Series A Preferred Stock for an aggregate
redemption price of $12,000. The Registrant issued such shares in reliance on
sec. 4(2) of the Securities Act of 1933, as not involving a public offering.
In September 1996, the Registrant sold an aggregate of 8,000 shares of
Common Stock to two of its executive officers for the aggregate purchase price
of $12,000. The shares purchased represented the underlying shares of Common
Stock of the Series A Preferred Stock which were actually redeemed by the
Registrant in August 1996. The Registrant issued such shares in reliance on
sec. 4(2) of the Securities Act of 1933, as not involving a public offering.
In November 1996, the Registrant approved the redemption of 1,050,000
shares of Series B Preferred Stock then outstanding and held by 14 accredited
investors. Such shares of Series B Preferred Stock were issued in July 1996. In
connection with such redemption, the holders of the Series B Preferred Stock
converted such Series B Preferred Stock into an aggregate of 268,250 shares of
Common Stock including accrued dividends and the Company redeemed 275,000 shares
for $275,000, plus accrued dividends. The Registrant issued such shares in
reliance on sec. 4(2) of the Securities Act of 1933, as not involving a public
offering.
In November 1996, the Registrant issued warrants to purchase 116,667 shares
of Common Stock at $3.00 per share exercisable through November 15, 1999 to a
financial advisor. The Registrant issued such securities in reliance on
sec. 4(2) of the Securities Act, as not involving a public offering.
In February 1997, the Registrant issued an aggregate of 4,134 shares of
Common Stock for aggregate proceeds of $12,400 to three individuals who had a
prior personal or business relationship with a Company director. Such shares
remained unsubscribed in the Company's rights offering to its shareholders
concluded in November 1996. The Registrant issued such shares in reliance on
sec. 4(2) of the Securities Act of 1933, as not involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
Certain of the following exhibits are filed herein and certain other
exhibits, designated with an asterisk (*) were previously filed in the
registration statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
1.2 -- Form of Representatives' Warrant Agreement
*2. -- Agreement and Plan of Merger by and between Renex Corp.,
Renex Acquisition Corp., Dialysis Facilities, Inc., C. David
Finch, Jr., Charles D. Finch, Sr., and Jeffery C. Finch
dated December 29, 1995
*3.1 -- Articles of Incorporation of the Company
*3.2 -- By-Laws of the Company
4.1 -- Specimen Certificate of Common Stock
*5.1 -- Form of Opinion of Wallace, Bauman, Fodiman & Shannon, P.A.,
Counsel to the Issuer
*10.1 -- Employment Agreement dated April 22, 1997 by and between
Renex Corp. and James P. Shea
*10.2 -- Employment Agreement dated April 22, 1997 by and between
Renex Corp. and Orestes L. Lugo
*10.3 -- Loan and Security Agreement by and between DVI Business
Credit Corporation, Renex Corp. and its Subsidiaries dated
as of August 23, 1996
*10.4 -- Directors Stock Option Plan
*10.5 -- 1994 Employee Stock Option Plan
</TABLE>
II-4
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.6 -- Master Lease Agreement by and between Renex Corp. and
Morcroft Leasing Corp. as of January 1, 1994
*10.7 -- Lease Agreement by and between JCD Partnership and Renex
Dialysis Facilities, Inc. dated December 29, 1995 for
certain property located in Jackson, Mississippi
*10.8 -- Lease Contract and Agreement by and between JCD Partnership
and Renex Dialysis Facilities, Inc. dated December 29, 1995
for certain property located in Jackson, Mississippi
*10.9 -- Lease Contract and Agreement by and between JCD Partnership
and Renex Dialysis Facilities, Inc. dated December 29, 1995
for certain property located in Delta, Louisiana
11.1 -- Computation of per share earnings
*21.1 -- Subsidiaries of the Company
23.1 -- Consent of Deloitte & Touche, LLP.
23.2 -- Consent of Ernst & Young, LLP.
23.3 -- Consent of Lashly & Baer
*23.4 -- Form of Consent of Wallace, Bauman, Fodiman & Shannon, P.A.
(included in their opinion filed as Exhibit 5.1)
*24.1 -- Powers of Attorney
27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
ITEM 17. UNDERTAKINGS
(a) EQUITY OFFERINGS OF NON-REPORTING REGISTRANTS: The undersigned
registrant hereby undertakes to provide to the representatives of the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
such representatives of the underwriters to permit prompt delivery to each
purchaser.
(b) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) RULE 430A UNDERTAKING. The undersigned registrant hereby undertakes
that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Coral Gables, State of
Florida, on the 8th day of September, 1997.
RENEX CORP.
By: /s/ JAMES P. SHEA
------------------------------------
James P. Shea
President/Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and Power of Attorney have been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MILTON J. WALLACE* Chairman of the Board September 8, 1997
- ----------------------------------------------------- of Directors
Milton J. Wallace
/s/ ARTHUR G. SHAPIRO, M.D.* Vice Chairman of the September 8, 1997
- ----------------------------------------------------- Board, Director of
Arthur G. Shapiro, M.D. Medical Affairs
/s/ JAMES P. SHEA President/CEO, Director September 8, 1997
- -----------------------------------------------------
James P. Shea
/s/ MARK D. WALLACE* Director September 8, 1997
- -----------------------------------------------------
Mark D. Wallace
/s/ EUGENE P. CONESE, SR.* Director September 8, 1997
- -----------------------------------------------------
Eugene P. Conese, Sr.
/s/ C. DAVID FINCH, M.D.* Director September 8, 1997
- -----------------------------------------------------
C. David Finch, M.D.
/s/ JOHN E. HUNT, SR.* Director September 8, 1997
- -----------------------------------------------------
John E. Hunt, Sr.
/s/ JEFFREY H. WATSON* Director September 8, 1997
- -----------------------------------------------------
Jeffrey H. Watson
/s/ CHARLES J. SIMONS* Director September 8, 1997
- -----------------------------------------------------
Charles J. Simons
/s/ ORESTES L. LUGO Vice President/Chief September 8, 1997
- ----------------------------------------------------- Financial and
Orestes L. Lugo Principal Accounting
Officer
*By: /s/ JAMES P. SHEA
- ----------------------------------------------------
James P. Shea
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 1
Exhibit 1.1
Proof of [filing date]
3,000,000 Shares
RENEX CORP.
Common Stock
FORM OF UNDERWRITING AGREEMENT
September , 1997
VECTOR SECURITIES INTERNATIONAL, INC.
NEEDHAM & CO., INC.
As Representatives of the Several Underwriters
c/o VECTOR SECURITIES INTERNATIONAL, INC.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Dear Sirs:
Renex Corp., a Florida corporation (the "Company"), proposes to issue
and sell an aggregate of 3,000,000 shares of its common stock, par value $.001
per share, (the "Initial Securities") to the several Underwriters named in
Schedule I hereto (the "Underwriters") for whom Vector Securities International,
Inc. ("Vector") and Needham & Co., Inc. ("Needham") are acting as
representatives (the "Representatives"). In addition, solely for the purpose of
covering over-allotments, the Company proposes to grant to the several
Underwriters, upon the terms and conditions set forth in Section 2 hereof, an
option to purchase up to an additional 450,000 shares of Common Stock of the
Company (the "Option Securities"). The Company also proposes to issue and sell
to the Representatives warrants (the "Representatives' Warrants") pursuant to
the Representatives' Warrant Agreement between the Company and the
Representatives (the Representatives' Warrant Agreement") for the purchase of an
additional 300,000 shares of Common Stock. The 300,000 shares of Common Stock
issuable upon exercise of the Representatives' Warrants are herein referred to
as the "Representatives' Securities." The Initial Securities, the Option
Securities and the Representatives' Securities are hereinafter collectively
referred to as the "Securities." The Company's common stock, par value $.001 per
share, including the Securities, is hereinafter referred to as the "Common
Stock." The Company wishes to confirm as follows its agreements with you and the
other Underwriters on whose behalf you are acting in connection with the several
purchases by the Underwriters of the Securities:
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") a
registration statement on Form S-1 (No. 333- 32611) covering the registration of
the Securities under the
<PAGE> 2
Securities Act of 1933, as amended (the "1933 Act"), including the related
preliminary prospectus, or prospectuses, and either (A) has prepared and filed,
prior to the effective date of such registration statement, an amendment to such
registration statement, including a final prospectus or (B) if the Company has
elected to rely upon Rule 430A ("Rule 430A") of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations"), will prepare and
file a prospectus, in accordance with the provisions of Rule 430A and Rule
424(b) ("Rule 424(b)") of the 1933 Act Regulations, promptly after execution and
delivery of this Agreement. Additionally, if the Company has elected to rely
upon Rule 434 ("Rule 434") of the 1933 Act Regulations, the Company will prepare
and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule
434 and Rule 424(b), promptly after execution and delivery of this Agreement.
The information, if any, included in such prospectus or in such Term Sheet, that
was omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it becomes
effective (a) pursuant to paragraph (b) of Rule 430A, is referred to herein as
the "Rule 430A Information," or (b) pursuant to paragraph (d) of Rule 434, is
referred to herein as the "Rule 434 Information." Each prospectus used before
the time such registration statement became effective, and any prospectus that
omitted, as applicable, the Rule 430A Information or the Rule 434 Information
that was used after effectiveness and prior to the execution and delivery of
this Agreement is herein called a "preliminary prospectus." Such registration
statement, including the exhibits and schedules thereto, at the time it became
effective and including, if applicable, the Rule 430A Information or the Rule
434 Information, is herein called the "Registration Statement." Any registration
statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein
referred to as the "Rule 462(b) Registration Statement," and after such filing
the term Registration Statement shall include the Rule 462(b) Registration
Statement. The final prospectus in the form first furnished to the Underwriters
for use in connection with the offering of the Securities is herein referred to
as the "Prospectus." If Rule 434 is relied upon, the term "Prospectus" shall
refer to the preliminary prospectus last furnished to the Underwriters in
connection with the offering of the Securities, together with the Term Sheet,
and all references to the date of the Prospectus shall mean the date of the Term
Sheet.
2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the
representations, warranties and agreements contained herein and subject to all
the terms and conditions set forth herein, the Company hereby agrees to issue
and sell to each Underwriter and each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $ per share
(the "purchase price per share"), the number of Initial Securities set
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<PAGE> 3
forth in Schedule I opposite the name of such Underwriter under the column
"Number of Initial Securities to be Purchased from the Company" (or such number
of Initial Securities increased as set forth in Section 10 hereof).
Upon the basis of the representations, warranties and agreements
contained herein and subject to all the terms and conditions set forth herein,
the Company hereby grants an option (the "over-allotment option") to the
Underwriters to purchase from the Company, at the purchase price per share, up
to an aggregate of 450,000 Option Securities. Option Securities may be purchased
solely for the purpose of covering over-allotments made in connection with the
offering of the Securities. Such option shall expire at 5:00 P.M., Chicago time,
on the 30th day after the date of this Agreement (or, if such 30th day shall be
a Saturday or Sunday or a holiday, on the next business day thereafter when the
New York Stock Exchange is open for trading). Such over-allotment option may be
exercised at any time or from time to time until its expiration. Upon any
exercise of the over-allotment option, each Underwriter, severally and not
jointly, agrees to purchase from the Company that proportion of the total number
of Option Securities as is equal to the percentage of Initial Securities that
such Underwriter is purchasing from the Company (or such number of Initial
Securities increased as set forth in Section 10 hereof), subject to such
adjustments as you may determine to avoid fractional shares.
On the Closing Date, the Company shall issue and sell to the
Representatives Representatives' Warrants at an aggregate purchase price of $30,
which warrants shall entitle the holders thereof to purchase an aggregate of
300,000 Representatives' Securities pursuant to the terms and provisions of the
Representatives' Warrant Agreement. The Representatives' Warrants shall be
exercisable for a period of five (5) years commencing on the effective date of
the Registration Statement at an initial exercise price equal to one hundred
seven percent (107%) of the initial public offering price of the Stock. The
Representatives' Warrant Agreement shall be substantially in the form filed as
Exhibit 1.4 to the Registration Statement. Payment for the Representatives'
Warrants shall be made on the Closing Date.
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you that
the Underwriters propose to make a public offering of the Securities as soon
after the Registration Statement and this Agreement have become effective as in
your judgment is advisable and initially to offer the Securities upon the terms
set forth in the Prospectus.
4. DELIVERY OF THE SECURITIES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Initial Securities shall be made at the
office of Skadden, Arps, Slate, Meagher & Flom, 333 West Wacker Drive, Suite
2100, Chicago, Illinois 60606, at 9:00 A.M., Chicago time, on the third (fourth,
if the pricing occurs after 4:30 p.m. (Eastern Time) on any given day) business
day after the date hereof (unless postponed in accordance with the provisions of
Section 10 hereof) (the "Closing Date"). The place of closing for the Initial
Securities and the Closing Date may be varied by agreement among you and the
Company.
Delivery to the Underwriters of and payment for any Option Securities
to be purchased by the Underwriters shall be made at the aforementioned office
of Skadden, Arps, Slate, Meagher & Flom at such time on such date (an "Option
Closing Date"), which may be the same as the Closing Date but shall in no event
be earlier than the Closing Date nor earlier than two nor later than
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<PAGE> 4
ten business days after the giving of the notice hereinafter referred to, as
shall be specified in a written notice from you on behalf of the Underwriters to
the Company of the Underwriters' determination to purchase a number, specified
in such notice, of Option Securities. The place of closing for any Option
Securities and the Option Closing Date for such Option Securities may be varied
by agreement between you and the Company.
Certificates for the Initial Securities and for any Option Securities
to be purchased hereunder shall be registered in such names and in such
denominations as you shall request by written notice (it being understood that a
facsimile transmission shall be deemed written notice) prior to 9:30 A.M.,
Chicago time, on the second business day preceding the Closing Date or any
Option Closing Date, as the case may be. Such certificates shall be made
available to you in Chicago, Illinois or New York, New York, as requested by you
in the aforesaid notice, for inspection and packaging not later than 9:30 A.M.,
Chicago time, on the business day next preceding the Closing Date or an Option
Closing Date, as the case may be. The certificates evidencing the Initial
Securities and any Option Securities to be purchased hereunder shall be
delivered to you on the Closing Date or the Option Closing Date, as the case may
be, against payment of the purchase price therefor by certified or official bank
check or checks payable in New York Clearing House (next day) funds to the order
of the Company. It is understood that each Underwriter has authorized you, for
its account, to accept delivery of, acknowledge receipt of, and make payment of
the purchase price for, the Initial Securities and the Option Securities, if
any, which it has agreed to purchase. Vector, individually and not as
representative of the Underwriters, may (but shall not be obligated to) make
payment of the purchase price for the Initial Securities or the Option
Securities, if any, to be purchased by any Underwriter whose check has not been
received by the Closing Date or the Option Closing Date, as the case may be, but
such payment shall not relieve such Underwriter from its obligations hereunder.
5. AGREEMENTS OF THE COMPANY. The Company covenants and agrees with the
several Underwriters as follows:
a. The Company will notify the Underwriters immediately, and confirm
the notice in writing, (i) of the effectiveness of the Registration Statement
and any amendment thereto, (ii) of the receipt of any comments from the
Commission, (iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information, (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the suspension of
qualification of the Securities for offering or sale in any jurisdiction or the
4
<PAGE> 5
initiation of any proceedings for such purpose and (v) during the period when
the Prospectus is required to be delivered under the 1933 Act or Securities
Exchange Act of 1934, as amended (the "1934 Act"), of any change, or any event
or occurrence which could result in such a change, in the Company's condition,
financial or otherwise, or the earnings, business affairs or business prospects
of the Company or the happening of any event, including the filing of any
information, documents or reports pursuant to the 1934 Act, that makes any
statement of a material fact made in the Registration Statement or the
Prospectus (as then amended or supplemented) untrue or which requires the making
of any additions to or changes in the Registration Statement or the Prospectus
in order to state a material fact required by the 1933 Act or the 1933 Act
Regulations to be stated therein or necessary in order to make the statements
therein not misleading, or of the necessity to amend or supplement the
Prospectus to comply with the 1933 Act, the 1933 Act Regulations or any other
law. The Company shall use its best efforts to prevent the issuance of any stop
order or order suspending the qualification or exemption of the Securities under
any state securities or Blue Sky laws, and, if at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration Statement,
or any state securities commission or other regulatory authority shall issue an
order suspending the qualification or exemption of the Securities under any
state securities or Blue Sky laws, the Company shall use every reasonable effort
to obtain the withdrawal or lifting of such order at the earliest possible time.
b. The Company will give the Underwriters notice of its intention to
prepare or file any amendment to the Registration Statement (including any
post-effective amendment), any Rule 462(b) Registration Statement, any Term
Sheet or any amendment or supplement to the Prospectus (including any revised
prospectus or Term Sheet and preliminary prospectus which the Company proposes
for use by the Underwriters in connection with the offering of the Securities
which differs from the prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised prospectus
or Term Sheet and preliminary prospectus is required to be filed pursuant to
Rule 424(b)), whether pursuant to the 1933 Act, the 1934 Act or otherwise, will
furnish the Underwriters with copies of any Rule 462(b) Registration Statement,
Term Sheet, amendment or supplement a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file any such Rule
462(b) Registration Statement, Term Sheet, amendment or supplement or use any
such prospectus to which the Underwriters or counsel for the Underwriters shall
object.
c. The Company has furnished or will deliver to the Underwriters and
their counsel, without charge, as many signed and conformed copies of the
Registration Statement as originally
5
<PAGE> 6
filed and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) as the Underwriters may reasonably request.
d. The Company will furnish to each Underwriter, without charge,
from time to time during the period when the Prospectus is required to be
delivered under the 1933 Act or the 1934 Act, such number of copies of the
Prospectus (as amended or supplemented) as such Underwriter may reasonably
request for the purposes contemplated by the 1933 Act, the 1934 Act, the 1933
Act Regulations or the rules and regulations of the Commission under the 1934
Act (the "1934 Act Regulations").
e. The Company will comply with the 1933 Act and the 1933 Act
Regulations so as to permit the completion of the distribution of the Securities
as contemplated in this Agreement and in the Prospectus. If at any time when a
prospectus is required by the 1933 Act, the 1934 Act, the 1933 Act Regulations
or the 1934 Act Regulations to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of which
it is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue statements
of a material fact or omit to state a material fact necessary in order to make
the statements therein not misleading in the light of the circumstances existing
at the time it is delivered to a purchaser, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration Statement or
amend or supplement the Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 5(b), such amendment or supplement
as may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements and the
Company will furnish to the Underwriters such number of copies of such amendment
or supplement as the Underwriters may reasonably request.
f. During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission or the Nasdaq National
Market ("NASDAQ"), and (ii) from time to time such other information concerning
the Company as you may request.
g. The Company will use its best efforts, in cooperation with
counsel to the Underwriters, to qualify the Securities for offering and sale
under the applicable securities or Blue Sky laws of such states and other
jurisdictions of the United States as the Underwriters may designate and to
maintain
6
<PAGE> 7
such qualifications in effect for a period of not less than one year from the
later of the effective date of the Registration Statement and any Rule 462(b)
Registration Statement; PROVIDED, HOWEVER, that the Company shall not be
obligated to qualify as a foreign corporation in any jurisdiction in which it is
not so qualified. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be required
by the laws of such jurisdiction to continue such qualification in effect for a
period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
h. The Company will make generally available to its security holders
as soon as practicable, but not later than 45 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 of the 1933 Act Regulations) covering a twelve-month period beginning
not later than the first day of the Company's fiscal quarter next following the
"effective date" (as defined in said Rule 158) of the Registration Statement.
i. The Company will use the net proceeds received by it from the
sale of the Securities in the manner specified in the Prospectus under "Use of
Proceeds."
j. If, at the time that the Registration Statement becomes
effective, any Rule 430A Information or Rule 434 Information shall have been
omitted therefrom, then immediately following the execution of this Agreement,
the Company will prepare, and file or transmit for filing with the Commission in
accordance with Rule 430A or Rule 434 and Rule 424(b), copies of a Prospectus or
Term Sheet containing such Rule 430A Information and Rule 434 Information,
respectively, or, if required by Rule 430A, a post-effective amendment to the
Registration Statement (including an amended Prospectus), containing such Rule
430A Information.
k. If the Company elects to rely upon Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay the applicable fees in accordance with Rule 111 of the
1933 Act Regulations by the earlier of (i) 10:00 P.M. Eastern Time on the date
hereof and (ii) the time confirmations are sent or given, as specified by Rule
462(b)(2).
l. The Company, during the period when the Prospectus is required to
be delivered under the 1933 Act or the 1934 Act, will file all documents
required to be filed with the Commission pursuant to Section 13, 14 or 15 of the
1934 Act within the time periods required by the 1934 Act and the 1934 Act
Regulations.
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<PAGE> 8
m. During a period of 180 days from the date of the Prospectus, the
Company will not, without the prior written consent of Vector, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any share
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the 1933
Act with respect to any of the foregoing or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Securities to be
sold hereunder, (B) any shares of Common Stock issued by the Company upon the
exercise of an option or warrant or the conversion of security outstanding on
the date hereof and referred to in the Prospectus, (C) any shares of Common
Stock issued or options to purchase Common Stock granted pursuant to existing
employee benefit plans of the Company referred to in the Prospectus or (D) any
shares of Common Stock issued pursuant to any non-employee director stock plan.
n. The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of its
current officers and directors and each of its stockholders designated by you.
o. The Company will supply the Underwriters with copies of all
correspondence to and from, and all documents issued to and by, the Commission
in connection with the registration of the Securities under the 1933 Act.
p. Prior to the Closing Date, the Company shall furnish to the
Underwriters, as soon as they have been prepared, copies of any unaudited
interim consolidated financial statements of the Company and its subsidiaries,
for any periods subsequent to the periods covered by the financial statements
appearing in the Registration Statement and the Prospectus.
q. Prior to the Closing Date, the Company will issue no press
release or other communications directly or indirectly and hold no press
conference with respect to the Company or any of its subsidiaries, the
condition, financial or otherwise, or the earnings, business affairs or business
prospects of any of them, or the offering of the Securities, without the prior
written consent of the Representatives unless in the judgment of the Company and
its counsel, and after notification to
8
<PAGE> 9
the Representatives, such press release or communication is required by law.
r. The Company has not taken, nor will it take, directly or
indirectly, any action designed to, or that might reasonably be expected to,
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Securities.
s. The Company will use its best efforts to have the Securities
approved for listing on the NASDAQ.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
a. When the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendment thereto becomes effective, at the
date of the Prospectus, if different, and at the Closing Date and the Option
Closing Date, as the case may be, the Registration Statement, the Rule 462(b)
Registration Statement and any amendments and supplements thereto complied or
will comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Prospectus and any supplements or amendments thereto will not at the date of the
Prospectus, at the date of any such supplements or amendments, or at the Closing
Date or the Option Closing Date, if any, include an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectus shall not be "materially different,"
as such term is used in Rule 434, from the Prospectus included in the
Registration Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or omissions from
the Registration Statement or Prospectus relating to any Underwriter made in
reliance upon and in conformity with information furnished to the Company in
writing by any Underwriter, through Vector expressly for use in the Registration
Statement or Prospectus. The Company has not distributed any offering materials
in connection with the offering or sale of the Securities other than the
Registration Statement, the preliminary prospectus, the Prospectus, the Term
Sheet, if applicable, or any other materials, if any, permitted by the 1933 Act
or the 1933 Act Regulations.
b. Each preliminary prospectus and the prospectus filed as part of
the Registration Statement as originally filed or
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<PAGE> 10
as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933
Act, complied when so filed in all material respects with the 1933 Act
Regulations.
c. The accountants who certified the financial statements and
supporting schedules included in the Registration Statement are independent
public accountants as required by the 1933 Act and the 1933 Act Regulations.
d. The financial statements included in the Registration Statement
and the Prospectus present fairly the financial position of the Company and its
consolidated subsidiaries as of the dates indicated and the results of their
operations for the periods specified; except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis; and the supporting schedules included in the Registration Statement
present fairly the information required to be stated therein. The financial
information and statistical data set forth in the Prospectus are prepared on an
accounting basis consistent with such financial statements.
e. Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
therein, (i) there has been no material adverse change or any development
involving a prospective material adverse change in or affecting the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, (ii) there have been
no transactions entered into by the Company or any of its subsidiaries, other
than those in the ordinary course of business, which are material with respect
to the Company, and (iii) there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock. The
Company has no material contingent obligations which are not disclosed in the
Registration Statement.
f. The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Florida with
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter into and
perform its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure to so qualify would not, singly or in the aggregate, have a material
adverse effect on the condition, financial or otherwise, or the
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<PAGE> 11
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise.
g. Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign corporation to transact business
and is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure to so qualify would not have a
material adverse effect on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise; all of the issued and outstanding
capital stock of each such subsidiary has been duly authorized and validly
issued, is fully paid and non-assessable and is owned by the Company, directly
or through subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, charge, encumbrance, claim or equity. There are no outstanding
subscriptions, options, warrants, commitments, convertible or exchangeable
securities or other rights granted by the Company or any subsidiary to acquire
any shares of capital stock of or ownership interests in any subsidiary of the
Company and there are no commitments, plans or arrangements to do so. [Except as
described in the Prospectus,] the Company does not own, directly or indirectly,
any shares of stock or any other equity or long-term debt securities of any
corporation or have any equity interest in any firm, partnership, joint venture,
association or other entity.
h. The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement or pursuant to
reservations, agreements, employee or director benefit plans or the exercise of
convertible securities referred to in the Prospectus); the shares of issued and
outstanding capital stock of the Company have been duly authorized and validly
issued and are fully paid and non-assessable and have not been issued in
violation of or are not otherwise subject to any preemptive or other similar
rights; the Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and the Representative's Warrant
Agreement, and, when issued and delivered by the Company pursuant to this
Agreement and the Representatives' Warrant Agreement against payment of the
consideration set forth herein and therein, will be validly issued and fully
paid and non-assessable; the certificates evidencing the Securities are in due
and proper form under Florida law; the authorized capital stock of the Company,
including the Securities, conforms to all statements relating thereto contained
in the Prospectus; and the issuance of the Securities is not
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<PAGE> 12
subject to preemptive or other similar rights. There are no outstanding
subscriptions, options, warrants, convertible or exchangeable securities or
other rights granted to or by the Company to purchase shares of Common Stock or
other securities of the Company and there are no commitments, plans or
arrangements to issue any shares of Common Stock or any security convertible
into or exchangeable for Common Stock, in each case other than as described in
the Prospectus.
i. Except as disclosed in the Registration Statement and except as
would not, singly or in the aggregate, reasonably be expected to have a material
adverse effect on the condition, financial or otherwise, or the earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, (A) the Company and its subsidiaries are each in
compliance with all applicable Environmental Laws, (B) the Company and its
subsidiaries have all permits, authorizations and approvals required under any
applicable Environmental Laws and are each in compliance with the requirements
of such permits authorizations and approvals, (C) there are no pending or, to
the best knowledge of the Company, threatened Environmental Claims against the
Company or any of its subsidiaries and (D) under applicable law, there are no
circumstances with respect to any property or operations of the Company or its
subsidiaries that are reasonably likely to form the basis of an Environmental
Claim against the Company or any of its subsidiaries.
For purposes of this Agreement, the following terms shall have the
following meanings: "Environmental Law" means any United States (or other
applicable jurisdiction's) Federal, state, local or municipal statute, law,
rule, regulation, ordinance, code, policy or rule of common law and any judicial
or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgement, relating to the environment,
health, safety or any chemical, material or substance, exposure to which is
prohibited, limited or regulated by any governmental authority. "Environmental
Claims" means any and all administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or violation,
investigations or proceedings relating in any way to any Environmental Law.
j. Neither the Company nor any of its subsidiaries is in violation
of its charter or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, deed, trust, note, lease, sublease, voting
agreement, voting trust, or other instrument or agreement to which the Company
or any of its subsidiaries is a party or by which it or any of them may be
bound, or to which any of the property or assets of the Company or any of its
subsidiaries is
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<PAGE> 13
subject; and the execution, delivery and performance of this Agreement and the
Representatives' Warrant Agreement and the consummation of the transactions
contemplated herein and therein and compliance by the Company with its
obligations hereunder and thereunder have been duly authorized by all necessary
corporate action and will not conflict with or constitute a breach of, or
default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any contract, indenture, mortgage, loan agreement,
deed, trust, note, lease, sublease, voting agreement, voting trust or other
instrument or agreement to which the Company or any of its subsidiaries is a
party or by which it or any of them may be bound, or to which any of the
property or assets of the Company or any of its subsidiaries is subject, nor
will such action result in any violation of the provisions of the charter or
bylaws of the Company or any of its subsidiaries or any applicable statute, law,
rule, regulation, ordinance, decision, directive or order.
k. No labor dispute with the employees of the Company or any of its
subsidiaries exists or, to the best knowledge of the Company, is imminent; and
the Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, manufacturers or contractors which
might, singly or in the aggregate, be expected to result in any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries considered as
one enterprise.
l. There is no action, suit, proceeding or audit before or by any
court or governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the Company or
any of its subsidiaries, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which, singly or in the
aggregate, might result in any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise, or
which, singly or in the aggregate, might materially and adversely affect the
properties or assets thereof or which might materially and adversely affect the
consummation of this Agreement, including, without limitation, any such
proceeding pursuant to federal or state laws or regulations (i) prohibiting the
payment or receipt of remuneration for patient referrals, (ii) prohibiting the
filing of false claims, (iii) prescribing conditions of participation for
certification by the Medicare and Medicaid programs and state kidney fund
programs or standards for licensure or health planning approval or (iv)
providing for reimbursement under the Medicare and Medicaid and state kidney
fund programs; all pending legal or governmental proceedings to which the
Company or any of its
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<PAGE> 14
subsidiaries is a party or of which any of their respective property or assets
is the subject which are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, are, considered in the
aggregate, not material; and there are no contracts or documents of the Company
or any of its subsidiaries which are required to be filed as exhibits to the
Registration Statement by the 1933 Act or by the 1933 Act Regulations which have
not been so filed.
m. The Company and its subsidiaries own or are licensed to use all
patents, patent applications, inventions, trademarks, trade names, applications
for registration of trademarks, service marks, service mark applications,
copyrights, know-how, manufacturing processes, formulae, trade secrets, licenses
and rights in any thereof and any other intangible property and assets (herein
called the "Proprietary Rights") which are material to the businesses of the
Company and its subsidiaries as now conducted and as proposed to be conducted,
in each case as described in the Prospectus. The description of the Proprietary
Rights is correct in all material respects and fairly and correctly describes
the Company's and its subsidiaries' rights with respect thereto. The Company
does not have any knowledge of, and the Company has not given or received any
notice of, any pending conflicts with or infringement of the rights of others
with respect to any Proprietary Rights or with respect to any license of
Proprietary Rights. No action, suit, arbitration, or legal, administrative or
other proceeding, or investigation is pending, or, to the best knowledge of the
Company, threatened, which involves any Proprietary Rights. Neither the Company
nor any subsidiary is subject to any judgment, order, writ, injunction or decree
of any court or any Federal, state, local, foreign or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, or any arbitrator, or has entered into or is a party to any contract
which restricts or impairs the use of any such Proprietary Rights in a manner
which would have a material adverse effect on the use of any of the Proprietary
Rights. To the best knowledge of the Company, no Proprietary Rights used by the
Company or any of its subsidiaries, and no services or products sold by the
Company or any of its subsidiaries, conflict with or infringe upon any
proprietary rights available to any third party. Neither the Company nor any
subsidiary has received written notice of any pending conflict with or
infringement upon such third-party proprietary rights. Neither the Company nor
any subsidiary has entered into any consent, indemnification, forbearance to sue
or settlement agreement with respect to Proprietary Rights other than in the
ordinary course of business. No claims have been asserted by any person with
respect to the validity of the Company's or any of its subsidiaries' ownership
or right to use the Proprietary Rights and, to the best knowledge of the
Company, there is no reasonable basis for any such claim to be successful. The
Proprietary Rights
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<PAGE> 15
are valid and enforceable and no registration relating thereto has lapsed,
expired or been abandoned or cancelled or is the subject of cancellation or
other adversarial proceedings, and all applications therefore are pending and
are in good standing. The Company and its subsidiaries have complied, in all
material respects, with their respective contractual obligations relating to the
protection of the Proprietary Rights used pursuant to licenses. To the best
knowledge of the Company, no person is infringing on or violating the
Proprietary Rights owned or used by the Company or any of its subsidiaries.
n. No registration, authorization, approval, qualification or
consent of any court or governmental authority or agency is necessary in
connection with the offering, issuance or sale of the Securities hereunder,
except such as may be required under the 1933 Act or the 1933 Act Regulations or
state securities or Blue Sky laws (or such as may be required by the National
Association of Securities Dealers, Inc. ("NASD")).
o. The Company and each of its subsidiaries and each of the
professional employees, employees and agents of the Company and its subsidiaries
possess and are operating in compliance with all licenses, certificates,
consents, authorities, approvals and permits (collectively, "permits") from all
local, state, Federal, foreign and other regulatory agencies or bodies necessary
to conduct the businesses now operated by them, including without limitation,
those permits, including certificates of need, pharmacy licenses, Medicare
provider numbers, accreditations and other similar documentation necessary in
connection with the provision of dialysis services under applicable licensure,
Medicare or Medicaid laws, and neither the Company nor any of its subsidiaries
has received any notice of proceedings relating to the revocation or
modification of any such permit or any circumstance which would lead it to
believe that such proceedings are reasonably likely which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
materially and adversely affect the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise.
p. Each of this Agreement and the Representatives' Warrant Agreement
has been duly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except as rights to indemnity and contribution hereunder may be
limited by Federal or state securities laws or the public policy underlying such
laws.
q. Except as described in the Prospectus, there are no persons with
registration or other similar rights to have any securities registered pursuant
to the Registration Statement
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<PAGE> 16
or otherwise registered by the Company under the 1933 Act.
r. No order preventing or suspending the use of any preliminary
prospectus has been issued and no proceedings for that purpose are pending,
threatened, or, to the knowledge of the Company, contemplated by the Commission;
and to the best knowledge of the Company, no order suspending the offering of
the Securities in any jurisdiction designated by the Underwriters pursuant to
Section 5(g) of this Agreement has been issued and, to the best knowledge of the
Company, no proceedings for that purpose have been instituted or threatened or
are contemplated.
s. The Company and each of its subsidiaries have good and marketable
title to their respective properties, free and clear of all material security
interests, mortgages, pledges, liens, charges, encumbrances, claims and equities
of record. The properties of the Company and its subsidiaries are, in the
aggregate, in good repair (reasonable wear and tear excepted), and suitable for
their respective uses. Any real properties held under lease by the Company and
its subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the conduct
of the business of the Company and its subsidiaries considered as one
enterprise.
t. The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (iii) access to assets is
permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
u. The Company and its subsidiaries have conducted and are
conducting their respective businesses in compliance with all applicable
Federal, state, local and foreign statutes, laws, rules, regulations,
ordinances, codes, decisions, decrees, directives and orders, except where the
failure to do so would not, singly or in the aggregate, have a material adverse
effect on the condition, financial or otherwise, or on the earnings, business
affairs or business prospects of the Company and its subsidiaries considered as
one enterprise.
v. To the best of the Company's knowledge, neither the Company nor
any of its subsidiaries nor any employee or agent of the Company or any
subsidiary has made any payment of
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<PAGE> 17
funds of the Company or any subsidiary or received or retained any funds in
violation of any law, rule or regulation, which payment, receipt or retention of
funds is of a character required to be disclosed in the Prospectus.
w. The Company is not now, and after sale of the Securities to be
sold by it hereunder and application of the net proceeds from such sale as
described in the Prospectus under the caption "Use of Proceeds" will not be, an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
x. All offers and sales of capital stock of the Company prior to the
date hereof were at all relevant times duly registered or exempt from the
registration requirements of the 1933 Act and were duly registered or subject to
an available exemption from the registration requirements of the applicable
state securities or Blue Sky laws.
y. Neither the Company nor, to its knowledge, any of its officers,
directors or affiliates has taken, and at the Closing Date and at any later
Option Closing Date, neither the Company nor, to its knowledge, any of its
officers, directors or affiliates will have taken, directly or indirectly, any
action which has constituted, or might reasonably be expected to constitute, the
stabilization or manipulation of the price of sale or resale of the Securities.
z. The Company and each of its subsidiaries maintain insurance of
the types and in amounts adequate for its and its subsidiaries' business and
consistent with insurance coverage maintained by similar companies in similar
business, including but not limited to, insurance covering medical malpractice
and real and personal property owned or leased against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
aa. The Company and each of its subsidiaries have filed all material
tax returns required to be filed, which returns are true and correct in all
material respects, and neither the Company nor any of its subsidiaries is in
default in the payment of any taxes, including penalties and interest,
assessments, fees and other charges, shown thereon due or otherwise assessed,
other than those being contested in good faith and for which adequate reserves
have been provided or those currently payable without interest which were
payable pursuant to said returns or any assessments with respect thereto.
bb. Except as described in the Prospectus, to the best of the
Company's knowledge, there are no rulemaking or
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<PAGE> 18
similar proceedings before any Federal, state, local or foreign government
bodies which involve or affect the Company or any subsidiary, which, if the
subject of an action unfavorable to the Company or any subsidiary, could involve
a prospective material adverse change in or effect on the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise.
cc. To the knowledge of the Company, if any full-time employee
identified in the Prospectus has entered into any non-competition,
non-disclosure, confidentiality or other similar agreement with any party other
than the Company or any subsidiary, such employee is neither in violation
thereof nor is expected to be in violation thereof as a result of the business
conducted or expected to be conducted by the Company or any subsidiary as
described in the Prospectus or such person's performance of his obligations to
the Company or any subsidiary.
dd. The Company and its officers and directors, and persons who
provide professional services under agreements with the Company have not:
(i) knowingly and willfully made or caused to be made a false
statement or representation of a material fact in any application for
any benefit or payment;
(ii) knowingly and willfully made or caused to be made any
false statement or representation of a material fact for use in
determining rights to any benefit or payment;
(iii) presented or caused to be presented a claim for
reimbursement under CHAMPUS, Medicare, Medicaid or other state health
care program that is (A) for an item or service that the person
presenting or causing to be presented knows or should know was not
provided as claimed, or (B) for an item or service and the person
presenting knows or should know that the claims is false or fraudulent;
(iv) failed to disclose knowledge of the occurrence of any
event affecting the initial or continued right of a claimant to any
benefit or payment on its own behalf or on behalf of another, with
intent to fraudulently secure such benefit or payment; or
(v) knowingly and willfully made or caused to be made or
induced or sought to induce the making of any false statement or
representation (or omitted to
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<PAGE> 19
state a fact required to be stated therein or necessary to make the
statements contained therein not misleading) of a material fact with
respect to (i) the conditions or operations of a facility in order that
the facility may qualify for, Medicare, Medicaid or other state health
care program certification, or (ii) information required to be provided
under Section 1124A of the Social Security Act (42 U.S.C. Section
1320a-3).
ee. (i) No person who immediately following the Closing Date will
have a direct or indirect ownership interest (as those terms are defined in 42
C.F.R. Section 1001.1001) in the Company of 5% or more (a "Major Investor"), and
(ii) to the best knowledge of the Company, no person or entity with any
relationship with such Major Investor (including without limitation a parent
company or shareholder of, or partner in, a Major Investor), who has an indirect
ownership interest (as that term is defined in 42 C.F.R. Section
1001.1001(a)(2)) in the Company of 5% or more: (1) has had a civil monetary
penalty assessed against it under 42 U.S.C. Section 1320a-7a; (2) has been
excluded from participation under the Medicare program or under a State health
care program as defined in 42 U.S.C. Section 1320a-7(h) ("State Health Care
Program"); or (3) has been convicted (as that term is defined in 42 C.F.R.
Section 1001.2) of any of the following categories of offenses as described in
42 U.S.C. Section 1320a-7(a) or (b)(1), (2), (3):
(A) criminal offenses relating to the delivery of an item or service
under Medicare or any State Health Care Program;
(B) criminal offenses under federal or state law relating to patient
neglect or abuse in connection with the delivery of a health care item or
service;
(C) criminal offenses under federal or state law relating to fraud,
theft, embezzlement, breach of fiduciary responsibility, or other financial
misconduct in connection with the delivery of a health care item or service or
with respect to any act or omission in a program operated by or financed in
whole or in part by any federal, state or local government agency;
(D) criminal offenses under federal or state laws relating to the
interference with or obstruction of any investigation into any criminal offense
described in (A) through (C) above; or
(E) criminal offenses under federal or state law relating to the
unlawful manufacture, distribution, prescription or dispensing of a controlled
substance.
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<PAGE> 20
ff. To the best knowledge of the Company and except as disclosed in
the Prospectus, there are no Medicare, Medicaid or CHAMPUS recoupment or
recoupments of any other third-party payor being sought, threatened, requested
or claimed against the Company or any subsidiary.
7. INDEMNIFICATION AND CONTRIBUTION.
a. The Company agrees to indemnify and hold harmless (i) each
Underwriter and (ii) each person, if any, who controls any Underwriter within
the meaning of Section 15 of the 1933 Act (any of the persons referred to in
this clause (ii) being hereinafter referred to as a "controlling person") and
(iii) the respective directors, officers, partners and employees of any of the
Underwriters or any controlling person (any person referred to in clause (i),
(ii) or (iii) may hereinafter be referred to as an "Indemnified Person") to the
fullest extent lawful, from and against any and all losses, claims, damages,
liabilities and expenses whatsoever (including, without limitation, all
reasonable costs of pursuing, investigating and defending any claim, suit or
action or any investigation or proceeding by any governmental agency or body,
commenced or threatened, including the reasonable fees and expenses of counsel
to any Indemnified Person), directly or indirectly, caused by, related to, based
upon or arising out of or in connection with any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any amendment thereto, including the Rule 430A Information and Rule 434
Information, if applicable, or any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading or caused by, related to, based upon, arising
out of or in connection with any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which has been made therein or
omitted therefrom in reliance upon and in conformity with the information
relating to such Underwriter furnished in writing to the Company by or on behalf
of any Underwriter through you expressly for use in connection therewith.
b. If any action, suit or proceeding shall be brought against any
Indemnified Person in respect of which indemnity may be sought against the
Company, such Indemnified Person shall promptly notify the parties against whom
indemnification is being sought (the "indemnifying parties"), and
20
<PAGE> 21
such indemnifying parties shall assume the defense thereof, including the
employment of counsel and payment of all fees and expenses. Such Indemnified
Person shall have the right to employ separate counsel in any such action, suit
or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Person
unless (i) the indemnifying parties have agreed in writing to pay such fees and
expenses, (ii) the indemnifying parties have failed to assume the defense and
employ counsel or (iii) the named parties to any such action, suit,
investigation or proceeding (including any impleaded parties) include both such
Indemnified Person and the indemnifying parties and representation of such
Indemnified Person and any indemnifying party by the same counsel would, in the
reasonable judgment of the Indemnified Person, be inappropriate due to actual or
potential differing interests between them (in which case the indemnifying party
shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Indemnified Person). It is understood, however,
that the indemnifying parties shall, in connection with any one such action,
suit or proceeding or separate but substantially similar or related actions,
suits or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
only one separate firm of attorneys (in addition to any local counsel) at any
time for all such Indemnified Persons not having actual or potential differing
interests with you or among themselves, which firm shall be designated in
writing by Vector, and that all such fees and expenses shall be reimbursed as
they are incurred. The indemnifying parties shall not be liable for any
settlement of any such action, suit or proceeding effected without their written
consent, which consent shall not be unreasonably withheld, but if settled with
such written consent, or if there be a final judgment for the plaintiff in any
such action, suit or proceeding, the indemnifying parties agree to indemnify and
hold harmless any Indemnified Person, to the extent provided in the preceding
paragraph, from and against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
c. Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, any person who controls the Company within the meaning
of Section 15 of the 1933 Act, to the same extent as the foregoing indemnity
from the Company to each Indemnified Person, but only with respect to
information relating to such Underwriter furnished in writing by or on behalf of
such Underwriter through Vector expressly for use in the Registration Statement,
the Prospectus or any preliminary prospectus, or any amendment or supplement
thereto. If any action, suit, investigation or proceeding shall be brought
against the Company, any of its directors, any such officer or any
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<PAGE> 22
such controlling person based on the Registration Statement, the Prospectus or
any preliminary prospectus, or any amendment or supplement thereto, and in
respect of which indemnity may be sought against any Underwriter pursuant to
this paragraph (c), such Underwriter shall have the rights and duties given to
the Company by paragraph (b) above, and the Company, its directors, any such
officer and any such controlling person shall have the rights and duties given
to the Indemnified Persons by paragraph (a) above.
d. If the indemnification provided for in this Section 7 is
unavailable to, or insufficient to hold harmless, an indemnified party under
paragraphs (a) or (c) hereof in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Securities or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law
or judicial determination, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other hand, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other hand
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus or, if Rule
434 is used, the corresponding location on the Term Sheet. The relative fault of
the Company on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or by the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The indemnity and contribution obligations of the Company
set forth herein shall be in addition to any liability or obligation the Company
may otherwise have to any Indemnified Person.
e. The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by a
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the
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<PAGE> 23
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating any claim or defending any such action,
suit or proceeding. Notwithstanding the provisions of this Section 7, no
Underwriter (or any of its related Indemnified Persons) shall be required to
contribute (whether pursuant to subsection (a) or (c) or otherwise) any amount
in excess of the underwriting discount applicable to the Securities underwritten
by such Underwriter. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 7 are several
in proportion to the respective numbers of Securities set forth opposite their
names in Schedule I hereto (or such numbers of Securities increased as set forth
in Section 10 hereof) and not joint.
f. No indemnifying party shall, without the prior written consent of
the Indemnified Person, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any Indemnified Person is or
could have been a party and indemnity could have been sought hereunder by such
Indemnified Person, unless such settlement includes an unconditional release of
such Indemnified Person from all liability on claims that are the subject matter
of such action, suit or proceeding.
g. Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Indemnified Person, the Company, its
directors or officers or any person controlling the Company, (ii) acceptance of
any Securities and payment therefor hereunder and (iii) any termination of this
Agreement.
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<PAGE> 24
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters to purchase the Initial Securities hereunder are subject to the
following conditions:
a. The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective on the date hereof; no stop
order suspending the effectiveness of the Registration Statement shall have been
issued under the 1933 Act or proceedings therefor initiated or threatened by the
Commission. If the Company has elected to rely upon Rule 430A, Rule 430A
Information previously omitted from the effective Registration Statement
pursuant to Rule 430A shall have been transmitted to the Commission for filing
pursuant to Rule 424(b) within the prescribed time period and the Company shall
have provided evidence satisfactory to the Underwriters of such timely filing,
or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A. If the Company has elected to rely upon Rule 434, a Term Sheet shall
have been transmitted to the Commission for filing pursuant to Rule 424(b)
within the prescribed time period.
b. The Underwriters shall have received:
(i) The favorable opinion, dated as of the Closing Date, of
Wallace, Bauman, Fodiman & Shannon, P.A., counsel for the Company, in
form and substance satisfactory to counsel for the Underwriters, to the
effect that:
A. The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Florida.
B. The Company has corporate power and authority to
own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the
Prospectus and to enter into and perform its obligations under
this Agreement.
C. To the best of their knowledge and information,
the Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction
in which such qualification is required.
D. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under
"Capitalization" (except for
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<PAGE> 25
subsequent issuances, if any, pursuant to reservations,
agreements, employee benefit plans or the exercise of
convertible securities referred to in the Prospectus), and the
shares of issued and outstanding capital stock of the Company,
including the Common Stock, have been duly authorized and
validly issued and are fully paid and non-assessable and, to
their knowledge and information, have not been issued in
violation of or are not otherwise subject to any preemptive
rights or other similar rights.
E. The Securities have been duly authorized for
issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and
fully paid and non-assessable; and the issuance of the
Securities is not subject to preemptive or other similar
rights.
F. Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease
and operate its properties and to conduct its business as
described in the Registration Statement and, to the best of
their knowledge and information, is duly qualified as a
foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is
required; all of the issued and outstanding capital stock of
each such subsidiary has been duly authorized and validly
issued, is fully paid and non-assessable and, to the best of
their knowledge and information, is owned by the Company,
directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim
or equity.
G. To the best of their knowledge and information,
except as described in the Prospectus, there are no
outstanding options, warrants or other rights granted to or by
the Company to purchase shares of Common Stock or other
securities of the Company and there are no commitments, plans
or arrangements to issue any shares of Common Stock or other
securities.
H. Each of this Agreement and the Representatives'
Warrant Agreement has been duly authorized,
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executed and delivered by the Company.
I. At the time the Registration Statement became
effective and at the Closing Date, the Registration Statement
(other than the financial statements and supporting schedules
included therein, as to which no opinion need be rendered)
complied as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations.
J. The form of certificate used to evidence each of
the Securities is in due and proper form and complies with all
applicable statutory requirements.
K. To the best of their knowledge and information,
there are no legal or governmental suits, proceedings or
audits pending or threatened which are required to be
disclosed in the Registration Statement other than those
disclosed therein, and all pending legal or governmental
proceedings to which the Company or any subsidiary is a party
or to which any of their property is subject which are not
described in the Registration Statement, including ordinary
routine litigation incidental to the business, are, considered
in the aggregate, not material.
L. The information in the Prospectus under
"Business--Medical Directors," "Business--Sources of
Reimbursement," "Business--Government Regulation,"
"Business--Litigation," "Management--Employment Agreements,"
"Management--Stock Option Plans," "Management--Employment
Agreements," "Certain Transactions," "Description of
Securities," and "Shares Eligible for Future Sale" and Item 15
of the Registration Statement to the extent that it
constitutes matters of law, summaries of legal matters,
documents, agreements or proceedings, or legal conclusions,
has been reviewed by them and is correct in all material
respects and fairly and correctly presents the information
called for with respect thereto.
M. To the best of their knowledge and
information, there are no contracts, indentures,
mortgages, loan agreements, deeds, trusts, notes, leases,
subleases, voting trusts, voting agreements or other
instruments or agreements required to be described or referred
to in the
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Registration Statement or to be filed as exhibits thereto
other than those described or referred to therein or filed as
exhibits thereto, the descriptions thereof or references
thereto are correct; and to the best of their knowledge and
information, no default exists in the due performance or
observance of any material obligation, agreement, covenant or
condition contained in any material contract, indenture,
mortgage, loan agreement, deed, trust, note, lease, sublease,
voting trust, voting agreement or other instrument or
agreement of the Company or any of its subsidiaries.
N. No authorization, approval, consent or order of
any court or governmental authority or agency is required in
connection with the offering, issuance or sale of the
Securities to the Underwriters, except such as may be required
under the 1933 Act or the 1933 Act Regulations or state
securities or Blue Sky laws or such as may be required by the
NASD; and the execution, delivery and performance of this
Agreement and the Representatives' Warrant Agreement and the
consummation of the transactions contemplated herein and
therein and the compliance by the Company with its obligations
hereunder and thereunder will not conflict with or constitute
a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries
pursuant to, any contract, indenture, mortgage, loan
agreement, note, deed, trust, lease, sublease, voting trust,
voting agreement or other instrument or agreement to which the
Company or any of its subsidiaries is a party or by which it
or any of them may be bound, or to which any of the property
or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the
provisions of the charter or bylaws of the Company or any of
its subsidiaries, or any applicable statute, law, rule,
regulation, ordinance, code, decision, directive or order.
O. To the best of their knowledge and information,
the Company and its subsidiaries possess and are in compliance
with all permits issued by the appropriate regulatory body or
agency, necessary to conduct the businesses now operated by
them, including without limitation, those permits required in
connection with the
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provision of dialysis services under applicable licensure,
Medicare or Medicaid laws, except where the failure to so
possess or comply with any permit would not have, singly or in
the aggregate, a material adverse effect on the business or
condition, financial or otherwise, of the Company and its
subsidiaries considered as one enterprise. To the best of
their knowledge and information, there are no proceedings,
pending or threatened, which if the subject of an unfavorable
decision, ruling or finding, would have a material adverse
effect on the business or condition, financial or otherwise,
of the Company and its subsidiaries considered as one
enterprise.
P. Except as described in the Prospectus, to the best
of their knowledge and information, there are no persons with
registration or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
Q. The Company is not an "investment company" or a
company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
R. All sales of the Company's capital stock during
the three years immediately prior to the date hereof were at
all relevant times duly registered or exempt from the
registration requirements of the 1933 Act.
S. To the best of their knowledge and information,
the Company and its subsidiaries are in compliance with, and
conduct their respective businesses in conformity with, all
applicable laws and regulations relating to the operation of
its business as described in the Registration Statement,
including, with limitation, all Medicare and Medicaid laws,
except to the extent that any failure so to comply or conform
would not have a material adverse effect upon the business or
condition, financial or otherwise, of the Company and its
subsidiaries considered as one enterprise.
T. The Registration Statement has become effective
under the 1933 Act; any required filing of the Prospectus, and
any supplements thereto or the Term Sheet, pursuant to Rule
424(b) and if
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<PAGE> 29
applicable, Rule 434, has been made in the manner and within
the time period required; and to their best knowledge and
information, no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and
no proceedings therefor have been instituted or are pending or
contemplated under the 1933 Act.
U. The Representatives' Warrants are exercisable for
Common Stock in accordance with the terms of the
Representatives' Warrant Agreement and at the prices therein
provided; the shares of Common Stock of the Company issuable
upon the exercise of the Representatives' Warrants have been
duly authorized and reserved for issuance upon such exercise
and such shares, when issued upon such exercise in accordance
with the terms of the Representatives' Warrant Agreement, will
be duly authorized, validly issued, fully paid and
non-assessable; and there are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the
voting or transfer of, any shares of the Common Stock of the
Company issuable upon exercise of the Representatives'
Warrants pursuant to the Company's charter or by-laws or any
agreement or other outstanding instrument known to such
counsel after due inquiry.
(ii) The favorable opinion, dated as of the Closing Date, of
Haythe & Curley, counsel to the Company, in form and substance
satisfactory to counsel for the Underwriters, to the effect that:
A. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under
"Capitalization" (except for subsequent issuances, if any,
pursuant to reservations, agreements, employee benefit plans
or the exercise of convertible securities referred to in the
Prospectus), and the shares of issued and outstanding capital
stock of the Company, including the Common Stock, have been
duly authorized and validly issued and are fully paid and
non-assessable and, to their knowledge and information, have
not been issued in violation of or are not otherwise subject
to any preemptive rights or other similar rights.
B. The Securities have been duly authorized for
issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and
fully paid and non-assessable; and the issuance of the
Securities is not subject to preemptive or other similar
rights.
C. To the best of their knowledge and information,
except as described in the Prospectus, there are no
outstanding options, warrants or other rights granted to or by
the Company to purchase shares of Common Stock or other
securities of the Company and there are no commitments, plans
or arrangements to issue any shares of Common Stock or other
securities.
D. Each of this Agreement and the Representatives'
Warrant Agreement has been duly authorized, executed and
delivered by the Company.
E. At the time the Registration Statement became
effective and at the Closing Date, the
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Registration Statement (other than the financial statements
and supporting schedules included therein, as to which no
opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933
Act Regulations.
F. The form of certificate used to evidence each of
the Securities is in due and proper form and complies with all
applicable statutory requirements.
G. To the best of their knowledge and information,
there are no legal or governmental suits, proceedings or
audits pending or threatened which are required to be
disclosed in the Registration Statement other than those
disclosed therein, and all pending legal or governmental
proceedings to which the Company or any subsidiary is a party
or to which any of their property is subject which are not
described in the Registration Statement, including ordinary
routine litigation incidental to the business, are, considered
in the aggregate, not material.
H. The information in the Prospectus under
"Business--Medical Directors," "Business--Sources of
Reimbursement," "Business--Government Regulation,"
"Business--Litigation," "Management--Employment Agreements,"
"Management--Stock Option Plans," "Management--Employment
Agreements," "Certain Transactions," "Description of
Securities," and "Shares Eligible for Future Sale" and Item 15
of the Registration Statement to the extent that it
constitutes matters of law, summaries of legal matters,
documents, agreements or proceedings, or legal conclusions,
has been reviewed by them and is correct in all material
respects and fairly and correctly presents the information
called for with respect thereto.
I. To the best of their knowledge and information,
there are no contracts, indentures, mortgages, loan
agreements, deeds, trusts, notes, leases, subleases, voting
trusts, voting agreements or other instruments or agreements
required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed as exhibits thereto,
the descriptions thereof or references thereto are
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<PAGE> 31
correct; and to the best of their knowledge and information,
no default exists in the due performance or observance of any
material obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan
agreement, deed, trust, note, lease, sublease, voting trust,
voting agreement or other instrument or agreement of the
Company or any of its subsidiaries.
J. No authorization, approval, consent or order of
any court or governmental authority or agency is required in
connection with the offering, issuance or sale of the
Securities to the Underwriters, except such as may be required
under the 1933 Act or the 1933 Act Regulations or state
securities or Blue Sky laws or such as may be required by the
NASD; and the execution, delivery and performance of this
Agreement and the Representatives' Warrant Agreement and the
consummation of the transactions contemplated herein and
therein and the compliance by the Company with its obligations
hereunder and thereunder will not conflict with or constitute
a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries
pursuant to, any contract, indenture, mortgage, loan
agreement, note, deed, trust, lease, sublease, voting trust,
voting agreement or other instrument or agreement to which the
Company or any of its subsidiaries is a party or by which it
or any of them may be bound, or to which any of the property
or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the
provisions of the charter or bylaws of the Company or any of
its subsidiaries, or any applicable statute, law, rule,
regulation, ordinance, code, decision, directive or order.
K. Except as described in the Prospectus, to the best
of their knowledge and information, there are no persons with
registration or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
L. The Company is not an "investment company" or a
company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
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<PAGE> 32
M. The Registration Statement has become effective
under the 1933 Act; any required filing of the Prospectus, and
any supplements thereto or the Term Sheet, pursuant to Rule
424(b) and if applicable, Rule 434, has been made in the
manner and within the time period required; and to their best
knowledge and information, no stop order suspending the
effectiveness of the Registration Statement or any part
thereof has been issued and no proceedings therefor have been
instituted or are pending or contemplated under the 1933 Act.
N. The Representatives' Warrants are exercisable for
Common Stock in accordance with the terms of the
Representatives' Warrant Agreement and at the prices therein
provided; the shares of Common Stock of the Company issuable
upon the exercise of the Representatives' Warrants have been
duly authorized and reserved for issuance upon such exercise
and such shares, when issued upon such exercise in accordance
with the terms of the Representatives' Warrant Agreement, will
be duly authorized, validly issued, fully paid and
non-assessable; and there are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the
voting or transfer of, any shares of the Common Stock of the
Company issuable upon exercise of the Representatives'
Warrants pursuant to the Company's charter or by-laws or any
agreement or other outstanding instrument known to such
counsel after due inquiry.
(iii) The favorable opinion, dated as of the Closing Date, of
Lashly & Baer, P.C., regulatory counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, to the effect
that:
A. The information in the Prospectus under "Risk
Factors--Dependence upon Government Reimbursement," "Risk
Factors--Operation Subject to Extensive Government
Regulation," "Business--Sources of Reimbursement," and
"Business--Government Regulation," to the extent that it
constitutes matters of law, summaries of legal matters,
documents or proceedings, or legal conclusions, has been
reviewed by them and is correct in all material respects and
fairly and correctly presents the information set forth
therein.
B. The execution, delivery and performance of this
Agreement by the Company will not require any consent,
approval, authorization or order of any court, regulatory
body, administration agency or other governmental body in
connection with the provision of dialysis facilities owned by
the Company or its subsidiaries (the "Facilities") of dialysis
services under applicable licensure, Medicare and Medicaid
laws in a manner described in the Prospectus or which could
effect the status of the Facilities as providers of dialysis
services under Medicare or Medicaid programs other than
presently effective actions, consents, disclosures or filing
that have already been made on or prior to the date hereof.
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<PAGE> 33
C. To the best of their knowledge and information,
the Company and its subsidiaries possess and are in compliance
with all permits issued by the appropriate regulatory body or
agency, necessary to conduct the businesses now operated by
them, including without limitation, those permits required in
connection with the provision of dialysis services under
applicable licensure, Medicare or Medicaid laws, except where
the failure to so possess or comply with any permit would not
have, singly or in the aggregate, a material adverse effect on
the business or condition, financial or otherwise, of the
Company and its subsidiaries considered as one enterprise. To
the best of their knowledge and information, there are no
proceedings, pending or threatened, which if the subject of an
unfavorable decision, ruling or finding, would have a material
adverse effect on the business or condition, financial or
otherwise, of the Company and its subsidiaries considered as
one enterprise.
D. To the best of their knowledge and information,
the Company and its subsidiaries are in compliance with, and
conduct their respective businesses in conformity with, all
applicable laws and regulations relating to the operation of
its business as described in the Registration Statement,
including, with limitation, all Medicare and Medicaid laws,
except to the extent that any failure so to comply or conform
would not have a material adverse effect upon the business or
condition, financial or otherwise, of the Company and its
subsidiaries considered as one enterprise.
(iv) The favorable opinion, dated as of the Closing Date, of
Skadden, Arps, Slate, Meagher & Flom, counsel for the Underwriters with
respect to the issuance and sale of the Securities, the Registration
Statement and the Prospectus and such other related matters as the
Underwriters shall reasonably request.
(v) In giving their opinions required by subsections (b)(i),
(b)(ii), (b)(iii) and (b)(iv), respectively, of this Section 8,
Wallace, Bauman, Fodiman & Shannon, P.A., Haythe & Curley, Lashly &
Baer, P.C. and Skadden, Arps, Slate, Meagher & Flom shall each
additionally state that nothing has come to their attention that leads
them to believe that the
33
<PAGE> 34
Registration Statement (except for financial statements and schedules
and other financial information included therein, as to which counsel
need make no statement), at the time it became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus (except for financial
statements and schedules and other financial information included
therein, as to which counsel need make no statement), as of its date
(unless the term "Prospectus" refers to a prospectus which has been
provided to the Underwriters by the Company for use in connection with
the offering of the Securities which differs from the Prospectus on
file at the Commission at the time the Registration Statement becomes
effective, in which case at the time it is first provided to the
Underwriters for such use) or at the Closing Date or the Option Closing
Date, as the case may be, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
c. (i) There shall not have been, since the date hereof or since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, any material adverse change or any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, (ii) the representations and
warranties of the Company in Section 6 hereof shall be true and correct with the
same force and effect as though expressly made at and as of the Closing Date,
except to the extent that any such representation or warranty relates to a
specific date, (iii) the Company shall have complied in all material respects
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Closing Date, (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been initiated or threatened by the Commission and (v) the
Representatives shall have received a certificate, dated the Closing Date and
signed by the President or any Vice President and the chief financial or
accounting officer of the Company to the effect set forth in clauses (i), (ii),
(iii) and (iv) above.
d. At the time of the execution of this Agreement, the Underwriters
shall have received from Deloitte & Touche, LLP
34
<PAGE> 35
a letter dated such date, in form and substance satisfactory to the
Underwriters, together with signed or reproduced copies of such letter for each
of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
e. The Underwriters shall have received from Deloitte & Touche, LLP
a letter, dated as of the Closing Date, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (d) of this
Section, except that the specified date referred to shall be a date not more
than three business days prior to the Closing Date.
f. The Securities shall have been approved for quotation on NASDAQ.
g. In the event that the Underwriters exercise their option provided
in Section 2 hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company hereunder shall be true
and correct as of the Option Closing Date and, at the relevant Option Closing
Date, the Underwriters shall have received:
(1) A certificate, dated such Option Closing Date, of the
President or any Vice President of the Company and of the chief
financial or accounting officer of the Company confirming that the
certificate delivered at the Closing Date pursuant to Section 8(c)
hereof remains true and correct as of such Option Closing Date.
(2) The favorable opinion of Wallace, Bauman, Fodiman &
Shannon, P.A., in form and substance satisfactory to counsel for the
Underwriters, dated such Option Closing Date, relating to the Option
Securities to be purchased on such Option Closing Date and otherwise to
the same effect as the opinion required by Sections 8(b)(i) and 8
(b)(v) hereof.
(3) The favorable opinion of Haythe & Curley, in form and
substance satisfactory to counsel for the Underwriters, dated such
Option Closing Date, relating to the Option Securities to the purchased
on such Option Closing Date and otherwise to the same effect as the
opinion required by Section 8(b)(ii) and 8(b)(v) hereof.
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<PAGE> 36
(4) The favorable opinion of Lashly & Baer, P.C., in form and
substance satisfactory to counsel for the Underwriters, dated such
Option Closing Date to the same effect as the opinion required by
Section 8(b)(iii) hereof.
(5) The favorable opinion of Skadden, Arps, Slate, Meagher &
Flom, counsel for the Underwriters, dated such Option Closing Date,
relating to the Option Securities to be purchased on such Option
Closing Date and otherwise to the same effect as the opinion required
by Sections 8(b)(iv) and 8(b)(v) hereof.
(6) A letter from Deloitte & Touche, LLP in form and substance
satisfactory to the Underwriters and dated such Option Closing Date,
substantially the same in form and substance as the letter furnished to
the Underwriters pursuant to Section 8(e) hereof, except that the
"specified date" in the letter furnished pursuant to this Section
8(g)(6) shall be a date not more than three business days prior to such
Option Closing Date.
h. On or before the Closing Date, the Company shall have executed
and delivered to the Representatives (i) the Representatives' Warrant Agreement
in final form and substance satisfactory to the Representatives and (ii) the
Representatives' Warrants issued in the name of the Representatives.
i. At the date of this Agreement, the Underwriters shall have
received lock-up agreements in form and substance satisfactory to the
Underwriters by the persons listed on Schedule B hereto.
j. Counsel for the Underwriters shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated and
related proceedings, or in order to evidence the accuracy of any of the
representations or warranties or the fulfillment of any of the conditions herein
contained; and all proceedings taken by the Company in connection with the
issuance and sale of the Securities as herein contemplated shall be satisfactory
in form and substance to the Underwriters and counsel for the Underwriters.
k. The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.
l. Any certificate or document signed by any officer of the Company
and delivered to you, as Representatives of the Underwriters, or to counsel for
the Underwriters, shall be deemed a representation and warranty by the Company
to each Underwriter as to the statements made therein.
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<PAGE> 37
m. If any condition specified in this Section 8 shall not have been
fulfilled when and as required to be fulfilled, this Agreement, or, in the case
of any condition to the purchase of Option Securities, on an Option Closing Date
which is after the Closing Date, the obligations of the several Underwriters to
purchase the relevant Option Securities, may be terminated by the
Representatives by notice to the Company at any time at or prior to Closing Date
or such an Option Closing Date as the case may be, and such termination shall be
without liability of any party to any other party except as provided in Section
9 and except that Sections 6 and 7 shall survive any such termination and remain
in full force and effect.
9. EXPENSES. The Company agrees to pay the following costs and expenses
and all other costs and expenses incident to the performance by it of its
obligations hereunder: (i) the preparation, printing or reproduction, and filing
with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each preliminary prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight and charges for
counting and packaging) of such copies of the Registration Statement, each
preliminary prospectus, the Prospectus, and all amendments or supplements to any
of them as may be reasonably requested for use in connection with the offering
and sale of the Securities; (iii) the preparation, printing, authentication,
issuance and delivery of certificates for the Securities, including any stamp
taxes in connection with the original issuance and sale of the Securities; (iv)
the printing (or reproduction) and delivery of this Agreement, the preliminary
and supplemental Blue Sky Memoranda and all other agreements or documents
printed (or reproduced) and delivered in connection with the original issuance
and sale of the Securities; (v) the registration of the Common Stock under the
1934 Act and the quotation of the Securities on NASDAQ; (vi) the registration or
qualification of the Securities for offer and sale under the securities or Blue
Sky laws of the several states as provided in Section 5(g) hereof (including the
reasonable fees, expenses and disbursements of counsel for the Underwriters
relating to the preparation, printing or reproduction, and delivery of the
preliminary and supplemental Blue Sky Memoranda and such registration and
qualification); (vii) the filing fees and the reasonable fees and expenses of
counsel for the Underwriters incident to securing any required review by the
NASD; and (viii) the fees and expenses of the Company's accountants and the fees
and expenses of counsel (including local and special counsel) for the Company.
If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 or
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<PAGE> 38
pursuant to clauses (ii), (iii), (iv) and (v) of Section 11 hereof) or if this
Agreement shall be terminated by the Underwriters because of any failure or
refusal on the part of the Company to comply, in any material respect, with the
terms or fulfill, in any material respect, any of the conditions of this
Agreement, the Company agrees to reimburse the Representatives for all
reasonable out-of-pocket expenses (including reasonable fees and expenses of
counsel for the Underwriters) incurred by you in connection herewith.
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective:
(i) upon the execution and delivery hereof by or on behalf of the parties
hereto; or (ii) if, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Securities may commence,
when notification of the effectiveness of the Registration Statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company.
If one or more of the Underwriters shall fail on the Closing Date to
purchase the Initial Securities which it or they are obligated to purchase under
this Agreement (the "Defaulted Securities"), the Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Defaulted Securities in such amounts as may be agreed upon
and upon the terms herein set forth; if, however, the Representatives shall not
have completed such arrangements within such 24-hour period, then:
a. if the number of Defaulted Securities does not exceed 10% of the
number of Initial Securities, the non-defaulting Underwriters shall be obligated
to purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of all
non-defaulting Underwriters, or
b. if the number of Defaulted Securities exceeds 10% of the number
of Initial Securities, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result
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<PAGE> 39
in a termination of this Agreement, either the Representatives or the Company
shall have the right to postpone the Closing Date for a period not exceeding
seven days in order to effect any required changes in the Registration Statement
or Prospectus or in any other documents or arrangements. As used herein, the
term "Underwriter" includes any person substituted for an Underwriter under this
Section 10.
Any notice under this Section 10 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT.
a. The Underwriters may terminate this Agreement, by notice to the
Company, at any time at or prior to the Closing Date or Option Closing Date, as
the case may be, (i) if there has been, since the date of this Agreement or
since the respective dates as of which information is given in the Registration
Statement, any material adverse change or any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, (ii) if there has occurred any
change in the financial markets in the United States or elsewhere or any
outbreak of hostilities or escalation thereof or other calamity or crisis the
effect of which is such as to make it, in your judgement, impracticable or
inadvisable to market the Securities or to enforce contracts for the sale of the
Securities, (iii) if trading in the Common Stock has been suspended by the
Commission, or if trading generally on the American Stock Exchange, the New York
Stock Exchange or in the over-the-counter markets has been suspended, or minimum
or maximum prices for trading have been fixed, or maximum ranges for prices for
securities have been required, by such exchange or markets or by order of the
Commission or any other governmental authority, or if a banking moratorium has
been declared by either Federal, New York or Illinois authorities, (iv) the
enactment, publication, decree or other promulgation of any Federal or state
statute, regulation, rule or order of any court or other governmental authority
which in your judgement materially and adversely affects or may materially or
adversely affect the business or operations of the Company and its subsidiaries
or (v) the taking of any action by any Federal, state or local government or
agency in respect of its monetary or fiscal affairs which in your judgment has a
material adverse effect on the securities markets in the United States, and
would in your judgement make it impracticable or inadvisable to market the
Securities or to enforce any contract for the sale thereof. Notice of such
termination may be given by telegram, telecopy or telephone and shall be
subsequently confirmed by letter.
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b. If this Agreement is terminated pursuant to this Section 11, such
termination shall be without liability of any party to any other party except as
provided in Section 9 and provided further that Sections 6 and 7 shall survive
such termination and remain in full force and effect.
12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set forth
in the last paragraph on the cover page, the stabilization legend on the inside
front cover page, and the statements under the caption "Underwriting" in any
preliminary prospectus and in the Prospectus constitute the only information
furnished by or on behalf of the Underwriters through you as such information is
referred to in Sections 5(a) and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10 and
11 hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company at the office of the
Company at, 2100 Ponce de Leon Boulevard, Suite 950, Coral Gables, Florida
33134, Attention: James P. Shea, President, Chief Executive Officer; or (ii) if
to you, as Representatives of the several Underwriters, care of Vector
Securities International, Inc., 1751 Lake Cook Road, Suite 350, Deerfield,
Illinois 60015, Attention: Syndicate Department.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by
and construed in accordance with the laws of the State of Illinois applicable to
contracts made and to be performed within the State of Illinois. This Agreement
may be signed in various counterparts which together constitute one and the same
instrument. If signed in counterparts, this Agreement shall not become effective
unless at least one counterpart hereof shall have been executed and delivered on
behalf of each party hereto.
15. SUCCESSORS. This Agreement has been and is made solely for the
benefit of the several Underwriters, the Company, its directors and officers,
the other persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Securities in his
status as such purchaser.
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<PAGE> 41
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
RENEX CORP.
By:
--------------------------
President and Chief
Executive Officer
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
VECTOR SECURITIES INTERNATIONAL, INC.
NEEDHAM & CO., INC.
As Representatives of the Several Underwriters
By VECTOR SECURITIES INTERNATIONAL, INC.
By:
----------------------------
Vice President
41
<PAGE> 42
SCHEDULE I
[NAME OF COMPANY]
NUMBER OF
INITIAL
SECURITIES
PURCHASED
FROM THE
UNDERWRITER COMPANY
----------- ----------
Vector Securities
International, Inc. . . .
Needham & Co., Inc. . . .
Total ----------
42
<PAGE> 1
Exhibit 1.2
[Form of Representatives' Warrant Agreement]
RENEX CORP.
AND
VECTOR SECURITIES INTERNATIONAL, INC.
AND
NEEDHAM & COMPANY, INC.
REPRESENTATIVES' WARRANT AGREEMENT
Dated as of , 1997
<PAGE> 2
REPRESENTATIVES' WARRANT AGREEMENT, dated as of ____________, 1997,
between Renex Corp., a Florida corpo- ration (the "Company"), and VECTOR
SECURITIES INTERNA- TIONAL, INC. and NEEDHAM & COMPANY, INC. (the "Represen-
tatives").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representatives warrants
("Warrants") to purchase up to an aggregate of 300,000 shares of Common Stock
(as defined in Section 8.3 hereof);
WHEREAS, pursuant to the underwriting agreement (the "Underwriting
Agreement"), dated as of the date hereof, between the Representatives, as
representative of the several Underwriters (as such term is defined in the
Underwriting Agreement), and the Company, the Representatives and the other
Underwriters have agreed to purchase 3,000,000 shares of common stock, $.001 par
value per share, of the Company, at a public offering price of $_____ per share
in connection with the Company's proposed public offering (the "Public
Offering"); and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representatives in consideration for, and as
part of the Representatives' compensation in connection with, the performance of
the Representatives pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, [the payment by the
Representatives to the Company of an aggregate of one hundred dollars
($100.00)], the agreements herein set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ss. 1. GRANT. The Representatives are hereby granted the right to
purchase, at any time from ________, 1997 [the effective date of the
registration statement] until 5:30 p.m., New York time, on _________, 2002 [five
years from the effective date of the registration statement] (the "Exercise
Period"), up to an aggregate of
2
<PAGE> 3
300,000 shares of Common Stock (the "Shares") at an initial exercise price
(subject to adjustment as provided in Section 8 hereof) of $______ [107% of the
initial public offering price per share] per share of Common Stock subject to
the terms and conditions of this Agreement.
ss. 2. WARRANT CERTIFICATES. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
ss. 3. EXERCISE OF WARRANT.
ss. 3.1 METHOD OF EXERCISE. The Warrants initially are exercisable at
an aggregate initial exercise price per share of Common Stock set forth in
Section 6 hereof (subject to adjustment as provided in Section 8 hereof) payable
by certified or official bank check in New York Clearing House funds. Upon
surrender of a Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the Purchase Price (as hereinafter
defined) for the shares of Common Stock purchased at the Company's principal
offices in Florida (presently located at 2100 Ponce de Leon Boulevard, Suite
950, Coral Gables, Florida 23134) the registered holder of a Warrant Certificate
("Holder" or "Holders") shall be entitled to receive a certificate or
certificates for the shares of Common Stock so purchased. The purchase rights
represented by each Warrant Certificate are exercisable at the option of the
Holder thereof, in whole or in part (but not as to fractional shares of the
Common Stock underlying the Warrants). In the case of the purchase of less than
all the shares of Common Stock purchasable under any Warrant Certificate, the
Company shall cancel said Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the shares of Common Stock purchasable thereunder.
ss. 3.2 EXERCISE BY SURRENDER OF WARRANTS. In addition to the method of
payment set forth in Section 3.1 and in lieu of any cash payment required
thereunder, the Holder(s) of the Warrants shall have the right at any
3
<PAGE> 4
time and from time to time to exercise the Warrants in whole or in part by
surrendering the Warrant Certificatein the manner specified in Section 3.1 in
exchange for the number of shares of Common Stock equal to (x) the number of
shares as to which the Warrants are being exercised MULTIPLIED BY (y) a
fraction, the numerator of which is the Market Price (as defined below) of the
Common Stock less the Exercise Price and the denominator of which is such Market
Price. Solely for the purposes of this paragraph, Market Price shall be
calculated either (i) on the date which the form of election attached hereto is
deemed to have been sent to the Company pursuant to Section 13 hereof ("Notice
Date") or (ii) as the average of the Market Prices for each of the five
consecutive trading days preceding the Notice Date, whichever of (i) or (ii) is
greater.
ss. 4. ISSUANCE OF CERTIFICATES. Upon the exercise of the Warrants, the
issuance of certificates for shares of Common Stock or other securities,
properties or rights underlying such Warrants, shall be made forthwith (and in
any event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Sections 5 and 1 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; PROVIDED, HOWEVER, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificates unless or until the persons or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the Shares
(and/or other securities, property or rights issuable upon the exercise of the
Warrants) shall be executed on behalf of the Company by the manual or facsimile
signature of the then present Chairman or Vice Chairman of the Board of
Directors or President or Vice President of the Company [under its corporate
seal reproduced thereon], attested to by the manual or facsimile
4
<PAGE> 5
signature of the then present Secretary or Assistant Secretary of the Company.
Warrant Certificates shall be dated the date of execution by the Company upon
initial issuance, division, exchange, substitution or transfer.
ss. 5. RESTRICTION ON TRANSFER OF WARRANTS. The Holder of a Warrant
Certificate, by its acceptance there- of, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof.
ss. 6. EXERCISE PRICE.
ss. 6.1 INITIAL AND ADJUSTED EXERCISE PRICE. Except as otherwise
provided in Section 8 hereof, the initial exercise price of each Warrant shall
be $[____] [107% of the initial public offering price] per share of Common
Stock. The adjusted exercise price shall be the Price which shall result from
time to time from any and all adjustments of the initial exercise price in
accordance with the provisions of Section 8 hereof.
ss. 6.2 EXERCISE PRICE. The term "ExercisE Price" as used herein shall
mean the initial exercise price or the adjusted exercise price, depending upon
the context.
ss. 7. REGISTRATION RIGHTS.
ss. 7.1 PIGGYBACK REGISTRATION. If, at any time commencing after the
date hereof and expiring seven (7) years thereafter, the Company proposes to
register any of its securities under the Securities Act of 1933, as amended (the
"Act") (other than in connection with a merger or pursuant to Form S-8 or a
successor form) it will give written notice by delivery in person, registered or
certified mail (postage prepaid, return receipt requested), telex, telecopier or
overnight air courier guaranteeing next day delivery, at least thirty (30) days
prior to the filing of each such registration statement, to the Representatives
and to all other Holders of the Warrants and/or the Warrant Shares (the
"Registrable Securities") of its intention to do so. If either of the
Representatives or other Holders of the Warrants and/or Warrant Shares notify
the Company within twenty (20) days
5
<PAGE> 6
after receipt of any such notice of its or their desire to include any such
securities in such proposed registration statement, the Company shall afford
each of the Representatives and such Holders of the Warrants and/or Warrant
Shares the opportunity to have any such Warrant Shares registered under such
registration statement.
Notwithstanding the foregoing, if, in the case of an underwritten
offering by the Company, the managing underwriter of such offering shall advise
the Company in writing that, in its opinion, the distribution of the Warrant
Shares requested to be included in the registration concurrently with the
securities being registered by the Company would adversely affect the market
price of such securities by the Company, then the offering and sale of such
Warrant Shares shall be delayed for such period, not to exceed ninety (90) days,
as such managing underwriter shall request. In the event of a delay as provided
in the preceding sentence, the Company shall file such supplements and
post-effective amendments, and take any such other steps as may be necessary, to
permit the proposed offering and sale of such Shares for a period of
one-hundred-eighty days (180) days immediately following the end of such period
of delay.
Notwithstanding the provisions of this Section 7.1, the Company shall
have the right at any time after it shall have given written notice pursuant to
this Section 7.1 (irrespective of whether a written request for inclusion of any
such securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
ss. 7.2 DEMAND REGISTRATION.
(a) At any time commencing after the date hereof and expiring five (5)
years thereafter, the holders of the Warrants and/or Warrant Shares representing
a "Majority" (as hereinafter defined) of such securities (assuming the exercise
of all of the Warrants) shall have the rights (which right is in addition to the
registration rights under Section 7.1 hereof), exercisable by written notice to
the Company, to have the Company prepare and file with the Securities and
Exchange Commission (the "Commission"), on one occasion, a registration
6
<PAGE> 7
statement and such other documents, including a prospectus, as may be necessary
in the opinion of both counsel for the Company and counsel for the
Representatives and the Holders, in order to comply with the provisions of the
Act, so as to permit a public offering and sale of their respective Warrant
Shares for six (6) consecutive months by such Holders and any other Holders of
the Warrants and/or Warrant Shares who notify the Company within twenty (20)
days after receiving notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.2 by any Holder or Holders to all
other registered Holders of the Warrants and the Warrant Shares within five (5)
days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.1 and
subsection (a) of this Section 7.2, at any time commencing after the date hereof
and expiring five (5) years thereafter, any Holder of warrants and/or Warrant
Shares shall have the right, exercisable by written request to the Company, to
have the Company prepare and file with the Commission, on one occasion, a
registration statement so as to permit a public offering and sale for six (6)
consecutive months by any such Holder of its Warrant Shares; PROVIDED, HOWEVER,
that the provisions of Section 7.3(b) hereof shall not apply to any such
registration request and registration and all costs incident thereto shall be at
the expense of the Holder or Holders making such request.
(d) No right of the Holders under this Section 7.2 shall be deemed to
have been exercised if with respect to such right:
(A) the requisite notice given by Holders pursuant to this
Section 7.2 is withdrawn prior to the date of filing of a registration
statement or if a registration statement filed by the Company under the
Securities Act pursuant to this Section 7.2 is withdrawn prior to its
effective date, in either case, by written notice to the Company from
the Holders of fifty percent (50%) or more of the Warrants and/or
Warrant Shares to be included or which
7
<PAGE> 8
are included in such registration statement stating that such Holders
have elected not to proceed with the offering contemplated by such
registration statement because (i) a development in the Company's
affairs has occurred or has become known to such Holders subsequent to
the date of the notice by the Holders to the Company requesting
registration of the Warrant Shares or the filing of such registration
statement which, in the judgment of such Holders or the managing
underwriter of the proposed public offering, adversely affects the
market price of such Warrant Shares or (ii) a registration statement
filed by the Company pursuant to this Section 7.2, in the reasonable
opinion of counsel for such Holders or the managing underwriter of the
proposed public offering, contains an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which made (other than any such statement or
omission relating to such Holders and based on information supplied or
failed to be supplied by such Holders) and the Company has not,
promptly after written notice thereof, corrected such statement or
omission in an amendment filed to such registration statement pursuant
to Section 7.3(m); or
(B) a registration statement pursuant to this Section 7.2
shall have become effective under the Securities Act and (i) the
underwriters shall not purchase any Warrant Shares because of a failure
of condition contained in the underwriting agreement (other than a
condition to be performed by or within the control of the Holders)
relating to the offering covered by such registration statement or (ii)
less than 85% of the Warrant Shares included therein shall have been
sold as a result of any stop order, injunction or other order or
requirement of the Commission or other governmental agency or court.
8
<PAGE> 9
ss. 7.3 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. In
connection with any registration under Section 7.1 or 7.2 hereof, the Company
covenants and agrees as follows:
(a) The Company shall use its best ef- forts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall use
its best efforts to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Shares such number of prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs (including fees and expenses of one
counsel to the Holder(s), but not underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
Sections 7.1 and 7.2(a) hereof including, without limitation, the Company's
legal and accounting fees, printing expenses, blue sky fees and expenses. The
Holder(s) will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 7.2(c). If the Company shall
fail to comply with the provisions of Section 7.3(a), the Company shall, in
addition to any other equitable or other relief available to the Holder(s),
extend the Exercise Period by such number of days as shall equal the delay
caused by the Company's failure, and be liable for any or all damages as the
Holder(s) may be entitled to as a matter of law.
(c) The Company will take all necessary action which may be required in
qualifying or registering the Warrant Shares included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as the Holder(s) shall designate; PROVIDED that the Company shall not be
obligated to qualify to do business in any such jurisdiction or to file any
general consent to service of process in any jurisdiction in any action other
than one arising out of the offering or the sale of the Warrant Shares.
(d) The Company shall indemnify each Holder of the Warrant Shares to be
sold pursuant to any registration statement and each person, if any, who
controls such Holder within the meaning of Section 15 of the Act or Section
20(a) of the Securities Exchange Act
9
<PAGE> 10
of 1934, as amended (the "Exchange Act"), against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which any
of them may become subject under the Act, the Exchange Act or otherwise, arising
from such registration statement.
(e) The Holder(s) of the Warrant Shares to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement.
(f) Nothing contained in this Agreement shall be construed as requiring
a Holder to exercise its Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Warrant Shares to be included in any registration statement filed
pursuant to Section 7.3 hereof, or file any registration statement subsequent to
the receipt of any notice pursuant to Section 7.3 hereof and until one hundred
and eighty (180) days after the effectiveness of a registration statement filed
pursuant to Section 7.3 hereof; PROVIDED, HOWEVER, that in the event of an
underwritten public offering, the Company shall have the right to permit the
inclusion of such other securities if the managing underwriter of such offering
advises the Company or the Holders in writing that, in its opinion, the
inclusion of such securities other than the Warrant Shares in such registration
statement will not adversely affect the distribution or the offering price of
such Warrant Shares.
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<PAGE> 11
(h) In connection with any registration statement filed pursuant to
Section 7.2 hereof, the Company shall furnish to each Holder participating in
any underwritten offering and to each underwriter, a signed counterpart,
addressed to such Holder or underwriter, of (i) an opinion of counsel to the
Company, dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the date
of the closing under the underwriting agreement), and (ii) a "cold comfort"
letter, dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, a letter dated the date
of the closing under the underwriting agreement), signed by the independent
public accountants who have issued a report on the Company's financial
statements included in such registration statement, in each case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and, in the case of such accountants' letter,
with respect to events subsequent to the date of such financial statements, as
are customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in underwritten public offerings of
securities.
(i) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within fifteen (15) months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least twelve (12) consecutive months beginning after the effective date of the
registration statement.
(j) The Company shall deliver promptly to each Holder participating in
the offering requesting the correspondence and memoranda described below, and to
the managing underwriters, copies of all correspondence between the Commission
and the Company, its counsel or auditors and all memoranda relating to
discussions with the Commission or its staff with respect to the registration
Statement and permit each Holder and underwriter to do such investigation, upon
reasonable advance notice, with respect to information contained in or omitted
from the registration statement as it deems reasonably
11
<PAGE> 12
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
or underwriter shall reasonably request.
(k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Shares requested to be included in such underwriting,
which may be any of the Underwriters. Such agreement shall be reasonably
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. The Holders shall be parties to
any underwriting agreement relating to an underwritten sale of their Warrant
Shares and may, at their option, require that any or all the representations,
warranties and covenants of the Company to or for the benefit of such
underwriters shall also be made to and for the benefit of such Holders. Such
Holders shall not be required to make any representations or warranties to or
agreements with the Company or the underwriters except as they may relate to
such Holders and their intended methods of distribution.
(l) For purposes of this Agreement, the term "Majority," in reference
to the Holders of Warrants or Warrant Shares, shall mean in excess of fifty
percent (50%) of the then outstanding Warrants or Warrant Shares that (i) are
not held by the Company, an officer, Creditor, employee or agent thereof or any
of their respective affiliates, members of their family, persons acting as
nominees or in conjunction therewith or (ii) have not been resold to the public
pursuant to a registration statement filed with the Commission under the Act.
(m) The Company shall promptly notify each Holder of Warrants and/or
Warrant Shares covered by, such registration statement, at any time when a
prospectus relating thereto is required to be delivered under
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<PAGE> 13
the Act, upon the Company's discovery that, or upon the happening of any event
as a result of which, the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made, and at the request of any such Holder promptly prepare and
furnish to such Holder and each underwriter, if any, a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be necessary
so that, as thereafter delivered to the purchasers of such securities, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made.
ss. 8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SHARES.
ss. 8.1 SUBDIVISION AND COMBINATION. In casE the Company shall at any
time subdivide or combine the outstanding shares of Common Stock, the Exercise
Price shall be decreased, in the case of subdivision, or increased, in the case
of combination, in the same proportions as the Common Stock is subdivided or
combined, in each case effective automatically upon, and simultaneously with,
the effectiveness of the subdivision or combination which gives rise to the
adjustment.
ss. 8.2 ADJUSTMENT IN NUMBER OF SHARES. UpoN each adjustment of the
Exercise Price pursuant to the provisions of this Section 8, the number of
Shares issu- able upon the exercise of each Warrant shall be adjusted to the
nearest full amount by multiplying a number equal to the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares
issuable upon exercise of the Warrants immediately prior to such adjustment and
dividing the product so obtained by the adjusted Exercise Price.
ss. 8.3 DEFINITION OF COMMON STOCK. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in
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<PAGE> 14
Certificate of Incorporation of the Company as may be amended as of the date
hereof, or (ii) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value. In
the event that the Company shall after the date hereof issue securities with
greater or superior voting rights than the shares of Common Stock outstanding as
of the date hereof, the Holder, at its option, may receive upon exercise of any
Warrant either shares of Common Stock or a like number of such securities with
greater or superior voting rights.
ss. 8.4 MERGER OR CONSOLIDATION. In case the Company after the date
hereof (i) shall consolidate with or merge into any other person and shall not
be the continuing or surviving corporation of such consolidation or merger, or
(ii) shall permit any other person to consolidate with or merge into the Company
and the Company shall be the continuing or surviving person but, in connection
with such consolidation or merger, the Common Stock shall be changed into or
exchanged for stock or other securities of any other person or cash or any other
property, or (iii) shall transfer all or substantially all of its properties or
assets to any other person, or (iv) shall effect a capital reorganization or
reclassifi- cation of the Common Stock (other than a capital reorganization or
reclassification resulting in the issue of additional shares of Common Stock for
which adjustment in the Exercise Price is provided in this Section 8), then, and
in the case of each such transaction, proper provision shall be made so that,
upon the basis and the terms and in the manner provided in this Agreement and
the Warrants, the Holders of the Warrants, upon the exercise thereof at any time
after the consummation of such transaction, shall be entitled to receive (at the
aggregate Exercise Price in effect at the time of such consummation for all
Common Stock issuable upon such exercise immediately prior to such
consummation), in lieu of the Common Stock or other securities issuable upon
such exercise prior to such consummation, the highest amount of securities, cash
or other property to which such Holders would actually have been entitled as
stockholders upon such consummation if such Holders had exercised the rights
represented by the Warrants immediately prior thereto,
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<PAGE> 15
subject to adjustments (subsequent to such consummation) as nearly equivalent as
possible to the adjustments provided for in this Section 8; PROVIDED that if a
purchase, tender or exchange offer shall have been made to and accepted by the
holders of more than 50% of the outstanding shares of Common Stock, and if a
Holder of warrants so designates in a notice given to the Company on or before
the date immediately preceding the date of the consummation of such transaction,
such Holder of such Warrants shall be entitled to receive the highest amount of
securities, cash or other property to which such Holder would actually have been
entitled as a stockholder if such Holder of such Warrants had exercised such
Warrants prior to the expiration of such purchase, tender or exchange offer and
accepted such offer, subject to adjustments (from and after the consummation of
such purchase, tender or exchange offer) as nearly equivalent as possible to the
adjustments provided for in this Section 8.
ss. 8.5 ASSUMPTION OF OBLIGATIONS. Notwithstanding anything contained
in the Warrants to the contrary, the Company will not effect any of the
transactions described in clauses (i) through (iv) of Section 8.4 unless, prior
to the consummation thereof, each person (other than the Company) which may be
required to deliver any stock, securities, cash or property upon the exercise of
the Warrants as provided herein shall assume, by written instrument delivered
to, and reasonably satisfactory to, the Holders of the Warrants, (a) the
obligations of the Company under this Agreement and the Warrants (and if the
Company shall survive the consummation of such transaction, such assumption
shall be in addition to, and shall not release the Company from, any continuing
obligations of the Company under this Agreement and the Warrants) and (b) the
obligation to deliver to such Holders such shares of stock, securities, cash or
property as, in accordance with the foregoing provisions of this Section 8, such
Holders may be entitled to receive, and such person shall have similarly
delivered to such Holders an opinion of counsel for such person, which counsel
shall be reasonably satisfactory to such Holders, stating that this Agreement
and the warrants shall thereafter continue in full force and effect and the
terms hereof (including, without limitation, all of the provisions of this
Section 8) shall be applicable to the
15
<PAGE> 16
stock, securities, cash or property which such person may be required to deliver
upon any exercise of the Warrants or the exercise of any rights pursuant hereto.
ss. 8.6 DIVIDENDS AND OTHER DISTRIBUTIONS. In the event that the
Company shall at any time prior to the exercise of all Warrants declare a
dividend or otherwise attribute to its stockholders any assets, property,
rights, evidences of indebtedness, securities (other than shares of Common
Stock), whether issued by the Company or by another, or any other thing of
value, the Holders of the unexercised Warrants shall thereafter be entitled, in
addition to the shares of Common Stock or other securities and property
receivable upon the exercise thereof, to receive, upon the exercise of such
Warrants, the same property, assets, rights, evidences of indebtedness,
securities or any other thing of value that they would have been entitled to
receive at the time of such dividend or distribution as if the Warrants had been
exercised immediately prior to such dividend or distribution. At the time of any
such dividend or distribution, the Company shall make appropriate reserves to
ensure the timely performance of the provisions of this Section 8.6.
ss. 8.7 OTHER DILUTIVE EVENTS. In case any event shall occur as to
which the purchase rights represented by the Warrants shall be diluted, then, in
each such case, the Exercise Price and/or the amount of any Common Stock, cash,
securities or other assets to be delivered upon exercise of the Warrants shall
be adjusted on a basis consistent with preserving, without dilution, the
purchase rights represented by the Warrants. In the event of such an occurrence,
upon receipt of a request for an adjustment from a majority of the Holders of
the Warrants, the Company and such Holders shall negotiate in good faith to
agree upon an appropriate adjustment within thirty (30) days of such notice, and
if the Company fails to agree within such 30-day period, the Company shall
appoint a firm of independent certified accountants of recognized national
standing (who can be the regular auditors of the Company), which shall render an
opinion upon the adjustment, if any, necessary to preserve, without dilution,
the purchase rights represented by the Warrants. Upon receipt of such opinion,
or final agreement with such Holders, the Company shall promptly mail a copy
thereof to all Holders of the Warrants and shall make the adjustment described
therein. The cost and
16
<PAGE> 17
expenses of such accountants shall be borne by the Company.
ss. 8.8 NOTICE OF ADJUSTMENT EVENTS. Whenever the Company contemplates
the occurrence of an event which would give rise to adjustments under this
Section 8, the Company shall mail to each Holder, at least thirty (30) days
prior to the record date with respect to such event or, if no record date shall
be established, at least thirty (30) days prior to such event, a notice
specifying (i) the nature of the contemplated event, (ii) the date of which any
such record is to be taken for the purpose of such event, (iii) the date on
which such event is expected to become effective and (iv) the time, if any, is
to be fixed, when the holders of record of Common Stock shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable in connection with such event.
ss. 8.9 NOTICE OF ADJUSTMENTS. Whenever the Exercise Price or the kind
of securities or property issuable upon exercise of the Warrants, or both, shall
be adjusted pursuant to this Section 8, the Company shall make a certificate
signed by its President or a Vice President and by its Chief Financial Officer,
Secretary or Assistant Secretary, setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method of which such
adjustment was calculated (including a description of the basis on which the
Company made any determination hereunder), and the Exercise Price and the kind
of securities or property issuable upon exercise of the Warrants after giving
effect to such adjustment, and shall cause copies of such certificate to be
mailed (by first class mail postage prepaid) to each Holder promptly after each
adjustment.
ss. 8.10 PRESERVATION OF RIGHTS. The Company will not, by amendment of
its certificate of incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Agreement or the Warrants or the rights represented
thereby, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
17
<PAGE> 18
appropriate in order to protect the rights of the Holders of the Warrants
against dilution or other impairment.
ss. 9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Shares in such denominations as
shall be designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonable satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
ss. 10. ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of shares of Common Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or other securities,
properties or rights.
ss. 11. RESERVATION AND LISTING OF SECURITIES. The Company shall at all
times reserve and keep available out of its authorized shares of Common Stock,
solely for the purpose of issuance upon the exercise of the Warrants, such
number of shares of Common Stock or other securities, properties or rights as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of the Warrants and payment of the Exercise Price therefor,
all shares of Common Stock and other securities issuable upon such exercise
shall be duly and validly issued, fully paid, nonassessable and not subject to
the preemptive rights of any stockholder. As long as the Warrants shall be
outstanding,
18
<PAGE> 19
the Company shall use its best efforts to cause all shares of Common Stock
issuable upon the exercise of the Warrants to be listed on all securities
exchanges and/or included in the automated quotation system of the NASDAQ
National Market System (subject to official notice of issuance) with respect to
which the Common Stock issued to the public in connection herewith may then be
so listed and/or quoted.
ss. 12. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution payable; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a voluntary or involuntary dissolu- tion, liquidation or winding-up
of the Company (other than in connection with a consolidation or merger) or any
capital reorganization, recapitalization or reclassifica- tion or a sale of all
or substantially all of its property, assets and business as an entirety shall
be proposed; then, in any one or more of said events, the Company will mail to
each Holder of a Warrant a notice specifying (i) the date or expected date on
which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right, and (ii) the date or expected date on which any such
reorganization, reclassification, recapitalization, consolidation, merger, sale,
dissolution, liquidation or winding-up is to take place and the
19
<PAGE> 20
time, if any such time is to be fixed, as of which the holders of record of
Common Stock shall be entitled to exchange their shares of Common Stock for the
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, consolidation, merger, sale, dissolution,
liquidation or winding-up. Such notice shall be mailed at least thirty (30) days
prior to the date therein specified.
ss. 13. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly given or made at the time delivered by hand if personally delivered; five
calendar days after mailings if sent by registered or certified mail; when
answered back, if telexed; when receipt is acknowledged, if telecopied: and the
next business day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery (except that a notice of change of
address shall not be deemed to have been given until actually received by the
addressee):
(a) If to the registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 hereof or
to such other address as the Company may designate by notice to the Holders.
ss. 14. SUPPLEMENTS AND AMENDMENTS. The Company and the Representatives
may from time to time supplement or amend this Agreement without the approval of
any holders of Warrant Certificates (other than the Representatives) in order to
cure any ambiguity, to correct or supplement any provision contained herein
which may be defective or inconsistent with any provisions herein, or to make
any other provisions in regard to matters or questions arising hereunder which
the Company and the Representatives may deem necessary or desirable and which
the Company and the Representatives deem shall not adversely affect the
interests of the Holders of Warrant Certificates.
ss. 15. SUCCESSORS. All the covenants and provisions of this
Agreement shall be binding upon and
20
<PAGE> 21
inure to the benefit of the Company, the Holders and their respective successors
and assigns hereunder.
ss. 16. TERMINATION. This Agreement shall terminate at the close of
business on _____________, 2002.
ss. 17. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and
each Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of [Illinois] and for all purposes shall be
construed in accordance with the laws of said State without giving effect to the
rules of said State governing the conflicts of laws.
Any process or summons to be served upon any of the Company, the
Representatives and the Holders (at the option of the party bringing such
action, proceeding or claim) may be served by transmitting a copy thereof, by
registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in Section 13 hereof. Such mailing
shall be deemed personal service and shall be legal and binding upon the party
so served in any action, proceeding or claim. The Company, the Representatives
and the Holders agree that the prevailing party(ies) in any such action or
proceeding shall be entitled to recover from the other par- ty(ies) all of
its/their reasonable legal costs and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefor.
ss. 18. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.
ss. 19. SEVERABILITY. If any provision of this Agreement shall be held
to be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
21
<PAGE> 22
ss. 20. CAPTIONS. The caption headings of the Sections of this
Agreement are for convenience of refer- ence only and are not intended to be,
nor should they be construed as, part of this Agreement and shall be given no
substantive effect.
ss. 21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give any person or corporation other than the Company and the
Representatives and any other registered Holder(s) of the Warrant Certificates
or Warrant Shares any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole and exclusive benefit of the
Company, the Representatives and any other registered Holder(s) of the Warrant
Certificates or Warrant Shares.
ss. 22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such Counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
22
<PAGE> 1
EXHIBIT 4.1
RC SHARES
NUMBER INCORPORATED UNDER THE LAWS
OF THE STATE OF FLORIDA
RENEX(R)
CORP.
COMMON STOCK SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 759683 10 5
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK $.001 PAR VALUE OF
Renex Corp. transferable on the books of the Corporation by the holder hereof in
person or by duly authorized Attorney, upon surrender of this Certificate
properly endorsed. This Certificate is not valid unless countersigned by the
Transfer Agent and registered by the Registrar. Witness the facsimile seal of
the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ Mark Wallace /s/ James P. Shea
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED OFFICER
<PAGE> 2
RENEX CORP.
THE CORPORATION IS AUTHORIZED TO ISSUE SHARES OF PREFERRED STOCK AND THE
BOARD OF DIRECTORS OF THE CORPORATION IS AUTHORIZED TO DETERMINE THE
DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS APPLICABLE TO
DIFFERENT CLASSES OF PREFERRED STOCK AND DIFFERENT SERIES WITHIN A CLASS OF
PREFERRED STOCK. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER
WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF WHICH THE CORPORATION IS AUTHORIZED TO ISSUE AND THE QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. ANY SUCH REQUEST
SHOULD BE MADE TO THE CORPORATION OR TO THE TRANSFER AGENT.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-____________ Custodian __________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right
of survivorship and not as tenants under Uniform Gifts to Minors
in common Act _____________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
Please print or typewrite name and address including postal zip code of assignee
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
________________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated, _______________________________
___________________________________
NOTICE: The signature of this
assignment must correspond with the
name as written upon the face of
the certificate in every
particular, without alteration or
enlargement or any change whatever.
SIGNATURE(S) GUARANTEED: ___________________________________
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 10.6
August 1, 1996
Mr. Orestes Lugo
Chief Financial Officer
Renex Corporation
2222 Ponce de Leon Boulevard
Suite 300
Coral Gables, FL 33134
Dear Orestes:
This letter evidences our understanding concerning the terms of the proposed
lease to RENEX CORPORATION of dialysis and other equipment required for dialysis
clinics under a Lease Line of Credit. These terms are as follows:
<TABLE>
<S> <C>
* LEASE LINE OF CREDIT : $6,000,000
* EQUIPMENT : - Dialysis machines
- Reverse osmosis systems
- Reuse machines
- Leasehold improvements (not to exceed 20% of the total
equipment cost for any particular schedule: for example, if we
have $250,000 of equipment, we will do a $300,000 schedule,
$50,000 of which will be for leasehold improvements)
* MINIMUM TAKEDOWN : $100,000
* DELIVERY DATE : Within 12 months hereof
* LEASE COMMENCEMENT DATE : The first day of the month in which the first item of equipment is
received
* LEASEHOLD GRACE PERIOD : Renex will have 30 days after the lease commencement date to
decide on the inclusion of leasehold improvements on any
particular schedule, at the percentage explained above. At the
end of the 30 days, the schedule will close with or without
leasehold improvements, and will commence as stated above.
After closing, leasehold's not included cannot be added to future
schedules in excess of the percentage explained above.
* END OF LEASE TERM OPTION : One Dollar Buyout
* MONTHLY LEASE RATE FACTOR : EQUIPMENT LEASEHOLD
LEASE RATE LEASE RATE
FACTORS RATE FACTORS RATE
---------- ---- ----------- ----
TERM OPTION 1. (60 MONTHS) .02112 10.48% .02174 11.84%
TERM OPTION 2. (48 MONTHS) .02521 10.60% .02595 12.99%
* MONTHLY RENTAL : - The monthly rental of the equipment leased under each
Equipment Schedule shall equal the cost of the equipment
multiplied by the appropriate Monthly Lease Rate Factor.
- Monthly rentals are
payable in advance and
the first and last
payments are due on the
Commencement Date of
each Equipment Schedule.
</TABLE>
<PAGE> 2
Mr. Orestes Lugo
August 1, 1996
Page 2 of 2
<TABLE>
<S> <C>
* LINKAGE : The Monthly Lease Rate Factor, ("MLRF") shall be fixed for the
lease term upon execution of each Equipment Schedule. Until
then, each MLRF is subject to change commensurate with
changes in the yield on 4 and 5 year Treasury Bonds, which are
currently 6.45% and 6.57% respectively as published in the Wall
Street Journal.
* DOCUMENTATION : Standard
Morcroft Master Lease
embodying the general lease
terms, with Equipment
Schedules issued pursuant
thereto for each takedown of
equipment.
* VALIDITY : The terms of this proposal are valid if accepted on or before
August 8, 1996. Such acceptance should be indicated by signing
this letter in the space provided below and returning same to
Morcroft.
* CONTINGENCY : This proposal is contingent on final credit approval and the
execution of acceptable documentation.
* SECURITY DEPOSIT : On acceptance of this lease proposal a security deposit equal to
.75% ($45,000) of the Equipment Cost is due and will be applied
to the full first rental payments due under the equipment
schedules as executed. At the expiration of Delivery Date, noted
above, any unused portion of the security deposit will, at
Lessee's discretion, be refunded. The security deposit is fully
refundable if final credit approval is not secured.
</TABLE>
We appreciate the opportunity to submit our proposal and look forward to your
favorable acknowledgement of this letter. Until then, if we can be of assistance
in any way, please call.
Very truly yours,
Shawn J. McBride
Account Executive
Accepted and agreed to:
RENEX CORPORATION
By: /s/ ORESTES LUGO
-----------------------------
Name: ORESTES LUGO
--------------------------
Title: CFO
--------------------------
Date: 8/5/96
--------------------------
<PAGE> 3
MASTER LEASE NO. 199
dated : as of January 1, 1994
between : Morcroft Leasing Corporation ("Lessor")
located at : 333 Fairfield Road, Fairfield, NJ 07004
and : Renex Corporation ("Lessee")
located at : 2222 Ponce De Leon Boulevard, Suite 300, Coral Gables, FL 33134
- -------------------------------------------------------------------------------
IN CONSIDERATION of the mutual agreements set forth herein, the parties agree as
follows:
1. PROPERTY LEASED. Lessor agrees to lease to Lessee, and Lessee agrees to [ewe
from Lessor, in accordance with the terms and conditions herein, the personal
property ("Equipment") listed in each Equipment Schedule which shall be
substantially in the form attached as Exhibit A. Each Equipment Schedule shall,
upon execution, be made a part hereof and shall be deemed a separate lease
agreement on the terms stated herein and in each such Equipment Schedule (each
such Equipment Schedule in conjunction with this Master Lease shall hereinafter
be the "Lease"). In the event of a conflict between the language of this Master
Lease and any Equipment Schedule hereto, the language of the Equipment Schedule
shall prevail with respect to that Equipment Schedule.
2. TERM. The Term of this Master Lease shall commence on the date set forth
above and shall continue in effect so long as the term of any Equipment Schedule
executed pursuant hereto remains in affect. The Term of each Equipment Schedule
shall be for the period set forth therein and shall commence on the date on
which the Lessee accepts the Equipment in the manner specified in section 3 of
this Master Lease (the "Acceptance Date"). Notwithstanding the foregoing, if an
Equipment Schedule does not contain a purchase obligation mandatory to Lessee,
Lessor or Lessee shall terminate its obligations under such Equipment Schedule
at the end of the Term stated therein by given other party 180 days prior
written notice of such termination. If no such notice of termination is given
180 days prior to the expiration of the term for such Equipment Schedule, then
the term for that Equipment Schedule shall be automatically extended to 180 days
subsequent to when such written notice is given.
3. ACCEPTANCE. Immediately, upon delivery and installation of the Equipment at
Lessee's premises, Lessee shall inspect the Equipment, determine that the
Equipment is properly installed and operating according to manufacturer's
specifications and shall promptly execute and deliver to Lessor a Certificate of
Acceptance substantially in the form attached as Exhibit B.
4. RENT. Lessee agrees to pay the total Rent for the Term, which shall be the
total amount of all rent payments stated in each Equipment Schedule, plus
additional amounts provided for herein.
5. OBLIGATION TO PAY RENT UNCONDITIONAL. Lessee acknowledges and agrees that the
Lease is a net lease and Lessee's obligation to pay Rent and all other sums
payable hereunder, and the rights of Lessor in and to such payments, shall be
absolute and unconditional and shall not be subject to any abatement, reduction,
setoff, defense, counterclaim or recoupment due or alleged to be due to, or by
reason of, any past, present or future claims which Lessee may have against
Lessor, the manufacturer or seller of the Equipment, or against any person for
any reason whatsoever including, without limitation, the disrepair or
inoperability of the Equipment.
6. TITLE. Lessee shall have no right, title or interest in the Equipment, except
as expressly set forth in the Lease. All Equipment shall remain personal
property and the title thereto shall at all times remain in the Lessor or its
assigns exclusively. All documents of title and evidences of delivery shall be
delivered to Lessor. Lessee will not change or remove any insignia or lettering,
if any, on the Equipment indicating Lessor's ownership thereof, and, upon
Lessor's request, shall affix to the Equipment in a prominent place, labels,
plates or other markings stating that the Equipment is owned by Lessor. Lessor
Is authorized, at Lessee's expense, to cause the Lease or any statement or other
instrument showing the interest of Lessor in the Equipment to be filed or
recorded and Lessee agrees to execute and deliver any statement or instrument
reasonably required by Lessor for such purpose. Lessee shall, at Lessee's
expense, protect and defend Lessor's title against all persons claiming against
or through Lessee, at all times keeping the Equipment free from any legal
process or encumbrances whatsoever, including but not limited to liens, levies
and attachments, and shall give Lessor immediate written notice thereof and
shall indemnify Lessor from any loss caused thereby.
<PAGE> 4
7. WARRANTY AND LIMITATION OF LIABILITY. Lessor warrants and represents that as
long as Lessee shall not be in default of any of the provisions of the Lease,
neither Lessor, nor any assignee or secured party of Lessor will disturb
Lessee's use or possession of the Equipment and Lessee's unrestricted use
thereof for its intended purpose. LESSOR MAKES NO OTHER WARRANTY EXPRESS OR
IMPLIED AS TO ANY MATTER WHATSOEVER INCLUDING, WITHOUT LIMITATION THE DESIGN OR
CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS OR CAPACITY OR
DURABILITY FOR ANY PARTICULAR PURPOSE, THE QUALITY OF THE MATERIAL OR
WORKMANSHIP OF THE EQUIPMENT OR CONFORMITY OF THE EQUIPMENT TO THE PROVISIONS
AND SPECIFICATIONS OF ANY PURCHASE ORDER OR ORDERS RELATING THERETO AND
EXPRESSLY DISCLAIMS THE SAME. LESSOR SHALL HAVE NO LIABILITY TO LESSEE FOR ANY
CLAIM. LOSS OR DAMAGE CAUSED OR ALLEGED TO BE CAUSED DIRECTLY, INDIRECTLY,
INCIDENTALLY OR CONSEQUENTIALLY BY THE EQUIPMENT, BY ANY INADEQUACY THEREOF OR
DEFICIENCY OR DEFECT THEREIN, BY ANY INCIDENT WHATSOEVER IN CONNECTION
THEREWITH, ARISING IN STRICT LIABILITY, NEGLIGENCE OR OTHERWISE, OR IN ANY WAY
RELATED TO OR ARISING OUT OF THE LEASE. Notwithstanding the foregoing, Lessee
will be entitled to the benefit of any applicable manufacturer's warranties,
and, to the, extent assignable, such warranties are hereby assigned by Lessor
for the benefit of Lessee. Lessee shall, at its sole expense, take all
reasonable action to enforce such warranties where available to Lessee.
8. INDEMNITY. Lessee agrees to defend, indemnify and hold Lessor harmless from
any and all claims, losses, liabilities (including negligence, tort and strict
liability), damages and/or legal proceedings, groundless or otherwise, Including
any liability for legal costs, fees and expenses, arising from this Master Lease
and Equipment Schedule(s) or the Equipment, including, without limitation, its
design, manufacture, selection, purchase, delivery, possession, condition,
suitability, use, operation or return. It is contemplated that any liabilities
indemnified against herein by Lessee shall be deemed to include, without
limitation, any liabilities based on theories of negligence, tort and/or strict
liability. Lessee's obligations hereunder will survive the expiration of this
Master Lease and Equipment Schedule(s) with respect to acts or events occurring
or alleged to have occurred prior to the return of the Equipment to Lessor.
9. INSTALLATION, MAINTENANCE AND REPAIR.
(a) Lessee shall, at Lessee's expense: (i) be responsible for the delivery,
installation, maintenance, service and repair of the Equipment, (ii) use
the Equipment only in the regular course of Lessee's business, within its
normal capacity, without abuse and in a manner contemplated by the
manufacturer; (iii) not make modification, alteration or addition to the
Equipment (other than normal operating accessories or controls) without
the consent of Lessor, which shall not be unreasonably withheld; iv)
protect the Equipment from deterioration; and (v) maintain In force a
standard maintenance agreement with the manufacturer or other party
reasonably acceptable to Lessor, requiring manufacturer or such other
party to repair, service and maintain the Equipment in good operating
condition, repair and appearance, normal wear and tear excepted. If a
party other than the manufacturer maintains the Equipment as permitted
above, upon surrender of such Equipment to Lessor, Lessee shall provide a
letter from the manufacturer of such Equipment certifying that it is
eligible for the manufacturer's standard maintenance agreement.
(b) Lessee shall not so affix the Equipment to realty so as to change its
nature to real property. Lessee agrees that the Equipment shall remain
personal property at all times regardless of how attached or installed,
shall remain at the location shown in the Equipment Schedule and shall
not be removed without the consent of Lessor, which shall not be
unreasonably withheld. All modifications, repairs, alterations,
additions, operating accessories and controls shall accrue to the
Equipment and become the property of Lessor. Lessor shall have the right,
during normal hours, subject to applicable laws and regulations, to enter
upon the premises where the Equipment is located in order to inspect,
observe or, upon the occurance of an Event of Default,
-2-
<PAGE> 5
remove the Equipment or otherwise protect Lessor's interest, and Lessee
shall cooperate in affording Lessor the opportunity to do so.
10. TAXES. All taxes, assessments, license and other charges including, without
limitation, personal property tax, sales and use taxes, transportation tax, or
similar levies imposed or assessed on the ownership, possession, rental or use
of the Equipment during the Term of the Lease (except for Federal or State
income taxes payable on the net income of Lessor) shall be paid by Lessee before
the same shall become delinquent. To the extent possible, under applicable law,
for the personal property tax return purposes only, Lessee shall include the
Equipment on such returns which shall be timely filed by Lessee in addition to
the timely payment of such taxes by Lessee. If Lessor Is required to file such
returns, Lessee will promptly furnish to Lessor such data and in such form which
will enable Lessor to make and file such returns in a timely manner. In case of
failure of Lessee to so pay said taxes, assessments, or other charges, Lessor
may pay all or any part of such items, in which event the amount so paid by
Lessor shall be Immediately payable by Lessee to Lessor. Lessee authorizes
Lessor to add to the amount of each Rent payment any sales and use tax,
transportation tax, or similar levies that may be imposed on or measured by the
Rent payments hereunder.
11. INSURANCE. Lessee, at its own expense, shall insure the Equipment against
all risks of loss or damage from every cause whatsoever for an amount not less
than the Casualty Loss Value. Lessee shall maintain a loss payable endorsement
in favor of Lessor affording to Lessor such additional protection as Lessor
shall reasonably require and shall, at its own expense, maintain adequate
liability insurance. All such Insurance shall be hold with an insurance company
reasonably acceptable to Lessor and of the Lessee's choosing and shall name
Lessor as additional, insured and loss payee and the policies shall provide that
they may not be cancelled or altered without at least 30 days' prior written
notice to Lessor.
12. LOSS OR DAMAGE. Lessee shall bear the entire risk of any destruction or loss
of or damage to Equipment for any reason whatsoever, including without
limitation, theft, governmental taking, war, strike or Act of God (herein "Loss
or Damage"). Lessee shall promptly notify Lessor of any Loss or Damage and no
such event shall relieve Lessee of its obligation to pay Rent or of any other
obligation under the Lease. In the event of any Loss or Damage of Equipment,
Lessee, at the option of Lessor, shall:
(a) Place the some in good condition and repair; or
(b) Replace the same with like Equipment in good condition and repair with
clear title thereto; or
(c) Pay to Lessor an amount, the Casualty Loss Value, equal to: (i) any Rent
or other amounts then due with respect to said Equipment; plus (ii) the
present value, based on an interest rate of 5% per annum, of the total
unpaid Rent payments, with respect to said Equipment, for the balance of
the Term of the Lease; plus (iii) the present value, based on an interest
rate of 5% per annum, of the amount of any purchase option or requirement
stated in the Lease or, where such options or requirements are not so
stated, the amount of the estimated fair market value of the Equipment at
the and of the Term of the Lease. Payment of the Casualty Loss Value
shall be due on the date of such Loss or Damage and, upon Lessor's
receipt of such payment, Lessee and/or Lessee's insurer shall be
entitled to Lessor's interest in said Equipment for salvage purposes in
its then condition and location, "as is" without warranty, express or
implied.
13. ASSIGNMENT.
(a) Lessor may transfer, assign or sell all or a portion of its right, title,
and interest in and to the Equipment or the Lease and/or grant a security
interest in the Equipment to one or more lenders or entities (herein
called "Assignee"). Lessee hereby: (i) consents to such transfers,
assignments, sales and/or grants; (ii) agrees to promptly execute and
deliver such further acknowledgements, agreements and other instruments
as may be reasonably requested by Assignee to effect such transfers,
assignments, sales and/or grants from time to time as each Equipment
Schedule is executed; and (iii) acknowledges that any such transfer,
assignment, sale and/or grant shall hoi materially change Lessee's duties
or obligations under the Lease nor materially increase the burdens or
risks imposed on Lessee. In the event of an assignment, all references
herein to Lessor shall include Assignee, provided, however, that Assignee
shall not be obligated to perform the obligations of Lessor hereunder
(except Lessor's obligation to allow
-3-
<PAGE> 6
Lessee quiet enjoyment of the Equipment and except for the application
pursuant hereto of any proceeds which shall be received by Assignee of
insurance provided by Lessee).
(b) Lessee's obligations to Assignee hereunder are absolute and
unconditional and are not subject to any abatement, reduction, defense,
offset or counterclaim available to Lessee for any reason whatsoever,
including, without limitation: (i) the operation of law; (ii) any defect
in the Equipment or the condition, design, operation or fitness for use
thereof; (iii) any loss, destruction or interference with the use of the
Equipment, of any part thereof; (iv) the failure of Lessor to perform any
of Its obligations hereunder. Lessee may reserve its rights, if any, to
have separate recourse against Lessor. However, except as otherwise
expressly provided herein, no Lease shall terminate by reason of any of
the foregoing or for any other cause whatsoever.
(c) LESSEE SHALL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR: (i)
ASSIGN OR IN ANY WAY DISPOSE OF ALL OR ANY PART OF ITS RIGHTS OR
OBLIGATIONS UNDER THE LEASE; OR (ii) ENTER INTO A SUBLEASE OF ALL OR ANY
PART OF THE EQUIPMENT.
14. SURRENDER OF EQUIPMENT. At the expiration of each Equipment Schedule, Lessee
shall, at its own expense, deliver the Equipment listed therein to Lessor (at
the location designated by the Lessor within the continental United States) in
the same condition as received, less normal depreciation and wear as certified
by vendor or substitute acceptable to Lessor. If Lessee shall, for any reason,
fail to return Equipment to Lessor within 10 days of the expiration of the
related Equipment Schedule, Lessee shall pay as penalty for each month, or
fraction thereof, after the expiration of said Equipment Schedule, an amount
equal to one hundred and five percent (5 %) of the monthly rental payment set.
forth in that Equipment Schedule, until the Equipment is received. by Lessor.
15. OTHER COVENANTS AND WARRANTIES OF LESSEE,
(a) Lessee shall promptly pay all costs, expenses and obligations of
every kind and nature incurred in connection with the use or operation of
the Equipment which may arise or become due during the Term of the Lease,
whether or not specifically mentioned herein.
(b) Lessee agrees that the application, statements and financial reports
submitted by Lessee to Lessor are material inducements to the execution
by Lessor of this Master Lease and Equipment Schedule(s) and Lessee
warrants that such applications, statements and reports and all
information hereafter furnished by Lessee to Lessor will be true and
correct in all material respects as of the date submitted.
(c) Lessee agrees to furnish promptly to Lessor such financial or other
statements respecting the condition, operations and affairs of Lessee or
respecting the Equipment as Lessor may from time to lime reasonably
request.
(d) Lessee agrees that, whenever any payment Is not paid by Lessee within
ten (10) days of when due hereunder, Lessee will pay to Lessor (as
liquidated damages occasioned by such delay), not later than one month
thereafter, an amount equal to five percent (5%) of such delayed payment,
but only to the extent allowed by law. Such amount shall be payable in
addition to all amounts payable by Lessee as a result of exercise by
Lessor of any of the remedies hereunder provided.
(e) Lessee warrants that this Master Lease and Equipment Schedule(s) have
been duly authorized and that no provision herein is inconsistent with
Lessee's charter, by-laws or any loan or credit agreement or other
instrument to which Lessee is a party or by which Lessee or Its property
may be bound or affected.
16. PERFORMANCE BY LESSOR OF LESSEE'S OBLIGATIONS. In case of the failure of
Lessee to comply with any of the provisions of the Lease, Lessor shall have the
right, but shall not be obligated, to effect such compliance on behalf of
Lessee. In that event all monies spent, liabilities incurred and expenses of
Lessor in effecting such compliance will be immediately due and payable by
Lessee to Lessor.
17. DEFAULT. The occurrence of any one of the following events shall constitute
an Event of Default hereunder.
-4-
<PAGE> 7
(a) Lessee shall default in the payment of Rent, or in making any other
payment hereunder when due and such default shall continue for five (5)
days after written notice thereof from Lessor;
(b) Lessee shall breach any warranty hereunder;
(c) Lessee shall default in the performance of any other covenant, term
or condition hereunder and such default shall continue for ten (10) days
after written notice thereof from Lessor;
(d) Lessee becomes insolvent or makes an assignment for the benefit of
creditors;
(e) Lessee applies for, or consents to, the appointment of a receiver,
trustee, conservator or liquidator of Lessee or of all or a substantial
part of its assets, or such receiver, trustee, conservator or liquidator
is appointed without the application or consent of Lessee;
(f) A petition is filed by or against Lessee under the Bankruptcy Act or
any amendment thereto (including without limitation a petition for
reorganization, arrangement or extension) or under any other Insolvency
law or laws providing for the relief of debtors, unless: (i) Lessee
promptly and diligently prosecutes an action to dismiss such petition;
AND (ii) such petition Is dismissed within thirty (30) days of such
filing;
(g) Lessee abandons any or all of the Equipment, or, without Lessor's
prior written consent, attempts to remove, sell, transfer, sublet or part
with the possession of any item of Equipment or assign any part of this
Master Lease or Equipment Schedule(s); or,
(h) Any representation or warranty made by Lessee in this Master Lease,
or in any Equipment Schedule, or in any document furnished by Lessee to
Lessor or Assignee in connection with this Master Lease or any Equipment
Schedule or with respect to the acquisition or use of the Equipment,
which Is untrue in any material respect.
18. REMEDIES. Upon the occurrence of any Event of Default under any Equipment
Schedule Lessor may, at its option and with respect to such Equipment Schedule,
do one or more of the following, all of which are hereby authorized by Lessee:
(a) Cause Lessee, without demand, to immediately pay to Lessor, as
liquidated damages and not as a penalty, the "Default Value", which shall
be an amount equal to: (i) the Casualty Loss Value of the Equipment on
the date of such Event of Default; plus (ii) any and all costs and
expenses Incurred by Lessor in connection with the enforcement of any of
Lessor's remedies, including all expenses of repossessing, storing,
shipping, repairing and selling the Equipment, and legal expenses and
reasonable attorney's fees;
(b) Cause Lessee, upon written demand of Lessor and at Lessee's expense,
to promptly return any and all items of Equipment to Lessor in accordance
with Section 14 hereof, or Lessor, at its option, may, without demand or
legal process, enter into the premises where the Equipment may be found
and take possession of and remove the same, without liability for
injuries suffered through or loss caused by such repossession, and all
rights of Less" in the Equipment so removed shall terminate absolutely;
and,
(c) Ship, store and/or repair all Equipment so removed. Lessor shall take
reasonable steps, in Lessor's opinion, to lease or sell the Equipment,
with or without notice and on public or private bid, and the proceeds of
such lease or sale shall be applied by Lessor: (i) first, to pay to
Lessor an amount equal to the Default Value to the extent not previously
paid by Lessee: and (ii) second, to reimburse Lessee for the Default
Value to the extent previously paid. Any surplus remaining thereafter
will be retained by Lessor.
All remedies of Lessor hereunder are cumulative, are in addition to any other
remedies provided for by law and may, to the extent permitted by law, be
exercised concurrently or separately, and the exercise of any one remedy shall
not be deemed to be an election of such remedy or to preclude the exercise of
any other remedy. No failure on the part of Lessor to exercise, and no delay in
exercising any right or remedy shall operate as a waiver thereof or modify the
terms of this Master Lease and Equipment Schedule(s), near shall any single or
partial exercise by Lessor of any right or remedy preclude any other or further
exercise of the some or any other right or remedy.
19. SURVIVAL OF COVENANTS. All of Lessee's covenants under this Master Lease and
Equipment Schedule(s) shall survive the delivery and return of the Equipment
leased hereunder.
-5-
<PAGE> 8
20. ORIGINALITY. This Master Lease and any Equipment Schedule executed pursuant
hereto shall be executed with only one "Original" with all other copies being
solely xerographic copies thereof. If Lessor grants a security interest in all
or part of an Equipment Schedule, the Equipment covered thereby and/or sums
payable thereunder, only the "Original" Equipment Schedule executed by the
Lessor and the Lessee shall be effective to transfer Lessor's right$ therein.
The "Original" Equipment Schedule shall bear the legend: "This Is the only
original Equipment Schedule No. ___. All other copies of This Equipment Schedule
No. ____ are xerographic copies only and have been marked as duplicates.
Possession of this "Original" is required to perfect, by possession, a security
interest in this Equipment Schedule as Chattel Paper under the UCC."
21. AMENDMENTS. THIS MASTER LEASE AND EQUIPMENT SCHEDULE(S) CONSTITUTES THE
ENTIRE AGREEMENT BETWEEN LESSOR AND LESSEE AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL DISCUSSIONS, NEGOTIATIONS
OR AGREEMENTS OF THE PARTIES. THERE IS NO UNDERSTANDING, ORAL OR WRITTEN, WHICH
IS NOT CONTAINED HEREIN. THIS MASTER LEASE AND EQUIPMENT SCHEDULE(S) MAY NOT BE
AMENDED EXCEPT BY A WRITTEN AGREEMENT SIGNED BY LESSOR AND LESSEE. THIS MASTER
LEASE AND EQUIPMENT SCHEDULE(S) SHALL BE BINDING ON AND INURE TO THE BENEFIT OF
THE PARTIES HERETO AND THEIR PERMITTED SUCCESSORS AND ASSIGNS.
22. MISCELLANEOUS.
(a) Applicable Law. This Lease shall be governed by, and construed in
accordance with, the laws of the State of New Jersey.
(b) Suspension of Obligations of Lessor. Prior to delivery of any item of
Equipment hereunder, the obligations of Lessor hereunder shall be
suspended to the extent that it is hindered or prevented from complying
therewith because of labor disturbances, including strikes and lockouts,
acts of God, fire, storms, accidents, failure of the manufacturer to
deliver any item of Equipment, governmental regulations or interference,
or any cause whatsoever not within the sole control of the Lessor.
(c) If any provision hereof, or its application to any person or
circumstances, shall to any extent be invalid or unenforceable, the
remaining provisions hereof, or the application of such provision to
persons or circumstances other than those as to which it is invalid or
unenforceable, shall not be affected thereby.
(d) Notices. Any notice required or permitted to be given by the
provisions hereof shall be delivered to a party at the address indicated
above (or at such other address au party shall specify to the other party
in writing) by courier or by registered or certified mail. Proof of
sending such notice shall be the responsibility of sender.
23. Executed as of the date first: written above.
"All of Lessor's rights, title and interest in and to Equipment Schedule
No. 1 to this Lease, and all of Lessor's rights and interests in and to the
equipment leased thereunder, have been assigned to the ITT Capital Finance
division of ITT Commercial Finance Corp. pursuant to that certain
Assignment of Lease (without Recourse) executed by Lessor on March 8,
1994."
LESSOR: Morcroft Leasing Corporation LESSEE: Renex Corporation
By: By:
----------------------------- -----------------------------
Name: Derek W. Morrison Name: James P. Shea
-------------------------- --------------------------
Title: President Title: President
-------------------------- --------------------------
-6-
<PAGE> 1
Exhibit 11.1 Computation of per share earnings
Renex Corporation
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 Q2 -1996 Q2 -1997
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (322,000) $ (842,000) $ (1,187,000 $ (2,449,000) $ (862,000) $ (503,000)
Weighted average shares 2,395,835 2,759,884 2,963,193 3,693,617 3,503,664 4,067,747
Net loss per share $ (0.13) $ (0.31) $ (0.40) $ (0.66) $ (0.25) $ (0.12)
Net loss proforma $ (3,693,451) $ (1,738,080)
============ =============
Additional shares based on IPO 1,167,445 1,167,445
Weighted average shares 3,693,617 4,067,747
------------ -------------
Total shares 4,861,062 5,235,192
============ =============
Net loss proforma per share $ (0.76) $ (0.33)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FASB #128
- -----------------------------------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 Q2 - 1996 Q2 -1997
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (322,000) $ (842,000) $ (1,187,000) $ (2,449,000) $ (862,000) $ (503,000)
Weighted average shares 1,377,401 1,741,450 1,944,759 2,930,540 2,485,231 3,973,884
Net loss per share $ (0.23) $ (0.48) $ (0.61) $ (0.84) $ (0.35) $ (0.13)
</TABLE>
<PAGE> 2
Exhibit 11.1 Computation of per share earnings
Renex Corporation
<TABLE>
<CAPTION>
1993 1994
---- ----
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARES 182 365
Initial capitalization 7/7/93 833,333 833,333 833,333
private offering 9/15/93 900,000 544,068 900,000
---------
1,733,333
Repurchase warrants/sell stock 12/9/94 134,667 8,117
---------
1,868,000
Orig warrants/sell stock 5/2/95 109,333
sell stock 8/4/95 4,667
stock for acquisition 12/29/95 376,857
---------
2,358,857
stock for acquisition 4/22/96 333,333
sell stock 9/30/96 351,007
convert PS -A 9/01/96 658,667
convert PS -B 11/15/96 268,250
---------
3,970,114
sell stock 1/15/97 4,133
--------- --------- ---------
3,974,247
---------
ACTUAL WEIGHTED AVG SHARES 1,377,401 1,741,450
RENEX CORPORATION
SAB 83 IMPACT
Warrants:
7/31/96 78,751 $6/SH $ 8 IPO 19,688 19,688 19,688
11/15/96 116,669 $3/SH $ 8 IPO 72,918 72,918 72,918
Options:
8/18/96 1,667 $6/SH $ 8 IPO 417 417 417
11/18/96 1,667 $6/SH $ 8 IPO 417 417 417
11/10/96 834 $6/SH $ 8 IPO 209 209 209
Stock:
9/30/96 351,007 $3/SH $ 8 IPO 219,379 219,379 219,379
1/15/97 4,133 $3/SH $ 8 IPO 2,583 2,583 2,583
Preferred Stock:
7/15/96 268,250 $3/SH $ 8 IPO 167,656 167,656 167,656
9/01/96 658,667 $1.50/SH $ 8 IPO 535,167 535,167 535,167
--------- ---------
(Converted 11/15/96 Series B and 9/01/96 Series A)
TOTAL WEIGHTED AVG SHARES 2,395,835 2,759,884
========= =========
</TABLE>
<TABLE>
<CAPTION>
1995 1996 Q2-96 Q2-97
---- ---- ----- -----
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARES 365 365 182 182
Initial capitalization 833,333 833,333 833,333 833,333
private offering 900,000 900,000 900,000 900,000
Repurchase warrants/sell stock 134,667 134,667 134,667 134,667
Orig warrants/sell stock 72,789 109,333 109,333 109,333
sell stock 1,905 4,667 4,667 4,667
stock for acquisition 2,065 376,857 376,857 376,857
stock for acquisition 231,050 126,374 333,333
sell stock 88,473 351,007
convert PS -A 218,353 658,667
convert PS -B 33,807 268,250
sell stock 3,770
--------- --------- -------- ---------
ACTUAL WEIGHTED AVG SHARES 1,944,759 2,930,540 2,485,231 3,973,884
RENEX CORPORATION
SAB 83 IMPACT
Warrants:
7/31/96 19,688 19,688 19,688 19,688
11/15/96 72,918 72,918 72,918 72,918
Options:
8/18/96 417 417 417 417
11/18/96 417 417 417 417
11/10/96 209 209 209 209
Stock:
9/30/96 219,379 163,483 219,379
1/15/97 2,583 2,583 2,583 215
Preferred Stock:
7/15/96 167,656 145,608 167,656
9/01/96 535,167 357,755 535,167
--------- --------- -------- ---------
(Converted 11/15/96 Series B and 9/01/96 Series A)
TOTAL WEIGHTED AVG SHARES 2,963,193 3,693,617 3,503,664 4,067,747
========= ========= ========= =========
</TABLE>
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-32611 of Renex Corp. and Subsidiaries of our report dated April 18,
1997, except for Note 18 for which the date is April 22, 1997, appearing in
the Prospectus, which is part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE, LLP
Miami, Florida
September 8, 1997
<PAGE> 1
Exhibit 23.2
Consent of Independent Certified Public Accountants
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 8, 1995, in Amendment No. 1 to the Registration
Statement (Form S-1 No. 333-32611) and related Prospectus of Renex Corp. for
the registration of 3,000,000 shares of common stock.
ERNST & YOUNG, LLP
Miami, Florida
September 4, 1997
<PAGE> 1
Exhibit 23.3
[LASHLY & BAER - LETTERHEAD
September 4, 1997
We hereby consent to be named as an expert in the "Legal Matters" and
"Experts" sections on Form S-1 of Registration Statement No. 333-32611 filed
with the Securities and Exchange Commission by Renex Corp.
Very truly yours,
LASHLY & BAER, P.C.
By: /s/ Richard Watters
------------------------------
Richard Watters
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 781,000
<SECURITIES> 0
<RECEIVABLES> 7,243,000
<ALLOWANCES> 1,336,000
<INVENTORY> 390,000
<CURRENT-ASSETS> 7,551,000
<PP&E> 8,798,000
<DEPRECIATION> 2,272,000
<TOTAL-ASSETS> 17,095,000
<CURRENT-LIABILITIES> 4,280,000
<BONDS> 0
0
0
<COMMON> 3,000
<OTHER-SE> 3,823,000
<TOTAL-LIABILITY-AND-EQUITY> 17,095,000
<SALES> 12,432,000
<TOTAL-REVENUES> 12,432,000
<CGS> 9,679,000
<TOTAL-COSTS> 9,679,000
<OTHER-EXPENSES> 2,091,000
<LOSS-PROVISION> 493,000
<INTEREST-EXPENSE> (503,000)
<INCOME-PRETAX> (503,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (503,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (503,000)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
