<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RENAL CARE GROUP, INC.
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 8092 62-1622383
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
2100 WEST END AVE, SUITE 800
NASHVILLE, TENNESSEE 37203
(615) 321-2333
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
SAM A. BROOKS, JR.
RENAL CARE GROUP, INC.
2100 WEST END AVE, SUITE 800
NASHVILLE, TENNESSEE 37203
(615) 321-2333
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
<TABLE>
<S> <C>
STEVEN L. POTTLE, ESQ. PETER J. ROMEO, ESQ.
ALSTON & BIRD HOGAN & HARTSON L.L.P.
ONE ATLANTIC CENTER 555 THIRTEENTH ST., N.W.
1201 WEST PEACHTREE STREET WASHINGTON, D.C. 20004
ATLANTA, GEORGIA 30309-3424 (202) 637-5600
(404) 881-7000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable on or after the effective date of this Registration Statement.
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. / /
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 statement 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
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value per
share................................ 3,450,000 $36.25 $125,062,500 $37,898
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</TABLE>
(1) Includes 450,000 shares subject to an over-allotment option granted to the
Underwriters by the Company.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of computing the
amount of the registration fee.
---------------------
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 SAID 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 , 1996
3,000,000 SHARES
[LOGO] RENAL CARE GROUP, INC.
COMMON STOCK
Of the 3,000,000 shares of Common Stock of Renal Care Group, Inc. ("Renal
Care Group" or the "Company") offered hereby (the "Offering"), 1,500,000 shares
are being offered by the Company and 1,500,000 shares are being offered by
certain stockholders of the Company (the "Selling Stockholders"). See "Principal
and Selling Stockholders." The Company will not receive any of the proceeds from
the sales of shares of Common Stock by the Selling Stockholders. The Common
Stock of the Company (the "Common Stock") is quoted on the Nasdaq National
Market System (the "Nasdaq Stock Market") under the symbol "RCGI." On October 7,
1996, the last sale price of the Common Stock as reported by the Nasdaq Stock
Market was $36.25 per share.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
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.
<TABLE>
<CAPTION>
===================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
===================================================================================================
</TABLE>
(1) See "Underwriting" for a description of indemnification arrangements with
the Underwriters.
(2) Before deducting expenses of the Offering, payable by the Company, estimated
at $ .
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to an additional 450,000 shares of Common Stock on the same
terms and conditions as set forth above, solely to cover over-allotments,
if any. If such option is exercised in full, the total "Price to Public,"
"Underwriting Discount" and "Proceeds to Company" will be $ ,
$ and $ , respectively. See "Underwriting."
---------------------
The Common Stock is offered by the several Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by them and
subject to approval of certain legal matters by counsel for the Underwriters.
The Underwriters reserve the right to reject orders in whole or in part and to
withdraw, to cancel or to modify the offer without notice. It is expected that
delivery of certificates representing the Common Stock will be on or about
, 1996.
EQUITABLE SECURITIES CORPORATION
HAMBRECHT & QUIST
MORGAN KEEGAN & COMPANY, INC.
NEEDHAM & COMPANY, INC.
The date of this Prospectus is , 1996
<PAGE> 3
MAP
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON
STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including notes thereto, appearing elsewhere in this Prospectus.
Prospective investors should also review carefully the information set forth
under "Risk Factors." Unless otherwise indicated, the information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
Renal Care Group is a specialized provider of nephrology services to
patients with kidney disease, including patients suffering from chronic kidney
failure, also known as end-stage renal disease ("ESRD"). The Company provides
dialysis and ancillary services to approximately 5,000 patients through 77
outpatient dialysis centers in 12 states and manages an additional eight
dialysis centers in five states in affiliation with leading medical centers such
as Vanderbilt University Medical Center and The Cleveland Clinic Foundation. In
addition to its outpatient dialysis center operations, Renal Care Group provides
acute dialysis services through contractual relationships with 42 hospitals,
staff-assisted dialysis services to 37 skilled nursing facilities and physician
practice management services to 16 of the 59 nephrologists who are affiliated
with the Company's outpatient dialysis centers.
Renal Care Group was formed by leading nephrologists with the objective of
creating an entity with the clinical and financial capability to manage the full
range of care for ESRD patients on a cost-effective basis. The Company is
working in conjunction with its affiliated physicians to develop fully
integrated nephrology networks that will implement clinical protocols designed
to improve outcomes and reduce costly medical complications associated with
ESRD.
Nephrology is the specialized practice of medicine dedicated to providing
care to patients with ESRD and other kidney-specific ailments. A key component
of the nephrologist's practice is the dialysis facility, where ESRD patients
receive their dialysis treatments three times per week in a technologically
advanced outpatient setting. Outpatient dialysis facilities generally are owned
by nephrology groups and comprise an integral component of the nephrologist's
practice because of the critical role that dialysis plays in the treatment of
ESRD patients. According to the Health Care Financing Administration ("HCFA"),
there were in excess of 2,800 dialysis centers in the United States at the end
of 1995. The Company believes that approximately 38% were owned by multi-center
dialysis companies, 32% were owned by independent physicians and 30% were
hospital-based centers. Although numerous nephrology groups have in the past
sold their dialysis centers to entities engaged in the business of owning and
operating such facilities, the Company believes that many nephrology groups
recognize the need to affiliate with an entity having broader capabilities that
can provide clinical, financial and business expertise to help them manage the
increasingly complex and time-consuming aspects of both their dialysis center
operations and their nephrology practices. In addition, many hospitals are
motivated to sell or outsource management of their dialysis facilities as they
refocus their resources on their core business in response to increasing
competitive pressures.
ESRD is the state of advanced renal impairment that is irreversible and
imminently lethal. ESRD patients require dialysis or kidney transplantation to
sustain life, with dialysis being the form of treatment provided to
approximately 94% of ESRD patients in 1995. Since 1972, individuals with ESRD
have been entitled to Medicare benefits regardless of age or financial
circumstances. According to data published by HCFA, the number of patients
receiving chronic dialysis services in the United States has grown at a compound
annual growth rate of 8.9%, from 66,000 patients in 1982 to approximately
200,000 in 1995. According to the United States Renal Data System ("USRDS"), the
ESRD incidence rate among Medicare-eligible patients increased by 97.3% from
1984 to 1993. The USRDS estimates that the total direct medical charges for ESRD
were approximately $11.1 billion in 1994. The Company attributes the growth in
the number of ESRD patients principally to the aging of the general population
and better treatment and survival of patients with hypertension, diabetes and
other illnesses that lead to chronic kidney disease. In addition, improved
technology has enabled older patients and those who previously could not
tolerate dialysis due to other illnesses to benefit from this life-sustaining
treatment. The Company believes these trends will result in
3
<PAGE> 5
continued growth in the number of ESRD patients and increased demand for
dialysis and associated nephrology services.
Renal Care Group's objective is to develop fully integrated nephrology
provider networks to assume and manage the clinical and financial risk
associated with providing renal disease management services on a capitated
basis. The Company seeks to achieve this objective by (i) acquiring, developing
and managing outpatient and university-based dialysis centers, (ii) integrating
its dialysis centers with affiliated nephrology practices, (iii) developing a
protocol-driven ESRD management model to enhance clinical outcomes and (iv)
providing an appropriate range of ancillary services to ESRD patients. The
Company believes an integrated network of nephrologists and dialysis centers,
combined with the Company's clinical expertise, management experience and access
to capital, will provide significant advantages to patients and third-party
payors by improving the quality of care while reducing the overall costs
associated with treating patients with all forms of kidney disease, including
those who have ESRD.
RECENT DEVELOPMENTS
On September 30, 1996, the Company completed a merger with RenalWest, L.C.
("RenalWest") which was accounted for as a pooling of interests. RenalWest,
which has 18 affiliated nephrologists, operates 19 freestanding hemodialysis
centers and three home peritoneal dialysis centers serving approximately 1,200
patients in the state of Arizona. RenalWest also provides inpatient dialysis
services to 16 acute care hospitals and staff-assisted dialysis services to 37
skilled nursing facilities.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,500,000 shares
Common Stock offered by the Selling
Stockholders............................... 1,500,000 shares
Common Stock to be outstanding after the
Offering(1)................................ 14,125,954 shares
Use of proceeds.............................. For general corporate purposes, which may
include potential future acquisitions. See
"Use of Proceeds."
Nasdaq Stock Market symbol................... RCGI
</TABLE>
- ---------------
(1) Excludes (i)1,831,993 shares subject to options outstanding at a weighted
average exercise price of $19.47 per share, (ii) 220,000 shares subject to
warrants outstanding at an exercise price of $7.50 per share and (iii)
184,000 shares of Common Stock that may be issued upon conversion of
$1,380,000 in principal amount of Convertible Senior Subordinated
Promissory Notes (the "Convertible Notes"). See "Management -- Stock Option
and Stock Purchase Plans" and "Capitalization."
4
<PAGE> 6
SUMMARY COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
The following presents summary combined financial and statistical data for
the periods indicated of Renal Care Group, five companies (the "Founding
Companies") acquired in simultaneous transactions in February 1996 (the
"Combination"), Main Line Suburban Dialysis Centers, Inc. ("Main Line") acquired
in April 1996 and RenalWest acquired in September 1996. The financial data set
forth below are unaudited and have been derived from the financial statements of
Renal Care Group and the Founding Companies included elsewhere and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1) SIX MONTHS ENDED JUNE 30,(1)
----------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1995(2) 1995 1996 1996(3)
------- -------- -------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue................ $80,442 $110,670 $115,329 $ 115,329 $56,253 $62,736 $62,736
Patient care costs......... 58,314 75,366 80,417 79,949 39,137 43,883 43,883
General and administrative
expenses................ 6,799 12,616 12,866 15,466 6,346 6,417 6,417
Provision for doubtful
accounts................ 2,010 2,914 3,995 3,995 2,031 1,196 1,196
Depreciation and
amortization............ 2,416 3,414 3,661 3,914 1,648 2,158 2,158
Merger expenses............ -- -- -- -- -- 680 680
Income from operations..... 10,903 16,360 14,390 12,005 7,091 8,402 8,402
Income before income
taxes................... 10,443 15,714 13,377 11,499 6,714 8,549 8,549
Net income................. 7,129 5,300
Earnings per share......... $ 0.64(4) $ 0.40
Weighted average shares
outstanding............. 11,080(4) 13,087
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED(5)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................... $32,019 $ 83,311
Total assets........................................................ 85,643 136,935
Total debt.......................................................... 6,805 6,805
Stockholders' equity................................................ 55,431 106,723
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATISTICAL DATA:
Treatments(6).................................. 470,035 598,228 625,413 309,162 331,280
Patients at period-end(7)...................... 3,697 4,063 4,246 4,093 4,416
Outpatient centers at period-end(8)............ 70 72 75 73 77
Acute service agreements at period-end......... 43 43 44 44 42
</TABLE>
- ---------------
(1) The Combination was accounted for using historical cost, in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 48,
because no single owner group from any of the Founding Companies held more
than a 50% equity interest in the Company as of the closing of the
Company's initial public offering. Accordingly, the Company has recorded
the net assets acquired at the Founding Companies' historical cost basis,
as determined by generally accepted accounting principles.
(2) Pro forma information for the year ended December 31, 1995 gives effect to
(a) the provision for federal and state income taxes as if not-for-profit
and S-corporations had been subject to such taxes; (b) additional estimated
corporate overhead of approximately $2.6 million that would have been
incurred
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had the Combination occurred at the beginning of 1995; and (c) certain
other adjustments to reflect the Combination and the initial public
offering. See Pro Forma Combining Financial Statements of Renal Care Group,
Inc. (of Delaware).
(3) Pro forma information for the six months ended June 30, 1996 gives effect to
the provision for federal and state income taxes as if not-for-profit and
S-corporations had been subject to such taxes. See Pro Forma Combining
Financial Statements of Renal Care Group, Inc. (of Delaware).
(4) The calculation of pro forma earnings per share for the year ended December
31, 1995 excludes 1,156,000 shares of Common Stock issued in the initial
public offering. The net proceeds from these shares were used for general
corporate purposes and therefore are excluded from the calculation. All
subsequent periods reflect the full impact of all shares issued in the
initial public offering.
(5) Adjusted to reflect the sale of 1,500,000 shares offered by the Company
hereby at an assumed public offering price of $36.25 per share and the
application of the net proceeds therefrom.
(6) Treatments include all hemodialysis treatments provided in outpatient
facilities, as well as all home dialysis treatments and acute care
treatments provided in hospitals. Peritoneal dialysis treatments are stated
in hemodialysis equivalents. Excludes treatments provided at centers
managed by the Company.
(7) Number of ESRD patients under care of outpatient centers at period-end,
including patients receiving treatments at the Company's outpatient centers
and in the patient's homes. Excludes patients receiving care at centers
managed by the Company.
(8) Includes centers managed by the Company.
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<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains certain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of the risk
factors set forth below and other factors described elsewhere in this
Prospectus.
LIMITED COMBINED OPERATING HISTORY
Renal Care Group has conducted operations as a combined entity only since
February 1996, when it acquired the Founding Companies effective upon the
closing of its initial public offering. Since the initial public offering, the
Company has made several additional acquisitions of entities that, in some
cases, have been part of the Company's combined operations for only a few weeks
or months. In particular, the Company's recent acquisition of RenalWest may
place significant demands on the Company's management and other resources, and
there can be no assurance that the Company will be able to integrate the
business operations of RenalWest successfully or that there will be any
operating efficiencies or economies of scale between the businesses. Further,
there can be no assurance that the Company will be able to integrate the
dialysis centers, information systems and related operations of the entities
acquired by it or to continue operating them profitably. Nor can there be any
assurance that the Company's management group will be able to implement
effectively the Company's operating and growth strategy while it is engaged in
acquisition activity. Failure to integrate successfully the centers and other
operations acquired by the Company or to implement effectively the Company's
operating and growth strategy could have a material adverse impact on the
Company's results of operations, financial condition and business. See
"Business -- Strategy."
DEPENDENCE ON GOVERNMENT REIMBURSEMENT
Renal Care Group is reimbursed for dialysis services primarily at fixed
rates established under the ESRD program administered by HCFA. Under this
program, once a patient becomes eligible for Medicare reimbursement, Medicare is
responsible for payment of 80% of the composite rate determined by HCFA for
dialysis treatments. Since 1972, qualified patients with ESRD have been entitled
to Medicare benefits regardless of age or financial circumstances. The Company
estimates that approximately 68%, 68% and 67% of its net revenue for the years
ended December 31, 1994 and 1995 and for the six months ended June 30, 1996,
respectively, consisted of reimbursements from Medicare under the ESRD program,
including revenue for the reimbursement of the administration of a
bio-engineered hormone, erythropoietin ("EPO"), to treat anemia. Since 1983,
Congressional actions have resulted in occasional changes in the Medicare
composite reimbursement rate, and the Company is not able to predict whether
future rate changes will be made. In August 1996, HCFA announced that an
increase in the composite rate may be appropriate within the next few years.
However, in making this announcement, HCFA also noted that any rate increase
must be considered in the context of Medicare budgetary concerns. HCFA stated
that it may recommend an update to the composite rate for fiscal year 1998.
Legislation or regulations may be enacted in the future that may significantly
modify the ESRD program or otherwise affect the amount paid for the Company's
services. Any such action could have a material adverse effect on the Company's
results of operations, financial condition and business. Furthermore, increases
in operating costs that are subject to inflation, such as labor and supply
costs, without a compensating increase in prescribed rates, may have a material
adverse effect on the Company's earnings in the future. The Company is also
unable to predict whether certain ancillary services, for which the Company
currently is reimbursed separately, may in the future be included in the
Medicare composite rate. See "Business -- Reimbursement -- Medicare
Reimbursement Rates."
Since June 1, 1989, the Medicare ESRD program has provided reimbursement
for the administration of EPO to dialysis patients. EPO is beneficial in the
treatment of anemia, a medical complication frequently experienced by dialysis
patients. The Company believes that in excess of 80% of its patients receive
EPO. Revenues from the administration of EPO (the substantial majority of which
are reimbursed through Medicare and Medicaid programs) were approximately 18%,
17% and 18% of the net revenue of the Company
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for each of the years ended December 31, 1994 and 1995 and for the six months
ended June 30, 1996, respectively. EPO reimbursement significantly affects the
Company's earnings. Any reduction in reimbursement rates for EPO could have a
material adverse effect on the Company's results of operations, financial
condition and business. EPO is produced by a single manufacturer, and any
interruption of supply or product cost increases could have a material adverse
effect on the Company's business. See "Business -- Reimbursement -- Medicare
Reimbursement Rates."
All of the states in which the Company currently operates dialysis centers
provide Medicaid (or comparable) benefits to qualified recipients to supplement
their Medicare entitlement. The Company estimates that approximately 8%, 7% and
7%, of the Company's net revenue for the years ended December 31, 1994 and 1995
and for the six months ended June 30, 1996, respectively, were funded by
Medicaid or comparable state programs. The Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy and governmental funding restrictions, all of which may have the effect
of decreasing program payments, increasing costs or modifying the way the
Company operates its dialysis business. See
"Business -- Reimbursement -- Medicaid Reimbursement" and
"Business -- Government Regulation."
DEPENDENCE ON OTHER SOURCES OF REIMBURSEMENT
The Company estimates that approximately 24%, 25% and 26% of its net
revenue for the years ended December 31, 1994 and 1995 and for the six months
ended June 30, 1996, respectively, were derived from sources other than Medicare
and Medicaid. Substantially all of this revenue comes from private insurance for
chronic dialysis treatments and payments from hospitals with which the Company
has contracts for the provision of acute dialysis services. In general, private
insurance reimbursement and payments for treatments performed at hospitals are
at rates significantly higher than Medicare and Medicaid rates. 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. In addition, the Company believes that
health maintenance organizations ("HMOs") and other managed care providers may
have a strong incentive to reduce further the costs of specialty care and may
seek to reduce amounts paid for dialysis. The Company is unable to predict
whether and to what extent changes in these private reimbursement rates may be
made in the future. Any reduction in the rates paid by private insurers and
hospitals or a significant change in the Company's payor mix towards additional
Medicare or Medicaid reimbursement could have a material adverse effect on the
Company's results of operations, financial condition and business. Similarly,
increases in operating costs that are subject to inflation, such as labor and
supply costs, without a compensating increase in private reimbursement rates,
could have a material adverse effect on the Company's results of operations,
financial condition and business. See "Business -- Operations" and "--
Reimbursement."
RISKS ASSOCIATED WITH GROWTH STRATEGY
The Company's strategy includes expanding its dialysis business through the
acquisition and development of dialysis centers and the acquisition and
management of nephrology practices. Competition for acquisitions in the dialysis
industry has increased significantly in recent years and, as a result, the cost
of acquiring dialysis centers has increased. There can be no assurance that the
Company will be able to identify, acquire or profitably integrate acquired
dialysis centers and nephrology practices. Acquisitions involve a number of
risks related to integration, including adverse short-term effects on the
Company's reported operating results, diversion of management's attention,
dependence on retention, hiring and training of key personnel, including Medical
Directors for each dialysis center, some or all of which could have a material
adverse effect on the Company's results of operations, financial condition and
business. In addition, there can be no assurance that acquired or managed
dialysis centers will achieve net revenue and earnings that justify the
Company's investment therein or expenses related thereto. In order to implement
its growth strategy, the Company may require substantial capital resources and
need to incur, from time to time, short- and long-term bank indebtedness. The
Company also may need to issue, in public or private transactions, equity or
debt securities, the terms of which will depend on market and other conditions.
There can be no assurance that any such
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<PAGE> 10
additional financing will be available on terms acceptable to the Company, if at
all. To the extent that the Company is unable to acquire dialysis centers or
acquire or manage nephrology practices, to integrate such centers and practices
successfully, or to obtain financing on terms acceptable to the Company, its
ability to expand its business could be reduced significantly. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Strategy."
DEPENDENCE ON PHYSICIAN REFERRALS
The Company's dialysis centers depend upon their Medical Directors and
other local nephrologists for referrals of ESRD patients for treatment and one
or a few physicians typically account for all or a significant portion of the
patient referral base at a center. The loss of one or more referring physicians
at a particular center could have a material adverse effect on the operations of
such center, and the loss of a significant number of referring physicians could
have a material adverse effect on the Company's results of operations, financial
condition and business. The illegal remuneration provisions of the Social
Security Act and similar state laws prohibit the payment of remuneration to
induce referrals. Furthermore, in many instances stockholders of the Company are
the primary referral sources for the dialysis centers operated by the Company.
If such ownership is deemed to violate applicable federal or state law, such
physician owners may be forced to dispose of their stock in the Company. The
Company cannot predict the effect such disposition would have on its business or
stock price. See "Business -- Operations -- Relationships With Referral Sources;
Medical Directors" and "Business -- Government Regulation."
OPERATIONS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
The Company is subject to extensive federal, state and local regulation
regarding, among other things, fraud and abuse, patient referral, health and
safety, environmental compliance and toxic waste disposal. Much of this
regulation, particularly in the area of patient referral, is complex and open to
differing interpretations. There are two general frameworks under which patient
referrals are regulated. First, the illegal remuneration provisions of the
Social Security Act make it illegal for any person to, among other things,
solicit, offer, receive or pay any remuneration in exchange for referring, or to
induce the referral of, a patient for treatment which may be paid for by
Medicare, Medicaid or a similar state program. Second, certain provisions
contained in the Omnibus Budget Reconciliation Act of 1989 and the Omnibus
Budget Reconciliation Act of 1993 ("Stark I" and "Stark II," respectively)
prohibit physician referrals for clinical laboratory services and "designated
health services" (including some of the specific services offered by the
Company) to entities with which a physician or an immediate family member has a
"financial relationship." These laws contain certain statutory exceptions, and
federal agencies have promulgated regulations clarifying certain of these
provisions and exceptions and creating certain additional exceptions, or "safe
harbors," from such prohibitions. Many states have enacted similar provisions of
law, which may not have identical prohibitions or exceptions, but which may
apply regardless of whether Medicare or Medicaid funds are involved. However,
due to the breadth of the statutory provisions and the absence in many instances
of regulations or court decisions addressing the specific arrangements by which
the Company conducts its business, it is possible that some of the Company's
practices might be challenged under these laws. Violations of the federal laws
are punishable by civil sanctions, including disqualification from participation
in the Medicare or Medicaid programs, and, in the case of the federal illegal
remuneration provisions, criminal sanctions. There can be no assurance that the
Company's practices will not be challenged by governmental authorities, or that
the Company will not be subject to sanctions under such laws or be required to
alter or discontinue certain of its practices. In addition, there can be no
assurance that if the Company is required to alter its practices, that it will
be able to do so successfully. The occurrence of any of these events may result
in a material adverse effect on the Company's net revenues and earnings. See
"Business -- Government Regulation."
A number of proposals for health care reform have been made recently to
provide greater governmental control of health care spending and to provide
broader access to health care services. For example, the Health Insurance
Portability and Accountability Act of 1996 was signed into law in August 1996.
This law, among other things, provides for insurance portability for individuals
who lose or change jobs, limit exclusions
9
<PAGE> 11
for pre-existing conditions, and establish a pilot program for medical savings
accounts. It is uncertain what additional health care reform legislation, if
any, ultimately will be implemented or whether other changes in the
administration or interpretation of governmental health care programs will
occur. The Company cannot predict what effect future health care legislation or
other changes in the administration or interpretation of governmental health
care programs may have on the Company's operations. See "Business -- Government
Regulation -- Health Care Legislation."
SUBSTANTIAL COMPETITION
The dialysis industry is fragmented and is consolidating rapidly.
Accordingly, the industry is highly competitive, particularly from the
standpoint of competition for the acquisition of existing dialysis centers and
the development of relationships with referring physicians. Many of the
Company's competitors have substantially greater financial resources and more
established operations and infrastructure than the Company and may compete with
the Company for acquisitions of dialysis centers and nephrology practices. In
addition, the Company may also experience competition from referring physicians
who open their own dialysis centers. There can be no assurance that the Company
will be able to compete effectively with any such competitors. See
"Business -- Competition."
DELAYS AND COSTS OF IMPLEMENTING INTEGRATED OPERATING SYSTEMS
The Company is in the process of implementing and integrating certain
information and operating systems for its centers, all of which have been
acquired within the last several months. The Company may experience delays,
complications and expenses in implementing, integrating and operating such
systems, any of which could have a material adverse effect on the Company's
results of operations, financial condition and business. Furthermore, while the
Company believes that the technology that it implements will be adequate for the
Company's current needs, such systems may require modification, improvement or
replacement as the Company expands or if new technologies render the Company's
systems obsolete. Such modifications, improvements or replacements may require
substantial expenditures to design and implement and may require interruptions
in operations during periods of implementation, any of which could have a
material adverse effect on the Company's results of operations, financial
condition and business. See "Business -- Operations."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the services of certain key executive
officers and the Chairman of the Board. The Company's growth will depend in part
upon its ability to attract and retain skilled employees, for whom competition
is intense. The Company believes that its future success will also depend on its
ability to attract and retain qualified physicians to serve as Medical Directors
of its dialysis centers. The Company does not carry key-man life insurance on
any of its officers. The loss by the Company of any of its executive officers or
the Chairman of the Board, or the inability to attract and retain qualified
management personnel and Medical Directors, could have a material adverse effect
on the Company's results of operations, financial condition and business. See
"Management."
SIGNIFICANT INFLUENCE BY MANAGEMENT AND PHYSICIAN STOCKHOLDERS
Upon completion of the Offering, the Company's directors, executive
officers and physician stockholders will beneficially own approximately %
of the outstanding shares of Common Stock ( % if the Underwriters'
over-allotment option is exercised in full). The Company's Amended and Restated
Certificate of Incorporation and Bylaws do not provide for cumulative voting.
Although directors, executive officers and physician stockholders do not have
any arrangements or understandings among themselves with respect to the voting
of the shares of Common Stock beneficially owned by such persons, such persons
acting together would be able to significantly influence the election of
directors and might be able to approve or disapprove any matter submitted to a
vote of stockholders, including a change in control in the Company. See
"Management" and "Principal and Selling Stockholders."
10
<PAGE> 12
POTENTIAL CONFLICTS OF INTEREST
The Company is a party to Medical Director agreements with Stephen D.
McMurray, M.D., W. Tom Meredith, M.D., Thomas A. Lowery, M.D., John D. Bower,
M.D. and Kenneth E. Johnson, M.D., each of whom is a director and stockholder of
the Company. In addition, the Company leases space from Dr. Bower, Dr. Lowery,
and an entity in which Dr. Meredith owns a one-third interest. The chairman of
the Company, Harry R. Jacobson, M.D., serves as Deputy Vice Chancellor of Health
Affairs at Vanderbilt University, and the Company has an agreement with
Vanderbilt University Medical Center to manage its outpatient dialysis facility.
The outside interests of these directors may give rise to certain conflicts of
interest concerning the fulfillment of their responsibilities as directors of
the Company, and such conflicts of interest could result in decisions that may
not reflect the interests of all stockholders equally. See "Certain
Transactions."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Amended and Restated Certificate of Incorporation and Bylaws
contain a number of provisions that could inhibit a change in control of the
Company by means of a tender offer, merger, proxy contest or otherwise,
including advance notice and super-majority voting provisions, provisions that
establish a classified board of directors, and provisions that enable the Board
of Directors to issue "blank check" preferred stock. See "Description of Capital
Stock -- Special Provisions of the Amended and Restated Certificate of
Incorporation, Bylaws and Delaware Law."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may fluctuate substantially in
response to variations in the Company's operating and financial results, changes
in earnings estimates by securities analysts, general economic and market
conditions, and other factors. See "Price Range of Common Stock."
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market or the
availability of such shares for sale following the Offering could adversely
affect the prevailing market price for the Common Stock. After completion of the
Offering, the Company will have 14,125,954 shares of Common Stock outstanding
(14,575,954 if the Underwriters' over-allotment option is exercised in full). Of
those shares, approximately 7,485,000 shares, including the 3,000,000 shares
offered hereby (7,935,000 and 3,450,000 shares, respectively, if the
Underwriters' over-allotment option is exercised in full), will be freely
tradeable without restriction or further registration under the Securities Act,
unless purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act of 1933, as amended (the "Securities Act"). In
addition, up to 1,831,993 shares of Common Stock are issuable upon the exercise
of options which will be freely tradeable without restriction unless purchased
by an "affiliate." The remaining approximately 6,640,954 shares outstanding,
plus up to 404,000 shares of Common Stock which may be issued upon exercise of
warrants or conversion of convertible securities, will become eligible for
future sale in the public market in accordance with Rule 144 under the
Securities Act, as currently in effect, beginning in February 1998. The Company
has granted certain "piggyback" registration rights with respect to shares of
Common Stock to the holders of a total of approximately 6,640,954 shares of
Common Stock and 220,000 shares issuable upon the conversion of warrants, such
"piggyback" registration rights not being exercisable except in connection with
a Company registration. The Company's officers and directors, and certain
stockholders of the Company, who upon completion of the Offering will own an
aggregate of approximately shares of Common Stock, have agreed not
to, directly or indirectly, offer, sell, contract to sell, grant any option to
purchase or otherwise sell or dispose of any shares of Common Stock or other
capital stock or any securities convertible into, or exercisable or exchangeable
for, any shares of Common Stock or other capital stock for a period of 180 days
after the Offering, without the prior written consent of Equitable Securities
Corporation. See "Shares Eligible for Future Sale."
11
<PAGE> 13
THE COMPANY
Renal Care Group is a specialized provider of nephrology services that was
founded in June 1995 to focus on the provision of care to patients with kidney
disease, including patients suffering from chronic kidney failure. In February
1996, the Company commenced its business with the simultaneous acquisition in
the Combination of the five Founding Companies: Kidney Care, Inc. and Medical
Enterprises Ltd. ("MEL" and collectively "Kidney Care"); D.M.N. Professional
Corporation ("DMN"); Tyler Nephrology Associates ("Tyler"); Kansas Nephrology
Association ("Kansas"); and Renal Care Group, Inc., a Tennessee corporation
("Tennessee"). At the time of the Combination, the Founding Companies had an
aggregate of 41 dialysis centers serving approximately 2,663 patients in eight
states. The aggregate consideration paid by the Company in the Combination was
approximately 4,834,000 shares of Common Stock with an aggregate value at the
time of the Combination of approximately $87.0 million, $32.8 million in cash,
$7.3 million in notes payable and $13.8 million of assumed debt.
On April 26, 1996, the Company completed a merger with Main Line Suburban
Dialysis, Inc. ("Main Line"). Main Line, based in Wynnewood, Pennsylvania,
operates five dialysis centers serving approximately 350 patients in the
suburban Philadelphia area. The Company acquired Main Line in exchange for
shares of Common Stock with an aggregate value of approximately $18.2 million at
the time the Company and Main Line entered into the merger agreement. The merger
was accounted for as a pooling of interests.
On July 1, 1996, the Company completed a merger with The Nephrology
Centers, Inc. ("TNC"), which is based in Pensacola, Florida and operated two
dialysis centers serving approximately 250 patients in the Pensacola and
Crestview, Florida areas. TNC constructed two additional satellite centers which
opened in September 1996. The Company acquired TNC in exchange for shares of
Common Stock with an aggregate value of approximately $10.2 million at the time
the Company and TNC entered into the merger agreement. The merger was accounted
for as a pooling of interests.
On September 30, 1996, the Company completed a merger with RenalWest, which
has 18 affiliated nephrologists and operates 19 freestanding hemodialysis
centers and three home peritoneal dialysis centers serving approximately 1,200
patients in the state of Arizona. RenalWest also provides inpatient dialysis
services to 16 acute care hospitals and staff-assisted dialysis services to 37
skilled nursing facilities. The Company acquired RenalWest in exchange for
shares of Common Stock with an aggregate value of approximately $72.0 million at
the time the Company and RenalWest entered into the merger agreement. The merger
was accounted for as a pooling of interests.
In February 1996, the Company entered into an agreement to develop a
dialysis center for the University of Louisville. In April 1996, the Company
announced an agreement to operate and manage the outpatient dialysis activities
of The Cleveland Clinic Foundation located in Cleveland, Ohio. The Cleveland
Clinic Foundation operates two dialysis facilities staffed by 11 nephrologists
serving approximately 370 patients.
The Company's address is 2100 West End Avenue, Suite 800, Nashville,
Tennessee 37203, and its telephone number is (615) 321-2333.
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered by it, at an assumed public offering price of $36.25 per
share, are estimated to be approximately $51.3 million after deducting estimated
underwriting discounts and offering expenses payable by the Company, (or
approximately $66.8 million if the Underwriters' over-allotment option is
exercised in full). The net proceeds will be used for working capital and
general corporate purposes, including the potential acquisition and development
of additional dialysis centers. The Company continually reviews and evaluates
acquisition candidates as part of its growth strategy and is at various stages
of evaluation, discussion or negotiation with a number of such candidates. The
Company is not a party to any definitive agreement or letter of intent regarding
any material acquisition, nor are there any material acquisitions that it
considers probable. Pending application of the net proceeds as described above,
the Company intends to invest the net proceeds in short-term, interest-bearing,
investment-grade securities. The Company will not receive any proceeds from the
sale of shares of Common Stock offered by the Selling Stockholders. See
"Principal and Selling Stockholders."
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq Stock Market under the symbol
"RCGI". The following table sets forth the high and low sales prices for the
Common Stock for the quarters indicated as reported on the Nasdaq Stock Market.
<TABLE>
<CAPTION>
PRICE RANGE
-------------------
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1996:
First Quarter(1)....................................................... $28.75 $23.25
Second Quarter......................................................... 36.00 27.75
Third Quarter.......................................................... 39.00 25.50
Fourth Quarter(2)...................................................... 37.00 36.25
</TABLE>
- ---------------
(1) Represents trading of the Common Stock from February 7, 1996 through March
31, 1996.
(2) Represents trading of the Common Stock from October 1, 1996 through October
7, 1996.
The last reported sale price of the Common Stock on the Nasdaq Stock Market
on October 7, 1996 was $36.25. As of October 7, 1996 there were approximately
1,800 stockholders of record.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock. The
Company currently anticipates that all of its earnings will be retained to
finance the growth and development of its business and, therefore, does not
anticipate that any cash dividends will be declared or paid on the Common Stock
in the foreseeable future. Any future declaration of dividends will be subject
to the discretion of the Company's Board of Directors and its review of the
Company's results of operations, financial condition, capital requirements and
surplus, contractual restrictions to pay such dividends and other factors it
deems relevant.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the short-term indebtedness and consolidated
capitalization of the Company as of June 30, 1996 and as adjusted to give effect
to the sale by the Company of 1,500,000 shares of Common Stock offered by it at
an assumed public offering price of $36.25 per share and the application of the
net proceeds therefrom as set forth under "Use of Proceeds." This table should
be read in conjunction with the Company's Combined Financial Statements and
related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term debt........... $ 4,361 $ 4,361
====== ======
Long-term debt and capital lease obligations........................... $ 2,444 $ 2,444
Stockholders' equity:
Preferred Stock, $0.01 par value (10,000,000 shares authorized, no
shares issued and outstanding).................................... -- --
Common Stock, $0.01 par value (22,000,000 shares authorized,
12,625,954 shares issued and outstanding; 14,125,954 shares issued
and outstanding as adjusted)...................................... 126 141
Additional paid-in capital (stockholders' equity)...................... 53,004 104,281
Retained earnings...................................................... 2,301 2,301
Total stockholders' equity................................... 55,431 106,723
Total capitalization......................................... $57,875 $ 109,167
====== ======
</TABLE>
14
<PAGE> 16
SELECTED HISTORICAL AND COMBINED FINANCIAL DATA
The Selected Historical Financial Data -- Renal Care Group, Inc. represent
the historical results of operations of the Company and includes the results of
operations of Main Line and RenalWest, which were acquired during 1996 in
pooling-of-interests transactions; however, this information does not include
the results of operations for the Founding Companies for any periods prior to
the six months ended June 30, 1996 except on a pro forma basis.
The Selected Combined Financial Data -- Renal Care Group, Inc. and Founding
Companies represent the results of operations had the Founding Companies and the
Company been combined on January 1, 1991 without giving effect to the initial
public offering for periods prior to February 1, 1996 except on a pro forma
basis.
The Combination was accounted for using historical cost, in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 48, because no
single owner group from any of the Founding Companies held more than 50% equity
interest in the Company as of the closing of the Company's initial public
offering. Accordingly, the Company has recorded the net assets acquired at the
Founding Companies' historical cost basis, as determined by generally accepted
accounting principles.
The Selected Historical Financial Data -- Renal Care Group, Inc. for the
years ended December 31, 1994 and 1995 and the Selected Combined Financial
Data -- Renal Care Group, Inc. and Founding Companies for the years ended
December 31, 1993, 1994 and 1995 are derived from audited data included
elsewhere in this Prospectus. The unaudited combined financial statements have
been prepared on the same basis as the audited combined financial statements
and, in the opinion of management, contain all adjustments consisting of normal,
recurring accruals necessary for a fair presentation of the combined financial
position and the combined results of operations for the periods presented. The
following data should be read in conjunction with the financial statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that appear elsewhere in this Prospectus.
15
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA -- RENAL CARE GROUP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1) SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------- -------------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(2) 1995(1) 1996(3) 1996(4)
----------- ----------- ------- ------- ------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Net revenue....... $ 7,367 $ 8,713 $18,126 $41,627 $42,971 $115,329 $21,242 $55,358 $62,736
Patient care
costs........... 5,336 6,309 13,034 25,003 26,908 79,949 13,307 38,461 43,883
General and
administrative
expenses........ 1,725 1,626 3,649 8,721 8,701 15,466 4,384 5,821 6,417
Provision for
doubtful
accounts........ 147 170 584 1,418 2,355 3,995 1,153 1,071 1,196
Depreciation and
amortization.... 147 153 601 1,484 1,580 3,914 666 1,970 2,158
Merger expenses... -- -- -- -- -- -- -- 680 680
------ ------ ------- ------- ------- -------- ------- ------- -------
Total operating
costs and
expenses........ 7,355 8,258 17,868 36,626 39,544 103,324 19,510 48,003 54,334
------ ------ ------- ------- ------- -------- ------- ------- -------
Income from
operations...... 12 455 258 5,001 3,427 12,005 1,732 7,355 8,402
Interest income
(expense),
net............. (33) (44) (128) (363) (452) (506 ) (221) 240 147
------ ------ ------- ------- ------- -------- ------- ------- -------
Income (loss)
before income
taxes........... $ (21) $ 411 $ 130 $ 4,638 $ 2,975 11,499 $ 1,511 7,595 8,549
====== ====== ======= ======= ======= =======
Provision for
income taxes.... 4,370 1,980 3,249
Net income........ $ 7,129 $ 5,615 $ 5,300
======== ======= =======
Earnings per
share........... $ 0.64 (5) $ 0.43 $ 0.40
======== ======= =======
Weighted average
shares
outstanding..... 11,080 (5) 13,140 13,087
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,(1)
---------------------------------------------------------------
1991 1992 1993 1994 1995 JUNE 30, 1996
----------- ----------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................. $ 303 $ 774 $ 3,519 $ 3,172 $(1,418) $32,019
Total assets................................ 2,242 2,613 14,393 17,318 20,765 85,643
Total debt.................................. 425 367 5,248 5,420 7,340 6,805
Stockholders' equity........................ 1,057 1,468 4,926 5,919 4,566 55,431
</TABLE>
- ---------------
(1) The financial information for each of the years and six month period ended
June 30, 1995 does not include the Founding Companies except on a pro forma
basis. See "Selected Combined Financial Data" for financial information of
the Company including the income statement and balance sheet data of the
Founding Companies.
(2) Pro forma information for the year ended December 31, 1995 gives effect to
(a) the provision for federal and state income taxes as if not-for-profit
and S-corporations had been subject to such taxes; (b) additional estimated
corporate overhead of approximately $2.6 million that would have been
incurred had the Combination occurred at the beginning of 1995; and (c)
certain other adjustments to reflect the Combination and the initial public
offering. See Pro Forma Combining Financial Statements of Renal Care Group,
Inc. (of Delaware).
(3) The financial information for the six months ended June 30, 1996 include the
results of operations for the Founding Companies since February 1996 when
they were acquired by the Company simultaneously with its initial public
offering.
(4) Pro forma information for the six months ended June 30, 1996 gives effect to
the provision for federal and state income taxes as if not-for-profit and
S-corporations had been subject to such taxes. See Pro Forma Combining
Financial Statements of Renal Care Group, Inc. (of Delaware).
(5) The calculation of pro forma earnings per share for the year ended December
31, 1995 excludes 1,156,000 shares of Common Stock issued in the initial
public offering. The net proceeds from these shares were used for general
corporate purposes and therefore are excluded from the calculation. All
subsequent periods reflect the full impact of all shares issued in the
initial public offering.
16
<PAGE> 18
SELECTED COMBINED FINANCIAL DATA -- RENAL CARE GROUP, INC.
AND FOUNDING COMPANIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1) SIX MONTHS ENDED JUNE 30,(1)
--------------------------------------------------------------------- ---------------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(2) 1995 1996 1996(3)
----------- ----------- ------- -------- -------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.... $56,575 $64,309 $80,442 $110,670 $115,329 $115,329 $56,253 $62,736 $62,736
Patient care
costs........ 40,516 46,752 58,314 75,366 80,417 79,949 39,137 43,883 43,883
General and
administrative
expenses..... 5,409 4,423 6,799 12,616 12,866 15,466 6,346 6,417 6,417
Provision for
doubtful
accounts..... 1,131 1,309 2,010 2,914 3,995 3,995 2,031 1,196 1,196
Depreciation
and
amortization... 1,752 1,895 2,416 3,414 3,661 3,914 1,648 2,158 2,158
Merger
expenses..... -- -- -- -- -- -- -- 680 680
------- ------- ------- -------- -------- ------- ------- -------- --------
Total operating
costs and
expenses..... 48,808 54,379 69,539 94,310 100,939 103,324 49,162 54,334 54,334
------- ------- ------- -------- -------- ------- ------- -------- --------
Income from
operations... 7,767 9,930 10,903 16,360 14,390 12,005 7,091 8,402 8,402
Interest income
(expense),
net.......... (693) (570) (460) (646) (1,013) (506 ) (377) 147 147
------- ------- ------- -------- -------- ------- ------- -------- --------
Income before
income
taxes........ $ 7,074 $ 9,360 $10,443 $ 15,714 $ 13,377 11,499 $ 6,714 $ 8,549 8,549
======= ======= ======= ======== ======== ======= ========
Provision for
income
taxes........ 4,370 3,249
------- --------
Net income
(loss)....... $ 7,129 $ 5,300
======= ========
Earnings per
share........ $ 0.64 (4) $ 0.40
======= ========
Weighted
average
shares
outstanding.. 11,080 (4) 13,087
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,(1)
--------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996(1)
----------- ----------- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 6,244 $ 9,638 $14,761 $ 18,158 $ 12,237 $32,019
Total assets........................................ 24,864 28,670 42,770 49,918 60,899 85,643
Total debt.......................................... 4,514 4,037 8,265 8,620 15,915 6,805
Stockholders' equity................................ 14,475 18,506 24,236 26,825 25,358 55,431
</TABLE>
- ---------------
(1) The financial information for each of the years and six month periods
represents the results of operations of Renal Care Group and Founding
Companies Combined without giving effect to the Company's initial public
offering for periods prior to February 1996 except on a pro forma basis.
(2) Pro forma information for the year ended December 31, 1995 gives effect to
(a) the provision for federal and state income taxes as if not-for-profit
and S-corporations had been subject to such taxes; (b) additional estimated
corporate overhead of approximately $2.6 million that would have been
incurred had the Combination occurred at the beginning of 1995; and (c)
certain other adjustments to reflect the Combination and the initial public
offering. See Pro Forma Combining Financial Statements of Renal Care Group,
Inc. (of Delaware).
(3) Pro forma information for the six months ended June 30, 1996 gives effect to
the provision for federal and state income taxes as if not-for-profit and
S-corporations had been subject to such taxes. See Pro Forma Combining
Financial Statements of Renal Care Group, Inc. (of Delaware).
(4) The calculation of pro forma earnings per share for the year ended December
31, 1995 excludes 1,156,000 shares of Common Stock issued in the initial
public offering. The net proceeds from these shares were used for general
corporate purposes and therefore are excluded from the calculation. All
subsequent periods reflect the full impact of all shares issued in the
initial public offering.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
information referenced in the Index to Financial Statements, including the notes
thereto, and the other financial information appearing elsewhere in this
Prospectus.
OVERVIEW
Renal Care Group is a specialized provider of nephrology services to
patients with kidney disease, including patients suffering from chronic kidney
failure. The Company commenced operations in February 1996 when it acquired the
Founding Companies simultaneous with the completion of its initial public
offering. At the time of the Combination, the Founding Companies were
established businesses engaged in the operation of outpatient dialysis centers
as separate, independent entities for an average of 14 years. For all periods
presented, the Combined Financial Statements include the financial information
of the Founding Companies, Main Line, a merger which was completed in April
1996, and RenalWest, a merger which was completed in September 1996. Both the
Main Line and RenalWest mergers were accounted for as poolings of interests.
RenalWest was organized in September 1993; consequently, the Combined Financial
Statements do not include a full year of operating results for that period.
Because the Founding Companies, Main Line and RenalWest were independent
entities that had not been operated by the Company's management prior to their
respective dates of acquisition, the historical results prior to such times may
not be indicative of future performance. In addition, the Combined Financial
Statements do not give effect to any operating efficiencies prior to such dates
of acquisition that the Company believes typically would be attainable in an
integrated organization.
Renal Care Group believes that its dialysis centers, on an individual
basis, generally did not have the management, capital and other resources prior
to the Combination and the Company's acquisition that are required to generate
sustainable growth in the increasingly competitive dialysis industry. By
combining the dialysis centers under an experienced executive management team
and providing the combined entity with access to greater financial and other
resources, management believes the Company is positioned to pursue an aggressive
growth strategy comprised of increased internal growth and strategic
acquisitions. Significant factors that influence internal growth in the dialysis
industry include the number of nephrologists associated with a company's
dialysis centers and the availability of capital to fund the development of new
centers. The Company plans to increase internal growth by providing management,
capital and other resources required to develop new centers and to recruit
additional nephrologists to increase utilization of the Company's existing
network of dialysis centers. Since the Combination, the Company has completed
four acquisitions, including Main Line and RenalWest, which added approximately
2,000 ESRD patients, and management believes that additional acquisition
candidates will be available as the dialysis industry continues its rapid
consolidation.
Renal Care Group has implemented company-wide supply, insurance and other
agreements that have resulted in lower operating costs for the combined entity.
Other operating efficiencies that the Company has realized include consolidation
of employee benefits, cash management and other similar functions. The Company
believes it will be able to realize economies of scale in both acquired and
managed operations by consolidating corporate and regional management expenses.
However, a portion of any operating efficiencies that may be achieved will be
offset by the need for increased general and administrative expenses as the
Company adds support services at the corporate headquarters.
SOURCES OF NET REVENUE
The Company's net revenue has been derived primarily from the following
sources: (i) outpatient hemodialysis services; (ii) ancillary services
associated with dialysis, primarily the administration of EPO; (iii) home
dialysis services; (iv) inpatient hemodialysis services provided pursuant to
contracts with acute care hospitals and skilled nursing facilities; (v)
management contracts with hospital-based and medical university dialysis
programs; and (vi) laboratory services. ESRD patients typically receive 156
dialysis
18
<PAGE> 20
treatments per year, with reimbursement for services provided primarily by the
Medicare ESRD program based on rates that are established by HCFA. For the six
months ended June 30, 1996, approximately 74% of the Company's net revenue was
derived from reimbursement under the Medicare and Medicaid programs. Medicare
reimbursement is subject to rate and other legislative changes by Congress and
periodic changes in regulations, including changes that may reduce payments
under the ESRD program. For patients with health insurance, dialysis generally
is reimbursed at rates higher than Medicare during the first 18 months of
treatment, after which time Medicare becomes the primary payor. Reimbursement
for dialysis services provided pursuant to a hospital contract is negotiated
with the individual hospital and generally is higher on a per treatment
equivalent basis than the Medicare rate. Because dialysis is a life-sustaining
therapy used to treat this chronic disease, utilization is predictable and is
not subject to seasonal fluctuations.
RESULTS OF OPERATIONS
The results of operations for all periods in the table below and in the
period comparisons that follow reflect the historical operations of the Company,
including the operations of Main Line and RenalWest, combined with the
operations of the Founding Companies. However, management of the Company did not
operate the Founding Companies until February 1996, Main Line until April 1996
and RenalWest until September 1996, the respective dates of acquisition of such
companies.
The following table sets forth, for the periods indicated, the percentage
of net revenue represented by the respective financial items:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER ENDED JUNE
31, 30,
--------------------- -------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Patient care costs................................. 72.5 68.1 69.7 69.6 69.9
General and administrative expenses................ 8.5 11.4 11.2 11.3 10.2
Provision for doubtful accounts.................... 2.5 2.6 3.5 3.6 1.9
Depreciation and amortization...................... 3.0 3.1 3.2 2.9 3.4
Merger expenses.................................... -- -- -- -- 1.1
----- ----- ----- ----- -----
Total operating costs and expenses................. 86.4 85.2 87.5 87.4 86.6
----- ----- ----- ----- -----
Income from operations............................. 13.6% 14.8% 12.5% 12.6% 13.4%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Revenue. Net revenue increased from $56,253,000 for the six months
ended June 30, 1995 to $62,736,000 for the six months ended June 30, 1996, an
increase of $6,483,000, or 11.5%. This increase resulted primarily from a 7.2%
increase in the number of treatments from 309,162 in the 1995 period to 331,280
in the 1996 period and a 3.3% increase in the average revenue per treatment from
$183 in the 1995 period to $189 in the 1996 period. The revenue per treatment
increase was due to an increase in EPO utilization and acute treatments. The
remaining revenue increase resulted from management fee income.
Patient Care Costs. Patient care costs consist of costs directly related
to the care of patients, including direct labor, drugs, and other medical
supplies and operational costs of facilities. Patient care costs increased from
$39,137,000 for the six months ended June 30, 1995 to $43,883,000 for the six
months ended June 30, 1996, an increase of $4,746,000, or 12.1%. This increase
was due to the increase in the number of treatments, which caused a
corresponding increase in the use of drugs, supplies and labor. Patient care
costs as a percentage of net revenue increased slightly from 69.6% in the 1995
period to 69.9% in the 1996 period, with such increase caused primarily by
higher patient care costs at Main Line and RenalWest. Average patient care cost
per treatment increased from $127 in the 1995 period to $132 in the 1996 period.
This increase was due to normal health care inflation, increased EPO utilization
and the increase in higher cost acute treatments.
General and Administrative Expenses. General and administrative expenses
include corporate office costs and clinic costs not directly related to the care
of patients, including clinic administration, accounting,
19
<PAGE> 21
billing and information systems. General and administrative expenses increased
from $6,346,000 for the six months ended June 30, 1995 to $6,417,000 for the six
months ended June 30, 1996, an increase of $71,000, or 1.1%. General and
administrative expenses as a percentage of revenue decreased from 11.3% in the
1995 period to 10.2% in the 1996 period. The net increase was a result of
increased corporate overhead expenses partially offset by reduced compensation
to prior physician owners.
Provision for Doubtful Accounts. The provision for doubtful accounts
decreased from $2,031,000 for the six months ended June 30, 1995 to $1,196,000
for the six months ended June 30, 1996. The provision for doubtful accounts as a
percentage of net revenue decreased from 3.6% in the 1995 period to 1.9% in the
1996 period. This decrease represented a return to a normal level of provision
for doubtful accounts in the 1996 period from the 1995 period when additional
expense was recorded due to a deterioration in the aging of accounts receivable.
The provision for doubtful accounts is a function of patient mix, billing
practices 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.
Depreciation and Amortization. Depreciation and amortization increased
from $1,648,000 for the six months ended June 30, 1995 to $2,158,000 for the six
months ended June 30, 1996, an increase of $510,000, or 30.9%. This increase was
due to the purchase of patient care facilities previously leased, higher than
normal replacement of dialysis machines and the purchase of a clinical computer
system.
Merger Expenses. Merger expenses of $680,000 represented legal, accounting
and compensation expenses related to the Main Line acquisition. Merger expenses
for the RenalWest acquisition have not yet been determined.
Income from Operations. Income from operations increased from $7,091,000
for the six months ended June 30, 1995 to $8,402,000 for the six months ended
June 30, 1996, an increase of $1,311,000, or 18.5%. Income from operations as a
percentage of net revenue increased from 12.6% in the 1995 period to 13.4% in
the 1996 period.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Revenue. Net revenue increased from $110,670,000 for the year ended
December 31, 1994 to $115,329,000 for the year ended December 31, 1995, an
increase of $4,659,000, or 4.2%. This increase resulted primarily from a 4.5%
increase in the number of treatments from 598,228 in the 1994 period to 625,413
in the 1995 period. Average revenue per treatment remained constant for the 1994
and 1995 periods at $185.
Patient Care Costs. Patient care costs increased from $75,366,000 for the
year ended December 31, 1994 to $80,417,000 for the year ended December 31,
1995, an increase of $5,051,000, or 6.7%. This increase was due to the increase
in the number of treatments, which caused a corresponding increase in the use of
drugs, supplies and labor. Patient care costs as a percentage of net revenue
increased from 68.1% in the 1994 period to 69.7% in the 1995 period. Average
patient care costs per treatment increased from $126 in the 1994 period to $129
in the 1995 period. This increase was the net result of normal health care
inflation and lower EPO utilization costs.
General and Administrative Expenses. General and administrative expenses
increased from $12,616,000 for the year ended December 31, 1994 to $12,866,000
for the year ended December 31, 1995, an increase of $250,000, or 2.0%. General
and administrative expenses as a percentage of net revenue decreased from 11.4%
in the 1994 period to 11.2% in the 1995 period. General and administrative
expenses decreased in the 1995 period due to the growth in revenue during the
period.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased from $2,914,000 for the year ended December 31, 1994 to $3,995,000 for
the year ended December 31, 1995. The provision for doubtful accounts as a
percentage of net revenue increased from 2.6% in the 1994 period to 3.5% in the
1995 period. This increase was due to additional bad debt expense recorded as a
result of a revision in the estimated collectibility of accounts receivable for
RenalWest to reflect the Company's accounts receivable valuation policy.
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<PAGE> 22
Depreciation and Amortization. Depreciation and amortization increased
from $3,414,000 for the year ended December 31, 1994 to $3,661,000 for the year
ended December 31, 1995, an increase of $247,000, or 7.2%. Depreciation and
amortization as a percentage of net revenue increased from 3.1% in the 1994
period to 3.2% in the 1995 period.
Income from Operations. Income from operations decreased from $16,360,000
for the year ended December 31, 1994 to $14,390,000 for the year ended December
31, 1995, a decrease of $1,970,000, or 12.0%. Income from operations as a
percentage of net revenue decreased from 14.8% in the 1994 period to 12.5% in
the 1995 period.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net Revenue. Net revenue increased from $80,442,000 for year ended
December 31, 1993 to $110,670,000 for the year ended December 31, 1994, an
increase of $30,228,000, or 37.6%. This increase resulted primarily from a 27.3%
increase in the number of treatments from 470,035 in the 1993 period to 598,228
in the 1994 period, with a significant component of treatment growth resulting
from the full-year impact in 1994 of RenalWest which operated for only four
months in 1993. In addition, the average revenue per treatment increased 7.6%
from $172 in the 1993 period to $185 in the 1994 period due to an increase in
acute treatments and greater EPO utilization.
Patient Care Costs. Patient care costs increased from $58,314,000 for the
year ended December 31, 1993 to $75,366,000 for the year ended December 31,
1994, an increase of $17,052,000, or 29.2%. This increase was due to the
increase in the number of treatments, which caused a corresponding increase in
the use of labor, drugs and supplies. Patient care costs as a percentage of net
revenue decreased from 72.5% in the 1993 period to 68.1% in the 1994 period.
Average patient care costs per treatment increased 0.8%, from $125 in the 1993
period to $126 in the 1994 period. This increase was due to normal health care
inflation, increased EPO utilization, increased acute treatments and the
inclusion of RenalWest as of September 1993.
General and Administrative Expenses. General and administrative expenses
increased from $6,799,000 for the year ended December 31, 1993 to $12,616,000
for the year ended December 31, 1994, an increase of $5,817,000, or 85.6%.
General and administrative expenses increased as a percentage of net revenue
from 8.5% in the 1993 period to 11.4% in the 1994 period due primarily to the
inclusion of RenalWest as of September 1993 and increases in compensation to
prior physician owners.
Provision for Doubtful Accounts. The provision for doubtful accounts
increased from $2,010,000 for the year ended December 31, 1993 to $2,914,000 for
the year ended December 31, 1994. The provision for doubtful accounts as a
percentage of net revenue increased from 2.5% in the 1993 period to 2.6% in the
1994 period.
Depreciation and Amortization. Depreciation and amortization increased
from $2,416,000 for the year ended December 31, 1993 to $3,414,000 for the year
ended December 31, 1994, an increase of $998,000, or 41.3%. This net increase
was due to the purchase of patient care facilities in the normal course of
business and the inclusion of RenalWest as of September 1993.
Income from Operations. Income from operations increased from $10,903,000
for the year ended December 31, 1993 to $16,360,000 for the year ended December
31, 1994, an increase of $5,457,000, or 50.1%. Income from operations as a
percentage of net revenue increased from 13.6% in the 1993 period to 14.8% in
the 1994 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the acquisition and the
development of dialysis centers, the purchase of property and equipment for
existing centers and to finance working capital requirements. At June 30, 1996,
the Company's working capital was $32,019,000, cash and cash equivalents were
$31,292,000 and the Company's current ratio was 2.2:1.
21
<PAGE> 23
The Company's net cash provided by operating activities was $10,767,000 in
the six months ended June 30, 1996. Generally, cash provided by operating
activities resulted from net income before depreciation and amortization
expense, partially offset by increases in accounts receivable. The Company's net
cash used in investing activities was $40,740,000 in the six months ended June
30, 1996. Cash used in investing activities resulted from $39,699,000 of cash,
working capital and certain other distributions to the Founding Companies
(including approximately $6,899,000 in distributions to former stockholders of
the Founding Companies) and $4,972,000 of capital expenditures, partially offset
by the $3,893,000 cash balances of the Founding Companies acquired at the time
of the Combination. Cash provided by financing activities was $59,631,000 for
the six months ended June 30, 1996. The Company's initial public offering in
February 1996 resulted in the sale of 4,485,000 shares from which the Company
received $71,842,000 after offering costs. Long-term debt repayments totaled
$9,694,000 and distributions to owners which occurred prior to the initial
public offering were $2,597,000.
The Company's line of credit allows for borrowings of up to $35,000,000 to
be used for acquisitions, working capital and capital expenditures. The line of
credit requires payments of interest only until May, 1998 with the balance
outstanding at that time amortized quarterly over the next three years. The
credit facility bears interest at one of two floating rates selected by the
Company: (i) the base rate plus a margin ranging from 0.00% to 1.00% or (ii)
LIBOR plus a margin of 0.95% to 2.70%.
At October 8, 1996, the Company had $1,380,000 of outstanding Convertible
Notes due in December 1996 that are convertible into Common Stock at a price of
$7.50 per share.
A significant component of the Company's growth strategy is the acquisition
and development of dialysis centers. The Company believes that the net proceeds
from the Offering, existing cash and funds from operations, together with funds
available under the line of credit, will be sufficient to meet the Company's
acquisition, expansion, capital expenditure and working capital needs through at
least the end of 1997. In order to finance certain large strategic acquisition
opportunities, the Company may incur from time to time additional short and
long-term bank indebtedness and may issue equity or debt securities, the
availability and terms of which will depend on market and other conditions.
There can be no assurance that such additional financing, if required, will be
available on terms acceptable to the Company.
IMPACT OF INFLATION
A substantial portion of the Company's net revenue is subject to
reimbursement rates that are regulated by the federal government and do not
automatically adjust for inflation. The Company is unable to increase the amount
it receives for the services provided by its dialysis business that are
reimbursed under the Medicare composite rate. Increased operating costs due to
inflation, such as labor and supply costs, without a corresponding increase in
reimbursement rates, may adversely affect the Company's earnings in the future.
22
<PAGE> 24
BUSINESS
Renal Care Group is a specialized provider of nephrology services to
patients with kidney disease, including patients suffering from chronic kidney
failure, also known as end-stage renal disease. The Company provides dialysis
and ancillary services to approximately 5,000 patients through 77 outpatient
dialysis centers in 12 states and manages an additional eight dialysis centers
in five states in affiliation with leading medical centers such as Vanderbilt
University Medical Center and The Cleveland Clinic Foundation. In addition to
its outpatient dialysis center operations, Renal Care Group provides acute
dialysis services through contractual relationships with 42 hospitals,
staff-assisted dialysis services to 37 skilled nursing facilities and physician
practice management services to 16 of the 59 nephrologists who are affiliated
with the Company's outpatient dialysis centers.
Renal Care Group was formed by leading nephrologists with the objective of
creating an entity with the clinical and financial capability to manage the full
range of care for ESRD patients on a cost-effective basis. The Company is
working in conjunction with its affiliated physicians to develop fully
integrated nephrology networks that will implement clinical protocols designed
to improve outcomes and reduce costly medical complications associated with
ESRD.
According to HCFA, there were in excess of 2,800 dialysis centers in the
United States at the end of 1995. The Company believes that approximately 38%
were owned by multi-center dialysis companies, 32% were owned by independent
physicians and 30% were hospital-based centers. Although numerous nephrology
groups have in the past sold their dialysis centers to entities engaged in the
business of owning and operating such facilities, the Company believes that many
nephrology groups recognize the need to affiliate with an entity having broader
capabilities that can also provide clinical, financial and business expertise to
help them manage the increasingly complex and time-consuming aspects of both
their dialysis center operations and their nephrology practices. In addition,
many hospitals are motivated to sell or outsource management of their dialysis
facilities as they refocus their resources on their core business in response to
increasing competitive pressures. As a result of these and other factors, the
dialysis services industry is undergoing rapid consolidation.
INDUSTRY OVERVIEW
End-Stage Renal Disease
ESRD is the state of advanced renal impairment that is irreversible and
lethal unless treated. This condition is most commonly a result of complications
associated with diabetes, hypertension, certain renal and hereditary diseases,
old age and other factors. In order to sustain life, individuals with ESRD
require either dialysis for the remainder of their lives or successful kidney
transplantation.
According to the USRDS, the total estimated direct medical charges for ESRD
exceeded $11.1 billion during 1994. Of the total direct medical charges for
ESRD, approximately $8.3 billion was paid by the federal government through the
Medicare program. As a result of legislation enacted in 1972, the federal
government provides Medicare funding for patients who are diagnosed with ESRD
regardless of their age or financial circumstances.
Based on Medicare ESRD enrollment data published by HCFA, the number of
ESRD patients in the United States requiring dialysis treatments has grown from
approximately 66,000 at the end of 1982 to approximately 200,000 at the end of
1995. Based on USRDS data, the ESRD incidence rate among Medicare-eligible
patients for all age groups was approximately 219 patients per million in 1993
as compared to 111 patients per million in 1984. Furthermore, USRDS data
indicates that the incidence rate in patients ages 65 to 74 increased 130% from
1984 to 1993, and in patients ages 75 and older the incidence rate increased
189% over the same period.
The Company attributes the growth in the number of ESRD patients
principally to the aging of the general population and the improved treatment
and increased survival rate of patients with diabetes, hypertension and other
illnesses that lead to ESRD. Moreover, improved dialysis technology has enabled
older patients and those who previously could not tolerate dialysis due to other
illnesses to benefit from this treatment.
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<PAGE> 25
Treatment Options for End-Stage Renal Disease
Currently, the three treatment options for ESRD are (i) hemodialysis, which
is performed either in a hospital setting, an outpatient facility or a patient's
home, (ii) peritoneal dialysis, which is generally performed in the patient's
home, and (iii) kidney transplant surgery. According to HCFA data, in 1995
approximately 83% of patients on dialysis in the United States received
outpatient hemodialysis treatment and approximately 17% received hemodialysis or
peritoneal dialysis in their homes.
- Hemodialysis is the most common form of ESRD treatment and is generally
performed either in a freestanding center or in a hospital. The process of
hemodialysis uses a dialyzer, essentially an artificial kidney, to remove
certain toxins, fluid and chemicals from the patient's blood and a device
to control external blood flow and to monitor certain vital signs of the
patient. The dialysis process occurs across a semi-permeable membrane that
divides the dialyzer into two chambers. While the blood is circulated
through one chamber, a pre-mixed dialysis fluid is circulated through the
adjacent chamber. The toxins and excess fluid contained in the blood cross
the membrane into the dialysis fluid. Hemodialysis treatment usually
requires approximately four hours and is administered three times per week
for the life of the patient pursuant to a nephrologist's plan of care.
- Peritoneal dialysis is generally performed by the patient at home and
uses the patient's peritoneal, or abdominal, cavity to eliminate fluids
and toxins in the patient's blood. Although there are several variations
of peritoneal dialysis, continuous ambulatory peritoneal dialysis ("CAPD")
and continuous cyclic peritoneal dialysis ("CCPD") are the most common.
CAPD uses a sterile dialysis solution which is introduced through a
surgically implanted catheter into the patient's peritoneal cavity. Toxins
in the blood continuously cross the peritoneal membrane into the dialysis
solution. After several hours, the patient drains the used solution and
replaces it with fresh solution. CCPD is performed in a manner similar to
CAPD, but utilizes a mechanical device to cycle dialysis solution through
the peritoneal membrane while the patient is sleeping or at rest. Patients
treated at home are monitored monthly either through a visit from a staff
person from a designated outpatient center or by the patient visiting the
center.
- Kidney transplantation, when successful, is the most desirable form of
therapeutic intervention. However, the shortage of suitable donors
severely limits the availability of this surgical procedure as a treatment
option. Approximately 6% of patients with ESRD undergo kidney
transplantation. Typically, transplant surgery is performed by transplant
surgeons and not nephrologists.
Ancillary Services
Nephrologists provide ancillary services to ESRD patients, the most
significant of which is the administration of EPO. EPO is a bio-engineered
protein that mimics a hormone found in a normal kidney by stimulating the
production of red blood cells. EPO is utilized in connection with all forms of
dialysis to treat anemia, a medical complication experienced by almost all ESRD
patients. EPO reduces or eliminates the need for blood transfusions in these
patients. Other ancillary services provided by nephrologists to or in connection
with ESRD patients may include but are not limited to (i) certain laboratory
tests required by Medicare to determine the effectiveness of dialysis
treatments, (ii) intradialytic parenteral nutrition ("IDPN"), which are
nutrients added to a patient's blood during hemodialysis, (iii) studies to test
the degree of a patient's bone deterioration, an ESRD complication, (iv)
electrocardiograms, (v) nerve conduction studies to test for deterioration of a
patient's nerves, another ESRD complication, (vi) Doppler flow testing for the
effectiveness of the patient's vascular access for dialysis, and (vii) blood
transfusions.
Nephrology Practice
Caring for ESRD patients is the primary clinical activity of nephrologists.
Other clinical activities of a nephrologist include the post-surgical care of
kidney transplant patients, the diagnosis and treatment of kidney diseases in
patients who are at risk for developing ESRD, and the diagnosis, treatment, and
management of clinical disorders including hypertension, kidney stones and
autoimmune diseases. Because of the complexity involved in treating patients
with chronic kidney disease, the nephrologist typically assumes the role of
primary
24
<PAGE> 26
care physician for the ESRD patient. The Company believes that while some
nephrologists practice independently or are members of multi-specialty groups,
most nephrologists practice in small single-specialty groups. Nephrology groups
typically provide services in relatively large geographic areas, and it is
common for a major part of a metropolitan area to be served by a single
nephrology group. Most nephrologists also have a significant office practice and
consult on numerous hospitalized patients who are not on dialysis. A
nephrologist typically derives income from services rendered (i) during office
visits, (ii) for the treatment of patients in acute care hospitals and (iii) for
the treatment of patients receiving dialysis services. Medicare reimburses
nephrologists based on a fixed fee per month for outpatient services rendered in
treating ESRD patients and based on designated rate schedules for services to
ESRD patients who are hospitalized.
STRATEGY
Renal Care Group's objective is to develop fully integrated nephrology
provider networks to assume and manage the clinical and financial risk
associated with providing renal disease management services on a capitated
basis. The Company seeks to achieve this objective by (i) acquiring, developing
and managing outpatient and university-based dialysis centers, (ii) integrating
its dialysis centers with affiliated nephrology practices, (iii) developing a
protocol-driven ESRD management model to enhance clinical outcomes and (iv)
providing an appropriate range of ancillary services to ESRD patients. The
Company believes an integrated network of nephrologists and dialysis centers,
combined with the Company's clinical expertise, management experience and access
to capital, will provide significant advantages to patients and third-party
payors by improving the quality of care while reducing the overall costs
associated with treating patients with all forms of kidney disease, including
those who have ESRD. Following is a discussion of the key components of the
Company's growth strategy.
Acquire, Develop and Manage Outpatient and University-Based Dialysis Centers
Renal Care Group believes that the acquisition and development of dialysis
centers is the first step in the development of a fully integrated nephrology
management company. When considering the acquisition or development of dialysis
centers, the Company's most important criteria are the ability to secure
significant market share, the availability of one or more leading nephrologists
to serve as medical director(s) of the center and the quality of care provided
by such center. In addition, the Company also considers factors such as
financial results and the potential financial impact on the Company, the growth
potential and demographic characteristics of the market, the convenience of the
location for patients and physicians, the condition of the center and its
equipment, the local labor conditions, and the availability of qualified
clinical personnel.
The Company's acquisition and development strategy contains two primary
elements. First, physicians affiliated with the Company explore acquisition
opportunities from among their contacts with nephrologist owners of dialysis
centers throughout the country. Second, the Company seeks to acquire and/or
develop dialysis centers in underserved or expanding population areas that are
contiguous to the present markets of the Company.
In addition to acquiring and developing freestanding centers, the Company
develops and operates dialysis centers by entering into arrangements with
leading hospitals and university medical dialysis programs for the management of
ESRD care. The Company currently has inpatient dialysis contracts with 42
hospitals. The Company also manages dialysis programs in affiliation with
leading medical centers such as Vanderbilt University Medical Center and The
Cleveland Clinic Foundation. The Company believes that contracts with medical
centers and university dialysis programs provide access to relevant studies and
other research that will enable the Company to determine measurable ESRD
outcomes and thereby enhance both the quality and cost-effectiveness of care. In
addition, the Company believes such affiliations may expand relationships with
highly qualified independent nephrologists and result in increased opportunities
to acquire the dialysis centers of such nephrologists. See
"Business -- Operations."
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<PAGE> 27
Integrate Dialysis Centers with Nephrology Practices
Renal Care Group intends to integrate its dialysis centers with affiliated
nephrologists into regional delivery networks. In order to facilitate this
integration, the Company attempts to acquire or enter into management agreements
with the practices of affiliated nephrologists. The Company believes that
increased managed care, capitation and other forms of risk-sharing between
payors and providers will require providers to offer integrated nephrology
services through a network of dialysis centers and nephrology practices. The
Company believes such arrangements will enable nephrologists to coordinate and
manage the delivery of care to ESRD patients more effectively. In addition, the
Company believes that a large, well-managed and well-capitalized nephrology
group will have an advantage in recruiting newly-trained nephrologists.
The Company believes that nephrology groups increasingly are recognizing
the need for professional, management and clinical services to assist in the
management of their practices and in the development and administration of the
most effective care for ESRD patients. The Company believes that nephrologists
typically practice independently or in small groups and lack (i) the capital to
expand or develop information systems, (ii) the ability to realize economies of
scale to manage resources or negotiate with suppliers, and (iii) the ability to
develop cost-effective clinical outcome strategies critical to contracting with
managed care payors.
The Company currently manages the practices of 16 nephrologists who have
practice privileges at 15 of its centers. In addition, the Company has certain
rights of first refusal with respect to any proposed arrangement with a third
party for the sale or management of the practices of 27 additional nephrologists
who have practice privileges at 34 of its centers. The Company provides billing,
information systems and general administrative services to the nephrology
practices it manages and is paid a management fee for such services. See
"Business -- Nephrology Practice Management."
Develop a Protocol-Driven ESRD Management Model to Enhance Clinical Outcomes
Renal Care Group believes that the provision of high quality care to ESRD
patients significantly reduces the aggregate costs associated with ESRD by
decreasing the number of days an ESRD patient spends in the hospital and thereby
limiting the most expensive component of ESRD health care. The Company believes
that access to medical research regarding causes and effects of ESRD, including
causes and lengths of hospitalization and resulting gross and standardized
mortality rates, and different types of treatment outcomes, is crucial to the
successful management of ESRD. The Company believes that its affiliation with
university-based dialysis programs provides it with access to such outcomes
research and to clinically advanced treatment protocols. For example, according
to data published by the USRDS, during 1993, the average number of days spent in
a hospital by dialysis patients less than 65 years of age was 11.5, and for
patients older than 65 years was 12.0. Similarly, the USRDS calculated the
overall mortality rate of dialysis patients during the first year of therapy
(starting in the 91st day after initiation of therapy) to be 25.7% in 1993.
Treatment protocols designed to address such issues as adequacy of dialysis,
nutrition, and management of hemodialysis access complications can significantly
improve mortality and decrease hospitalization rates. The Company believes that
the protocols it has implemented in the dialysis program at Vanderbilt have been
effective in maintaining an overall mortality rate of approximately one-half of
the national average and in reducing the average hospitalization rate for all
age groups to less than 10 days a year per patient. The Company is in the
process of implementing clinical protocols at its centers and believes that such
implementation will enhance outcomes and improve operating efficiencies.
Provide an Appropriate Range of Ancillary Services
Renal Care Group provides a variety of ancillary services necessary for the
treatment of ESRD patients, the most significant of which is the administration
of EPO. EPO is a bio-engineered protein which stimulates the production of red
blood cells and is used in connection with all forms of dialysis to treat
anemia, a medical complication frequently experienced by ESRD patients. Other
ancillary services offered by the Company include studies to test the degree of
bone deterioration; electrocardiograms; nerve conduction studies to test the
degree of deterioration of nerves; Doppler flow testing to test the
effectiveness of the patient's vascular
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<PAGE> 28
access for dialysis; and blood transfusions. The Company estimates that less
than 0.5% of its net revenue for the six months ended June 30, 1996 was
reimbursement for the administration of IDPN.
In addition, the Company requires the services of a clinical laboratory to
perform certain blood testing in connection with dialysis treatment. Pursuant to
a management contract with Kidney Care, the Company provides certain management
services to and uses as a reference lab a full service laboratory owned by
Kidney Care with capacity to perform clinical testing services for up to
approximately 7,000 ESRD patients. Due to certain regulatory constraints, the
Company was not able to acquire the laboratory at the time of the Combination,
but has an option to purchase the assets of such laboratory expiring in April
1999, by which time the Company expects to be in a position to exercise the
option if it so desires. See "Certain Transactions" and "Business -- Government
Regulation."
OPERATIONS
Location, Capacity and Use of Facilities
Renal Care Group operates 77 outpatient dialysis centers in 12 states with
59 affiliated nephrologists and 1,111 certified dialysis stations, excluding
eight centers managed by the Company. The Company leases 58 centers and owns 19
centers. The Company also provides inpatient dialysis services to 42 acute care
hospitals and 37 skilled nursing facilities. Excluding managed centers, 625,413
and 331,280 hemodialysis treatments were provided at the Company's facilities
during the year ended December 31, 1995 and the six months ended June 30, 1996,
respectively.
The Company estimates that its centers were operating at approximately 64%
of capacity as of June 30, 1996, based on the assumption that a dialysis center
is able to provide up to three treatments a day per station, six days a week.
The Company believes it may increase the number of dialysis treatments at its
centers without making additional capital expenditures.
Operation of Facilities
Renal Care Group's dialysis centers provide outpatient hemodialysis and
related services to ESRD patients in a convenient setting. A majority of the
Company's centers utilize volumetric dialysis equipment that accommodates high
flux and high efficiency dialysis treatments. In addition to dialysis stations,
the Company's centers generally contain a nurses' station, a patient waiting
area, examination rooms, a supply room, a water treatment space to purify water
used in hemodialysis treatments, a dialyzer reprocessing room, staff work areas,
offices, and a staff lounge. Many of the Company's centers also have a
designated area for training patients in home dialysis and also offer certain
amenities for the patients.
In accordance with conditions for participation in the Medicare ESRD
program, each of the Company's centers is supervised by a qualified Medical
Director. Each center is managed by an administrator, typically a registered
nurse, who is responsible for the day-to-day operations of the center and its
staff. The staff of each center typically includes registered nurses, licensed
practical or vocational nurses, patient care technicians, social workers,
registered dietitians, a unit clerk, and biomedical equipment technicians. Each
center is staffed in a manner that allows the number of personnel to be adjusted
according to the number of patients receiving treatments.
Home Dialysis
All of Renal Care Group's centers offer various forms of peritoneal and
home hemodialysis, primarily CAPD or CCPD. As of June 30, 1996, approximately
13% of the patients treated by the Company received home dialysis. The Company's
home dialysis services consist of providing equipment and supplies, training,
patient monitoring and follow-up assistance to patients who prefer and are able
to receive dialysis treatments in their homes. The Company intends to expand its
home dialysis program, which the Company believes is important to the
development of a fully integrated nephrology services company.
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<PAGE> 29
Hospital and Skilled Nursing Facility Care
Certain of Renal Care Group's centers provide dialysis services through
contracts with 42 hospitals located within their respective service areas. Under
these contracts, the Company's centers typically provide equipment, supplies and
personnel required to perform hemodialysis and peritoneal dialysis in connection
with the hospital's inpatient services. Such inpatient dialysis services are
required for patients with acute renal failure resulting from accidents, medical
and surgical complications, patients in the early stage of renal failure and
ESRD patients who require hospitalization for other reasons. The terms of these
contracts are individually negotiated and vary by contract. Most of the
Company's hospital contracts specify predetermined fees per dialysis treatment,
although the Company believes that such fees may be subject to negotiation in
the future as the provision of health care services becomes increasingly
influenced by managed care and subject to capitated arrangements.
The Company also provides staff-assisted dialysis services to 37 skilled
nursing facilities in the Phoenix metropolitan area. A central office dispatches
equipment, supplies and personnel required to perform dialysis treatments in
connection with the extended care services of skilled nursing facilities.
University Division
Renal Care Group currently manages the dialysis programs at Vanderbilt
University Medical Center, The Cleveland Clinic Foundation and Case Western
Reserve University, provides home dialysis services for a group of patients at
the University of Arkansas, provides consulting services to the University of
Michigan Medical Center regarding its dialysis program and is developing a
dialysis center for the University of Louisville. The Company intends to expand
its university management program and is currently in various stages of
discussions with a number of university-based dialysis programs. In addition,
the Company also intends to acquire or develop university-based dialysis
centers. The Company believes that its affiliation with leading nephrology
groups will enhance its ability to attract and maintain agreements to manage the
dialysis programs of university medical centers. Furthermore, the Company
expects that affiliation with university medical centers will provide a greater
number of patients, including the potential for the development of new centers
and access to highly qualified Medical Directors and outcomes research.
Relationships with Referral Sources; Medical Directors
A key factor in the success of a dialysis center is its relationship with
local nephrologists. An ESRD patient generally seeks treatment at a center where
the patient's nephrologist has practice privileges. Consequently, Renal Care
Group relies on its ability to attract and to meet the needs of referring
nephrologists in order to receive and gain new referrals.
The Company has engaged practicing, board-eligible or board-certified
nephrologists to serve as Medical Directors for each of its centers. Each of the
Company's Medical Directors provides services pursuant to an independent
contractor agreement between the Company and the physician or his or her
professional practice group. Medical Directors' responsibilities primarily
consist of the administration and monitoring of the Company's patient care
policies, including patient education, administration of dialysis treatment,
development and training programs and assessment of all patients. Coordination
of the delivery of care is important in maintaining ESRD patients' general level
of health and in avoiding medical complications that might necessitate
hospitalization.
The Company typically enters into Medical Director agreements with
nephrologists at each of its centers containing terms of seven years with
three-year renewal options. The Company's Medical Director agreements typically
provide for its Medical Directors to be paid fees for their supervisory services
and include non-competition clauses with specific limitations on their ability
to compete with the Company for certain periods of time and in certain
geographic areas. In consideration for such non-competition agreements, the
Company has granted options to purchase shares of Common Stock to the physicians
serving as Medical Directors or their professional practice groups.
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<PAGE> 30
Nephrology Practice Management
Renal Care Group currently manages the practices of 16 physician
nephrologists pursuant to the terms of management service arrangements. Under
these arrangements, the Company typically provides to the physicians, in
exchange for a management fee, certain equipment, supplies and administrative
services, including billing, collection, accounting, human resources and
information systems. Each physician retains exclusive control of the provision
of medical services to his or her patients.
QUALITY ASSURANCE
In order to optimize therapy and improve outcomes, Renal Care Group
establishes and maintains quality criteria for its clinical operations, monitors
patient outcomes in all of its centers, utilizes a Medical Advisory Board to
develop a protocal-driven clinical management model and involves its patients in
their own care.
Quality Criteria
Renal Care Group actively involves its Medical Advisory Board in the
establishment of quality criteria for both owned centers and its acquisition
candidates. Regular evaluation of the prescribed dialysis treatments and the key
physiological parameters of patients constitutes part of the continuous quality
improvement that is the Company's primary clinical objective. The Company
employs a registered nurse as a corporate Quality Assurance Coordinator to
oversee the Company's continuous quality assurance program. In addition, each
center has a quality assurance committee that typically includes the Medical
Director, the center administrator and nurses, as well as other technical
personnel. This committee meets regularly to monitor the quality of care in the
center and to assure compliance with applicable regulations.
Outcomes Data
Renal Care Group believes that an important factor in the successful
management of ESRD is access to a broad database of treatment-specific outcomes
information from which clinical pathways may be defined. The Quality Assurance
Coordinator oversees the collection of patient outcomes and cost data in the
Company's centers to assist in implementing clinical pathways to enhance patient
outcomes while reducing the cost of care. Management believes that the
implementation of such clinical pathways is necessary to improve the overall
quality and operating efficiencies of its dialysis centers and to contract more
effectively with payors in a health care environment increasingly influenced by
managed care.
Medical Advisory Board
Renal Care Group's Medical Advisory Board meets quarterly to monitor the
development and implementation of clinical protocols and to review patient
outcomes. The Medical Advisory Board is chaired by Raymond Hakim, M.D., Ph.D.,
the Company's Chief Medical Officer, and is composed of affiliated
nephrologists. In addition, the Medical Advisory Board is responsible for
establishing, implementing and monitoring the Company's quality assurance
policies and procedures, identifying therapy deficiencies, and evaluating
technological changes. The Medical Advisory Board's principal task is the
development of a protocol-driven clinical management model that will enable the
Company to manage effectively the financial risk associated with ESRD
capitation.
Patient Involvement
The Company also attempts to ensure quality care by instructing all ESRD
patients before and after the initiation of dialytic therapy on methods for
participating in their own care to the fullest extent possible. In addition, in
some of the Company's centers, "self-care" units are formed in which
self-reliance is fostered through instruction and support.
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<PAGE> 31
REIMBURSEMENT
The following table sets forth information regarding the Company's
reimbursement sources:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER ENDED JUNE
31, 30,
---------------------- -------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Medicare.......................................... 72 % 68 % 68 % 68 % 67 %
Medicaid.......................................... 7 8 7 7 7
Private and other payors.......................... 15 18 20 20 21
Hospital inpatient dialysis services.............. 6 6 5 5 5
--- --- --- --- ---
Total................................... 100 % 100 % 100 % 100 % 100 %
=== === === === ===
</TABLE>
The Social Security Act (the "Act") provides for Medicare coverage for
certain individuals who are medically determined to have ESRD. Once an
individual is medically determined to have ESRD, the Act 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 Act
provides that entitlement begins the third month after the month in which a
regular course of renal dialysis is initiated. 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.
Under the Medicare ESRD program, the reimbursement rates per treatment are
fixed but have been adjusted from time to time by legislation. Although this
form of reimbursement limits the allowable charge per treatment, it provides the
Company with predictable and recurring per treatment revenue. The Medicare
composite rate, set by HCFA, governs the Medicare reimbursement available for a
designated group of dialysis services, including the dialysis treatment,
supplies used for such treatment, certain laboratory tests and medications. The
Medicare composite rate is subject to regional differences based on certain
factors, including regional differences in wages. Certain other services and
drugs are eligible for separate reimbursement under Medicare and are not part of
the composite rate, including certain drugs such as EPO and certain physician
ordered tests provided to dialysis patients. The Company generally submits
Medicare claims monthly and is usually paid within 30 days of the submission.
Medicare Eligibility
Set forth below are summaries of the general requirements for participation
in the Medicare ESRD program:
- Medicare generally covers those who are ages 65 and over, as well as
those who are under age 65 and who have been medically determined to have
ESRD. However, Medicare coverage is secondary for some patients who have
qualifying employer group health insurance.
- For patients eligible for Medicare based solely on ESRD (generally, those
under age 65), Medicare coverage begins three months after the month in
which the patient begins dialysis. During this three-month waiting period,
Medicaid (if the patient is eligible), private insurance, or the patient
is responsible for payment for dialysis services. This waiting period is
waived for individuals who participate in a self-care dialysis training
program.
- For ESRD patients under age 65 who have any employer group health
insurance coverage (regardless of the size of the employer or the
individual's employment status), Medicare coverage is secondary to the
employer coverage during the 18-month period following the establishment
of Medicare eligibility based on ESRD. Medicare continues to be secondary
regardless of whether the individual becomes eligible for Medicare based
on age or disability before the expiration of the 18 months.
- During the period of secondary coverage, 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 rates.
Medicare generally pays the difference between what the employer group
health plan paid and the gross amount payable by Medicare.
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- For patients over ages 65 for whom Medicare already is the primary payor
and who later develop ESRD, Medicare remains the primary payor. (Some
group health coverage does not render Medicare coverage secondary for
beneficiaries eligible for Medicare based on age or disability.) However,
if the patient's employer group health coverage already was primary to
Medicare (based on the size of the employer and the patient's employment
status), then Medicare remains secondary for the 18-month period.
- When Medicare is the primary payor, it reimburses 80% of the amount set
by the Medicare prospective reimbursement system for each treatment. The
beneficiary is responsible for the remaining 20%, as well as any unmet
Medicare deductible amount, although Medicare supplemental insurance,
Medicaid, or other private health insurance may pay on the beneficiary's
behalf.
Following amendments in 1993 to the Medicare Secondary Payor ("MSP")
provisions, HCFA required employer group health plans to serve as the primary
payor during the 18-month period in situations where the beneficiary was
entitled to Medicare Benefits on the basis of both age and ESRD. In April 1995,
HCFA revised its interpretation of the 1993 MSP amendments to require Medicare
to serve as primary payor for the 18 month period only where employer coverage
was already secondary to Medicare for individuals eligible for Medicare benefits
on the basis of both age and ESRD. This change eliminates for some
dually-eligible individuals the 18-month period commencing 90 days after the
start of treatment during which the employer coverage would serve as primary
payor source and reimburse the Company at a rate that the Company believes is
higher than Medicare. Furthermore, HCFA also announced that the revised
interpretation would apply retroactively to August 1993 and, as a result,
amounts collected from employer-based group health plans as primary payors
between August 1993 and April 1995 were to be refunded if the plan was not
already serving as primary payor. In June 1995, the United States District Court
for the District of Columbia issued a preliminary injunction prohibiting HCFA
from applying this revised interpretation retroactively to August 1993, although
a final ruling on the issue has not yet been issued by the court. The Company
has established reserves for the retroactive application of the revised HCFA
interpretation and believes that the amount of such reserves is adequate.
Medicare Reimbursement Rates
The Medicare composite rate for outpatient dialysis services currently
averages $126 per treatment and may vary depending on regional wage differences.
Medicare reimbursement rates are adjusted periodically based on certain factors,
including legislation and executive and congressional budget reduction and
control processes, inflation and costs incurred in rendering the services, but
in the past have had little relationship to the cost of conducting business.
The Medicare ESRD composite reimbursement rate was unchanged from
commencement of the program in 1972 until 1983. From 1983 through December 1990,
numerous Congressional actions resulted in net reductions of the average
composite reimbursement rate from a fixed fee of $138 per treatment in 1983 to
approximately $125 per treatment in 1986. Congress increased the ESRD composite
reimbursement rate, effective January 1991, resulting in an average rate of $126
per treatment.
The Medicare ESRD composite reimbursement 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, the Prospective Payment
Assessment Commission ("PROPAC") recommended that the ESRD composite
reimbursement rate be increased by 2.0% for freestanding facilities for fiscal
year 1997. In August 1996, and in response to the March 1996 report of PROPAC,
HCFA announced that an increase in the composite rate may be appropriate within
the next few years. In making this announcement HCFA also stated that any rate
increase must be considered in the context of Medicare budgetary concerns.
Nevertheless, HCFA stated that it may recommend an update to the composite rate
for fiscal year 1998. In January 1996, HCFA announced a three-year demonstration
project involving the enrollment of ESRD patients in managed care organizations.
The demonstration project would adjust payment rates based upon treatment
status, age groups, and the cause of renal failure. Based upon the
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<PAGE> 33
results of the demonstration project, HCFA has stated it would make
recommendations to Congress concerning the appropriateness of paying for ESRD
services on a capitated basis. Congress is not required to implement these
recommendations and could either raise or lower the reimbursement rate. During
the last congressional session, there were various proposals for the reform of
numerous aspects of Medicare. The Company is unable to predict what, if any,
future changes may occur in the Medicare composite reimbursement rate. Any
reductions in the Medicare composite reimbursement rate could have a material
adverse effect on the Company's results of operations, financial condition and
business.
From June 1989 through December 1990, the Medicare ESRD program added $40
per administration of EPO to the dialysis center's allowable composite rate for
dosages of up to 9,999 units per administration. For higher dosages, an
additional $30 per treatment was allowed. Effective January 1991, the Medicare
allowable prescribed rate for EPO was changed to $11 per 1,000 units, rounded to
the nearest 100 units. Subsequently, legislation was enacted to reduce the
Medicare prescribed rate for EPO by $1 to $10 per 1,000 units for administration
of EPO in 1994. For subsequent periods, the Secretary of the Department of
Health and Human Services ("HHS") is authorized to determine an appropriate
rate, which currently is $10 per 1,000 units administered.
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. The programs also serve as supplemental insurance programs for the
Medicare co-insurance portion and provide certain coverages (e.g., oral
medications) that are not covered by Medicare. State regulations generally
follow Medicare reimbursement levels and coverages without any coinsurance
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 Reimbursement/Acute Care Contracts
The Company receives reimbursement from private payors for ESRD treatments
prior to Medicare becoming a patient's primary payor at rates significantly
higher than the per treatment rate set by Medicare. After Medicare becomes a
patient's primary payor, private secondary payors generally reimburse the
Company for 20% of the Medicare per treatment rate. The Company has negotiated
managed care contracts with certain payors at rates that are higher than the
Medicare rate. The Company also receives payments from hospitals under 21 acute
care contracts at rates significantly higher than the Medicare composite rate.
GOVERNMENT REGULATION
General
The Company's dialysis center operations are subject to extensive
governmental regulation at the federal, state and local levels. These
regulations require the Company to meet various standards relating to, among
other things, the management of centers, personnel, maintenance of proper
records, equipment and quality assurance programs. The dialysis centers are
subject to periodic inspection by state agencies and other governmental
authorities to determine if the premises, equipment, personnel and patient care
meet applicable standards. To receive Medicare reimbursement, the Company's
dialysis centers must be certified by HCFA as meeting certain Medicare
conditions of coverage. All of the Company's dialysis centers are so certified.
HCFA has announced that it is in the process of revising the current Medicare
Conditions of Coverage for ESRD services. The Company is unable to predict what,
if any, future changes may occur in the Medicare Conditions of Coverage for ESRD
facilities.
Any changes to the Medicare Conditions of Coverage, or 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 revenues is
derived or a change resulting from health care reform reducing dialysis
reimbursement or reducing or eliminating
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<PAGE> 34
coverage for dialysis services would have a material adverse effect on the
Company's operations, revenues and net earnings. To date, the Company and its
subsidiaries have maintained their licenses and their Medicare and Medicaid
authorizations. 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 will not result in a material
adverse change to the Company.
Furthermore, the Company potentially could be held responsible for actions
previously taken by entities it has acquired. As part of its announced
regulatory agenda for 1996, HHS intends to issue a proposed rule that would
automatically assign to the new owner of a Medicare provider or supplier
liability for any Medicare overpayments, violations, or sanctions incurred by or
imposed on, the previous owner. There can be no assurance that previous
operating practices of the Company's acquisitions will not be reviewed and
challenged by government regulators or that the Company will not be liable for
such practices.
Fraud and Abuse
The Company's operations are subject to the illegal remuneration provisions
of the Social Security Act (sometimes referred to as the "anti-kickback"
statute) and similar state laws that impose criminal 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.
Federal enforcement officials may attempt to impose civil false claims
liability with respect to claims resulting from an anti-kickback violation.
Violations of the federal anti-kickback statute are punishable by criminal
penalties, including imprisonment, fines and exclusion of the provider from
future participation in the Medicare or Medicaid programs. Civil penalties for
violations of the federal anti-kickback statute are punishable by criminal
penalties, including imprisonment, fines and exclusion of the provider 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. While
the federal anti-kickback statute expressly prohibits transactions that have
traditionally had criminal implications, such as kickbacks, rebates or bribes
for patient referrals, its language has been construed broadly and has not been
limited to such obviously wrongful transactions. Court decisions state that,
under certain circumstances, the statute is also violated when one purpose (as
opposed to the "primary" or a "material" purpose) of a payment is to induce
referrals. Congress has frequently considered federal legislation that would
expand the federal anti-kickback statute to include the same broad prohibitions
regardless of payer source. In fact, effective January 1, 1997, the Health
Insurance Portability and Accountability Act of 1996 expands the anti-kickback
statute to certain other "Federal Health Care Programs," such as CHAMPUS.
In July 1991 and in November 1992, the Secretary of HHS published
regulations that create exceptions or "safe harbors" for certain business
transactions. 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. The Company seeks to structure its various
business arrangements to satisfy as many safe harbor elements as possible under
the circumstances, although not all of the Company's arrangements satisfy all of
the elements of a safe harbor. Although the Company has never been challenged
under any anti-kickback statute and the Company believes it has a reasonable
basis for concluding that it complies in all material respects with the federal
anti-kickback statute and all other applicable related laws and regulations,
there can be no assurance that the Office of the Inspector General (the "OIG")
within HHS or other governmental agency will not take a contrary position or
that the Company will not be required to change its practices in a manner which
will cause, or will not otherwise experience, a material adverse effect as a
result of any such challenge or any sanction which might be imposed.
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In July 1994, the Secretary of HHS proposed a rule that would modify the
original set of safe harbor provisions to give greater clarity to the rule
making's original intent. The proposed rule would make changes to the safe
harbors on personal services and management contracts, small entity investment
interests and space rentals, among others. The Company does not believe that its
current operations, as set forth above, would change if the proposed rule were
adopted in the form proposed. However, the Company cannot predict the outcome of
the rule making process or whether changes in the safe harbors rule will affect
the Company's position with respect to the federal anti-kickback statute.
Nephrologist Ownership. At the closing of the Combination and the
Company's recent mergers, shares of Common Stock were issued to certain
nephrologist owners of the facilities. In addition, pursuant to the terms of the
Company's agreements with its Medical Directors or their professional practice
groups, the Company pays fees for medical director services and has granted
options to purchase shares of Common Stock to individual Medical Directors or
their respective practice groups. Because these physicians refer to the
Company's centers, the federal anti-kickback statute could be found to apply to
referrals by nephrologists to the Company's facilities. However, the Company
believes these ownership relationships are in material compliance with the
federal anti-kickback statute. Also, the Company believes that the value of
Common Stock issued and options granted to nephrologists have and will be
consistent with the fair market value of assets transferred to, or services
performed by such nephrologists for, the Company and there is no intent to
induce referrals to the Company's facilities. There is a safe harbor for certain
investments in large public companies, and the Company believes that there are
good arguments that its physician ownership relationships meet at least a
majority of the criteria for this safe harbor. However, these relationships do
not satisfy all of the criteria of a safe harbor and there can be no assurance
that these relationships will not subject the Company to investigation or
prosecution by enforcement agencies.
Medical Director Relationships. The Conditions of Coverage under the
Medicare ESRD program mandate that treatment at a dialysis center be under the
general supervision of a medical director who is a licensed physician.
Generally, the medical director must be board eligible or board certified in
internal medicine or pediatrics and have had at least 12 months of experience or
training in the care of patients at ESRD centers. The Company has engaged
Medical Directors at each of its centers under contracts with physicians,
nephrologists or group practices. The compensation of the Medical Directors and
other physicians under contract with the Company is separately negotiated and
generally depends upon competitive factors in the local market, the physician's
professional qualifications and responsibilities and the size and utilization of
the center or relevant program. The aggregate compensation of the Medical
Directors and other physicians under contract with the Company is generally
fixed in advance for periods of one year or more by written agreement and is set
to reflect the fair market value of the services rendered and does not take into
account the volume or value of patients referred to the Company's facilities.
Because in all cases the Medical Directors and the other physicians under
contract with the Company refer patients to the Company's centers, the federal
anti-kickback statute could be found to apply. However, the Company believes it
has a reasonable basis for concluding that its contractual arrangements with
these physicians are in material compliance with the federal anti-kickback
statute. In all instances, the Company seeks to comply with the requirements of
the personal services and management contract safe harbor when entering into
agreements or contracts with its Medical Directors and other physicians.
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 and technical
personnel and technical services, and, in some 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 be found to apply. However, the Company believes it
has a reasonable basis for concluding that its contractual arrangements with
hospitals for acute inpatient dialysis services are in material compliance with
the federal anti-kickback statute. In all instances, the company seeks to comply
with the requirements of the personal services and equipment lease safe harbors
when entering into agreements or contracts for acute inpatient dialysis
services.
Certain Relationships with Laboratories, IDPN Suppliers, and
Hospitals. The Company enters into arrangements for purposes of obtaining
laboratory services. Such services include testing currently reimbursed
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<PAGE> 36
under the Medicare composite rate, as well as testing reimbursed separately from
the Medicare 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 center obtains discounts from a laboratory for testing encompassed
within the Medicare composite rate in return for referring all or most of the
dialysis center's non-composite rate testing to the laboratory. In addition, the
Company enters into arrangements with suppliers of IDPN. In May 1993, the OIG
issued a report indicating its belief that many ESRD patients receive IDPN
despite not meeting 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 centers for
administering IDPN to patients during dialysis could violate the federal
anti-kickback statute where the payments made to the dialysis centers are
unreasonably high (the report cited fees in the range of $30 per administration
as raising anti-kickback law questions). Moreover, the Company enters into acute
inpatient dialysis service arrangements under which the Company agrees to
provide a hospital with supervised emergency or acute inpatient dialysis
services, including qualified nursing and technical personnel and technical
services and, in some cases, equipment and supplies. 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 be found to apply.
The Company believes that the current arrangements of the Company with
nephrologist owners, medical directors, laboratories, IDPN suppliers, hospitals,
and other persons or entities who either refer patients to the Company's
dialysis centers or from whom the Company purchases items or services generally
are in material compliance with the federal anti-kickback statute. Specifically,
the Company believes that such arrangements now generally provide, and will
provide for reasonable compensation to or by the Company for the items and
services it buys from or furnishes to such persons or entities. Moreover, the
Company intends that IDPN therapy will be furnished in accordance with specified
utilization protocols consistent with Medicare coverage guidelines, and only to
patients for whom it is deemed medically necessary, as demonstrated by
physician-authorized Certificates of Medical Necessity. However, there can be no
assurance that the Company's future arrangements will not be challenged or
subject to sanctions for any of the Founding Companies' 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 operations, net
revenue and earnings.
Stark II
Provisions enacted as part of the Omnibus Budget Reconciliation Act of 1993
("Stark II") restrict 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. Provisions enacted as part of the Omnibus Budget Reconciliation Act of
1989 ("Stark I") imposing comparable restrictions to clinical laboratory
services became effective in 1992. Stark II provisions applicable to "designated
health services" that may be relevant to the Company became effective in January
1995.
A "financial relationship" under Stark II 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 practices. The Medical Directors or their professional practices
also will own shares, and options to purchase shares, of Common Stock.
Accordingly, the Medical Directors will have a "financial relationship" with the
company for purposes of Stark II.
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; prosthetic
devices; physical and occupational therapy services; outpatient prescription
drugs; durable medical equipment; and inpatient and outpatient hospital
services. Dialysis is not a designated health service under Stark II. However,
the Stark II 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
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<PAGE> 37
services are considered separately rather than collectively as dialysis. Under
the final Stark I regulations published in August 1995, HCFA provided an
exception from Stark I for clinical laboratory services reimbursed under the
Medicare "composite rate" for dialysis. The Company believes it likely that,
when final Stark II regulations are published, they will contain a similar
exception for "designated health services" reimbursed under the composite rate.
However, there can be no assurance that HCFA will adopt such a position. Even if
the final Stark II regulations contain such an exception, the Company's
provision of, or arrangement and assumption of financial responsibility for,
outpatient prescription drugs, including EPO, enteral and parenteral nutrients,
such as IDPN, clinical laboratory services, center dialysis services and
supplies, home dialysis supplies and equipment, and services to hospital
inpatients and outpatients, includes services and items that are reimbursed
separate from the Medicare composite rate and therefore are likely to be
construed to be "designated health services" within the meaning of Stark II. In
addition, the Company obtains clinical laboratory services from the laboratory
that currently is operated by Kidney Care, a tax exempt entity under Section
501(c)(3) of the Internal Revenue Code. The Company holds an option to purchase
the assets of this laboratory. The Company has also entered into a management
agreement under which it provides certain management and administrative
services, equipment and technical support to the laboratory for a fee. The
Company believes, based on the fact that there is no direct or indirect
physician ownership of the laboratory and that the option relates only to the
assets of the laboratory (and not the entity that owns them or any earnings
therefrom) and, with respect to the management agreement, that the terms of the
contract with the laboratory comply with the material provisions of the personal
services and equipment and space lease exceptions under Stark II, that there are
sound arguments that the existence of the option and the management agreement
will not create an indirect ownership or compensation arrangement between the
laboratory and the Company's nephrologist owners or Medical Directors that would
prohibit the Company's dialysis centers from obtaining services from this
laboratory that are reimbursed separate from the Medicare composite rate in the
absence of a Stark II exception. However, there can be no assurance that HCFA or
the OIG would adopt or agree with this position.
Although the Company has learned that HCFA officials responsible for
drafting implementing regulations for Stark II have tentatively taken the
informal position that administration of certain prescription drugs that would
not be needed but for a patient's need for dialysis (e.g., EPO) will not be
treated as outpatient prescription drugs subject to the Stark II prohibition on
self-referral, this informal position is not binding on HCFA, and there can be
no assurance that final Stark II regulations will adopt such a position. With
respect to the other items and services provided by the Company that are likely
to be deemed to be "designated health services" subject to the Stark II
prohibition, the language of Stark II and of the Stark I final regulation
suggest that the Company will not be permitted to offer such services in the
absence of a Stark II exception.
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: (a)
bona fide employment relationships; (b) personal services contracts; (c) space
and equipment leasing arrangements; (d) certain group practice arrangements with
a hospital that were in existence prior to December 1989; and (e) 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. The
Company believes that several of its financial relationships with referring
physicians will meet the criteria for an exception. For example, the company
believes, based on the language of Stark II, that its agreements with Medical
Directors of their professional practices materially satisfy the exception for
compensation pursuant to a personal services contract. Similarly, the company
believes, based in part on the legislative history to Stark II, that it has a
reasonable basis for concluding that its contractual relationships with
hospitals for acute inpatient dialysis services should be deemed to satisfy the
criteria for the exceptions for personal services or leased equipment
arrangements. In the case of certain other financial arrangements, however,
there may be no exception available.
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<PAGE> 38
Stark II also 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 $75.0 million in
stockholder equity at the end of the issuer's most recent fiscal year or on
average during the previous three (3) fiscal years. Prior to the Offering, the
Company has not had stockholder equity of at least $75.0 million, but expects
that the net proceeds to the Company from the Offering will enable it to meet
that requirement as of the end of 1996.
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 HHS to apply to the company's acute
dialysis arrangements with hospitals. However, Stark II contains exceptions for
certain equipment rental and personal services arrangements, and the company
believes it has a reasonable basis for concluding that its contractual
arrangements with hospitals for acute inpatient dialysis services are in
material compliance with the requirements of such exceptions to Stark II.
Consequently, if it were to apply, Stark II may require the Company to
restructure certain existing compensation agreements with its Medical Directors
or, in the alternative, to refuse to accept referrals for designated health
services from such physicians. Moreover, since Stark II prohibits Medicare or
Medicaid reimbursement of items or services provided pursuant to a prohibited
referral, and imposes substantial civil monetary penalties on entities which
present or cause to be presented claims for reimbursement in such cases, the
Company could be required to repay amounts reimbursed for items and services
that HCFA determines to have been furnished in violation of Stark II, and could
be subject to substantial civil monetary penalties, either or both of which
could have a material adverse effect on the Company's operations, net revenue or
earnings. The Company believes that if Stark II is interpreted to apply to the
Company's operations, the Company will be able on a prospective basis to bring
its financial relationships with referring physicians into material compliance
with the provisions of Stark II, including relevant exceptions, although
prospective compliance would not affect amounts or penalties determined to be
owed for past conduct, and there can be no assurance that such prospective
compliance, if possible, will not have a material adverse effect on the
Company's operations, net revenue or earnings. If Stark II is interpreted by HHS
to apply to the Company and the Company is determined to be liable for past
violations of Stark II by itself or one or more of the entities it has acquired,
the application of Stark II could have a material adverse effect on the Company.
STATE REFERRAL REGULATIONS
Several states have enacted statutes prohibiting physicians from holding
financial interests in various types of medical centers 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 state
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 is
interpreted to apply to the Company and the Company is determined to be liable
for violations of such state laws by itself or one or more of the entities it
has acquired, the application of such state laws could have a material adverse
effect on the Company.
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 payers) 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, or for medically unnecessary services may be excluded
from Medicare and Medicaid participation, required to repay previously collected
amounts, and/or subject to substantial civil monetary penalties. Although
dialysis centers are generally reimbursed by Medicare based upon prospectively
determined composite rates, the submission of Medicare cost reports and requests
for payments by dialysis centers will be covered by these laws. The Company
believes that it has procedures to
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ensure the accurate completion of cost reports and requests for payment.
However, there can be no assurance that cost reports or requests for payment
filed by the Company's dialysis centers will be materially accurate or will not
be subject to challenge under these laws. Furthermore, there can be no assurance
that cost reports or payment requests previously submitted by any of the
entities acquired by the Company will not be challenged under these laws. Any
such challenges, including any related sanctions which might be assessed, could
have a material adverse effect on the Company's operations, net revenue and
earnings.
STATE LAWS REGARDING PROVISION OF MEDICINE AND INSURANCE
The laws of many states prohibit physicians from splitting fees with
non-physicians and prohibit non-physician entities from practicing medicine.
These laws vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. Although the Company believes its
operations as currently conducted are in material compliance with existing
applicable laws, many aspects of the Company's business operations, including
the structure of the Company's relationship with physicians, have not been the
subject of state of federal regulatory interpretation. There can be no assurance
that review of the Company's business by courts or regulatory authorities will
not result in determinations that could materially adversely affect the
operations, revenues or net earnings of the Company or that the health care
regulatory environment will not change so as to restrict the Company's existing
operations or their expansion. In addition, expansion of the operations of the
Company to certain jurisdictions may require structural modifications of the
Company's form of relationships with physician groups, which could have a
material adverse effect on the operations, revenues and net earnings of the
Company.
Most states have laws regulating insurance companies and HMOs. The Company
is not qualified in any state to engage in the insurance or HMO business. As the
managed care business evolves, state regulators may begin to scrutinize the
practices of, and relationships between, third-party payers, medical service
providers and entities providing management and other services to medical
service providers with respect to the application of insurance and HMO laws and
regulations. The Company believes, based on its general knowledge of the health
care, HMO and insurance industries as operated in the states in which its
centers are located, that its practices are consistent with those of other
health care companies and should not subject it to such laws and regulations.
However, given the limited regulatory history with respect to such practices,
there can be no assurance that states will not attempt to regulate the Company
as an insurer or HMO. If the Company is subject to prosecution or other
enforcement proceeding by state regulatory agencies, it may be required to
change or discontinue certain practices which could have a material adverse
effect on the operations, revenues and net earnings of the Company.
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, among other reasons. 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. For example,
the 1995 budget reconciliation bill sent by Congress to the President (and
subsequently vetoed by the President) proposed extending the period during which
Medicare payment for ESRD would be secondary to a patient's employer group
health plan from 18 to 30 months. In addition, the conference report to the
reconciliation bill called for HHS to report to Congress not later than December
31, 1999 with recommendations on expanding the definition of individuals
eligible to enroll in the bill's proposed MedicarePlus managed care plans to
include ESRD patients, and the President's response would have immediately made
such persons eligible for participation in such plans.
The Health Insurance Portability and Accountability Act of 1996, signed
into law in August 1996, will, among other things, provide for insurance
portability for individuals who lose or change jobs, limit exclusions for
preexisting conditions, and establish a pilot program for medical savings
accounts. In addition, this legislation also greatly expands federal efforts at
combating health care fraud and abuse by making numerous amendments to the
Social Security Act and the federal criminal code. Among other things, the new
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<PAGE> 40
legislation creates a new "Health Care Fraud and Abuse Control Account,"
provides for the issuance of "advisory opinions" by the OIG regarding the
application of the anti-kickback statute, extends certain criminal penalties for
Medicare and Medicaid fraud to other federal health care programs, expands the
exclusion authority of the OIG, extends Medicare and Medicaid civil monetary
penalty provisions to other federal health care programs, increases the amounts
of civil monetary penalties, and establishes a criminal health care fraud
statute. Most of the Act's fraud and abuse provisions take effect on January 1,
1997.
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 operations, revenue or earnings.
OTHER REGULATIONS
The Company's operations are subject to various state hazardous waste
disposal laws. Those laws as currently in effect do not classify most of the
waste produced during the provision of dialysis services to be hazardous,
although disposal of non-hazardous medical waste is also subject to regulation.
OSHA regulations require employers of workers who are occupationally subject to
blood or other potentially infectious materials require employers of workers who
are occupationally subject to blood or other potentially infectious materials to
provide those workers with certain prescribed protections against blood borne
pathogens. These regulatory requirements apply to all health care centers,
including dialysis centers, and require employers to make a determination as to
which employees may be exposed to blood or other potentially infectious
materials and to have in effect a written exposure control plan. In addition,
employers are required to provide hepatitis B vaccinations, personal protective
equipment, infection control training, post-exposure evaluation and follow-up,
waste disposal techniques and procedures, and engineering and work practice
controls. Employers are also required to comply with certain record-keeping
requirements. Some states have established certificate of need ("CON") programs
regulating the establishment or expansion of health care centers, including
dialysis centers. The Company believes that it is in material compliance with
the foregoing laws and regulations.
The Company believes it is in material compliance with all applicable laws
and 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. Such
investigation could result in the imposition of any combination of the penalties
discussed above depending upon the agency involved in such investigation and
prosecution. None of the Company's business arrangements with physicians,
vendors, patients or others have been the subject of investigation by any
governmental authority. No assurance can be given that the Company's activities
will not be reviewed or challenged by regulatory authorities. The Company
monitors legislative developments and would seek to restructure a business
arrangement if the Company determined that one or more of its business
relationships placed it in material noncompliance with such a statute. The
Company believes that in the near future the health care service industry will
continue to be subject to substantial regulation at the federal and state
levels, the scope 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
revenues are derived would have a material adverse effect on its operations,
revenues and net earnings.
COMPETITION
The dialysis industry is fragmented and highly competitive. Competition for
qualified physicians to act as Medical Directors is also significant. According
to HCFA, there were in excess of 2,800 dialysis centers in the United States at
the end of 1995. The Company believes that approximately 38% were owned by
multi-center dialysis companies, 32% were owned by independent physicians and
30% were hospital-based centers. Certain 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 centers
and nephrology practices. The Company believes that competition for acquisitions
has increased the cost of acquiring dialysis centers and will likely increase
the cost of acquiring nephrology practices. The Company may also experience
competition from centers established by former Medical Directors or other
referring
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physicians. There can be no assurance that the Company will be able to compete
effectively with any such competitors.
PROPERTIES
Excluding the eight managed centers, the Company operates 77 dialysis
centers in 12 states, of which 58 are located in leased facilities and 19 are
owned. Certain of the premises are leased from physicians who practice at the
center and who are stockholders of the Company. The Company's leases generally
have terms ranging from one to 15 years and typically contain renewal options.
The sizes of the Company's centers range from approximately 400 to 17,000 square
feet. The Company leases office space in Nashville, Tennessee for its corporate
headquarters and university division under leases that expire in 2002 and 1999.
The Company considers its physical properties to be in good operating condition
and suitable for the purposes for which they are being used.
Expansion or relocation of the Company's dialysis centers would be subject
to compliance with conditions relating to participation in the Medicare ESRD
program. In states that require a certificate of need, approval of an
application submitted by the Company would be necessary for expansion or
development of a new dialysis center. The Company generally owns the equipment
used in its outpatient centers. The Company considers its equipment to generally
be in good operating condition and suitable for the purposes for which it is
being used.
LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business, including those arising from patient treatment, which the Company
believes will be covered by malpractice insurance. The Company is not currently
a party to any material legal actions.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth certain information concerning each of the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Harry R. Jacobson, M.D.(1)......... 49 Chairman of the Board
Sam A. Brooks, Jr.(1).............. 57 President, Chief Executive Officer and Director
Gary Brukardt...................... 50 Executive Vice President, Chief Operating Officer
Joseph A. Cashia................... 40 Senior Vice President -- Development
Ronald Hinds....................... 48 Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
Raymond Hakim, M.D., Ph.D.......... 51 Executive Vice President and Chief Medical Officer
John D. Bower, M.D.(1)............. 64 Vice Chairman of the Board
Joseph C. Hutts(2)(3).............. 55 Director
Kenneth Johnson, M.D............... 52 Director
Thomas A. Lowery, M.D.(3).......... 53 Director
Stephen D. McMurray, M.D.(2)....... 49 Director
W. Tom Meredith, M.D.(2)(3)........ 61 Director
</TABLE>
- ---------------
(1) Member of the Nominating Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Dr. Jacobson has been Chairman of the Board of Directors of the Company
since June 1995. He currently serves as Deputy Vice Chancellor for Health
Affairs at Vanderbilt University, a position he has held since August 1995, and
as Professor of Medicine and Director of the Division of Nephrology, Department
of Medicine, Vanderbilt University Medical Center, and Staff
Physician/Nephrologist, Veterans Administration Hospital in Nashville, positions
he has held since 1985. Dr. Jacobson received a B.S. degree from the University
of Illinois and his M.D. from the University of Illinois Abraham Lincoln School
of Medicine. He completed his internal medicine training at Johns Hopkins
Hospital and his nephrology training at Southwestern Medical School in Dallas,
Texas.
Mr. Brooks has been President and Chief Executive Officer of the Company
since June 1995, served as Treasurer from June 1995 to November 1995, and has
been President of Tennessee since February 1994. He also currently serves as
President of MedCare Investments Corp., a health care investment company, and
Chairman of the Board of National Imaging Affiliates, Inc., an owner of
outpatient diagnostic imaging centers, and has held such positions since June
1991 and April 1992, respectively. Mr. Brooks is a director of Kinetic Concepts,
Inc., a manufacturer and distributor of specialty hospital beds; Quorum Health
Group, Inc., an owner, operator and manager of acute care hospitals; Nationwide
Health Properties, Inc., a health care real estate investment trust; and PhyCor,
Inc., an operator of multi-specialty medical clinics.
Mr. Brukardt has been Executive Vice President and Chief Operating Officer
of the Company since August 1996. From 1991 to August 1996, Mr. Brukardt served
as Executive Vice President of Baptist Health Care Affiliates in Nashville,
Tennessee, where he was responsible for the development and operation of
physician practice management organizations and the management of four hospitals
and 22 outpatient facilities. In addition, from 1991 to August 1996, Mr.
Brukardt served as Chairman and President of HealthNet Management, Inc., a
managed care company.
Mr. Cashia has been Senior Vice President -- Development since June 1996
and served as Chief Operating Officer of the Company from June 1995 to June
1996. Mr. Cashia also has served as Chief Operating Officer of Tennessee since
April 1994. He served as Vice President of Operations for REN Corporation-USA,
an operator of dialysis centers and laboratories, from 1989 to 1993. Mr. Cashia
was
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<PAGE> 43
employed by Community Dialysis Centers (now Vivra, Inc.), a provider of
outpatient dialysis services, from 1983 to 1989 in various positions, the last
of which was Vice President of Western Region Operations. Mr. Cashia attended
the University of Alabama and received his nursing degree from Samford
University and his M.B.A. from Vanderbilt University's Owen Graduate School of
Management.
Mr. Hinds has been an Executive Vice President and Chief Financial Officer
of the Company since August 1995. He was an audit partner with Deloitte & Touche
LLP from 1981 to 1994 where he managed the health care practice of the Nashville
office. During his tenure at Deloitte & Touche, Mr. Hinds also served as a
Regional Health Care Partner for the firm. Mr. Hinds received his B.A. in
accounting from Middle Tennessee State University.
Dr. Hakim has been Executive Vice President and Chief Medical Officer of
the Company since June 1995. He has published extensively on the adequacy of
dialysis and the clinical aspects of bio-compatibility. From 1992 to 1995, Dr.
Hakim served as Medical Director for the Vanderbilt Dialysis Program. He served
as a member of the Medical Board of Vanderbilt in 1992, as Chairman of the
Ambulatory Services Committee of Vanderbilt in 1990 and 1991, and as Director,
Clinical Nephrology of Vanderbilt from 1987 to 1991. He received his M.S. from
Rensselaer Polytechnic Institute, his Ph.D. from Massachusetts Institute of
Technology and his M.D. from McGill University. Dr. Hakim performed his
residency at Royal Victoria Hospital and his renal fellowship at Brigham and
Women's Hospital.
Dr. Bower has been a director of the Company since January 1996. He is a
board certified nephrologist trained at Medical College of Virginia and has been
practicing in Mississippi since 1972. He has been a Professor of Medicine and
Chief, Division of Nephrology at University of Mississippi Medical Center since
July 1976 and June 1990, respectively. In addition, he has served as Chairman of
the Board and President of MEL since October 1977, and served as Chief Executive
Officer of MEL from December 1993 to January 1995. He also has served as
Chairman of the Board and President of Kidney Care since August 1973.
Mr. Hutts has been a director of the Company since December 1995. He has
been Chairman of the Board, President and Chief Executive Officer of PhyCor,
Inc., an operator of multi-specialty medical clinics, since 1988. Mr. Hutts was
formerly with Hospital Corporation of America in various positions, the last of
which was President, HCA Health Plans. From 1986 to 1988, Mr. Hutts was Vice
Chairman and Chief Operating Officer of Equitable HCA Corporation d/b/a Equicor.
Mr. Hutts serves on the board of directors of Response Technologies, Inc., a
provider of cancer treatment services, and Quorum Health Group, Inc.
Dr. Johnson has been a director of the Company since September 1996. He is
a board certified nephrologist trained at the University of Utah. In 1975, Dr.
Johnson was a founding partner of Arizona Nephrology Associates and RenalWest.
Dr. Johnson has served as the director of the Critical Care Units of two
hospitals and serves as chairman of several Departments of Medicine in the East
Valley area of Mesa, Arizona. Dr. Johnson is a member of the Medical Review
Board of the Regional End Stage Renal Disease Network.
Dr. Lowery has been a director of the Company since January 1996. He is a
board certified nephrologist trained at Baylor College of Medicine and the
University of Alabama, Birmingham. He has served on the Executive Committee of
Southwest Organ Bank and has been the Director of the Renal Transplant Program
of East Texas Medical Center in Tyler, Texas. In addition, he has been
practicing as a partner of Tyler since 1979.
Dr. McMurray has been a director of the Company since January 1996. He is a
board certified nephrologist trained at Indiana University Medical Center and
has been practicing nephrology in Fort Wayne, Indiana, since 1977. He has been
President of the Medical Staff at Lutheran Hospital in Fort Wayne, Indiana, and
has been affiliated with DMN since 1991.
Dr. Meredith has been a director of the Company since January 1996. He is a
board certified nephrologist and has been practicing in Wichita, Kansas, since
1969. He has been Clinical Associate Professor Department of Internal Medicine,
The University of Kansas School of Medicine, Wichita, since 1977. In addition,
he has been the President of Kansas since November 1979 and the President of
Kansas Nephrology Physicians, P.A. since August 1990.
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<PAGE> 44
BOARD OF DIRECTORS
Board Classes. The Company's Board of Directors is composed of three
classes, designated Class I, Class II and Class III. The initial term of the
Class I directors shall be until the 1997 annual meeting of stockholders of the
Company, the initial term of the Class II directors shall be until the 1998
annual meeting of the stockholders of the Company, and the initial term of the
Class III directors shall be until the 1999 annual meeting of the stockholders
of the Company. Each succeeding term of a director in Class I, Class II or Class
III shall be for three years or until his or her successor is elected.
Currently, the members of the three classes are as follows: Class I -- Mr.
Brooks and Dr. McMurray; Class II -- Mr. Hutts and Dr. Lowery; Class III -- Dr.
Jacobson, Dr. Bower, Dr. Meredith and Dr. Johnson.
Board Committees. The Board of Directors has established a Compensation
Committee, a Nominating Committee, and an Audit Committee. The Company's
Compensation Committee, composed solely of non-employee directors, is
responsible for establishing salaries, bonuses, and other compensation for the
Company's executive officers and administering any stock option and other
employee benefit plans of the Company. The Company's Nominating Committee is
responsible for considering nominations of Directors to the Company's Board of
Directors. The Company's Audit Committee, composed solely of nonemployee
directors, recommends the annual appointment of the Company's auditors, and, in
conjunction with such auditors, reviews the scope of audit and other assignments
and related fees, accounting principles used by the Company in financial
reporting and internal auditing procedures, and the adequacy of the Company's
internal control procedures.
Compensation of Directors. Employees of the Company who are members of the
Board of Directors of the Company do not receive any compensation for serving on
the Company's Board of Directors. Each non-employee member of the Board of
Directors receives a fee of $2,000 for each meeting of the Board of Directors
attended by such director, and $1,000 for each committee meeting not attended on
the same day as a meeting of the Board of Directors. All directors of the
Company, including members who are employees, receive reimbursement of
out-of-pocket expenses incurred in connection with attending Board of Directors
or committee meetings thereof. In February 1996, Dr. Jacobson was paid $75,000
by the Company for his efforts related to the initial public offering.
In January 1996, the Company adopted the Renal Care Group, Inc. 1996 Stock
Option Plan for Outside Directors (the "Director Plan") to provide for grants of
options to its non-employee directors. See "Management -- Stock Option and Stock
Purchase Plans." Supplemental to the Director Plan, Mr. Hutts has been granted
options to purchase an aggregate of 15,000 shares of Common Stock, of which
10,000 are exercisable at a price of $7.50 per share and 5,000 are exercisable
at $18.00 per share, and Dr. Jacobson has been granted options to purchase an
aggregate of 75,000 shares of Common Stock, of which 25,000 are exercisable at a
price of $7.50 per share and 50,000 are exercisable at $18.00 per share.
COMPENSATION OF EXECUTIVE OFFICERS
During 1996 Messrs. Brooks, Hinds, Brukardt and Cashia, and Dr. Hakim (the
"Named Executive Officers") will earn annual salaries of $250,000, $200,000,
$220,000, $184,000 and $200,000, respectively. See "Management -- Employment
Agreements" for more detail regarding these employment arrangements.
43
<PAGE> 45
OPTION GRANTS
The following table sets forth certain information concerning the grant of
options to purchase Common Stock to each of the Company's Named Executive
Officers.
OPTION GRANTS DURING 1995
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SHARES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES PRICE EXPIRATION -----------------------
NAME GRANTED IN 1995(2) ($/SHARE) DATE 5% 10%
- -------------------------- ---------- ----------- ---------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sam A. Brooks, Jr......... 250,000(3)(4) 37.1% $ 7.50 November 4, 2005 $1,179,177 $2,988,267
Joseph A. Cashia.......... --(5) -- -- -- -- --
Raymond Hakim, M.D........ 100,000(4)(6) 14.8 7.50 November 4, 2005 471,671 1,195,307
Ronald Hinds.............. 60,000(4)(6) 8.9 7.50 November 4, 2005 283,003 717,184
25,000(4)(6) 3.7 18.00 November 4, 2005 283,003 717,184
------- ----
Totals........... 435,000 64.5%
======= ====
</TABLE>
- ---------------
(1) The potential realizable value through the expiration date of the options
has been determined on the basis of the market price per share at the time
of grant compounded annually over the term of the option, net of the
exercise price. These values have been determined based upon assumed rates
of appreciation mandated by the Securities and Exchange Commission and are
not intended to forecast the possible future appreciation, if any, of the
price or value of the Common Stock.
(2) The number of options granted to all employees in 1995 includes options to
purchase 673,948 shares of Common Stock, but does not include options to
purchase 115,500 shares of the Common Stock of Tennessee granted in April
1994 and January 1995 that were assumed by the Company in the Combination
in February 1996 on a share-for-share basis.
(3) Does not include warrants to purchase 90,000 shares of the common stock of
Tennessee granted in February 1994 at a price of $10.00 per share that were
assumed by the Company in February 1996 on a share-for-share basis but with
an exercise price of $7.50 per share. These warrants were exercisable as of
the grant date.
(4) In the event of certain changes in control of the Company and the
termination of the employment of the optionee, or in the event of certain
changes in control of the Company that result in the Common Stock or stock
of a successor not being traded on a national securities market, these
options may accelerate and be "cashed out" under the circumstances
described under "Management -- Stock Option and Stock Purchase
Plans -- 1996 Stock Option Plan."
(5) Does not include the following options to purchase shares of the common
stock of Tennessee granted in April 1994 that were assumed by the Company
in February 1996 on a share-for-share basis: 30,000 shares at an exercise
price of $7.50 per share; 25,000 shares at an exercise price of $6.00 per
share; 20,000 shares at an exercise price of $3.50 per share; and 10,000
shares at an exercise price of $2.00 per share.
(6) Options are exercisable as to 20% of these shares as of the grant date, and
an additional 20% will vest on each of the first four anniversaries of the
grant date.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee are Joseph C. Hutts,
Stephen D. McMurray, M.D., and W. Tom Meredith, M.D. Mr. Brooks, the Chief
Executive Officer, President and a Director of the Company, is a member of the
board of directors of PhyCor, Inc., of which Mr. Hutts is the Chairman of the
Board, President and Chief Executive Officer. See "Certain Transactions."
EMPLOYMENT AGREEMENTS
The Company has entered into or assumed employment and non-competition
agreements with certain of its principal executive officers, including Messrs.
Brooks, Hinds, Brukardt and Cashia and Dr. Hakim, and with certain other key
personnel, except that Dr. Hakim's agreement does not contain non-competition
provisions. The Company has not and does not expect to enter into an employment
agreement with
44
<PAGE> 46
Dr. Jacobson, the Chairman of the Board, because he does not devote his full
time and attention to the affairs of the Company. Other than Dr. Hakim, each
Named Executive Officer's employment agreement contains restrictive covenants
prohibiting such officer from competing with the Company for a period of one
year after the end of the employment term. The terms of the employment
agreements commenced on February 12, 1996 and will continue for a term of three
years and successive one year renewal terms thereafter, except for Mr. Cashia's
which was assumed by the Company on February 12, 1996 and expires March 31,
1997, and Mr. Brukardt's which commenced on July 22, 1996 and will continue for
a term of three years and successive one year renewal terms thereafter.
The annual salaries of the Named Executive Officers as set forth in the
employment agreements are $250,000, $220,000, $200,000, $184,000 and $200,000
for Messrs. Brooks, Brukardt, Hinds and Cashia, and Dr. Hakim, respectively.
Each Named Executive Officer is eligible under his employment agreement for
bonuses at the sole discretion of the Company (up to a maximum, in Mr. Cashia's
agreement, of $50,000).
The employment agreements of Messrs. Brooks, Brukardt and Hinds, also
provide for severance for each such Named Executive Officer of (i) his salary
for 12 months if such officer is terminated without cause, (ii) his salary for
one month if such officer is terminated for cause, or (iii) his salary for 36
months if such officer is terminated within 12 months of certain changes in
control of the Company either (A) without cause, or (B) by resignation of the
officer as a result of declining to accept reassignment to a job that is not the
equivalent of his then current position. Dr. Hakim's employment agreement
contains similar severance provisions that become operative if he enters into a
non-competition agreement.
In addition to the above provisions, Mr. Brooks' employment agreement also
provides for (i) life insurance coverage of $2.0 million, (ii) long term
disability insurance of 60% of Mr. Brooks' annual base salary, (iii) an annual
bonus of 75% of his annual base salary to be earned if the Company meets or
exceeds its earning per share projections as approved by the Compensation
Committee, (iv) a $100,000 payment for efforts related to the initial public
offering, paid out of the proceeds of the initial public offering, and (v)
severance as provided above but based upon his salary plus his prior year's
bonus instead of just his salary.
The Company assumed the employment agreement between Tennessee and Mr.
Cashia dated April 4, 1994. Mr. Cashia's agreement provides for severance of his
salary for 12 months and the amount of any bonus paid to Mr. Cashia in the prior
year, and medical coverage during such 12 months for himself and his family if
he is terminated without cause (as defined in his agreement).
STOCK OPTION AND STOCK PURCHASE PLANS
Amended and Restated 1996 Stock Option Plan
In January 1996, the Company adopted the Renal Care Group, Inc. 1996 Stock
Option Plan (the "Employee Plan"), which was amended and restated effective
September 1996. Under the Employee Plan, options to purchase a total of
1,000,000 shares of Common Stock were reserved for grant to eligible employees
and consultants of the Company. Options granted under the Employee Plan may
qualify as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or nonqualified stock options. Any key
employee or consultant of the Company selected by the Compensation Committee
will be eligible for grants under the Employee Plan. The Compensation Committee
will determine the number of shares of Common Stock subject to each grant and
prescribe the other terms and conditions of each grant. Options will become
exercisable and expire at such time and in such installments as the Compensation
Committee shall determine.
The Board of Directors, in its discretion, may amend, terminate or modify
the Employee Plan from time to time without stockholder approval; provided,
however, that the Committee may condition any amendment on the approval of
stockholders if such approval is necessary or deemed advisable with respect to
tax, securities or other applicable laws, policies or regulations. No
termination, amendment or modification of the Employee Plan shall adversely
affect any option previously granted under the plan, without the written consent
of the option holder.
45
<PAGE> 47
In the event of a change of control of the Company (as defined in the
Employee Plan), the Employee Plan requires that upon the termination of
employment of any employee option holder within 12 months after such change in
control (except for terminations for death, certain disabilities, cause, or
certain resignations), any vesting of such employee's outstanding options under
the Employee Plan will accelerate and the Company or its successor must "cash
out" such options by paying such employee an amount for each share subject to
such options equal to the difference of (i) the greater of the fair market value
of a share of Common Stock on the date of termination or the highest closing
price per share of Common Stock during the 90 day period ending on the date of
the change in control of the Company, minus (ii) the exercise price. In
addition, upon any such change in control of the Company that results in the
Common Stock or the stock of any successor to the Company ceasing to be publicly
traded in a national securities market, the foregoing acceleration and "cash
out" provisions (except that the "cash out" value is measured solely by the
difference of (i) the highest closing price per share of Common Stock during the
90 day period ending on the date of the change in control of the Company, minus
(ii) the exercise price) will be triggered for all outstanding option holders
under the Employee Plan unless otherwise determined by the Board of Directors.
1996 Stock Option Plan For Outside Directors
In January 1996, the Company adopted the Director Plan and reserved 100,000
shares of Common Stock for issuance to non-employee directors of the Company
thereunder. The Director Plan provides for grants of options to purchase 2,500
shares of Common Stock to "outside directors" who have been directors for at
least six months on the day after each annual meeting of stockholders of the
Company, and for grants of options to purchase 5,000 shares of Common Stock to
"outside directors" on the day such persons first become directors of the
Company. For purposes of the Director Plan, "outside director" means any
non-employee director who is not the Chairman or Vice Chairman of the Board and
who also is not a party to, and whose medical practice is not a party to, a then
currently effective Medical Director Agreement with the Company. The option
price for each option granted under the Director Plan will be equal to 100% of
the fair market value on the date of grant. An option under the Director Plan
will be immediately exercisable and will remain exercisable for ten years from
the date of grant. In the event of a change of control of the Company (as
defined in the Director Plan) that results in the Common Stock or the stock of
any successor to the Company ceasing to be publicly traded or quoted in a
national securities market, the Director Plan requires that the Company or its
successor must "cash out" such options by paying the director an amount for each
share subject to such options equal to the difference of the highest closing
price per share of Common Stock during the 90 day period ending on the date of
the change in control of the Company, minus the exercise price.
Amended and Restated Employee Stock Purchase Plan
The Renal Care Group, Inc. Amended and Restated Employee Stock Purchase
Plan (the "Purchase Plan") was adopted in January 1996 and became effective
February 6, 1996. A total of 300,000 shares of Common Stock have been reserved
for issuance under the Purchase Plan, which is intended to qualify under Section
423 of the Code. The Purchase Plan allows participants to purchase shares of
Common Stock in connection with option periods commencing January 1 and ending
the following December 31 (except the first option period which commenced
February 6, 1996 and ends December 31, 1996).
The Purchase Plan permits eligible employees of the Company and certain of
its subsidiaries to purchase Common Stock through payroll deductions, which may
not exceed 10% of the employee's base compensation, at a price equal to 85% of
the fair market value of the Common Stock at the beginning of the option period
or at the end of the option period, which ever is lower (subject to a minimum
price specified in the Purchase Plan). Employees are eligible to participate in
the Purchase Plan if they are employed by the Company or a participating
subsidiary for at least 20 hours per week and more than five months in any
calendar year and have been employed for at least six months since their last
date of hire, except that credit is given for service with acquired companies.
In the event of a change of control of the Company (as defined in the
Purchase Plan), each option under the Purchase Plan will (if the Company is the
surviving corporation) pertain to and apply to the securities to which a holder
of the number of shares of the Company subject to such option would have been
entitled in such transaction. If the Company is not the surviving corporation in
such change in control, then all options
46
<PAGE> 48
under the Purchase Plan will terminate, provided that the Compensation Committee
may determine that such options shall be exercisable on the day prior to such
change in control transaction.
CERTAIN TRANSACTIONS
CONSIDERATION FOR FOUNDING COMPANIES
In connection with the Combination, and as consideration for their
interests in the Founding Companies, certain officers, directors and holders of
5% or more of the Common Stock received cash (excluding $7.0 million of
contingent payments), shares of Common Stock (valued at the initial public
offering price of $18.00 per share) and notes approximately as follows: Harry R.
Jacobson, M.D. (Chairman of the Board) -- $2,674,000; Sam A. Brooks, Jr.
(President, Chief Executive Officer and Director) -- $1,337,000 (received in the
form of shares of Common Stock, as to which Mr. Brooks disclaims beneficial
ownership because the shares are held in a trust of which Mr. Brooks' daughter
is the sole beneficiary); Dr. Bower -- $13,436,000; Dr. McMurray -- $3,581,000;
Dr. Meredith -- $6,888,000; Dr. Lowery -- $5,281,000; and Kidney Care --
$31,783,000. In addition, the Company assumed indebtedness for which certain
officers, directors and holders of 5% or more of the Common Stock or their
Founding Companies were obligated approximately as follows: Dr.
Bower -- $2,244,000; Dr. McMurray -- $6,618,000; and Dr. Lowery -- $2,300,000,
all of which indebtedness was repaid with a portion of the proceeds of the
Company's initial public offering.
TENNESSEE WARRANTS
Various options and warrants of Tennessee outstanding at the time of the
Combination were assumed by the Company, on a share-for-share basis unadjusted
for the exchange rate in the transactions with Tennessee in the Combination. In
addition, the exercise price of the outstanding warrants of Tennessee was
reduced from $10.00 to $7.50 per share upon consummation of the Combination. Sam
A. Brooks, Jr., and Harry R. Jacobson, M.D., hold warrants for the purchase of
90,000 and 70,000 shares, respectively.
ISSUANCE OF CONVERTIBLE NOTES
The Company issued $1.38 million of Convertible Notes on December 7, 1995
to provide funds to complete the Combination and its initial public offering.
Certain executive officers, directors and holders of 5% or more of the Common
Stock purchased (and currently own) Convertible Notes as follows: Dr. Bower --
$100,000 (7.2% of the outstanding); Dr. McMurray -- $20,000 (1.4% of the
outstanding); Dr. Meredith -- $120,000 (8.7% of the outstanding); Dr.
Lowery -- $100,000 (7.2% of the outstanding); and Kidney Care -- $160,000 (11.6%
of the outstanding). The executive officers and directors as a group purchased
(and currently own) $340,000 of Convertible Notes (24.6% of the outstanding).
The Convertible Notes bear interest at 7.0% and, if not previously converted,
mature on December 7, 1996. The holders may convert the principal balance and
accrued interest into Common Stock at $7.50 per share and the Company may redeem
the Convertible Notes at par plus accrued interest. The shares of Common Stock
into which the Convertible Notes may be converted are eligible for the "piggy
back" registration rights applicable to the shares acquired by such holders in
the Combination.
MEDICAL DIRECTOR ARRANGEMENTS
Dr. McMurray is a member of Indiana Dialysis Management, P.C., a practice
group currently consisting of four nephrologists. The Company entered into a
Medical Director agreement dated February 12, 1996 with such practice group that
has a term of seven years with successive renewal terms of three years each and
provides for medical director fees of $228,000 in year one, $277,000 in year
two, and $326,000 in year three and each year thereafter in effect. In addition,
pursuant to the terms of such Medical Director agreement, on February 12, 1996,
the Company granted to such practice an option to purchase 37,500 shares of
Common Stock with an exercise price of $18.00 per share. See
"Business -- Operations -- Relationships with Referral Sources, Medical
Directors."
Dr. Meredith is a member of Kansas Nephrology Physicians, P.A., a practice
group currently consisting of four nephrologists. The Company entered into a
Medical Director agreement dated February 12, 1996 with
47
<PAGE> 49
such practice group that has a term of seven years with successive renewal terms
of three years each and provides for medical director fees of $245,000 in year
one, $289,000 in year two, and $350,000 in year three and each year thereafter
in effect. In addition, pursuant to the terms of such Medical Director
agreement, on February 12, 1996 the Company granted to such practice an option
to purchase 37,500 shares of Common Stock with an exercise price of $18.00 per
share. See "Business -- Operations -- Relationships with Referral Sources,
Medical Directors."
Dr. Lowery is a member of Tyler Dialysis & Transplant Associates, P.A., a
practice group currently consisting of five nephrologists. The Company entered
into a Medical Director agreement with such practice group dated February 12,
1996 that has a term of seven years with successive renewal terms of three years
each and provides for medical director fees of $274,000 in year one, $333,000 in
year two, and $392,000 in year three and each year thereafter in effect. In
addition, pursuant to the terms of such Medical Director agreement, on February
12, 1996, the Company granted to such practice an option to purchase 37,500
shares of Common Stock with an exercise price of $18.00 per share. See
"Business -- Operations -- Relationships with Referral Sources, Medical
Directors."
Dr. Bower is a party to an agreement with the Company dated February 12,
1996 to serve as Chief Medical Officer of the Company's centers in Mississippi
for which he is compensated $100,000 annually through February 2000. The
agreement has a term of four years with successive annual renewals.
Dr. Johnson is a party to a Medical Director Services Agreement with
several additional nephrologists dated September 30, 1996 that has a term of
seven years with successive renewal terms of three years each and provides for
medical director fees of $840,000 per year. See
"Business -- Operations -- Relationships with Referral Sources, Medical
Directors."
The Company believes that each of the foregoing Medical Director Agreements
were obtained on terms no less favorable to the Company than could be obtained
from unaffiliated third parties. The terms of each such Medical Director
Agreement were determined by arm's-length negotiations between the Company and
the practices, and such terms were subject to scrutiny and negotiations with
representatives of the Founding Companies in connection with the Combination.
LABORATORY MANAGEMENT AGREEMENT
The Company entered into an agreement with Kidney Care dated February 12,
1996, pursuant to which the Company provides certain business, management,
administrative and equipment maintenance services to Kidney Care's clinical
laboratory located in Jackson, Mississippi. The agreement has a term of one year
with a provision for automatic renewal for an additional one year term. In
consideration for the management services provided by the Company, Kidney Care
has agreed to pay the Company a fixed management fee of $250,000 per year and to
reimburse the Company for its expenses in providing services under the
agreement, including the cost of certain employees, laboratory supplies and
equipment maintenance.
DEVELOPMENT SERVICES
In connection with development services provided, and to be provided, to
the Company, the Company has granted options with an exercise price equal to
$18.00 per share to purchase 30,000, 20,000 and 20,000 shares of Common Stock to
Drs. Bower, Lowery and McMurray, respectively.
PURCHASE OF REAL PROPERTY
The Company has purchased certain real property owned by Dr. Bower on which
certain of the centers previously operated by Kidney Care are located. The
purchase price was paid by the Company by the issuance of 68,000 shares of
Common Stock valued at the initial public offering price of $18.00 per share
plus the assumption of approximately $1.1 million of indebtedness incurred by
Dr. Bower to finance such property. The consideration paid to Dr. Bower for the
real estate was determined by arm's-length negotiations between the Company and
Dr. Bower, and such consideration was subject to scrutiny by and negotiations
with representatives of the Founding Companies.
48
<PAGE> 50
LEASES OF REAL PROPERTY
Pursuant to a lease agreement dated February 12, 1996, the Company leases
from an affiliate of Dr. Bower approximately 20,000 square feet of
administrative and other space used by the Company for the operation of the
centers acquired from KidneyCare. The lease is a triple net lease at a rate of
approximately $6.00 per square foot per year, or a gross payment of
approximately $10,000 per month. The lease contains an initial term of ten years
and two five-year renewal options.
Dr. Lowery owns a 25% interest in certain real property and improvements
used in connection with the operation of two of Tyler's centers. Pursuant to a
lease agreement dated February 12, 1996, the Company leases those centers which
are located in Carthage and Tyler, Texas. Each lease is a triple net lease with
rent payable at $12.00 per square foot per year. The Tyler lease requires a
gross payment of $20,092 per month, and the Carthage lease requires a gross
payment of $2,479 per month. Each lease has an initial term of ten years with
two additional five-year renewal options. The amount of rent is subject to a
consumer price index adjustment after the initial five-year period. In addition,
the Company has subleased back to Tyler Nephrology Associates, Inc. a portion of
the Tyler center on terms substantially similar to those contained in the lease
of such center to the Company.
Dr. Meredith owns a one-third interest in a partnership that subleases to
the Company approximately 4,100 square feet for its Dodge City, Kansas center.
The sublease, dated February 12, 1996, has a term of five years, with five
additional options to renew for periods of five years. The sublease is a double
net sublease with a base rent payment of approximately $3,300 per month,
adjusted at the commencement of each extended term by a factor based on the
consumer price index.
EMPLOYMENT AGREEMENT
Ann N. Bower, Dr. Bower's daughter, is a party to an employment agreement
dated February 12, 1996 with the Company with an annual base salary of $125,000
and having a term of three years, renewable thereafter for successive one-year
terms. Ms. Bower serves as the chief operating officer of the Company's
Mississippi operations.
RELATIONSHIP WITH VANDERBILT UNIVERSITY
Dr. Jacobson currently serves as Deputy Vice Chancellor of Health Affairs
at Vanderbilt University and as Professor of Medicine and Director of the
Division of Nephrology, Department of Medicine, Vanderbilt University. On
February 12, 1996, the Company assumed a Dialysis Center Management Agreement
with Vanderbilt University Medical Center pursuant to which the Company manages
its outpatient dialysis center. The Company received revenues of approximately
$132,500 pursuant to this agreement for the six months ended June 30, 1996. Such
agreement has a one-year term that is automatically renewed each year unless
either party cancels the agreement at least 90 days prior to the end of the
current term. Vanderbilt University owns approximately 247,616 of the
outstanding shares of the Company.
SUPPLY RELATIONSHIP
The Company has entered into an agreement dated February 12, 1996, with
Healthcare Suppliers, Inc. ("HSI"), a former affiliate of Kidney Care, pursuant
to which the Company is obligated, for a period of 18 months, to purchase most
of the dialysis and related supplies required for its Kidney Care centers at
pre-determined prices no greater than the best prices available to any other
Founding Company as of November 1995. The Company believes it will purchase
approximately $5.0 million of supplies from HSI during the 18-month term of the
agreement.
COMPANY POLICY
The Company has adopted a policy pursuant to which transactions with
affiliates (other than those entered into pursuant to the Combination) must be
reviewed by the Audit Committee and approved by a majority of the disinterested
members of the Board of Directors and will be made on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
49
<PAGE> 51
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Common Stock (i) as of October 7, 1996, and as adjusted to
reflect the sale of Common Stock offered hereby by: (i) each person or entity
known by the Company to own beneficially 5% or more of the Common Stock, (ii)
each Named Executive Officer and director of the Company, (iii) by each of the
Selling Stockholders, and (iv) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR OWNERSHIP AFTER
TO OFFERING(1) NUMBER OF OFFERING(1)
------------------- SHARES BEING -------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Kidney Care, Inc.(2)........................ 891,114 7.1%
Harry R. Jacobson, M.D.(3).................. 237,662 1.9
Sam A. Brooks, Jr.(4)....................... 340,000 2.6
Gary Brukardt(5)............................ 20,000 *
Joseph A. Cashia(6)......................... 55,000 *
Ronald Hinds(7)............................. 29,000 *
Raymond Hakim, M.D., Ph.D.(8)............... 49,229 *
John D. Bower, M.D.(9)...................... 829,925 6.6
Joseph C. Hutts(10)......................... 9,000 *
Kenneth E. Johnson, M.D. ................... 367,180 2.9
Thomas A. Lowery, M.D.(11).................. 283,991 2.3
Stephen D. McMurray, M.D.(12)............... 179,211 1.4
W. Tom Meredith, M.D.(13)................... 263,882 2.1
Directors and Executive Officers as a Group
(10 persons)(14).......................... 2,664,090 25.0
</TABLE>
- ---------------
* Less than 1% of the outstanding Common Stock.
(1) Applicable percentage of ownership prior to the Offering is based upon
12,625,954 shares of Common Stock outstanding. Applicable percentage of
ownership after the Offering is based upon 14,125,954 shares of Common
Stock outstanding. Information relating to the beneficial ownership of
Common Stock by the above individuals is based upon information furnished
by each such individual using "beneficial ownership" concepts set forth in
rules promulgated by the Securities and Exchange Commission under Section
13(d) of the Securities Exchange Act of 1934, as amended. Except as
indicated in other footnotes to this table, the above individuals possessed
sole voting and investment power with respect to all shares set forth by
their names, except to the extent such power is shared by a spouse under
applicable law. Any security that any person named above has the right to
acquire within 60 days is deemed to be outstanding for purposes of
calculating the percentage ownership of such person, but is not deemed to
be outstanding for purposes of calculating the ownership percentage of any
other person.
(2) The address of Kidney Care, Inc. is 3925 West Northside Drive, Jackson,
Mississippi 39209. Includes 34,666 shares of Common Stock that could be
acquired upon the conversion of Convertible Notes, which are presently
convertible. Kidney Care, Inc. is a not-for-profit corporation that has
eight members of its Board of Directors, only one of which, Dr. Bower, is
affiliated with the Company. See note 8 to this table.
(3) Includes 70,000 shares of Common Stock which may be acquired upon exercise
of immediately exercisable warrants. Includes 20,000 Shares of Common Stock
which may be acquired upon exercise of options exercisable within 60 days.
Does not include 55,000 shares of Common Stock which may be acquired upon
exercise of options not exercisable within 60 days.
(4) Includes 90,000 shares of Common Stock which may be acquired upon exercise
of immediately exercisable warrants and 250,000 shares of Common Stock
which may be acquired upon exercise of options exercisable within 60 days.
50
<PAGE> 52
(5) Includes 20,000 shares of Common Stock which may be acquired upon exercise
of options. Does not include 80,000 shares of Common Stock that are not
exercisable within 60 days.
(6) Includes 55,000 shares of Common Stock which may be acquired upon exercise
of options. Does not include 30,000 shares of Common Stock that are not
exercisable within 60 days.
(7) Includes 29,000 shares of Common Stock which may be acquired upon exercise
of options exercisable within 60 days. Does not include 56,000 shares of
Common Stock which may be acquired upon exercise of options that will not
be exercisable within 60 days.
(8) Includes 40,000 shares of Common Stock which may be acquired upon exercise
of options that will be exercisable within 60 days. Does not include 60,000
shares of Common Stock which may be acquired upon exercise of options that
will not be exercisable within 60 days.
(9) Dr. Bower's address is 3925 West Northside Drive, Jackson, Mississippi
39209. Includes 13,333 shares of Common Stock that could be acquired upon
the conversion of Convertible Notes, which are presently convertible.
Includes 7,500 shares of Common Stock which may be acquired upon exercise
of options exercisable within 60 days. Does not include 30,500 shares of
Common Stock which may be acquired upon exercise of options that will not
be exercisable within 60 days. Dr. Bower is a director of Kidney Care, Inc.
Dr. Bower disclaims beneficial ownership of the shares held by Kidney Care,
Inc. and such shares are not included in Dr. Bower's holdings.
(10) Includes 9,000 shares of Common Stock which may be acquired upon exercise
of options that will be exercisable within 60 days. Does not include 6,000
shares of Common Stock which may be acquired upon exercise of options that
will not be exercisable within 60 days.
(11) Includes 13,333 shares of Common Stock that could be acquired upon the
conversion of Convertible Notes, which are presently convertible and 4,000
shares of Common Stock which may be acquired upon exercise of options
exercisable within 60 days. Does not include 16,000 shares of Common Stock
which may be acquired upon exercise of options that will not be exercisable
within 60 days.
(12) Includes 2,666 shares of Common Stock that could be acquired upon the
conversion of Convertible Notes, which are presently convertible. Includes
4,000 shares of Common Stock which may be acquired upon exercise of options
exercisable within 60 days. Does not include 16,000 shares of Common Stock
which may be acquired upon exercise of options that will not be exercisable
within 60 days.
(13) Includes 16,000 shares of Common Stock that could be acquired upon the
conversion of Convertible Notes, which are presently convertible.
(14) Includes 658,503 shares of Common Stock which may be acquired upon exercise
of options and warrants.
51
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
The following summary is a description of certain provisions of the
Company's Amended and Restated Certificate of Incorporation. Such summary does
not purport to be complete and is subject to, and is qualified in its entirety
by, all of the provisions of the Company's Amended and Restated Certificate of
Incorporation.
The Company's authorized capital stock consists of 22,000,000 shares, $.01
par value, of Common Stock and 10,000,000 shares of Preferred Stock, $.01 par
value ("Preferred Stock"). Upon completion of the Offering, the Company will
have outstanding 14,125,954 shares of Common Stock (14,575,954 if the
Underwriters' over-allotment option is exercised in full) and no shares of
Preferred Stock. As of October 7, 1996, there are approximately 1,800 record
holders of Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders and are not entitled to cumulative voting
in the election of directors. The holders of Common Stock are entitled to share
ratably in dividends, if any, as may be declared from time to time by the Board
of Directors in its discretion out of funds legally available therefor. The
Company currently anticipates that all of its earnings will be retained to
finance the growth and development of its business and, therefore, does not
anticipate that any cash dividends will be declared on the Common Stock in the
foreseeable future. The holders of Common Stock are entitled to share ratably in
any assets remaining after satisfaction of all prior claims upon liquidation of
the Company. The Company's Amended and Restated Certificate of Incorporation
gives holders of Common Stock no preemptive or other subscription or conversion
rights, and there are no redemption provisions with respect to such shares. All
outstanding shares of Common Stock are, and the shares offered hereby will be,
when issued and paid for, fully paid and nonassessable. The rights, preferences,
and privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of Preferred Stock
which the Company may designate and issue in the future. See "Dividend Policy."
PREFERRED STOCK
Subject to conditions specified in the Company's Amended and Restated
Certificate of Incorporation, the Delaware General Corporation Law ("DGCL") and
other applicable law, the Board of Directors has the authority to issue
undesignated Preferred Stock in one or more class or series and to determine the
dividend rights, dividend rate, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, sinking fund provisions, number of
shares constituting any class or series, and designations of such class or
series without any further vote or action by the stockholders of the Company.
The Company has no present intention to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock is to enable the Board
of Directors to render more difficult or to discourage an attempt to obtain
control of the Company by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of the Company's management.
For example, the Company could issue a series of preferred stock having
characteristics that would make a takeover prohibitively expensive. The issuance
of shares of the Preferred Stock pursuant to the Board of Directors' authority
described above may adversely affect the rights of the holders of Common Stock.
For example, Preferred Stock issued by the Company may rank senior to the Common
Stock as to dividend rights, liquidation preference or both, may have full or
unlimited voting rights and may be convertible into shares of Common Stock.
Accordingly, the issuance of shares of Preferred Stock may discourage bids for
the Common Stock or may otherwise adversely affect the market price of the
Common Stock.
SPECIAL PROVISIONS OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws may be deemed to have an anti-takeover effect or may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in such stockholder's best interest, including those attempts
that might result in a premium over the market price for the shares held by a
stockholder.
52
<PAGE> 54
Delaware Anti-Takeover Law. Section 203 of the DGCL ("Section 203")
applies to the Company and generally provides that a person who, together with
affiliates and associates owns, or within three years did own, 15% or more of
the outstanding voting stock of a corporation subject to the statute (an
"Interested Stockholder") but less than 85% of such stock may not engage in
certain business combinations with the corporation for a period of three years
after the date on which the person became an Interested Stockholder unless (i)
prior to such date, the corporation's board of directors approved either the
business combination or the transaction in which the stockholder became an
Interested Stockholder, (ii) the Interested Stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes such person an Interested Stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans), or (iii) subsequent to such date, the
business combination is approved by the corporation's board of directors and
authorized at a stockholders' meeting by a vote of at least two-thirds of the
corporation's outstanding voting stock not owned by the Interested Stockholder.
Section 203 defines the term "business combination" to encompass a wide variety
of transactions with or caused by an Interested Stockholder, including mergers,
asset sales, and other transactions in which the Interested Stockholder receives
or could receive a benefit on other than a pro rata basis with other
stockholders.
The Company's stockholders, by adopting an amendment to the Certificate of
Incorporation, may elect not to be governed by Section 203, which election would
be effective 12 months after such adoption. Neither the Amended and Restated
Certificate of Incorporation nor the Bylaws presently exclude the Company from
the restrictions imposed by Section 203, and the restrictions imposed by Section
203 apply to the Company. The provisions of Section 203 could delay or frustrate
a change in control of the Company, deny stockholders the receipt of a premium
on their Common Stock and have a depressing effect on the market price of the
Common Stock. The provisions also could discourage, impede or prevent a merger,
tender offer or proxy contest, even if such event would be favorable to the
interests of stockholders.
Classified Board of Directors. The Amended and Restated Certificate of
Incorporation of the Company provides for the Board of Directors to be divided
into three classes of directors serving staggered three-year terms. A director
may be removed from office prior to the expiration of his or her term only "for
cause," so any person acquiring control of the Company would need three annual
meetings to replace all of the members of the Board of Directors. The classified
board provision of the Company's Amended and Restated Certificate of
Incorporation could have the effect of making the removal of incumbent directors
more time-consuming and difficult, and, therefore discouraging a third party
from making a tender offer or otherwise attempting to obtain control of the
Company, even though such an attempt might be beneficial to the Company and its
stockholders. Thus, the classified board provision could increase the likelihood
that incumbent directors will retain their positions. The Company believes that
a classified Board of Directors will help to assure the continuity and stability
of the Board of Directors and of the business strategies and policies of the
Company as determined by the Board of Directors. See "Management -- Board of
Directors."
Number of Directors; Removal; Filling Vacancies. The Amended and Restated
Certificate of Incorporation and Bylaws of the Company provide that the number
of directors will be fixed from time to time with the consent of two-thirds of
the Board of Directors. Moreover, the Amended and Restated Certificate of
Incorporation provides that directors may only be removed with cause by the
affirmative vote of the holders of at least a majority of the outstanding shares
of capital stock of the Company then entitled to vote at an election of
directors. This provision prevents stockholders from removing any incumbent
director without cause and allows two-thirds of the incumbent directors to add
additional directors without approval of stockholders until the next annual
meeting of stockholders at which directors of that class are elected.
Advance Notice of Nominations and Stockholder Proposals. The Company's
Bylaws contain a provision requiring at least 60 but no more than 90 days'
advance notice by a stockholder of a proposal or director nomination that such
stockholder desires to present at any annual or special meeting of stockholders,
which would prevent a stockholder from making a proposal or a director
nomination at a stockholder meeting without the Company having advance notice of
the proposal or director nomination. This provision could make a change in
control more difficult by providing the directors of the Company with more time
to prepare an opposition to a proposed change in control.
53
<PAGE> 55
Vote Requirement for Calling Special Meeting. The Company's Bylaws also
contain a provision requiring the vote of the holders of two-thirds of the
outstanding Common Stock in order to call a special meeting of stockholders.
This provision would prevent a stockholder with less than a two-thirds interest
from calling a special meeting to consider a merger unless such stockholder had
first garnered adequate support from a sufficient number of other stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitations of Director Liability. Section 102(b)(7) of the DGCL ("Section
102(b)") authorizes corporations to limit or to eliminate the personal liability
of directors to corporations and their stockholders for monetary damages for
breach of directors' fiduciary duty of care. Although Section 102(b) does not
change directors' duty of care, it enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Company's
Amended and Restated Certificate of Incorporation limits the liability of
directors to the Company or its stockholders to the full extent permitted by
Section 102(b). Specifically, directors of the Company are not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability: (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL, or (iv) for any transaction
from which the director derived an improper personal benefit.
Indemnification. To the maximum extent permitted by law, the Amended and
Restated Certificate of Incorporation of the Company provides for mandatory
indemnification of directors and officers of the Company against an expense,
liability and loss to which they may become subject, or which they may incur as
a result of being or having been a director or officer of the Company. In
addition, the Company must advance or reimburse directors and officers for
expenses incurred by them in connection with indemnifiable claims.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Union
National Bank of North Carolina.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock into the public market after
the Offering, or the perception that such sales could occur, could adversely
affect the prevailing market price for the Common Stock and the ability of the
Company to raise equity capital. The Company can make no prediction as to the
effect, if any, that the sale or availability for future sale of shares of
additional Common Stock will have on the market price of the Common Stock
prevailing from time to time.
Upon completion of the Offering, the Company will have 14,125,954 shares of
Common Stock outstanding (assuming no exercise of options or warrants and no
conversion of any Convertible Notes after the date of this Prospectus). The
3,000,000 shares sold in the Offering (plus any additional shares sold upon
exercise of the Underwriters' over-allotment option) and the 4,485,000 shares of
Common Stock sold in the initial public offering are freely tradable, except
that any shares purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act of 1933, as amended,
("Affiliates"), may generally only be sold in compliance with the limitations of
Rule 144 ("Rule 144") under the Securities Act of 1933, as amended (the
"Securities Act"), as described below.
The remaining 6,640,954 shares of Common Stock outstanding are not
registered under the Securities Act, and, accordingly, such shares may not be
sold except in transactions registered under the Securities Act or pursuant to
an exemption from registration. In addition, holders of approximately
shares of Common Stock have agreed not to sell any shares of Common Stock or
other capital stock or any securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock or other capital stock for a period
of 180 days following the Offering, without the prior written consent of
Equitable Securities Corporation. After the expiration of such 180 day period,
all of such shares may be sold in accordance with
54
<PAGE> 56
Rule 144, subject to the applicable volume, holding period and other limitations
of Rule 144 as described below. These same individuals have entered into a
similar agreement with the Company covering a period until February 7, 1997.
The Company has granted certain registration rights to holders of 8,140,954
shares of restricted stock, of which 1,500,000 shares are being offered hereby.
If any such stockholder who has elected to participate in the Offering is not
able to dispose of 20% of his Common Stock in the Offering (40% in the case of
former stockholders of RenalWest), then such stockholders, upon the request of
persons holding at least 20% of the restricted shares of Common Stock, may
request, at any time prior to the expiration of the two-year holding period
specified in Rule 144 with respect to such shares, that the Company file a
registration statement under the Securities Act for an offering of no less than
10% of the restricted shares of Common Stock held by them. The Company is
obligated to effect only one such registration pursuant to such a request,
subject to certain exceptions. In addition, in the event that the Company
proposes to register under the Securities Act any Common Stock for its own
account or for the account of others at prior to the expiration of the two-year
holding period specified in Rule 144 with respect to such shares, subject to
certain exceptions, such stockholders have the right to require the Company to
include their shares in such registration, subject to the right of any managing
underwriter of the Offering to exclude some or all of the shares for marketing
reasons. In general, all fees, costs and expenses of such registrations (other
than underwriting commissions, dealer's fees, brokers' fees and concessions
applicable to shares of Common Stock registered and any counsel for the selling
stockholders) will be borne by the Company.
In addition to the shares of Common Stock that will be outstanding, an
aggregate of up to 1,831,993 shares of Common Stock may be issued upon exercise
of options that the Company has outstanding. These options and warrants will be
exercisable as follows: (i) options and warrants to purchase up to shares
of Common Stock are exercisable immediately; (ii) options to purchase up to
shares of Common Stock will become exercisable on or prior to December
31, 1996; (iii) options to purchase up to shares of Common Stock will
become exercisable on or prior to December 31, 1997; (iv) options to purchase up
to shares of Common Stock will become exercisable on or prior to December
31, 1998; (v) options to purchase up to shares of Common Stock will
become exercisable on or prior to December 31, 1999; and (vi) options to
purchase up to shares of Common Stock will become exercisable on or prior
to December 31, 2000. The Company has filed a registration statement on Form S-8
under the Securities Act to register all shares of Common Stock subject to these
stock options. The shares covered by these registration statements will be
eligible for sale in the public markets, subject to the lock-up agreements
discussed above, if applicable.
The Company has outstanding warrants to purchase an additional 220,000
shares of Common Stock. The outstanding warrants to purchase shares of Common
Stock grant certain registration rights to their holders that may be acquired
upon exercise of such warrants, which rights under appropriate circumstances
would allow holders of warrants to cause the Company to register such shares,
even if the Company does not elect to effect the registration that it intends to
effect as described above. Upon any such registration, the shares of Common
Stock registered will immediately be eligible for resale in the public market,
unless such shares are purchased by an Affiliate.
Up to 184,000 additional shares may be issued upon conversion of the
Convertible Notes. These shares will not be registered under the Securities Act,
and, accordingly, such shares may not be sold except in transactions registered
under the Securities Act or pursuant to an exemption from registration. In the
event that the Company proposes to register under the Securities Act any Common
Stock for its own account or for the account of others during the first two
years following the completion of the Offering, subject to certain exceptions,
the holders of the Convertible Notes have the right to require the Company to
include their shares in such registration, subject to the right of any managing
underwriter of the offering to exclude some or all of the shares for marketing
reasons.
Any shares of Common Stock that have not been registered under the
Securities Act could be sold under Rule 144. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least two years, including a person
who may be deemed an
55
<PAGE> 57
Affiliate, is entitled to sell within any three-month period a number of shares
of Common Stock that does not exceed the greater of 1% of the then-outstanding
shares of Common Stock or the average weekly reported trading volume of the
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are subject to certain restrictions relating to manner of sale, notice,
and the availability of current public information about the Company. A person
who is not an Affiliate at any time during the three months preceding a sale,
and who has beneficially owned shares for at least three years, would be
entitled to sell such shares immediately following the Offering without regard
to the volume limitations, manner of sale provisions, or notice or other
requirements of Rule 144.
The Securities and Exchange Commission has published a notice of proposed
rulemaking that, if adopted as proposed, would shorten the applicable holding
periods under Rule 144(d) and Rule 144(k) to one and two years, respectively
(from the current two- and three-year periods). The Company cannot predict
whether such amendments will be adopted or the effect thereof on the trading
market for its Common Stock.
56
<PAGE> 58
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Equitable
Securities Corporation, Hambrecht & Quist LLC, Morgan Keegan & Company, Inc. and
Needham & Company, Inc. are acting as representatives (the "Representatives"),
have severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from the Company the number of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
--------------------------------------------------------------------------- ---------
<S> <C>
Equitable Securities Corporation...........................................
Hambrecht & Quist LLC......................................................
Morgan Keegan & Company, Inc...............................................
Needham & Company, Inc.....................................................
Total Underwriters...............................................
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $ per share, and the Underwriters may allow, and
such dealers may reallow, a concession of not more than $ per share to
certain other dealers. After the Offering, the price and concessions and
reallowances to dealers may be changed by the Underwriters. The Common Stock is
offered subject to receipt and acceptance by the Underwriters and to certain
other conditions, including the right to reject orders in whole or in part.
The Company has granted a 30-day option to the Underwriters, to purchase up
to a maximum of 450,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial 3,000,000
shares to be purchased by the Underwriters. To the extent the Underwriters
exercise this option, each of the Underwriters will be committed, subject to
certain conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with the sale of the
shares of the Common Stock offered hereby.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, its directors, executive officers, affiliates and other
persons who are holders of outstanding shares of Common Stock as of the
consummation of the Offering have agreed not to offer, issue, sell, contract to
sell, grant any option for the sale of, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exchangeable for shares of Common Stock or any rights to acquire Common Stock
for a period of 180 days after the date of this Prospectus, without the prior
written consent of Equitable Securities Corporation. These same individuals have
entered into a similar agreement with the Company covering a period until
February 7, 1997. See "Shares Eligible for Future Sale."
The Representatives have advised the Company that the Underwriters do not
intend to confirm any sales to accounts over which they exercise discretionary
authority.
In connection with the Offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq Stock Market may engage in passive market making on
the Nasdaq Stock Market in accordance with rule 10b-6A under the Securities and
Exchange Act of 1934, as amended, during the two business day period before the
commencement of the offers or sales of the Common Stock. The passive market
making transactions must comply with the applicable volume and price limits and
be identified as such. In general, a passive market maker may display its bid at
a price not in excess of the highest independent bid for such security; if all
independent bids are lowered before the passive market maker's bid, however,
such bid must then be lowered when certain purchase limits are exceeded.
57
<PAGE> 59
On December 7, 1995, Equitable Securities Corporation ("Equitable")
purchased in a private placement an aggregate principal amount of $50,000 of
Convertible Notes from the Company. The Convertible Notes mature on December 7,
1996, bear interest at a rate of 7.0% per annum, and the principal and accrued
interest thereof are convertible at a conversion price of $7.50 per share. The
Convertible Notes, and the Common Stock into which the Convertible Notes are
convertible, will not be sold, transferred, assigned, pledged or hypothecated by
Equitable prior to February 6, 1997. The Convertible Notes provide that
Equitable has the same "piggyback" registration rights applicable to the former
owners of the Founding Companies in connection with the Common Stock received by
such persons in the Combination. As a result of the purchase of such Convertible
Notes, Equitable will be deemed to have received additional compensation in
connection with the Offering. Equitable also acted as financial advisor to Renal
Care Group and rendered a fairness opinion in connection with the acquisition of
RenalWest in September 1996 and received a fee for such services.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of the
Common Stock offered hereby will be passed upon for the Company by Alston &
Bird, Atlanta, Georgia. Certain legal matters related to the Offering will be
passed upon for the Underwriters by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The financial statements and schedules appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein
which, insofar as their report on Renal Care Group, Inc. (of Tennessee) and
Three Unrelated Businesses to be Acquired, is based in part on the reports of
Henry & Peters, P.C. and Allen, Gibbs & Houlik, L.C., independent auditors. The
financial statements referred to above are included herein in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information contained in the
Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or any other document are not necessarily complete; with respect to
each such contract or document filed as an exhibit to the Registration
Statement, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the information requirements of the 1934 Act,
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information, as well as a copy of the Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the principal
office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New
York, New York, 10048. Copies of such material may be obtained from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fees prescribed by the Commission. Such reports,
proxy statements and other information, as well as the Registration Statement,
including the exhibits and schedules thereto, is also available on the
Commission's Web site at http://www.sec.gov. Statements contained in the
Prospectus concerning the provisions of certain documents filed as exhibits to
the Registration Statement are of necessity brief descriptions thereof, and are
not necessarily complete and each such statements is qualified in its entirety
by reference to the full text of such document.
58
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA COMBINING FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. (OF DELAWARE)
(UNAUDITED)
Pro Forma Combining Statements of Operations for the six months ended June 30, 1996
and the year ended December 31, 1995................................................ F-2
Notes to Pro Forma Combining Financial Statements..................................... F-5
RENAL CARE GROUP, INC.
Report of Independent Auditors'....................................................... F-6
Supplemental Consolidated Balance Sheets as of December 31, 1994 and 1995,
and June 30, 1996 (unaudited)....................................................... F-7
Supplemental Consolidated Income Statements for the years ended December 31, 1993,
1994 and 1995, and the six-months ended June 30, 1995 and 1996 (unaudited).......... F-8
Supplemental Consolidated Statements of Changes in Owners' Equity for the years ended
December 31, 1993, 1994 and 1995, and the six-month period ended June 30, 1996
(unaudited)......................................................................... F-9
Supplemental Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995, and the six-months ended June 30, 1995 and 1996 (unaudited).... F-10
Notes to Supplemental Consolidated Financial Statements............................... F-11
RENAL CARE GROUP, INC. (OF TENNESSEE) AND THREE UNRELATED BUSINESSES TO BE ACQUIRED
Report of Independent Auditors........................................................ F-19
Combined Balance Sheets as of December 31, 1994 and 1995.............................. F-22
Combined Statements of Operations for the years ended December 31, 1993, 1994, 1995... F-23
Combined Statements of Changes in Owners' Equity for the years ended December 31,
1993, 1994, 1995.................................................................... F-24
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994, and
1995................................................................................ F-25
Notes to Combined Financial Statements................................................ F-26
KIDNEY CARE, INC., ET AL. (PREDECESSOR COMPANY)
Report of Independent Auditors........................................................ F-36
Combined Balance Sheets as of January 31, 1995 and 1996............................... F-37
Combined Statements of Revenues, Expenses, and Changes in Unrestricted Net Assets for
the years ended January 31, 1994, 1995, and 1996 and the six months ended June 30,
1995................................................................................ F-38
Combined Statements of Cash Flows for the years ended January 31, 1994, 1995 and 1996,
and the six months ended June 30, 1995.............................................. F-39
Notes to Combined Financial Statements................................................ F-40
</TABLE>
F-1
<PAGE> 61
PRO FORMA COMBINING FINANCIAL STATEMENTS OF
RENAL CARE GROUP, INC. (OF DELAWARE)
The following unaudited pro forma combining financial statements give
effect to the acquisition by Renal Care Group, Inc., a Delaware Corporation
("RCG" or the "Company"), of Kidney Care, Inc. et al. ("KCI") and Renal Care
Group, Inc. (of Tennessee) and Three Unrelated Businesses to be Acquired
("Tennessee") which occurred on February 6, 1996 contemporaneously with an
initial public offering of RCG's stock (the "Combination"). The Combination was
accounted for using historical cost basis, in accordance with Securities and
Exchange Commission Staff Accounting Bulletin No. 48. The historical financial
statements of RCG also include the results of operations of Main Line Suburban
Dialysis Centers, Inc. and RenalWest L.C., et al both accounted for as poolings
of interest. The unaudited pro forma combining financial statements have been
prepared by the Company based on the historical financial statements of RCG,
KCI, and Tennessee included elsewhere in this Prospectus, and certain
preliminary estimates and assumptions deemed appropriate by management of the
Company. These pro forma combining financial statements may not be indicative of
actual results as if the transactions had occurred on the dates indicated or
which may be realized in the future. The pro forma combining statements of
operations for the six months ended June 30, 1996 and year ended December 31,
1995, assume the Company had completed the Combination on January 1, 1996 and
1995, respectively. The pro forma combining statement of operations for the year
ended December 31, 1995 includes the results of operations of KidneyCare for the
twelve months ended on January 31, 1996.
F-2
<PAGE> 62
PRO FORMA COMBINING FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC.
(OF DELAWARE)
UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RENAL CARE
GROUP, INC.
(OF TENNESSEE)
RENAL CARE AND THREE
GROUP, INC. KIDNEY UNRELATED THE PRO FORMA
OF DELAWARE CARE, INC. BUSINESSES COMPANY ADJUSTMENTS PRO FORMA
----------- ---------- -------------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenue................................ $ 55,358 $ 3,440 $ 3,938 $62,736 $ $62,736
Operating costs and expenses:
Patient care costs....................... 38,401 2,518 2,904 43,883 43,883
General and administrative expenses...... 5,821 254 341 6,417 6,417
Provision for doubtful accounts.......... 1,071 77 48 1,196 1,196
Depreciation and amortization............ 1,970 70 118 2,158 2,158
Merger expenses.......................... 680 -- -- 680 680
----------- ---------- ------- ------- ----------- ---------
Total operating costs and
expenses......................... 48,003 2,919 3,412 54,334 54,334
----------- ---------- ------- ------- ----------- ---------
Income from operations..................... 7,355 521 526 8,402 8,402
Interest expense, net...................... (240) 18 75 (147 ) (147)
----------- ---------- ------- ------- ----------- ---------
Income before taxes........................ 7,595 503 451 8,549 8,549
Pro forma provision for income taxes....... 1,980 -- -- 1,980 1,269(a) 3,249
----------- ---------- ------- ------- ----------- ---------
Pro forma net income....................... $ 5,615 $ 503 $ 451 $6,569 (1,269) $ 5,300
=========== ========= ============= ======== =========== =========
Pro forma net income per share............. $ 0.40
Pro forma weighted average shares
outstanding.............................. 13,087
</TABLE>
See accompanying notes to Unaudited Pro Forma Combining Financial Statements.
F-3
<PAGE> 63
PRO FORMA COMBINING FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC.
(OF DELAWARE)
UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS -- (CONTINUED)
FOR THE CALENDAR YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RENAL CARE
GROUP, INC.
(OF TENNESSEE)
RENAL CARE AND THREE
GROUP, INC. KIDNEY UNRELATED THE PRO FORMA
OF DELAWARE CARE, INC. BUSINESSES COMPANY ADJUSTMENTS PRO FORMA
----------- ---------- -------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net revenue................................ $ 42,971 $ 38,862 $ 33,496 $115,329 $ $115,329
Operating costs and expenses:
Patient care costs....................... 26,908 29,890 23,619 80,417 (468)(f) 79,949
General and administrative expenses...... 8,701 927 3,238 12,866 2,600(b) 15,466
Provision for doubtful accounts.......... 2,355 851 789 3,995 3,995
Depreciation and amortization............ 1,580 903 1,178 3,661 253(c) 3,914
----------- ---------- ------- -------- ----------- ---------
Total operating costs and
expenses......................... 39,544 32,571 28,824 100,939 (2,385) 103,324
----------- ---------- ------- -------- ----------- ---------
Income from operations..................... 3,427 6,291 4,672 14,390 (2,385) 12,005
Interest expense, net...................... 452 167 394 1,013 507(e) 506
----------- ---------- ------- -------- ----------- ---------
Income before taxes........................ 2,975 6,124 4,278 13,377 1,878 11,499
Pro forma provision for income taxes....... -- -- -- -- 4,370(d) 4,370
----------- ---------- ------- -------- ----------- ---------
Pro forma net income....................... $ 2,975 $ 6,124 $ 4,278 $13,377 $(6,248) $ 7,129
========== ========= ============= ======== =========== =========
Pro forma net income per share............. .64
=========
Pro forma weighted average shares
outstanding.............................. 11,080
=========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combining Financial Statements.
F-4
<PAGE> 64
PRO FORMA COMBINING FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC.
(OF DELAWARE)
NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS
(a) Reflects additional income tax provision of $1,264 for state and
federal taxes at a combined effective rate of 38% as the Founding Companies,
Main Line, and RenalWest previously were taxed as Subchapter S corporations,
partnerships, or organizations exempted from federal income tax under Internal
Revenue Code as amended Section 501(c)(3).
(b) Reflects additional corporate shared services costs of $2,600
consisting of general and administrative personnel, office facilities and
equipment, and other related expenses had the Company maintained a corporate
office beginning January 1, 1995.
(c) Depreciation and Amortization has been increased by $253 due to
additional depreciation on facilities purchased from the owners of Kansas and
Kidney Care and increased amortization as a result of DMN's buyout of a 50%
interest in a joint venture.
(d) Reflects additional income tax provision of $4,370 for state and
federal taxes at a combined effective rate of 38% as the Founding Companies,
Main Line, and RenalWest previously were taxed as Subchapter S corporations,
partnerships, or organizations exempted from federal income tax under Internal
Revenue Code as amended Section 501(c)(3).
(e) Interest expense has been reduced by $507 to reflect the repayment of
both existing and assumed debt from the net proceeds of the offering.
(f) Patient care costs have been reduced by $468 due to purchase of
facilities from the owners of Kansas and Kidney Care.
(g) The computation of pro forma net income per share for the six months
ended June 30, 1996 is based upon 13,087 weighted average shares of Common Stock
outstanding, which includes (i) 4,834 shares issued to the owners of the
Founding Companies, (ii) 4,485 shares being sold in the Offering, (iii) 2,928
shares issued to entities acquired through a pooling-of-interests transaction,
and (iv) 840,000 shares outstanding using the treasury stock method on stock
options and warrants.
(h) The computation of pro forma net income per share for December 31, 1995
is based upon 11,080 weighted average shares of Common Stock outstanding, which
includes (i) 4,834 shares issued to the owners of the Founding Companies, (ii)
3,318 shares being sold in the Offering to cover the cash portion of the
purchase price to be paid in connection with the Combination, (iii) 2,928 shares
issued to entities acquired through an pooling-of-interests transaction.
F-5
<PAGE> 65
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Renal Care Group, Inc.
We have audited the accompanying supplemental consolidated balance sheets
of Renal Care Group, Inc. (formed as a result of the merger of Renal Care Group,
Inc. and RenalWest L.C., et al.) as of December 31, 1994 and 1995, and the
related supplemental consolidated income statements, statements of changes in
owners' equity, and cash flows for each of the two years in the period ended
December 31, 1995. The supplemental consolidated financial statements and
schedule give retroactive effect to the merger of Renal Care Group, Inc. and
RenalWest L.C., et al. consummated on September 30, 1996, which has been
accounted for using the pooling-of-interests method as described in the notes to
the supplemental consolidated financial statements. These supplemental financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the supplemental financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Renal Care Group, Inc. at December 31, 1994 and 1995 and the consolidated
results of operations and cash flows for each of the two years ended December
31, 1995 after giving retroactive effect to the merger of RenalWest L.C., et
al., as described in the notes to the supplemental consolidated financial
statements, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
October 8, 1996
F-6
<PAGE> 66
RENAL CARE GROUP, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------- 1996
1994 1995 -----------
------- ------- (UNAUDITED --
NOTE 12)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 298 $ 1,341 $31,292
Accounts receivable, net...................................... 9,338 8,204 24,510
Inventory..................................................... 767 727 2,188
Prepaid expenses and other assets............................. 392 650 826
Related party receivable...................................... 186 196 --
------- ------- -------
Total current assets.................................. 10,981 11,118 58,816
Property, plant and equipment, net.............................. 6,192 9,225 22,409
Intangible assets, net.......................................... 64 53 3,202
Other assets.................................................... 81 369 1,216
------- ------- -------
Total assets.......................................... 17,318 20,765 85,643
======= ======= =======
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable.............................................. 1,389 2,175 8,536
Accrued wages and benefits.................................... 1,382 1,420 4,296
Due to third parties.......................................... 2,413 4,265 4,323
Due to related parties........................................ 250 270 --
Accrued expenses and other current liabilities................ 545 729 3,301
Income taxes payable.......................................... -- -- 1,980
Line of credit................................................ 44 785 --
Current portion of long-term debt............................. 1,787 2,892 4,361
------- ------- -------
Total current liabilities............................. 7,810 12,536 26,797
Long-term debt, net of current portion.......................... 3,589 3,663 2,444
Deferred tax liabilities........................................ -- -- 971
------- ------- -------
Total liabilities..................................... 11,399 16,199 30,212
Total owners' equity.................................. 5,919 4,566 55,431
------- ------- -------
Total liabilities and owners' equity.................. $17,318 $20,765 $85,643
======= ======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE> 67
RENAL CARE GROUP, INC.
SUPPLEMENTAL CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
----------- ------- ------- ------- -------
(UNAUDITED -- (UNAUDITED -- NOTE
NOTE 12) 12)
<S> <C> <C> <C> <C> <C>
Net revenue................................. $18,126 $41,627 $42,971 $21,242 $55,358
Operating costs and expenses:
Patient care costs........................ 13,034 25,003 26,908 13,307 38,461
General and administrative expenses....... 3,649 8,721 8,701 4,384 5,821
Provision for doubtful accounts........... 584 1,418 2,355 1,163 1,071
Depreciation and amortization............. 601 1,484 1,580 666 1,970
Merger expenses........................... -- -- -- -- 680
------- ------- ------- ------- -------
Total operating costs and
expenses........................ 17,868 36,626 39,544 19,520 48,003
------- ------- ------- ------- -------
Income from operations...................... 258 5,001 3,427 1,722 7,355
Interest expense, net....................... 128 363 452 221 (240)
------- ------- ------- ------- -------
Income before taxes......................... 130 4,638 2,975 1,501 7,595
Provision for income taxes.................. -- -- -- -- 1,980
------- ------- ------- ------- -------
Net income.................................. $ 130 $ 4,638 $ 2,975 $ 1,501 $ 5,615
======= ======= ======= ======= =======
Earnings per share.......................... $ .43
=======
Weighted average shares outstanding......... 13,140
=======
</TABLE>
See accompanying notes.
F-8
<PAGE> 68
RENAL CARE GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
--------
<S> <C>
Balance at December 31, 1992 (unaudited -- Note 12)............................... $ 5,435
Capital contributions (unaudited -- Note 12)...................................... 104
Net income (unaudited -- Note 12)................................................. 130
Distributions to owners (unaudited -- Note 12).................................... (768)
--------
Balance at December 31, 1993 (unaudited -- Note 12)............................... 4,901
Capital contributions............................................................. 411
Net income........................................................................ 4,638
Distributions to owners........................................................... (4,031)
--------
Balance at December 31, 1994...................................................... 5,919
Capital contributions............................................................. 768
Net income........................................................................ 2,975
Distributions to owners........................................................... (5,096)
--------
Balance at December 31, 1995...................................................... 4,566
Initial Public Offering ("IPO") Proceeds.......................................... 71,842
Common stock issued to Founders................................................... 16,258
Net income........................................................................ 5,615
Distributions to owners........................................................... (2,601)
Dividends (Note 11)............................................................... (40,249)
--------
Balance at June 30, 1996 (unaudited -- Note 12)................................... $ 55,431
========
</TABLE>
See accompanying notes.
F-9
<PAGE> 69
RENAL CARE GROUP, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- ------------------
1993 1994 1995 1995 1996
------------ ------- ------- ------- --------
(UNAUDITED -- (UNAUDITED --
NOTE 12) NOTE 12)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................... $ 130 $ 4,638 $ 2,975 $ 1,501 $ 5,615
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 601 1,484 1,580 666 1,970
Gain (loss) on sale of property and
equipment............................. 72 -- -- (9) (118)
Equity in earnings of subsidiary........ -- -- -- (129)
Changes in assets and liabilities:
Accounts receivable................... (497) (3,284) 1,134 79 (3,042)
Inventory............................. (392) (72) 40 19 206
Prepaid expenses and other assets..... (369) 186 (258) (93) 3,085
Related party receivables............. (36) (75) 90 143 (38)
Accounts payable...................... (637) 1,646 2,639 1,195 (461)
Accrued wages and benefits............ 68 235 38 328 37
Due to related parties................ 1,210 250 20 -- --
Accrued expenses and other
liabilities........................ 1,075 2 184 (133) 1,662
Income taxes payable.................. -- -- -- -- 1,980
---- ------- ------- ------- --------
Net cash provided by operating activities.... 1,225 5,010 8,442 3,696 10,767
INVESTING ACTIVITIES
Sale of property and equipment............... 21 -- 171 34 196
Purchases of property and equipment.......... (1,051) (2,428) (4,784) (1,122) (4,972)
Change in other assets....................... 105 15 (277) (30) (3)
Cash distributions to founders, net of cash
contributions.............................. -- -- -- -- (35,961)
---- ------- ------- ------- --------
Net cash used in investing activities........ (925) (2,413) (4,890) (1,118) (40,740)
FINANCING ACTIVITIES
Payments on line of credit................... (3,253) (9,642) (8,414) (3,097) (10,814)
Proceeds from line of credit................. 2,453 9,603 9,155 3,311 10,358
Payments on long-term debt and capital
leases..................................... (296) (1,830) (1,765) (908) (9,694)
Proceeds from long-term debt and capital
leases..................................... 1,272 1,960 2,844 -- 540
Capital contribution......................... 104 411 767 409 (4)
Distributions to owners...................... (768) (4,031) (5,096) (2,717) (2,597)
IPO proceeds, net of IPO costs............... -- -- -- -- 71,842
---- ------- ------- ------- --------
Net cash used in financing activities........ 488 (3,529) (2,509) (3,002) 59,631
---- ------- ------- ------- --------
Increase (decrease) in cash and cash
equivalents................................ (188) (932) 1,043 (424) 29,658
Cash and cash equivalents at beginning of
year....................................... 1,418 1,230 298 298 1,341
---- ------- ------- ------- --------
Cash and cash equivalents (bank overdraft) at
end of year................................ $ 1,230 $ 298 $ 1,341 $ (126) $ 30,999
==== ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid................................ $ $ 386 $ 469 $ 238 $ 280
==== ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
TRANSACTIONS:
Due from related party for issuance of
convertible senior subordinated promissory
notes...................................... $ -- $ -- $ 100 $ -- $ --
==== ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 70
RENAL CARE GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
DECEMBER 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Renal Care Group, Inc. (of Delaware) (the "Company") was formed in June
1995, primarily for the purpose of acquiring four dialysis businesses and Renal
Care Group, Inc. (of Tennessee) ("Tennessee"), in exchange for shares of its
Common Stock, cash, notes payable and the assumption of certain debt (the
"Combination"). As discussed more fully in Note 12, on February 6, 1996, the
Company closed an initial public offering of 3,900 shares of its Common Stock
and simultaneously consummated the Combination. The four related businesses
acquired in the Combination, which are comprised of numerous legal entities,
conduct business as Kidney Care, Inc. and certain operating divisions of Medical
Enterprises, Ltd. and Health Care Suppliers, Inc. ("KCI"), DMN Professional
Corporation ("DMN"), Tyler Nephrology Associates, P.A. ("Tyler"), and Kansas
Nephrology Associates, P.A. ("KNA") and Kansas Dialysis Supply, Inc. ("KDS,"
combined, "Kansas"). Tennessee and the four unrelated businesses acquired are
based in Tennessee, Mississippi, Indiana, Texas, and Kansas.
The Combination is being accounted for utilizing the historical cost basis
in accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 48 with the stock being valued at the historical cost of the net assets
exchanged. Cash consideration given in the Combination is treated for accounting
purposes as a dividend from the Company to Tennessee, KCI, DMN, Tyler, Kansas,
and their owners.
In April 1996, the Company acquired Main Line Suburban Dialysis Centers,
Inc. ("Main Line") in a merger accounted for as a pooling-of-interests through
the exchange of 528 shares of the Company's Common Stock. In September 1996, the
Company acquired RenalWest, L.C., et al ("RenalWest") in a merger accounted for
as a pooling-of-interests through the exchange of 2,400 shares of the Company's
common stock. Generally accepted accounting principles proscribe giving effect
to a consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation of the
RenalWest merger; however, they will become the historical consolidated
financial statements of the Company after the financial statements including the
date of consummation of the RenalWest merger are issued. These financial
statements reflect the restated consolidated financial statements of the Company
effecting this pooling-of-interest.
As mentioned above, on February 6, 1996, the Company completed an initial
public offering of 3,900 shares of Common Stock and on February 20, 1996, the
underwriters of the offering fully exercised their over allotment option for an
additional 585 shares. The 4,485 shares were issued at the initial public
offering price of $18 per share.
Physician services are provided to the Company by stockholders or legal
entities owned by stockholders of the Company. Substantially all of the dialysis
treatments performed by the Company are referred by these related physician
groups.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company.
Significant intercompany transactions and accounts have been eliminated in
consolidation.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with original
maturities of three months or less to be cash equivalents.
F-11
<PAGE> 71
RENAL CARE GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories consist of drugs, supplies and parts consumed in dialysis
treatments and is stated at the lower of cost (using the average method and the
first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided by the
straight-line method over the useful lives of the related assets, generally
three to five years. Leasehold improvements are amortized using the
straight-line method over the related lease terms. Maintenance and repair costs
are charged to operations as incurred.
OTHER ASSETS
Other assets at December 31, 1994 and 1995 consist primarily of costs
related to the Company's initial public offering. These costs were capitalized
and recorded as a reduction in proceeds from the initial public offering in
February 1996.
USE OF ESTIMATES
The preparation of the Company's combined financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect amounts reported in the combined
financial statements and accompanying notes. Actual results could differ from
those estimates. During 1995, the Company changed its assumptions in estimating
the accounts receivable allowance for doubtful accounts, resulting in a $1,680
increase in the provision for doubtful accounts.
NET REVENUE
Accounts receivable and net revenue are recorded at the estimated net
realizable amount from Medicare, Medicaid, patients, commercial insurers and
other third-party payors for services rendered. The Medicare and Medicaid
programs reimburse the Company at amounts that are different from the Company's
established rates. Contractual adjustments under these programs represent the
difference between the amounts billed for these services and the amounts that
are reimbursable by third party payors. A summary of the basis for reimbursement
with these payors follows:
Medicare
The Company is paid by the Medicare program on a prospective payment system
for dialysis services. Each facility receives a composite rate that is adjusted
to account for geographic differences in the cost of labor. The prospectively
determined composite rates are subject to retroactive adjustments.
Medicaid
Medicaid is a state administered program with reimbursements varying by
state. The Medicaid programs administered in each state in which the Company
operates reimburse the Company for dialysis services rendered.
Other
Other payments from patients, commercial insurers and other third-party
payors are received pursuant to a variety of reimbursement arrangements, which
are generally higher than those payments received from the Medicare and Medicaid
programs.
The allowance for doubtful accounts represent management's estimate of
potential credit losses associated with amounts due from patients, commercial
insurers and other third-party payors. Management of
F-12
<PAGE> 72
RENAL CARE GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company does not believe that receivables from the Medicare and Medicaid
programs represent any credit risk.
Reimbursements from Medicare and Medicaid at established rates approximated
83%, 78% and 71% for the years ended December 31, 1993 (unaudited -- Note 12),
1994 and 1995, respectively.
INCOME TAXES
Prior to the Combination and mergers, KCI, DMN, Tyler, Kansas, Main Line
and RenalWest operated as not-for-profits, S Corporations or partnerships;
accordingly, income tax liabilities were the responsibility of the respective
owners or partners. Under these provisions, the entities did not pay corporate
income taxes; rather the income or loss was allocated to each stockholder for
inclusion in their respective income tax returns. Because of this practice,
provisions for income taxes and deferred tax assets and liabilities of these
taxable entities have not been reflected in these supplemental consolidated
financial statements.
Tennessee and the Company are C Corporations and account for income taxes
under the liability method. Under this method, deferred tax assets and
liabilities are determined based upon differences between financial reporting
and tax basis assets and liabilities and are measured using the enacted tax laws
that will be in effect when the differences are expected to reverse.
ESTIMATED MEDICAL PROFESSIONAL LIABILITY CLAIMS
The Company is insured for medical professional liability claims through
retrospectively rated commercial insurance policies. It is its policy that
provision for estimated premium adjustments to medical professional liability
costs be made for asserted and unasserted claims based on its experiences.
Provision for such professional liability claims included estimates of the
ultimate costs of such claims. To date, the Company's experience with such
claims has not been significant; accordingly, no such provision has been made.
OWNERS' EQUITY
Owners' equity includes capital stock, additional paid-in capital and
retained earnings of the Company.
EARNINGS PER SHARE (UNAUDITED)
Earnings per share for the six months ended June 30, 1996 is based on the
weighted average number of shares outstanding during the period including the
dilutive effect of options and warrants and the 2,928 shares issued in
connection with the Main Line and RenalWest mergers.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has considered the impact of newly issued accounting
pronouncements, principally Statement of Financial Accounting Standards No 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and does not believe that adoptions of this and any other newly
issued pronouncements would have a significant impact on the consolidated
financial statements.
MARKET VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
long-term debt and capital lease obligations. The market values for these
financial instruments approximates their carrying value at December 31, 1994 and
1995.
F-13
<PAGE> 73
RENAL CARE GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MERGERS
On April 26, 1996, the Company completed a merger with Main Line through
the exchange of shares of the Company's Common Stock with an aggregate value of
approximately $18,200 at the date of the merger agreement.
On August 7, 1996, the Company entered into a definitive agreement to merge
with RenalWest, L.C. et al. This transaction was completed on September 30,
1996. Each share of RenalWest common stock then issued and oustanding was
canceled and retired then converted into one share of RenalWest common stock.
Renal Care Group, Inc. exchanged 2,400 shares of its common stock for the one
share of RenalWest common stock.
The Main Line and RenalWest mergers have been accounted for as a
pooling-of-interests, and accordingly, the supplemental consolidated financial
statements give retroactive effect to the combined operations of Renal Care
Group, Inc. for all periods presented. The following is a summary of the results
of operations of the separate entities for periods prior to the Main Line and
RenalWest mergers:
<TABLE>
<CAPTION>
RCG MAIN LINE RENALWEST COMBINED
------- ------------ --------- --------
<S> <C> <C> <C> <C>
1993 (unaudited -- Note 12)
Net revenue............................... $ -- $ 10,305 $ 7,821 $18,126
Income from operations.................... -- 831 (573) 258
Net income................................ -- 792 (662) 130
1994
Net revenue............................... -- 10,933 30,694 41,627
Income from operations.................... -- (807) 5,807 5,000
Net income................................ -- (841) 5,478 4,637
1995
Net revenue............................... -- 10,999 32,037 43,036
Income from operations.................... -- 12 3,415 3,427
Net income................................ (6) (25) 3,006 2,975
June 30, 1995 (unaudited -- Note 12)
Net revenue............................... -- 5,568 15,674 21,242
Income from operations.................... -- 133 1,589 1,722
Net income................................ -- 116 1,385 1,501
June 30, 1996 (unaudited -- Note 12)
Net income................................ 32,004 5,968 17,386 55,358
Income from operations.................... 4,150 635 2,570 7,355
Net income................................ 2,660 647 2,308 5,615
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Patient accounts receivable...................................... 11,167 12,185
Allowance for doubtful accounts.................................. 1,829 3,981
------- -------
Net accounts receivable.......................................... $ 9,338 $ 8,204
======= =======
Percent of patient accounts receivable related to patients
participating in the Medicare and Medicaid programs............ 54% 60%
</TABLE>
F-14
<PAGE> 74
RENAL CARE GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Medical equipment................................................ $ 6,246 $ 8,551
Furniture and nonmedical equipment............................... 1,740 2,591
Leasehold improvements........................................... 1,919 2,836
Buildings........................................................ 841 961
------- -------
10,746 14,939
Less accumulated depreciation.................................... 4,554 5,714
------- -------
Net property and equipment....................................... $ 6,192 $ 9,225
======= =======
</TABLE>
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------ ------
<S> <C> <C>
Term note, bearing interest at the prime rate plus 1/2% (8.88% at December
31, 1995), payable in monthly installments, collateralized by inventory,
accounts receivable, property and equipment, due 1997...................... $1,088 $ 502
Nonrevolving line of credit converted to a term note, bearing interest at the
prime rate plus 3/8% (8.88% at December 31, 1995), payable in monthly
installments, collateralized by inventory, accounts receivable, property
and equipment, due 1999.................................................... 1,500 1,200
Equipment line of credit, advances made through December 31, 1995, bearing
interest at the variable bank base rate plus 3/8% (8.88% at December 31,
1995), converts May 28, 1996 to a term loan, bearing interest at the
variable Bank Base Rate plus 1/2%, due May 31, 2001....................... -- 1,460
Term note, bearing interest at the prime rate plus 1/2% (8.5% at December
31, 1995), payable in monthly installments, collateralized by inventory,
accounts receivable, property and equipment, due 1997...................... 1,869 1,263
Notes payable, bearing interest at prime plus 1/2%, (8.50% at December 31,
1995), paid in 1995........................................................ 102 --
Loans from related parties, secured by purchased equipment, monthly payments
due through 2001, at interest rates from 11% to 13.5%...................... 250 212
Convertible senior subordinated promissory notes............................. -- 1,380
Capital lease obligations, due through 1999.................................. 505 507
Other........................................................................ 62 31
------ ------
Total long-term debt......................................................... 5,376 6,555
Less current portion......................................................... 1,787 2,892
------ ------
Long-term debt, net of current portion....................................... $3,589 $3,663
====== ======
</TABLE>
At December 31, 1995 the Company has a $1,500 revolving line of credit with
a bank which expires in June 1996. Interest is payable monthly at the variable
Bank Base Rate plus 3/8% (8.88% at December 31, 1995). The Company also has an
unsecured line of credit available for $20 from a local bank. At December 31,
1995, no amounts were outstanding relative to this line of credit.
F-15
<PAGE> 75
RENAL CARE GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 7, 1995, the Company issued an aggregate of principal amount of
$1,380 of Convertible Senior Subordinated Promissory Notes to provide funds to
complete the initial public offering. Such notes bear interest at a rate of 7%
per annum, mature on the first anniversary of their issuance, and the principal
and accrued interest thereof is convertible into shares of Common Stock of the
Company, beginning 180 days after the closing of the initial public offering, at
a conversion price of $7.50 per share. The Company offered such securities
solely to "accredited investors" (as defined in Regulation D promulgated under
the Securities Act) in a private placement exempt from registration under the
Securities Act and state securities laws.
Future maturities of long-term debt at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES
--------- -------
<S> <C> <C>
1996............................................................. $ 2,749 $ 186
1997............................................................. 1,508 156
1998............................................................. 703 153
1999............................................................. 656 105
2000............................................................. 305 --
Thereafter....................................................... 127 --
----- -----
6,048 600
===== =====
Less amounts representing interest............................... (93)
----- -----
Total minimum principal payments................................. $ $ 507
===== =====
</TABLE>
7. BENEFIT PLANS
The Company has qualified defined contribution plans covering substantially
all employees which permit participants to make voluntary contributions. The
Company pays all general and administrative expenses of the plans and makes
matching contributions on behalf of the employees. The Company made
contributions relating to these plans totaling $86, $284 and $157 for the years
ended December 31, 1993 (unaudited -- Note 12), 1994 and 1995, respectively.
8. RELATED PARTY TRANSACTIONS
PHYSICIAN SERVICES, MEDICAL DIRECTOR FEES AND MANAGEMENT FEES
Physician and medical director services are provided to the Company by
shareholders, partners or legal entities owned by shareholders or partners of
the Company. Physician and medical director fees included in patient care costs
were $1,327, $2,332 and $787 for the years ended December 31, 1993 (unaudited --
Note 12), 1994 and 1995, respectively. Management fees, which comprise
administrative expenses and general overhead expenses were $122, $221 and $243
for the years ended December 31, 1993 (unaudited -- Note 12), 1994 and 1995,
respectively. Such fees are included in general and administrative expenses.
OTHER RELATED PARTY BALANCES AND TRANSACTIONS
Expenses for leases and other services provided through entities owned by
shareholders or other related parties aggregated $20, $168 and $116 for the
years ended December 31, 1993, (unaudited -- Note 12), 1994 and 1995,
respectively.
Certain shareholders of the Company established an organization named Main
Line Medical Leasing from which the Company has borrowed amounts to purchase
equipment. Amounts due to Main Line Medical Leasing were $212 and $177 at
December 31, 1994 and 1995, respectively. These balances are included in
long-term debt.
F-16
<PAGE> 76
RENAL CARE GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Related party receivables consist primarily of amounts paid by the Company
on behalf of its owner members which were repaid subsequent to year-end.
During 1994 and 1995, related parties loaned the Company $75 and $20,
respectively. There are no terms or interest rates associated with these loans.
9. OPERATING LEASES
The Company rents office and medical facilities under lease agreements
which are classified as operating leases for financial statement purposes. At
December 31, 1995, future minimum rental payments under noncancelable operating
leases are:
<TABLE>
<S> <C>
1996........................................................................ $1,389
1997........................................................................ 1,416
1998........................................................................ 1,285
1999........................................................................ 934
2000........................................................................ 436
Thereafter.................................................................. 404
------
$5,864
======
</TABLE>
Rent expense related to operating leases amounted to $616, $1,428, and
$1,648 for the years ending December 31, 1993 (unaudited -- Note 12), 1994 and
1995, respectively.
10. INCOME TAXES
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before provision
for deferred income taxes. The differences are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
----------- ------- -------
(UNAUDITED-
NOTE 12)
<S> <C> <C> <C>
Tax provision at statutory rate......................... $ 44 $ 1,576 $ 1,012
State income tax less federal tax benefit............... -- -- --
Adjustment to eliminate S Corporations.................. (44) (1,576) (1,014)
Change in valuation allowance........................... -- -- 2
--- ------ ------
$ -- $ -- $ --
=== ====== ======
</TABLE>
The Company made no payments for federal income taxes in 1993
(unaudited -- Note 12), 1994 or 1995.
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
As discussed in Note 2, certain entities comprising the Company operated
under 503(c)(1) and Subchapter S of the Internal Revenue Code and were not
subject to corporate federal income tax. In connection with the initial public
offering, the Subchapter S elections were terminated. As a result, these
entities are subject to corporate income taxes subsequent to the termination of
their S Corporation status. The Company had operating income for income tax
purposes of $131, $4,641, and $2,990 for the years ending December 31, 1993,
1994 and 1995, respectively. Had the Company filed federal and state income tax
returns as a regular corporation for these periods, income tax expense under the
provisions of Financial Accounting
F-17
<PAGE> 77
RENAL CARE GROUP, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Standard No. 109 would have been $50, $1,764, and $1,136 for the years ending
December 31, 1993, 1994 and 1995, respectively.
At the date of termination of S Corporation status, the Company was
required to provide for a deferred tax liability for cumulative temporary
differences between financial reporting and tax reporting. Such deferred taxes
are based on the cumulative temporary difference at the date of termination of S
Corporation status. If the termination of S Corporation status had occurred at
December 31, 1995, the deferred income tax liability would have been $192. The
effect of recognizing the deferred taxes will be included in income from
continuing operations in the year of termination of S Corporation status.
11. SUBSEQUENT EVENTS
RECAPITALIZATION AND INITIAL PUBLIC OFFERING
On February 6, 1996, the Company completed an initial public offering of
3,900 shares of Common Stock and on February 20, 1996, the underwriters of the
offering fully exercised their over allotment option for an additional 585
shares, all of which were issued at $18 per share. Simultaneously the Company
exchanged 4,834 shares of Common Stock, plus cash, notes payable and the
assumption of certain debt for either stock or selected assets and liabilities
of KCI, NEI, Tyler, Kansas and Tennessee in accordance with executed combination
agreements. The exchange is being accounted for utilizing the historical cost
basis in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 48 with the stock being valued at the historical cost of the net
assets exchanged. Cash consideration given in these acquisitions is treated for
accounting purposes as a dividend from the Company to Tennessee and the four
unrelated businesses acquired to their owners.
STOCK OPTION PLANS
In April 1996, the Company registered approximately 1,892 shares of Common
Stock with the Securities and Exchange Commission on Form S-8 for the following
plans: Renal Care Group, Inc. Employee Stock Purchase Plan (300 shares); Renal
Care Group, Inc. 1996 Stock Option Plan (300 shares); Outstanding Options
Granted Outside of a Plan for 888 Shares Granted to Employees, Directors,
Medical Directors and Consultants (888 shares); Renal Care Group, Inc. 1996
Stock Option Plan for Outside Directors (100 shares); and Renal Care Group, Inc.
1994 Stock Option Plan (approximately 304 shares). Options for the purchase of
approximately 1,192 shares (includes options and warrants assumed from Tennessee
in connection with the combination agreement) had been granted as of the date of
the Company's Registration Statement on Form S-8, at exercise prices ranging
from $2 to $18 with varying vesting provisions.
12. UNAUDITED FINANCIAL INFORMATION
The unaudited consolidated balance sheet as of June 30, 1996 and the
unaudited supplemental consolidated statements of income, changes in owners'
equity and cash flows for the six months ended June 30, 1995 and 1996 have been
prepared by management and are presented for informational purposes only. The
financial statements, presented for informational purposes only, include all
adjustments, consisting of only normal recurring adjustments necessary for a
fair presentation of the results.
F-18
<PAGE> 78
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Renal Care Group, Inc.
We have audited the accompanying combined balance sheets of Renal Care
Group, Inc. (of Tennessee) and Three Unrelated Businesses to be Acquired, as
identified in Note 1, as of December 31, 1994 and 1995, and the related combined
statements of operations, changes and owners' equity and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1993 and 1994 financial statements of Tyler
Nephrology Associates, P.A. and the combined financial statements of Kansas
Nephrology Associates, P.A. and Kansas Dialysis Supply, Inc., which statements
reflect total assets constituting 57% as of December 31, 1994 and total revenues
constituting 68% for the two years in the period ended December 31 1994. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to data included for Tyler Nephrology
Associates, P.A. and the combined financial statements of Kansas Nephrology
Associates, P.A. and Kansas Dialysis Supply, Inc., is based solely on the
reports of the other auditors.
We conducted our audits 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 audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the combined financial position of Renal Care Group, Inc. (of Tennessee) and
Three Unrelated Businesses to be Acquired at December 31, 1994 and 1995, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
September 30, 1996
Nashville, Tennessee
F-19
<PAGE> 79
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Kansas Nephrology Associates, P.A. and
Kansas Dialysis Supply, Inc.
We have audited the accompanying combined balance sheet of Kansas
Nephrology Associates, P.A. and Kansas Dialysis Supply, Inc. as of December 31,
1994, and the related combined statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended December 31, 1994.
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kansas Nephrology
Associates, P.A. and Kansas Dialysis Supply, Inc. as of December 31, 1994, and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 1994 in conformity with generally accepted
accounting principles.
/s/ Allen, Gibbs & Houlik, L.C.
Wichita, Kansas
July 15, 1995
F-20
<PAGE> 80
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Tyler Nephrology Associates, P.A.
Tyler, Texas
We have audited the accompanying balance sheets of The Dialysis Operations
of Tyler Nephrology Associates, P.A. as of December 31, 1994 and the related
statements of operations and cash flows for the two years then ended. These
financial statements are the responsibility of the Association's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
As described in Note 1, The Dialysis Operations of Tyler Nephrology
Associates, P.A., are a part of Tyler Nephrology Associates, P.A. The
accompanying financial statements include those assets and liabilities, and
revenues and expenses specifically identified with dialysis operations as well
as allocations of other items which in the opinion of management are properly
allocable to the dialysis operations.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Dialysis Operations of
Tyler Nephrology Associates, P.A. as of December 31, 1994, and the results of
its operations and its cash flows for the two years then ended in conformity
with generally accepted accounting principles.
/s/ Henry & Peters, P.C.
Tyler, Texas
July 24, 1995
F-21
<PAGE> 81
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 2,096 $ 2,567
Held to maturity securities............................................ 1,638 111
Accounts receivable, net............................................... 5,344 4,917
Inventories............................................................ 583 592
Due from related parties............................................... 217 125
Prepaid expenses....................................................... 169 227
Other.................................................................. 261 334
------- -------
Total current assets........................................... 10,308 8,873
Property, plant and equipment, net....................................... 6,328 7,469
Intangible assets, net................................................... 30 2,933
Other assets............................................................. 1,091 2,761
------- -------
Total assets................................................... $17,757 $22,036
======= =======
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Current portion of long-term debt...................................... $ 303 $ 1,233
Accounts payable....................................................... 1,598 1,750
Accrued wages and benefits............................................. 789 1,090
Due to related parties................................................. -- 372
Other accrued expenses................................................. 182 983
------- -------
Total current liabilities...................................... 2,872 5,428
Long-term debt, net of current portion................................... 2,152 6,753
Advances received, net................................................... 2,449 --
Redeemable preferred stock............................................... -- 2,449
------- -------
Total liabilities.............................................. 7,473 14,630
Owners' equity........................................................... 10,285 7,406
------- -------
Total liabilities and owners' equity........................... $17,757 $22,036
======= =======
</TABLE>
See accompanying notes.
F-22
<PAGE> 82
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Total revenue..................................................... $30,950 $32,749 $33,496
Operating costs and expenses:
Patient care costs.............................................. 21,025 22,006 23,619
General and administrative expenses............................. 2,021 2,965 3,238
Provision for doubtful accounts................................. 710 726 789
Depreciation and amortization................................... 943 1,011 1,178
------- ------- -------
Total operating costs and expenses...................... 24,699 26,708 28,824
------- ------- -------
Income from operations............................................ 6,251 6,041 4,672
Interest expense, net............................................. 147 100 394
------- ------- -------
Income before taxes............................................... 6,104 5,941 4,278
Provision for income taxes........................................ -- 4 --
------- ------- -------
Net income........................................................ $ 6,104 $ 5,937 $ 4,278
======= ======= =======
</TABLE>
See accompanying notes.
F-23
<PAGE> 83
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1992...................................................... $ 9,487
Net income...................................................................... 6,104
Capital distributions........................................................... (5,219)
-------
Balance at December 31, 1993...................................................... 10,372
Net income...................................................................... 5,937
Capital distributions........................................................... (6,026)
Capital contributions by owners and partners.................................... 2
-------
Balance at December 31, 1994...................................................... 10,285
Net income...................................................................... 4,278
Capital distributions........................................................... (7,325)
Capital contributions by owners and partners.................................... 495
Other decreases................................................................. (327)
-------
Balance at December 31, 1995...................................................... 7,406
</TABLE>
See accompanying notes.
F-24
<PAGE> 84
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................... $ 6,104 $ 5,937 $ 4,278
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 943 1,011 1,178
Loss on asset disposals..................................... 14 6 --
Other....................................................... 43 (175) (117)
Changes in assets and liabilities:
Accounts receivable and due to related parties........... 700 (1,368) 519
Inventories, prepaid expenses and other current assets... (307) 207 (140)
Other assets............................................. (100) (174) (1,670)
Accounts payable......................................... (388) 959 157
Accrued wages and benefits............................... 102 181 301
Other accrued expenses and other liabilities............. 48 35 1,168
------- ------- -------
Net cash provided by operating activities........... 7,159 6,619 5,674
INVESTING ACTIVITIES
Proceeds from sale of investments............................. -- 24,303 1,527
Purchases of investments...................................... -- (25,941) --
Proceeds from sale of property, plant and equipment........... 19 18 --
Purchases of property, plant and equipment.................... (549) (1,469) (1,701)
Intangible assets acquired.................................... -- -- (3,143)
Contributions from (to) an equity investment.................. (102) -- 116
------- ------- -------
Net cash used in investing activities............... (632) (3,089) (3,201)
FINANCING ACTIVITIES
Proceeds from long-term borrowings............................ 624 745 5,879
Principal payments on long-term debt and capital lease
obligations................................................. (1,329) (494) (348)
Capital contributions by owners and partners.................. -- 2 495
Advances received, net........................................ -- 2,449 --
Capital distributions......................................... (5,219) (5,623) (8,028)
------- ------- -------
Net cash used in financing activities......................... (5,924) (2,921) (2,002)
------- ------- -------
Net increase in cash and cash equivalents..................... 603 609 471
Cash and cash equivalents at beginning of period.............. 884 1,487 2,096
------- ------- -------
Cash and cash equivalents at end of period.................... $ 1,487 $ 2,096 $ 2,567
======= ======= =======
Supplemental disclosures of cash flow information:
Interest paid............................................... $ 202 $ 170 $ 315
======= ======= =======
Noncash capital transactions.................................. $ -- $ 404 $ 607
======= ======= =======
</TABLE>
See accompanying notes.
F-25
<PAGE> 85
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
Renal Care Group, Inc. (of Delaware) ("the Company") was formed in June
1995, primarily for the purpose of acquiring four dialysis businesses and Renal
Care Group, Inc. (of Tennessee) ("Tennessee"), in exchange for shares of its
Common Stock, cash, notes payable and the assumption of certain debt (the
"Combination"). The Combination was effected in accordance with executed
combination agreements with the four dialysis businesses and Tennessee and
occurred concurrently with the closing of the initial public offering of the
Company (the "Offering") in February 1996. Kidney Care, Inc. and certain
operating divisions of Medical Enterprises, Ltd. and Health care Suppliers, Inc.
(collectively "KidneyCare") has been designated as the Predecessor and thus
KidneyCare's financial statements are not included in these combined financial
statements. The Three Unrelated Businesses to be Acquired, which comprise
numerous legal entities, conduct business as Northeast Indiana Kidney Center
("NEI"), Tyler Nephrology Associates, P.A. ("Tyler"), and Kansas Nephrology
Associates, P.A. ("KNA") and Kansas Dialysis Supply, Inc. ("KDS," and with KNA,
"Kansas"). Tennessee and Three Unrelated Businesses to be Acquired are based in
Tennessee, Indiana, Texas, and Kansas. Effective July 31, 1995, D.M.N.
Professional Corporation, which is owned by the physician owners of NEI, bought
the remaining 50% ownership interest in NEI from its former joint venture
partner (See Note 3). The joint venture which is NEI is included in these
combined financial statements.
Physician services are provided to the Three Unrelated Businesses to be
Acquired by physician groups, which comprise shareholders, partners or legal
entities owned by shareholders or partners of the Three Unrelated Businesses to
be Acquired. Substantially all of the dialysis treatments performed by the Three
Unrelated Businesses to be Acquired are referred by these related physician
groups.
Tennessee and the Three Unrelated Businesses to be Acquired previously have
operated as separate independent entities. Their historical financial positions,
results of operations and cash flows have been combined in the accompanying
financial statements and do not reflect any adjustments relating to the
Combination or the impacts that may have occurred if the operations of Tennessee
and the Three Unrelated Businesses to be Acquired had been combined. All
significant intercompany accounts and transactions have been eliminated.
Two of the Three Unrelated Businesses to be Acquired maintain their books
and records on the cash basis of accounting. The accompanying financial
statements have been prepared on the accrual basis of accounting. These combined
financial statements have been prepared to show the combined operations and
combined financial position of Tennessee and Three Unrelated Businesses to be
Acquired. Certain entities are not required to pay federal or state income taxes
(due to their status as partnerships, S Corporations and corporations managed to
result in taxes being the responsibility of the respective owners), as further
described in Note 2.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NET REVENUE
Accounts receivable and net revenue are recorded at the estimated net
realizable amount from Medicare, Medicaid, patients, commercial insurers, and
other third-party payors for services rendered. The Medicare and Medicaid
programs reimburse Tennessee and Three Unrelated Businesses to be Acquired at
amounts that are different from the Company's established rates. Contractual
adjustments under these programs represent the
F-26
<PAGE> 86
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
difference between the amounts billed for these services and the amounts that
are reimbursable by third-party payors. A summary of the basis for reimbursement
with these payors follows:
Medicare
Tennessee and Three Unrelated Businesses to be Acquired are paid by
the Medicare program on a prospective payment system for dialysis services.
Each facility receives a composite rate that is adjusted to account for
geographic differences in the cost of labor. The prospectively determined
composite rates are not subject to retroactive adjustments.
Medicaid
Medicaid is a state administered program with reimbursements varying
by state. The Medicaid programs administered by each of Indiana, Ohio,
Texas, Kansas and Tennessee, reimburse Tennessee and the respective Three
Unrelated Businesses to be Acquired.
Other
Other payments from patients, commercial insurers, and other
third-party payors are received pursuant to a variety of reimbursement
arrangements, which are generally higher than those payments received from
the Medicare and Medicaid programs.
The allowance for doubtful accounts represents management's estimate
of potential credit losses associated with amounts due from patients,
commercial insurers, and other third-party payors. Management of Tennessee
and Three Unrelated Businesses to be Acquired does not believe that
receivables from the Medicare and Medicaid programs represent any
significant credit risk.
Reimbursements from Medicare and Medicaid at established rates
approximated 68%, 64%, and 69% of patient service revenue for the years
ended December 31, 1993, 1994 and 1995, respectively.
CASH AND CASH EQUIVALENTS
For the purpose of the combined statements of cash flows, cash and cash
equivalents include demand deposits and money market accounts at a financial
institution. All highly liquid investments with a maturity of three months or
less when purchased are considered to be cash equivalents. The carrying amount
reflected on the balance sheet at December 31, 1994 and 1995 is equal to
approximate fair value.
HELD-TO-MATURITY SECURITIES
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when there is the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at cost, adjusted for amortization of premium and
accretion of discount to maturity. Any such amortization is included in interest
income. Any interest received on securities classified as held-to-maturity is
included in interest income. All held-to-maturity securities mature within one
year of the balance sheet date.
INVENTORIES
Inventories consist of dialysis supplies and are stated at the lower of
cost or market under the first-in, first-out method or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. The general
range of useful lives is five to 40 years for buildings and leasehold
improvements (limited to the terms of the lease including expected renewal
periods), and five to
F-27
<PAGE> 87
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
15 years for furniture, fixtures and equipment. Routine maintenance and repairs
are expensed as incurred, while costs of betterments and renewals are
capitalized.
OTHER ASSETS
Included in other assets are escrow deposits related to a performance
guarantee agreement between Kansas and a local hospital, which originated in
1986. Such agreement requires Kansas to deposit $8 per month with a designated
money manager until 1996, at which time Kansas will have unrestricted use of the
amounts deposited and any earnings thereon if it has fulfilled certain
obligations thereto. In the opinion of management of Kansas, the assets relating
to this guarantee are deemed fully collectible.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INCOME TAXES
The Three Unrelated Businesses to be Acquired are S Corporations or
partnerships; accordingly, income tax liabilities are the responsibility of the
respective owners or partners. Under these provisions, the Three Unrelated
Businesses to be Acquired generally do not pay corporate income taxes; rather
the income or loss is allocated to each stockholder for inclusion in their
respective income tax returns. Because of this practice, provisions for income
taxes and deferred tax assets and liabilities of these taxable entities have not
been reflected in these combined financial statements.
Tennessee is a C Corporation and accounts for income taxes under the
liability method. Under this method, deferred tax assets and liabilities are
determined based upon differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax and laws that will
be in effect when the differences are expected to reverse.
ESTIMATED MEDICAL PROFESSIONAL LIABILITY CLAIMS
Tennessee and each of the Three Unrelated Businesses to be Acquired are
insured for medical professional liability claims through retrospectively rated
commercial insurance policies. It is their respective policies that provision
for estimated premium adjustments to medical professional liability costs be
made for asserted and unasserted claims and based upon their experiences.
Provision for such professional liability claims includes estimates of the
ultimate costs of such claims. To date, their experiences with such claims has
not been significant. Accordingly, no such provision has been made.
OWNERS' EQUITY
Owners' equity includes the respective capital stock, additional paid-in
capital, partnership capital, and retained earnings of the various legal
entities reflected herein. The Three Unrelated Businesses to be Acquired have
multiple owners, various types of agreements exist among the owners which call
for the transfer of a physician's ownership interest by the continuing owners in
the case of certain events such as the owner's retirement or death. Frequently,
the existing owners are required to pay the departed owner for his interest.
NEWLY ISSUED ACCOUNTING STANDARDS
Tennessee and each of the Three Unrelated Businesses to be Acquired have
considered the impact of newly issued financial accounting pronouncements,
principally Statement of Financial Accounting Standards
F-28
<PAGE> 88
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and do not believe that adoption of this and any
other newly issued pronouncements would have a significant impact on the
combined financial statements.
3. ACQUISITION OF PARTNERSHIP INTEREST
Effective July 31, 1995, the 50% physician owners of NEI bought out the
remaining 50% ownership interest of its joint venture partner for $4,200, which
was paid from the proceeds of new debt. This transaction was accounted for using
purchase accounting which resulted in the recognition of approximately $2,900 of
goodwill which is being amortized over forty years.
4. CASH, CASH EQUIVALENTS AND HELD-TO-MATURITY SECURITIES
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Tennessee adopted the provisions of the new
standard for investments held as of or acquired after January 1, 1994. In
accordance with the Statement, prior period financial statements have not been
restated to reflect the change in accounting principle. There was no cumulative
effect of adopting Statement 115 as of January 1, 1994. The following is a
summary of cash, cash equivalents, and investments in held-to-maturity
securities as of:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Cash and cash equivalents:
Demand deposits and money market account..... $2,096 $ -- $ -- $2,096
====== ====== ====== ======
Held-to-maturity securities:
Obligations.................................. $1,638 $ 6 $ -- $1,644
====== ====== ====== ======
DECEMBER 31, 1995
Cash and cash equivalents:
Demand deposits and money market account..... $2,567 $ -- $ -- $2,567
====== ====== ====== ======
Held-to-maturity securities:
Obligations.................................. $ 111 $ -- $ -- $ 111
====== ====== ====== ======
</TABLE>
5. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Patient accounts receivable...................................... $ 6,058 $ 5,484
Other receivables................................................ 408 178
Allowance for doubtful accounts.................................. (1,122) (745)
------- -------
Net accounts receivable.......................................... $ 5,344 $ 4,917
======= =======
Percent of patient accounts receivable related to patients
participating in the Medicare and Medicaid programs............ 76% 69%
</TABLE>
F-29
<PAGE> 89
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Buildings........................................................ $ 2,323 $ 3,377
Furniture, fixtures and equipment................................ 5,707 6,552
Leasehold improvements........................................... 1,598 2,002
Other............................................................ 5 --
------- -------
9,633 11,931
Less accumulated depreciation.................................... (3,305) (4,462)
------- -------
Net property, plant and equipment................................ $ 6,328 $ 7,469
======= =======
</TABLE>
7. SHORT-TERM AND LONG-TERM OBLIGATIONS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Line of credit with bank, due February 2, 1996, interest of bank's
base rate (9.25%), secured by accounts receivable, equipment and
inventory, credit available of $1,000 at December 31, 1995....... $ -- $ --
Bank lines of credit, with conversion options to term loan, due
from 1995 to 2010, bearing interest ranging from 8.25% to 9.35%,
secured by certain equipment, inventory and accounts receivable,
credit available under such lines of $3,647 at December 31,
1995............................................................. 600 1,604
Notes payable to banks due through 1998, bearing interest ranging
from 8.5% to 9.5%, payable monthly, secured by certain equipment,
accounts receivable, and inventory............................... 529 965
Real estate mortgage notes payable, due through 2007, bearing
interest ranging from 8.375% to 8.75%, payable monthly, secured
by certain real estate and furniture and fixtures................ 1,326 1,217
Business financing note payable monthly beginning March 1, 1996
with interest at the bank's reference rate plus .5% (9.25% at
December 31, 1995) through August 31, 2005....................... -- 4,200
------- -------
Total long-term debt..................................... 2,455 7,986
Less current portion............................................... 303 1,233
------- -------
Long-term debt, net of current portion............................. $2,152 $6,753
======= =======
</TABLE>
One Unrelated Business to be Acquired has an unsecured line of credit
facility with a bank leasing interest at the bank's reference rate (9.35% at
December 31, 1995), in the amount of $500. There were no borrowings at December
31, 1994 and 1995.
Certain debt obligations contain covenants that require maintenance of
certain financial ratios. Default of any covenant could affect the ability of
individual entities to borrow under the agreements and, if not waived or
corrected, could accelerate the maturity of any borrowings outstanding under the
agreements. As of December 31, 1995, Tennessee and each of the Three Unrelated
Businesses to be Acquired had complied with
F-30
<PAGE> 90
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
existing loan covenants. Various of these debt instruments are guaranteed by the
respective owners or related entities.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996........................................................................ $ 906
1997........................................................................ 1,023
1998........................................................................ 944
1999........................................................................ 846
2000........................................................................ 666
Thereafter.................................................................. 3,601
------
$7,986
======
</TABLE>
Tennessee and Three Unrelated Businesses to be Acquired lease office space
as well as certain equipment under capital leases and noncancelable operating
lease agreements which expire at various dates. At December 31, 1995, minimum
annual rental commitments under noncancelable operating leases with terms in
excess of one year are as follows:
<TABLE>
<S> <C>
1996........................................................................ $ 629
1997........................................................................ 605
1998........................................................................ 502
1999........................................................................ 448
2000........................................................................ 422
Thereafter.................................................................. 147
------
Total minimum lease payments...................................... $2,753
======
</TABLE>
Rent expense related to operating leases amounted to $834, $963 and $998
for the years ended December 31, 1993, 1994 and 1995, respectively.
8. BENEFIT PLANS
The Three Unrelated Businesses to be Acquired have qualified defined
contribution plans which permit participants to make voluntary contributions.
The Three Unrelated Businesses to be Acquired pay all general and administrative
expenses of the plans and, in some cases, make matching contributions on behalf
of the employees. The Three Unrelated Businesses to be Acquired made
contributions related to these plans totaling $251, $351 and $414 in 1993, 1994
and 1995, respectively.
Tennessee and Three Unrelated Businesses to be Acquired do not typically
provide employees any post-retirement benefits other than pensions and,
accordingly, the impact of Statement of Financial Accounting Statements No. 106
had no material effect on these combined financial statements.
STOCK OPTIONS
Effective February 15, 1994, Tennessee adopted the 1994 Stock Option Plan.
The plan provided for the grant of options to purchase up to 320 shares of
Common Stock to directors, officers and other key persons. Under the plan
Tennessee may grant incentive stock options, nonqualified stock options or stock
appreciation rights. Options are exercisable as determined by the Board of
Directors.
F-31
<PAGE> 91
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of option transactions during the period from
February 11, 1994 (date of inception of Renal Care Group, Inc. (of Tennessee)
through December 31, 1995:
<TABLE>
<CAPTION>
EXERCISE
OPTIONS PRICE RANGE
------- -----------
<S> <C> <C>
Options granted................................................ 85 $2.00 - $7.50
Options exercised.............................................. --
Options forfeited.............................................. --
-------
Balance at December 31, 1994................................... 85 $2.00 - $7.50
Options granted................................................ 31 $7.50
Options exercised.............................................. --
Options forfeited.............................................. --
-------
Balance at December 31, 1995................................... 116 $2.00 - $7.50
======
Exercisable at December 31, 1995............................... 55
Available for future grant at December 31, 1995................ 204
</TABLE>
9. ADVANCES RECEIVED AND PREFERRED STOCK
Tennessee is authorized to issue 1,000 shares of Preferred Stock at $.01
par value per share. Tennessee has designated as Series A Preferred Stock, 667
shares, $.01 par value per share. The remaining 333 shares of the Preferred
Stock may be issued from time to time in one or more series, each such series to
be so designated as to distinguish the shares from the shares of all other
series or classes. The Board of Directors has the authority to divide the
Preferred Stock into series and determine the preferences, limitations and
relative rights.
The holders of the Series A Preferred Stock have voting rights and receive
dividends, if any, share for share, with Common Stock. The holders of Series A
Preferred Stock vote as a class with respect to amending the charter of
Tennessee, approving a consolidation or merger of Tennessee, changing the
preferences of the Series A Preferred Stock, and effecting an exchange of the
Series A Preferred Stock. The holders of Series A Preferred Stock have no
preferences with respect to dividends. The Series A Preferred Stock is
convertible into Common Stock and will receive a preference distribution equal
to its purchase price upon liquidation or sale of Tennessee. The holders shall
be entitled to a Preference Amount of $7.50. The number of shares of Common
Stock issuable will equal the result obtained by dividing the Preference Amount
by the Current Conversion Price. The Initial Conversion Price is set at $7.50
and shall be adjusted to the Current Conversion Price, as defined. In the event
of a public offering of Tennessee's Common Stock, the Series A Preferred Stock
will have the right to convert to Common Stock at anytime. In the event that
prior to May 6, 1999, Tennessee has neither sold shares in an initial public
offering nor effected a merger or consolidation, at the option of the holder of
Series A Preferred Stock, the shares become redeemable at $10.50 per share plus
an amount equal to $.0016438 per day for each day after May 6, 1999.
In April and May 1994, Tennessee received $2,449, net of commissions and
legal fees of $51, relating to the subscription of Series A Preferred Stock. On
June 22, 1995, the stock was issued to the subscribers. Such proceeds are
classified as advances received at December 31, 1994 and as redeemable preferred
stock at December 31, 1995.
10. WARRANTS
Tennessee issued warrants to two of its officers, effective February 14,
1994, to purchase an aggregate of 160 shares of Common Stock of Tennessee at
$7.50 per share. Also effective February 14, 1994, Tennessee issued to Equitable
Securities Corporation, as compensation for its investment banking services and
for
F-32
<PAGE> 92
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
nominal additional consideration, warrants to purchase 60 shares of Common Stock
of Tennessee at $7.50 per share. The warrants have a term of ten years from the
date of issuance.
11. INCOME TAXES
Income tax expense consists of the following (also see Note 2):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal........................................................... $-- $ 4 $--
State............................................................. -- -- --
--- --- ---
$-- $ 4 $--
=== === ===
</TABLE>
Significant components of the deferred tax assets and liabilities as of
December 31, 1994 and 1995, are as follows:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization...................................... $ 3 $ 15
Deferred tax liabilities............................................. 3 15
----- -----
Deferred tax assets:
Net operating loss carryforwards................................... 228 620
Other.............................................................. 1 2
----- -----
Deferred tax assets.................................................. 229 622
Valuation allowance.................................................. (226) (607)
----- -----
Net deferred tax assets.............................................. 3 15
----- -----
Net deferred tax liabilities (assets)................................ $ -- $ --
===== =====
</TABLE>
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before provision
for deferred income taxes. The differences are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Tax provision at statutory rate........................... $ 2,075 $ 2,256 $ 1,454
State income tax less applicable federal tax benefit...... 245 (34) 40
Income reported in not-for-profit corporation and
adjustment to eliminate S Corporations.................. (2,320) (2,445) (1,875)
Change in valuation allowance............................. -- 225 381
Other, net................................................ -- 2 --
------- ------- -------
$ -- $ 4 $ --
======= ======= =======
</TABLE>
Tennessee and Three Unrelated Businesses to be Acquired made no payments
for federal income taxes in 1993, 1994 and 1995.
F-33
<PAGE> 93
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
As discussed in Note 2, the Three Unrelated Businesses to be Acquired
operate under Subchapter S of the Internal Revenue Code and are not subject to
corporate federal income tax. In connection with the Offering (see Note 14), the
Subchapter S elections were terminated. As a result, the Three Unrelated
Businesses to be Acquired are subject to corporate income taxes subsequent to
the termination of their S Corporation status. Tennessee and Three Unrelated
Businesses to be Acquired had net operating income for income tax purposes of
$5,963, $6,341 and $4,061 for 1993, 1994 and 1995, respectively. Had Tennessee
and Three Unrelated Businesses to be Acquired filed federal and state income tax
returns as a regular corporation for 1993, 1994 and 1995, income tax expense
under the provisions of Financial Accounting Standard No. 109 would have been
$2,457, $2,455, and $1,754 respectively.
At the date of termination of S Corporation status, Tennessee and Three
Unrelated Businesses to be Acquired will be required to provide for a deferred
tax liability for cumulative temporary differences between financial reporting
and tax reporting. Such deferred taxes are based on the cumulative temporary
difference at the date of termination of S Corporation status.
12. COMMITMENTS AND CONTINGENCIES
THIRD-PARTY PAYOR SETTLEMENTS
Final determination of amounts earned under prospective payment and
cost-reimbursement activities is subject to review by appropriate governmental
authorities or their agents. In the opinion of management, adequate provision
has been made for any adjustments that may result from any such reviews.
SELF-INSURED EMPLOYEE HEALTH BENEFIT PLAN
One of the Three Unrelated Businesses to be Acquired adopted a
self-insurance program for health benefits which comprised a $25 per claim
self-insured portion and 20% self-insured portion in excess of $25 up to a
maximum specific loss benefit of $1,000.
Tennessee and Three Unrelated Businesses to be Acquired obtain medical
malpractice insurance and general liability coverage primarily with commercial
carriers. They are subject to claims and suits arising in the ordinary course of
its business for which they believe are adequately covered by insurance.
13. RELATED PARTY TRANSACTIONS
PHYSICIAN SERVICES, MEDICAL DIRECTOR FEES, AND MANAGEMENT FEES
Physician and management services are provided to the Three Unrelated
Businesses to be Acquired by shareholders, partners or legal entities owned by
shareholders or partners of the Three Unrelated Businesses to be Acquired.
Physician and Medical Director Fees included in patient care costs were $983,
$728 and $663 for the years ended December 31, 1993, 1994 and 1995,
respectively. Management fees, which comprise administrative and executive
expenses, accounting fees, maintenance fees, and general overhead expenses were
$165, $160 and $203 for the years ended December 31, 1993, 1994 and 1995,
respectively. Such fees are included in general and administrative expenses.
F-34
<PAGE> 94
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LEASE TRANSACTIONS
Certain of the Three Unrelated Businesses to be Acquired lease facility
space from various partnerships and corporations which are owned by shareholders
or partners of the Unrelated Businesses to be Acquired.
Additionally, certain of the Three Unrelated Businesses to be Acquired
lease equipment from physician owners. Rent expense on related-party operating
leases amounted to $422, $429 and $349 for the years ended December 31, 1993,
1994 and 1995 respectively.
OTHER RELATED-PARTY BALANCES AND TRANSACTIONS
In various instances, relatives of the owners of the Three Unrelated
Businesses to be Acquired are employees of the clinics.
In 1995, one of the Three Unrelated Businesses to be Acquired began
providing personnel to staff the office of its physician owners. Revenue
recognized for the reimbursement of these services was $290 for the year ended
December 31, 1995.
14. SUBSEQUENT EVENTS
RECAPITALIZATION AND INITIAL PUBLIC OFFERING
In February 1996, the Company consummated the Offering and simultaneously
consummated the Combination, pursuant to which it exchanged shares of its common
stock, cash, notes payable and the assumption of certain debt for selected
assets of and liabilities of Tennessee and Three Unrelated Businesses to be
Acquired and the Predecessor. The exchange is accounted for utilizing the
historical cost basis with the common stock being valued at the historical cost
of the net assets exchanged. Cash consideration given in these acquisitions is
treated for accounting purposes as a dividend from the Company to Tennessee and
Three Unrelated Businesses to be Acquired, the Predecessor and their owners.
In December 1995, Renal Care Group, Inc. (of Delaware) sold an aggregate
principal amount of $1,380 of Convertible Senior Subordinated Promissory Notes
(the "Convertible Notes") to provide funds to complete the Offering. Such
Convertible Notes bear interest at a rate of 7.0%, mature in one year, and the
principal and accrued interest thereof is convertible, beginning 180 days after
the closing of the Offering into shares of common stock of the Company at a
conversion price of $7.50 per share. The Company offered such securities solely
to "accredited investors" (as defined in Regulation D promulgated under the
Securities Act) in a private placement exempt from registration under the
Securities Act and state securities laws. Certain owners of Tennessee and
Unrelated Businesses to be Acquired purchased an aggregate principal amount of
$1,120 of the Convertible Notes.
15. UNAUDITED FINANCIAL INFORMATION
The unaudited combined statements of operations, owners' equity and cash
flows for the six months ended June 30, 1996 have been prepared by management
and are presented for informational purposes only. The financial statements,
presented for informational purposes only, include all adjustments, consisting
of only normal recurring adjustments necessary for a fair presentation of the
results.
F-35
<PAGE> 95
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Kidney Care, Inc.
We have audited the accompanying combined balance sheets of Kidney Care,
Inc., et al. (see Note 1) as of January 31, 1995 and 1996, and the related
combined statements of revenues, expenses and changes in net assets and cash
flows for the each of the three years in the period ended January 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Kidney Care, Inc.,
et al. as of January 31, 1995 and 1996, and the combined results of their
operations and cash flows for each of the three years then ended in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
May 15, 1996
F-36
<PAGE> 96
KIDNEY CARE, INC., ET AL.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31
-----------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 1,050 $ 3,895
Short-term government securities......................................... 1,000 512
Accounts receivable, net................................................. 7,814 8,348
Inventories.............................................................. 861 1,039
Due from related parties................................................. 771 728
Prepaid expenses......................................................... 135 177
Deferred income taxes.................................................... 65 23
------- -------
Total current assets............................................. 11,696 14,722
Property, plant and equipment, net......................................... 3,027 2,539
Other assets............................................................... 120 837
------- -------
Total assets..................................................... $14,843 $18,098
======= =======
LIABILITIES AND UNRESTRICTED NET ASSETS
Current liabilities:
Current portion of long-term debt........................................ $ 669 $ 389
Accounts payable......................................................... 1,208 1,838
Due to related parties................................................... 1,236 1,105
Accrued wages and benefits............................................... 928 908
Other accrued expenses................................................... 105 272
------- -------
Total current liabilities........................................ 4,146 4,512
Long-term debt, net of current portion..................................... 76 200
------- -------
Total liabilities................................................ 4,222 4,712
Unrestricted net assets.................................................... 10,621 13,386
------- -------
Total liabilities and unrestricted net assets.................... $14,843 $18,098
======= =======
</TABLE>
See accompanying notes.
F-37
<PAGE> 97
KIDNEY CARE, INC., ET AL.
COMBINED STATEMENTS OF REVENUES, EXPENSES
AND CHANGES IN UNRESTRICTED NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net revenue....................................................... $31,366 $36,294 $38,862
Operating costs and expenses:
Patient care costs.............................................. 24,255 28,357 29,890
General and administrative expenses............................. 1,129 930 927
Provision for doubtful accounts................................. 716 770 851
Depreciation and amortization................................... 872 919 903
------- ------- -------
Total operating costs and expenses...................... 26,972 30,976 32,571
------- ------- -------
Income from operations............................................ 4,394 5,318 6,291
Interest expense, net............................................. 185 183 167
------- ------- -------
Income before taxes............................................... 4,209 5,135 6,124
Provision for income taxes........................................ 1,074 944 1,213
------- ------- -------
Net income........................................................ 3,135 4,191 4,911
Unrestricted net assets not retained by the entity................ (1,447) (2,508) (2,146)
Unrestricted net assets at beginning of period.................... 7,250 8,938 10,621
------- ------- -------
Unrestricted net assets at end of year............................ $ 8,938 $10,621 $13,386
======= ======= =======
</TABLE>
See accompanying notes.
F-38
<PAGE> 98
KIDNEY CARE, INC., ET AL.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................... $ 3,135 $ 4,191 $ 4,911
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 872 919 903
Gain on disposal of equipment............................ -- (6) (25)
Deferred income tax credit............................... (23) (28) 42
Changes in assets and liabilities:
Accounts receivable................................... (1,416) (1,048) (491)
Inventories........................................... (90) (7) (178)
Prepaid expenses and other assets..................... (136) 25 (778)
Recoverable sales tax................................. (570) 1,727 --
Accounts payable...................................... 662 (534) 630
Other accrued expenses and other liabilities.......... 371 (645) 16
------- ------- -------
Net cash provided by operating activities....................... 2,805 4,594 5,030
INVESTING ACTIVITIES
Maturities of short-term government securities.................. -- -- 3,095
Purchases of short-term government securities................... -- (1,000) (2,608)
Proceeds from sales of property, plant and equipment............ 10 19 25
Purchases of property, plant and equipment...................... (810) (761) (395)
------- ------- -------
Net cash provided by (used in) investing activities............. (800) (1,742) 117
FINANCING ACTIVITIES
Proceeds from long-term borrowings.............................. 406 428 483
Principal payments on long-term debt and capital lease
obligations................................................... (448) (497) (639)
Decrease in unrestricted net assets not retained by the
entity........................................................ (1,447) (2,508) (2,146)
------- ------- -------
Net cash used in financing activities........................... (1,489) (2,577) (2,302)
------- ------- -------
Net increase in cash and cash equivalents....................... 516 275 2,845
Cash and cash equivalents at beginning of year.................. 259 775 1,050
------- ------- -------
Cash and cash equivalents at end of year........................ $ 775 $ 1,050 $ 3,895
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid................................................. $ 106 $ 70 $ 50
======= ======= =======
</TABLE>
See accompanying notes.
F-39
<PAGE> 99
KIDNEY CARE, INC., ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
JANUARY 31, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Kidney Care, Inc., et al. ("Kidney Care") consists of Kidney Care, Inc.
("KC") and certain operating divisions of its affiliates, Medical Enterprises,
Ltd. ("MEL") and Health Care Suppliers, Inc. ("HSI"). Kidney Care operates
dialysis treatment centers and provides outpatient and home patient dialysis
services in the southern United States. The combined financial statements
present the operating results and financial position of the divisions of those
entities affiliated with KC that became part of a combination referred to in
Note 12. KC, MEL and HSI have common management and members of the Boards of
Directors. All significant intercompany transactions between KC and the
operating divisions of MEL and HSI have been eliminated in the combination.
MEL and HSI provide various administrative services to Kidney Care
including data processing, accounting, personnel, purchasing and customer
service. It is Kidney Care's policy to charge the expenses of MEL and HSI first
on the basis of direct usage when identifiable, with the remainder allocated on
the basis of time spent by the service departments on Kidney Care matters.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Revenue
Net revenue is recorded as services are rendered at established rates net
of contractual adjustments. During the years ended January 31, 1994, 1995, and
1996, Kidney Care received approximately 86% of its net revenue from Medicare
and Medicaid reimbursement programs which reimburse dialysis services on a
prospective payment system. Contractual adjustments arise due to the terms of
certain reimbursement and managed care contracts. Such adjustments represent the
difference between charges at established rates and estimated amounts to be
reimbursed to Kidney Care and are recognized when the services are rendered. Any
differences between estimated contractual adjustments and actual final
settlements under reimbursement contracts are recognized when the final
settlements are made.
Kidney Care provides charity care to certain patients who are identified
based on financial information provided. Charity care patient service revenue,
which is not material, is recorded when payment is received.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with original maturity of
three months or less.
Short-term Government Securities
Short-term government securities are stated at cost, which approximates
market, and consist of U.S. Government agencies securities with maturities of
one year or less.
Inventories
Inventories are stated at cost (first-in, first-out method) and consist of
kidney dialysis supplies, drugs and raw materials and supplies used in the
production of dialysis concentrate.
Depreciation and Amortization
Depreciation and amortization are provided on the straight-line method over
the estimated useful lives of the assets which range from five to ten years for
furniture, fixtures and equipment and five to thirty-one years for leasehold
improvements and buildings. Repairs and maintenance costs are expensed as they
are incurred, while costs of betterments and renewals are capitalized.
F-40
<PAGE> 100
KIDNEY CARE, INC., ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated Medical Professional Liability Claims
Kidney Care is insured for medical professional liability claims through a
retrospectively rated commercial insurance policy. It is Kidney Care's policy
that provision for estimated premium adjustments to medical professional
liability costs be made for asserted and unasserted claims and based upon Kidney
Care's experience. Provision for such professional liability claims includes
estimates of the ultimate costs of such claims. To date, Kidney Care's
experience with such claims has not been significant. Accordingly, no such
provision has been made.
Income Taxes
KC is a not-for-profit corporation as described in Section 501(c)(3) of the
Internal Revenue Code, as amended (the "Code") and is exempt from federal and
state income taxes on related income pursuant to Section 501(a) of the Code.
Consequently, the accompanying combined statements of revenues, expenses and
changes in net assets do not include provisions for income taxes from KC's
operations. Income taxes have been provided by the liability method on earnings
of the operating divisions of MEL and HSI included therein in accordance with
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
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 dates of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
3. ACCOUNTS RECEIVABLE
Accounts receivable, net at January 31, 1995 and 1996 of $7,814 and $8,348,
respectively, includes an allowance for contractual adjustments of $9,284 and
$10,724, respectively, and an allowance for doubtful accounts of $2,616 and
$1,855, respectively.
4. RECOVERABLE SALES TAX
On January 5, 1994, the Mississippi State Tax Commission principally
granted Kidney Care an exemption from Mississippi sales taxes. Kidney Care
recovered sales tax of $1,727 principally applicable to supply purchases from
February 1, 1990 through December 31, 1994. Supplies and drugs expense included
in patient care costs in the accompanying combined statements of revenues,
expenses and changes in net assets is included net of the sales taxes recovered
applicable to the respective fiscal years.
F-41
<PAGE> 101
KIDNEY CARE, INC., ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------
1995 1996
------- -------
<S> <C> <C>
Land............................................................... $ 29 $ 29
Building........................................................... 78 78
Furniture, fixtures and equipment.................................. 8,629 8,143
Leasehold improvements............................................. 2,528 2,549
------- -------
11,264 10,799
Less accumulated depreciation...................................... (8,237) (8,260)
------- -------
Property, plant and equipment, net................................. $ 3,027 $ 2,539
======= =======
</TABLE>
6. CREDIT FACILITIES, LONG-TERM DEBT AND CAPITAL LEASES
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Notes payable to a bank, due in monthly installments, bearing interest
at 8.75%, matured in fiscal 1996.................................... $151 $ --
Notes payable to a bank, due in monthly installments, bearing interest
at 8.75%, maturing in fiscal 1999................................... 169 152
Equipment notes payable, due in monthly installments, bearing interest
at rates from 5.9% to 8.75%, maturing in fiscal 1997 and 2000....... 10 35
Notes payable to insurance companies, due in monthly installments,
bearing interest at 6.4% to 7.4%, maturing in fiscal 1997........... -- 330
Notes payable to insurance companies, matured in fiscal 1996.......... 318 --
Capital lease obligation, due in monthly installments, including
interest at 10.8%................................................... 97 72
---- ----
$745 $589
==== ====
</TABLE>
At January 31, 1996, the aggregate maturities of long-term debt and capital
leases are as follows:
<TABLE>
<CAPTION>
CAPITAL
LONG-TERM LEASE
DEBT OBLIGATION
--------- ----------
<S> <C> <C>
1997......................................................... $ 360 $ 35
1998......................................................... 29 35
1999......................................................... 122 12
2000......................................................... 6 --
---- ----
Total aggregate payments........................... $ 517 82
====
Less amounts representing interest........................... (10)
----
Present value of net minimum lease payments.................. 72
Less amounts due in one year................................. 29
----
Long-term portion of capital lease obligations............... $ 43
====
</TABLE>
Kidney Care has a $1,200 line of credit with a bank, all of which was
available at January 31, 1996, that matures June 30, 1996. Interest on
borrowings under the line of credit bear an interest rate of prime plus 1% and
borrowings are collateralized by accounts receivable. Accounts receivable, land,
building and certain
F-42
<PAGE> 102
KIDNEY CARE, INC., ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
furniture, fixtures and equipment and leasehold improvements collateralize the
notes payable to a bank. Certain equipment collateralize the equipment notes
payable.
Kidney Care leases certain computer equipment under a capitalized lease.
The cost of such equipment at January 31, 1995 and 1996 was $134. Accumulated
amortization was $47 and $74, respectively.
7. BENEFIT PLANS
Kidney Care has a 403(b) defined contribution plan for its employees who
elect to participate in the plan. Kidney Care matches up to 5% of salaries of
participating employees. The retirement plan expense was $256, $316, and $330
for the years ended January 31, 1994, 1995, and 1996, respectively.
Kidney Care provides employee health coverage for its employees for claims
up to $35 per employee and total aggregate claims of $1,000 per annum. Effective
June 1, 1994, Kidney Care provides dental coverage claims up to $1.5 per
employee per annum. Kidney Care has reinsurance coverage for amounts in excess
of the self-insured amounts.
8. INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------
1994 1995 1996
------ ---- ------
<S> <C> <C> <C>
Current:
Federal.................................................... $ 950 $885 $1,067
State...................................................... 147 87 104
------- ----- -------
1,097 972 1,171
Deferred (credits):
Federal.................................................... (20) (25) 39
State...................................................... (3) (3) 3
------- ----- -------
(23) (28) 42
------- ----- -------
$1,074 $944 $1,213
======= ====== =======
</TABLE>
The difference between provision for income taxes at Kidney Care's
effective tax rate and income taxes (credits) at the statutory federal tax rate
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Statutory federal income taxes.............................. $1,431 $1,746 $2,082
State income taxes, net..................................... 95 83 107
Income reported in not-for-profit corporation............... (464) (900) (991)
Other....................................................... 12 15 15
------- ------- -------
$1,074 $ 944 $1,213
======= ======= =======
</TABLE>
The components of deferred income tax assets are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
-----------
1995 1996
---- ----
<S> <C> <C>
Accounts receivable...................................................... $64 $23
Accrued expenses......................................................... 1 --
--- ---
$65 $23
=== ===
</TABLE>
F-43
<PAGE> 103
KIDNEY CARE, INC., ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS
Kidney Care rents certain dialysis treatment facilities from one of its
directors. Kidney Care also obtained certain water and housekeeping services
from MEL and HSI. The following is a summary of these expenses.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY
31,
--------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Patient care costs:
Water services............................................... $ 70 $ 42 $ 99
Facility rent................................................ 338 338 333
Housekeeping services........................................ 425 551 477
---- ---- ----
$833 $931 $909
==== ==== ====
</TABLE>
10. PRO FORMA INCOME TAXES (UNAUDITED)
The following unaudited pro forma information reflects income tax expense
of Kidney Care as if KC had been subject to federal and state income taxes:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal.................................................... $1,871 $1,840 $1,835
State...................................................... 290 285 176
------ ------ ------
2,161 2,125 2,011
Deferred credits............................................. (578) (193) 289
------ ------ ------
Pro forma income taxes....................................... 1,583 1,932 2,300
Income taxes as reported..................................... 1,074 944 1,213
------ ------ ------
Pro forma income tax adjustment.............................. $ 509 $ 988 $1,087
====== ====== ======
</TABLE>
The pro forma income tax expense differs from the statutory federal income
taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Statutory federal income taxes............................... $1,431 $1,746 $2,083
State income taxes, net...................................... 139 169 202
Other........................................................ 13 17 15
------ ------ ------
$1,583 $1,932 $2,300
====== ====== ======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Kidney Care leases certain facilities and computer equipment. Rent expense
for the years ended January 31, 1994, 1995, and 1996 totaled $893, $948, and
$912, respectively. Minimum rental payments under noncancellable operating
leases having remaining terms in excess of one year as of January 31, 1996, by
fiscal year are as follows:
<TABLE>
<S> <C>
1997.................................................................. $665
1998.................................................................. 636
1999.................................................................. 624
2000.................................................................. 518
2001.................................................................. 471
</TABLE>
F-44
<PAGE> 104
KIDNEY CARE, INC., ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Kidney Care is involved from time to time in claims and routine litigation
in the normal course of its business. Management is of the opinion, based on the
advice of counsel, that the outcome of any matters presently pending will not
have a material adverse effect on the combined financial position or operations
of Kidney Care.
12. ASSET TRANSFER AGREEMENTS
On July 31, 1995, KC entered into an agreement with Renal Care Group, Inc.
("RCG") whereby RCG agreed to purchase substantially all of KC's assets and
assume certain of KC's liabilities. On November 14, 1995, MEL entered into an
agreement with RCG whereby MEL agreed to be acquired by RCG in a merger, prior
to which MEL's assets that are unrelated to its dialysis business will be spun
off into a separate entity.
Effective February 6, 1996, RCG completed an initial public offering of
3,900 shares of Common Stock. Simultaneous with the consummation of the
offering, a combination was consummated which included provisions for the
transfer agreements between RCG, KC and MEL described above.
F-45
<PAGE> 105
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OF 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 CIRCUMSTANCE CREATE ANY
IMPLICATION 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....................
Risk Factors..........................
The Company...........................
Use of Proceeds.......................
Price Range of Common Stock...........
Dividend Policy.......................
Capitalization........................
Dilution..............................
Selected Consolidated Financial
Data................................
Pro Forma Financial Data..............
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business..............................
Management............................
Principal and Selling Stockholders....
Description of Capital Stock..........
Shares Eligible for Future Sale.......
Underwriting..........................
Legal Matters.........................
Experts...............................
Additional Information................
Index to Financial Statements F-1.....
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,000,000 SHARES
RENAL CARE GROUP, INC.
COMMON STOCK
[LOGO]
-----------------
PROSPECTUS
-----------------
EQUITABLE SECURITIES CORPORATION
HAMBRECHT & QUIST
MORGAN KEEGAN & COMPANY, INC.
NEEDHAM & COMPANY, INC.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 106
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by the
Company in connection with the issuance and distribution of the securities being
registered hereby, other than underwriting discounts and commissions. The
Company is paying all of these expenses in connection with the issuance and
distribution of the securities.
<TABLE>
<CAPTION>
PAYABLE BY
THE REGISTRANT
--------------
<S> <C>
SEC registration fee............................................................ $ 37,898
NASD filing fee................................................................. 13,006
Nasdaq Stock Market's National Market listing fee............................... 17,500
Accountants' fees and expenses..................................................
Legal fees and expenses.........................................................
Printing and engraving costs....................................................
Blue Sky fees and expenses......................................................
Transfer Agent and Registrar fees...............................................
Miscellaneous...................................................................
-------
Total.................................................................
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Certificate of Incorporation provides
that the Company shall, to the fullest extent permitted by Section 145 of the
General Corporation Law of the State of Delaware, as amended from time to time,
indemnify its officers and directors.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorney's fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they 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 reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnify for such expenses despite such
adjudication of liability.
The Company's Amended and Restated Certificate of Incorporation contains a
provision which eliminates, to the fullest extent permitted by the General
Corporation Law of Delaware, director liability for monetary damages for
breaches of the fiduciary duty of care or any other duty as a director.
Reference is hereby made to the Underwriting Agreement, the form of which
is filed as Exhibit 1.1 hereto, in which the Company agrees to indemnify the
Underwriters and certain other persons against certain civil liabilities.
II-1
<PAGE> 107
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its incorporation on June 20, 1995, the Company has issued the
following securities:
(A) On June 22, 1995, Sam A. Brooks purchased one share of Common
Stock for $10.00. Such sale was made in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act.
(B) At various times between July 19, 1995, and November 4, 1995, the
Company granted options to purchase 1,076,448 shares of Common Stock to
various consultants, directors and officers of the Company. Such grants
were made in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act and Rule 701 as promulgated thereunder.
(C) Between November 16, 1995 and December 8, 1995, the security
holders of the Founding Companies made their investment decision to
purchase 4,381,000 shares of Common Stock upon the closing of the initial
public offering. Obtaining such investment decisions and the ultimate sale
of such shares of Common Stock at the closing of the initial public
offering were made in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act. Such shares of Common Stock
(along with certain cash payments and assumptions of liabilities by the
Company) were issued in exchange for the Founding Companies as described in
"The Company" and "Certain Transactions."
(D) On December 7, 1995, the Company sold an aggregate principal
amount of $1,380,000 of Convertible Senior Subordinated Promissory Notes to
17 owners of certain of the Founding Companies in a private placement
pursuant to the exemption from registration set forth in Section 4(2) of
the Securities Act. Such notes bear interest at a rate of 7.0% per annum,
mature on December 7, 1996, and the principal and accrued interest thereon
are convertible into shares of Common Stock of the Company at a conversion
price of $7.50 per share.
(E) On February 12, 1996, the Company issued 4,381,000 shares of
Common Stock to the former owners of the Founding Companies in a private
placement pursuant to the exemption from registration set forth in Section
4(2) of the Securities Act.
(F) On April 26, 1996, the Company issued 528,245 shares of Common
Stock to the former owners of Main Line Suburban Dialysis Centers, Inc. in
a private placement pursuant to the exemption from registration set forth
in Section 4(2) of the Securities Act.
(G) On July 1, 1996, the Company issued 298,775 shares of Common Stock
to the former owners of The Nephrology Centers, Inc. in a private placement
pursuant to the exemption from registration set forth in Section 4(2) of
the Securities Act.
(H) On September 30, 1996, the Company issued 2,400,000 shares of
Common Stock to the former owners of RenalWest, L.C. in a private placement
pursuant to the exemption from registration set forth in Section 4(2) of
the Securities Act.
(I) On September 30, 1996, the Company issued 70,000 shares of Common
Stock to the former owner of Northeast Alabama Kidney Center, Inc. in a
private placement pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act.
No underwriters were engaged in connection with the foregoing sales of
securities.
II-2
<PAGE> 108
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. Exhibits (See exhibit index immediately preceding the exhibits for the
page number where each exhibit can be found)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------------------------------------------------------------------
<C> <S> <C>
*1.1 -- Form of Underwriting Agreement among the Company and Equitable Securities
Corporation, Hambrecht & Quist LLP, Morgan Keegan & Company, Inc. and Needham &
Company, Inc., as the Representatives of the several Underwriters
2.1 -- Uniform Terms and Conditions attached to each of the Combination Agreements listed
in Exhibits 2.2 through 2.7(1)
2.2 -- Amended and Restated Transfer Agreement, dated November 11, 1995, between the
Company and Kansas Nephrology Association and its owners(1)
2.3 -- Amended and Restated Transfer Agreement, dated November 8, 1995, between the
Company and Tyler Nephrology Associates, P.A. and its owners(1)
2.4 -- Amended and Restated Transfer Agreement, dated November 8, 1995, between the
Company and D.M.N. Professional Corporation and its owners(1)
2.5 -- Agreement and Plan of Merger, dated November 14, 1995, between the Company and
Medical Enterprises, Ltd. and John Bower, M.D.(1)
2.6 -- Amended and Restated Transfer Agreement, dated November 14, 1995, between the
Company and Kidney Care, Inc.(1)
2.7 -- Agreement and Plan of Merger, dated November 15, 1995, between the Company and
Renal Care Group, Inc. (a Tennessee corporation)(1)
2.8 -- Agreement for Purchase and Sale of Real Property, dated July 31, 1995, between
Renal Care Group, Inc. and John D. Bower, M.D.(1)
2.9 -- Agreement and Plan of Merger, dated August 7, 1996, by and among the Company, RCG
Three Corp., RCG Nine Corp., RCG Four Corp., RenalWest, L.C., 3-CO, Inc., 4-CO,
Inc. and 9-CO, Inc.
3.1 -- Amended and Restated Certificate of Incorporation of the Company(1)
3.2 -- Amended and Restated Bylaws of the Company(1)
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Certificate of
Incorporation and Bylaws of the Company defining rights of holders of Common Stock
of the Company(1)
4.2 -- Specimen stock certificate for the Common Stock of the Company(1)
4.3 -- Form of 7.0% Convertible Senior Subordinated Promissory Note(1)
*5.1 -- Opinion of Alston & Bird, including consent
10.1 -- Employment Agreement, dated February 6, 1996, between the Company and Sam A.
Brooks(2)
10.2 -- Employment Agreement, dated February 6, 1996, between the Company and Ron Hinds
10.3 -- Employment Agreement between the Company and Raymond Hakim, M.D.(1)
10.4 -- Employment Agreement, dated April 1, 1994, between the Company and Joseph A.
Cashia(2)
10.5 -- Employment Agreement, dated February 12, 1996, between the Company and Ann N.
Bower(2)
10.6 -- Medical Director Services Agreement, dated February 12, 1996, between the Company
and Kansas Nephrology Physicians, P.A.(2)
10.7 -- Medical Director Services Agreement, dated February 12, 1996, between the Company
and Indiana Dialysis Management, P.C.(2)
10.8 -- Medical Director Services Agreement, dated February 12, 1996, between the Company
and Tyler Dialysis & Transplant Associates, P.A.(2)
10.9 -- Lease agreement, dated February 5, 1996, between the Company and MEL, Inc. relating
to approximately 20,000 square feet of space.(2)
10.10 -- Lease agreement, dated February 12, 1996, among the Company and Thomas A. Lowery,
M.D., James R. Cotton, M.D., Roy D. Gerard, M.D. and Kevin A. Curran, M.D.,
relating to property in Carthage, Texas.(2)
</TABLE>
II-3
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------------------------------------------------------------------
<C> <S> <C>
10.11 -- Lease agreement, dated February 12, 1996, among the Company and Thomas A. Lowery,
M.D., James R. Cotton, M.D, Roy D. Gerard, M.D. and Kevin A. Curran, M.D., relating
to property in Tyler Texas.(2)
10.12 -- Sublease agreement between M-W-R Investment and Kansas Nephrology Associates, P.A.
dated February 1, 1990, to be assumed by the Company, and the related Lease
agreement between Dodge City Medical Center Building, Inc. and M-W-R Investment.(1)
10.13 -- Sublease Agreement, dated February 12, 1996, with Tyler Nephrology Associates,
Inc.(2)
10.14 -- Dialysis Center Management Agreement, dated May 11, 1994 between Renal Care Group,
Inc (of Tennessee) and Vanderbilt University(1)
10.15 -- 1996 Stock Option Plan for Outside Directors(1)
10.16 -- Amended and Restated 1996 Stock Option Plan
10.17 -- Employee Stock Purchase Plan(1)
10.18 -- Agreement between the Company and Healthcare Suppliers, Inc. dated December 7,
1995(1)
10.19 -- Amendment No. 1 to the Company's Employee Stock Purchase Plan
10.20 -- Laboratory Management Agreement, dated February 12, 1996, between the Company and
Kidney Care, Inc.
10.21 -- Chief Medical Officer Agreement, dated February 12, 1996, between the Company and
John D. Bower, M.D.
10.22 -- Medical Director Services Agreement, dated September 30, 1996, between the Company
and a group of individual physicians
10.23 -- Employment Agreement, dated June 30, 1996, between the Company and Gary Brukardt
10.24 -- Management Agreement, dated March 1, 1996, between the Company and The Cleveland
Clinic Foundation
11.1 -- Statement regarding computation of per share earnings
*21.1 -- List of subsidiaries of the Company
*23.1 -- Consent of Alston & Bird (Contained in Exhibit 5.1.)
23.2 -- Consent of Ernst & Young LLP
23.3 -- Consent of Henry & Peters, P.C.
23.4 -- Consent of Allen, Gibbs, & Houlik, L.C.
24.1 -- Powers of Attorney with respect to amendments of this Registration Statement
(included as part of the signature page to this Registration Statement, page II-7)
</TABLE>
- ---------------
* To be filed by Amendment
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Reg. No. 333-80221) effective February 6, 1996.
(2) Incorporated by reference to the Company's Form 10-Q for the Quarter ended
March 31, 1996 (Commission File No. 0-27640).
B. Financial Statement Schedules
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the
II-4
<PAGE> 110
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 Company 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 of 1933 and will be governed by the
final adjudication of such issue.
The Company hereby undertakes to provide to the Representative of the
Underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the Representative of the Underwriters to permit prompt delivery to each
purchaser.
The Company 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 of 1933 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> 111
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 Nashville, State of
Tennessee, on October 9, 1996.
RENAL CARE GROUP, INC.
By: /s/ SAM A. BROOKS, JR.
--------------------------------------
Sam A. Brooks, Jr.
President and Chief Executive Officer
II-6
<PAGE> 112
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Sam A.
Brooks, Jr. and Ronald Hinds and each of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement or a Registration Statement filed pursuant to
Rule 462 of the Securities Act of 1933, as amended, and to file the same with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on October 9, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------------------- --------------------------------------------
<C> <S>
/s/ SAM A. BROOKS, JR. President, Chief Executive Officer and
- ----------------------------------------------- Director (Principal Executive Officer)
Sam A. Brooks, Jr.
/s/ RONALD HINDS Executive Vice President, Chief Financial
- ----------------------------------------------- Officer, Secretary and Treasurer
Ronald Hinds (Principal Financial Officer and Principal
Accounting Officer)
/s/ JOSEPH C. HUTTS Director
- -----------------------------------------------
Joseph C. Hutts
/s/ HARRY R. JACOBSON, M.D. Director and Chairman of the Board
- -----------------------------------------------
Harry R. Jacobson, M.D.
Director
- -----------------------------------------------
Thomas A. Lowery
/s/ JOHN D. BOWER, M.D. Director and Vice Chairman of the Board
- -----------------------------------------------
John D. Bower, M.D.
/s/ STEPHEN D. MCMURRAY, M.D. Director
- -----------------------------------------------
Stephen D. McMurray, M.D.
/s/ W. TOM MEREDITH, M.D. Director
- -----------------------------------------------
W. Tom Meredith, M.D.
Director
- -----------------------------------------------
Kenneth Johnson, M.D.
</TABLE>
II-7
<PAGE> 113
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Renal Care Group, Inc.
We have audited the supplemental consolidated financial statements of Renal
Care Group, Inc., as of December 31, 1994 and 1995, and for each of the two
years in the period ended December 31, 1995, and have issued our report thereon
dated October 8, 1996 (included elsewhere in this Registration Statement). Our
audits also included the supplemental consolidated financial statement schedule
listed in Item 16(b) of this Registration Statement. This supplemental
consolidated schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the supplemental consolidated financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Ernst & Young LLP
Nashville, Tennessee
October 8, 1996
S-1
<PAGE> 114
SCHEDULE II
RENAL CARE GROUP, INC.
SUPPLEMENTAL CONSOLIDATED SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ----------------------- BALANCE AT
BEGINNING OF CHARGED TO CHARGED TO END
PERIOD EXPENSE REVENUE WRITE-OFFS OF PERIOD
------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1994............. $ 954 $1,418 $ 0 $ (543) $1,829
========= ======== ======== ======= ========
Year ended December 31, 1995............. $1,829 $2,355 $399 $ (204) $3,980
========= ======== ======== ======= ========
</TABLE>
S-2
<PAGE> 115
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Renal Care Group, Inc.
We have audited the combined financial statements of Renal Care Group, Inc.
(of Tennessee) and Three Unrelated Businesses to be Acquired as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995, and have issued our report thereon dated September 30, 1996 (included
elsewhere in this Registration Statement). Our audits also included the combined
financial statement schedule listed in Item 16(b) of this Registration
Statement. This combined schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. We
did not audit the financial statements of Tyler Nephrology Associates, P.A. and
the combined financial statements of Kansas Nephrology Associates, P.A. and
Kansas Dialysis Supply, Inc. which statements reflect total assets constituting
57% as of December 31, 1994 and total revenues constituting 68% for the two
years in the period ended December 31, 1994. We have been furnished with the
report of other auditors with respect to Schedule II of Renal Care Group, Inc.
(of Tennessee) and Three Unrelated Businesses to be Acquired.
In our opinion, based on our audits and the reports of other auditors, the
combined financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Ernst & Young LLP
Nashville, Tennessee
September 30, 1996
S-3
<PAGE> 116
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Kansas Nephrology Associates, P.A. and
Kansas Dialysis Supply, Inc.
We have audited the combined financial statements of Kansas Nephrology
Associates, P.A. and Kansas Dialysis Supply, Inc. as of December 31, 1994 and
for each of the two years in the period ended December 31, 1994, and have issued
our report thereon dated July 15, 1995 (included elsewhere in this Registration
Statement). Our audits also included a combined financial statement schedule
which is included in the schedule listed in Item 16(b) of this Registration
Statement. This combined schedule is the responsibility of the Companies'
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the combined financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Allen, Gibbs & Houlik, L.C.
Wichita, Kansas
July 15, 1995
S-4
<PAGE> 117
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Tyler Nephrology Associates, P.A.
Tyler, Texas
We have audited the financial statements of Tyler Nephrology Associates,
P.A. as of December 31, 1994 and for each of the two years in the period ended
December 31, 1994, and have issued our report thereon dated July 24, 1995. Our
audits also included the combined financial statement schedule listed in Item
16(b) of this Registration Statement. This combined schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Henry & Peters, P.C.
Tyler, Texas
July 24, 1995
S-5
<PAGE> 118
SCHEDULE II
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
COMBINED SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS BALANCE
BALANCE AT ----------------------- AT
BEGINNING CHARGED TO CHARGED TO END
OF PERIOD EXPENSE REVENUE WRITE-OFFS OF PERIOD
---------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
December 31, 1993.......................... $ 633 $ 710 $ -- $ (633) $ 710
======== ======== ======== ======== =======
December 31, 1994.......................... $ 710 $ 726 $ -- $ (314) $ 1,122
======== ======== ======== ======== =======
December 31, 1995.......................... $1,122 $ 789 $ -- $ (1,166) $ 745
======== ======== ======== ======== =======
</TABLE>
S-6
<PAGE> 119
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Kidney Care, Inc.
We have audited the combined financial statements of Kidney Care, Inc., et
al. as of January 31, 1995 and 1996, and for each of the three years in the
period ended January 31, 1996, and have issued our report thereon dated May 15,
1996 (included elsewhere in this Registration Statement). Our audits also
included the combined financial statement schedule listed in Item 16(b) of this
Registration Statement. This combined schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the combined financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Nashville, Tennessee
May 15, 1996
S-7
<PAGE> 120
SCHEDULE II
KIDNEY CARE, INC., ET AL.
COMBINED SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ----------------------- BALANCE AT
BEGINNING CHARGED TO CHARGED TO END
OF PERIOD EXPENSE REVENUE WRITE-OFFS OF PERIOD
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
January 31, 1994........................... $ 482 $716 $ -- $ (847) $ 2,045
======== ======== ======== ======= ========
January 31, 1995........................... $2,045 $770 $ -- $ 198 $ 2,617
======== ======== ======== ======= ========
January 31, 1996........................... $2,617 $851 $ -- $ 1,613 $ 1,855
======== ======== ======== ======= ========
</TABLE>
S-8
<PAGE> 1
Exhibit 2.9
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
RENAL CARE GROUP, INC.,
RCG THREE CORP.,
RCG NINE CORP.,
RCG FOUR CORP.,
RENALWEST, L.C.,
3-CO., INC.,
9-CO., INC.
AND
4-CO., INC.
DATED AS OF AUGUST 7, 1996
<PAGE> 2
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into as of August 7, 1996, by and among RENAL CARE GROUP, INC. ("RCG"), a
Delaware corporation; RCG THREE CORP. ("RCG Three"), an Arizona corporation,
RCG NINE CORP. ("RCG Nine"), an Arizona corporation, RCG FOUR CORP. ("RCG
Four"), an Arizona corporation; RENALWEST, L.C., an Arizona limited liability
company ("RenalWest"); 3-CO., Inc., an Arizona corporation ("Three Co"); 9-CO.,
Inc., an Arizona corporation ("Nine Co"), 4-CO., Inc., an Arizona corporation
("Four Co"), and those parties listed on the signature pages hereto as the
shareholders of Three Co, Nine Co and Four Co (the "Owners") (RCG Three, RCG
Nine, and RCG Four together the "Merger Corps" and individually a "Merger
Corp.;" Three Co., Nine Co. and Four Co together the "Members" and
individually a "Member"; the Members and RenalWest together the "Companies" and
individually a "Company").
PREAMBLE
The Merger Corps are wholly-owned subsidiaries of RCG and the Members are
the sole owners of RenalWest. The Boards of Directors of RCG, the Merger
Corps, and the Members, and RenalWest and the Owners are of the opinion that
the transactions described herein are in the best interests of the parties and
their respective shareholders, as applicable. This Agreement provides for the
acquisition of the Companies by RCG pursuant to the simultaneous mergers of (i)
RCG Three with and into Three Co, (ii) RCG Nine with and into Nine Co and (iii)
RCG Four with and into Four Co. At the Effective Time of such mergers, the
outstanding shares of the capital stock of each of Three Co, Nine Co and Four
Co shall be converted into the right to receive shares of the common stock of
RCG (except as provided herein). As a result, the Owners shall become
shareholders of RCG and each of Three Co, Nine Co and Four Co shall continue
to conduct its business and operations as a wholly owned subsidiary of RCG, and
RenalWest shall continue to be owned by Three Co, Nine Co and Four Co. It is
the intention of the parties to this Agreement that the mergers qualify (i) as
a "reorganization" within the meaning of Section 368(a) of the Code for federal
income tax purposes, and (ii) for treatment as a pooling of interests for
accounting purposes.
Certain terms used in this Agreement are defined in Article 14 of this
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants and agreements set forth herein, the parties agree
as follows:
ARTICLE 1
TRANSACTIONS AND TERMS OF MERGER
1.1 The Mergers. Subject to the terms and conditions of this Agreement,
at the Effective Time, (i) RCG Three shall be merged with and into Three Co,
(ii) RCG Nine shall be merged with and into Nine Co, and (iii) RCG Four shall
be merged with and into Four Co, in each case in accordance with the applicable
provisions of ABCA (together the "Mergers" and individually a "Merger"). Each
of Three Co, Nine Co and Four Co shall be the Surviving Corporation resulting
from the Mergers and shall continue in existence as a wholly owned Subsidiary
of RCG and shall continue to be governed by the Laws of the State of Arizona.
The Mergers shall be consummated pursuant to the terms of this Agreement, which
has been approved and adopted by the respective Boards of Directors of RCG, the
Merger Corps and the Members.
1.2 Time and Place of Closing. The closing (the "Closing") will take
place as soon as practicable after the satisfaction or waiver of all conditions
in Articles 9 and 10 hereof and at such location or on such other date as may
be mutually agreed upon by RCG and RenalWest (such actual date of Closing the
"Closing Date").
<PAGE> 3
1.3 Effective Time. Subject to the provisions of this Agreement, the
parties shall file Articles of Merger executed in accordance with the relevant
provisions of the ABCA and shall make all other filings or recordings required
under the ABCA as soon as practicable on or after the Closing Date. The
Mergers and other transactions contemplated by this Agreement shall become
effective on the date and at the time the Articles of Merger reflecting the
Mergers become effective with the Secretary of State of the State of Arizona
(the "Effective Time").
ARTICLE 2
TERMS OF MERGERS
2.1 Charter. The Articles of Incorporation of the Members in effect
immediately prior to the Effective Time shall be amended and restated,
effective at the Effective Time, in a manner satisfactory to RCG. The Articles
of Incorporation of the Members, as so amended and restated, shall be the
Articles of Incorporation of the Surviving Corporations until otherwise amended
or repealed.
2.2 Bylaws. The Bylaws of Merger Corps. in effect immediately prior to
the Effective Time shall be the Bylaws of the Surviving Corporations until
otherwise amended or repealed.
2.3 Tax-Free Reorganization. The parties hereby adopt this Agreement as
a tax-free "plan of reorganization" within the meaning of Sections 1.368-2(g)
and 1.368-3(a) of the United States Treasury Regulations.
ARTICLE 3
MANNER OF CONVERTING SHARES
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at
the Effective Time, by virtue of the Mergers and without any action on the part
of the parties hereto or the shareholders of any of the parties, the shares of
the constituent corporations of the Mergers shall be converted as follows:
(a) Each share of each Merger Corp. Common Stock issued and outstanding at
the Effective Time shall cease to be outstanding and shall (after giving effect
to Section 3.1(b) below) be converted into one share of Member Common Stock.
(b) All of the shares of Member Common Stock (excluding treasury shares)
issued and outstanding at the Effective Time shall cease to be outstanding and
shall be converted into and exchanged for the right to receive an aggregate of
2,400,000 shares of RCG Common Stock to be distributed to Owners as set forth
on Schedule 3.1(b) hereto (the "Merger Consideration").
3.2 Anti-Dilution Provisions. In the event RCG changes the number of
shares of RCG Common Stock issued and outstanding prior to the Effective Time
as a result of a stock split, stock dividend, combination of shares or other
similar recapitalization with respect to such stock (an "Anti-Dilution Event")
and the record date therefor or, if there is no record date, the effective date
thereof, shall be prior to the Effective Time, then the Average Trading Prices
and the numbers of shares specified in Section 3.1 shall be adjusted to
appropriately and proportionately adjust the number of shares of RCG Common
Stock into which the shares of Member Common Stock will be converted pursuant
to Section 3.1.
3.3 Shares Held by the Company. Each share of Member Common Stock held in
treasury by the Members, shall be canceled and retired at the Effective Time
and no consideration shall be issued in exchange therefor.
- 2 -
<PAGE> 4
3.4 Fractional Shares. No certificates representing fractional shares of
RCG Common Stock will be issued as a result of the Mergers. Any fractional
share interest to which a Company shareholder would otherwise be entitled to
receive shall be rounded up to the nearest whole share if such fraction is .5
or greater and shall be rounded down to the nearest whole share if such
fraction is less than .5.
ARTICLE 4
EXCHANGE OF SHARES
4.1 Exchange Procedures. Promptly (and in no event more than five (5)
calendar days) after the Effective Time, RCG and the Company shall cause the
exchange agent selected by RCG (the "Exchange Agent") to mail to the former
holders of Member Common Stock appropriate transmittal materials (which shall
specify that delivery shall be effected, and risk of loss and title to the
certificates theretofore representing shares of Member Common Stock shall pass,
only upon proper delivery of such certificates to the Exchange Agent). After
the Effective Time, each holder of shares of Member Common Stock (other than
shares to be canceled pursuant to Section 3.3 of this Agreement) issued and
outstanding at the Effective Time shall surrender the certificate or
certificates representing such shares to the Exchange Agent and shall promptly
upon surrender thereof receive in exchange therefor the consideration provided
in Section 3.1 of this Agreement. RCG shall not be obligated to deliver the
consideration to which any former holder of Member Common Stock is entitled as
a result of the Merger until such holder surrenders his certificate or
certificates representing the shares of Member Common Stock for exchange as
provided in this Section 4.1 or such holder provides an appropriate affidavit
regarding loss of such certificate and an indemnification for loss in favor of
RCG. The certificate or certificates of Member Common Stock so surrendered
shall be duly endorsed as the Exchange Agent may require. Any other provision
of this Agreement notwithstanding, neither RCG, the Surviving Corporation nor
the Exchange Agent shall be liable to a holder of Member Common Stock for any
amounts paid or property delivered in good faith to a public official pursuant
to any applicable abandoned property Law.
4.2 Rights of Former Member Shareholders. At the Effective Time, the
stock transfer books of the Members shall be closed and no transfer of Member
Common Stock by any such holder shall thereafter be made or recognized. Until
surrendered in accordance with the provisions of Section 4.1 of this Agreement,
each certificate theretofore representing shares of Member Common Stock (other
than shares to be canceled pursuant to Section 3.3 of this Agreement) shall
from and after the Effective Time represent for all purposes only the right to
receive the consideration provided in Section 3.1 of this Agreement in exchange
therefor. To the extent permitted by Law, former shareholders of record of the
Members shall be entitled to vote after the Effective Time at any meeting of
RCG shareholders the number of whole shares of RCG Common Stock into which
their respective shares of Member Common Stock are converted. Whenever a
dividend or other distribution is declared by RCG on the RCG Common Stock, the
record date for which is at or after the Effective Time, the declaration shall
include dividends or other distributions on all shares issuable pursuant to
this Agreement, but no dividend or other distribution payable to the holders of
record of RCG Common Stock as of any time subsequent to the Effective Time
shall be delivered to the holder of any certificate representing shares of
Member Common Stock issued and outstanding at the Effective Time until such
holder surrenders such certificate for exchange as provided in Section 4.1 of
this Agreement. However, upon surrender of such certificate, the RCG Common
Stock certificate (together with all such undelivered dividends or other
distributions without interest) shall be delivered and paid with respect to
each share represented by such certificate.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANIES AND THE OWNERS
Each Company and the Owners jointly and severally represent and warrant
the following to RCG:
- 3 -
<PAGE> 5
5.1 Organization, Authority and Capacity. Each Member is a corporation
and RenalWest is a limited liability company, duly organized, validly existing,
and in good standing under the laws of the State of Arizona, and has the full
power and authority necessary to (i) execute, deliver and perform its
obligations under this Agreement and the other documents and instruments to be
delivered by it pursuant to this Agreement (collectively, the "Merger
Documents") and (ii) carry on its business as it has been and is now being
conducted and to own and lease the properties and assets which it now owns or
leases. Each Company is duly qualified to do business and is in good standing
in the jurisdictions set forth with respect to that Company in Schedule 5.1,
which includes every jurisdiction in which the failure to be so qualified or in
good standing would have a material adverse effect on (i) such Company's
ability to perform its obligations under the Merger Documents or (ii) the
assets, results of operations or prospects of the Companies taken as a whole.
5.2 Authorization and Validity. The execution, delivery and performance
of the Merger Documents have been duly authorized by all necessary corporate
action on the part of each Company. The Merger Documents to be executed and
delivered by the Companies have been or will be, as the case may be, duly
executed and delivered by each Company and constitute or will constitute the
legal, valid and binding obligations of each Company, enforceable in accordance
with their respective terms, except as may be limited by bankruptcy,
insolvency, or other laws affecting creditors' rights generally, or as may be
modified by a court of equity.
5.3 Absence of Conflicting Agreements or Required Consents. Except as set
forth on Schedule 5.3, the execution, delivery and performance by each Company
of the Merger Documents to be executed and delivered by each Company: (i) do
not require the consent of or notice to any governmental or regulatory
authority or any other third party; (ii) will not conflict with any provision
of such Company's organizational documents; (iii) will not conflict with or
result in a violation of any law, ordinance, regulation, ruling, judgment,
order or injunction of any court or governmental instrumentality to which such
Company is subject or by which such Company or any of its properties are bound;
(iv) will not conflict with, constitute grounds for termination of, result in a
breach of, constitute a default under, require any notice under, or accelerate
or permit the acceleration of any performance required by the terms of any
agreement, instrument, license or permit to which such Company is a party or by
which such Company or any of its properties are bound; and (v) will not create
any lien, encumbrance or restriction upon any of the assets or properties of
such Company.
5.4 Governing Documents of the Company. True and correct copies of the
organizational documents and all amendments thereto of each Company (certified
by the Secretary of State of the State of Arizona) have been provided to RCG.
RCG has previously been provided with access to each Company's minutes, and
such minutes accurately reflect in all material respects the proceedings of the
board of directors (or other similar body) of each Company (and all committees
thereof). The record books of each Company, which have been made available to
RCG for review, contain true, complete and accurate records of the ownership of
each Company.
5.5 Outstanding and Authorized Capitalization. All authorized and
outstanding Company Equity Securities are accurately described on Schedule 5.5.
No shares of capital stock are held in the treasury of any Company except as
set forth on Schedule 5.5. All outstanding Company Equity Securities are
listed and held of record as indicated on Schedule 5.5 and have been duly and
validly issued, are fully paid and nonassessable. None of such Company Equity
Securities were issued in violation of preemptive rights of any past or present
holder of any Company Equity Security. There are no outstanding warrants,
options, rights, calls or other commitments of any nature relating to Company
Equity Securities and there are no outstanding securities of any Company
convertible into or exchangeable for any Company Equity Securities. Except as
set forth on Schedule 5.5, no Company is obligated to issue or repurchase any
of its Company Equity Securities for any reason and no person or entity has any
right or privilege (whether preemptive or contractual) for the purchase,
subscription or issuance of any unissued Company Equity Securities. There are
no outstanding rights to demand registration of securities of any Company or to
sell securities of any Company in connection with a registration by such
Company under the 1933 Act. Except
- 4 -
<PAGE> 6
as set forth in Schedule 5.5, to the knowledge of each Company and the Owners,
there has been no transaction or action taken with respect to any Company
Equity Securities in contemplation of the Merger that would prevent RCG from
accounting for the Merger on a "pooling of interests" basis.
5.6 Subsidiaries, Investments and Predecessors. Except as set forth on
Schedule 5.6, no Company has owned and does not currently own, directly or
indirectly, of record, beneficially or equitably, any capital stock or other
equity, ownership or proprietary interest in any corporation, partnership,
limited liability company, association, trust, joint venture or other entity.
Set forth on Schedule 5.6 is a listing of all predecessor companies of each
Company, including the names of any entities from whom each Company previously
acquired material assets, and any other entity of which such Company has been a
subsidiary or division. Except as listed on Schedule 5.6, no Company has sold
or disposed of, by way of asset sale, stock sale, spin-off or otherwise, any
material assets or business.
5.7 Financial Statements. Attached hereto as Schedule 5.7 are the audited
financial statements of the Companies on a combined basis for the years ended
December 31, 1994 and 1995 prepared by Ernst & Young, LLP and interim financial
statements for the interim period ending June 30, 1996, which reflect the
results of operations and financial condition of the Companies on a combined
basis for such periods and at such dates (collectively, the "Financial
Statements"). The Financial Statements have been prepared in accordance with
generally accepted accounting principles consistently applied, except for (i)
the omission of notes to unaudited Financial Statements, (ii) the fact that
interim Financial Statement are subject to normal and customary year-end
adjustments which will not, in the aggregate, be material and (iii) any
exceptions that may be indicated in the notes to such Financial Statements.
The Financial Statements present fairly in all material respects the financial
position of the Company as of the dates indicated and present fairly in all
material respects the results of the Companies' operations on a combined basis
for the periods then ended, and are in accordance with the books and records of
the Companies, which have been properly maintained and are complete and correct
in all material respects.
5.8 Absence of Changes. Except as set forth on Schedule 5.8, and except
as contemplated by this Agreement, since December 31, 1995, the Companies have
conducted their business only in the ordinary course and have not:
(i) suffered any material adverse change in their working capital,
condition (financial or otherwise), assets, liabilities, reserves, business or
operations;
(ii) paid, discharged or satisfied any material liability other than in
the ordinary course of business;
(iii) written off as uncollectible any account receivable other than in
the ordinary course of business;
(iv) compromised any debts, claims or rights or disposed of any of its
properties or assets other than in the ordinary course of business;
(v) entered into any commitments or transactions not in the ordinary
course of business involving aggregate value in excess of $250,000 or made
aggregate capital expenditures or commitments in excess of $250,000;
(vi) made any material change in any method of accounting or accounting
practice;
(vii) subjected any of their assets, tangible or intangible, to any lien,
encumbrance or restriction of any nature whatsoever, except for liens for
current property taxes not yet due and payable;
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(viii) increased any salaries, wages or employee benefits for any employee
of the Company other than in the ordinary course of business;
(ix) hired, committed to hire or terminated any employee or medical
director other than in the ordinary course of business;
(x) except for payments, dividends or distributions consistent with past
practices for prior periods, declared, set aside or made any payment, dividend
or other distribution to any holder of a Company Equity Security or purchased,
redeemed or otherwise acquired, directly or indirectly, any Company Equity
Security;
(xi) terminated or amended any material contract, license or other
instrument to which any Company is a party or suffered any loss or termination
or threatened loss or termination of any existing material business arrangement
or supplier, the termination or loss of which, in the aggregate, could
materially and adversely affect the Companies;
(xii) effected any change in its capital structure; or
(xiii) agreed, whether in writing or otherwise, to take any action
described in this Section 5.8.
5.9 No Undisclosed Liabilities. Except as listed on Schedule 5.9 hereto,
or otherwise disclosed herein or in the Schedules hereto, the Companies have no
material Liabilities or obligations, whether accrued, absolute, contingent or
otherwise, except for liabilities and obligations reflected in the Financial
Statements or incurred in the ordinary course of its business since the date of
the Companies' most recent balance sheet included in the Financial Statements.
5.10 Litigation, etc. Except as listed on Schedule 5.10 hereto, there are
no claims, lawsuits, actions, arbitrations, administrative or other proceedings
pending against any Company. Except as listed on Schedule 5.10, to the
knowledge of the Companies and the Owners, (i) no such matter described in the
previous sentence is threatened and there is no basis for any such action, and
(ii) there are no governmental or administrative investigations or inquiries
pending that involve any Company, except in either case for any such matter
that could not reasonably be expected to have a material adverse effect on the
business of the Companies taken as a whole, financial or otherwise. Except as
listed on Schedule 5.10, there are no judgments against or consent decrees
binding on any Company or its assets or, to the knowledge of the Companies and
its Owners, any licensed professional relating to the business of the
Companies.
5.11 No Violation of Law. Except as set forth on Schedule 5.11, to the
knowledge of the Companies and the Owners, no Company has been or is currently
in violation of any applicable local, state or federal law, ordinance,
regulation, order, injunction or decree, or any other requirement of any
governmental body, agency or authority or court binding on it, or relating to
its property or business or its advertising, sales or pricing practices, except
for any such violations as would not individually or in the aggregate have a
material adverse effect on the Companies taken as a whole, financial or
otherwise.
5.12 Real and Personal Property. (a) Schedule 5.12(a) sets forth a list
of all items of personal and mixed, tangible and intangible property, rights
and assets of each Company having an original or replacement cost or value
greater than $10,000. Except as set forth on Schedule 5.12(a), each Company
(i) has good and valid title to all of the personal and mixed, tangible and
intangible property, rights and assets which it purports to own, including all
the personal property and assets reflected in the Financial Statements; and
(ii) owns such rights, assets and personal property free and clear of all
liens, encumbrances or restrictions of any nature whatsoever (except for
current year ad valorem taxes).
(b) The Company does not own any real property. Schedule 5.12(b) contains
a true and correct description of all real property leased by each Company,
including all improvements located thereon. RCG has been furnished with true,
correct and complete copies of all leases, deeds, easements and
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other documents and instruments concerning the matters listed on Schedule
5.12(b). No condemnation or similar actions are currently in effect or, to the
knowledge of the Companies and the Owners, pending or threatened against any
part of any real property leased by any Company. To the knowledge of the
Company and the Owners, there are no encroachments, leases, easements,
covenants, restrictions, reservations or other burdens of any nature which
might impair in any material respect the use of any leased real property in a
manner consistent with past practices nor does any part of any building
structure or any other improvement thereon encroach on any other property.
(c) The present zoning, subdivision, building and other ordinances and
regulations applicable to the leased real property permit the continued
operation, use, occupancy and enjoyment of such real property consistent with
past practices, and each Company is in compliance with, and has received no
notices of violations of, any applicable zoning, subdivision or building
regulation, ordinance or other law, regulation, or requirement. Each Company
has all rights and easements necessary for public ingress thereto and egress
therefrom and for the provision of all utility services thereto, including any
required curb cut or street opening permits or licenses for vehicular access
over presently existing roads and driveways.
(d) Each Company's assets (including all buildings and improvements in
connection therewith) are in good operating condition and repair, ordinary wear
and tear excepted (and except where the failure to be in such condition and
repair, either individually or in the aggregate, would not have a material
adverse effect on the Companies taken as a whole, financial or otherwise), and
such assets include all rights, properties, interests in properties, and assets
necessary to permit the Companies to continue their business after the Closing
Date as presently conducted, with the Members becoming wholly owned
subsidiaries of RCG.
(e) Schedule 5.12(e) contains a complete and correct list of all
trademarks, trade names, service marks, service names, brand names, copyrights,
technology rights and licenses, know-how, software and patents, registrations
thereof and applications therefor, and any other intellectual property used in
the business of each Company, together with a complete list of all licenses
granted by or to each Company with respect to any of the foregoing. Neither
the Company nor any of the Owners is currently in receipt of any notice of any
violation of, and each has no reason to believe that the Company's operations
are violating, the rights of others with respect to any such matter, and the
Company has taken reasonable measures to protect its rights with respect to any
such matters as are proprietary to the Company.
5.13 Contracts and Commitments. (a) Schedule 5.13 contains a complete
and accurate list of all contracts, agreements, commitments, instruments and
obligations (whether written or oral, contingent or otherwise) of each Company
of or concerning the following matters (the "Company Agreements"):
(i) the lease, as lessee or lessor (except for leases of machines and
equipment, the aggregate annual rental payments by the Companies for which do
not exceed $25,000), or license, as licensee or licensor, of any real or
personal property (tangible or intangible);
(ii) the employment or engagement of any officer, director, employee,
consultant or agent, other than those terminable at will without material
severance obligation;
(iii) any relationship that requires financial payments, or performance
over a period of more than 90 days, with any Owner, or any person or entity
affiliated with or related to any Owner or any officer or director;
(iv) any arrangement limiting the freedom of such Company to compete in
any manner in any line of business or requiring such Company to share profits;
(v) any arrangement that could reasonably be anticipated to have a
material adverse effect on such Company, financial or otherwise;
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(vi) any material arrangement not in the ordinary course of business;
(vii) any power of attorney, whether limited or general, granted by or to
such Company; and
(viii) any other arrangement that requires performance for a period of
more than 90 days or that requires payments in excess of $50,000.
(b) Each Company has delivered to RCG true and complete copies of all of
its Company Agreements. Except as indicated on Schedule 5.13, the Company
Agreements are valid and effective in accordance with their terms, and there is
not under any of such Company Agreements (i) any existing or claimed default by
any Company or event which with the notice or lapse of time, or both, would
constitute a material default by such Company or (ii) to the knowledge of the
Companies and the Owners, any existing or claimed default by any other party or
event which with notice or lapse of time, or both, would constitute a material
default by any such party. Except as indicated on Schedule 5.13, the
continuation, validity and effectiveness of the Company Agreements will not be
affected by the Mergers and the Mergers will not result in a breach of or
default under, or require the consent of any other party to, any of the Company
Agreements. There is no actual or, to the knowledge of the Companies and the
Owners, threatened termination, cancellation or limitation of any Company
Agreements that would have a material adverse effect on the Companies taken as
a whole, financial or otherwise. To the knowledge of the Companies and the
Owners, there is no pending or threatened bankruptcy, insolvency or similar
proceeding with respect to any other party to the Company Agreements.
5.14 Employment and Labor Matters. (a) Schedule 5.14(a) sets forth (i)
the number of full-time and part-time employees of each Company and (ii) the
name and compensation (including benefits) paid to each employee of or
consultant to each Company who received salary and bonuses for either of such
Company's two most recently ended fiscal years in excess of $50,000.
(b) Each Company is in compliance in all material respects with all
applicable laws respecting employment and employment practices, terms and
conditions of employment, wages and hours, occupational safety and health,
including laws concerning unfair labor practices within the meaning of Section
8 of the National Labor Relations Act, and the employment of non-residents
under the Immigration Reform and Control Act of 1986.
(c) Except as disclosed on Schedule 5.14(c),
(i) there are no charges, governmental audits, investigations,
administrative proceedings or complaints concerning any Company's employment
practices pending or, to the knowledge of the Companies and the Owners,
threatened before any federal, state or local agency or court that could
reasonably be expected to have a material adverse effect on the Companies taken
as a whole, financial or otherwise, and, to the knowledge of the Companies and
the Owners, no basis for any such matter exists;
(ii) to the knowledge of the Companies and the Owners, there are no
inquiries, investigations or monitoring of activities of any licensed,
registered, or certified professional personnel employed by, credentialed or
privileged by, or otherwise affiliated with any Company pending or threatened
by any state professional board or agency charged with regulating the
professional activities of health care practitioners;
(iii) no Company is a party to any union or collective bargaining
agreement, and, to the knowledge of the Companies and the Owners, no union
attempts to organize the employees of any Company have been made, nor are any
such attempts now threatened; and
(iv) no Company has experienced any organized slowdown, work interruption,
strike, or work stoppage by its employees.
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<PAGE> 10
5.15 Employee Benefit Matters .
(a) The Companies currently maintain only the employee pension benefit
plans, as defined in Section 3(2) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), as are listed on Schedule 5.15(a) (the
"Pension Plans"). The Companies have never maintained or contributed to any
other employee pension benefit plan, as defined in Section 3(2) of ERISA.
(b) The Companies currently maintain only the employee welfare benefit
plans, as defined in Section 3(1) of ERISA (including but not limited to, life
insurance, medical, hospitalization, holiday, vacation, disability dental and
vision plans) as are listed on Schedule 5.15(b) (the "Welfare Plans").
(c) The Companies currently maintain, or have entered into, only the
compensation programs and/or employment arrangements, (including but not
limited to, any written or unwritten incentive compensation, fringe benefit,
payroll or employment practice, bonus, severance, sick pay, salary
continuation, deferred compensation, supplemental executive compensation plans,
employment agreements and consulting agreements for the benefit of their
officers, directors, employees, former employees, or independent contractors)
as are listed on Schedule 5.15(c) (the "Compensation Programs").
(d) No Company or an ERISA Affiliate contributes or has contributed within
the last five years to any multiemployer plan, as defined by Section 3(37) of
ERISA.
(e) Each Pension Plan and Welfare Plan has been operated and administered
in substantial compliance with ERISA and the Code; each Pension Plan which is
intended to be qualified under Section 401(a) of the Code has been determined
by the Internal Revenue Service to be so qualified or a request for such
determination has been timely filed with the Internal Revenue Service (and no
Company has any knowledge that any event has occurred between the date of the
last such determination and the Closing Date that would cause the Internal
Revenue Service to revoke such determination).
(f) Each Pension Plan and Welfare Plan designed to satisfy the
requirements of Section 125, Section 401, Section 401(k), Section 409, Section
501(c)(9), Section 4975(e)(7), and/or Section 4980B of the Code, satisfies such
section.
(g) No accumulated funding deficiency, as defined in Section 302(a)(2) of
ERISA, exists (whether or not waived) with respect to any Pension Plan as of
the date hereof.
(h) All amounts required to be paid by the Companies with respect to each
Pension Plan, Welfare Plan and Compensation Program on or before the Closing
Date have been paid.
(i) Neither the execution and delivery of this Agreement nor the
consummation of any of the transactions contemplated hereby will (i) result in
any payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due to any current or
former employee, (ii) increase any benefits otherwise payable under any Pension
Plan, Welfare Plan or Compensation Program, or (iii) result in any acceleration
of the time of payment or vesting of any such benefits.
(j) Neither the execution and delivery of this Agreement nor the
consummation of any of the transactions contemplated hereby will result in a
material increase in the premium costs of any Welfare Plan for which benefits
are insured or a material increase in benefit costs of any Welfare Plan which
provides self-insured benefits.
(k) No Pension Plan is subject to a lien (or expected to be subject to a
lien) under Code Section 412(n) or ERISA Section 302(f) or to tax under Code
Section 4971. No Pension Plan has a "liquidity shortfall" as defined in Code
Section 412(m)(5). No event has occurred in connection with a
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<PAGE> 11
Pension Plan that could result in liability under Title IV of ERISA. None of
the Companies has incurred any liability to the Pension Benefit Guaranty
Corporation in connection with any Pension Plan.
(l) The assets of each Pension Plan are sufficient to provide all "benefit
liabilities" (as defined in ERISA Section 4001(a)(16)) under such Pension Plan
if such Pension Plan is terminated, and are also sufficient to provide all
other benefits due under the Pension Plan (including, but not limited to,
ancillary, disability, shutdown, early retirement and welfare benefits).
(m) None of the Pension Plans or a Company or any party in interest or
disqualified person has engaged in any non-exempt "prohibited transactions" as
defined in Section 406 of ERISA or Section 4975 of the Code.
(n) Except as disclosed in Schedule 5.15(n), no Pension Plan or Welfare
Plan provides benefits, including without limitation death or medical benefits
(whether or not insured), with respect to current or former employees beyond
their retirement or other termination of service other than (i) coverage
mandated by applicable law, (ii) retirement benefits under a Pension Plan,
(iii) death benefits under a Welfare Plan, (iv) deferred compensation accrued
on the books of the Company or a Subsidiary, or (v) benefits the full cost of
which is borne by the current or former employer (or his or her beneficiary).
(o) No "leased employee," as that term is defined in Section 414(n) of the
Code, performs services for a Company.
(p) No liability has been, or is expected by a Company to be, incurred by
a Company under Section 4062 of ERISA with respect to any Pension Plan.
(q) No reportable event within the meaning of Title IV of ERISA has
occurred with respect to any Pension Plan.
(r) The Companies have furnished RCG with correct and complete copies of
each Pension Plan, Welfare Plan, and Compensation Program, together with any
trust agreements, summary plan descriptions, employee informational material,
IRS Forms 5500, the most recent actuarial valuation for any Pension Plan,
financial statements relating thereto and participant listings.
5.16 Insurance Policies. Except as described on Schedule 5.16, all of the
assets and business of each Company are insured in such amounts and against
such losses, casualties or risks as are customary for similar properties and
businesses, and the Company has maintained such insurance continuously from the
earlier of (i) the date of its inception and (ii) the date of inception of any
of its predecessors. Schedule 5.16 sets forth a complete and accurate list and
description of all insurance policies in force naming each Company, or any
employee thereof, as an insured or beneficiary or as a loss payee or for which
the Company has paid or is obligated to pay all or part of the premiums,
including, without limitation, all liability, malpractice, fire, health and
life insurance policies. All such policies are in full force and effect and
the premiums due thereon have been timely paid. No Company has received notice
of any pending or threatened termination or premium increase (retroactive or
otherwise) with respect thereto, and, to the knowledge of the Companies and the
Owners, each Company is in compliance with all conditions contained therein.
Except as set forth on Schedule 5.16, there are no pending claims against such
insurance by any Company as to which insurers are defending under reservation
of rights or have denied liability, and except as set forth on Schedule 5.16,
there exists no claim under such insurance that has not been properly filed by
any Company. To the knowledge of the Companies and the Owners, there are no
outstanding or unfulfilled requirements or recommendations of any insurance
company insuring any Company regarding any repairs to or work to be performed
with respect to the assets of such Company. Each Company has complied with any
such requirements and recommendations as to which the Company has received
notice. Schedule 5.16 contains a listing of all claims made and loss histories
in respect of any insurance maintained by each Company or any predecessor
during the past three (3) years.
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5.17 Environmental Matters. Except as set forth in Schedule 5.17, to the
knowledge of the Companies and the Owners, there are no present or past
Environmental Conditions in any way relating to the business, properties or
assets of any Company. For the purposes of this Agreement, "Environmental
Condition" means (a) the introduction into the environment of any pollution,
including without limitation any contaminant, irritant or pollutant or other
toxic or hazardous substance, in violation of any federal, state or local law,
ordinance or governmental rule or regulations, as a result of any spill,
discharge, leak, emission, escape, injection, dumping or release of any kind
whatsoever of any substance or exposure of any type in any work places or to
any medium, including without limitation air, land, surface waters or ground
waters, or from any generation, transportation, treatment, discharge, storage
or disposal of waste materials, raw materials, hazardous materials, toxic
materials or products of any kind or from the storage, use or handling of any
hazardous or toxic materials or other substances, as a result of which any
Company has or may become liable to any person or by any reason of which any of
the assets of any Company may suffer or be subjected to any lien, encumbrance
or restriction of any nature, or (b) any noncompliance with any federal, state
or local environmental law, rule, regulation or order as a result of or in
connection with any of the foregoing.
5.18 Accounts Receivable and Payable. To the knowledge of the Companies
and the Owners, except as set forth on Schedule 5.18.1, the accounts receivable
outstanding as of the Effective Time will be subject to no defenses,
counterclaims, or rights of setoff other than those arising in the ordinary
course of business and for which adequate reserves have been established. No
accounts payable of any Company are, at this date, over 45 days old and no
accounts payable of any Company will be over 45 days old at any Closing Date,
except as listed on Schedule 5.18.2.
5.19 Taxes. (a) Except as listed in Schedule 5.19 or as reflected in the
Financial Statements, there does not exist any material liability for taxes
which may be asserted by any taxing authority against, and no lien or other
encumbrance for taxes will attach to, any Company or any of its assets other
than taxes due in respect of periods for which tax returns are not yet due and
for which adequate accruals have been made in the Financial Statements. All
federal, state and local tax returns and tax reports required to be filed prior
to the date hereof with respect to any Company have been filed (other than
returns for which extensions to file have been granted) with the appropriate
governmental agencies in all jurisdictions in which such returns and reports
are required to be filed, all of which are true, correct and complete, and all
amounts shown as owing thereon have been paid.
(b) Except as listed on Schedule 5.19, no Company has received notice of
any tax claims being asserted or any proposed assessment by any taxing
authority and no tax returns of any Company have been audited by the Internal
Revenue Service (the "IRS") or the appropriate state agencies for any fiscal
year or period ended prior to the date hereof, and no Company is presently
under, nor has received notice of any, contemplated investigation or audit by
the IRS or any state agency concerning any fiscal year or period ended prior to
the date hereof. Except as listed on Schedule 5.19, no Company has executed
any extension or waivers of any statute of limitations on the assessment or
collection of any tax due that is currently in effect.
(c) Each Company and any of its predecessors in interest have withheld or
collected from each payment made to each of their employees the amount of all
taxes required to be withheld or collected therefrom and each Company and any
of its predecessors in interest have paid the same to the proper tax
depositories or collecting authorities.
(d) From its inception, each Member has been a validly electing S
corporation as defined in Section 1361 of the Code and corresponding provisions
of state and local income tax law in all jurisdictions in which it is required
to report its business operations. No Member or Owner has received any notice
from the IRS challenging such status and no Member or Owner is aware of any
circumstances that would be a basis for challenging such status.
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(e) From its inception, each of RenalWest and its ninety-nine percent
owned subsidiary, Renal West Health Supply L.C., has been a limited liability
company formed under Arizona law and taxable as a partnership under Section
7701 of the Code and in all states in which it has conducted business.
(f) The Owners shall cause to be prepared and filed, at their expense, a
short period tax return of each Company ending on the Closing Date. Such
returns shall be provided for RCG's prior review and approval, which approval
shall not be unreasonably withheld or delayed. The Owners shall file as an "S"
corporation for that short period for each Member and as a partnership for
RenalWest. RCG shall make available any information in its or the Companies'
possession which is reasonably required by the Owners to complete such returns
at no cost to the Owners.
(g) Except as disclosed on Schedule 5.19, there is no liability for taxes
on the part of any Company or any of their subsidiaries (excluding transactions
for which the financial reporting gain would exceed applicable income tax
liability related to such transaction) (i) that will arise with respect to a
current or a future taxable period, (ii) that is wholly or partly a consequence
of a transaction or occurrence, or transactions or occurrences, one or more of
which occurred before the date hereof, and (iii) that is not fully reserved on
the Financial Statements. In addition, except as disclosed on Schedule 5.19,
there are no joint venture, partnership or other arrangements or contracts to
which any Company or any of their subsidiaries is a party and that could be
treated as a partnership for federal income tax purposes.
(h) For purposes hereof, "taxes" shall mean any federal, state, county,
local, foreign or other tax, charge, imposition or other levy (including
interest or penalties thereon) including without limitation, income taxes
estimated taxes, excise taxes, sales taxes, use taxes, gross receipts taxes,
franchise taxes, taxes on earnings and profits, employment and payroll related
taxes, property taxes, real property transfer taxes, Federal Insurance
Contributions Act taxes, taxes on value added and import duties, whether or not
measured in whole or in part by net income, imposed by the United States or any
political subdivision thereof or by any jurisdiction other than the United
States or any political subdivision thereof.
5.20 Licenses, Authorizations and Provider Programs. (a) Each Company is
the holder of all valid licenses and other rights and authorizations required
by law, ordinance, regulation or ruling of any governmental regulatory
authority necessary to operate its business. RenalWest is certified for
participation and reimbursement under Titles XVIII and XIX of the Social
Security Act (the "Medicare and Medicaid programs") (Medicare and Medicaid
programs and such other similar federal, state or local reimbursement or
governmental programs for which the Company is eligible are hereinafter
referred to collectively as the "Government Programs") and has current provider
agreements for such Government Programs and with such private non-governmental
programs, including without limitation any private insurance program, under
which the Company directly or indirectly is presently receiving payments (such
non-governmental programs herein referred to as "Private Programs"). Set forth
on Schedule 5.20.1, as to each facility, is a correct and complete list of such
licenses, permits and other authorizations, and provider agreements under all
Government and Private Programs, complete and correct copies of which have been
provided to RCG. True, complete and correct copies of all surveys of each
Company or its facilities conducted in connection with any Government Program,
Private Program or licensing or accrediting body during the past two (2) years
have been provided to RCG.
(b) To the knowledge of the Companies and the Owners, no material
violation, default, order or deficiency exists with respect to any of the items
listed on Schedule 5.20.1. None of the Companies or the Owners has received
any notice of any action pending or recommended by any state or federal
agencies having jurisdiction over the items listed on Schedule 5.20.1, either
to revoke, withdraw or suspend any license, right or authorization, or to
terminate the participation of any Company in any Government or Private
Program. To the knowledge of the Companies and the Owners, no event has
occurred which, with the giving of notice, the passage of time, or both, would
constitute grounds for a material violation, order or deficiency with respect
to any of the items listed on Schedule 5.20.1 or to revoke, withdraw or suspend
any such license, or to terminate or modify the participation of any Company
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in any Government or Private Program. To the knowledge of the Companies and
the Owners, there has been no decision not to renew any provider or
third-party payor agreement of any Company. Except as listed on Schedule
5.20.2, no consent or approval of, prior filing with or notice to, or any
action by, any governmental body or agency or any other third party is required
in connection with any such license, right or authorization, or Government or
Private Program, by reason of the consummation of the Mergers, and the
continued operation of the business of the Companies thereafter on a basis
consistent with past practices.
(c) Each Company has timely filed all cost reports and other reports
required to be filed by it prior to the date hereof with respect to the
Government and Private Programs, all fiscal intermediaries and other insurance
carriers and all such reports are complete and accurate in all material
respects and have been prepared in material compliance with all applicable
laws, regulations, and principles governing reimbursement and payment claims.
True and complete copies of such cost reports filed by each Company for the
most recent cost-reporting year, if applicable, have heretofore been delivered
to RCG. Each Company has paid or caused to be paid or has properly reflected
in the Financial Statements all known and undisputed refunds, overpayments,
discounts or adjustments which have become due pursuant to such reports and has
no liability under any Government or Private Program (known or unknown,
contingent or otherwise) for any refund, overpayment, discount or adjustment
other than in the ordinary course, and no interest or penalties accruing with
respect thereto, except as has been specifically reserved for in the Financial
Statements or disclosed herein or in the Schedules hereto. To the knowledge of
the Companies and Owners, except as set forth on Schedule 5.20.3, there are no
pending appeals, adjustments, challenges, audits, litigation, or notices of
intent to reopen any closed cost reports. There are no other reports required
to be filed by any Company in order to be paid under any Government or Private
Program for services rendered, except for cost reports not yet due.
5.21 Inspections and Investigations. Except as set forth and described in
Schedule 5.21, (i) neither any of the Company's right nor, to the knowledge of
the Companies and the Owners, the right of any licensed professional or other
individual affiliated with any Company to receive reimbursements pursuant to
any Government or Private Program has been terminated or otherwise adversely
affected as a result of any investigation or action whether by any federal or
state governmental regulatory authority or other third party, (ii) no Company,
or, to the knowledge of the Companies and the Owners, any licensed professional
or other individual affiliated with any Company has, during the past three (3)
years, been the subject of any inspection, investigation, survey, audit,
monitoring or other form of review by any governmental regulatory entity, trade
association, professional review organization, accrediting organization or
certifying agency based upon any alleged improper activity on the part of such
individual, nor has any Company received any notice of deficiency during the
past three years in connection with its operations, (iii) there are not
presently, and at the Effective Time there will not be, any outstanding
deficiencies or work orders of any governmental authority having jurisdiction
over any Company, or other third party, requiring conformity to any applicable
agreement, statute, regulation, ordinance or bylaw, including but not limited
to, the Government and Private Programs, and (iv) there is not any notice of
any claim, requirement or demand of any licensing or certifying agency or other
third party supervising or having authority over any Company or their
operations to rework or redesign any part thereof or to provide additional
furniture, fixtures, equipment, appliances or inventory so as to conform to or
comply with any existing law, code, rule, regulation or standard. Attached as
part of Schedule 5.21 are copies of all reports, correspondence, notices and
other documents relating to any matter described or referenced therein.
5.22 Certain Relationships. (a) Except as set forth on Schedule 5.22(a),
no Company has:
(i) offered, paid, solicited or received anything of value, paid directly
or indirectly, overtly or covertly, in cash or in kind ("Remuneration") to or
from any physician, family member of a physician, or an entity in which a
physician or physician family member has an ownership or investment interest,
including, but not limited to:
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(A) payments for personal or management services pursuant to a
medical director agreement, consulting agreement, management contract,
personal services agreement, or otherwise;
(B) payments for the use of premises leased to or from a physician,
a family member of a physician or an entity in which a physician or
family member has an ownership or investment interest;
(C) payments for the acquisition or lease of equipment, goods or
supplies from a physician, a family member of a physician or an entity in
which a physician or family member has an ownership or investment
interest; or
(ii) offered, paid, solicited or received any Remuneration (excluding fair
market value payments for equipment or supplies) to or from any healthcare
provider, pharmacy, drug or equipment supplier, distributor or manufacturer,
including, but not limited to:
(A) payments or exchanges of anything of value under a warranty
provided by a manufacturer or supplier of an item to the Company; or
(B) discounts, rebates, or other reductions in price on a good or
service received by the Company;
(iii) offered, paid, solicited or received any Remuneration to or from any
person or entity in order to induce business, including, but not limited to,
payments intended not only to induce referrals of patients, but also to induce
the purchasing, leasing, ordering or arrangement for any good, facility,
service or item;
(iv) entered into any joint venture, partnership, co-ownership or other
arrangement involving any ownership or investment interest by any physician, or
family member of a physician, or an entity in which physician or physician
family member has an ownership or investment interest, directly or indirectly,
through equity, debt, or other means, including, but not limited to, an
interest in an entity providing goods or services to such Company;
(v) entered into any joint venture, partnership, co-ownership or other
arrangement involving any ownership or investment interest by any person or
entity including, but not limited to, a hospital, pharmacy, drug or equipment
supplier, distributor or manufacturer, that is or was in a position to make or
influence referrals, furnish items or services to, or otherwise generate
business for the Company; or
(vi) entered into any agreement providing for the referral of any patient
for the provision of goods or services by such Company, or payments by such
Company as a result of any referrals of patients to the Company.
(b) Set forth on Schedule 5.22(b) is a list of all affiliated practices or
physicians who have privileges to use any Company's dialysis facilities or who
are otherwise involved with the use or operation of or referral of patients to
any Company's dialysis facilities.
5.23 Statements True and Correct. No representation or warranty made
herein by the Companies or any of the Owners, nor in any statement, certificate
or instrument to be furnished to RCG by the Companies or any of the Owners
pursuant to any Merger Document, contains or will contain any untrue statement
of material fact or omits or will omit to state a material fact necessary to
make these statements contained herein and therein not misleading.
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ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF THE OWNERS
Each Owner, severally and not jointly, represents and warrants the
following to RCG:
6.1 Ownership Interest Held and Conveyed. Owner is the owner of all
right, title and interest (legal, record and beneficial) in and to the Company
Equity Securities as set forth on Schedule 6.1, free and clear of any and all
liens, encumbrances or restrictions of any nature whatsoever (except for any
restrictions on transfer imposed by securities laws), and Owner holds no other
interest in any Company. Except as provided in Schedule 6.1 or as specifically
contemplated by this Agreement, no person or entity has any right or privilege
(whether preemptive or contractual) for the purchase of any Company Equity
Securities from Owner. Schedule 6.1 contains a complete list of all agreements
or arrangements, whether written or oral, to which Owner is a party that relate
in any way to the Company Equity Securities.
6.2 Organization, Authority and Capacity. Owner has the full authority
and capacity necessary to execute, deliver and perform his or her obligations
under the Merger Documents to be executed and delivered by Owner.
6.3 Authorization and Validity. Owner has the legal capacity required
for executing, delivering and performing the Merger Documents to be executed
and delivered by Owner. If Owner is married and Owner's interest in the
Company constitutes community property, the Merger Documents to be executed and
delivered by Owner's spouse have been or will be, as the case may be, duly
executed and delivered by Owner's spouse and constitute or will constitute the
legal, valid and binding obligations of Owner's spouse, enforceable in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency or other laws affecting creditors' rights generally, or as may be
modified by a court of equity.
6.4 Absence of Conflicting Agreements or Required Consents. Except as set
forth on Schedule 6.4, the execution, delivery and performance by Owner of the
Merger Documents to be executed and delivered by Owner (i) do not require the
consent of or notice to any governmental or regulatory authority or any other
third party; (ii) will not conflict with or result in a violation of any law,
ordinance, regulation, ruling, judgment, order or injunction of any court or
governmental instrumentality to which Owner is subject or by which Owner is
bound; (iii) will not conflict with, constitute grounds for termination of,
result in a breach of, constitute a default under, require any notice under, or
accelerate or permit the acceleration of any performance required by the terms
of any agreement, instrument, license or permit material to the Merger and (v)
will not create any encumbrance or restriction upon the Company Equity
Securities.
6.5 Interested Transactions. Except as set forth on Schedule 6.5, Owner
is not a party to any contract, loan or other transaction with any Company and
does not have any direct or indirect interest in or affiliation with any party
to any such a contract, loan or other transaction. Except as set forth on
Schedule 6.5, Owner is not an employee, consultant, partner, principal,
director or owner of, and does not have any other direct or indirect interest
in or affiliation with, any person or business entity that is engaged in a
business that competes with or is similar to the business of any Company.
6.6 Purchase for Investment, Etc. (a) Such Owner is acquiring the RCG
Common Stock for such Owner's own account and not with a view to or for sale in
connection with any public distribution thereof within the meaning of the 1933
Act;
(b) such Owner (i) has sufficient knowledge and experience in financial
and business matters to enable him, her or it to evaluate the merits and risks
of an investment in the RCG Common Stock, (ii) has the ability to bear the
economic risk of acquiring the RCG Common Stock, (iii) has received and
reviewed the RCG Documents identified in Section 7.8 below, and (iv) has had an
opportunity to ask
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<PAGE> 17
questions of and to receive answers from the officers of RCG and to obtain
additional information in writing as requested, which has been made available
to and examined by such Owner or such Owner's advisors;
(c) such Owner (i) acknowledges that the RCG Common Stock has not been
registered under any securities laws and cannot be resold without registration
thereunder or exemption therefrom, (ii) agrees not to transfer all or any of
the RCG Common Stock received by such Owner unless such transfer has been
registered or is exempt from registration under applicable securities laws and
(iii) acknowledges that the certificate(s) representing the RCG Common Stock
shall bear a prominent legend with respect to the restrictions on transfer
under applicable securities laws; and
(d) such Owner has accurately completed the Investor Questionnaire
required by RCG contemporaneous with the execution of this Agreement and the
statements therein are true and correct.
6.7 Pooling and Tax-Free Reorganization Restrictions. (a) Except as
disclosed on Schedule 6.7(a) during the 30 days immediately preceding the
Effective Time of the Merger, such Owner represents, warrants and covenants
that he has not and will not have sold, transferred, or otherwise disposed of
his interests in, or reduced his risk relative to, any of the shares of Member
Common Stock beneficially owned by the undersigned, except for any pledges of
such Member Common Stock existing prior to such 30-day period as disclosed on
Schedule 6.7(a) hereto. In the event of any such pledge, each Owner will use
his commercially reasonable efforts to obtain an agreement from any such
pledgee to abide by the terms of this Agreement.
(b) Each Owner is aware that the Merger is intended to qualify as a
tax-free reorganization under Section 368 of the Internal Revenue Code ("Code")
for federal income tax purposes. Each Owner acknowledges that Section
1.368-1(b) of the Income Tax Regulations requires "continuity of interest" in
order for the Merger to be treated as tax-free under Section 368 of the Code.
Such Owner represents that he has no pre-arrangement, plan or intention to sell
or otherwise dispose of an amount of his RCG Common Stock to be received in the
Merger which would cause the foregoing requirement not to be satisfied. Each
Owner represents that he has consulted with counsel of his choosing regarding
this and other requirements for such a tax-free reorganization and that he
understands such requirements and the risk that his receipt of RCG Common Stock
could be a taxable event if such requirements are not met. Each Owner further
represents that he is not relying on RCG or its advisors concerning the tax
treatment or consequences of this Agreement or the transactions contemplated
hereby.
6.8 Statements True and Correct. No representation or warranty made
herein by Owner, nor in any statement, certificate or instrument furnished or
to be furnished to RCG by Owner pursuant to any Merger Document, contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements contained herein and
therein not misleading.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF RCG AND MERGER CORPS.
RCG and each Merger Corp. hereby represent and warrant to the Company and
the Owners as follows:
7.1 Organization, Authority and Capacity. RCG is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and each Merger Corp. is a corporation duly organized, validly
existing and in good standing under the laws of the State of Arizona. RCG and
each Merger Corp. have the full power and authority necessary to (i) execute,
deliver and perform their obligations under the Merger Documents to be executed
and delivered by them, and (ii) carry on their business as they have been and
are now being conducted and to own and lease the properties and assets which
they now own or lease. RCG and each Merger Corp. are duly qualified to do
business and are in
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<PAGE> 18
good standing in each jurisdiction in which a failure to be so qualified
or in good standing would have a material adverse effect on (i) their
ability to perform their obligations under the Merger Documents to be executed
and delivered by them or, (ii) the assets, results of operations or prospects
of RCG.
7.2 Authorization and Validity. The execution, delivery and performance
of the Merger Documents to be executed and delivered by RCG and each Merger
Corp. have been duly authorized by all necessary action by RCG and each Merger
Corp. The Merger Documents to be executed and delivered by RCG and each Merger
Corp. have been or will be, as the case may be, duly executed and delivered by
RCG and each Merger Corp. and constitute or will constitute the legal, valid
and binding obligations of RCG and each Merger Corp., enforceable in accordance
with their respective terms, except as may be limited by bankruptcy,
insolvency, or other laws affecting creditors' rights generally, or as may be
modified by a court of equity.
7.3 Absence of Conflicting Agreements or Required Consents. The
execution, delivery and performance by RCG and each Merger Corp. of the Merger
Documents to be executed and delivered by it: (i) do not require the consent of
or notice to any governmental or regulatory authority or any other third party;
(ii) will not conflict with any provision of RCG's or such Merger Corp.'s
articles of incorporation or bylaws; (iii) will not conflict with or result in
a violation of any law, ordinance, regulation, ruling, judgment, order or
injunction of any court or governmental instrumentality to which RCG or such
Merger Corp. is a party or by which RCG or such Merger Corp. or any of their
respective properties is bound; (iv) will not conflict with, constitute grounds
for termination of, result in a breach of, constitute a default under, require
any notice under, or accelerate or permit the acceleration of any performance
required by the terms of any agreement, instrument, license or permit to which
RCG or such Merger Corp. is a party or by which any of its properties are
bound; and (v) will not create any lien, encumbrance or restriction upon any of
the assets or properties of RCG or such Merger Corp.
7.4 Governing Documents. True and correct copies of the organizational
documents and all amendments thereto of RCG (certified by the Secretary of
State of the State of Delaware) and copies of the bylaws of RCG have been
provided to the Company and the Owners. The Company and the Owners have
previously been provided with access to RCG's minutes, and such minutes
accurately reflect all material proceedings of the shareholders and board of
directors of RCG (and all committees thereof). True and correct copies of the
organizational documents and all amendments thereto of each Merger Corp.
(certified by the Secretary of State of the State of Arizona) and copies of the
Bylaws of each Merger Corp. have been provided to the Company and the Owners.
The Company and the Owners have previously been provided with access to the
minutes of each Merger Corp., and such minutes accurately reflect all material
proceedings of the shareholder and Board of Directors of each Merger Corp.
7.5 Outstanding and Authorized Capitalization. (a) The authorized
capital stock of each Merger Corp. consists of 1,000 shares of common stock, of
which 100 shares are issued and outstanding. All of the issued and outstanding
shares of capital stock of each Merger Corp. have been duly and validly issued,
are fully paid and non-assessable. There are no outstanding warrants, options,
rights, calls or other commitments of any nature relating to capital stock of
any Merger Corp., and there are no outstanding securities of any Merger Corp.
convertible into or exchangeable for any securities of any Merger Corp. or RCG.
(b) The authorized capital stock of RCG consists of 22,000,000 shares of
RCG Common Stock and 10,000,000 shares of $.01 par value Preferred Stock. As
of the date hereof, RCG has 10,146,020 shares of RCG Common Stock and no shares
of Preferred Stock issued and outstanding. All issued and outstanding shares
of RCG Common Stock have been duly and validly issued, are fully paid and
non-assessable. Except for (i) options to purchase 1,433,948 shares of common
stock, (ii) warrants to purchase 220,000 shares of common stock and (iii)
promissory notes that are convertible into 184,000 shares of common stock,
there are no outstanding warrants, options, rights, calls or other commitments
of any nature relating to shares of capital stock of RCG, no outstanding
securities convertible into or exchangeable for shares of capital stock of RCG,
and, RCG is not obligated to issue or repurchase any of its
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<PAGE> 19
shares of capital stock for any reason and no person or entity has any
right or privilege (whether preemptive or contractual) for the purchase,
subscription or issuance of any unissued shares of capital stock of RCG.
Except for rights with respect to 5,661,020 shares outstanding, 220,000 shares
under warrants and 184,000 shares under convertible notes, there are no
outstanding rights to demand registration of any shares of capital stock of RCG
or to sell any securities in connection with a registration by RCG under the
1933 Act. No shares of Common Stock are held in RCG's treasury. All RCG
Common Stock to be issued in connection with the Merger will be duly and
validly issued, fully paid and nonassessable, and, based on the representations
of the Companies and the Owners herein and in documents delivered pursuant
hereto, will be issued pursuant to a valid exemption from registration under
the 1933 Act and all applicable state securities laws.
7.6 Litigation and Claims. There are no claims, lawsuits, actions,
arbitrations, administrative or other proceedings, governmental investigations
or inquiries pending or threatened against RCG or the Merger Corps. which could
(i) affect the performance by RCG or the Merger Corps. of the Merger Documents,
or (ii) adversely affect the condition of RCG or the Merger Corps. (financial
or otherwise), and there is no basis for any such action or any state of facts
or occurrence of any event which might give rise to the foregoing.
7.7 Statements True and Correct. No representation or warranty made
herein by RCG and the Merger Corps., nor in any statement, certificate or
instrument to be furnished to the Company or any of the Owners by RCG or the
Merger Corps. pursuant to any Merger Document, nor in any RCG Document,
contains or will contain any untrue statement of material fact or omits or will
omit to state a material fact necessary to make these statements contained and
therein not misleading.
7.8 RCG Documents. RCG has heretofore furnished the following documents
to the Company:
(a) Confidential Private Placement Memorandum, dated November 15, 1995;
(b) Final Prospectus, dated February 6, 1996, contained in its
Registration Statement on Form S-1 (Registration No. 33-80221);
(c) Current Report on Form 8-K, dated March 22, 1996 (Commission File No.
0-2764);
(d) Press release, dated April 1, 1996;
(e) Registration Statement on Form S-8, dated April 22, 1996;
(f) Press release, dated April 29, 1996;
(g) current report on Form 8-K/A, dated May 3, 1996;
(h) Form 12b-25, dated May 3, 1996;
(i) Press release, dated May 6, 1996;
(j) Form 12b-25, dated May 13, 1996;
(k) Form SR, dated May 17, 1996;
(l) Form 10-Q, dated May 20, 1996;
(m) Form 10-K, dated May 21, 1996;
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<PAGE> 20
(n) Form 10-K/A, dated June 7, 1996;
(o) Press Release, dated July 1, 1996;
(p) Press Release, dated July 18, 1996;
(q) Agreement and Plan of Merger, dated April 26, 1996, among RCG and Main
Line Suburban Dialysis Centers, Inc., et al.;
(r) Merger Agreement, dated June 20, 1996, among RCG and The Nephrology
Center, Inc., et al.;
(s) Loan Agreement, dated May 30, 1996, among RCG, et al. and NationsBank
of Tennessee, N.A.; and
(t) Press Release, dated August 6, 1996.
The foregoing documents together with the exhibits thereto (which will be
made available upon written request), are collectively referred to herein as
the "RCG Documents." The RCG Documents include accurate and complete copies of
each and every (i) report and registration statement filed with the SEC ("SEC
Documents") and (ii) publicly disseminated press release of RCG during the past
twelve months ("Press Releases"). As of the time each SEC Document was filed
with the SEC, such SEC Document did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
7.9 Absence of Changes. Except as set forth on Schedule 7.9, since March
31, 1996 (the date of last financial statements), RCG has not suffered any
material adverse change in its working capital, condition (financial or
otherwise), assets, liabilities, reserves, business or operations.
7.10 No Undisclosed Liabilities. Except as listed on Schedule 7.10, and
except for liabilities and obligations reflected in the most recent financial
statements of RCG contained in the RCG Documents or incurred in the ordinary
course of its business since the date of RCG's most recent balance sheet
included in the RCG Documents, RCG has no material liabilities or obligations,
whether accrued, absolute, contingent or otherwise.
7.11. No Liabilities of Merger Corps. Except for the obligations
hereunder, the Merger Corps. are not subject to any liabilities, obligations or
claims, whether accrued, absolute, contingent, liquidated or unliquidated, or
otherwise. Each Merger Corp. was formed solely for the purpose of consummating
the Mergers contemplated by this Agreement and each Merger Corp. has not
engaged in any business or other activity for any other purpose.
7.12 Compliance with Legal Requirements. To the knowledge of RCG, RCG and
each Merger Corp. are in compliance with all applicable legal requirements,
except where the failure to comply with such legal requirements has not had and
could not reasonably be expected to have a material adverse effect on RCG or
the Company. RCG has not received any notice or any communication from any
governmental authority regarding any actual or possible violation of, or
failure to comply with, any legal requirement, except where failure to comply
with such legal requirement has not had and could not reasonably be expected to
have a material adverse effect on RCG.
7.13 Employee Benefits. RCG agrees that after the Mergers it will cause
the Members to cause RenalWest to credit RenalWest employees with service for
eligibility and vesting purposes, as applicable,
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under the benefit plans in which they participate after the Closing Date
and that such employees will receive such RCG benefits as are provided to
similarly situated employees of RCG.
7.14 Taxes. (a) Except as reflected in RCG's financial statements
included in the RCG Documents (the "RCG Financial Statements"), there does not
exist any material liability for taxes that may be asserted by any taxing
authority against, and no lien or other encumbrance for any such taxes will
attach to, RCG, any subsidiary ("Subsidiary") of RCG, or any assets of RCG or
any Subsidiary, other than taxes due in respect of periods for which tax
returns are not yet due and for which adequate accruals have been made in the
RCG Financial Statements. All federal, foreign, state, county, and local tax
returns and tax reports required to be filed prior to the date hereof with
respect to RCG or any Subsidiary have been timely filed (other than returns for
which extensions to file have been granted) with the appropriate governmental
agencies in all jurisdictions in which such returns and reports are required to
be filed, all of which are true, correct, and complete, and all amounts shown
as owing thereon have been timely paid.
(b) Neither RCG nor any Subsidiary has received notice of any tax claims
being asserted or any proposed assessment by any taxing authority and neither
RCG nor any Subsidiary is presently under, nor has received notice of, any
contemplated investigation or audit by the IRS or any other taxing authority
concerning any fiscal year or period ended prior to the date hereof. Neither
RCG nor any Subsidiary has executed any extensions or waivers of any statute of
limitations on the assessment or collection of any tax due that is currently in
effect.
(c) RCG and each Subsidiary, as well as any of their predecessors in
interest, have withheld or collected from each payment made to each of their
employees the amount of all taxes required to be withheld or collected
therefrom and have paid the same to the proper tax depositories or collecting
authorities.
(d) Neither RCG nor any Subsidiary is or has ever been an includible
corporation in an affiliated group of corporations, within the meaning of
Section 1504 of the Code, other than in the affiliated group of which RCG is
the common parent corporation.
(e) Neither RCG nor any Subsidiary is now or has ever been a party to any
tax-sharing agreements or similar arrangements, other than with respect to the
federal income tax returns for the affiliated group of which RCG is the common
parent corporation.
(f) For purposes hereof, "tax" or "taxes" shall have the meaning
prescribed for "taxes" in section 5.19(g) of this Agreement.
(g) RCG has no intention to cause or permit the liquidation or merging out
of existence of the Members.
(h) RCG has no intention following the Mergers to sell or otherwise
dispose of its ownership of the Members, except for transfers of stock to
corporations controlled by RCG, as "control" is defined in section 368(c) of
the Code, or to cause the Members to sell or otherwise dispose of any of their
assets or of any of the assets acquired from any of the Merger Corps, except
for dispositions made in the ordinary course of business or transfers of assets
to a corporation controlled by RCG, as "control" is defined in section 368(c)
of the Code.
(i) Except as disclosed on Schedule 7.14, there is no liability for taxes
on the part of RCG or any Subsidiary (excluding transactions for which the
financial reporting gain would exceed applicable income tax liability related
to such transaction) (i) that will arise with respect to a current or a future
taxable period, (ii) that is wholly or partly a consequence of a transaction or
occurrence, or transactions or occurrences, one or more of which occurred
before the date hereof, and (iii) that is not fully reserved on the RCG
Financial Statements. In addition, except as disclosed on Schedule 7.14, there
are no
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joint venture, partnership or other arrangements or contracts to which
RCG or any Subsidiary is a party and that could be treated as a partnership for
federal income tax purposes.
ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 Access to Company Information. At all times prior to the Closing, the
Companies and the Owners will afford the officers and authorized
representatives of RCG access upon reasonable notice to all of the Companies'
properties, books and records that may relate to or concern the Mergers and
will furnish such parties with such additional financial, operating and other
information as to the business and properties of the Companies as such parties
may from time to time reasonably request. Such parties shall also be allowed
access, upon reasonable notice, to consult with the officers, employees,
accountants, counsel and agents of the Companies in connection with such
investigation of the properties and business of the Companies. In addition, at
all times prior to the Closing, RCG will afford to the Companies and the
Owners, and their representatives, access, upon reasonable notice, to all of
RCG's and its affiliate's properties, books and records as the Companies and
the Owners may reasonably request. No such investigation shall diminish or
otherwise affect any of the representations, warranties, covenants or
agreements of any party under this Agreement.
8.2 No-Shop. Unless and until this Agreement is terminated pursuant to
Article 11 hereof, neither any of the Companies nor any Owner shall directly or
indirectly, through any officer, director, employee, agent, intermediary or
otherwise: (i) solicit, initiate or encourage submission of proposals or offers
from any person or other entity relating to any purchase of an equity interest
in any of the Companies, or any merger, sale of substantial assets or any
similar transaction whether or not resulting in a change of control of any of
the Companies; (ii) participate in any discussions or negotiations regarding,
or furnish to any other person or other entity, any information with respect
to, or otherwise respond to, cooperate or encourage, any effort or attempt by
any other person or other entity to purchase any equity interest in the
Companies, or engage in a merger, purchase of substantial assets or any similar
transaction whether or not such transaction contemplates a change of control of
any of the Companies; or (iii) approve or undertake any such transaction. The
Companies and the Owners shall promptly communicate to RCG the terms of any
such oral or written proposal or offer upon knowledge or receipt of such
proposal or offer.
8.3 Affirmative Covenants of the Companies and the Owners. From the date
hereof until the earlier of the Effective Time or the termination of this
Agreement, the Companies and the Owners covenant and agree that, unless the
prior written consent of RCG shall have been obtained, and except as otherwise
expressly contemplated herein, each Company shall:
(i) operate its business only in the usual, regular, and ordinary course
of business, consistent with past practices;
(ii) use reasonable commercial efforts to preserve intact its business
organization, licenses, permits, government programs, private programs and
customers;
(iii) use reasonable commercial efforts to retain the services of its
employees, agents and consultants on terms and conditions not less favorable
than those existing prior to the date hereof and to ensure that there are no
material or adverse changes to employee relations;
(iv) keep and maintain its assets in their present condition, repair and
working order, except for normal depreciation and wear and tear, and maintain
its insurance, rights and licenses;
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(v) pay all accounts payable of the Company in accordance with past
practice and collect all accounts receivable in accordance with past practice,
but not less than in accordance with prudent business practices;
(vi) consult with RCG prior to undertaking any new business opportunity
outside the ordinary course of business;
(vii) confer on a regular and frequent basis with one or more designated
representatives of RCG to report material operational matters and to report the
general status of ongoing business operations;
(viii) make available to RCG true and correct copies of all internal
management and control reports (including aging of accounts receivable,
listings of accounts payable, and inventory control reports) and financial
statements related to the Company and furnished to management of the Company;
(ix) cause all tax returns that are due and have not been filed prior to
the date hereof or which become due prior to the Effective Time, to be prepared
and filed on or before the date such tax return is required to be filed (taking
into account any extensions of the filing deadlines granted); provided,
however, that any such tax return shall not be filed without a reasonable
opportunity for prior review and comment by RCG;
(x) as soon as reasonably practicable after they become available, but in
no event more than thirty (30) days following the end of each calendar month,
deliver to RCG true and complete copies of its monthly financial statements for
each calendar month ending subsequent to the date hereof in the format
historically utilized by the Company;
(xi) perform in all material respects all obligations under agreements
relating to or affecting its assets, properties or rights, except for the
failure of which performance would not have a material adverse effect on the
business of the Companies taken as a whole, financial or otherwise;
(xii) keep in full force and effect present insurance policies or other
comparable insurance coverage; and
(xiii) notify RCG of (i) any event or circumstance which is reasonably
likely to have a material adverse effect on the Company or would cause or
constitute a breach of any of the Company's representations, warranties or
covenants contained herein; or (ii) any unexpected change in the normal course
of business or in the operation of the Company's assets, and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), adjudicatory proceedings, budget
meetings or submissions involving any material property. Each Company agrees
to keep RCG fully informed of such events and to permit RCG's representatives
prompt access to all materials prepared in connection therewith.
8.4 Negative Covenants of the Company and the Owners. From the date
hereof until the earlier of the Effective Time or the termination of this
Agreement, the Companies and the Owners covenant and agree that no Company will
do any of the following without the prior written consent of the RCG:
(i) take any action which would (a) adversely affect the ability of any
party to the Merger Documents to obtain any consents required for the
transactions contemplated thereby, or (b) adversely affect the ability of any
party hereto to perform its covenants and agreements under the Merger
Documents;
(ii) amend any of its organizational or governing documents, except as
provided herein or for the purpose of accomplishing the transactions
contemplated by this Agreement;
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<PAGE> 24
(iii) incur any additional debt obligation or other obligation for
borrowed money in excess of an aggregate of $100,000 except in the
ordinary course of the business of the Company consistent with past practices,
or impose, or suffer the imposition, on any material asset of the Company of
any lien or permit any such lien to exist;
(iv) repurchase, redeem, or otherwise acquire or exchange, directly or
indirectly, any Company Equity Securities, or any securities convertible into
any Company Equity Securities, or declare or pay any dividend or make any other
distribution in respect of Company Equity Securities, other than such dividends
or distributions as are described in Section 8.19 below.
(v) other than pursuant to the Merger Documents, issue, sell, pledge,
encumber, authorize the issuance of, enter into any contract to issue, sell,
pledge, encumber, or authorize the issuance of, or otherwise permit to become
outstanding, any additional Company Equity Securities or any rights with
respect to any Company Equity Securities;
(vi) purchase or acquire any assets or properties, whether real or
personal, tangible or intangible, or sell or dispose of any assets or
properties, whether real or personal, tangible or intangible, except in the
ordinary course of business and consistent with past practices;
(vii) adjust, split, combine or reclassify any Company Equity Securities
or issue or authorize the issuance of any other securities in respect of or in
substitution for Company Equity Securities, or sell, lease, mortgage or
otherwise dispose of or otherwise encumber any asset having a book value in
excess of $50,000 other than in the ordinary course of business for reasonable
and adequate consideration;
(viii) purchase any securities or make any material investment, either by
purchase of stock or other securities, contributions to capital, asset
transfers, or purchase of any assets, in any entity, or otherwise acquire
direct or indirect control over any other entity;
(ix) grant any increase in compensation or benefits to the employees or
officers of the Company, except in accordance with past practice; pay any
severance or termination pay or any bonus other than pursuant to written
policies or written contracts in effect as of the date hereof and disclosed on
the Schedules hereto; enter into or amend any severance agreements with
officers of the Company; or grant any material increase in fees or other
increases in compensation or other benefits to directors of the Company except
in accordance with past practice;
(x) enter into or amend any employment contract between the Company and
any person or entity (unless such amendment is required by law) that the
Company does not have the unconditional right to terminate without liability
(other than liability for services already rendered), at any time on or after
the Effective Time;
(xi) adopt any new employee benefit plan or make any material change in or
to any existing employee benefit plans other than any such change that is
required by law or that, in the opinion of counsel, is necessary or advisable
to maintain the tax qualified status of any such plan;
(xii) make any significant change in any tax or accounting methods or
systems of internal accounting controls, except as may be appropriate to
conform to changes in tax laws or regulatory accounting requirements or GAAP;
(xiii) commence any litigation other than in accordance with past
practice, settle any litigation involving any liability of the Company for
material money damages or restrictions upon the operations of the Company;
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(xiv) except in the ordinary course of business and which is not material,
modify, amend or terminate any material contract or waive, release, compromise
or assign any material rights or claims;
(xv) except in the ordinary course of business and, even if in the
ordinary course of business, then not in an amount to exceed $300,000 in the
aggregate, make or commit to make any capital expenditure, or enter into any
lease of capital equipment as lessee or lessor;
(xvi) take any action, or omit to take any action, which would cause any
of the representations and warranties contained in Article 5 to be untrue or
incorrect; or
(xvii) make any loan to any person or increase the aggregate amount of any
loan currently outstanding to any person.
8.5 Affirmative Covenants of RCG. From the date hereof until the earlier
of the Effective Time or the termination of this Agreement, RCG covenants and
agrees that, unless the prior written consent of RenalWest shall have been
obtained, and except as expressly contemplated herein, RCG shall
(i) consult with RenalWest prior to making a new material business
opportunity outside the ordinary course of business;
(ii) as soon as reasonably practicable after they become available,
deliver to RenalWest true and complete copies of its monthly financial
statements for each calendar month ending subsequent to the date hereof, in the
format historically utilized by RCG;
(iii) perform in all material respects all obligations under agreements
relating to or affecting its assets, property or rights, except for the failure
of which performance would not have a material adverse effect on the business
of RCG, financial or otherwise; and
(iv) notify RenalWest of (i) any event or circumstance which is reasonably
likely to have a material adverse effect on RCG or would cause or constitute a
breach of any of RCG's representations, warranties or covenants contained
herein; or (ii) any unexpected change in the normal course of business or in
the operation of RCG's assets, and of any governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated), adjudicatory proceedings, budget meetings or submissions
involving any material property. RCG agrees to keep RenalWest fully informed
of such events and to permit RenalWest's representatives prompt access to all
materials prepared in connection therewith.
8.6 Negative Covenants of RCG. (a) From the date hereof until the
earlier of the Effective Time or the termination of this Agreement, RCG
covenants and agrees that it will not do any of the following without the prior
written consent of RenalWest:
(i) take any action that would (a) adverse affect the ability of any
party to the Merger Documents to obtain any consents required for the
transactions contemplated thereby, or (b) adversely affect the ability of any
party hereto to perform its covenants and agreements under the Merger
Documents; or
(ii) amend any of its organizational or governing documents, except for
the purpose of accomplishing the transactions contemplated by this Agreement.
(b) From the date hereof until the earlier of the Effective Time or the
termination of this Agreement, RCG covenants and agrees that it will not do any
of the following without first notifying RenalWest of its intent:
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<PAGE> 26
(i) other than pursuant to the Merger Documents, issue, sell, pledge,
encumber or enter into any contract to issue, sell, pledge, encumber, or
authorize the issuance of, or otherwise permit to become outstanding, any
additional capital stock of RCG, except for the granting of stock options to
employees and consultants in the ordinary course;
(ii) adjust, split or reclassify any outstanding capital stock of RCG
or authorize the issuance of any other securities in respect of, or in
substitution for, or in addition to, any outstanding capital stock of RCG, or
sell, lease, mortgage or otherwise dispose of or otherwise encumber any asset
having a book value in excess of $100,000 other than in the ordinary course of
business for reasonable and adequate consideration;
(iii) except for normal and customary cash management activities,
purchase any securities or make any material investment, either by purchase of
stock or other securities, contributions to capital, asset transfers, or
purchase of any assets, in any entity, or otherwise acquire direct or indirect
control over any other entity; or
(iv) take any action, or omit to take any action, which would cause any
of the representations and warranties contained in Article 7 to be untrue or
incorrect.
8.7 Confidentiality, Public Announcements. The parties hereby affirm and
ratify the terms of that certain letter agreement, dated June 27, 1996, among
them concerning confidentiality, public announcements and related matters,
which agreement remains valid and binding among the parties notwithstanding
Section 15.9 hereof.
8.8 Confidentiality, Noncompetition and Nonsolicitation. (a) Each Owner
agrees that, for a period of ten (10) years after the Effective Time, Owner
will not in any manner, directly or indirectly, by himself or herself or in
conjunction with any other person, conduct activities that are competitive with
the business of the Companies or acquire, establish or own any financial,
beneficial or other interest in (other than an interest consisting of less than
one percent (1%) of a class of publicly traded security), make any loan to or
for the benefit of, or render any managerial, marketing or other business
advice, to any entity that is then conducting activities that are competitive
with the business of the Companies, in either case within a geographic
territory defined as the seventy-five (75) mile radius of the Companies'
current locations (the "Territory"). For purposes of this Section the
"business of the Companies" shall mean owning or operating a renal dialysis
center, unit or facility or providing renal dialysis supplies or services to
any other center, unit or facility or any acute care facility or any home renal
dialysis patient, including the provision of pharmaceuticals or laboratory
services.
(b) Each Owner further agrees that, for a period of ten (10) years after
the Effective Time, Owner will keep confidential and not directly or indirectly
divulge to anyone or use or otherwise appropriate for Owner's own benefit or
for the benefit of others, any knowledge or information of a confidential
nature with respect to the business of the Companies, RCG, or any of their
affiliates, including all trade secrets, pricing information, marketing
information or technical information (hereinafter referred to as the
"Confidential Data"), except for (i) a disclosure that is required by law; or
(ii) information that has been made generally available to the public by the
act of one who has the right to disclose such information. Each Owner hereby
acknowledges and agrees that the prohibitions against disclosure of
Confidential Data recited herein are in addition to, and not in lieu of, any
rights or remedies which RCG may have available pursuant to the laws of any
jurisdiction or at common law to prevent the disclosure of confidential
information, and the enforcement by RCG of its rights and remedies pursuant
hereto shall not be construed as a waiver of any other rights or available
remedies which RCG may possess in law or equity. Each Owner acknowledges that
RCG has taken reasonable and appropriate steps to ensure the confidentiality
and non-disclosure of all such Confidential Data.
(c) Each Owner also agrees that, for a period of ten (10) years after the
Effective Time, Owner will not, for his or her own benefit or the benefit of
others, solicit any person or entity that has
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had, or disrupt or attempt to disrupt, any relationship, contractual or
otherwise (including with any patient, payor, physician, provider, managed care
organization or supplier), with RCG or any of its affiliates (including the
Companies), for the purpose of assisting, or creating such a relationship for,
any business entity that is conducting activities competitive with the business
of the Companies within the Territory.
(d) Each Owner further agrees that, for a period of ten (10) years after
the Effective Time, Owner shall not induce, nor attempt to induce, any employee
of RCG, or any of its affiliates (including the Companies), to terminate his or
her association with any such party.
(e) The covenants contained in this Section 8.8 are considered by the
parties hereto to be fair, reasonable and necessary for the protection of RCG
and the Companies. The parties mutually agree that if a violation of any
covenant contained in this Section 8.8 occurs, such violation or threatened
violation will cause irreparable injury to RCG and the Companies and the remedy
at law for any such violation or threatened violation will be inadequate. Each
Owner therefore agrees that RCG shall be entitled to appropriate equitable
relief, including but not limited to a temporary restraining order or a
preliminary injunction, in addition to any other remedy that might be available
at law or in equity.
(f) Nothing in this Section 8.8 shall be deemed to prohibit any Owner who
is a physician from exercising his or her medical judgment concerning the
treatment of his or her patient in any manner whatsoever in any location
whatsoever, and shall not be deemed to require the referral of any such patient
to any facility of RCG or any of its affiliates.
(g) The foregoing ten (10) year periods in this Section 8.8 are subject to
RCG obtaining from its physician stockholders owning at least sixty percent
(60%) of the RCG Common Stock issued to its physician stockholders in
connection with the acquisition by RCG of their dialysis centers (the "Required
Physicians"), revisions where needed to similar agreements with such Required
Physician extending their corresponding periods of coverage to ten (10) years
from their original starting date. In the event that the Required Physicians
are not subject to such ten year periods prior to or at the Closing, then the
foregoing ten (10) year periods in this Section 8.8 shall be reduced to the
longest corresponding period of time to which the Required Physicians are or
become subject.
8.9 Medical Director Agreements. The parties hereto agree that the
Company and each affiliated physician practice that has a physician member or
employee involved with the use, operation of or referral of patients to the
Company's dialysis facilities (the "Practices"), shall enter into a Medical
Director Agreement at Closing under which the Practices shall provide medical
director services to the Company for the dialysis facilities operated by the
Company. Such Medical Director Agreement shall have an initial term of seven
(7) years with renewal terms for additional three year periods and shall
provide for (i) an aggregate annual fee to be paid by RCG to the Practices of
$840,000 (subject to agreed upon modifications) to be divided among the
Practices at the Practices' discretion, (ii) certain restrictive covenants,
including but not limited to a covenant not to compete with a duration of the
term of the Medical Director Agreement and three (3) years after termination of
the Medical Director Agreement, and (iii) other customary terms and conditions.
The Owners agree that a Medical Director Agreement substantially in the form
of Exhibit 8.9 attached hereto will be entered into at the Closing by them and
their practices.
8.10 Right of First Refusal. The Owners recognize the opportunities to
provide care for End Stage Renal Disease in an integrated manner and agree to
work in good faith with RCG to pursue opportunities for RCG and its affiliates
to offer the full range of dialysis services, including physician and
transplant services, to payors, health maintenance and other managed care
organizations. Furthermore, the Owners agree to work in good faith with RCG or
any of its affiliates for the provision of medical director services for
dialysis treatment and for the provision of nephrology physician services at
the facilities of RCG acquired from or operated through the Company after the
Closing, and agree that for a period of three years from the Closing Date, the
Owners will allow RCG to have a right of first refusal with respect to any
proposed contract or other arrangement with a third party for the sale or
management of the Owner's medical practice on the same terms and conditions as
proposed by such third party, provided that such offer
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shall not apply to any a transaction in which the Owner's medical practice
would join the multispecialty physician group from which the Owner's
practice has received substantially all of its patient referrals. RCG or any
of its affiliates may accept the offer by giving written notice of such
acceptance at any time within 20 days following receipt of written notice of
the offer. No activities of any Owner under this Section 8.10 shall be deemed a
violation of Section 8.8 hereof.
8.11 Delivery of Schedules. As soon as reasonably practical following the
execution hereof, the Companies and the Owners shall deliver all Schedules to
be delivered by them to RCG and its counsel accompanied by a certificate,
executed by the Companies and the Owners stating that all Schedules required to
be delivered by them hereunder have been delivered. The Companies and the
Owners understand and acknowledge that RCG's obligation to consummate the
Closing is subject to its satisfactory review of said Schedules as contemplated
by Section 9.6 hereof. After receipt of all such Schedules and the
certificate, RCG shall complete its review of said Schedules and notify the
Company of its satisfaction with said Schedules at least ten (10) days prior to
Closing.
8.12 Availability of Rule 144 Information. For so long as RCG is subject
to the 1934 Act, RCG shall take all actions necessary to enable the Owners to
sell any shares of RCG Stock received by them without registration under the
1933 Act within the limitations of the exemption provided by Rule 144 under the
1933 Act, as such rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Securities and Exchange Commission,
including filing on a timely basis all reports required to be filed by the 1934
Act. Upon the request of an Owner, RCG shall deliver to such Owner a written
statement as to whether it has complied with such requirements.
8.13 Approval of Transactions. Subject to Article 11 hereof, each Owner,
through the execution and delivery of this Agreement, irrevocably votes for and
approves the Merger in its capacity as a holder of Company Equity Securities
and each such Owner does hereby waive any required notice for any meeting
concerning such matters. Subject to Article 11 hereof, at any further meeting
of the Owners of the Company called to vote on the Mergers or in any other
circumstances upon which a vote, consent or other approval with respect to the
Mergers is sought, such Owner shall vote (or cause to be voted), such Owner's
Company Equity Securities in favor of the Mergers and the execution, delivery
and performance by the Companies of the Merger Documents. Each Owner
acknowledges and agrees that he, she or it has had adequate opportunity to
review the terms and conditions of the Mergers and to seek independent legal,
tax and financial advice.
8.14 Accounting and Tax Treatment. Each of the parties undertakes and
agrees to use its reasonable efforts to cause the Mergers, and to take no
action which would cause the Mergers not, to qualify for pooling-of-interests
accounting treatment and treatment as a "reorganization" within the meaning of
Section 368(a) of the Code for federal income tax purposes. Each Owner agrees
that he will not sell, transfer, or otherwise dispose of his interests in, or
reduce his risk relative to, any of the shares of RCG Common Stock into which
his shares of Company Common Stock are converted upon consummation of the
Merger until such time as the requirements of SEC Accounting Series Release
Nos. 130 and 135 ("ASR 130 and 135") have been met. Each Owner understands
that ASR 130 and 135 relate to publication of financial results of post-Merger
combined operations of RCG and the Companies. RCG agrees to promptly notify
the Owners following satisfaction of the requirements of ASR 130 and 135.
8.15 Resignation and Releases. Simultaneously with the execution and
delivery of this Agreement, each officer, director and Owner of the Companies
shall deliver a Resignation and Release, to be effective as of the Closing, in
the form of Exhibit 8.15 to this Agreement.
8.16 Representations on RCG Board of Directors and Medical Advisory Board.
RCG agrees that it shall at the Closing increase the number of members to its
Board of Directors by one and add an individual specified by the Companies as a
new member, with such member subject to the reasonable approval of RCG, to
serve an initial term ending on the date of RCG's 1999 Annual Meeting of its
stockholders. Further, RCG shall recommend to its stockholders at such 1999
Annual Meeting that such
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designee, or such other designee reasonably approved by RCG, serve for
an additional three (3) year term as a member of the Board of Directors of
RCG. Furthermore, RCG agrees to name a physician specified by the Companies,
who shall be subject to the reasonable approval of RCG, as a member of RCG's
Medical Advisory Board.
8.17 Grant of Options. At Closing, RCG shall grant options to purchase an
aggregate of 270,000 shares of RCG Common Stock to employees of the Companies.
Such options shall (i) to the extent possible be granted under RCG's 1996 Stock
Option Plan, (ii) be non-qualified stock options for tax purposes, (iii) be
allocated among the employees or consultants of the Companies in a manner
mutually agreed with RCG prior to the Closing, (iv) vest over a five-year
period, and (v) have exercise prices equal to the closing price of the RCG
Common Stock on the Nasdaq National Market on the Closing Date. The additional
terms of said options shall be commensurate with similar stock options granted
generally by RCG to similarly situated employees and affiliates of RCG.
8.18 Arizona Operations. RCG agrees that the main office of RenalWest in
Mesa, Arizona, will serve as the executive headquarters of RCG's southwest
region, which will include the existing operations of the Companies in Mesa
plus all centers newly developed or acquired in the states of Arizona, New
Mexico, Colorado, Utah, Nevada and California (the "Southwest Region"), and
that John Greksa, the current Chief Executive Officer of RenalWest, will serve
as the Chief Operating Officer of the Southwest Region while he is employed
with RCG. The foregoing covenant shall expire upon the later to occur of the
fifth anniversary of the Closing Date or the date on which Sam A. Brooks, Jr.
ceases to serve as the Chief Executive Officer of RCG.
8.19 Pre-Closing Distributions to Members. The parties intend and agree
that, solely in a manner consistent with prior practices, the income of
RenalWest earned prior to the Closing shall be distributed to the Members and
that the Members shall distribute such income to the Owners. Such
distributions by RenalWest shall be made in accordance with the respective
ownership interests therein of the Members and such distributions to the Owners
shall be made in accordance with their respective ownership of the Members, all
of which shall be consistent with past practices. The Owners agree that they
shall be responsible for their personal income tax liability resulting from
such distributions. RCG agrees to provide reasonable cooperation to assist
with the accounting and completion of such distributions.
8.20 Filings with State Offices. Upon the terms and subject to the
conditions of this Agreement, the Members and the Merger Corps. shall execute
and file Articles of Merger with the Secretary of State of Arizona in
connection with the Closing.
8.21 Availability of Books and Records. RCG agrees to cause the Companies
to make available in a reasonable manner the books and records of the Companies
to enable the Owners to complete the tax returns and other matters described in
Section 5.19 and for general review by the Owners for a period of three (3)
years following the Closing.
8.22 Conditions to Closing. The Owners, the Companies and RCG agree to
use their commercially reasonable efforts to satisfy the closing conditions set
forth in Articles 9 and 10 of this Agreement by September 30, 1996, and if not
by such time, as soon thereafter as possible.
ARTICLE 9
CONDITIONS TO OBLIGATIONS OF RCG AND MERGER CORP.
The obligation of RCG and the Merger Corps. to consummate the Mergers is
subject to the satisfaction or waiver, at or prior to Closing, of each of the
following conditions:
9.1 Representations and Warranties. The representations and warranties of
the Companies and the Owners set forth in this Agreement, or any document or
instrument delivered to RCG hereunder,
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<PAGE> 30
shall be true and correct as of the Effective Time with the same force
and effect as if such representations and warranties had been made at and as of
the Effective Time, except with respect to any of such representations and
warranties referring to a state of facts existing on a specified date prior to
the Closing Date, it shall be sufficient if at the Effective Time such
representation and warranty continues to describe accurately the state of facts
existing on the date so specified.
9.2 Performance; Covenants. All of the terms, covenants and conditions of
the Merger Documents to be complied with or performed by the Companies or the
Owners at or prior to Closing shall have been complied with and performed in
all material respects including, but not limited to, the delivery of the
following documents:
(a) A good standing certificate regarding the Companies, certified by the
Secretary of State of Arizona dated within fifteen (15) business days of the
Closing;
(b) A certificate dated as of the Closing Date signed by the duly
authorized officers of the Companies and by the Owners certifying the
satisfaction of the condition in Section 9.1 and that the Companies and each of
the Owners have fulfilled all of the conditions of this Article 9;
(c) Written consents of all third parties necessary for the consummation
of the transactions contemplated by the Merger Documents;
(d) Resolutions of the Companies (Board and shareholder) in form and
substance reasonably satisfactory to RCG approving the execution, delivery and
performance of this Agreement and the consummation of the Mergers, certified by
an appropriate officer of the Companies;
(e) An incumbency certificate certifying the identity of the officers of
the Companies; and
(f) Resignations and Release of each of the officers, directors and Owners
of the Companies (as applicable) effective as of the Effective Time;
(g) The Medical Director Agreements entered into by the Practices as
described in Section 8.9;
(h) All books and records of the Companies, including all corporate and
other records, minute books, stock record books, stock registers, books of
accounts, contracts, agreements and such other documents or certificates as
shall be reasonably requested by RCG; and
(i) All agreements or arrangements, whether written or oral, among the
Owners and/or the Companies that relate in any manner to the Company Equity
Securities shall have been terminated.
9.3 Necessary Consents and Approvals. RCG, the Companies and the Owners
shall have obtained all licenses, consents and permits, provided all notices,
and all waiting periods required by Law shall have expired, necessary in order
for RCG, the Merger Corps. and the Companies to consummate the Mergers and for
the continued operation of the business of the Company after the Effective Time
consistent with their operation prior to the Effective Time, including all
consents and approvals listed on the Schedules hereto.
9.4 No Material Adverse Change. There shall not have occurred any
material adverse change in the business, assets, liabilities or condition,
financial or otherwise, of the Companies, taken a whole, between the date
hereof and the Effective Time, and a certificate shall have been delivered to
RCG to such effect signed by each of the Owners and such executive officers of
the Companies as RCG may request.
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9.5 No Injunction, Etc. No action, proceeding, investigation or
legislation shall have been instituted, threatened or proposed before any
court, governmental agency, or legislative body to enjoin, restrain, prohibit
or obtain substantial damages in respect of, or which is related to, arises out
of, this Agreement or the consummation of the Mergers, or which is related to
or arises out of the business or operations of the Companies, if such action,
proceeding, investigation or legislation, in the reasonable judgment of RCG or
its counsel, would make it inadvisable to consummate such transactions.
9.6 Satisfactory Due Diligence. RCG shall in all respects be reasonably
satisfied with the results of its due diligence investigation of the Company,
including its continuing review of matters contained or not contained in the
Schedules.
9.7 Legal Opinion. RCG shall have received an opinion of counsel to the
Company and Owners in form and substance reasonably satisfactory to RCG .
9.8 Pooling Letter. RCG shall have received, from Ernst & Young LLP,
assurances in form and substance reasonably acceptable to RCG to the effect
that the Mergers will qualify for pooling-of-interests accounting treatment.
9.9 Stockholder Approval. The Mergers shall have been approved by the
stockholders of RCG.
9.10 Employment Agreements. Each of John Greksa, Jeff Weintraub and Ron
Fuller shall have entered into an Employment Agreement in form and substance
reasonably satisfactory to RCG.
9.11 Dissenter's Rights. No Owner shall have exercised dissenter's or
appraisal rights under any applicable law in respect of the Mergers.
ARTICLE 10
CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE OWNERS
The obligations of the Companies and the Owners to close the Mergers are
subject to the satisfaction or waiver, at or prior to Closing, of each of the
following conditions:
10.1 Representations and Warranties. The representations and warranties
of RCG and the Merger Corp. set forth in this Agreement, or any document or
instrument delivered to any party hereunder, shall be true and correct as of
the Effective Time with the same force and effect as if such representations
and warranties had been made at and as of the Effective Time, except with
respect to any of such representations and warranties referring to a state of
facts existing at a specified date prior to the Closing Date, it shall be
sufficient if at the Effective Time such representation and warranty continues
to describe accurately the state of facts existing on the date so specified.
10.2 Performance; Covenants. All of the terms, covenants and conditions
of this Agreement to be complied with or performed by RCG at or prior to the
Closing shall have been complied with and performed in all material respects,
including, but not limited to delivery of the following documents:
(a) A good standing certificate regarding the Merger Corps. certified
by the Secretary of State of Arizona, each dated within 15 days prior to
Closing;
(b) A certificate dated as of the Closing Date signed by a duly
authorized officer of RCG and the Merger Corps. certifying the satisfaction of
the condition in Section 10.1 and that RCG and the Merger Corps. have fulfilled
all of the conditions of this Article 10;
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(c) Resolutions adopted by the Board of Directors of RCG and the Board
of Directors and shareholder of the Merger Corps. in form and substance
satisfactory to the Companies and the Owners approving the execution, delivery
and performance of this Agreement and the consummation of the Mergers,
certified by the Secretary of RCG and the Merger Corps., respectively;
(d) The Medical Director Agreement entered into by RCG as described in
Section 8.9; and
(e) An incumbency certificate certifying the identity of the officers of
RCG.
10.3 Necessary Consents and Approvals. RCG, the Companies and the Owners
shall have obtained all licenses, consents and permits, provided all notices,
and all waiting periods required by Law shall have expired, necessary in order
for RCG, the Merger Corps. and the Companies to consummate the Mergers and for
the continued operation of the business of the Company after the Effective Time
consistent with their operation prior to the Effective Time, including all
consents and approvals listed on the Schedules hereto.
10.4 No Material Adverse Change. There shall not have occurred any
material adverse change in the business, assets, liabilities or condition,
financial or otherwise, of RCG between the date hereof and the Effective Time,
and a certificate shall have been delivered to the Companies and the Owners to
such effect signed by an authorized officer of RCG.
10.5 No Injunction, Etc. No action, proceeding, investigation or
legislation shall have been instituted, threatened or proposed before any
court, governmental agency, or legislative body to enjoin, restrain, prohibit
or obtain substantial damages in respect of, or which is related to, arises out
of, this Agreement or the consummation of the Mergers, or which is related to
or arises out of the business or operations of RCG, if such action, proceeding,
investigation or legislation, in the reasonable judgment of the Companies or
their counsel, would make it inadvisable to consummate such transactions.
10.6 Legal Opinion. The Owners shall have received an opinion of counsel
to RCG in form and substance reasonably satisfactory to the Owners.
10.7 SEC and Exchange Approval. RCG shall have taken all actions and
complied in all material respects with requirements necessary to notify and
obtain any consents from the SEC, Nasdaq and any state securities law
regulatory agency of all actions contemplated by this Agreement.
10.8 Approval of Registration Rights. RCG shall have obtained the
requisite approval of its stockholders currently holding registration rights
for the grant of the registration rights provided to the Owners in Article 13
hereof.
10.9 Satisfactory Due Diligence. The Owners shall in all respects be
reasonably satisfied with the results of the due diligence investigation of
RCG.
10.10 Pooling Letter. RCG shall not have waived the condition in Section
9.8.
10.11 Employment Agreements. RCG shall have caused RenalWest to enter
into an employment agreement with each of John Greksa, Jeff Weintraub and Ron
Fuller on terms and conditions reasonably satisfactory to and approved by
RenalWest prior to the Closing.
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ARTICLE 11
TERMINATION
11.1 Right of Termination. This Agreement and the Mergers may be
terminated at any time prior to the Closing Date:
(a) By the mutual written consent of RCG and each Company.
(b) By RCG or the Companies as contemplated in Section 3.1(b)(iii) and
(v).
(c) By RCG in the event that the conditions set forth in Article 9 of this
Agreement shall not have been satisfied or waived by October 31, 1996, unless
such satisfaction shall have been frustrated or made impossible by any act or
failure to act of RCG.
(d) By the Companies in the event that the conditions set forth in Article
10 of this Agreement shall not have been satisfied or waived by October 31,
1996, unless such satisfaction shall have been frustrated or made impossible by
any act or failure to act of any Company or one or more of the Owners.
(e) By the Companies or RCG if the Closing shall not have occurred by
November 30, 1996.
11.2 Effect of Termination. In the event of termination in accordance
with Section 11.1, this Agreement shall become void and of no further force or
effect, without any liability on the part of any of the parties hereto or their
respective owners, directors, officers or employees, except the obligations of
each party to preserve the confidentiality of documents, certificates and
information furnished to such party pursuant thereto and for any obligation or
liability of any party based on or arising from any breach or default by such
party with respect to its representations, warranties, covenants or agreements
contained in the Merger Documents.
ARTICLE 12
INDEMNIFICATION
12.1 Indemnification by Owners. (a) Subject to Sections 12.3 through
12.6, each Owner shall, severally and not jointly, indemnify and hold harmless
RCG, the Surviving Corporations and their respective officers, directors,
agents or affiliates, from and against any and all demands, claims, actions or
causes of action, assessments, losses, diminution in value, damages (including
special and consequential damages), liabilities, costs and expenses, including
but not limited to reasonable attorneys' fees ("Losses"), suffered or incurred
by any such party by reason of or arising out of any of the following:
(i) the breach of any representation or warranty contained in Article 6
hereof or in any document or instrument delivered by such Owner in connection
with the Merger Documents; and
(ii) the non-fulfillment of any covenant or agreement of such Owner
contained in the Merger Documents.
(b) Subject to Sections 12.3 through 12.6, the Owners shall jointly and
severally indemnify and hold harmless RCG, the Surviving Corporations and their
respective officers, directors, agents or affiliates, from and against any and
all demands, claims, actions or causes of action, assessments, losses,
diminution in value, damages (including special and consequential damages),
liabilities, costs and
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<PAGE> 34
expenses, including but not limited to reasonable attorneys' fees
("Losses"), suffered or incurred by any such party by reason of or arising out
of any of the following:
(i) the breach of any representation or warranty contained in Article 5
hereof or in any document or instrument delivered by the Companies in
connection with the Merger Documents; and
(ii) the non-fulfillment of any covenant or agreement of the Companies
contained in the Merger Documents.
(c) No claim for indemnification with respect to any alleged
misrepresentation or breach of warranty may be made (i) thirty days after the
first publication by RCG of audited consolidated financial statements covering
an accounting period after the Closing Date for those items that would be
expected to be encountered in the audit process or (ii) one (1) year after the
Closing Date for all other items; provided, however, that the right to
indemnification shall extend beyond such period with respect to any specific
claim for indemnification for which written notice was given to the Owners
during such period but shall expire on the expiration of the applicable
statutes of limitations unless an action has been brought with respect thereto.
12.2 Indemnification by RCG. (a) Subject to Sections 12.3 through 12.6,
RCG shall indemnify and hold harmless the Owners, and any of their officers,
directors, agents and affiliates, at all times after the date hereof from and
against any and all Losses suffered or incurred by any such party by reason of,
or arising out of any of the following:
(i) any misrepresentation, breach of warranty or breach or
non-fulfillment of any agreement of RCG contained in any Merger Document or any
document or instrument delivered by RCG in connection therewith; and
(ii) the non-fulfillment of any covenant or agreement of RCG contained
in the Merger Documents hereof.
(b) No claim for indemnification with respect to any alleged
misrepresentation or breach of warranty may be made (i) thirty days after first
publication by RCG of audited consolidated financial statements covering an
accounting period after the Closing Date for those items that would be expected
to be encountered in the audit process or (ii) one (1) year after the Closing
Date for all other items; provided, however, that the right to indemnification
shall extend beyond such period with respect to any specific claim for
indemnification for which written notice was given to RCG during such period
but shall expire on the expiration of the applicable statutes of limitations
unless an action has been brought with respect thereto.
12.3 Notice and Opportunity to Defend. The party indemnified under this
Article 12 (the "Indemnified Party") shall promptly notify in writing the
indemnifying party (the "Indemnifying Party") of any matter giving rise to an
obligation to indemnify and the Indemnifying Party shall defend such claim at
its expense with counsel reasonably acceptable to the Indemnified Party,
provided that the Indemnifying Party may not settle any such claim without the
consent of the Indemnified Party. The Indemnified Party agrees to cooperate
with the Indemnifying Party and to make reasonably available to the
Indemnifying Party any necessary records or documents in the possession of the
Indemnified Party which are necessary to defend such claim. If the
Indemnifying Party does not defend or settle such claim, the Indemnified Party
may do so without the Indemnifying Party's participation, in which case the
Indemnifying Party shall pay the expenses of such defense, and the Indemnified
Party may settle or compromise such claim without the Indemnifying Party's
consent. The failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations hereunder
except to the extent that the Indemnifying Party is actually prejudiced by such
failure to give notice.
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<PAGE> 35
12.4 Indemnification Deductible. Except with respect to any
indemnification claim under Sections 12.1(a)(ii), 12.1(b)(ii) or 12.2(a)(ii),
no Indemnifying Party (with the Owners as a group deemed as a single
Indemnifying Party for this purpose) shall be required to indemnify the
Indemnified Party (with the Owners as a group deemed as a single Indemnifying
Party for this purpose) unless the amount of the loss or claim for which
indemnification is sought, when aggregated with all other losses and claims for
which indemnification is sought by the Indemnified Party (with the Owners as a
group deemed as a single Indemnifying Party for this purpose), exceeds
$200,000, at which time rights to indemnification for losses and claims may be
asserted for any amounts in excess of $200,000.
12.5 Indemnification Limit.
(a) In no event shall any Owner be required to satisfy an indemnification
obligation in excess of one hundred percent (100%) of the aggregate value of
the shares of RCG Common Stock (valued at the Average Trading Price) to be
received by such Owner and in no event shall RCG be required to satisfy an
indemnification obligation in excess of one hundred percent (100%) of the
aggregate value of all of the shares of RCG Common Stock (valued at the Average
Trading Price) issued as consideration hereunder.
(b) The obligations to indemnify under this Article 12 shall be satisfied
solely and exclusively by means of delivery by the Indemnifying Party to the
Indemnified Party of shares of RCG Common Stock whose Average Trading Price
equals the amount for which the Indemnified Party is entitled to be
indemnified, provided that the Owners shall be obligated to satisfy their
indemnification obligation in cash to the extent that they no longer hold a
sufficient number of shares of RCG Common Stock to satisfy their obligation.
12.6 Survival, Exclusivity and Insurance. The representations and
warranties of the parties contained in the Merger Documents or in any document
or instrument delivered in connection therewith shall survive the Closing and
shall not be extinguished thereby notwithstanding any investigation or other
examination by any party, provided that from and after the Closing the remedies
set forth in this Article 12 shall constitute the sole and exclusive remedy for
any inaccuracy or breach of any such representation or warranty. The
limitations contained in this Article 12 shall not apply to fraud or
intentional misrepresentation.
ARTICLE 13
REGISTRATION RIGHTS
13.1 General.
(a) For purposes of this Article 13, (i) the term "Registrable Securities"
means (1) the RCG Common Stock issued to the Owners pursuant to this Agreement
and (2) any security issued as (or issuable upon the conversion or exercise of
any warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of (pursuant
to any reorganization, recapitalization, business combination or otherwise),
such RCG Common Stock and (ii) the term "Holder" means the Owners or a
transferee of Registrable Securities to which the Owners may transfer their
registration rights pursuant hereto, but not a transferee of any such
transferee.
(b) RCG hereby grants to the Holders the right to include their
Registrable Securities in a registration for resale upon the same terms and
conditions as granted by RCG to its existing stockholders (the "Founding
Stockholders"), a copy of which registration rights is attached hereto as
Appendix A and which are hereby granted and made applicable to the Owners with
the following modifications:
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<PAGE> 36
(i) RCG will undertake reasonable commercial efforts to file a
registration statement for the Secondary Offering described in Section 1.2(a)
of Appendix A with the SEC by November 30, 1996 and thereafter to take
reasonable commercial efforts to have said registration statement declared
effective by the SEC as soon as practicable.
(ii) To the extent permissible under the "pooling of interests" rules
described in Section 8.14 of this Agreement, the Owners shall have the right to
include up to forty percent (40%) of their aggregate Registrable Securities in
any such Secondary Offering, provided that said Registrable Securities are
allocated among the Owners in a manner reasonably acceptable to RCG.
(iii) The Owners, acting by a majority in interest, shall have the
right independently to elect the demand registration rights described in
Section 1.2(a) of Appendix A and shall have the right to include up to twenty
percent (20%) of their Registrable Securities in any such demand registration.
(iv) Notwithstanding Section 1.11 of Appendix A, the rights granted in
this Article 13 shall not expire until the expiration of the holding period
specified in paragraph (d) of Rule 144 under the 1933 Act with respect to the
Registrable Securities, as said Rule may be amended after the date hereof.
(v) Notwithstanding Section 1.2(c) of Appendix A, if Holders (i.e.,
Owners and their transferees as defined in this Agreement) proposing to
distribute their Registrable Securities shall be prevented from including at
least eighty percent (80%) of the Registrable Securities proposed to be
distributed by them, then RCG shall be obligated to effect one (1) additional
demand registration pursuant to Section 1.2 upon the request of Holders.
(vi) Notwithstanding Section 1.3 of Appendix A, the Holders shall have
the right to include up to forty percent (40%) of their aggregate Registrable
Securities in any such Piggy-Back Registration.
(vii) Notwithstanding Section 1.9 of Appendix A, any Holder's
registration rights hereunder may be assigned to a permitted transferee or
assignee of Registrable Securities, provided that RCG is given written notice
by such Holder at the time of or within a reasonable time of after such
transfer, stating the name and address of said transferee or assignee and
identifying the Registrable Securities with respect to which such registration
rights are being assigned. Any transferee shall, as a condition of such
transfer, agree that all transferred Registrable Securities are subject to the
terms, conditions, provisions and agreement of this Agreement.
(c) The foregoing rights in Section 13.1(b) are subject to RCG obtaining
the written consent of the Founding Stockholders as required by Section 1.10 of
Appendix A.
(d) RCG agrees to undertake reasonable commercial efforts to satisfy the
reporting requirements described in Section 8.14 in a manner to enable the
Owners to participate in the Secondary Offering described above and to take
other reasonable and appropriate actions to enable the owners to participate in
such Secondary Offering. In the event that such Secondary Offering occurs and
the Owners are not able to participate through no fault of them or the
Companies, then RCG agrees to provide reasonable assistance to the Owners to
aid them in obtaining a loan or loans from a third party (such loan secured by
an adequate amount of their shares of Common Stock) until June 30, 1997 (the
"Maturity Date"), including, if necessary, a guaranty by RCG to such third
party lender of up to an aggregate of $1,500,000 of such loan or loans (such
guaranty by RCG to be secured by an adequate number of the Owners' shares of
RCG Common Stock and allocated among such Owner loans at their discretion). If
such loan or loans are not available on terms and conditions otherwise
reasonably acceptable to the Owners, RCG agrees to provide a loan or loans
directly to the Owners of up to an aggregate amount of $1,500,000 (to be
allocated among the Owners at their discretion) which (i) mature on the
Maturity Date (ii) contain terms and
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<PAGE> 37
conditions to the Owners no less favorable than are available to RCG
from its third party lenders, and (iii) are secured by an adequate number of
shares of RCG Common Stock. Either of the loan or loans described in this
Section 13.1(d) shall be paid prior to the Maturity Date to the extent of the
first available proceeds from any resale of the Owner's shares of RCG Common
Stock under the registration rights provided herein.
ARTICLE 14
CERTAIN DEFINITIONS
Except as otherwise provided herein, the capitalized terms set forth below
shall have the following meanings:
"ABCA" shall mean the Arizona Business Corporation Act.
"Agreement" shall mean this Agreement and Plan of Merger, including the
Exhibits and Schedules delivered pursuant hereto and incorporated herein by
reference.
"Articles of Merger" shall mean the Articles of Merger to be executed by
the Merger Corps. and the Members and filed with the Secretary of State of
Arizona relating to the Mergers as contemplated by Section 1.1 of this
Agreement.
"Closing Date" shall mean the date on which the Closing occurs.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder.
"Company Equity Securities" shall mean the equity securities of each
Company of any type, including but not limited to common stock, preferred
stock, options to purchase the foregoing and securities convertible into any of
the foregoing.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" shall mean, with respect to any entity, any other
entity, which, together with such entity, would be treated as a single employer
(i) under Section 414(b) or (c) of the Code or (ii) for purposes of any Benefit
Plan subject to Title IV of ERISA, under Section 414(b), (c), (m) or (o) of the
Code.
"Exhibits" shall mean the Exhibits so marked, copies of which are attached
to this Agreement. Such Exhibits are hereby incorporated by reference herein
and made a part hereof, and may be referred to in this Agreement and any other
related instrument or document without being attached hereto.
"HSR Act" shall mean Section 7A of the Clayton Act, as added by Title II
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations promulgated thereunder.
"Law" shall mean any code, law, ordinance, regulation, reporting or
licensing requirement, rule, or statute applicable to a person or its assets,
Liabilities or business, including those promulgated, interpreted or enforced
by any Regulatory Authority.
"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including costs
of investigation, collection and defense), claim, deficiency, guaranty or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for collection or deposit in the ordinary course
of business) of any type, whether accrued, absolute or contingent, liquidated
or unliquidated, matured or unmatured, or otherwise.
"Member Common Stock" shall mean the common stock of the Members.
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<PAGE> 38
"Merger Corp. Common Stock" shall mean the $0.01 par value common
stock of each Merger Corp.
"Merger Documents" shall mean the Merger Agreement, including these
terms and conditions, and all other agreements, instruments and documents to be
executed and delivered in connection with the Merger Agreement and the
transactions contemplated hereby.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
"Person" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
"RCG Common Stock" shall mean the $0.01 par value common stock of RCG.
"Regulatory Authorities" shall mean, collectively, all federal and
state regulatory agencies having jurisdiction over the Parties and their
respective Subsidiaries, including the NASD, and the SEC.
"SEC" shall mean the Securities and Exchange Commission.
"Surviving Corporations" shall mean the Members as the surviving
corporations resulting from the Mergers.
(b) In addition to the terms defined in Section 14.1 (a) above, the
terms set forth below shall have the meanings ascribed thereto in the referenced
sections:
<TABLE>
<S> <C>
Anti-Dilution Event - Section 3.2 Indemnified Party - Section 12.3
Benefit Plans - Section 5.15 Indemnifying Party - Section 12.3
Closing - Section 1.2 IRS - Section 5.19
Closing Date - Section 1.2 Losses - Section 12.1
Company Agreements - Section 5.13 Medicare and Medicaid programs - Section 5.20
Confidential Data - Section 8.7(b) Merger - Section 1.1
Effective Time - Section 1.3 Merger Consideration - Section 3.1(b)
Environmental Condition - Section 5.17 Merger Documents - Section 5.1
Exchange Agent - Section 4.1 Private Programs - Section 5.20
Financial Statements - Section 5.7 RCG Documents - Section 7.8
Government Programs - Section 5.20 Remuneration - Section 5.22
</TABLE>
(c) Any singular term in this Agreement shall be deemed to include
the plural, and any plural term the singular. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
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<PAGE> 39
ARTICLE 15
MISCELLANEOUS PROVISIONS
15.1 Notices. (a) Any notice sent in accordance with the provisions of
this Section 15.1 shall be deemed to have been received (even if delivery is
refused or unclaimed) on the date which is: (i) the date of proper posting, if
sent by certified U.S. mail or by Express U.S. mail or private overnight
courier; or (ii) the date on which sent, if sent by facsimile transmission,
with confirmation and with the original to be sent by certified U.S. mail,
addressed as follows:
<TABLE>
<S> <C>
If to the Owners: c/o Jeff Weintraub
------------------------------
------------------------------
------------------------------
Telecopy Number:
--------------
Copy to Counsel: Squire, Sanders & Dempsey
Two Renaissance Square
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004
Telecopy Number: 602-253-8129
Attention: Christopher D. Johnson, Esq.
If to RCG: Renal Care Group, Inc.
2100 West End Avenue, Suite 800
Nashville, Tennessee 37203
Telecopy Number: (615) 321-5419
Attention: Mr. Sam A. Brooks
Copy to Counsel: Alston & Bird
One Atlantic Center
1201 W. Peachtree Street
Atlanta, Georgia 30309
Telecopy Number: (404) 881-7777
Attention: Steven L. Pottle, Esq.
</TABLE>
(b) Any party hereto may change its address specified for notices
herein by designating a new address by notice in accordance with this Section
15.1.
15.2 Owner's Representative. (a) The Owners have and do hereby
irrevocably make, constitute and appoint Jeff Weintraub as their agent (the
"Owner's Representative") and authorize and empower him to fulfill the role of
Owner's Representative hereunder. In the event of the resignation of the
Owner's Representative, the resigning Owner's Representative shall appoint a
successor from among the Owners and who shall agree in writing to accept such
appointment. If the Owner's Representative should die or become incapacitated,
his successor shall be appointed within 15 days of his death or incapacity by a
majority of the Owners, and such successor shall be a Owner. The choice of a
successor Owner's Representative appointed in any manner permitted above shall
be final and binding upon all of the Owners. The decisions and actions of any
successor Owner's Representative shall be, for all purposes, those of a Owner's
Representative as if originally named herein.
(b) Each Owner has made, constituted and appointed and by the execution
of this Agreement hereby irrevocably makes, constitutes and appoints the
Owner's Representative as such person's true and lawful attorney in fact and
agent, for such person and in such person's name, place and stead for all
purposes necessary or desirable in order for the Owner's Representative to take
the actions contemplated by
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<PAGE> 40
the Merger Documents on behalf of the Owners, with the ability to execute and
deliver all instruments, certificates and other documents of every kind
incident to the foregoing to all intents and purposes and with the same effect
as such Owner could do personally, and each such Owner hereby ratifies and
confirms as his, her, or its own act, all that the Owner's Representative shall
do or cause to be done pursuant to the provisions hereof. All Claim Notices
and all other notices and communications directed to Owners under this
Agreement shall be given to the Owner's Representative.
(c) The death or incapacity of any Owner shall not terminate the
authority and agency of the Owner's Representative.
(d) The Owners hereby agree to indemnify the Owner's Representative and
to hold him or her harmless against any and all loss, liability or expense
incurred without bad faith on the part of the Owner's Representative and
arising out of or in connection with his or her duties as Owner's
Representative, including the reasonable costs and expenses incurred by the
Owner's Representative in defending against any claim or liability in
connection herewith.
15.3 Expenses. Each of the parties hereto shall bear and pay all costs
and expenses incurred by it or on its behalf in connection with the
transactions contemplated hereunder, provided, however, all legal, accounting
and other fees and expenses incurred by the Companies and the Owners concerning
the transactions contemplated hereby in excess of $150,000 shall be paid by the
Owners at the Closing or thereafter when due.
15.4 Further Assurances. Each party covenants that at any time, and from
time to time, after the Closing, it will execute such additional instruments
and take such actions as may be reasonably requested by the other parties to
confirm or perfect or otherwise to carry out the intent and purposes of this
Agreement.
15.5 Waiver. Any failure on the part of any party to comply with any of
its obligations, agreements or conditions hereunder may be waived by any other
party to whom such compliance is owed. No waiver of any provision of this
Agreement shall be deemed, or shall constitute, a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a continuing
waiver.
15.6 Assignment. This Agreement shall not be assignable by any of the
parties hereto without the written consent of all other parties.
15.7 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, legal
representatives, executors, administrators, successors and assigns. This
Agreement shall survive the Closing and not be merged therein.
15.8 Headings. The section and other headings in this Agreement are
inserted solely as a matter of convenience and for reference, and are not a
part of this Agreement.
15.9 Entire Agreement. This Agreement and the Exhibits, Schedules,
certificates and other documents delivered pursuant hereto or incorporated
herein by reference, contain and constitute the entire agreement among the
parties and supersede and cancel any prior agreements, representations,
warranties, or communications, whether oral or written, among the parties
relating to the transactions contemplated by this Agreement. Neither this
Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally, but only by an agreement in writing signed by the party
against whom or which the enforcement of such change, waiver, discharge or
termination is sought.
15.10 Governing Law; Severability. This Agreement shall be governed by
and construed in accordance with the Laws of the State of Delaware, without
regard to any applicable conflicts of Laws; provided, however, that the
effectiveness and validity of the Mergers and Section 8.7 hereof shall be
governed by the Laws of the State of Arizona. The provisions of this Agreement
are severable and the
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<PAGE> 41
invalidity of one or more of the provisions herein shall not have any effect
upon the validity or enforceability of any other provision.
15.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15.12 No Brokers. The Owners, the Companies and RCG each represent to the
others that no broker or finder has been employed in connection with the
transactions hereunder.
15.13 Schedules and Exhibits. All Schedules and Exhibits attached to this
Agreement are by reference made a part hereof.
[Signatures appear on next page]
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<PAGE> 42
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf and its corporate seal to be hereunto affixed and
attested by officers thereunto as of the day and year first above written.
ATTEST: RENAL CARE GROUP, INC.
By:
- ----------------------- ----------------------------
Secretary Title:
--------------------------
[CORPORATE SEAL]
ATTEST: RENAL THREE CORP.
By:
- ----------------------- ----------------------------
Secretary Title:
--------------------------
[CORPORATE SEAL]
ATTEST: RCG NINE CORP.
By:
- ----------------------- ----------------------------
Secretary Title:
--------------------------
[CORPORATE SEAL]
ATTEST: RCG FOUR CORP.
By:
- ----------------------- ----------------------------
Secretary Title:
--------------------------
[CORPORATE SEAL]
ATTEST: RENALWEST, L.C.
By:
- ----------------------- ----------------------------
Secretary Title:
--------------------------
[CORPORATE SEAL]
- 41 -
<PAGE> 43
ATTEST: 3-CO.,INC.
By:
- ----------------------- ----------------------------
Secretary Title:
--------------------------
[CORPORATE SEAL]
ATTEST: 9-CO.,INC.
By:
- ----------------------- ----------------------------
Secretary Title:
--------------------------
[CORPORATE SEAL]
ATTEST: 4-CO.,INC.
By:
- ----------------------- ----------------------------
Secretary Title:
--------------------------
[CORPORATE SEAL]
OWNERS:
--------------------------------
--------------------------------
--------------------------------
--------------------------------
--------------------------------
--------------------------------
--------------------------------
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<PAGE> 44
--------------------------------
--------------------------------
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--------------------------------
--------------------------------
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--------------------------------
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<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of February 6, 1996, by and
between RENAL CARE GROUP, INC., a Delaware corporation (the "Company"), and RON
HINDS (hereinafter "Employee").
WITNESSETH:
WHEREAS, the Company desires to employ Employee, and Employee desires to
be employed by the Company, on the terms and conditions contained herein; and
WHEREAS, in serving as an employee of the Company, Employee has and will
participate in the use and development of confidential proprietary information
about the Company, its customers and suppliers, and the methods used by the
Company and its employees in competition with other companies, as to which the
Company desires to protect fully its rights; and
WHEREAS, the Company wishes to enter into an agreement with Employee
whereby Employee shall agree not to compete with the Company in any current or
future business activity conducted or entered into by the Company and to hold
certain information obtained by and through Employee's employment in
confidence.
NOW, THEREFORE, in consideration of the compensation payable to Employee
by the Company pursuant to this Agreement, and the mutual promises, covenants,
representations and warranties contained herein, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto do agree as follows:
1. Employment.
Effective on February 6, 1996, the Company hereby employs Employee, and
Employee hereby agrees to accept employment with the Company, upon the terms and
conditions hereinafter set forth.
2. Term.
This Agreement shall begin on February 6, 1996 (the "Effective Date"),
and shall continue for an initial period of thirty-six (36) months (the
"Initial Period"), subject to earlier termination by employee or the Company as
hereinafter provided. This Agreement shall renew for additional terms of
twelve (12) months each, subject to earlier termination hereinafter provided,
on the same terms and conditions (subject to mutually agreeable modifications,
if any).
<PAGE> 2
3. Compensation and Benefits
(a) Base Compensation: The Company shall pay Employee an annual
salary of One Hundred Seventy-Five Thousand Dollars ($175,000), as may be
adjusted as provided herein (the "Base Compensation"), payable according to the
pay periods of the Company as may be in effect from time to time. Such payment
shall be prorated for periods less than a full pay period. The Base
Compensation shall be subject to withholding for federal, state and local
payroll and all other taxes or withholdings applicable to Employee. Any
increase of the Base Compensation shall be at the discretion of the Company,
provided that any decreases to the then current Base Compensation shall require
the consent of the Employee.
(b) Benefits: During the term of this Agreement, Employee
shall also be entitled to participate in the insurance and other fringe benefits
made available generally to similar employees of the Company, as such benefits
may be determined from time to time by the Company, provided that Employee shall
have at least four (4) weeks of paid vacation time.
(c) Bonuses: In addition to the Base Compensation payable to
the Employee pursuant to the Section 3(a) above, from time to time Employees may
be entitled to an annual bonus as determined in the sole discretion of the
Company.
(d) Expenses: The Company shall reimburse Employee for any and
all expenses reasonably incurred by employee incident to the performance of the
duties imposed upon Employee hereunder.
4. Duties, Extent of Services.
Employee is engaged as Executive Vice President and Chief
Financial Officer and shall perform such duties and responsibilities as are
typically incident thereto, and shall perform in a faithful and competent manner
such additional duties as may be reasonably assigned from time to time by the
Company. Such duties shall be performed on a full-time basis for the Company at
the Company's offices in Nashville, Tennessee. Employee may be required, from
time to time, to perform his duties temporarily hereunder at such other place or
places as the Company shall reasonably require, provided that such period does
not exceed thirty (30) consecutive days without Employee's consent and that
during any such period Employee is able to return to Nashville, Tennessee at the
Company's expense for weekends.
Employee shall devote all of Employee's business time, attention,
knowledge, and skill solely to the business and interest of the Company, and the
Company shall be entitled to all the benefits, profits, and other issues arising
from, or incident to, all work, services, and advice of Employee.
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5. Termination.
This Agreement may be terminated by the parties in the manners
specified below:
(a) Termination without Cause. Either the Company or the
employee may terminate Employee's employment under this Agreement at any time
for any reason upon thirty (30) day's prior written notice to the other party.
(b) Termination for Cause.
The Company may terminate this Agreement on written notice
at any time for "cause". For purposes of this Agreement, "cause" shall mean:
(i) Employee is convicted of, pleads guilty to, or confesses to a felony or any
crime involving any act of dishonesty, fraud, misappropriation, embezzlement or
moral turpitude, in which event the Company may terminate this Agreement
immediately, (ii) the misconduct or gross negligence by Employee in connection
with the performance of Employee's duties hereunder, (iii) the engaging by
Employee in any fraudulent, disloyal or unprofessional conduct which results in
an injury to the Company, its affiliates or any of its or their centers,
monetarily or otherwise, (iv) Employee breaches any provision of Section 6 of
this Agreement, or (v) the failure by Employee to otherwise substantially
perform his duties with the Company (other than any such failure resulting from
the disability of Employee under Section 5(c)(i)) or the breach of any provision
of this Agreement other than Section 6. In the event of any termination for
cause pursuant to the provisions of (ii), (iii), (iv) or (v) of this subsection,
the Company shall give Employee written notice prior to such termination
detailing the specific acts, actions, failures, or events upon which the
forecast termination is based, and Employee shall have fifteen (15) days after
such written notice to cease such actions or otherwise correct any such failure
or breach. If Employee does not cease such action or otherwise correct such
failure or breach within such fifteen day time period, or having once received
such written notice and ceased such actions or corrected such failure or breach,
Employee at any time thereafter again so acts, fails or breaches, the Company
may terminate this Agreement immediately.
(c) Involuntary Termination.
The employment of Employee hereunder shall be automatically
terminated by the death or disability of Employee as outlined below.
(i) Disability. The Company may terminate this
Agreement at the time Employee shall have been Disabled for a continuous period
of six (6) months during any continuous twelve month period. For purposes of
this Paragraph 5(c)(i), the term "Disabled" shall mean Employee's inability to
perform the essential functions of his duties, with or without reasonable
accommodation. During Employee's six month period of Disability or such longer
wait period as may be provided for in any policy of disability that may be
maintained by the Company for the benefit of Employee, the Company agrees to
continue to pay Employee's Base
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Compensation (less regular withholdings for payroll or other taxes and other
required or proper items, and less any payments from all disability plans
provided by the Company). In the event of a termination of Employee on account
of Disability, however, the Company shall be obligated to pay only Employee's
Base Compensation that has been earned through the effective date of termination
(less regular withholdings for payroll or other taxes and other required or
proper times, and less any payments from all disability plans provided by the
Company).
(ii) Death. In the event Employee shall die during the
term of this Agreement, this Agreement shall terminate and Employee's estate
shall receive the remainder of the Base Compensation set forth in Section 3(a)
hereof accrued to the last day of the month in which death occurs.
(d) Post-Termination Compensation. Except as provided in
Section 5(c) above, upon termination of this Agreement, the Company shall be
relieved of all of its obligations hereunder notwithstanding any period of time
remaining under the initial or any renewal term, subject to the following:
(i) Termination without Cause. In the event that the
Company terminates Employee's employment hereunder without Cause under Section
5(a) above, then Employee shall, after the effective date of such termination,
as Employee's sole and exclusive remedy, receive the Base Compensation (as then
in effect) for a period of twelve (12) months after the termination date. If
the Employee's employment is terminated by the Company without Cause, the
Employee shall be under no duty to seek or accept other employment; but if he
shall do so, any compensation he shall receive therefrom shall not diminish the
Company's obligation to make payments required to the Employee hereunder. In
the event that Employee terminates his or her employment under Section 5(a)
above, the Company's obligation to pay Employee's Base Compensation shall
terminate as of the date of termination.
(ii) Termination for Cause. In the event that the
Company terminates Employee's employment hereunder with Cause under Section 5(b)
above, then Employee shall, after the effective date of such termination, as
Employee's sole and exclusive remedy, receive the Base Compensation (as then in
effect) for a period of one (1) month after the termination date.
(iii) Termination following Change in Control. If within
twelve (12) months following a Change in Control (as defined below), either (A)
the Company terminates the employment of Employee hereunder without Cause under
Section 5(a) above or (B) Employee resigns from a declined reassignment of a job
that is not reasonably equivalent in responsibility or compensation or that is
not in the same geographical area, then, in lieu of any other compensation that
may be specified herein, Employee shall continue to receive the Base
Compensation (as then in effect) for a period of thirty-six (36) months from the
date of termination payable in the same manner as it was being paid as of the
date of termination, provided, however, that the salary payment provided for
hereunder may at the option of the Company be paid in a single lump-sum payment,
to be paid not later than thirty (30) days after termination. In the event such
payment obligation arises, no compensation received from other
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<PAGE> 5
employment (or otherwise) shall reduce the obligation to make the payment(s)
described in this paragraph.
(e) Change in Control. "Change in Control" means a change in
control of the Company of a nature that would be required to be reported
(assuming such event has not been "previously reported") in response to Item
1(a) of a Current Report on Form 8-K pursuant to Section 13 of 15(d) of the
Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, a
Change in Control shall also be deemed to have occurred at such time as:
(i) any "person" within the meaning of Section 14(d) of
the Exchange Act, other than the Company; a subsidiary, or any employee benefit
plan(s) sponsored by the Company or any Subsidiary, is or has become the
"beneficial owner," as defined in rule 13d-3 under the Exchange Act, directly or
indirectly, of 25% or more of the combined voting power of the outstanding
securities of the Company ordinarily having the right to vote at the election of
directors, or
(ii) individuals who constitute the Board immediately
prior to any meeting of stockholders (the "Incumbent Board") have ceased for any
reason to constitute at least a majority thereof, provided that any person
becoming a director whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least three-quarters (3/4) of the
directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named as
a nominee for director without objection to such nomination) shall be, for
purposes of this Agreement, considered as though such person were a member of
the Incumbent Board; or
(iii) upon approval by the Company's stockholders of a
reorganization, merger, share exchange or consolidation, other than one with
respect to which those persons who were the beneficial owners, immediately prior
to such reorganization, merger, share exchange or consolidation, or outstanding
securities of the Company ordinarily having the right to vote in the election of
directors own, immediately after such transaction, more than 75% of the
outstanding securities of the resulting corporation ordinarily having the right
to vote in the election of directors; or
(iv) upon approval by the Company's stockholders of a
complete liquidation and dissolution of the Company or the sale or other
disposition of all or substantially all of the assets of the Company other than
to a Subsidiary.
Notwithstanding the occurrence of any of the foregoing, the Board may
determine, if it deems it to be in the best interest of the Company and
consistent with a good faith interpretation of this Agreement, that an event or
events otherwise constituting a Change in Control shall not be so considered.
Such determination shall only be effective (A) if it is made by the Board prior
to the occurrence of an event that otherwise would be or probably will lead to a
Change in Control or after such event if made by the Board a majority of which
is composed of directors who were
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members of the Board immediately prior to the event that otherwise would be or
probably will lead to a Change in Control and 75% or more of such directors vote
in favor of such determination, and (B) if it is made with respect to all
executive officers of the Company. Upon such determination, such event or
events shall not be deemed to be in Change in Control for any purposes
hereunder.
6. Nondisclosure, Confidentiality; Competition.
(a) Employee agrees that, during the term of this Agreement and
of Employee's employment by the Company, and for a period twelve (12) months
after the termination of Employee's employment with the Company, Employee will
not in any manner, directly or indirectly, by himself or in conjunction with any
other person, (i) conduct any of the activities or perform any of the
responsibilities or duties that Employee provided the Company during his
employment by the Company for any business entity that is competitive with the
business of the Company or its affiliates or (ii) establish or own any
financial, beneficial or other interest in (other than an interest consisting of
less than one percent (1%) of a class of publicly traded security), make any
loan to or for the benefit of, or render any managerial, marketing or other
business advice, to any entity that is then conducting activities that are
competitive with those of the business of the Company or its affiliates, in
either case with a geographic territory defined as the greater of (i) a
seventy-five (75) miles radius of any renal dialysis center, unit or facility
owned or operated by the Company or an affiliate of the Company (an "RCG
Center"), or (ii) the geographic area, as narrowly construed as is practicable,
from which the Company received patients at each of the RCG Centers. For
purposes of this Section, the "business of the Company or its affiliates" shall
mean owning or operating a renal dialysis center, unit or facility, and
providing practice management services to nephrologists.
(b) Employee further agrees that, for a period of three (3) years
after the termination of Employee's employment with the Company, Employee will
keep confidential and not directly divulge, or allow through a lack of
reasonable care to be divulged to anyone, or use or otherwise appropriate for
Employee's own benefit or for the benefit of others, any knowledge or
information of a confidential nature with respect to the Company's and its
affiliates' current business, the Company itself, or any of its affiliates,
including all trade secrets, pricing information, marketing information or
technical information (hereinafter referred to as the "Confidential Data"),
except for (i) a disclosure that is required by law; or (ii) information that
has been made generally available to the public by the act of one who has the
right to disclose such information; or (iii) information that has become part
of the public domain through no fault of the Employee; and (iv) was known to
the Employee prior to June 1995. Employee hereby acknowledges and agrees that
the prohibitions against disclosure of Confidential Data recited herein are in
addition to, and not in lieu of, any rights or remedies which the Company may
have available pursuant to the laws of any jurisdiction or at common law to
prevent the disclosure of confidential information, and the enforcement by the
Company of its rights and remedies pursuant hereto shall not be construed as a
waiver of any other rights or available remedies which the Company may possess
in law or equity. Employee acknowledges that the Company has
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<PAGE> 7
taken reasonable and appropriate steps to ensure the confidentiality and
non-disclosure of all such Confidential Data. For purposes of this Section the
Company's and its affiliates' "current business" shall mean owning or opening a
renal dialysis center, unit or facility.
(c) Employee further agrees that, for a period of three (3) years
after the termination of Employee's employment with the Company, Employee will
not, for his own benefit or the benefit of others, solicit any person or entity
that has or has had, or disrupt or attempt to disrupt, any relationship,
contractual or otherwise, with the Company or an affiliate of the Company
(including any patient, payor, physician, provider, managed care organization
or supplier) or any time during Employee's employment with the Company, for the
purpose of assisting, or creating such a relationship for, any business entity
that is competitive with the Company or an affiliate of the Company. For
purposes of this Section, a business entity is competitive with the Company or
an affiliate of the Company if it provides or offers any renal dialysis service
that is provided by the Company or an affiliate of the Company.
(d) Employee further agrees that, for a period of three (3) years
after the termination of Employee's employment with the Company, Employee shall
not induce, nor attempt to induce, any employee of the Company, or any of its
affiliates, to terminate such employee's association with the Company or any of
its affiliates.
(e) These post-employment covenants are considered by the parties
hereto to be fair, reasonable and integral for the protection of the Company.
The parties mutually agree that if a violation of any of these covenants occurs,
such violation or any threatened violation will cause irreparable injury to the
Company and the remedy at law for any such violation will cause irreparable
injury to the Company and the remedy at law for any such violation or threatened
violation will be inadequate. The parties acknowledge that these covenants will
survive, and remain in effect and enforceable after, termination of this
Agreement.
(f) Employee agrees to indemnify and hold harmless the Company from
and against any and all claims, causes of action, damages and/or any other
losses suffered or incurred by the Company as a result of any breach or
purported breach by Employee of any agreement applicable to Employee which
existed prior to the time of the entering into of this Agreement. Such
obligations of Employee to indemnify and hold the Company harmless shall include
any and all costs of defense of any such claim or threatened claim, including
reasonable attorneys' fees.
7. Severability.
The parties hereto hereby expressly agree and contract that it is
not the intention of either party to violate any public policy, or any statutory
or common law, and that if any paragraph, sentence, clause or combination of
the same of this Agreement shall be in violation of the laws of any state where
applicable, such paragraph, sentence, clause or the combination of the same
shall be void in the jurisdictions where it is unlawful, and the remainder
thereof shall remain binding on the parties hereto. It is the intention of the
parties to make the covenants of
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this Agreement binding only to the extent that they may be lawfully done under
existing applicable laws. In the event that any part of any term or covenant
of this Agreement is determined by a court of law or equity to be overly broad
or otherwise unenforceable, the parties hereto agree that such court shall be
empowered to substitute, and it is the intent of the parties hereto that such
court substitute, a reasonably judicially enforceable term or limitation in the
place of such unenforceable term or covenant, and that as so modified this
Agreement shall be fully enforceable.
8. Entire Agreement; Modification.
This Agreement constitutes the entire agreement between the
parties and supersedes any and all prior understandings or agreements, and any
changes or additions hereto must be in writing and signed by both parties.
9. Assignment.
(a) The rights and benefits of Employee under this
Agreement, other than accrued and unpaid amounts due under Section 3(a) hereof,
are personal to Employee and shall not be assignable.
(b) This Agreement may not be assigned by the Company
except to an affiliate of the Company, provided that such affiliate assumes the
Company's obligations under this Agreement; provided, further, that if the
Company shall merge or effect a consolidation or share exchange with or into,
or sell or otherwise transfer substantially all its assets to, another business
entity, the Company may assign its rights hereunder to that business entity
without the consent of the Employee provided that it causes such business
entity to assume the Company's obligations under this Agreement.
10. Notice.
The references to the notice periods of certain "days"
contained in this Agreement shall mean calendar days. Any notice provided for
in this Agreement shall be delivered to Employee at the most recent address of
employee listed in the Company's then current employment records. Notice to
the Company shall be delivered to the following address: c/o Renal Care Group,
Inc., 2100 West End Avenue, Suite 800, Nashville, Tennessee 37203, Attention:
President.
11. Waiver.
The waiver by any party to this Agreement of a breach of any of the
provisions contained herein shall not operate or be construed as a waiver of
any subsequent breach.
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12. Disputes and Governing Law.
The Company and employee agree that any dispute arising in connection
with, or relating to, this Agreement or the termination of this Agreement, to
the maximum extent allowed by applicable law, shall be subject to resolution
through informal methods and, failing such efforts, through arbitration.
Either party may notify the other party of the existence of a dispute by
written notice to the address indicated above in Section 10. The parties shall
thereafter attempt in good faith to resolve their differences within thirty
(30) days after the receipt of such notice. If the dispute cannot be resolved
within such 30-day period, either party may file a written demand for
arbitration with the other party. The arbitration shall proceed in accordance
with the terms of the Federal Arbitration Act and the rules and procedures of
the American Arbitration Association. A single arbitrator shall be appointed
through the American Arbitration Association's procedures to resolve the
dispute.
The parties agree that in the event arbitration is necessary, the laws
of the State of Tennessee and any applicable federal law shall apply. The
place of the arbitration shall be Nashville, Tennessee.
The award of the arbitrator shall be binding and conclusive upon the
parties. Either party shall have the right to have the award made the
judgement of a court of competent jurisdiction in the State of Tennessee.
In the event of a dispute arising under this Agreement, the prevailing
party shall be entitled to all reasonable attorneys' fees incurred in
connection with such dispute. The Company agrees, to the maximum extent
permitted by law and the By-laws of the Company, to defend and indemnify the
Employee against and to hold the Employee harmless from any and all claims,
suits, losses, liabilities, and expenses (including disputes arising under this
Agreement and including reasonable attorney's fees and payment of reasonable
expenses incurred in defending against such claim or suite as such expenses are
incurred) asserted against the Employee for actions taken or omitted to be
taken by the Employee in good faith and within the scope of his
responsibilities as an officer or employee of the Company. If requested by the
Employee, the Company shall advance to the Employee, promptly following the
Company's receipt of any such request, any and all expenses for which
indemnification is available hereunder.
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IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement on the day and year first above written.
COMPANY:
RENAL CARE GROUP, INC.
By: /s/ Sam A. Brooks
-------------------------------------
Sam A. Brooks
President
[Corporate Seal]
EMPLOYEE:
/s/ Ronald Hinds (Seal)
----------------------------------
Ron Hinds
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<PAGE> 1
EXHIBIT 10.16
RENAL CARE GROUP, INC.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
ARTICLE I
PURPOSE
1.1 GENERAL. The purpose of the Renal Care Group, Inc. Amended and
Restated 1996 Stock Option Plan (the "Plan") is to promote the success, and
enhance the value, of Renal Care Group, Inc. (the "Company"), by linking the
personal interests of its key employees and consultants to those of Company
stockholders and by providing its key employees and consultants with an
incentive for outstanding performance. The Plan is further intended to provide
flexibility to the Company in its ability to motivate, attract, and retain the
services of employees and consultants upon whose judgment, interest, and special
effort the successful conduct of the Company's operation is largely dependent.
Accordingly, the Plan permits the grant of stock option awards from time to time
to selected officers and key employees and consultants.
ARTICLE 2
EFFECTIVE DATE
2.1 EFFECTIVE DATE. The Plan first became effective upon approval of the
same by the Board of Directors of the Company (January 15, 1996) (the "Effective
Date"), as approved by the sole stockholder of the Company. The first amendments
to the Plan were approved by the Board of Directors of the Company on August ,
1996, subject to approval thereof by the stockholders of the Company at the
special meeting of stockholders held on September 27, 1996.
ARTICLE 3
DEFINITIONS
3.1 DEFINITIONS. When a word or phrase appears in this Plan with the
initial letter capitalized, and the word or phrase does not commence a sentence,
the word or phrase shall generally be given the meaning ascribed to it in this
Section or in Sections 1.1 or 2.1 unless a clearly different meaning is required
by the context. The following words and phrases shall have the following
meanings:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means the continued failure by a Participant to
substantially perform such Participant's duties of employment after written
warnings identifying the lack of substantial performance are communicated
to the Participant by the employer that identify the manner in which the
employer believes that the Participant has not substantially performed such
duties, or the engaging by an Participant in illegal conduct that is
materially and demonstrably injurious to the Company, unless otherwise
defined in an employment agreement between the Participant and the Company
or a Subsidiary in effect on the date of termination in which case "Cause"
shall be defined as set forth therein.
(c) "Change in Control" means a change in control of the Company after
the closing of an initial public offering of Stock registered under the
Securities Act on a Registration Statement on Form S-1 of a nature that
would be required to be reported (assuming such event has not been
"previously reported") in response to Item 1(a) of a Current Report on Form
8-K pursuant to Section 13 or 15(d) of the Exchange Act; provided that,
without limitation, a Change in Control shall also be deemed to have
occurred at such time as:
(i) any "person" within the meaning of Section 14(d) of the
Exchange Act, other than the Company, a Subsidiary, or any employee
benefit plan(s) sponsored by the Company or any
<PAGE> 2
Subsidiary, is or has become the "beneficial owner," as defined in Rule
13d-3 under the Exchange Act, directly or indirectly, of 25% or more of
the combined voting power of the outstanding securities of the Company
ordinarily having the right to vote at the election of directors;
(ii) individuals who constitute the Board immediately prior to any
meeting of stockholders (the "Incumbent Board") have ceased for any
reason to constitute at least a majority thereof, provided that any
person becoming a director whose election, or nomination for election by
the Company's stockholders, was approved by a vote of at least
three-quarters ( 3/4) of the directors comprising the Incumbent Board
(either by a specific vote or by approval of the proxy statement of the
Company in which such person is named as a nominee for director without
objection to such nomination) shall be, for purposes of this Agreement,
considered as though such person were a member of the Incumbent Board;
(iii) upon approval by the Company's stockholders of a
reorganization, merger, share exchange or consolidation, other than one
with respect to which those persons who were the beneficial owners,
immediately prior to such reorganization, merger, share exchange or
consolidation, of outstanding securities of the Company ordinarily
having the right to vote in the election of directors own, immediately
after such transaction, more than 75% of the outstanding securities of
the resulting corporation ordinarily having the right to vote in the
election of directors; or
(iv) upon approval by the Company's stockholders of a complete
liquidation and dissolution of the Company or the sale or other
disposition of all or substantially all of the assets of the Company
other than to a Subsidiary.
Notwithstanding the occurrence of any of the foregoing, the Board may
determine, if it deems it to be in the best interest of the Company, that an
event or events otherwise constituting a Change in Control shall not be so
considered. Such determination shall be effective if it is made by the Board
prior to the occurrence of an event that otherwise would be or probably will
lead to a Change in Control or after such event if made by the Board a majority
of which is composed of directors who were members of the Board immediately
prior to the event that otherwise would be or probably will lead to a Change in
Control. Upon such determination, such event or events shall not be deemed to be
a Change in Control for any purposes hereunder, including but not limited to,
Section 8.6.
(d) "Change in Control Price" means the highest closing price per
share paid for the purchase of Stock in a national securities market during
the ninety (90) day period ending on the date the Change in Control occurs.
(e) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(f) "Committee" means the committee of the Board described in Article
4.
(g) "Company" means Renal Care Group, Inc., a Delaware corporation.
(h) "Disability" shall mean any permanent disability as defined by
Section 22(e)(3) of the Code. The Committee may require such medical or
other evidence as it deems necessary to judge the nature and permanency of
a Participant's Disability.
(i) "Effective Date" has the meaning assigned such term in Section
2.1.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
(k) "Fair Market Value" means the closing price of the shares of Stock
on the New York Stock Exchange or other national securities exchange on the
day on which such value is to be determined or, if no shares were traded on
such day, on the next preceding day on which shares were traded, as
reported by the National Quotation Bureau, Inc. or other national quotation
service. If the shares are not traded on an exchange but are traded in the
over-the-counter market, Fair Market Value means the closing "asked" price
of the shares in the over-the-counter market on the day on which such value
is to be determined or, if such "asked" price is not available, the last
sales price on such day or, if no shares were traded on such
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day, on the next preceding day on which the shares were traded, as reported
by the National Association of Securities Dealers Automatic Quotation
System (NASDAQ) or other national quotation service.
(l) "Incentive Stock Option" means an Option that is intended to meet
the requirements of Section 422 of the Code or any successor provision
thereto.
(m) "Non-Qualified Stock Option" means an Option that is not an
Incentive Stock Option.
(n) "Option" means a right granted to a Participant under Article 7 of
the Plan to purchase Stock at a specified price during specified time
periods. An Option may be either an Incentive Stock Option or a
Non-Qualified Stock Option.
(o) "Option Agreement" means any written agreement, contract, or other
instrument or document evidencing an Option.
(p) "Participant" means a person who, as an officer or key employee or
consultant of the Company or any Subsidiary, has been granted an Option
under the Plan.
(q) "Plan" means the Renal Care Group, Inc. 1996 Stock Option Plan, as
amended from time to time.
(r) "Securities Act" means the Securities Act of 1933, as amended from
time to time.
(s) "Stock" means the $0.01 par value common stock of the Company and
such other securities of the Company as may be substituted for Stock
pursuant to the terms of the Plan including but not limited to Article 9
hereof.
(t) "Subsidiary" means any corporation that qualifies as a subsidiary
of a corporation under the definition of "subsidiary corporation" contained
in Section 424(f) of the Code.
ARTICLE 4
ADMINISTRATION
4.1 The Plan shall be administered by a committee of directors of the
Company (the "Committee") appointed by the Board from time to time and
consisting of at least two members of the Board, each of whom shall be both (i)
a "non-employee director" as such term is defined in Rule 16b-3 promulgated
under Section 16 of the Exchange Act or any successor provision, and (ii) an
"outside director" as that term is used in Section 162 of the Code and the
regulations promulgated thereunder. In the absence of an appointment of a
Committee, the Board shall serve as the Committee.
4.2 AUTHORITY OF COMMITTEE. The Committee has the exclusive power,
authority and discretion to:
(a) Designate Participants;
(b) Determine the type or types of Options to be granted to each
Participant;
(c) Determine the number of Options to be granted and the number of
shares of Stock to which an Option will relate;
(d) Determine the terms and conditions of any Option granted under the
Plan, including but not limited to, the exercise price, any restrictions or
limitations on the Option, any schedule for lapse of forfeiture
restrictions or restrictions on the exercisability of an Option, and
accelerations or waivers thereof, based in each case on such considerations
as the Committee in its sole discretion determines;
(e) Determine whether, to what extent, and under what circumstances an
Option may be settled in, or the exercise price of an Option may be paid
in, cash, Stock, or other property, or an Option may be canceled,
forfeited, or surrendered;
(f) Prescribe the form of each Option Agreement, which need not be
identical for each Participant;
(g) Decide all other matters that must be determined in connection
with an Option;
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(h) Establish, adopt or revise any rules and regulations as it may
deem necessary or advisable to administer the Plan; and
(i) Make all other decisions and determinations that may be required
under the Plan or as the Committee deems necessary or advisable to
administer the Plan.
4.3. DECISIONS BINDING. The Committee's interpretation of the Plan, any
Options granted under the Plan, any Option Agreement and all decisions and
determinations by the Committee with respect to the Plan are final, binding, and
conclusive on all parties.
ARTICLE 5
SHARES SUBJECT TO THE PLAN
5.1. NUMBER OF SHARES. Subject to adjustment as provided in Section 9.1,
the aggregate number of shares of Stock reserved and available for Options shall
be .
5.2. LAPSED AWARDS. To the extent that an Option is canceled, terminates,
expires or lapses for any reason, any shares of Stock subject to the Option will
again be available for the grant of an Option under the Plan.
5.3. STOCK DISTRIBUTED. Any Stock distributed pursuant to an Option may
consist, in whole or in part, of authorized and unissued Stock, treasury Stock
or Stock purchased on the open market.
5.4. LIMITATION ON NUMBER OF SHARES SUBJECT TO AWARDS. Notwithstanding any
provision in the Plan to the contrary, the maximum number of shares of Stock
with respect to one or more Options that may be granted to any one Participant
in any one taxable year shall be 100,000, subject to adjustment as set forth in
Article 9 hereto.
ARTICLE 6
ELIGIBILITY
6.1. GENERAL. Options may be granted only to individuals who are (i)
officers or other key employees (including employees who also are directors or
officers) of the Company or a Subsidiary, or (ii) bona fide consultants to the
Company or a Subsidiary, as determined by the Committee.
ARTICLE 7
STOCK OPTIONS
7.1. GENERAL. The Committee is authorized to grant Options to Participants
on the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock under an
Option shall be determined by the Committee. The Committee may elect to
grant Non-Qualified Stock Options with an exercise price per share of Stock
less than the Fair Market Value of a share of Stock on the date any such
Non-Qualified Stock Option is granted.
(b) Time and Conditions of Exercise.
(i) The Committee shall determine the time or times at which an
Option may be exercised in whole or in part. The Committee also shall
determine the performance or other conditions, if any, that must be
satisfied before all or part of an Option may be exercised.
(ii) In connection with the grant of any Options, the Committee may
provide in the Option Agreement for the termination of all or any
portion of the Options under certain circumstances, including, without
limitation, termination of a Participant's employment, provided that the
Committee may distinguish among various causes of termination as the
Committee deems appropriate. In
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<PAGE> 5
addition, the Committee may provide, through the Option Agreement or
otherwise, that if a Participant's employment is terminated: (i) such
Participant's Option(s) may be exercised for specified periods
thereafter but no later than the expiration date of such Option; (ii) to
the extent not fully exercisable on the date of termination of
employment, such Option may continue to become exercisable within the
term of the Option; or (iii) some or all of the Options not fully
exercisable on the date of termination of employment may be deemed fully
exercisable. A Participant's employment shall be deemed to terminate on
the last date for which he or she receives a regular wage or salary
payment (excluding severance payments unless otherwise provided in the
Option Agreement). Whether military, government or other service or
other leave of absence shall constitute a termination of employment
shall be determined in each case by the Committee at its discretion, and
any determination by the Committee shall be final and conclusive. A
termination of employment shall not occur where the Participant
transfers from the Company to one of its Subsidiaries, transfers from a
Subsidiary to the Company or transfers from one Subsidiary to another
Subsidiary.
(c) Payment. The Committee shall determine the methods by which the
exercise price of an Option may be paid, the form of payment, including,
without limitation, cash, shares of Stock, or other property (including
"cashless exercise" arrangements), and the methods by which shares of Stock
shall be delivered or deemed to be delivered to Participants. Without
limiting the power and discretion conferred on the Committee pursuant to
the preceding sentence, the Committee may, in the exercise of its
discretion, but need not, allow a Participant to pay the exercise price of
an Option by directing the Company to withhold from the shares of Stock
that would otherwise be issued upon exercise of the Option that number of
shares having a Fair Market Value on the exercise date equal to the
exercise price, all as determined pursuant to rules and procedures
established by the Committee.
(d) Evidence of Grant. All Options shall be evidenced by a written
Option Agreement between the Company and the Participant. The Option
Agreement shall include such provisions as may be specified by the
Committee.
7.2. INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock Options
granted under the Plan must comply with the following additional rules:
(a) Exercise Price. The exercise price per share of Stock shall be
set by the Committee, provided that the exercise price for any Incentive
Stock Option shall not be less than the Fair Market Value as of the date of
the grant.
(b) Exercise. In no event may any Incentive Stock Option be
exercisable for more than ten years from the date of its grant.
(c) Individual Dollar Limitation. The aggregate Fair Market Value
(determined as of the time an Option is made) of all shares of Stock with
respect to which Incentive Stock Options are first exercisable by a
Participant in any calendar year may not exceed $100,000.
(d) Ten Percent Owners. No Incentive Stock Option shall be granted to
any individual who, at the date of grant, owns stock possessing more than
ten percent of the total combined voting power of all classes of stock of
the Company or any Subsidiary unless the exercise price per share of such
Option is at least 110% of the Fair Market Value per share of Stock at the
date of grant and the Option expires no later than five years after the
date of grant.
(e) Expiration of Incentive Stock Options. No award of an Incentive
Stock Option may be made pursuant to the Plan on or after the tenth
anniversary of the Effective Date.
(f) Right To Exercise. During a Participant's lifetime, an Incentive
Stock Option may be exercised only by the Participant.
(g) Interpretation of Incentive Stock Options. In interpreting this
Section 7.2 of the Plan and the provisions of individual Option Agreements
granting Incentive Stock Options, the Committee shall be
5
<PAGE> 6
governed by the principles and requirements of Sections 421, 422 and 424 of
the Code, and applicable Treasury Regulations.
ARTICLE 8
GENERAL PROVISIONS APPLICABLE TO OPTIONS
8.1. STAND-ALONE, TANDEM, AND SUBSTITUTE OPTIONS. Options granted under
the Plan may, in the discretion of the Committee, be granted either alone or in
addition to, in tandem with, or in substitution for, any other Option granted
under the Plan. If an Option is granted in substitution for another Option, the
Committee may require the surrender of such other Option in consideration of the
grant of the new Option. Options granted in addition to or in tandem with other
Options may be granted either at the same time as or at a different time from
the grant of such other Options.
8.2. EXCHANGE PROVISIONS. The Committee may at any time offer to exchange
or buy out any previously granted Option for a payment in cash, Stock, or
another Option (subject to Section 8.1), based on the terms and conditions the
Committee determines and communicates to the Participant at the time the offer
is made.
8.3. TERM OF OPTION. The term of each Option shall be for the period as
determined by the Committee, provided that in no event shall the term of any
Incentive Stock Option exceed a period of ten years from the date of grant.
8.4. LIMITS ON TRANSFER. No right or interest of a Participant in any
Option may be pledged, encumbered, or hypothecated to or in favor of any party
other than the Company or a Subsidiary, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than the
Company or a Subsidiary. No Option shall be assignable or transferable by a
Participant other than by will or the laws of descent and distribution or,
except in the case of an Incentive Stock Option, pursuant to a domestic
relations order as defined in Section 414(p)(1)(B) of the Code, if the order
satisfies Section 414(p)(1)(A) of the Code.
8.5. STOCK CERTIFICATES. All Stock certificates delivered under the Plan
are subject to any stop-transfer orders and other restrictions as the Committee
deems necessary or advisable to comply with federal or state securities laws,
rules and regulations and the rules of any national securities exchange or
automated quotation system on which the Stock is listed, quoted, or traded. The
Committee may place legends on any Stock certificate to reference restrictions
applicable to the Stock.
8.6. CHANGES IN CONTROL.
(a) Change in Control Followed by Employment Termination. In the
event that a Change in Control shall occur and an employee Participant's
employment shall terminate, except as provided in the next sentence, within
twelve (12) months after the Change in Control, then (i) all unexercised
Options (whether vested or not vested) shall automatically become one
hundred percent (100%) vested immediately, (ii) no other terms, conditions,
restrictions or limitations shall be imposed upon any such Options after
such date, and in no circumstance shall an Option be forfeited on or after
such date, and (iii) all such Options shall be valued on the basis of the
greater of the Change in Control Price or the Fair Market Value on the date
of such termination, and such value shall promptly be paid to the
Participant in cash by the Company or its successor. The foregoing shall
not apply if employment termination is due to (i) death, (ii) disability
entitling the Participant to benefits under the Company's or its
successor's long-term disability plan, (iii) Cause, or (iv) resignation
(other than (A) resignation from a declined reassignment to a job that is
not reasonably equivalent in responsibility or compensation or that is not
in the same geographic area, or (B) resignation within 30 days following a
reduction in base pay).
(b) Automatic Acceleration and Cash-Out. Upon a Change in Control
that results directly or indirectly in the Stock (or the stock of any
successor to the Company received in exchange for Stock) ceasing to be
publicly traded in a national securities market, (i) all unexercised
Options (whether vested or not vested) shall automatically become one
hundred percent (100%) vested immediately, (ii) no other
6
<PAGE> 7
terms, conditions, restrictions or limitations shall be imposed upon any
such Options after such date, and in no circumstance shall an Option be
forfeited on or after such date, and (iii) all such Options shall be valued
on the basis of the Change in Control Price, and such value shall promptly
be paid to the Participant in cash by the Company or its successor.
(c) Miscellaneous. Upon a Change in Control, no action, including,
without limitation, the amendment, suspension or termination of the Plan,
shall be taken that would adversely affect the rights of any Participant or
the operation of the Plan with respect to any Option to which a Participant
may have become entitled hereunder on or prior to the date of the Change in
Control or to which such Participant may become entitled as a result of
such Change in Control.
8.7. MODIFICATION, EXTENSION AND RENEWAL. The Committee may modify, renew
or accept the surrender of outstanding Options issued under the Plan (or the
surrender of similar grants issued under any other plan of the Company or a
Subsidiary), including the acceleration or waiver of any vesting or other
restrictions or limitations, or the conversion of such Options (with appropriate
adjustments) to be applicable to the securities of any successor corporation to
the Company, and the Committee may authorize new Options pursuant to the Plan in
substitution for any outstanding Options. Any substituted, modified or converted
Options may bear such different or additional terms and conditions as the
Committee shall deem appropriate within the limitations of the Plan. The
determination of the Committee as to the terms of any of the foregoing may be
made without regard to whether a Change in Control has or has not occurred (or
whether the Committee has determined that any event shall not be considered to
be a Change in Control) and shall be conclusive and binding notwithstanding the
provisions of the respective agreements regarding exercisability. Any fractional
shares resulting from any of the foregoing adjustments under this Section shall
be disregarded and eliminated. However, no modification of an Option shall,
without the consent of the Participant holding the Option, adversely affect the
rights or obligations of such Participant with respect to such Option.
ARTICLE 9
CHANGES IN CAPITAL STRUCTURE
9.1. GENERAL. If the Company's outstanding shares of Stock are increased
or decreased or changed into or exchanged for a different number or kind of
shares or other securities of the Company by reason of any recapitalization,
reclassification, stock split, combination of shares, stock dividend, or
transaction having similar effect, the Board shall proportionately and
appropriately adjust (i) the number of shares of Stock authorized and reserved
for grants under the Plan as set forth in Section 5.1, (ii) the number of shares
of Stock that may be subject to one or more Options granted to any one
Participant in any one taxable year as set forth in Section 5.4, and (iii) the
number and kind of shares that are subject to each Option and the exercise price
per share, without any change in the aggregate price to be paid therefor upon
exercise of each Option.
ARTICLE 10
AMENDMENT, MODIFICATION AND TERMINATION
10.1. AMENDMENT, MODIFICATION AND TERMINATION. With the approval of the
Board, at any time and from time to time, the Committee may terminate, amend or
modify the Plan without stockholder approval; provided, however, that the
Committee may condition any amendment on the approval of stockholders of the
Company if such approval is necessary or deemed advisable with respect to tax,
securities or other applicable laws, policies or regulations.
10.2 OPTIONS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect any Option previously granted
under the Plan, without the written consent of the Participant.
7
<PAGE> 8
ARTICLE 11
GENERAL PROVISIONS
11.1. NO RIGHTS TO OPTIONS. No Participant or employee shall have any
claim to be granted any Option under the Plan, and neither the Company nor the
Committee is obligated to treat Participants and employees uniformly.
11.2. NO STOCKHOLDER RIGHTS. No Option gives the Participant any of the
rights of a stockholder of the Company unless and until shares of Stock are in
fact issued to such person in connection with such Option.
11.3. WITHHOLDING. The Company or any Subsidiary shall have the authority
and the right to deduct or withhold, or require a Participant to remit to the
Company, an amount sufficient to satisfy federal, state, and local taxes
(including the Participant's FICA obligation) required by law to be withheld
with respect to any taxable event arising as a result of the Plan. With respect
to withholding required upon any taxable event under the Plan, the Committee
may, at the time the Option is granted or thereafter, require that any such
withholding requirement be satisfied, in whole or in part, by withholding shares
of Stock having a Fair Market Value on the date of withholding equal to the
amount to be withheld for tax purposes, all in accordance with such procedures
as the Committee establishes.
11.4. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Option Agreement
shall interfere with or limit in any way the right of the Company or any
Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Company or any
Subsidiary.
11.5. UNFUNDED STATUS. The Plan is intended to be an "unfunded" plan for
incentive and deferred compensation. With respect to any payments not yet made
to a Participant pursuant to the Plan, nothing contained in the Plan or any
Option Agreement shall give the Participant any rights that are greater than
those of a general creditor of the Company or any Subsidiary.
11.6. RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
savings, profit sharing, group insurance, welfare or benefit plan of the Company
or any Subsidiary.
11.7. EXPENSES. The expenses of administering the Plan shall be borne by
the Company and its Subsidiaries.
11.8. TITLES AND HEADINGS. The titles and headings of the Sections in the
Plan are for convenience of reference only, and in the event of any conflict,
the text of the Plan, rather than such titles or headings, shall control.
11.9. GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
11.10. FRACTIONAL SHARES. No fractional shares of Stock shall be issued
and the Committee shall determine, in its discretion, whether cash shall be
given in lieu of fractional shares or whether such fractional shares shall be
eliminated by rounding up.
11.11. SECURITIES LAW COMPLIANCE. It is intended that the provisions of
the Plan and any grant of Options hereunder shall comply in all respects with
the terms and conditions of Rule 16b-3 under the Exchange Act, or any successor
provisions, as it relates to persons subject to the reporting requirements of
Section 16(a) of the Exchange Act. Any agreement granting any Options shall
contain such provisions as are necessary or appropriate to assure such
compliance. To the extent that any provision hereof is found not to be in
compliance with such Rule as it relates to such Act, such provision shall be
deemed to be modified so as to be in compliance with such Rule, or if such
modification is not possible, shall be deemed to be null and void, as it relates
to such Participant.
8
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11.12. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to
make payment of awards in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by government agencies as
may be required. The Company shall be under no obligation to register under the
Securities Act any of the shares of Stock paid under the Plan. If the shares
paid under the Plan may in certain circumstances be exempt from registration
under the Securities Act, the Company may restrict the transfer of such shares
in such manner as it deems advisable to ensure the availability of any such
exemption.
11.13. GOVERNING LAW. To the extent not governed by federal law, the Plan
and all Option Agreements shall be construed in accordance with and governed by
the laws of the State of Delaware.
IN WITNESS WHEREOF, Renal Care Group, Inc., acting by and through its duly
authorized officers, has executed this instrument as of the day of
, 1996.
<TABLE>
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ATTEST: RENAL CARE GROUP, INC.
By: By:
------------------------------------- -----------------------------------
Ronald Hinds Sam A. Brooks, Jr.
Secretary President and
Chief Executive Officer
</TABLE>
9
<PAGE> 1
Exhibit 10.19
AMENDMENT NO. 1 TO THE
RENAL CARE GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN
The Renal Care Group, Inc. Employee Stock Purchase Plan (the "Plan") be
and hereby is amended as follows:
1. Section 1.1 of the Plan is hereby deleted in its entirety and
the following is hereby inserted in lieu thereof:
1.1. "Anniversary Date" shall mean January 1 of each year.
2. Section 1.14 of the Plan is hereby deleted in its entirety and
the following is hereby inserted in lieu thereof:
1.14. "Normal Monthly Pay" for purposes of determining the amount of
a Participant's contributions for any Plan Year shall be (i) for hourly paid
Employees an amount computed by annualizing the Participant's hourly base pay
and his regular scheduled hours of work as of December 1 of the preceding Plan
Year and dividing by twelve (12), and (ii) for salaried employees, their
regular monthly base pay as of December 1 of the preceding Plan Year. For
purposes of computing a Participant's "Normal Monthly Pay" for contributions
during the first Plan Year, a Participant's hourly base pay and regular
scheduled hours of regular monthly base pay as applicable shall be determined
as of the later of (i) February 6, 1996, or (ii) his date of employment.
3. Section 1.19 of the Plan is hereby deleted in its entirety and
the following is hereby inserted in lieu thereof:
1.19. "Plan Year" shall mean a twelve (12) month period beginning on
the first day of January and ending on the last day of December of each year;
provided, however, that in the year of adoption, Plan Year shall mean the
period commencing on the Effective Date and ending on the last day of December,
1996.
4. Section 3.1 of the Plan is hereby deleted in its entirety and
the following is hereby inserted in lieu thereof:
3.1. Every Employee who becomes an Employee during the first Plan
Year (i.e., the Plan Year beginning on the Effective Date) and whose customary
employment is at least twenty (20) hours per week and more than five (5) months
in a calendar year shall be eligible to participate as of the date he or she
first becomes an Employee. Every other Employee whose customary employment is
at least twenty (20) hours per week and more than five (5) months in a calendar
year shall be eligible to participate as of any Anniversary
<PAGE> 2
Date coincident with or immediately following his completion of at least six
(6) months of Continuous Service. An Employee shall not be eligible to
participate, however, if immediately after the Options are granted such
Employee would own stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of the Sponsoring Employer or a
subsidiary corporation or parent corporation (as those terms are defined in
Section 424(e) and (f) of the Code). For purposes of this paragraph, the
ownership attribution rules of Section 424(d) of the Code shall apply in
determining the stock ownership of an Employee and stock which the Employee may
purchase under outstanding options (under this or any other plan or agreement)
shall be treated as stock owned by the Employee.
5. Section 4.2 of the Plan is hereby deleted in its entirety and
the following is hereby inserted in lieu thereof:
4.2. With respect to the first Plan Year only, in addition to or in
lieu of payroll contributions, a Participant may make cash contributions to his
or her Contribution Account, which, together with any payroll contributions
during the first Plan Year, do not exceed the product of (i) 10% of the
Participant's Normal Monthly Pay, and (ii) the number of partial or full months
in the first Plan Year (i.e., eleven). An election to make a cash contribution
shall be in writing on such form as provided by the Committee, and must be
received by the Employer no later than December 31, 1996. For all purposes of
this Plan, a Participant's cash contributions shall be allocated to and deemed
a part of the Participant's Contribution Account. No interest shall accrue or
be paid on any cash contributions under the Plan.
6. Section 5.2 of the Plan is hereby deleted in its entirety and
the following is hereby inserted in lieu thereof:
5.2. The Issue Price of the Sponsoring Employer Stock under this Plan
shall be equal to the lesser of: (i) eighty-five percent (85%) of the Market
Price on the Exercise Date of each Plan Year; or (ii) eighty-five percent (85%)
of the Market Price on the Grant Date of each Plan Year. The Issue Price is
subject, however, to a "Minimum Issue Price" for each Plan Year. The "Minimum
Issue Price" for any Plan Year shall be the book value of the Sponsoring
Employer Stock as of the December 31 for the calendar year preceding the
calendar year during which the Grant Date for the Plan Year occurs.
Notwithstanding any provision to the contrary, if the Issue Price for any Plan
Year is less than the Minimum Issue Price, the Options granted for that Plan
Year shall be considered null and void and the payroll deductions credited to
the Participant's Contribution Account shall be returned to the Participant.
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<PAGE> 3
7. Except as amended hereby, the Plan shall be and remain in full
force and effect.
Executed this 15th day of August, 1996.
RENAL CARE GROUP, INC.
By: /s/ Ronald Hinds
---------------------------
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Exhibit 10.20
LABORATORY MANAGEMENT
AGREEMENT
by and between
KIDNEY CARE, INC.
and
RENAL CARE GROUP, INC.
Effective Date: February 12, 1996
<PAGE> 2
LABORATORY MANAGEMENT AGREEMENT
by and between
KIDNEY CARE, INC., AND RENAL CARE GROUP, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1.
DEFINITIONS........................................................ 1
1.2 KCI.......................................................... 1
1.3 Laboratory................................................... 1
1.4 Professional Services........................................ 2
1.5 Pathologists................................................. 2
1.6 Laboratory Services.......................................... 2
1.7 Term......................................................... 2
ARTICLE 2.
RCG'S DUTIES....................................................... 2
2.1 Management Services.......................................... 2
2.2 Professional Services........................................ 2
2.3 Personnel.................................................... 2
2.3-1 Management and Clerical Personnel..................... 2
2.3-2 Technical Health Care Personnel....................... 3
2.4 Equipment Maintenance........................................ 3
2.5 Supplies..................................................... 3
2.6 Quality Assurance and Utilization Review..................... 3
2.7 Financial Services........................................... 3
2.7-1 Billing and Collection....................................... 3
2.7-2 Financial Matters..................................... 4
(a) Annual Budget..................................... 4
(b) Accounting and Financial Records.................. 4
(c) Access............................................ 4
2.8 Compliance With Laws, Rules, and Regulations.................. 4
2.9 Records and Reports Produced by RCG........................... 5
2.10 Insurance..................................................... 5
2.11 Indemnity..................................................... 5
2.11-1 RCG Indemnity......................................... 5
2.11-2 KCI Indemnity......................................... 6
ARTICLE 3.
KCI'S DUTIES....................................................... 6
3.1 Space and Facilities.......................................... 6
3.2 Equipment..................................................... 6
3.3 Insurance..................................................... 6
</TABLE>
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<TABLE>
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3.4 Licensure and Certification............................................... 6
ARTICLE 4.
MANAGEMENT FEE................................................................. 6
4.1 Amount of Management Fee.................................................. 6
4.2 Payment of Management Fee................................................. 7
ARTICLE 5.
TERM AND TERMINATION........................................................... 7
5.1 Term...................................................................... 7
5.2 Termination............................................................... 7
5.2-1 Termination by Agreement........................................... 7
5.2-2 Damage or Condemnation of Laboratory............................... 7
5.2-3 Bankruptcy......................................................... 7
5.2-5 Default............................................................ 8
5.2-6 Termination Due to Legislative or Administrative Changes........... 8
5.2-7 Termination Due to Exercise of Purchase Option..................... 8
5.3 Effect of Termination in General.......................................... 8
5.4 Effect of Termination Pursuant to Purchase Option......................... 8
ARTICLE 6.
GENERAL PROVISIONS.............................................................. 9
6.1 Relationship of Parties.................................................... 9
6.2 Delegation and Assignment.................................................. 9
6.3 Notices.................................................................... 9
6.4 Amendments................................................................. 10
6.5 Governing Law.............................................................. 10
6.6 Severability............................................................... 10
6.7 Legal Costs................................................................ 10
6.8 Force Majeure.............................................................. 10
6.9 Nonwaiver.................................................................. 11
6.10 Interpretation............................................................. 11
6.11 Documents.................................................................. 11
6.12 Warranty of Authority...................................................... 11
6.13 Cooperation and Fair Dealing............................................... 11
6.14 Ambiguities................................................................ 11
6.15 Representations............................................................ 11
</TABLE>
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<PAGE> 4
LABORATORY MANAGEMENT AGREEMENT
THIS LABORATORY MANAGEMENT AGREEMENT is entered into this _____ day of April,
1996, effective as of February 12, 1996 ("Effective Date"), by and between
KIDNEY CARE, INC., a Mississippi not-for-profit corporation ("KCI"), and RENAL
CARE GROUP, INC., a Delaware corporation ("RCG").
RECITALS
WHEREAS, KCI owns a clinical laboratory facility ("Laboratory") located
in Jackson, Mississippi and desires to arrange for the timely and
cost-effective operation and management of its Laboratory; and
WHEREAS, as part of the arrangements, KCI desires that a pathologist
serve as Medical Director of its Laboratory who is properly qualified to assume
professional and clinical responsibility for the services furnished through the
Laboratory; and
WHEREAS, RCG has available expertise in the management, administration,
and supervision of clinical reference laboratory businesses and is ready,
willing and able to manage and operate the Laboratory; and
WHEREAS, KCI and RCG desire to have a clear written understanding of
their responsibilities and expectations, and therefore enter into this
Agreement.
NOW, THEREFORE, for and in consideration of the mutual promises,
covenants, terms and conditions contained herein, the parties agree as follows:
ARTICLE 1.
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings ascribed thereto unless otherwise clearly required by the context in
which such term is used.
1.1 AGREEMENT. The term "Agreement" shall mean this Laboratory
Management Agreement and any amendments thereto as may be from time to time
adopted as hereinafter provided.
1.2 KCI. The term "KCI" shall mean Kidney Care, Inc., a
Mississippi not-for-profit corporation.
1.3 LABORATORY. The term "Laboratory" shall mean the laboratory
facility owned by KCI, which is located at 644E Lakeland East Drive in Jackson,
Mississippi.
<PAGE> 5
1.4 PROFESSIONAL SERVICES. The term "Professional Services" shall
mean services furnished by pathologists, which shall include both medical
direction and professional medical services.
1.5 PATHOLOGISTS. The term "Pathologists" shall mean the
physicians rendering Professional Services as herein provided for or
contemplated, each of which shall: (1) be licensed to practice medicine; and
(2) maintain board certification or eligibility for certification by the
American Board of Pathology.
1.6 LABORATORY SERVICES. The term "Laboratory Services" shall mean
anatomic and clinical pathology services and other laboratory services relevant
to the provision of care for patients with End Stage Renal Disease, such as
water/dialysate testing.
1.7 TERM. The term "Term" shall mean the contract period provided
for under Section 5.1 of this Agreement.
ARTICLE 2.
RCG'S DUTIES
2.1 MANAGEMENT SERVICES. RCG shall provide business,
administrative, and full management services for KCI related to the operation
of the Laboratory, including, without limitation, day-to-day management
services, billing and collection services, financial record keeping and
reporting services, scheduling services, supervision of personnel, and other
business office services.
2.2 PROFESSIONAL SERVICES. RCG shall arrange for the provision of
clinical oversight services required in connection with the Laboratory Services
furnished through the Laboratory, which services will include the provision of
a Pathologist to serve as Medical Director of the Laboratory in compliance
with all licensure and certification requirements. RCG shall also arrange for
the provision of professional medical services by a Pathologist that are
required for Laboratory Services furnished through the Laboratory.
2.3 PERSONNEL.
2.3-1 Management and Clerical Personnel. RCG shall
employ or otherwise retain, and shall be responsible for selecting,
training, supervising, scheduling and terminating, all management
and clerical personnel as RCG deems reasonably necessary and
appropriate for RCG's performance of its duties under this
Agreement. RCG shall have sole responsibility for determining the
salaries, wages, and fringe benefits of all such management and
clerical personnel, for paying such salaries and wages and providing
such fringe benefits, for reimbursing travel, lodging, and ancillary
expenses incurred by such personnel in the course of fulfilling RCG's
duties under this Agreement, and for establishing and implementing
human resource policies for all such personnel. RCG shall also have
sole responsibility for withholding, as required by law, any sums for
income tax,
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<PAGE> 6
unemployment insurance, social security, or any other withholding
required by applicable federal or state law. RCG shall
appoint an Administrative Director who shall be responsible for
administering the day-to-day operations of the Laboratory, and whose
duties shall include supervision of nonphysician personnel,
administrative and fiscal management, planning, scheduling and
budgeting.
2.3-2 Technical Health Care Personnel. RCG shall employ or
otherwise retain, and shall be responsible for selecting,
training, supervising, scheduling, and terminating all
technical health care personnel as RCG deems reasonably
necessary and appropriate to provide Laboratory Services
pursuant to this Agreement. RCG shall have sole responsibility
for determining the salaries, wages, and fringe benefits of
all such technical health care personnel, for paying such
salaries and wages and providing such fringe benefits, and for
establishing and implementing human resource policies for all
such technical health care personnel. RCG shall also have sole
responsibility for withholding, as required by law, any sums
for income tax, unemployment insurance, social security, or any
other withholding required by applicable federal or state law.
Technical health care personnel retained by RCG shall have
applicable licensure, experience, and training necessary to
provide the Laboratory Services. RCG shall appoint a
Laboratory Supervisor who shall be responsible for the
provision of clinical supervision (in conjunction with the
Medical Director) in compliance with all licensure and
certification requirements.
2.4 EQUIPMENT MAINTENANCE. RCG shall maintain all equipment
located in the Laboratory, which is provided by KCI in accordance with Section
3.2 hereof. The equipment shall be maintained by RCG in good and operable
condition, ordinary wear excepted.
2.5 SUPPLIES. RCG shall furnish all laboratory, office, and other
supplies necessary for the operation of the Laboratory and the provision of
services by personnel employed or otherwise retained by RCG pursuant to this
Agreement.
2.6 QUALITY ASSURANCE AND UTILIZATION REVIEW. RCG shall participate
in the development, implementation, and periodic review of quality assurance,
risk management, and utilization review programs to assure the consistency and
quality of all Laboratory Services provided through the Laboratory. RCG shall
also develop and periodically review a manual for the Laboratory setting forth
general policies, procedures, and protocols applicable to the provision of
Laboratory Services. RCG will participate with KCI in the formation and
maintenance of a laboratory service committee ("Committee"). The Committee
will oversee the operations of the Laboratory, including the quality assurance
and utilization review programs.
2.7 FINANCIAL SERVICES.
2.7-1 Billing and Collection. On behalf of and for the
account of KCI, RCG shall establish and maintain credit and billing
and collection policies and procedures, and shall be responsible for
the billing and collection of fees for Laboratory Services. RCG shall
advise and consult with KCI regarding the fees established by KCI
for Laboratory
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<PAGE> 7
Services. In connection with the billing and collection services to be provided
hereunder, RCG shall bill patients, third-party payors, and contact purchasers,
in KCI's name and on KCI's behalf, for all Laboratory Services provided through
the Laboratory. RCG shall also collect and receive, in KCI's name and on KCI's
behalf, all accounts receivable generated by such billings and deposit all
amounts collected into the KCI Account, which account shall be established and
maintained by KCI.
2.7-2 Financial Matters.
(a) Annual Budget. Within thirty (30) days of execution of
this Agreement, RCG shall prepare, in consultation with
KCI, and deliver to KCI an operational budget for the
Laboratory setting forth an estimate of the KCI revenues and
expenses (including, without limitation, all costs associated
with the services provided by RCG hereunder). RCG shall use
its best efforts to perform its duties and obligations under
this Agreement such that the actual revenues, costs, and
expenses are consistent with the budget.
(b) Accounting and Financial Records. RCG shall establish and
administer accounting procedures, controls, and systems
for the development, preparation, and safekeeping of records
and books of accounts relating to the business and financial
affairs of KCI, all of which shall be prepared and maintained
on an accrual basis according to generally accepted accounting
principles. RCG shall prepare and deliver to KCI monthly
financial statements reflecting the financial status of KCI in
respect of the provision of Laboratory Services, which shall
include a balance sheet, a statement of income and expenses, and
a statement of cash flow. Additionally, RCG shall prepare and
deliver to KCI such other financial statements or records as
RCG may from time to time deem appropriate or as KCI may from
time to time reasonably request.
(c) Access. KCI shall have the right, at KCI's Expense, at
all reasonable times during normal business hours to
audit, examine, and make copies of books of account maintained
by RCG concerning the operation of the Laboratory.
2.8 COMPLIANCE WITH LAWS, RULES, AND REGULATIONS. All services provided
hereunder by RCG shall be performed in compliance with the certification
standards required by federal law under the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"), the State of Mississippi's licensure requirements,
the applicable standards for laboratories participating in the Medicare and
Medicaid programs, all other applicable laws and regulations, ethical and
professional standards, and the reasonable policies of KCI. RCG and KCI shall
use their best efforts to ensure that the Laboratory continuously maintains
status as a Medicare and Medicaid provider, CLIA certification, and
satisfactory performance on other appropriate laboratory surveys
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<PAGE> 8
and testing programs.
2.9 RECORDS AND REPORTS PRODUCED BY RCG. RCG shall maintain a
record of specimens received by the Laboratory and an appropriate system for
identification of each specimen. Reports of all Laboratory Services performed
on such specimens shall be furnished to KCI and the requesting parties on a
timely basis taking into consideration the specific needs and circumstances of
each occasion and the requirements of any contractual agreements. RCG shall
retain or cause to be retained in a readily retrievable manner duplicate copies
of the reports of all Laboratory Services performed. All records, reports,
slides, tissue blocks, samples, and specimens shall be and remain joint property
of KCI, RCG, and of the Pathologists providing Professional Services with
respect thereto. All such property shall be created, maintained, and disposed
of by RCG in accordance with KCI policies, the requirements of CLIA, the
Medicare and Medicaid programs, and all applicable laws (including laws
governing confidentiality of patient information).
2.10 INSURANCE. During the Term or any extended Term of this
Agreement, and for the period of the applicable statute of limitations
thereafter (for which statute of limitations RCG's liability may be satisfied by
purchasing appropriate "tail" coverage), RCG shall continuously provide and
maintain for itself and all employees or agents providing Laboratory Services
under this Agreement, professional malpractice insurance and broad form
comprehensive public liability insurance with a responsible company authorized
to do business in the State of Mississippi, with policy limits which shall be
continuously sufficient to protect against the probable amounts of potential
judgments, and which shall initially with respect to malpractice insurance be in
an amount not less than $1,000,000 per occurrence and $3,000,000 in the
aggregate. RCG shall provide to KCI, initially after signing this Agreement
and thereafter periodically upon KCI's request, reasonable evidence of such
insurance and shall inform KCI of any proposed materially adverse changes in
such coverage at least thirty days prior to such proposed changes becoming
effective.
2.11 INDEMNITY.
2.11-1 RCG Indemnity. RCG shall indemnify, defend, protect,
and hold harmless KCI, its officers, trustees, agents, employees,
and independent contractors, upon written demand from and
against all claims, losses, liabilities, damages, awards, judgments,
assessments, costs, and expenses of any kind or nature, including
reasonable attorneys' fees, arising out of or in any manner related to
(i) RCG's failure to satisfy or perform its obligations and duties
arising under this Agreement, (ii) RCG's negligence, illegal or
wrongful misconduct, or intentional acts or omissions in connection
with the performance of its obligations and duties pursuant to this
Agreement, or (iii) the compensation, employment, retention or
termination of the persons furnishing services on behalf of RCG
pursuant to this Agreement, including, without limitation, all
compensation or salaries, employee benefits, federal and state
withholding taxes, compliance with federal and state wage-hour
obligations, and other applicable taxes and contributions to government
mandated employment related insurance and similar programs.
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<PAGE> 9
2.11-2 KCI Indemnity. KCI shall indemnify, defend, protect,
and hold harmless RCG, its officers, trustees, agents, employees, and
independent contractors, upon written demand from and against all
claims, losses, liabilities, damages, awards, judgments, assessments,
costs, and expenses of any kind or nature, including reasonable
attorneys' fees, arising out of or in any manner related to (i) KCI's
failure to satisfy or perform its obligations and duties arising under
this Agreement, (ii) KCI's negligence, illegal or wrongful misconduct,
or intentional acts or omissions in connection with the performance of
its obligations and duties pursuant to this Agreement, or (iii) the
compensation, employment, retention or termination of the persons
furnishing services on behalf of KCI pursuant to this Agreement,
including, without limitation, all compensation or salaries, employee
benefits, federal and state withholding taxes, compliance with federal
and state wage hour obligations, and other applicable taxes and
contributions to government mandated employment related insurance and
similar programs.
ARTICLE 3.
KCI'S DUTIES
3.1 SPACE AND FACILITIES. KCI shall provide the current Laboratory
space for RCG's use in providing services under this Agreement. KCI shall
provide such space with heat, cooling, light, water, security, physical plant
requirements, special utility lines as reasonably required, reasonably
necessary fixtures, and reasonable housekeeping, laundry, maintenance, and
garbage services.
3.2 EQUIPMENT. KCI shall provide the equipment listed in Exhibit
1, which is currently located in the Laboratory. KCI shall consider and
evaluate all reasonable requests by RCG for the purchase of new equipment or
the update of the equipment listed on Exhibit 1, deemed necessary and
appropriate for the provision of Laboratory Services in the Laboratory. Upon
its sole discretion, KCI shall purchase or lease such additional equipment.
3.3 INSURANCE. KCI shall continuously maintain insurance, in such
amounts as KCI in its sole discretion shall determine, to cover losses arising
from all reasonably insurable risks, including damage to property, plant and
equipment, general liability and malpractice risks.
3.4 LICENSURE AND CERTIFICATION. KCI shall apply for and maintain
all licensures and certifications relating to operation of the Laboratory,
including, but not limited to, CLIA certification, and certification as a
provider under the Medicare and Medicaid programs.
ARTICLE 4.
MANAGEMENT FEE
4.1 AMOUNT OF MANAGEMENT FEE. KCI agrees to pay RCG a fixed annual
fee of $250,000 for services furnished under this Agreement. KCI shall also
reimburse RCG for Direct Expenses incurred by RCG in providing services under
this Agreement. The term "Direct Expenses" shall mean: (1) payroll expenses
associated with the technical health care, management
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<PAGE> 10
and clerical personnel provided by RCG in accordance with Section 2.3-2
hereunder; (2) expenses incurred in providing laboratory supplies; and (3)
costs incurred in maintaining the equipment listed on Exhibit 1, as may be
added to from time to time pursuant to Section 3.2 hereof.
4.2 PAYMENT OF MANAGEMENT FEE. KCI shall pay RCG the monthly pro
rata amount of the fixed annual fee specified in Section 4.1 above by the 10th
day of the month for services furnished during the month then ended. RCG shall
invoice KCI on a monthly basis for all Direct Expenses incurred in the month
then ended, which invoices shall separately state the amount of Direct Expenses
that are payroll expenses associated with technical health care, management and
clerical personnel provided by RCG in accordance with Section 2.3-2 hereunder.
KCI shall pay the portion of such invoices relating to Direct Expenses that are
payroll costs within five (5) business days of receipt and the balance of such
invoices within ten (10) business days of receipt.
ARTICLE 5.
TERM AND TERMINATION
5.1 TERM. This Agreement shall be effective as of the Effective
Date and shall continue for an initial Term of one (1) year, unless sooner
terminated pursuant to Section 5.2 hereof. At the expiration of the initial
Term, and at the expiration of each renewal Term (if any) of this Agreement,
this Agreement shall be automatically renewed for a further Term of one (1)
year, unless at least ninety (90) days prior to the date of such expiration
either party has provided written notice to the other party stating an intent
not to renew.
5.2 TERMINATION.
5.2-1 Termination by Agreement. In the event KCI and RCG
shall mutually agree in writing, this Agreement may be terminated on
the date specified in such written agreement.
5.2-2 Damage or Condemnation of Laboratory. In the event
that the Laboratory is totally or substantially destroyed by fire,
explosion, flood, windstorm, hail, earthquake, hurricane, tornado, or
other casualty or act of God, or in the event all or a substantial
portion of the Laboratory and the premises on which it is situated are
taken or to be taken by condemnation or eminent domain proceeding, then
either KCI or RCG may by written notice to the other immediately
terminate this Agreement.
5.2-3 Bankruptcy. In the event that either KCI or RCG
becomes insolvent, or if any petition under federal or state law
pertaining to bankruptcy or insolvency or for a reorganization or
arrangement or other relief from creditors shall be filed by or against
either such party, or if any assignment, trust, mortgage, or other
transfer shall be made of all or a substantial part of the property of
either such party, or if either such party shall make or offer a
composition in its debts with its creditors, or if a receiver, trustee,
or similar officer or creditor's committee shall be appointed to take
charge of any property of or to operate or wind up the affairs of
either such party, then the other party may, by
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written notice, immediately terminate this Agreement.
5.2-4 Nonpayment. In the event that KCI fails to make and
continues to fail to make for thirty (30) or more business days,
payment in accordance with Section 4.2 above, RCG shall have the option
and right to terminate this Agreement upon thirty (30) calendar days'
notice to KCI without waiving any other rights or remedies RCG may
have.
5.2-5 Default. In the event any party shall give written
notice to the other that such other party has substantially defaulted
in the performance of any material duty or material obligation (which
obligation must be for the benefit of the party giving notice) imposed
upon it by this Agreement, and such default shall not have been cured
within thirty (30) days following the giving of such written notice, the
party giving such written notice shall have the right to immediately
terminate this Agreement unless the defaulting party, within said
thirty (30) day period, shall have made a good faith effort to initiate
corrective action, and it is contemplated that such corrective action
will be completed within the following thirty (30) day period.
5.2-6 Termination Due to Legislative or Administrative
Changes. In the event that there shall be a change in federal or state
law, the Medicare or Medicaid statutes, regulations, or general
instructions (or in the application thereof), the adoption of new
legislation or regulations applicable to this Agreement, or the
initiation of an enforcement action with respect to legislation,
regulations, or instructions applicable to this Agreement, any of which
affects the continuing viability or legality of this Agreement or the
ability of either party to obtain reimbursement for services provided
by that party, then either party may by notice propose an amendment to
conform this Agreement to existing laws. If notice of such a change or
an amendment is given and if RCG and KCI are unable within thirty (30)
days thereafter to agree upon the amendment, then either party may
terminate this Agreement by giving thirty (30) days written notice to
the other, unless a sooner termination is required by law or
circumstances.
5.2-7 Termination Due to Exercise of Purchase Option. In the
event RCG exercises its option to purchase the Laboratory, set forth in
Section 3.7 of that certain Amended and Restated Transfer Agreement,
dated November 14, 1995, between RCG and KCI, this Agreement shall
terminate upon the transfer of the Laboratory to RCG.
5.3 EFFECT OF TERMINATION IN GENERAL. Unless otherwise provided in
this Agreement, upon termination neither party shall have any further
obligations hereunder, except for (i) obligations arising prior to the date of
termination which remain unsatisfied as of the date of termination and (ii)
obligations or covenants which expressly or necessarily extend beyond the Term
of this Agreement, including the obligations for the payment of the fees to RCG
through the date of termination in the manner described in Section 4 above.
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<PAGE> 12
5.4 EFFECT OF TERMINATION PURSUANT TO PURCHASE OPTION. In the
event this Agreement is terminated pursuant to Section 5.2-7 hereof, RCG agrees
to acquire or assume responsibility for any item of equipment purchased or
leased by KCI pursuant to Section 3.2 hereof in accordance with the following:
(i) with respect to all equipment purchased by KCI pursuant to Section 3.2
hereof, RCG agrees to pay KCI the cost incurred by KCI in acquiring such
equipment, less accumulated depreciation determined in accordance with
generally accepted accounting principles; and (ii) with respect to all
equipment leased by KCI pursuant to Section 3.2 hereof, RCG agrees to assume
all remaining lease payments, including reimbursing KCI for the pro rata
portion of any lease payments covering periods exceeding the termination date
of this Agreement, and KCI agrees to assign all such leases to RCG.
ARTICLE 6.
GENERAL PROVISIONS
6.1 RELATIONSHIP OF PARTIES. RCG is and shall continue to be an
independent contractor for all services furnished pursuant to this Agreement by
RCG and its employees. RCG and its employees shall provide services hereunder
free of any direction or control by KCI, in a manner consistent with current
standards of practice. This agreement shall not expressly or by implication
create any employer/employee, joint venture or partnership relationship between
KCI and RCG or its employees. This Agreement shall not directly or by
implication obligate KCI to withhold income taxes for RCG or any of its
employees, or to provide employee benefits or coverage of any type for RCG or
its employees.
6.2 DELEGATION AND ASSIGNMENT. Except as expressly provided
herein, neither party shall delegate its duties or assign its rights under this
Agreement, in whole or in part, without the prior written consent of the other
party. Any attempt to do so without such consent shall be void and without
effect. Subject to the foregoing, the provisions of this Agreement and the
obligations arising hereunder shall extend to, be binding upon, and inure to
the benefit of the parties hereto and their respective heirs, successors,
assigns and legal representatives.
6.3 NOTICES. All notices, requests, demands or other
communications required or permitted to be given under this Agreement shall be
in writing and shall be given to the party for whom the notice is intended
either (i) by personal delivery to the address for that party to which notices
are to be addressed (in which case such notice shall be deemed given on the
date of delivery), (ii) by consigning the same for prepaid delivery with a
responsible national courier service (e.g., Federal Express or other similar
service) (in which case such notice shall be deemed given on the business day
next following the date of consignment with the courier service), or (iii) by
telefax followed by a copy sent in either other manner specified in this
Section (in which case such notice shall be deemed given on the date on which
such telefax is sent), and properly sent to the following addresses and/or
telefax numbers:
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If to RCG:
1801 West End Avenue, Suite 1100
Nashville, Tennessee 37203
Facsimile: (615) 321-5491
Attn: Joseph A. Cashia
If to KCI:
3925 West Northside Drive
Jackson, Mississippi 39209
Facsimile: (601) 923-3642
Attn: James F. Dorris, Chief Executive Officer
A party to this Agreement may change its address for purposes of this Section
6.3 by giving written notice to the other party in the manner specified in this
Section 6.3.
6.4 AMENDMENTS. Any amendment hereto must be in writing and signed
by both parties hereto in order to be effective.
6.5 GOVERNING LAW. This Agreement and all rights, duties, and
obligations hereunder shall be construed and interpreted in accordance with the
internal laws, and not the law of conflicts, of the State of Mississippi
applicable to agreements made and to be wholly performed within the State.
Each party hereby agrees to submit to the jurisdiction and venue of any state
or federal court in Hinds County, Mississippi.
6.6 SEVERABILITY. Nothing contained in this Agreement shall be
construed so as to require the commission of an act contrary to law and
whenever there is any conflict between any provision of this Agreement and any
present statute, law, ordinance, or regulation contrary to which the parties
have no legal right to contract, the latter shall prevail, but in such event,
the provisions of this Agreement affected shall be curtailed and limited only
to the extent necessary to bring it within the requirements of the law and to
carry out the purposes of this Agreement.
6.7 LEGAL COSTS. In any dispute arising out of an alleged breach
of this Agreement, the prevailing party shall be awarded reasonable costs and
attorneys fees, in addition to its judgment or award.
6.8 FORCE MAJEURE. Neither party shall be liable nor deemed to be
in default for any delay or failure in performance under this Agreement or
other interruption of service or employment deemed resulting, directly or
indirectly, from acts of God, civil or military authority, riots or civil
disobedience, acts of public enemy, war, accidents, fires, explosions,
earthquakes, floods, failure of transportation, machinery, supplies or
utilities, vandalism, strikes or other work interruptions beyond the reasonable
control of any party. However, the parties shall make good faith efforts to
perform under this Agreement in the event of any such circumstances.
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6.9 NONWAIVER. Any waiver of any term and condition hereof must be
in writing and signed by the party giving the waiver. A waiver of any of the
terms and conditions hereof shall not be construed as a waiver of any other
terms and conditions hereof. Failure or delay of any party to insist upon
strict performance of any of the provisions if this Agreement, or to exercise
any right or action herein conferred, shall not be construed to be a waiver or
relinquishment of any such right and the same shall be and remain in full force
and effect.
6.10 INTERPRETATION. Titles in this Agreement are not part of this
Agreement and shall have no effect upon the interpretation of any part hereof.
As used in this Agreement the words "herein," "hereof," "hereunder," and
similar expressions refer to this Agreement as a whole and not to any
particular portion hereof, unless the context otherwise clearly requires. As
used herein the masculine gender includes the feminine and neuter genders, and
vice versa, and the singular the plural, and vice versa, where the context
reasonably permits. None of the provisions of the Agreement are for the
benefit of nor shall be enforceable by any third party, including clients,
employees, patients or creditors.
6.11 DOCUMENTS. Each of the parties hereto shall execute and deliver
all documents, papers, and instruments necessary or convenient to carry out the
terms of this Agreement.
6.12 WARRANTY OF AUTHORITY. Each person signing this Agreement
represents and warrants that he is duly authorized and executes this Agreement
on behalf of and as the free and voluntary act and deed of the organization he
purports to represent.
6.13 COOPERATION AND FAIR DEALING. Each party agrees to deal fairly
with the other in good faith in all matters concerning this Agreement, and
without limiting the generality of the foregoing agrees to cooperate in good
faith with the other party so that the purposes of this Agreement may be
served.
6.14 AMBIGUITIES. The general rule that ambiguities are to be
construed against the drafter shall not apply to this Agreement. In the event
that any provision of this Agreement is found to be ambiguous, each party shall
have an opportunity to present evidence as to the actual intent of the parties
with respect to such ambiguous provision.
6.15 REPRESENTATIONS. This Agreement contains the entire
understandings of the parties with respect to the subject-matters of this
Agreement and there are no other written or oral understandings or agreements
between the parties with respect to the subject matters of this Agreement other
than those contained herein. Each party acknowledges (i) that no
representation or promise not expressly contained in this Agreement has been
made by any other party hereto or by any of its agents, employees,
representatives or attorneys; (ii) that this Agreement is not being entered
into on the basis of, or in reliance on, any promise or representation,
expressed or implied, other than such as are set forth expressly in this
Agreement; and (iii) that such party has been represented by legal counsel of
its own choice in the preparation and negotiation of this Agreement, or has
affirmatively elected not to be represented by legal counsel.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement on this 8th day of April, 1996.
KCI RCG
By: /s/ Jimmy Dorris By: /s/ Joseph Cashia
------------------------- ----------------------
Name: Jimmy Dorris Name: Joseph Cashia
------------------------ -------------------
Title: CEO Title: COO
----------------------- -------------------
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EXHIBIT 1
EQUIPMENT LIST
FEBRUARY 12, 1996
EQUIPMENT LIST FOR KCI LABORATORY
1. Two Abbott Call-Dyn 3000 Hematology Analyzers
2. Sysmex R-3000 Reticulocyte Analyzer
3. Hitachi 717 Chemistry Analyzer
4. Hitachi 747 Chemistry Analyzer
5. Varifuge Floor Model Centrifuge
6. Ultra Low Temperature Freezer
7. Microbiology Incubator
8. Nikon Labophot Microscope
9. Two Victory Double Door Refrigerators
10. Office Furniture
11. Hemstek 2000 Slide Stainer
12. Kenmore Kitchen Refrigerator
13. G.E. Turntable Microwave Oven
14. Handtruck
15. Sharp Fax Machine Model FO-1700
16. Lanier Model 6514 Copier
17. Dell Dimension 433SV PC and Monitor
18. Dell Dimension XPS 466V PC and Monitor
19. Okidata Microline 320 Printer
20. Uninterruptible Power Supplies (5)
21. Modulus Laboratory Information System
<PAGE> 1
Exhibit 10.21
RENAL CARE GROUP, INC.
CHIEF MEDICAL OFFICER SERVICES AGREEMENT
FEBRUARY 12, 1996
<PAGE> 2
CHIEF MEDICAL OFFICER SERVICES AGREEMENT
THIS CHIEF MEDICAL OFFICER SERVICES AGREEMENT (the "Agreement") is made
and entered into this 12th day of February, 1996, to be effective as provided
for herein below, by and between RCG MISSISSIPPI, INC., a Delaware corporation
(the "COMPANY"), and John D. Bower, M.D., an individual resident of the State
of Mississippi (the "PHYSICIAN").
WITNESSETH
WHEREAS, the COMPANY owns and operates various renal dialysis
facilities located throughout the Southeastern United States which provide
outpatient and home dialysis services,
WHEREAS, the COMPANY desires to engage a physician who is skilled in
the care of patients at End Stage Renal Disease ("ESRD) facilities and is
willing to act as the COMPANY's Chief Medical Officer;
WHEREAS, the PHYSICIAN is licensed to practice medicine and prescribe
drugs without restriction in the States of Mississippi, Arkansas and Louisianna
specializes in dialysis services, is experienced in the care of patients at
ESRD facilities and is willing to act as the COMPANY's Chief Medical Officer.
NOW THEREFORE, in consideration of the mutual covenants and agreements
of the parties as herein set forth, the receipt and sufficiency of such
consideration being hereby acknowledged, the parties agree as follows:
ARTICLE I
SERVICES
1.1 ENGAGEMENT. The COMPANY shall engage the services of the PHYSICIAN
and the PHYSICIAN shall perform services for the COMPANY as the Chief Medical
Officer. In such capacity, the PHYSICIAN shall (i) serve as the chairman of
the COMPANY's Medical Advisory Board, (ii) oversee the activities of the
Physicians retained by the COMPANY as medical directors of the COMPANY's
various ESRD Facilities located in the Southeastern United States and the
physicians admitting patients to the COMPANY's facilities, (iii) assist the
COMPANY in formulating and implementing policies and procedures for the
operation of the COMPANY's ESRD facilities which shall be in accordance with
the requirements of Medicare and Medicaid and other applicable state and
federal laws, rules and regulations; (iv) make recommendations to the COMPANY
in keeping controllable costs of the COMPANY's facilities to a minumum; (v)
maintain the COMPANY's overall quality management program, and procedures to
promote the consistency and quality of all dialysis services provided by the
COMPANY so that the COMPANY is in compliance with all applicable governmental
requirements; and (vii) perform the services customarily performed by medical
directors of dialysis facilities and such additional or other tasks related to
the oversight of dialysis treatments being administered at any COMPANY ESRD
facility located in Mississippi, Arkansas, and Louisianna which is temporarily
without a medical director.
<PAGE> 3
1.2 RESPONSIBILITIES. Without limiting the generality of the foregoing,
when acting as a medical director of an ESRD facility, the PHYSICIAN shall
perform the following services:
(a) Ensure proper administration and execution of the
facility's patient care policies through the facility's Administrative Nurse;
(b) Provide medical expertise to the facility's nursing staff
through the facility's Administrative Nurse;
(c) Oversee the facility's physical facilities and assets and
the daily operation and maintenance of dialysis equipment;
(d) Monitor the selection of the appropriate dialysis treatment
modality and treatment setting for facility patients in conjunction with the
patients attending physician, if necessary;
(e) Ensure policies are in place for assuring the availability
of personnel capable of handling emergency situations should they arise;
(f) Develop needs analyses, implement and monitor facility
training programs, including in-service training to patients;
(g) Review and approve water analysis results and monthly
culture reports, direct and monitor appropriate remedial steps as needed;
(h) Participate in on-site governmental and managed care
organization surveys upon request of the COMPANY; review federal, state and
local survey reports and, as needed, participate in the development and
implementation of appropriate plans of correction;
(i) Review all facility incident reports, patient complaints
and quality management reviews and implement corresponding actions, if
necessary;
(j) Be available to the members of the facility's physicians in
a counseling capacity and serve as the facility's governing body representative
to such physicians;
(k) Attend periodic conferences upon request of the COMPANY's
Medical Advisory Board;
(l) Perform those other functions required of the facility's
medical director;
2
<PAGE> 4
ARTICLE II
TERM AND TERMINATION
2.1 TERM. This Agreement shall become effective as of 12:01 a.m. on
February 12, 1996 (the "Effective Date") and shall remain in full force and
effect until 12:00 p.m. midnight on February 11, 2000, unless otherwise earlier
terminated as provided in this Article II (the "Initial Term"). Unless the
PHYSICIAN or the COMPANY provides notice in writing to the other of such party's
intention to terminate at least 30 days prior to the expiration date of the
initial term or the then existing term, this Agreement shall automatically renew
for an additional one (1) year term on the same terms and conditions of this
Agreement.
2.2 TERMINATION BY AGREEMENT. If the COMPANY and the PHYSICIAN shall
mutually agree in writing, this Agreement shall be terminated on the time and
date stipulated therein.
2.3 TERMINATION WITHOUT CAUSE. Either the COMPANY or the PHYSICIAN may
terminate this Agreement at the end of the Initial Term or any Renewal Term by
giving thirty (30) days prior written notice to the PHYSICIAN of such intention
to terminate.
2.4 TERMINATION FOR CAUSE. The COMPANY may terminate this Agreement and
all rights and liabilities created by this Agreement immediately, at any time
for cause including, but not limited to the PHYSICIAN's dishonesty;
misappropriation of funds; suspension or revocation of any of the PHYSICIAN's
medical licenses or authorizations or ability to prescribe drugs; loss or
suspension of the PHYSICIAN's board certification; commission or conviction,
including a plea of nolo contendre, of any felony or of any crime involving
moral turpitude.
2.5 EFFECT OF TERMINATION OR EXPIRATION. Following the expiration of
this Agreement or its termination for any reason, the PHYSICIAN shall not
interfere with any intent by the COMPANY to contract with any other individual
or entity for the provision of chief medical officer services.
ARTICLE III
ILLNESS, INCAPACITY OR DEATH
3.1 INCAPACITY. If, at any time during the term of this Agreement, the
PHYSICIAN becomes disabled or unable to perform for any reason all of the duties
described herein, such disability or inability to perform his duties shall not
then be in breach of this Agreement. The disability or inability to perform his
duties shall be determined by a qualified physician selected by the COMPANY.
The PHYSICIAN shall continue to receive all of the compensation provided in
Article IV of this Agreement during any disability.
3.2 DEATH. In the event of PHYSICIAN's death during the term of this
Agreement, PHYSICIAN's estate shall continue to receive all of the compensation
provided in Article IV of this Agreement.
3
<PAGE> 5
ARTICLE IV
COMPENSATION
4.1 COMPENSATION. In consideration of the services, covenants, and
agreements agreed to be performed by the PHYSICIAN during the Term of this
Agreement, the COMPANY shall pay the PHYSICIAN a Chief Medical Officer Fee of
One Hundred Thousand Dollars ($100,000) during each year of this Agreement. The
Chief Medical Officer Fee shall be payable in equal monthly installments on the
tenth (10th) day of the month following the month in which services are
rendered. The PHYSICIAN agrees to accept the Chief Medical Officer Fee as
determined above as the total compensation for all services, covenants and
agreements pursuant to this Agreement.
4.2 ADDITIONAL EFFECT OF TERMINATION. If either the COMPANY or the
PHYSICIAN terminates this Agreement or it expires before the end of a pay
period, the compensation shall be pro-rated on a daily basis for purposes of
calculating the amount of compensation due PHYSICIAN through the date of
termination or expiration.
ARTICLE V
STATUS OF PARTIES
5.1 INDEPENDENT CONTRACTOR STATUS. It is mutually understood and agreed
that the PHYSICIAN is an independent contractor in his performance of the
professional services, duties and obligations contemplated by this Agreement.
The COMPANY shall neither have nor exercise any control or direction over the
methods or manner by which the PHYSICIAN performs his professional services and
functions. Except for requiring the coverage of services called for in the
Agreement, the COMPANY shall not set nor shall it have the right to set, the
specific working hours of the PHYSICIAN. The PHYSICIAN shall not be subject to
any policies or procedures applicable to the COMPANY except those required of
the COMPANY for it to be in compliance with governmental laws and regulations;
nor shall he be entitled to employee benefits including vacation pay, sick
leave, retirement benefits, Social Security, Workers' Compensation, disability
or unemployment insurance benefits that may be provided to the COMPANY's
employees. The terms of this Agreement shall take precedence over any
inconsistent terms which may be found in the policies, PHYSICIAN applications,
or otherwise of the COMPANY as presently existing or as amended.
5.2 PAYMENT OF TAXES. The PHYSICIAN acknowledges that he will have sole
responsibility for the payment of all federal, state and local estimated,
withholding and employment taxes arising out of its relationship with and the
performance of the professional services for the COMPANY. The PHYSICIAN
acknowledges and agrees that the COMPANY will not withhold on his behalf any
sums for income tax, unemployment insurance, social security or any other
withholding pursuant to any law or requirement of any governmental body, nor
will the COMPANY make available to the PHYSICIAN any of the benefits afforded to
employees of the COMPANY. Each and every one of such payments, withholding and
benefits, if any, is the sole responsibility of the PHYSICIAN. The PHYSICIAN
agrees to indemnify and hold the COMPANY harmless from any and all loss or
liability arising with respect to such payments, withholdings and benefits, if
any. In the event the United States Internal Revenue Service ("IRS") should
question or challenge the
4
<PAGE> 6
worker status of the PHYSICIAN, the parties hereto mutually agree that both the
PHYSICIAN and the COMPANY shall have the right to participate in any discussion
or negotiation occurring with the IRS, irrespective of or by whom such
discussions or negotiations are initiated; and, each party shall notify the
other in advance of any planned meeting or discussion.
5.3 NO AGENCY. The PHYSICIAN shall not have the right or authority and
hereby expressly covenants not to enter into a contract in the name of the
COMPANY or otherwise bind the COMPANY, in any way, without the express written
consent of the COMPANY. The PHYSICIAN shall hold the COMPANY harmless from any
loss attributable to a violation of this covenant. However, PHYSICIAN shall
advise and assist the COMPANY in securing and retaining contracts in the name
and for the account of the COMPANY with such individuals or entities necessary
for the proper and efficient functioning of the COMPANY.
5.4 ACCESS TO RECORDS. If it is ultimately determined that Section 952
of the Omnibus Reconciliation Act of 1980 applies to this Agreement, the
PHYSICIAN will make available to the Secretary of the United States Department
of Health and Human Services, the United States Comptroller General, and their
representatives, this Agreement and all books, documents and records necessary
to certify the nature and extent of the costs of those services. If the
PHYSICIAN carries out the duties of this Agreement through a subcontract worth
$10,000 or more over a twelve-month period with a related organization, the
subcontract will also contain an access clause to permit access by the
Secretary, Comptroller General, and their representatives to the related
organizations's books, documents and records.
ARTICLE VI
INSURANCE
6.1 MINIMUM INSURANCE COVERAGE. The PHYSICIAN shall purchase and
maintain at his expense professional and general liability insurance coverage
from a commercial insurance company licensed to transact insurance in the State
of Mississippi and acceptable to the COMPANY in an amount equal to the higher
of One Million Dollars ($1,000,000) per claim and Three Million Dollars
($3,000,000) in the aggregate per year, (the "Minimum Coverage").
6.2 CONTINUING COVERAGE. If the PHYSICIAN either changes insurance
carriers for any reason or switches from "claims made" to "occurrence"
coverage, or has the Minimum Coverage terminated for any reason, then the
PHYSICIAN shall obtain the requisite Minimum Coverage with prior acts coverage
containing a retroactive date sufficient to cover any claims arising out of
acts which occurred from the Effective Date of this Agreement through and
including the expiration date of the current coverage.
6.3 EVIDENCE OF COVERAGE. On execution of this Agreement and annually
thereafter or on reasonable request, the PHYSICIAN shall provide the COMPANY
with a certificate of insurance or other written instrument acceptable to the
COMPANY evidencing purchase of the requisite Minimum Coverage. The PHYSICIAN
shall notify the COMPANY at least thirty (30) days prior
5
<PAGE> 7
to the voluntary cancellation or termination of the Minimum Coverage and
immediately upon receipt of any notice of involuntary cancellation or
termination of the Minimum Coverage.
ARTICLE VII
REPRESENTATIONS
7.1 Representations and Warranties. In performing services under
this Agreement, the PHYSICIAN covenants and warrants that he:
(a) Is licensed without restriction to practice medicine in
the States of Mississippi, Arkansas and Louisiana, and has never had any such
license in this or any other state limited, withdrawn, suspended, subject to
reprimand, curtailed, placed on probation or revoked;
(b) Is a member of the active medical staff of a hospital
and has at least one (1) year experience or training in the care of patients at
an end stage renal disease treatment facility;
(c) Has never been denied membership or reappointment to
membership on the medical staff of any health care facility, and no health care
facility medical staff membership or clinical privileges of the PHYSICIAN have
ever been limited, suspended, curtailed, revoked, placed on probation or
withdrawn, subject to reprimand whether voluntarily or as a result of action
(either formal or informal) initiated by any health care facility or its
medical staff;
(d) Shall use his best and most diligent efforts and
professional skills and judgment in rendering services under this Agreement;
(e) Shall perform professional services and shall render
care to patients in accordance with and in a manner consistent with appropriate
standards and the ethics of the medical profession and as necessary for the
COMPANY to maintain compliance with applicable governmental laws and
regulations;
(f) Shall immediately notify the COMPANY of any denial,
suspension, revocation or curtailment of licensure or certification status,
medical staff membership or clinical privileges held by the PHYSICIAN with any
state, company, payor or health care facility;
(g) Has notified the COMPANY of each action or claim
alleging professional negligence filed or asserted against him within the
previous five (5) years and a current status and/or ultimate resolution of
such claim and will immediately notify the COMPANY in writing of his receipt of
any action, claim or lawsuit alleging professional negligence lodged against
him individually or against any partnership, professional corporation or
association with which he is affiliated; and
(h) Shall immediately notify the COMPANY of any sanction,
threatened sanction, investigation or proceeding by any governmental agency or
any entity regarding his participation in the Medicare, Medicaid program or any
third party payor program.
6
<PAGE> 8
ARTICLE VIII
MISCELLANEOUS
8.1 NOTICES. Any notices to be given under this Agreement shall be
deemed given if sent U.S. certified mail, return receipt requested, to the
parties at the following addresses:
PHYSICIAN: John D. Bower, M.D.
3220 North State Street
Jackson, Mississippi 39216
COMPANY: RCG MISSISSIPPI, INC.
1801 West End Avenue, Suite 1100
Nashville, Tennessee 37203
Attn: Sam A. Brooks, President
If either party desires to change either the address or the person to
whom notice is to be given, such change must be done in writing delivered to
the parties.
8.2 AMENDMENTS. This Agreement may be amended at any time by mutual
agreement of the parties hereto, but any such amendment shall not be operative
or valid unless the same is reduced to writing and approved by the parties
hereto.
8.3 ASSIGNABILITY. This Agreement is personal to the PHYSICIAN and the
PHYSICIAN shall not assign any of his rights or obligations under this Agreement
without consent of the COMPANY. The COMPANY may not assign its rights and
obligations under this Agreement without the consent of the PHYSICIAN.
8.4 SEVERABILITY AND TERMINATION PROVISIONS. If any provision of this
Agreement is held to be illegal, invalid or unenforceable under present or
future laws in effect during the term of this Agreement, the legality, validity
or enforceability of the remaining provisions of this Agreement shall not be
effected thereby, and in lieu of such illegal, invalid or unenforceable
provisions, there shall be added automatically as part of this Agreement a
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be legal, valid and enforceable.
8.5 HEADINGS. The headings of this Agreement are inserted for
convenience only and are not to be considered in constructing of the provisions
hereof.
8.6 ENTIRE AGREEMENT. This Agreement constitutes the full contract and
agreement of the parties, superseding all prior or contemporaneous agreements,
either oral or written.
8.7 CONSTRUCTION OF THE AGREEMENT AND BINDING EFFECT. This Agreement
shall be construed and interpreted according to the laws of the State of
Mississippi.
7
<PAGE> 9
8.8 NON-WAIVER. The failure of either part to exercise any of its
rights under this Agreement for a breach thereof shall not be deemed to be a
waiver of such rights or a waiver of any subsequent breach.
8.9 DISPUTES AND GOVERNING LAW. The COMPANY and the PHYSICIAN agree
that any dispute arising in connection with, or relating to, this Agreement or
the termination of this Agreement, to the maximum extent allowed by applicable
law, shall be subject to resolution through informal methods and, failing such
efforts, through arbitration. Either party may notify the other party of the
existence of a dispute by written notice to the address indicated hereinabove.
The parties shall thereafter attempt in good faith to resolve their differences
within thirty (30) days after the receipt of such notice. If the dispute
cannot be resolved within such 30-day period, either party may file a written
demand for arbitration with the other party. The arbitration shall proceed in
accordance with the terms of the Federal Arbitration Act and the rules and
procedures of the American Arbitration Association. A single arbitrator shall
be appointed through the American Arbitration Association's procedures to
resolve the dispute.
The parties agree that in the event arbitration is necessary, the laws of
the State of Mississippi and any applicable federal law shall apply. The
place of the arbitration shall be Jackson, Mississippi.
The award of the arbitrator shall be binding and conclusive upon the
parties. Either party shall have the right to have the award made the judgment
of a court of competent jurisdiction in the State of Mississippi.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written to be effective as provided hereinabove.
COMPANY: RCG MISSISSIPPI, INC.
BY: /s/ Sam A. Brooks, President
-----------------------------
Sam A. Brooks, President
PHYSICIAN:
/s/ John D. Bower, M.D.
-----------------------------
John D. Bower, M.D.
8
<PAGE> 1
Exhibit 10.22
RENAL CARE GROUP, INC.
MEDICAL DIRECTOR SERVICES AGREEMENT
(GROUP PRACTICE)
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
ARTICLE I SERVICES ............................................. 1
1.1 Engagement ........................................... 1
1.2 Responsibilities ..................................... 1
1.3 Patient Care Manual .................................. 3
1.4 Records .............................................. 3
1.5 Medical Staff ........................................ 3
1.6 Coverage ............................................. 3
ARTICLE II TERM AND TERMINATION ................................ 4
2.1 Term ................................................. 4
2.2 Termination By Agreement ............................. 4
2.3 Termination Without Cause ............................ 4
2.4 Termination for Cause by the Company ................. 4
2.5 Termination for Cause by the Group ................... 4
2.6 Effect of Termination or Expiration .................. 5
ARTICLE III COMPENSATION ....................................... 5
3.1 Compensation ......................................... 5
3.2 Intentionally Omitted ................................ 5
3.3 Additional Effect of Termination ..................... 5
ARTICLE IV STATUS OF PARTIES ................................... 6
4.1 Tax Status ........................................... 6
4.2 No Agency ............................................ 6
4.3 Access to Records .................................... 6
ARTICLE V INSURANCE ............................................ 6
5.1 Minimum Insurance Coverage ........................... 6
5.2 Continuing Coverage .................................. 6
5.3 Evidence of Coverage ................................. 7
ARTICLE VI REPRESENTATIONS ..................................... 7
6.1 Representations and Warranties ....................... 7
ARTICLE VII POST-EMPLOYMENT, CONFIDENTIALITY, NONCOMPETITION AND
NONSOLICITATION COVENANT ......................................... 8
7.1 Additional Covenants ................................. 8
ARTICLE VIII MISCELLANEOUS ..................................... 10
8.1 Notices .............................................. 10
8.2 Amendments ........................................... 10
8.3 Assignability ........................................ 10
8.4 Severability and Termination Provisions .............. 10
8.5 Headings ............................................. 10
8.6 Entire Agreement ..................................... 10
8.7 Construction of the Agreement and Binding Effect ..... 10
8.8 Non-Waiver ........................................... 10
8.9 Disputes and Governing Law ........................... 11
</TABLE>
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<PAGE> 3
MEDICAL DIRECTOR SERVICES AGREEMENT
(GROUP PRACTICE/FREESTANDING FACILITIES)
THIS MEDICAL DIRECTOR SERVICES AGREEMENT (the "Agreement") is made and
entered into this day of __ day of September, 1996, to be effective as provided
for hereinbelow, by and between RENAL CARE GROUP, INC., a Delaware corporation
(the "COMPANY"), and those individual physicians who are signatories hereto (the
"GROUP").
W I T N E S S E T H:
WHEREAS, the COMPANY owns and operates twenty-two renal dialysis
facilities known as "RenalWest" (such facilities collectively referred to as
"Facility") which provide outpatient and home dialysis services;
WHEREAS, the COMPANY desires to engage a single group of nephrologists
skilled in dialysis center administration to provide medical director services
at the Facility;
WHEREAS, the GROUP desires to provide medical director services to the
COMPANY at the Facility, and is willing to engage for this purpose a physician
or physicians licensed to practice medicine and prescribe drugs without
restriction in the State of Arizona, who specialize in nephrology and dialysis
services, and are experienced in dialysis center administration.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties as herein set forth, the receipt and sufficiency of such
consideration being hereby acknowledged, the parties agree as follows:
ARTICLE I
SERVICES
1.1 ENGAGEMENT. The COMPANY shall engage the services of the GROUP and
the GROUP shall provide services for the COMPANY as medical director of the
Facility. In such capacity, the GROUP shall perform the services customarily
performed by medical directors of dialysis facilities and such additional or
other tasks related to the oversight of dialysis treatments being administered
at the Facility as designated by the COMPANY. The GROUP shall devote its ability
and effort to provide for the proper medical quality and conduct of the Facility
and its operations; provided, however, operational decisions regarding the
Facility shall be made solely by the COMPANY.
1.2 RESPONSIBILITIES. Without limiting the generality of the foregoing,
the GROUP shall provide the following services:
(a) Ensure proper administration and execution of the Facility's
patient care policies through the Facility's Head Nurse;
(b) Provide medical expertise to the Facility's nursing staff
through the Facility's Head Nurse;
(c) Oversee the Facility's physical facilities and assets and the
daily operation and maintenance of dialysis equipment;
<PAGE> 4
(d) Monitor the selection of the appropriate dialysis treatment
modality and treatment setting for Facility patients in conjunction with
patients' attending physician(s), if necessary;
(e) Ensure policies are in place for assuring the availability of
personnel capable of handling emergency situations should they arise;
(f) Develop needs analyses and implement and monitor Facility
training programs, including in-service training to patients;
(g) Review and approve water analysis results and monthly culture
reports; direct and monitor appropriate remedial steps as needed;
(h) Participate in on-site governmental and managed care
organization surveys upon request of the COMPANY; review federal, state and
local survey reports and, as needed, participate in the development and
implementation of appropriate plans of correction;
(i) Require a physician to review all Facility incident reports,
patient complaints and quality management reviews and implement corresponding
actions, if necessary;
(j) Make available to the members of the Facility's physicians an
appropriate physician to serve in a counseling capacity and serve as the
Facility's governing body representative to such physicians;
(k) Make available an appropriate physician to attend periodic
conferences upon request of the COMPANY's Medical Advisory Board;
(l) Provide those other functions required of the Facility's
medical director as generally required of medical directors in similar
facilities;
(m) Make recommendations to the COMPANY in keeping controllable
costs of the Facility to a minimum;
(n) Present recommendations to the Regional Chief Executive
Officer, Regional Chief Operating Officer or the Executive Vice President,
Chief Operating Officer of the COMPANY, Head Nurse of the Facility, or other
persons designated by the COMPANY respectively, concerning policies and
procedures for the Facility to be submitted for the COMPANY's Medical Advisory
Board approval, which polices and procedures shall be in accordance with the
requirements of Medicare and Medicaid and as well as with applicable state and
federal laws, rules and regulations;
(o) Make available an appropriate physician to act as liaison with
the Facility's affiliated medical institutions and renal transplant centers;
(p) Oversee the Facility's overall quality management program,
procedures to promote the consistency and quality of all dialysis services
provided at the Facility by physician and non-physician personnel and, subject
to the direction or guidelines of the COMPANY, at all times operate the
Facility so it is in compliance with all applicable governmental requirements;
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<PAGE> 5
(q) Cooperate with the COMPANY's insurance carriers and/or its
designees regarding any claims, investigations or lawsuits involving the
services provided hereunder and immediately notify the COMPANY upon receipt of
notification of any such claim, investigation or lawsuit; and
(r) Require its physicians to obtain and maintain from the Facility
privileges sufficient to perform the obligations hereunder and meet COMPANY's
quality standards as set by the Medical Advisory Board.
1.3 PATIENT CARE MANUAL. The COMPANY shall advise the GROUP on federal
regulatory compliance and modifications to such regulations. The GROUP shall
advise the COMPANY on the Facility's compliance with governmental regulations
including, but not limited to, those which require renal care facilities to
maintain and implement a patient care policy and procedures manual describing:
(a) The types of dialysis used in the Facility and the procedures
followed in performance of each type of dialysis;
(b) Procedures for implementing universal precautions for the
prevention of disease transmission;
(c) Procedures for properly handling blood-borne and infectious
pathogens; and
(d) A disaster readiness plan.
1.4 RECORDS. The GROUP shall assure the current status of all medical
and business records relating to the care and treatment of patients in the
Facility in accordance with COMPANY policies and applicable regulations of
governmental agencies. While the Head Nurse has day-to-day responsibility in
this regard and the attending physician has the medical responsibility for the
content of the medical record, the GROUP is ultimately responsible for the
integrity and completeness of such records, including:
(a) Patient long-term care plans, patient short-term care plans and
medical histories;
(b) Results of physical examinations and laboratory tests; and
(c) Progress notes by all patient care staff, complete and legibly
signed orders and discharge summaries.
1.5 MEDICAL STAFF. The GROUP shall review the applications of physicians
requesting to attend to patients at the Facility and forward a recommendation
concerning such applications to the COMPANY's Medical Advisory Board. The GROUP
shall maintain oversight of all disciplinary actions with regard to any matter
of such physicians or patient care personnel as needed to assure the quality of
services and conformity to COMPANY and Facility rules and policies.
1.6 COVERAGE. The GROUP shall make available one or more physicians, at
a minimum, to provide services at each site for their respective hours of
operation. Should the Facility's patient case load increase, the COMPANY may
increase the GROUP's on-site obligation coverage accordingly and the GROUP shall
provide such coverage.
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<PAGE> 6
ARTICLE II
TERM AND TERMINATION
2.1 TERM. This Agreement shall become effective as of 12:01 a.m. on
September__, 1996 (the "Effective Date") and shall remain in full force and
effect until 12:00 p.m. midnight on the Seventh (7th) anniversary of the
Effective Date, unless otherwise earlier terminated as provided in this Article
II (the "Initial Term"). This Agreement shall automatically renew for successive
terms of three (3) year(s) duration each (the "Renewal Terms"), unless either
party provides written notice of its election not to renew at least ninety (90)
days prior to the expiration of a term or unless otherwise earlier terminated as
provided in this Article II.
2.2 TERMINATION BY AGREEMENT. If the COMPANY and the GROUP shall
mutually agree in writing, this Agreement shall be terminated on the time and
date stipulated therein.
2.3 TERMINATION WITHOUT CAUSE. Either party may terminate this Agreement
at the end of the Initial Term or any Renewal Term by giving ninety (90) days
prior written notice to the other party of such intention to terminate.
2.4 TERMINATION FOR CAUSE by the Company. The COMPANY may terminate this
Agreement and all rights and liabilities created by this Agreement immediately,
except for those relating to Article VII, at any time for cause including, but
not limited to the GROUP's (or any one of its physician's(s')) dishonesty,
misconduct, misappropriation of funds, disparagement of the COMPANY, the
Facility or any of their representatives or employees, refusal to perform
properly designated tasks, negligence in the performance of medical or other
functions, suspension or revocation of the GROUP's license(s) to conduct
business or any licenses or authorizations of its physician(s), including
medical license(s), board certifications or board eligibility, medical staff
membership(s), clinical privilege(s) or authorization(s) or ability to prescribe
drugs, commission or conviction, including a plea of nolo contendere, of any
felony or of any crime involving moral turpitude, act or omission that could be
detrimental to the reputation of the Facility or the COMPANY, failure to perform
or observe any of the terms or provisions of this Agreement, breach of any terms
or provisions of this Agreement, reprimand by a federal or state regulatory or
professional oversight board, any expulsion or other discipline by the medical
staff or management of any health care facility where one of the physicians of
the GROUP enjoys membership or clinical privileges, or failure of any of the
GROUP's representations in this Agreement. The GROUP shall notify the COMPANY
immediately upon learning of any event described in the foregoing sentence. Upon
the occurrence of any event described herein this Section 2.4, the COMPANY
agrees not to terminate this Agreement if: (A) with respect to an action or
omission by an individual physician within ten (10) days of the COMPANY's
request (i) the GROUP agrees that any GROUP physician who is the subject of such
cause will not provide services under this Agreement, and (ii) such physician
agrees to be placed on leave and not to practice at the Facility until a final
determination is made that such actions or omissions constituting such cause did
not occur or that such actions or omissions will not result in any disciplinary
action against such physician, and if such a final determination is not reached,
the physician agrees, at the request of the COMPANY, to tender immediately in
writing a voluntary resignation of such physician's privileges to attend
patients at the Facility or (B) with respect to any breach of any material term
or provision of this Agreement by GROUP, within (30) days of the COMPANY's
notice to the GROUP of its intent to terminate, the GROUP is able to remedy such
occurrence.
2.5 TERMINATION FOR CAUSE BY THE GROUP. The Group may terminate this
Agreement for cause in the event that (a) the Company fails to perform or
observe any material term or provision of this Agreement, (b) the Company
breaches any material term or provision of this Agreement, or (c) the Company
is reprimanded or disciplined by a federal or state regulatory or professional
agency in a manner that adversely affects the public image of the Group. Upon
the occurrence of any event described above in this Section 2.5,
- 4 -
<PAGE> 7
the Group agrees that it will not to terminate this Agreement if, within thirty
(30) days of the Group's notice to the Company of its intent to terminate, the
Company is able to remedy such occurrence.
2.6 EFFECT OF TERMINATION OR EXPIRATION.
(a) Following the expiration of this Agreement or its
termination for any reason, the GROUP shall not interfere with any action by the
COMPANY to contract with any other individual or entity for the provision of
medical director services.
(b) Following the expiration or termination of this Agreement
and the termination or resignation of a physician from the GROUP, the GROUP
shall maintain for itself and each of the physicians provided hereunder, with an
insurer licensed to transact insurance in the State of Arizona, prior acts
coverage with policy limits and with a retroactive date sufficient to cover any
claims arising out of acts which occurred from the Effective Date of this
Agreement through and including the date of such termination or obtain an
extended reporting endorsement for two (2) years, all as acceptable to the
COMPANY. The GROUP shall provide evidence of such coverage to COMPANY upon
request.
ARTICLE III
COMPENSATION
3.1 COMPENSATION. In consideration of the services, covenants, and
agreements agreed to be performed by the GROUP during the Initial or any Renewal
Term of this Agreement, the COMPANY shall pay the GROUP an amount equal to the
sum of Eight Hundred Forty Thousand Dollars ($840,000) per year, payable monthly
in advance. The GROUP agrees to accept this payment by the COMPANY as the total
compensation for all services, covenants and agreements pursuant to this
Agreement; provided however, ninety (90) days prior to each annual anniversary
of the Effective Date of the Initial Term and any Renewal Term, the parties
shall discuss in good faith whether any adjustment to the compensation described
in Article III herein would be appropriate to reflect the value of the services
provided hereunder by the GROUP and the medical director services required by
the Facility for each year of this Agreement and to reflect any changes in
reimbursement levels for services provided by the Facilities or the economics of
owning and operating the facilities in each case with a view to determining the
fair market value of the services provided herein. No change to the compensation
shall be made unless both the parties agree in writing and any such change shall
be effective for at least twelve (12) months from the effective date of such
change.
3.2 INTENTIONALLY OMITTED.
3.3 ADDITIONAL EFFECT OF TERMINATION. If either the COMPANY or the GROUP
terminates this Agreement or it expires before the end of a Facility pay period,
the compensation shall be pro-rated on a daily basis for purposes of calculating
the amount of compensation due GROUP through the date of termination or
expiration. The COMPANY may offset any sums owing it due from GROUP from such
owed sums.
ARTICLE IV
STATUS OF PARTIES
4.1 TAX STATUS. It is mutually understood that the physician(s) to be
engaged to perform the services required hereunder are to be engaged by the
GROUP, and shall under no circumstances be considered the employee(s) of the
COMPANY or the Facility. The GROUP shall be responsible for any payroll and
similar taxes related to its engagement of the physician(s), and neither the
GROUP nor its physician(s) shall be entitled to any benefits afforded to the
employees of the COMPANY. The GROUP agrees to indemnify and
- 5 -
<PAGE> 8
hold the COMPANY harmless from any and all loss or liability arising with
respect to such payments, withholdings and benefits, if any. In the event the
United States Internal Revenue Service ("IRS") should question or challenge the
worker status of the GROUP or its physicians, the parties hereto mutually agree
that both the GROUP and the COMPANY shall have the right to participate in any
discussion or negotiation occurring with the IRS, irrespective of or by whom
such discussions or negotiations are initiated; and, each party shall notify
the other in advance of any planned meeting or discussion.
4.2 NO AGENCY. Except as required in the ordinary and customary conduct
of its responsibilities as set forth in Section 1.2, the GROUP shall not have
the right or authority and hereby expressly covenants not to enter into a
contract in the name of the COMPANY or otherwise bind the COMPANY, in any way,
without the express written consent of the COMPANY. The GROUP shall hold the
COMPANY harmless from any loss attributable to a violation of this covenant.
However, GROUP shall advise and assist the COMPANY in securing and retaining
contracts in the name and for the account of the COMPANY with such individuals
or entities necessary for the proper and efficient functioning of the
Facilities.
4.3 ACCESS TO RECORDS. If it is ultimately determined that ss. 952 of
the Omnibus Reconciliation Act of 1980 applies to this Agreement, then until the
expiration of four (4) years after the furnishing of services provided under
this Agreement, the GROUP will make available to the Secretary of the United
States Department of Health and Human Services, the United States Comptroller
General, and their representatives, this Agreement and all books, documents and
records necessary to certify the nature and extent of the costs of those
services. If the GROUP carries out the duties of this Agreement through a
subcontract worth $10,000 or more over a twelve-month period with a related
organization, the subcontract will also contain an access clause to permit
access by the Secretary, Comptroller General, and their representatives to the
related organization's books, documents and records.
ARTICLE V
INSURANCE
5.1 MINIMUM INSURANCE COVERAGE. The GROUP shall purchase and maintain at
its expense for itself and each of the physicians professional and general
liability insurance coverage from a commercial insurance company licensed to
transact insurance in the State of Arizona and acceptable to the COMPANY in an
amount equal to the higher of One Million Dollars ($1,000,000.00) per claim and
Three Million Dollars ($3,000,000) in the aggregate per year, (the "Minimum
Coverage") or such greater amount required by a governmental entity.
5.2 CONTINUING COVERAGE. In the event that the GROUP switches from its
present "occurrence" coverage to "claims made" coverage and then if the GROUP
thereafter either changes insurance carriers for any reason or switches from
"claims made" to "occurrence" coverage, or has the Minimum Coverage terminated
for any reason, then the GROUP shall obtain the requisite Minimum Coverage with
prior acts coverage containing a retroactive date sufficient to cover any claims
arising out of acts which occurred from the Effective Date of this Agreement
through and including the expiration date of the current coverage.
5.3 EVIDENCE OF COVERAGE. On execution of this Agreement and annually
thereafter or on reasonable request, the GROUP shall provide the COMPANY with
certificates of insurance or other written instruments acceptable to the COMPANY
evidencing purchase of the requisite Minimum Coverage for itself and each of the
GROUP's physicians. The GROUP shall notify the COMPANY at least sixty (60) days
prior to the voluntary cancellation or termination of any Minimum Coverages and
immediately upon receipt of any notice of involuntary cancellation or
termination of any Minimum Coverages.
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<PAGE> 9
ARTICLE VI
REPRESENTATIONS
6.1 REPRESENTATIONS AND WARRANTIES. In performing services under this
Agreement, the GROUP covenants and warrants that it:
(a) Is licensed to conduct its business in the State of Arizona,
and shall engage only physician(s) who are licensed without restriction to
practice medicine in such state and who never have had any such license in this
or any other state limited, withdrawn, suspended, subject to reprimand,
curtailed, placed on probation or revoked;
(b) Shall engage only physician(s) who is(are) board eligible or
board certified in the specialty of nephrology as recognized by the American
Board of Medical Specialists;
(c) Shall engage only physician(s) who is(are) a member(s) of the
active medical staff of a local hospital and has(have) adequate experience or
training in the care of patients at an end stage renal disease treatment
facility;
(d) Shall engage only physician(s) who has(have) never been denied
membership or reappointment to membership on the medical staff of any health
care facility, and no health care facility medical staff membership or clinical
privileges of a physician have ever been limited, suspended, curtailed,
revoked, placed on probation or withdrawn, subject to reprimand whether
voluntarily or as a result of action (either formal or informal) initiated by
any health care facility or its medical staff;
(e) Shall require its physician(s) to use their best and most
diligent efforts and professional skills and judgment in rendering services
under this Agreement;
(f) Shall require its physician(s) to perform professional services
and shall render care to patients in accordance with and in a manner consistent
with appropriate standards and the ethics of the medical profession and as
necessary for the Facility to maintain compliance with applicable governmental
laws and regulations;
(g) Shall require its physician(s) to immediately notify the
COMPANY of any denial, suspension, revocation or curtailment of licensure or
certification status, medical staff membership or clinical privileges held by
such physician(s) with any state, company, payor or health care facility;
(h) Has notified the COMPANY of each action or claim alleging
professional negligence filed or asserted against any engaged physician within
the previous two (2) years and a current status and/or ultimate resolution of
such claim and will immediately notify the COMPANY in writing of its receipt of
any action, claim or lawsuit alleging professional negligence lodged against
any engaged physician individually or against any partnership, professional
corporation or association with which any engaged physician is affiliated;
(i) Shall, for itself, and for each physician provided hereunder,
immediately notify the COMPANY of any sanction, threatened sanction,
investigation or proceeding by any governmental agency or any entity regarding
its or such physician's(s') participation in the Medicare, Medicaid program or
any third party payor program in which the CENTER participates; and
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<PAGE> 10
(j) Shall cause each physician within the GROUP or other physicians
performing services on behalf of the GROUP hereunder (as may be approved by the
COMPANY), to execute this Agreement (i) demonstrating each physician's
understanding of this Agreement and its provisions, including the understanding
that he or she will not retain privileges at the Facility if this Agreement is
terminated or if their employment or contractual relationship with the GROUP is
terminated for any reason, and (ii) agreeing to be bound by Article VII as
provided therein.
The COMPANY may in its sole discretion make exceptions to the foregoing
representations and warranties on a case by case basis based upon the facts
provided to the COMPANY by the GROUP.
ARTICLE VII
CONFIDENTIALITY, NONCOMPETITION
AND NONSOLICITATION COVENANT
7.1 ADDITIONAL COVENANTS.
(a) The GROUP agrees that, during the term of this Agreement and
for a period of three (3) years after the termination of this Agreement, the
GROUP will not in any manner, directly or indirectly, by itself or in
conjunction with any other person, (i) conduct any of the activities or perform
any of the responsibilities delineated in Article I ("Services") of this
Agreement for any business entity that is competitive with the business of the
COMPANY or (ii) establish or own any financial, beneficial or other interest in
(other than an interest consisting of less than one percent (1%) of a class of
publicly traded security), make any loan to or for the benefit of, or render
any managerial, marketing or other business advice, to any entity that is then
conducting activities that are competitive with those of the business of the
COMPANY, in either case within a seventy-five (75) mile radius of the Facility.
For purposes of this Article, the "business of the COMPANY" shall mean owning
or operating a renal dialysis center, unit or facility or providing renal
dialysis supplies or services to any other center, unit or facility or any
acute care facility or any home renal dialysis patient, including the provision
of pharmaceuticals or laboratory services.
The terms and provisions of this Article VII shall also apply to each
physician of the GROUP or other physician performing services on behalf of the
GROUP hereunder (as may be approved by the COMPANY), any member or shareholder
of any professional corporation or association of which a GROUP is a shareholder
or any person with whom the GROUP is associated in partnership and in or with
respect to which by virtue of said professional corporation or partnership the
GROUP receives an indirect financial benefit. With respect to the persons
identified in this paragraph, the time periods applicable to this Article VII
shall begin on the earlier of (i) the termination or expiration of this
Agreement or (ii) a physician's departure from the GROUP or a physician
cessation of services hereunder on behalf of the GROUP.
(b) The GROUP further agrees that during the term of this Agreement
and for a period of three (3) years after the termination of this Agreement,
the GROUP will keep confidential and not directly divulge, or allow through
reasonable care to be divulged to anyone, or use or otherwise appropriate for
the GROUP's own benefit or for the benefit of others, any knowledge or
information of a confidential nature with respect to the business of the
COMPANY, COMPANY itself, or any of its affiliates, including all trade secrets,
pricing information, marketing information or technical information
(hereinafter referred to as the "Confidential Data"), except for (i) a
disclosure that is required by law; or (ii) information that has been made
generally available to the public by the act of one who has the right to
disclose such information. The GROUP hereby acknowledges and agrees that the
prohibitions against disclosure of Confidential Data recited herein are in
addition to, and not in lieu of, any rights or remedies which the COMPANY may
have available pursuant to
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<PAGE> 11
the laws of any jurisdiction or at common law to prevent the disclosure of
confidential information, and the enforcement by the COMPANY of its rights and
remedies pursuant hereto shall not be construed as a waiver of any other rights
or available remedies which the COMPANY may possess in law or equity. The GROUP
acknowledges that the COMPANY has taken reasonable and appropriate steps to
ensure the confidentiality and non-disclosure of all such Confidential Data.
(c) The GROUP also agrees that during the term of this Agreement
and for a period of three (3) years after the termination of this Agreement,
the GROUP will not, for its own benefit or the benefit of others, solicit any
person or entity that has or has had, or disrupt or attempt to disrupt, any
relationship, contractual or otherwise, with the COMPANY (including any
patient, payor, physician, provider, managed care organization or supplier) at
any time during the GROUP's Agreement with the COMPANY, for the purpose of
assisting, or creating such a relationship for, any business entity that is
competitive with the business of the COMPANY.
(d) The GROUP further agrees that during the term of this Agreement
and for a period of three (3) years after the termination of this Agreement,
the GROUP shall not induce, nor attempt to induce, any employee of the COMPANY,
or any of its affiliates, to terminate his or her association with the COMPANY
or any of its affiliates.
(e) These covenants are considered by the parties hereto to be
fair, reasonable and integral for the protection of the COMPANY. The parties
mutually agree that if a violation of any of these covenants occurs, such
violation or any threatened violation will cause irreparable injury to the
COMPANY and the remedy at law for any such violation or threatened violation
will be inadequate. The parties acknowledge that these covenants will survive,
and remain in effect and enforceable after, termination of this Agreement.
(f) Nothing in these covenants shall be deemed to prohibit the
physicians of the GROUP from exercising their medical judgment concerning the
medical treatment of a patient in any manner whatsoever in any location
whatsoever, and shall not be deemed to require the referral of any such patient
to any facility of the COMPANY or any of its affiliates. The GROUP acknowledges
that enforcement of this covenant will not prevent a physician of the GROUP
from earning a living by practicing medicine or nephrology.
(g) The GROUP hereby further agrees that prior to the engagement of
any physician as an independent contractor or the employment of a physician to
perform services for the patients or medical practice of the GROUP, the GROUP
will require as a condition of said physician's engagement or employment that
the physician enter into a supplemental non-compete agreement with the COMPANY
like the one contained within. It is expressly understood and agreed by the
GROUP that its promises in this subparagraph (g) have served as a material
inducement to the COMPANY to enter into this Agreement.
ARTICLE VIII
MISCELLANEOUS
8.1 NOTICES. Any notices to be given under this Agreement shall be
deemed given if sent U.S. certified mail, return receipt requested, to the
parties at the following addresses:
GROUP: c/o _______________, M.D.
------------------------
------------------------
------------------------
------------------------
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<PAGE> 12
COMPANY: Renal Care Group, Inc.
2100 West End, Suite 800
Nashville, Tennessee 37202
Attn: Chief Financial Officer
and Chief Operating Officer
If either party desires to change either the address or the person to
whom notice is to be given, such change must be done in writing delivered to the
parties.
8.2 AMENDMENTS. This Agreement may be amended at any time by mutual
agreement of the parties hereto, but any such amendment shall not be operative
or valid unless the same is reduced to writing and approved by the parties
hereto.
8.3 ASSIGNABILITY. This Agreement shall not be assignable by either
party and neither party shall assign any of its rights or obligations under this
Agreement without consent of the other party; provided that the GROUP may assign
this agreement to an entity owned by the GROUP.
8.4 SEVERABILITY AND TERMINATION PROVISIONS. If any provision of this
Agreement is held to be illegal, invalid or unenforceable under present or
future laws in effect during the term of this Agreement, the legality, validity
or enforceability of the remaining provisions of this Agreement shall not be
affected thereby, and in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as part of this Agreement a
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be legal, valid and enforceable.
8.5 HEADINGS. The headings of this Agreement are inserted for
convenience only and are not to be considered in construction of the provisions
hereof.
8.6 ENTIRE AGREEMENT. This Agreement constitutes the full contract and
agreement of the parties, superseding all prior or contemporaneous agreements,
either oral or written.
8.7 CONSTRUCTION OF THE AGREEMENT AND BINDING EFFECT. This Agreement
shall be construed and interpreted according to the laws of the State of
Tennessee.
8.8 NON-WAIVER. The failure of either party to exercise any of its
rights under this Agreement for a breach thereof shall not be deemed to be a
waiver of such rights or a waiver of any subsequent breach.
8.9 DISPUTES AND GOVERNING LAW. The parties agree that any dispute
arising in connection with, or relating to, this Agreement or the termination of
this Agreement, to the maximum extent allowed by applicable law, shall be
subject to resolution through informal methods and, failing such efforts,
through arbitration. Either party may notify the other party of the existence of
a dispute by written notice to the address indicated hereinabove. The parties
shall thereafter attempt in good faith to resolve their differences within
thirty (30) days after the receipt of such notice. If the dispute cannot be
resolved within such 30-day period, either party may file a written demand for
arbitration with the other party. The arbitration shall proceed in accordance
with the terms of the Federal Arbitration Act and the rules and procedures of
the American Arbitration Association. A single arbitrator shall be appointed
through the American Arbitration Association's procedures to resolve the
dispute.
- 10 -
<PAGE> 13
The parties agree that in the event arbitration is necessary, the laws
of the State of Arizona and any applicable federal law shall apply. The place of
the arbitration shall be Phoenix, Arizona.
The award of the arbitrator shall be binding and conclusive upon the
parties. Either party shall have the right to have the award made the judgment
of a court of competent jurisdiction in the State of Arizona or Tennessee.
[Signatures on Next Page]
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<PAGE> 14
IN WITNESS WHEREOF, the parties have executed this Medical Director
Services Agreement on the day and year first above written to be effective as
provided hereinabove.
COMPANY: RENAL CARE GROUP, INC.
By: /s/
----------------------------------
Title:
-------------------------------
GROUP:
Each physician executing below acknowledges that he or she has read and
understood the terms of this Agreement and hereby makes the acknowledgment set
forth in Section 6(j) and agrees that he or she is bound by Article VII as
provided therein.
(Seal)
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, M.D.
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(Seal)
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, M.D.
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(Seal)
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, M.D.
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(Seal)
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, M.D.
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(Seal)
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, M.D.
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(Seal)
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, M.D.
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(Seal)
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, M.D.
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(Seal)
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, M.D.
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(Seal)
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, M.D.
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<PAGE> 15
Each physician executing below acknowledges that he or she has read and
understood the terms of this Agreement and hereby makes the acknowledgment set
forth in Section 6(j) and agrees that he or she is bound by Article VII as
provided therein.
/s/ Dr. Sean O'Regan (Seal)
--------------------------------------
Sean O'Regan , M.D.
--------------------------
/s/ Richard (Seal)
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Richard , M.D.
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/s/ (Seal)
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, M.D.
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/s/ Ronald Hyde (Seal)
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Ronald Hyde , M.D.
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/s/ (Seal)
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, M.D.
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/s/ Berne Yee (Seal)
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Berne Yee , M.D.
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/s/ William E. Smith (Seal)
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William E. Smith , M.D.
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/s/ David Reichert (Seal)
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David Reichert , M.D.
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/s/ Gary Birnbaum (Seal)
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Gary Birnbaum , M.D.
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/s/ (Seal)
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, M.D.
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/s/ Kenneth (Seal)
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Kenneth , M.D.
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/s/ Kenneth Johnson (Seal)
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Kenneth Johnson , M.D.
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<PAGE> 16
/s/ Jeffrey (Seal)
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Jeffrey , M.D.
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/s/ (Seal)
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, M.D.
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/s/ (Seal)
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, M.D.
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/s/ (Seal)
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, M.D.
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(Seal)
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, M.D.
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(Seal)
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, M.D.
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(Seal)
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, M.D.
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(Seal)
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, M.D.
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(Seal)
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, M.D.
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<PAGE> 1
Exhibit 10.23
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of June 30, 1996, by and
between RENAL CARE GROUP, INC., a Delaware corporation (the "Company"), and GARY
BRUKARDT (hereinafter "Employee").
WITNESSETH:
WHEREAS, the Company desires to employ Employee, and Employee desires to
be employed by the Company, on the terms and conditions contained herein; and
WHEREAS, in serving as an employee of the Company, Employee has and will
participate in the use and development of confidential proprietary information
about the Company, its customers and suppliers, and the methods used by the
Company and its employees in competition with other companies, as to which the
Company desires to protect fully its rights; and
WHEREAS, the Company wishes to enter into an agreement with Employee
whereby Employee shall agree not to compete with the Company in any current or
future business activity conducted or entered into by the Company and to hold
certain information obtained by and through Employee's employment in confidence.
NOW, THEREFORE, in consideration of the compensation payable to
Employee by the Company pursuant to this Agreement, and the mutual promises,
covenants, representations and warranties contained herein, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do agree as
follows:
1. Employment.
Effective on August 5, 1996, the Company hereby employs Employee,
and Employee hereby agrees to accept employment with the Company, upon the terms
and conditions hereinafter set forth.
2. Term.
This Agreement shall begin on July 22, 1996 (the "Effective
Date"), and shall continue for an initial period of thirty-six (36) months (the
"Initial Period"), subject to earlier termination by employee or the Company as
hereinafter provided. This Agreement shall renew automatically for additional
terms of twelve (12) months each, subject to earlier termination as hereinafter
provided, on the same terms and conditions (subject to mutually agreeable
modifications, if any).
<PAGE> 2
3. Compensation and Benefits.
(a) Base Compensation: The Company shall pay Employee an annual
salary of Two Hundred Twenty Thousand Dollars ($220,000), as may be adjusted as
provided herein (the "Base Compensation"), payable according to the pay periods
of the Company as may be in effect from time to time. Such payments shall be
prorated for periods less than a full pay period. The Base Compensation
shall be subject to withholding for federal, state and local payroll and all
other taxes or withholdings applicable to Employee. Any increase of the Base
Compensation shall be at the discretion of the Company, provided that any
decreases to the then current Base Compensation shall require the consent of
Employee.
(b) Benefits: During the term of this Agreement, Employee shall
also be entitled to participate in the insurance and other fringe benefits made
available generally to similar employees of the Company, as such benefits may be
determined from time to time by the Company, provided that Employee shall have
at least four (4) weeks of paid vacation time. In addition, Employee shall be
entitled to those other benefits described on the exhibit attached hereto and
incorporated herein by reference.
(c) Bonuses: In addition to the Base Compensation payable to
Employee, pursuant to Section 3(a) above, Employee shall also be entitled to an
annual incentive bonus as described in the exhibit attached hereto and
incorporated herein by reference.
(d) Expenses: The Company shall reimburse Employee for any and
all expenses reasonably incurred by employee incident to the performance of the
duties imposed upon Employee hereunder.
4. Duties, Extent of Services:
Employee is engaged as Executive Vice President and Chief Operating
Officer and shall perform such duties and responsibilities as are typically
incident thereto, and shall perform in a faithful and competent manner such
additional duties as may be reasonably assigned from time to time by the
Company. Such duties shall be performed on a full-time basis for the Company
at the Company's offices in Nashville, Tennessee. Employee may be required,
from time to time, to perform his duties temporarily hereunder at such other
place or places as the Company shall reasonably require, provided that such
period does not exceed thirty (30) consecutive days without Employee's consent
and that during any such period Employee is able to return to Nashville,
Tennessee at the Company's expense for weekends.
Employee shall devote all of Employee's business time, attention,
knowledge, and skill solely to the business and interest of the Company, and the
Company shall be entitled to all the benefits, profits, and other issues arising
from, or incident to, all work, services, and advice of Employee.
2
<PAGE> 3
5. Termination.
This Agreement may be terminated by the parties in the manners
specified below:
(a) Termination without Cause. Either the Company or the employee
may terminate Employee's employment under this Agreement at any time for any
reason upon thirty (30) day's prior written notice to the other party.
(b) Termination for Cause.
The Company may terminate this Agreement on written notice at any
time for "cause". For purposes of this Agreement, "cause" shall mean: (i)
Employee is convicted of, pleads guilty to, or confesses to a felony or any
crime involving any act of dishonesty, fraud, misappropriation, embezzlement or
moral turpitude, in which event the Company may terminate this Agreement
immediately, (ii) the gross misconduct or gross negligence by Employee in
connection with the performance of Employee's duties hereunder, (iii) the
engaging by Employee in any fraudulent, disloyal or unprofessional conduct
which results in a material injury to the Company, its affiliates or any of its
or their centers, monetarily or otherwise, (iv) Employee breaches any provision
of Section 6 of this Agreement, or (v) the failure by Employee to otherwise
substantially perform his duties with the Company (other than any such failure
resulting from the disability of Employee under Section 5(c)(i)) or the breach
of any provision of this Agreement other than Section 6. In the event of any
termination for cause pursuant to the provisions of (ii), (iii), (iv) or (v) of
this subsection, the Company shall give Employee written notice prior to such
termination detailing the specific acts, actions, failures, or events upon
which the forecast termination is based, and Employee shall have fifteen (15)
days after such written notice to cease such actions or otherwise correct any
such failure or breach. If Employee does not cease such action or otherwise
correct such failure or breach within such fifteen day time period, or having
once received such written notice and ceased such actions or corrected such
failure or breach, Employee at any time thereafter again so acts, fails or
breaches, the Company may terminate this Agreement immediately.
(c) Involuntary Termination.
The employment of Employee hereunder shall be automatically
terminated by the death or disability of Employee as outlined below.
(i) Disability. The Company may terminate this Agreement at the
time Employee shall have been Disabled for a continuous period of six (6)
months during any continuous twelve month period. For purposes of this
Paragraph 5(c)(i), the term "Disabled" shall mean Employee's inability to
perform the essential functions of his duties, with or without reasonable
accommodation. During Employee's six month period of Disability or such longer
3
<PAGE> 4
wait period as may be provided for in any policy of disability that may be
maintained by the Company for the benefit of Employee, the Company agrees to
continue to pay Employee's Base Compensation (less regular withholdings for
payroll or other taxes and other required or proper items, and less any
payments from all disability plans provided by the Company). In the event of
a termination of Employee on account of Disability, however, the Company shall
be obligated to pay only Employee's Base Compensation that has been earned
through the effective date of termination (less regular withholdings for
payroll or other taxes and other required or proper times, and less any
payments from all disability plans provided by the Company).
(ii) Death. In the event Employee shall die during the term of this
Agreement, this Agreement shall terminate and Employee's estate shall receive
the remainder of the Base Compensation set forth in Section 3(a) hereof accrued
to the last day of the month in which death occurs.
(d) Post-Termination Compensation. Except as provided in Section 5(c)
above, upon termination of this Agreement, the Company shall be relieved of all
of its obligations hereunder notwithstanding any period of time remaining under
the initial or any renewal term, subject to the following:
(i) Termination without Cause. In the event that the Company
terminates Employee's employment hereunder without Cause under Section 5(a)
above, then Employee shall, after the effective date of such termination, as
Employee's sole and exclusive remedy, receive the Base Compensation (as then in
effect) for a period of twelve (12) months after the termination date. If the
Employee's employment is terminated by the Company without Cause, the Employee
shall be under no duty to seek or accept other employment; but if he shall do
so, any compensation he shall receive therefrom shall not diminish the
Company's obligation to make payments required to the Employee hereunder. In
the event that Employee terminates his or her employment under Section 5(a)
above, the Company's obligation to pay Employee's Base Compensation shall
terminate as of the date of termination.
(ii) Termination for Cause. In the event that the Company
terminates Employee's employment hereunder with Cause under Section 5(b) above,
then Employee shall, after the effective date of such termination, as
Employee's sole and exclusive remedy, receive the Base Compensation (as then in
effect) for a period of one (1) month after the termination date.
(iii) Termination following Change in Control. If within twelve (12)
months following a Change in Control (as defined below), either (A) the Company
terminates the employment of Employee hereunder without Cause under Section
5(a) above or (B) Employee resigns from a declined reassignment of a job that
is not reasonably equivalent in responsibility or compensation that is not in
the same geographic area, then, in lieu of any other compensation that may be
specified herein, Employee shall continue to receive the Base Compensation (as
then in effect) for a period of thirty-six (36) months from the date of
termination payable in the same manner as it was being paid as of the date of
termination, provided, however, that the salary payment provided for hereunder
may at the option of the
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<PAGE> 5
Company be paid in a single lump-sum payment, to be paid not later than thirty
(30) days after termination. In the event such obligation arises, no
compensation received from other employment (or otherwise) shall reduce the
obligation to make the payment(s) described in this paragraph.
(e) Change in Control. "Change in Control" means a change in control
of the Company of a nature that would be required to be reported (assuming such
event has not been "previously reported") in response to Item 1(a) of a Current
Report on Form 8-K pursuant to Section 13 of 15(d) of the Exchange Act of 1934
(the "Exchange Act"); provided that, without limitation, a Change in Control
shall also be deemed to have occurred at such time as:
(i) any "person" within the meaning of Section 14(d) of the
Exchange Act, other than the Company; a subsidiary, or any employee benefit
plan(s) sponsored by the Company or any Subsidiary, is or has become the
"beneficial owner," as defined in rule 13d-3 under the Exchange Act, directly or
indirectly, of 25% or more of the combined voting power of the outstanding
securities of the Company ordinarily having the right to vote at the election of
directors, or
(ii) individuals who constitute the Board immediately prior to
any meeting of stockholders (the "Incumbent Board") have ceased for any reason
to constitute at least a majority thereof, provided that any person becoming a
director whose election, or nomination for election by the Company's
stockholders, was approved by a vote of a least three-quarters (3/4 )of the
directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named as
a nominee for director without objection to such nomination shall be, for
purposes of this Agreement, considered as though such person were a member of
the Incumbent Board; or
(iii) upon approval by the Company's stockholders of a
reorganization, merger, share exchange or consolidation, other than one with
respect to which those persons who were the beneficial owners, immediately
prior to such reorganization, merger, share exchange or consolidation, or
outstanding securities of the Company ordinarily having the right to vote in the
election of directors own, immediately after such transaction, more than 75% of
the outstanding securities of the resulting corporation ordinarily having the
right to vote in the election of directors; or
(iv) upon approval by the Company's stockholders of a complete
liquidation and dissolution of the Company or the sale or other disposition of
all or substantially all of the assets of the Company other than to a
Subsidiary.
Notwithstanding the occurrence of any of the foregoing, the Board may
determine, if it deems it to be in the best interest of the Company and
consistent with a good faith interpretation of this Agreement, that an event
otherwise constituting a Change in Control shall not be so considered. Such
determination shall only be effective (A) if it is made by the Board prior to
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<PAGE> 6
the occurrence of an event that otherwise would be or probably will lead to a
Change in Control or after such event if made by the Board a majority of which
is composed of directors who were members of the Board immediately prior to the
event that otherwise would be or probably will lead to a Change in Control and
75% or more of such directors vote in favor of such determination, and (B) if it
is made with respect to all executive officers of the Company. Upon such
determination, such event or events shall not be deemed to be a Change in
Control for any purposes hereunder.
6. Nondisclosure, Confidentiality; Competition.
(a) Employee agrees that, during the term of this Agreement and
of Employee's employment by the Company, and for a period twelve (12) months
after the termination of Employee's employment with the Company, Employee will
not in any manner, directly or indirectly, by himself or in conjunction with any
other person, (i) conduct any of the activities or perform any of the
responsibilities or duties that Employee provided the Company during his
employment by the Company for any business entity that is competitive with the
business of the Company or its affiliates or (ii) establish or own any
financial, beneficial or other interest in (other than an interest consisting of
less than one percent (1%) of a class of publicly traded security), make any
loan to or for the benefit of, or render any managerial, marketing or other
business advice, to any entity that is then conducting activities that are
competitive with those of the business of the Company or its affiliates, in
either case within a geographic territory defined as the greater of (i) a
seventy-five (75) mile radius of any renal dialysis center, unit or facility
owned or operated by the Company or an affiliate of the Company (an "RCG
Center"), or (ii) the geographic area, as narrowly construed as is practicable,
from which the Company received patients at each of the RCG Centers. For
purposes of this Section, the "business of the Company or its affiliates" shall
mean owning or operating a renal dialysis center, unit or facility, and
providing practice management services to nephrologists.
(b) Employee further agrees that, for a period of three (3) years
after the termination of Employee's employment with the Company, Employee will
keep confidential and not directly divulge, or allow through a lack of
reasonable care to be divulged to anyone, or use or otherwise appropriate for
Employee's own benefit or for the benefit of others, any knowledge or
information of a confidential nature with respect to the Company's and its
affiliates' current business, the Company itself, or any of its affiliates,
including all trade secrets, pricing information, marketing information or
technical information (hereinafter referred to as the "Confidential Data"),
except for (i) a disclosure that is required by law; or (ii) information that
has been made generally available to the public by the act of one who has the
right to disclose such information; or (iii) information that has become part of
the public domain through no fault of the Employee; and (iv) was known to the
Employee prior to June 1996. Employee hereby acknowledges and agrees that the
prohibitions against disclosure of Confidential Data recited herein are in
addition to, and not in lieu of, any rights or remedies which the Company may
have available pursuant to the laws of any jurisdiction or at common law to
prevent the disclosure of confidential information, and the enforcement by the
Company of its rights and remedies
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pursuant hereto shall not be construed as a waiver of any other rights or
available remedies which the Company may possess in law or equity. Employee
acknowledges that the Company has taken reasonable and appropriate steps to
ensure the confidentiality and non-disclosure of all such Confidential Data.
For purposes of this Section the Company's and its affiliates' "current
business" shall mean owning or opening a renal dialysis center, unit or
facility.
(c) Employee further agrees that, for a period of three (3) years
after the termination of Employee's employment with the Company, Employee will
not, for his own benefit or the benefit of others, solicit any person or entity
that has or has had, or disrupt or attempt to disrupt, any relationship,
contractual or otherwise, with the Company or an affiliate of the Company
(including any patient, payor, physician, provider, managed care organization or
supplier) at any time during Employee's employment with the Company, for the
purpose of assisting, or creating such a relationship for, any business entity
that is competitive with the Company or an affiliate of the Company. For
purposes of this Section, a business entity is competitive with the Company or
an affiliate of the Company if it provides or offers any renal dialysis service
that is provided by the Company or an affiliate of the Company.
(d) Employee further agrees that, for a period of three (3) years
after the termination of Employee's employment with the Company, Employee shall
not induce, nor attempt to induce, any employee of the Company, or any of its
affiliates, to terminate such employee's association with the Company or any of
its affiliates.
(e) These post-employment covenants are considered by the parties
hereto to be fair, reasonable and integral for the protection of the Company.
The parties mutually agree that if a violation of any of these covenants occurs,
such violation or any threatened violation will cause irreparable injury to the
Company and the remedy at law for any such violation or threatened violation
will be inadequate. The parties acknowledge that these covenants will survive,
and remain in effect and enforceable after, termination of this Agreement.
(f) Employee agrees to indemnify and hold harmless the Company from
and against any and all claims, causes of action, damages and/or any other
losses suffered or incurred by the Company as a result of any breach or
purported breach by Employee of any agreement applicable to Employee which
existed prior to the time of the entering into of this Agreement. Such
obligations of Employee to indemnify and hold the Company harmless shall include
any and all costs of defense of any such claim or threatened claim, including
reasonable attorneys' fees.
7. Severability.
The parties hereto hereby expressly agree and contract that it is
not the intention of either party to violate any public policy, or any statutory
or common law, and that if any paragraph, sentence, clause or combination of the
same of this Agreement shall be in violation of the laws of any state where
applicable, such paragraph, sentence, clause or the combination of
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the same shall be void in the jurisdictions where it is unlawful, and
the remainder thereof shall remain binding on the parties hereto. It is the
intention of the parties to make the covenants of this Agreement binding only
to the extent that they may be lawfully done under existing applicable laws.
In the event that any part of any term or covenant of this Agreement is
determined by a court of law or equity to be overly broad or otherwise
unenforceable, the parties hereto agree that such court shall be empowered to
substitute, and it is the intent of the parties hereto that such court
substitute, a reasonably judicially enforceable term or limitation in the place
of such unenforceable term or covenant, and that as so modified this Agreement
shall be fully enforceable.
8. Entire Agreement; Modification.
This Agreement constitutes the entire agreement between the
parties and supersedes any and all prior understandings or agreements, and any
changes or additions hereto must be in writing and signed by both parties.
9. Assignment.
(a) The rights and benefits of Employee under this Agreement,
other than accrued and unpaid amounts due under Section 3(a) hereof, are
personal to Employee and shall not be assignable.
(b) This Agreement may not be assigned by the Company except to
an affiliate of the Company, provided that such affiliate assumes the Company's
obligations under this Agreement; provided, further, that if the Company shall
merge or effect a consolidation or share exchange with or into, or sell or
otherwise transfer substantially all its assets to, another business entity, the
Company may assign its rights hereunder to that business entity without the
consent of the Employee provided that it causes such business entity to assume
the Company's obligations under this Agreement.
10. Notice.
The references to the notice periods of certain "days" contained
in this Agreement shall mean calendar days. Any notice provided for in this
Agreement shall be delivered to Employee at the most recent address of employee
listed in the Company's then current employment records. Notice to the Company
shall be delivered to the following address: c/o Renal Care Group, Inc., 2100
West End Avenue, Suite 800, Nashville, Tennessee 37203, Attention: President.
11. Waiver.
The waiver by any party to this Agreement of a breach of any of the
provisions contained herein shall not operate or be construed as a waiver of any
subsequent breach.
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12. Disputes and Governing Law.
The Company and employee agree that any dispute arising in connection
with, or relating to, this Agreement or the termination of this Agreement, to
the maximum extent allowed by applicable law, shall be subject to resolution
through informal methods and, failing such efforts, through arbitration.
Either party may notify the other party of the existence of a dispute by
written notice to the address indicated above in Section 10. The parties shall
thereafter attempt in good faith to resolve their differences within thirty
(30) days after the receipt of such notice. If the dispute cannot be resolved
within such 30-day period, then the parties will submit the dispute for
mediation. If mediation efforts are not successful, then either party may file
a written demand for arbitration with the other party. The arbitration shall
proceed in accordance with the terms of the Federal Arbitration Act and the
rules and procedures of the American Arbitration Association. A single
arbitrator shall be appointed through the American Arbitration Association's
procedures to resolve the dispute.
The parties agree that in the event arbitration is necessary, the laws of
the State of Tennessee and any applicable federal law shall apply. The place of
the arbitration shall be Nashville, Tennessee.
The award of the arbitrator shall be binding and conclusive upon the
parties. Either party shall have the right to have the award made the judgment
of a court of competent jurisdiction in the State of Tennessee.
In the event of a dispute arising under this Agreement, the prevailing
party shall be entitled to all reasonable attorney's fees incurred in connection
with such dispute. The Company agrees, to the maximum extent permitted by law
and the By-laws of the Company, to defend and indemnify the Employee against and
to hold the Employee harmless from any and all claims, suits, losses,
liabilities, and expenses (including disputes arising under this Agreement and
including reasonable attorneys' fees and payment of reasonable expenses incurred
in defending against such claim or suite as such expenses are incurred) asserted
against the Employee for actions taken or omitted to be taken by the Employee in
good faith and within the scope of his responsibilities as an officer or
employee of the Company. If requested by the Employee, the Company shall
advance to the Employee, promptly following the Company's receipt of any such
request, any and all expenses for which indemnification is available hereunder.
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IN WITNESS WHEREOF, the Company and Employee have executed this Agreement
on the day and year first above written.
COMPANY:
RENAL CARE GROUP, INC.
By: /s/ Sam A. Brooks
-----------------------------------------
Sam A. Brooks
President
[Corporate Seal]
EMPLOYEE:
/s/ Gary Brukardt (Seal)
-----------------------------------------
Gary Brukardt
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Exhibit 10.24
DIALYSIS PROGRAM
MANAGEMENT AGREEMENT
THIS AGREEMENT is made effective this 1st day of March, 1996 ("Effective Date")
by and between The Cleveland Clinic Foundation, an Ohio non-profit corporation,
and Renal Care Group, Inc., a Tennessee corporation ("Management Company").
WITNESSETH:
WHEREAS, Management Company is engaged in the business of managing
dialysis units; and
WHEREAS, The Cleveland Clinic Foundation desires that Management
Company manage its current outpatient dialysis services program ("UNIT")
pursuant to this Agreement; and
WHEREAS, Management Company agrees to manage the UNIT under the name,
The Cleveland Clinic Foundation;
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings contained in this Agreement, The Cleveland Clinic Foundation and
Management Company agree as follows:
I. AUTHORITY OF THE PARTIES
1.1 Ultimate Control. The Cleveland Clinic Foundation shall at all
times exercise ultimate authority and control over the policies and assets of
the UNIT, and shall retain the ultimate authority and responsibility regarding
the powers, duties, and responsibilities vested in The Cleveland Clinic
Foundation with respect to the UNIT by applicable law and regulations. In
accordance with the intent of the parties, Management Company shall, subject to
the approval of The Cleveland Clinic Foundation, establish general
administrative policies which shall be carried out by Management Company as
specified under this Agreement.
1.2 Grant of Day-to-Day Management Authority. Subject to the
foregoing, and to supervision of all professional medical care by the Medical
Director as provided below, The Cleveland Clinic Foundation hereby grants and
delegates to Management Company the authority to supervise and manage the
day-to-day operations of the UNIT and to perform the specific functions set out
in this Agreement. The Cleveland Clinic Foundation shall cooperate with
Management Company in order to facilitate Management Company's efficient
performance of its management responsibilities under this Agreement.
<PAGE> 2
1.3 Relationship of the Parties. The parties hereto intend by this
Agreement solely to effect the appointment of Management Company for
administrative management of UNIT as described herein, and does not extend to
or involve any other activities of either The Cleveland Clinic Foundation or
Management Company, except as set forth in Section 1.4 herein. No other
relationship is intended to be created between the parties hereto and nothing
in this Agreement shall be construed as to make either party hereto the
employer or employee of the other, agent or principal of the other, the joint
venturer or partner of the other, or have the right to, or control of, or in any
manner conduct the other's business; other than as is herein explicitly
provided.
1.4 Exclusivity. Without the prior consent of The Cleveland Clinic
Foundation, Management Company shall not provide outpatient dialysis management
services other than to The Cleveland Clinic Foundation during the term of this
Agreement within the area outlined on Exhibit A attached hereto and made a part
hereof; provided, however, that this shall not prohibit the Management Company
from providing such services to MetroHealth System (which shall include its
affiliated entities) in Cleveland, Ohio.
II. MANAGEMENT PERSONNEL
2.1 Administrator.
2.1.1 Management Company shall hire and appoint an administrator
for the UNIT ("Administrator"), who shall be an employee of Management Company.
Notwithstanding the above, the appointment of the Administrator shall be
subject to the approval of The Cleveland Clinic Foundation.
2.1.2 The Administrator shall have general day-to-day
responsibility for the management of the UNIT, other than those duties
specifically delegated to the Medical Director pursuant to this Agreement.
2.2 Medical Director.
2.2.1 The Cleveland Clinic Foundation, on the recommendation of
the Director of the Division of Nephrology at The Cleveland Clinic Foundation,
shall hire or retain and appoint, and may remove, the Medical Director of the
UNIT, who shall be and remain an employee of The Cleveland Clinic Foundation.
2.2.2 The Medical Director shall supervise all professional
medical services performed in the UNIT and shall undertake overall coordination
of utilization review, quality assurance, and related functions as directed by
The Cleveland Clinic Foundation. The Medical Director may perform other duties
as The Cleveland Clinic Foundation may deem appropriate, and which do not
interfere with the performance of the Medical Director's duties under this
agreement. The Cleveland Clinic Foundation shall be responsible for the
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compensation, including fringe benefits, expenses, including professional
liability insurance, and other support and operating costs of the Medical
Director.
2.3 Other Personnel. The Cleveland Clinic Foundation and Management
Company each shall, at its sole expense, employ, pay, and supervise some other
personnel reasonably necessary to perform each party's duties under this
Agreement, and in such party's discretion may remove and/or reassign such other
personnel, and locate such personnel at such places as are appropriate.
Subject to the prior approval of the Medical Director and in accordance with
the terms of the Annual Operating Plan, as further described in Section 3.2,
the Management Company shall provide certain personnel, such as registered
nurses, for patient care purposes (hereinafter "Management Company Patient Care
Personnel"). The Cleveland Clinic Foundation and Management Company shall each
be responsible for the compensation, including fringe benefits, expenses, and
other support and operating costs of the personnel it employs; provided,
however, that Management Company shall be reimbursed by The Cleveland Clinic
Foundation, as set forth in the Annual Operating Plan, approved by The
Cleveland Clinic pursuant to Section 3.2 hereon, for the cost of the Management
Company Health Care Personnel assigned to and performing services at the Unit.
2.4 In the event either party reasonably determines that any personnel
provided by the other party should be terminated or re-assigned as a result of
lack of competence, conduct or behavior detrimental to patient care, the party
employing such individual shall promptly review such determination and make
reasonable best efforts to take appropriate personnel action, in accordance
with its customary personnel policies and procedures.
III. ADMINISTRATIVE SERVICES
3.1 General Responsibilities and Services. Management Company shall
perform those services as set forth in this Article III, and all related
functions as are reasonably necessary for the effective management of the
operations of the UNIT. Management Company shall establish operational
policies for the UNIT, subject to The Cleveland Clinic Foundation's approval,
and shall implement those policies. Management Company shall perform its
services diligently in accordance with generally recognized standards of good
management in the health care industry relating to dialysis centers, in the
reasonable exercise of Management Company's judgment, and in accordance with
performance standards to be developed by Management Company and updated
annually, which standards will be subject to the review and approval of The
Cleveland Clinic Foundation. Nothing in this Agreement shall be construed to
require or permit the practice of medicine by Management Company or any
employee thereof.
3.2 Preparation and Adoption of Annual Operating Plan. Management
Company shall prepare, for The Cleveland Clinic Foundation's approval, an
annual operating plan ("Annual Operating Plan") for each fiscal year or part
thereof during which this Agreement is in effect. The Annual Operating Plan
shall set out major operating objectives and anticipated revenues and expenses
of the UNIT and will be presented to The Cleveland Clinic
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Foundation for its acceptance, rejection, or modification not later than three
(3) months prior to the beginning of each fiscal year, except that the first
Annual Operating Plan shall be presented to The Cleveland Clinic Foundation
prior to the execution of this Agreement. After the Annual Operating Plan has
been modified to incorporate any changes made by The Cleveland Clinic
Foundation, and subject to the provisions of this Agreement, it shall serve as
a guide for the operation of the UNIT. The Annual Operating Plan will include
information with respect to the UNIT's major business objectives, anticipated
revenues and expenses, capital expenditures, cash flow, enrollment and staffing
projections, and a discussion of anticipated changes, if any, in utilization,
patient charges, and other significant criteria identified by The Cleveland
Clinic Foundation. Management Company may, from time to time, propose
modifications to the Annual Operating Plan which it deems necessary or
advisable, which modifications shall be incorporated into the Annual Operating
Plan upon approval by The Cleveland Clinic Foundation. The Cleveland Clinic
Foundation may also, from time to time, propose modifications to the Annual
Operating Plan which it deems necessary and advisable, which modifications
shall, after consultation with Management Company, be incorporated into the
Annual Operating Plan.
3.3 Billing and Collection of Accounts. Management Company shall,
at its expense, design, implement and maintain a billing and collection system
and procedures appropriate to the UNIT's operations using the UNIT's End State
Renal Dialysis ("ESRD") Number. These procedures shall be in accordance with
billing and collection policies approved by The Cleveland Clinic Foundation.
Management Company shall supply directly to The Cleveland Clinic Foundation all
patient billing and collection data produced or administered by Management
Company. The Cleveland Clinic Foundation shall retain sole authority to bill
and to take prompt action to collect accounts owed to the UNIT in The Cleveland
Clinic Foundation's or the UNIT's name and on The Cleveland Clinic Foundations'
behalf, and to take possession of and endorse in The Cleveland Clinic
Foundation's name any cash, notes, checks, money orders, insurance payments,
and other instruments received in payment for services rendered by the UNIT.
3.4 Deposit and Disbursement of Funds.
3.4.1 Management Company shall promptly deposit all funds it
receives on behalf of The Cleveland Clinic Foundation in federally-insured
accounts established by The Cleveland Clinic Foundation in The Cleveland
Clinic Foundations's name with banks or other appropriate depository
institutions. Management Company shall pay for all operating expenses of the
UNIT as set forth in the Annual Operating Plan approved by The Cleveland Clinic
Foundation, and shall be reimbursed by The Cleveland Clinic Foundation on an
actual cost basis for all approved expenditures. Management Company shall
request reimbursement from The Cleveland Clinic Foundation on a fortnightly or
less frequent basis and shall accompany each request for reimbursement with an
itemized statement of the actual expenditures to be reimbursed. Disbursements
for approved expenses must be supported by vouchers, receipts, or other
reasonable records duly approved by the Administrator or his/her
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delegate, and Management Company shall provide copies of these to The Cleveland
Clinic Foundation upon request.
3.5 Accounting Records and Reports. Management Company shall implement
and maintain an appropriate accounting system adequate for the UNIT's needs and
shall cause to be delivered to The Cleveland Clinic Foundation monthly
unaudited financial statements for the UNIT. These statements shall be
prepared on an accrual basis in accordance with generally accepted accounting
principles. These financial statements shall be delivered to The Cleveland
Clinic Foundation on or before the tenth (10) business day of the following
month, commencing March, 1996. Management Company will also prepare and
deliver to The Cleveland Clinic Foundation such other reports as are necessary
to manage the UNIT including, but not limited to, quarterly service reports
(analyzing the utilization and cost of dialysis services and supplies provided,
and quarterly billing reports. Within twelve (12) days after the end of each
Cleveland Clinic Foundation's fiscal year, Management Company shall prepare and
deliver to The Cleveland Clinic Foundation unaudited financial statements. Any
financial books and records of the Management Company that relate to its
operation of the UNIT shall be available for inspection by The Cleveland Clinic
Foundation or its delegates during normal business hours or otherwise upon
reasonable notice. With respect to all such reports and financial statements,
Management Company shall be entitled to supplement such reports and financial
statements from time to time as deemed necessary by Management Company.
3.6 Ancillary and Other Agreements. On behalf of The Cleveland Clinic
Foundation, Management Company shall negotiate and enter into such
administrative agreements, with terms not exceeding one (1) year (unless a
longer term is approved in writing by The Cleveland Clinic Foundation prior to
execution), as Management Company reasonably deems necessary or advisable for
the furnishing of utilities, services, concessions, and non-physician services
and supplies for the maintenance and operation of the UNIT, other than those
directly provided by Management Company hereunder.
3.7 Other Agreements. Except as provided in the approved Annual
Operating Plan or as otherwise specifically provided herein, Management Company
shall not enter into any contracts, agreements, leases, debts, obligations, or
legal commitments on behalf of The Cleveland Clinic Foundation or make any
capital expenditure involving an expense in excess of $10,000 on behalf of the
UNIT, or dispose of any asset of the UNIT having a value of more than $10,000,
except as approved in writing prior to execution by The Cleveland Clinic
Foundation.
3.8 Limitation of Contractual Liability. In the event this Management
Agreement is terminated by either party as set forth in Section VIII, The
Cleveland Clinic Foundation's sole liability under agreements entered into by
Management Company pursuant to Sections 3.6 and 3.7 shall be limited to payment
for all supplies and services received and accepted by The Cleveland Clinic
Foundation. In addition, the Management Company shall, upon request from The
Cleveland Clinic Foundation, use its best efforts to promptly terminate such
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agreements. Upon receipt of payment for such supplies and services, Management
Company shall hold The Cleveland Clinic Foundation harmless for any other
claims or liabilities alleged or brought by third parties related to such
agreements.
3.9 Regulatory Requirements. Management Company shall prepare and submit
on behalf of the UNIT all necessary reports and filings, including cost and
utilization reports, supporting data and other material required in connection
with reimbursement under Medicare, Medicaid, Nationwide Insurance Company, and
other third-party payment contracts and programs in which the UNIT may from
time to time participate. In addition, Management Company shall take all other
appropriate actions necessary for regulatory compliance or otherwise advisable
in order that The Cleveland Clinic Foundation be in compliance with any
requirements of local, state, or federal agencies having jurisdiction over the
UNIT's operations, or in order to comply with requirements of payors, provided
that Management Company shall consult with The Cleveland Clinic Foundation on
an ongoing basis concerning these functions and compliance.
IV. DUTIES OF THE CLEVELAND CLINIC FOUNDATION
AND MANAGEMENT COMPANY
4.1 Data and Information. The Cleveland Clinic Foundation shall provide
to Management Company without charge all necessary and relevant data and
information in the possession of The Cleveland Clinic Foundation as shall be
reasonably required or requested by Management Company in order to enable it to
perform its duties hereunder.
5.1 Amount of Compensation. In consideration of the services to The
Cleveland Clinic Foundation to be provided by Management Company pursuant to
this Agreement, Management Company will receive a monthly management fee of
Seventy-Six Thousand, Seven Hundred and Thirty-Nine Dollars ($76,739.00) for
each contract month of this Agreement. Such fee represents payment to
Management Company for the general and administrative overhead and executive
management of Management Company. In addition, The Cleveland Clinic Foundation
shall reimburse Management Company for the approved actual operating expenses
of the UNIT as set forth in the Annual Operating Plan approved by The Cleveland
Clinic Foundation pursuant to Section 3.2 hereof. The management fee shall be
paid in monthly installments, payable on or before the tenth (10th) business
day of the following month, commencing as of the Effective Date.
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VI. OWNERSHIP OF WORK PRODUCT
6.1 Work Product
6.1.1 All operating procedures, protocols, information
systems, operating data, patient lists, computer data base, reports, and other
non-public proprietary business systems or information pertaining to or owned
by The Cleveland Clinic Foundation used or obtained by Management Company in
performing its management activities under this Agreement, with respect to the
UNIT, shall be and remain the exclusive property of The Cleveland Clinic
Foundation. All operating procedures, protocols, information systems, computer
data base programs, and other non-public proprietary business systems or
information not uniquely pertaining to The Cleveland Clinic Foundation, that
are or were created, developed, or obtained by Management Company from sources
other than The Cleveland Clinic Foundation shall be the exclusive property of
Management Company. Management Company acknowledges that any and all Cleveland
Clinic Foundation business, patient or financial data residing in any
Management Company database or information system is, and shall remain, the
exclusive property of The Cleveland Clinic Foundation.
6.1.2 Management Company shall not disclose or use for any
other purpose other than for the performance of its obligations hereunder any
confidential or proprietary data, reports, or other information or materials
concerning The Cleveland Clinic Foundation, the UNIT, or its products or
services without the prior written consent of The Cleveland Clinic Foundation,
except as otherwise required by law or regulation applicable to The Cleveland
Clinic Foundation or Management Company.
6.2. Licensure of Service Mark.
6.2.1 Management Company acknowledges The Cleveland Clinic
Foundation's exclusive right, title, and interest in and to the trade names and
service marks related to The Cleveland Clinic Foundation, and all related
names, symbols, trade names, and service marks now owned by The Cleveland
Clinic Foundation (the "Marks"). The Marks will not be altered or changed by
Management Company without the prior written approval of The Cleveland Clinic
Foundation. Management Company shall use the Marks only on connection with the
operation and management of the UNIT, and in a manner which shall be subject to
the prior approval of The Cleveland Clinic Foundation. The parties agree that
violations of this Section will result in irreparable harm and that, in
addition to any other rights and remedies provided by law, The Cleveland Clinic
Foundation shall be entitled to injunctive relief to enforce Management
Company's obligations under this Section.
6.2.2 With The Cleveland Clinic Foundation's prior written
approval, the Management Company may, on a non-exclusive basis, use the Marks
in Management Company's service area in connection with the operation of the
UNIT while this Agreement remains in effect. The Cleveland Clinic Foundation
shall have the right to use the marks on its own behalf as well.
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6.2.3 The Cleveland Clinic Foundation shall defend or settle
at its expense any litigation or claim which may be instituted against The
Cleveland Clinic Foundation insofar as such litigation or claim solely contests
the ownership of the Marks.
VII. INSURANCE AND INDEMNIFICATION
7.1 Each party (the"Indemnitor") shall indemnify, save and hold
harmless the other party (the "Indemnitee") from and against any and all
judgments, damages, costs and expenses, including reasonable attorney's fees,
paid or incurred by the Indemnitee in any claim, action or proceeding for damage
to property, injury or death to person, or otherwise, arising solely out of the
proven negligent acts or omissions of Indemnitor in Indemnitor's performance
under this Agreement. Indemnitee obligations as set forth in the preceding
sentence are conditioned upon (i) Indemnitee promptly notifying Indemnitor of
any claim, demand or action, or any incident of which Indemnitee has actual and
constructive knowledge, which may reasonably result in a claim, demand or
action, and for which Imdemnite will look to Indemnitor for indemnification
under this Section, (ii) Indemnitee, its directors, officers, employees and
servants, shall reasonably and in good-faith cooperate with Indemnitor in
Indemnitor's investigation and review of any such claim, demand, action or
incident, and (iii) Indemnitee not entering into any admissions, agreements or
settlements which may affect the rights of Indemnitee or Indemnitor without the
prior written consent and approval of Indemnitor. Indemnitor reserves the
right, in its sole discretion, to assume the defense of Indemnitee in any such
claim, action or proceeding.
7.2 The Indemnitee shall have the right to employ separate counsel
in any such action and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnitee unless (a)
employment of such counsel and payment of the fees and expenses thereof by the
Indemnitor has been specifically authorized by the Indemnitor, or (b) in the
reasonable judgment of such Indemnitee, employment of such counsel is necessary
because the claim or defense for which such counsel is employed is inconsistent
or in conflict with the claims or defenses of the Indemnitor, or (c) the
Indemnitee shall have reasonably concluded that there may be claims or defenses
available to it that are different from or in addition to those available to
the Indemnitor, in any of which events such fees and expenses shall be borne by
the Indemnitor, but in any such event, the Indemnitor shall not have the right
to direct the defense of such action on behalf of the Indemnitee. The
Indemnitor shall not be liable for any settlement of any such action effected
without the Indemnitor's consent by the Indemnitee, but if settled with consent
of the Indemnitor or if there shall be a final judgment for the plaintiff in
such action against the Indemnitee or the Indemnitor with or without the
consent of Indemnitor, the Indemnitor agrees to indemnity and hold harmless the
Indemnitee to the extent provided herein.
7.3 Each party shall procure and maintain for the term of this
Agreement professional liability insurance in a minimum amount of $3,000,000
per incident/$3,000,000 annual aggregate. Each party shall also provide the
other with certificate or affidavit of said coverage. Each party will notify
the other of any cancellation or significant change thirty
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(30) days prior to such cancellation or change. If such coverage is written on
a claims-made form following termination of this Agreement, coverage shall
survive for a period of no less than five (5) years. Coverage shall provide
for a retroactive date of placement coinciding with the Effective Date of this
Agreement. The Cleveland Clinic Foundation shall reimburse Management Company
for that portion of the reasonable cost of such insurance attributable to
Management Company's Health Care Personnel assigned to or performing services
on a full-time basis at the UNIT, provided such costs are set forth in the
Annual Operating Plan, approved by The Cleveland Clinic Foundation, pursuant to
Section 3.2 hereof.
The Cleveland Clinic Foundation, at its expense, will provide
professional liability insurance coverage for the Medical Director of the UNIT
and for its other employees providing services to the UNIT hereunder.
7.4 The Cleveland Clinic Foundation, at its expense, shall provide
fire and extended coverage insurance with respect to the UNIT and its contents.
Management Company shall be named as an additional insured under such policy.
The Cleveland Clinic Foundation also shall obtain general liability insurance
coverage in a minimum amount of $1,000,000 per incident/$3,000,000 annual
aggregate with respect to its ownership of the UNIT. Management Company shall
obtain, at its expense, general liability insurance coverage in a minimum
amount of $1,000,000 per incident /$3,000,000 annual aggregate with respect to
its actions as manager of the UNIT.
Management Company shall procure and maintain workers' compensation
insurance meeting statutory requirements and employer liability insurance
coverage in commercially reasonable amounts with respect to the Management
Company's employees. The Cleveland Clinic Foundation shall reimburse
Management Company for that portion of the reasonable cost of such insurance
attributable to Management Company's Health Care Personnel assigned to or
performing services on a full-time basis at the UNIT, provided such costs are
set forth in the Annual Operating Plan, approved by The Cleveland Clinic
Foundation, pursuant to Section 3.2 hereof.
7.5 Management Company shall be solely responsible for the hiring,
compensation, termination and all matters relating to any persons, companies or
corporations employed by Management Company, for any reason whatsoever in
regard hereto, arising herefrom or otherwise, and shall indemnify and hold The
Cleveland Clinic Foundation harmless from any liability arising from the
employment by Management Company of any such persons or companies, including
any liability arising under the Civil Rights Act of 1964, as amended, the
Americans with Disabilities Act of 1990, the Age Discrimination in Employment
Act, and any other relevant federal, state, and local laws or regulations.
7.6 No individual whose compensation for services is paid by
Management Company shall be in any way, directly or indirectly, expressly or by
implication, deemed an employee of The Cleveland Clinic Foundation or any
related entity, nor shall any such individual, be deemed to be employed by The
Cleveland Clinic Foundation or any related
9
<PAGE> 10
entity for the purpose of any payroll taxes, income tax withholding, or
contributions imposed by any federal, state, or local law or regulations, with
respect to employment, workers' compensation, or otherwise. Management Company
accepts exclusive liability for any and all payroll taxes, income tax
withholding or contributions, in any form whatsoever, imposed by federal, state
or local law or regulations, not only with respect to itself, but also with
respect to any and all of its agents or employees.
VIII. TERM AND TERMINATION
8.1 Term. The term of this Agreement shall be one (1) year, unless
earlier terminated as hereinafter set forth. This Agreement may be terminated
at any time without cause by either: i) mutual written consent of the parties;
or ii) The Cleveland Clinic Foundation providing sixty (60) days prior written
notice to the Management Company.
8.2 Termination for Cause.
8.2.1 Bankruptcy Termination. Management Company may
terminate this Agreement upon the "bankruptcy" of The Cleveland Clinic
Foundation and The Cleveland Clinic Foundation may terminate this Agreement
upon the "bankruptcy" of Management Company, in each case upon written notice
thereof to the other party. As used in this Section, "bankruptcy" of a party
means: the filing of a petition commencing a voluntary case against it under
the Bankruptcy Code; a general assignment by it for the benefit of creditors;
its insolvency; its inability to pay its debts as they become due; the filing
by it of any petition or answer in any proceeding seeking for itself or
consenting to, or acquiescing in, any insolvency, receivership, composition,
readjustment, liquidation, dissolution, or similar relief under any present or
future statute, law, or regulation, or the filing by it of an answer or other
pleading admitting or failing to deny or to contest the material allegations of
the petition filed against it in any such proceeding; its seeking or consent
to, or acquiescence in the appointment of, any trustee, receiver, or liquidator
of it or any material part of its property; or the commencement against it of
any involuntary case under the Bankruptcy Code, or a proceeding under any
receivership, composition, readjustment, liquidation, insolvency, dissolution,
or like law or statute, which case or proceeding is not dismissed or vacated
within sixty (60) days from commencement.
8.2.2 Termination for Breach or Default. If either party
("Defaulting Party") fails substantially to perform any of its material
obligations under this Agreement, the other party ("Non-Defaulting Party")
shall have the right to give the Defaulting Party a "Notice of Default." The
Notice of Default shall set forth the nature of the obligation that the
Defaulting Party has not performed. If, within ten (10) business days
following the giving of the Notice of Default, the Defaulting Party in good
faith commences to cure the default, and thereafter diligently and continuously
pursues the curing to completion within thirty (30) days of such notice, unless
the default is impossible to cure within thirty (30) days, in which event the
defaulting party must continuously and diligently pursue a cure to completion
within a reasonable time, it shall be deemed that the Notice of Default has not
been given and the
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<PAGE> 11
Defaulting Party shall not lose any of its rights under this Agreement by
reason thereof, although such Defaulting Party may be required to pay interest
relating to such default if so required by the terms of this Agreement. If,
within the ten (10) day notice period, the Defaulting Party does not commence
in good faith the curing to the default or does not thereafter diligently and
continuously prosecute and achieve the curing to completion within the
applicable cure period, the Non-Defaulting Party shall have the right to
terminate this Agreement upon ten (10) days' written notice to the Defaulting
Party.
8.3 Rights Upon Termination.
8.3.1 The right to terminate this Agreement shall be in
addition to any other remedy available on account of any breach or default.
8.3.2 Upon termination of this Agreement for any reason, and
notwithstanding Section 8.2 hereof, Management Company shall, for a period not
to exceed ninety (90) days, assist The Cleveland Clinic Foundation in effecting
an orderly transfer of all of its management functions, including, without
limitation, billing, collections, and maintenance of data, so as to prevent or
minimize disruption of the UNIT's operations. In addition, upon prior
consultation with Management Company, The Cleveland Clinic Foundation shall have
the right to solicit all non-officer Management Company employees in the event
of a termination by Management Company hereunder. Such assistance shall be
rendered in a manner consistent with usual and customary practice and The
Cleveland Clinic Foundation's needs.
IX. MISCELLANEOUS
9.1 Assignment. This Agreement shall not be assigned by either
party without the prior written consent of the other party.
9.2 Further Documents. The parties do hereby covenant and agree
that they and their successors and assigns will execute any and all
instruments, releases, assignments, and consents which may reasonably be
required of them in order to carry out the provisions of this Agreement.
Notwithstanding expiration or termination of this Agreement, each party hereto
shall take such further actions as are necessary to fulfill its existing
obligations, including those in Section 3.2, Section 6.1, and Article X.
9.3 Effect on Successors. Without in any way limiting the
provisions of Section 9.1, this Agreement shall be binding upon, enforceable by,
and inure to the benefit of the parties and their permitted successors and
assigns.
9.4 Entire Agreement. This Agreement contains the entire agreement
between the parties relating to the subject matter of this Agreement. The
terms of this Agreement may be modified or amended only by a writing signed by
all parties.
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9.5 Governing Law. This Agreement shall be governed by and
construed, interpreted, and enforced pursuant to the laws of the State of Ohio.
9.6 Notices. All notices under this Agreement by any party to the
other shall be in writing. All notices, demands, and requests shall be deemed
given when mailed, postage prepaid, registered or certified mail, return
receipt requested, or sent by prepaid express delivery service:
(a) TO: The Cleveland Clinic Foundation
9500 Euclid Avenue; Desk A-101
Cleveland, Ohio 44195
Attention: Dr. Vincent Dennis
With copies to:
General Counsel; Desk H-18
(b) TO: Renal Care Group, Inc.
University Division
1801 West End Avenue, Suite 1100
Nashville, TN 37203
Attention: Virginia Long, Vice President
With copies to Stuart Campbell, Esq.
Fares, Warfield & Kanaday
17th Floor
Third National Bank Building
201 Fourth Avenue, North
Nashville, TN 37219
9.7 No Waiver. The future of any party to insist at any time upon
the strict observance or performance of any of the provisions of this Agreement
shall not impair any such right or remedy or be construed to be a waiver or
relinquishment. Every right and remedy given by this Agreement to the parties
may be exercised from time to time and as often as may be deemed expedient by
the parties.
9.8 Enforceability, Severability. The invalidity or
unenforceability of any term or provision of this Agreement shall not, unless
otherwise specified, affect the validity or enforceability of any other term or
provision, unless the term or provision is material and its invalidity or
unenforceability results in a substantial economic detriment to The Cleveland
Clinic Foundation or Management Company, in which event the parties hereto
shall negotiate in good faith a resolution which to the maximum extent feasible
preserves to each party the right and benefits contemplated hereunder.
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<PAGE> 13
9.9 Confidentiality. Each party hereto covenants and agrees that
it shall not disclose the terms of this Agreement or any agreement
supplementing this Agreement to third parties, except as and to the extent
disclosure is required by law, or required for the performance of its
obligations hereunder or under related agreements, or as necessary or
appropriate in dealing with the accountants, attorneys, and other
representatives of the respective parties.
9.10 Medicare Access to Books and Records. In the event, and only
in the event, that Section 952 of P.L. 96-499 [(42 U.S.C. Section 1395 x
(v)(1)(1)] is applicable to this Agreement, each party agrees as follows:
a. Until the expiration of four (4) years after the
furnishing of such services pursuant to this Agreement, each party shall make
available, upon written request, to the Secretary of the Federal Department of
Health and Human Services or, upon request to the Comptroller General of the
United States, or any of its duly authorized representatives, this Agreement,
and books, documents and records of each party that are necessary to certify
the nature and extent of the cost of services provided pursuant to this
Agreement; and
b. If any party carries out any of the duties of this
Agreement through a subcontract, with a value or cost of Ten Thousand Dollars
($10,000) or more over a twelve (12) month period, with a related organization,
such subcontract shall contain a clause to the effect that until the expiration
of four (4) years after the furnishing of such services pursuant to such
subcontract, the related organization shall make available, upon written
request, to the Secretary of the Federal Department of Health and Human
Services or, upon request, to the Comptroller General of the United States, or
any of its duly authorized representatives, the subcontract, and books,
documents and records of such organization that are necessary to verify the
nature and extent of the cost of services provided pursuant to such
subcontract;
c. Each party shall notify the other parties immediately
of any request for access to books and records described above. In addition,
each party shall indemnify, defend and hold the other party harmless from any
liability arising out of any refusal by the refusing party or its
subcontractors to grant access to books and records as required above.
9.11 Resolution of Disputes/Binding Arbitration. In the event that
a dispute, the resolution of which is not already provided herein, arises
between the Management Company and The Cleveland Clinic Foundation, the parties
agree that such dispute shall first be submitted to the Chief Executive
Officers of both parties. If such dispute is not resolved to the parties'
satisfaction, said dispute shall be submitted to a panel of arbitrators in
Cleveland, Ohio, who shall be governed the rules of the American Arbitration
Association and whose decision shall be binding and conclusive on the parties.
Costs associated with such arbitration shall be borne proportionate to the
arbitrators' finding of fault.
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X. GOVERNMENTAL APPROVALS
The Management Group and The Cleveland Clinic Foundation acknowledge
that they have, in good faith, made reasonable efforts to comply with any
applicable restrictions under the laws of the United States of America or the
State of Ohio with respect to the practice of medicine and relationships
between physicians and management companies. In the event that: (a) any
applicable licensing, administrative or governmental agency, authority or
office, or any court of competent jurisdiction finds, pursuant to a final
nonappealable determination or order, that any aspect of this Agreement or any
transaction contemplated by this Agreement does or may violate applicable
prohibitions or restrictions with respect to the practice of medicine by
unlicensed persons or relationships between management corporations and
physicians; or (b) any party to this Agreement has reasonable belief that such
findings may be made, then the Management Company and The Cleveland Clinic
Foundation shall use their best efforts to reform or reorganize the structure
of their relationship described in this Agreement so that such violation or
alleged violation no longer exists; provided, however, that notwithstanding
such efforts and reformation or reorganization, in the event of (a) above,
either party may elect to terminate this Agreement by proving sixty (60) days
prior written notice, and upon such termination, neither party shall have any
liability to the other party with respect to this Agreement except incurred
prior to termination or with respect to such violation or alleged violation to
the extent that Hospital and Foundation restructure or reorganize their
relationship, they shall do so to preserve to the greatest extent possible the
economic relationship between them.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
THE CLEVELAND CLINIC FOUNDATION RENAL CARE GROUP, INC.
By: /s/ Frank L. Lordeman By: /s/
---------------------------- --------------------------------
FRANK L. LORDEMAN
Title: CHIEF OPERATING OFFICER Title: Chief Medical Officer
------------------------ Director, University Division
Renal Care Group
--------------------------------
APPROVED AS TO FORM
COF - Office of
General Counsel
By /s/ Donald W. Rowan
---------------------------
Date 3/17/96
-------------------------
--------------------------------
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EXHIBIT A
EXCLUSIVE SERVICE AREA
CUYAHOGA, LAKE, SUMMIT, GEAUGA, LORAIN, HURON AND ERIE COUNTIES
15
<PAGE> 1
EXHIBIT 11.1
RENAL CARE GROUP, INC. (OF DELAWARE)
STATEMENT RE PRO FORMA COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED PRO FORMA)
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ------------------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
Common Stock issued to Founders............................ 4,834,000 4,834,000
Common Stock issued to Public.............................. 3,318,000(1) 4,485,000
Common Stock issued to acquired entities................... 2,928,000 2,928,000
---------- ----------
Common Stock outstanding..................................... 11,080,000 12,247,000
Treasury Stock Method of Options and Warrants................ -- 840,000
---------- ----------
Average weighted shares outstanding.......................... 11,080,000 13,087,000
========== ==========
ProForma Net Income.......................................... $ 7,129,000 $5,300,000
========== ==========
ProForma Earnings per Share.................................. $ 0.64 $ 0.40
========== ==========
</TABLE>
- ---------------
(1) Excludes 1,167,000 shares the proceeds of which will be used for general
corporate purposes.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated October 8, 1996 with respect to the supplemental
consolidated financial statements of Renal Care Group, Inc., the use of our
reports dated September 30, 1996 with respect to the combined financial
statements of Renal Care Group, Inc. (of Tennessee) and Three Unrelated
Businesses to be Acquired and the use of our reports dated May 15, 1996 with
respect to the combined financial statements of Kidney Care, Inc. et al. in the
Registration Statement (Form S-1) and the related Prospectus of Renal Care
Group, Inc. for the Registration of 3,000,000 shares of its common stock.
/s/ Ernst & Young LLP
Nashville, Tennessee
October 8, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Tyler Nephrology Associates, P.A.
We consent to the reference to our firm under the caption "Experts", and to
the use of our reports on the financial statements of Tyler Nephrology
Associates, P.A. to be included in the Form S-1 Registration Statement of Renal
Care Group, Inc.
/s/ Henry & Peters, P.C.
Tyler, Texas
October 7, 1996
<PAGE> 1
EXHIBIT 23.4
CONSENT OF ALLEN, GIBBS & HOULIK, L.C., INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Combined Financial Data" and to the use of our report dated July 15,
1995, relating to the combined financial statements of Kansas Nephrology
Associates, P.A. and Kansas Dialysis Supply, Inc. and to the inclusion of those
financial statements audited by our firm in the combined financial statements
referred to in the audit report of Ernst & Young LLP, dated September 30, 1996
in the Registration Statement (Form S-1) and the related Prospectus of Renal
Care Group, Inc.
/s/ Allen, Gibbs & Houlik, L.C.
Wichita, Kansas
October 7, 1996
