<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1996
REGISTRATION NO. 333-13813
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
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>
---------------------
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. [ ]
---------------------
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
2,500,000 SHARES
(LOGO) RENAL CARE GROUP
COMMON STOCK
Of the 2,500,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of Renal Care Group, Inc. ("Renal Care Group" or the "Company")
offered hereby (the "Offering"), 1,063,598 shares are being offered by the
Company and 1,436,402 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 is
quoted on the Nasdaq National Market System (the "Nasdaq Stock Market") under
the symbol "RCGI." On November 18, 1996, the last sale price of the Common Stock
as reported by the Nasdaq Stock Market was $32.25 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.................. $32.00 $1.52 $30.48 $30.48
Total(3)................... $80,000,000 $3,800,000 $32,418,467 $43,781,533
===================================================================================================
</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 $600,000.
(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day over-allotment option to purchase up to an additional 281,250 and
93,750 shares of Common Stock, respectively, 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," "Proceeds to Company" and "Proceeds to Selling
Stockholders" will be $92,000,000, $4,370,000, $40,990,967 and $46,639,033,
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
November 22, 1996.
EQUITABLE SECURITIES CORPORATION
HAMBRECHT & QUIST
MORGAN KEEGAN & COMPANY, INC.
NEEDHAM & COMPANY, INC.
The date of this Prospectus is November 19, 1996
<PAGE> 3
RENAL CARE GROUP CENTER LOCATIONS
MAP
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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 ("THE EXCHANGE ACT"). 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 76
outpatient dialysis centers in 11 states and manages an additional ten dialysis
centers in five states, six of which are 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 44
hospitals, staff-assisted dialysis services to 37 skilled nursing facilities and
physician practice management services to 16 of the 62 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 approximately 2,800 dialysis centers in the United States at the end
of 1995. The Company believes that approximately 45% were owned by multi-center
dialysis companies, 25% were owned by independent physicians and other companies
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 all such
patients other than those who receive a transplant (approximately 6% of ESRD
patients annually). Since 1972, individuals with ESRD who are eligible for
Social Security 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 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
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<PAGE> 5
illnesses to benefit from this life-sustaining treatment. The Company believes
these trends will result in 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.
In October 1996, the Company acquired a dialysis company in Anniston,
Alabama and began managing, with the right to develop, a dialysis facility in
Bay City, Texas, which together serve an aggregate of approximately 200
patients.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,063,598 shares
Common Stock offered by the Selling
Stockholders............................... 1,436,402 shares
Common Stock to be outstanding after the
Offering(1)................................ 13,689,552 shares
Use of proceeds.............................. For general corporate purposes, which may
include potential future acquisitions. See
"Use of Proceeds."
Nasdaq Stock Market symbol................... RCGI
</TABLE>
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(1) Excludes (i)1,912,993 shares subject to options outstanding at a weighted
average exercise price of $20.12 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 AND STATISTICAL 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 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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,(1) SEPTEMBER 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 $84,749 $97,363 $97,363
Patient care costs......... 58,314 75,366 80,417 79,949 58,956 68,124 68,124
General and administrative
expenses................ 6,799 12,616 12,866 15,466 9,775 9,860 9,860
Provision for doubtful
accounts................ 2,010 2,914 3,995 3,995 2,775 1,835 1,835
Depreciation and
amortization............ 2,416 3,414 3,661 3,914 2,824 3,370 3,370
Merger expenses............ -- -- -- -- -- 1,960 1,960
------- -------- -------- -------- ------- ------- -------
Income from operations..... 10,903 16,360 14,390 12,005 10,419 12,214 12,214
Income before income
taxes................... 10,443 15,714 13,377 11,499 9,813 12,514 12,514
Net income................. 7,129 7,838
Earnings per share......... $ 0.64(4) $ 0.59
Weighted average shares
outstanding............. 11,091(4) 13,207
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED(5)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................. $24,226 $ 56,044
Total assets.................................................... 88,779 120,597
Total debt...................................................... 6,638 6,638
Stockholders' equity............................................ 54,104 85,922
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATISTICAL DATA:
Treatments(6).......................... 470,035 598,274 624,988 465,637 510,360
Patients at period-end(7).............. 3,697 4,063 4,246 4,067 4,727
Outpatient centers at period-end(8).... 70 72 75 73 83
Acute service agreements at
period-end.......................... 43 43 44 44 44
</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;
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<PAGE> 7
(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 nine months ended September 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). Net income and earnings per share before merger expenses for the
nine month period ended September 30, 1996 would have been $9,072,000 and
$0.69, respectively.
(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 1,063,598 shares offered by the Company
hereby at the public offering price of $32.00 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 patients' homes. Excludes patients receiving care at centers
managed by the Company.
(8) Includes centers managed by the Company.
6
<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 nine months ended September 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 19% of the net revenue of the Company
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<PAGE> 9
for each of the years ended December 31, 1994 and 1995 and for the nine months
ended September 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 nine months ended September 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 nine months
ended September 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 for pre-existing conditions, and
establish a pilot program for medical savings accounts. It is uncertain what
additional
9
<PAGE> 11
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 -- 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 42.4% of
the outstanding shares of Common Stock (41.0% 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 13,689,552 shares of Common Stock outstanding
(13,970,802 if the Underwriters' over-allotment option is exercised in full). Of
those shares, approximately 6,985,000 shares, including the 2,500,000 shares
offered hereby (7,360,000 and 2,875,000 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
of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of
the Company, as that term is defined in Rule 144 under the Securities Act. In
addition, up to 1,912,993 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 6,704,552 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 registration rights with respect to shares of Common Stock
to the holders of a total of approximately 6,704,552 shares of Common Stock and
220,000 shares issuable upon the conversion of warrants. The Company's officers
and directors, and certain stockholders of the Company, who upon completion of
the Offering will own an aggregate of approximately 5,902,000 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.
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.
On April 26, 1996, the Company completed a merger with 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 operates three
dialysis centers serving approximately 250 patients in the Pensacola and
Crestview, Florida areas. 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 October 1996, the Company acquired a dialysis company in Anniston,
Alabama and began managing, with the right to develop, a dialysis facility in
Bay City, Texas, which together serve an aggregate of approximately 200
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 1,063,598 shares of Common
Stock offered by it, at the public offering price of $32.00 per share, are
approximately $31.8 million after deducting estimated underwriting discounts and
offering expenses payable by the Company, (or approximately $40.4 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)...................................................... 37.50 32.25
</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 November
18, 1996.
The last reported sale price of the Common Stock on the Nasdaq Stock Market
on November 18, 1996 was $32.25. As of November 18, 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 September 30, 1996 and as adjusted to give
effect to the sale by the Company of 1,063,598 shares of Common Stock offered by
it at the public offering price of $32.00 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>
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term debt........... $ 6,638 $ 6,638
======= =======
Long-term debt and capital lease obligations........................... -- --
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,
12,555,954 shares issued and outstanding; 13,689,552 shares issued
and outstanding as adjusted)...................................... 126 137
Additional paid-in capital (stockholders' equity)...................... 53,860 85,667
Retained earnings...................................................... 118 118
------- -------
Total stockholders' equity................................... 54,104 85,922
------- -------
Total capitalization......................................... $54,104 $85,922
======= =======
</TABLE>
14
<PAGE> 16
SELECTED HISTORICAL, PRO FORMA AND COMBINED FINANCIAL DATA
The Selected Historical and Pro Forma Financial Data -- Renal Care Group,
Inc. on page 16 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 nine months ended September 30, 1996
except on a pro forma basis.
The Selected Combined and Pro Forma Financial Data -- Renal Care Group,
Inc. and Founding Companies on page 17 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 and Pro Forma Financial Data -- Renal Care Group,
Inc. for the years ended December 31, 1994 and 1995 and the Selected Combined
and Pro Forma 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 AND PRO FORMA FINANCIAL DATA -- RENAL CARE GROUP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31,(1) SEPTEMBER 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 $32,072 $90,987 $97,363
Patient care costs................... 5,336 6,309 13,034 25,003 26,908 79,949 20,090 63,397 68,124
General and administrative
expenses........................... 1,725 1,626 3,649 8,721 8,701 15,466 6,521 9,427 9,860
Provision for doubtful accounts...... 147 170 584 1,418 2,355 3,995 1,596 1,710 1,835
Depreciation and amortization........ 147 153 601 1,484 1,580 3,914 1,120 3,197 3,370
Merger expenses...................... -- -- -- -- -- -- -- 1,960 1,960
------ ------ ------- ------- ------- -------- ------- ------- -------
Total operating costs and expenses... 7,355 8,258 17,868 36,626 39,544 103,324 29,327 79,691 85,149
------ ------ ------- ------- ------- -------- ------- ------- -------
Income from operations............... 12 455 258 5,001 3,427 12,005 2,745 11,296 12,214
Interest income (expense), net....... (33) (44) (128) (363) (452) (506 ) (335) 394 300
------ ------ ------- ------- ------- -------- ------- ------- -------
Income (loss) before income taxes.... $ (21) $ 411 $ 130 $ 4,638 $ 2,975 11,499 $ 2,410 11,690 12,514
====== ====== ======= ======= ======= =======
Provision for income taxes........... 4,370 3,109 4,676
Tax adjustment(5).................... -- 1,500 --
-------- ------- -------
Net income........................... $ 7,129 $ 7,081 $ 7,838
======== ======= =======
Earnings per share................... $ 0.64 (6) $ 0.53 $ 0.59
======== ======= =======
Weighted average shares
outstanding........................ 11,091 (6) 13,350 13,207
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,(1)
--------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------ ------ ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................... $ 303 $ 774 $ 3,519 $ 3,171 $(1,418) $24,226
Total assets.................................................. 2,242 2,613 14,393 17,318 20,765 88,779
Total debt.................................................... 406 367 5,248 5,420 7,340 6,638
Stockholders' equity.......................................... 1,057 1,468 4,901 5,919 4,566 54,104
</TABLE>
- ---------------
(1) The financial information for each of the years and nine month period ended
September 30, 1995 does not include the Founding Companies except on a pro
forma basis. See "Selected Combined and Pro Forma 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 nine months ended September 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 nine months ended September 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). Net income and earnings per share before merger expenses for the
nine month period ended September 30, 1996 would have been $9,072,000 and
$0.69, respectively.
(5) Adjustment to reflect one-time provision in accordance with FAS 109 for
federal and state income taxes arising from timing differences due to the
conversion of RenalWest and Main Line from cash-basis to accrual-basis tax
reporting.
(6) 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 AND PRO FORMA FINANCIAL DATA -- RENAL CARE GROUP, INC.
AND FOUNDING COMPANIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31,(1) 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 $84,749 $97,363 $97,363
Patient care costs............... 40,516 46,752 58,314 75,366 80,417 79,949 58,956 68,124 68,124
General and administrative
expenses....................... 5,409 4,423 6,799 12,616 12,866 15,466 9,775 9,860 9,860
Provision for doubtful
accounts....................... 1,131 1,309 2,010 2,914 3,995 3,995 2,775 1,835 1,835
Depreciation and amortization.... 1,752 1,895 2,416 3,414 3,661 3,914 2,824 3,370 3,370
Merger expenses.................. -- -- -- -- -- -- -- 1,960 1,960
------- ------- ------- -------- -------- ------- ------- ------- -------
Total operating costs and
expenses....................... 48,808 54,379 69,539 94,310 100,939 103,324 74,330 85,149 85,149
------- ------- ------- -------- -------- ------- ------- ------- -------
Income from operations........... 7,767 9,930 10,903 16,360 14,390 12,005 10,419 12,214 12,214
Interest income (expense), net... (693) (570) (460) (646) (1,013) (506 ) (606) 300 300
------- ------- ------- -------- -------- ------- ------- ------- -------
Income before income taxes....... $ 7,074 $ 9,360 $10,443 $ 15,714 $ 13,377 11,499 $ 9,813 $12,514 12,514
======= ======= ======= ======== ======== ======= =======
Provision for income taxes....... 4,370 4,676
------- -------
Net income (loss)................ $ 7,129 $ 7,838
======= =======
Earnings per share............... $ 0.64 (4) $ 0.59
======= =======
Weighted average shares
outstanding.................... 11,091 (4) 13,207
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,(1)
------------------------------------------------- SEPTEMBER 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 $24,226
Total assets................................................ 24,864 28,670 42,770 49,918 60,899 88,779
Total debt.................................................. 4,495 4,037 8,265 8,620 15,915 6,638
Stockholders' equity........................................ 14,475 18,506 24,211 26,825 25,358 54,104
</TABLE>
- ---------------
(1) The financial information for each of the years and nine 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 nine months ended September 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). Net income and earnings per share before merger expenses for the
nine month period ended September 30, 1996 would have been $9,072,000 and
$.069, respectively.
(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 being operated by the Company 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 treatments per year, with reimbursement for services provided primarily
by the Medicare ESRD program
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<PAGE> 20
based on rates that are established by HCFA. For the nine months ended September
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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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 70.0
General and administrative
expenses....................... 8.5 11.4 11.2 11.5 10.1
Provision for doubtful
accounts....................... 2.5 2.6 3.5 3.3 1.9
Depreciation and amortization.... 3.0 3.1 3.2 3.3 3.5
Merger expenses.................. -- -- -- -- 2.0
----- ----- ----- ----- -----
Total operating costs and
expenses....................... 86.4 85.2 87.5 87.7 87.5
----- ----- ----- ----- -----
Income from operations........... 13.6% 14.8% 12.5% 12.3% 12.5%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Net Revenue. Net revenue increased from $84,749,000 for the nine months
ended September 30, 1995 to $97,363,000 for the nine months ended September 30,
1996, an increase of $12,614,000, or 14.9%. This increase resulted primarily
from a 9.6% increase in the number of treatments from 465,637 in the 1995 period
to 510,360 in the 1996 period and a 4.4% increase in the average revenue per
treatment from $182 in the 1995 period to $190 in the 1996 period. The revenue
per treatment increase was due to an increase in EPO utilization and
higher-revenue generating 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
$58,956,000 for the nine months ended September 30, 1995 to $68,124,000 for the
nine months ended September 30, 1996, an increase of $9,168,000, or 15.6%. 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 70.0% in the 1996 period. Average patient care cost per treatment
increased from $127 in the 1995 period to $133 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 $9,775,000 for the nine months ended September 30, 1995 to $9,860,000 for
the nine months ended September 30, 1996, an increase of $85,000, or 0.8%. The
net increase was a result of increased corporate overhead expenses partially
offset by reduced compensation to prior physician owners. General and
administrative expenses as a percentage of revenue decreased from 11.5% in the
1995 period to 10.1% in the 1996 period.
Provision for Doubtful Accounts. The provision for doubtful accounts
decreased from $2,775,000 for the nine months ended September 30, 1995 to
$1,835,000 for the nine months ended September 30, 1996. The provision for
doubtful accounts as a percentage of net revenue decreased from 3.3% 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 certain 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 $2,824,000 for the nine months ended September 30, 1995 to $3,370,000 for
the nine months ended September 30, 1996, an increase of $546,000, or 19.3%.
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 $1,960,000 represented legal,
accounting and employee severance and related benefits in connection with the
Main Line and RenalWest acquisitions.
Income from Operations. Income from operations increased from $10,419,000
for the nine months ended September 30, 1995 to $12,214,000 for the nine months
ended September 30, 1996, an increase of $1,795,000, or 17.2%. Income from
operations as a percentage of net revenue increased from 12.3% in the 1995
period to 12.5% 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 598,274 in the 1994 period to 624,988
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.
20
<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 598,274
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 September 30,
1996, the Company's working capital was $24,226,000, cash and cash equivalents
were $25,476,000 and the Company's current ratio was 1.8:1.
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<PAGE> 23
The Company's net cash provided by operating activities was $14,061,000 in
the nine months ended September 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 $45,291,000 in the nine months ended
September 30, 1996. Cash used in investing activities resulted from $39,699,000
of cash, working capital and certain other distributions at the closing of the
Combination (including approximately $6,899,000 in distributions to former
stockholders of the Founding Companies) and $9,880,000 of capital expenditures,
partially offset by the $3,903,000 cash balances of the Founding Companies
acquired at the time of the Combination. Cash provided by financing activities
was $55,365,000 for the nine months ended September 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 $71,797,000 after offering costs.
Long-term debt repayments totaled $10,266,000, and distributions of $6,246,000
were made to shareholders of acquired companies since the Combination.
Under its agreement with Kidney Care in connection with the Combination,
the Company has certain contingent payments payable on each of April 30, 1997
and 1998 based on a formula applied to the amount by which pre-tax earnings of
the operations acquired from Kidney Care for the 12 months ended December 31,
1996 and 1997, respectively, exceed the pre-tax earnings of such operations for
the 12 months ended December 31, 1994. The maximum amount of the contingent
payments is $7,000,000.
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 November 18, 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
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 76 outpatient
dialysis centers in 11 states and manages an additional ten dialysis centers in
five states, six of which are 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 44 hospitals,
staff-assisted dialysis services to 37 skilled nursing facilities and physician
practice management services to 16 of the 62 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 approximately 2,800 dialysis centers in the
United States at the end of 1995. The Company believes that approximately 45%
were owned by multi-center dialysis companies, 25% were owned by independent
physicians and other companies 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 if eligible for Social
Security.
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.
23
<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 annually. 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 44
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 Affiliated 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 -- Operations -- 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 and medical center 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 per year at risk by dialysis patients was 15.8.
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 the Vanderbilt University Medical Center have been effective
in maintaining an overall mortality rate of approximately one-half of the
national average and in reducing the average hospitalization rate per year at
risk to less than 10 days 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 to ESRD Patients
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, 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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access for dialysis; and blood transfusions. The Company estimates that less
than 0.5% of its net revenue for the nine months ended September 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 76 outpatient dialysis centers in 11 states with
62 affiliated nephrologists and 1,212 certified dialysis stations, excluding ten
centers managed by the Company. The Company leases 61 centers and owns 15
centers. The Company also provides inpatient dialysis services to 44 acute care
hospitals and 37 skilled nursing facilities. Excluding managed centers, 624,988
and 510,360 hemodialysis treatments were provided at the Company's facilities
during the year ended December 31, 1995 and the nine months ended September 30,
1996, respectively.
The Company estimates that its centers were operating at approximately 66%
of capacity as of September 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 September 30, 1996,
approximately 12% 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 44 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, Arizona 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 and medical center management program and is currently in various
stages of discussions concerning a number of such programs. In addition, the
Company also intends to acquire or develop university and medical center
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 universities and medical centers. Furthermore,
the Company expects these affiliations 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 certain instances, 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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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 protocol-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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REIMBURSEMENT
The following table sets forth information regarding the Company's
reimbursement sources:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Medicare................................ 72 % 68 % 68 % 69 % 67 %
Medicaid................................ 7 8 7 5 7
Private and other payors................ 15 18 20 21 21
Hospital inpatient dialysis services.... 6 6 5 5 5
--- --- --- --- ---
Total......................... 100 % 100 % 100 % 100 % 100 %
=== === === === ===
</TABLE>
The Social Security 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 Social Security 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 Social
Security 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
(assuming Social Security eligibility) 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 age 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 in free standing facilities 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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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. Moreover, on
October 1, 1996, the OIG issued a report concluding that some laboratories may
be improperly seeking Medicare reimbursement for tests already reimbursed under
the composite rate. The report recommended that HCFA monitor laboratory billing
for possible post-payment reviews. 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 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 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
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<PAGE> 37
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 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 of 1986 as amended (the "IRC"). 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: (i)
bona fide employment relationships; (ii) personal services contracts; (iii)
space and equipment leasing arrangements; (iv) certain group practice
arrangements with a hospital that were in existence prior to December 1989; and
(v) purchases by physicians of laboratory services, or of other items and
services at fair market value. In order to be exempt from the Stark II
self-referral prohibition, it is necessary to meet all of the criteria of a
particular exception for each financial relationship existing between an entity
and a referring physician. 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 or 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
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<PAGE> 38
for personal services or leased equipment arrangements. In the case of certain
other financial arrangements, however, there may be no exception available.
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 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
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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 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
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<PAGE> 40
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
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 these 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.
Occupational Safety and Health Administration regulations 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
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 45% were owned by
multi-center dialysis companies, 25% were owned by independent physicians and
other companies 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
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<PAGE> 41
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 physicians. There can be no assurance that the Company will be
able to compete effectively with any such competitors.
PROPERTIES
Excluding the ten managed centers, the Company operates 76 dialysis centers
in 11 states, of which 61 are located in leased facilities and 15 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....................... 49 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)............. 65 Vice Chairman of the Board
Joseph C. Hutts(2)(3).............. 55 Director
Kenneth Johnson, M.D.(3)........... 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 (the
"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 -- Amended and Restated 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 6, 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 1, 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 IRC, 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 Compensation 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.
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
45
<PAGE> 47
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 IRC. 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 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.
46
<PAGE> 48
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 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
47
<PAGE> 49
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 7, 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
$231,984 pursuant to this agreement for the nine months ended September 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 246,103 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 as of November 18, 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(2) NUMBER PERCENT
- -------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS, DIRECTORS AND 5%
STOCKHOLDERS:
Harry R. Jacobson, M.D.(3)................ 247,662 2.0% 27,300 220,362 1.6%
Sam A. Brooks, Jr.(4)..................... 340,000 2.6 -- 340,000 2.5
Gary Brukardt(5).......................... 20,000 * -- 20,000 *
Joseph A. Cashia(6)....................... 55,000 * -- 55,000 *
Ronald Hinds(7)........................... 34,000 * -- 34,000 *
Raymond Hakim, M.D., Ph.D.(8)............. 49,229 * -- 49,229 *
John D. Bower, M.D.(9).................... 828,425 6.6 -- 828,425 6.1
Joseph C. Hutts(10)....................... 6,000 * -- 6,000 *
Kenneth E. Johnson, M.D.(11) ............. 367,180 2.9 72,173 295,007 2.2
Thomas A. Lowery, M.D.(12)................ 283,991 2.3 49,299 234,692 1.7
Stephen D. McMurray, M.D.(13)............. 179,211 1.4 31,900 147,311 1.1
W. Tom Meredith, M.D.(14)................. 263,882 2.1 40,000 223,882 1.6
Kidney Care, Inc.(15)..................... 891,114 7.1 158,337 732,777 5.4
Directors and Executive Officers as a
Group (12 persons)(16)................. 2,674,580 21.1 220,672 2,453,908 17.9
ADDITIONAL SELLING STOCKHOLDERS:
Douglas A. and Lisa Anderson Family
Trust.................................. 169,200 1.3 62,563 106,637 *
Robert L. Benz, M.D....................... 101,865 * -- 101,865 *
Birnbaum Family Trust..................... 169,200 1.3 62,563 106,637 *
Kenneth R. Boren Family Revocable Trust... 364,980 2.9 134,954 230,026 1.7
Chang Family Trust........................ 53,004 * 19,599 33,405 *
James R. Cotton, Jr., M.D................. 266,658 2.1 49,299 217,359 1.6
Kevin A. Curran, Jr., M.D.(17)............ 177,772 1.4 32,866 144,906 *
Kimberly Ann Dauser....................... 29,877 * 5,524 24,353 1.1
Robert W. Dettmer, M.D.................... 172,545 1.4 30,000 142,545 1.0
John K. Dyer, M.D......................... 172,545 1.4 25,900 146,645 1.1
Samuel R. Eby, M.D........................ 51,763 * 5,000 46,763 *
Richard P. Flick, M.D..................... 18,499 * 2,000 16,499 *
Ronald R. Fuller.......................... 28,711 * 10,616 18,095 1.1
Roy D. Gerard, Jr., M.D.(18).............. 177,772 1.4 32,866 144,906 *
Gary S. Gilgore, M.D...................... 101,865 * -- 101,865 *
John E. Greksa & Teresa L. Greksa
Revocable Trust........................ 54,545 * 20,168 34,377 *
Robert H. Harris, Jr., M.D................ 104,571 * 19,333 85,238 *
Ronald H. Hyde, M.D....................... 19,682 * 6,500 13,182 *
James Leininger........................... 164,068 1.3 30,333 133,735 *
Rick Maniscalco(19)....................... 101,865 * -- 101,865 *
Francis X. McCusker, M.D.................. 101,865 * -- 101,865 *
Richard L. Nielsen........................ 172,545 1.4 30,000 142,545 1.0
Thomas D. Noland(20)...................... 9,101 * 569 8,532 *
O'Regan Family Trust...................... 78,386 * 28,984 49,402 *
</TABLE>
50
<PAGE> 52
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR OWNERSHIP AFTER
TO OFFERING(1) NUMBER OF OFFERING(1)
------------------- SHARES BEING -------------------
NAME NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- -------------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Packer Family Trust....................... 169,200 1.3 62,563 106,637 *
Thomas F. Parker(21)...................... 8,153 * 1,231 6,922 *
David A. Reichert, M.D.................... 364,980 2.9 134,954 230,026 1.7
Dennis L. Ross, M.D.(22).................. 338,661 2.7 5,000 333,661 2.4
Charles R. Schleifer, M.D................. 101,865 * -- 101,865 *
Keith T. Shearlock, M.D................... 134,449 1.1 24,857 109,592 *
Miles H. Sigler, M.D...................... 101,865 * -- 101,865 *
William E. Smith & Nina Smith Family
Trust.................................. 169,200 1.3 60,000 109,200 *
Brendan P. Teehan, M.D.................... 101,865 * -- 101,865 *
Denise VanValkenburgh(23)................. 7,608 * -- 7,608 *
Voit Family Trust......................... 169,200 1.3 50,760 118,440 *
Hugo P. Weber, Jr., M.D................... 247,882 2.0 45,828 202,054 1.5
Berne Yee, M.D............................ 169,200 1.3 62,563 106,637 *
</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 13,689,552 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 Commission under Section 13(d) of the Exchange
Act. 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) An additional 93,750 shares of Common Stock may be sold by the Selling
Stockholders if the over-allotment option is exercised in full as follows:
Jacobson, 2,232 shares; Lowery, 701 shares; McMurray, 2,600 shares; Kidney
Care, Inc., 12,951 shares; Anderson Family Trust, 5,117 shares; Birnbaum
Family Trust, 5,117 shares; Boren Family Trust, 11,038 shares; Chang Family
Trust; 1,410 shares; Cotton, 4,033 shares; Curran, 2,688 shares; Dauser,
451 shares; Fuller, 868 shares; Gerard, 2,688 shares; Greksa Revocable
Trust, 1,650 shares; Harris, 1,581 shares; Leininger, 2,481 shares; Noland,
31 shares; O'Regan Family Trust, 2,370 shares; Packer, 5,117 shares;
Reichert, 11,038 shares; Shearlock, 2,033 shares; Weber, 3,748 shares; Yee,
5,117 and an additional 6,699 shares to be allocated among Benz, Gilgore,
Maniscalco, McCusker, Schleifer, Sigler, Teehan and VanValkenburgh.
(3) Includes 70,000 shares of Common Stock which may be acquired upon exercise
of immediately exercisable warrants. Includes 30,000 Shares of Common Stock
which may be acquired upon exercise of options 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.
(5) Includes 20,000 shares of Common Stock which may be acquired upon exercise
of options.
(6) Includes 55,000 shares of Common Stock which may be acquired upon exercise
of options.
(7) Includes 34,000 shares of Common Stock which may be acquired upon exercise
of options 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.
(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
51
<PAGE> 53
convertible. Includes 6,000 shares of Common Stock which may be acquired
upon exercise of options exercisable within 60 days. Does not include
31,500 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 6,000 shares of Common Stock which may be acquired upon exercise
of options that will be exercisable within 60 days.
(11) Includes 77,808 shares of Common Stock held for the benefit of (in the
amount of 9,726 each) Kenneth Eugene Johnson, Steven Michael Johnson,
Daniel Aaron Johnson, David Alexander Johnson, Timothy Paul Johnson, Rachel
Ann Johnson, Angela Sharon Johnson, and Graham Brinton Johnson.
(12) 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.
(13) 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.
(14) Includes 16,000 shares of Common Stock that could be acquired upon the
conversion of Convertible Notes, which are presently convertible.
(15) 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.
(16) Includes 688,998 shares of Common Stock which may be acquired upon exercise
of options and warrants.
(17) Includes 88,886 shares held in escrow for the benefit of Thomas A. Lowery,
M.D. over which Kevin A. Curran, Jr., M.D. has voting control and 88,886
shares held in escrow for the benefit of James R. Cotton over which Kevin
A. Curran, Jr., M.D., has voting control.
(18) Includes 88,886 shares held in escrow for the benefit of Thomas A. Lowery,
M.D. over which Roy D. Gerrard, M.D. has voting control and 88,886 shares
held in escrow for the benefit of James R. Cotton over which Roy D. Gerard,
Jr., M.D. has voting control.
(19) Includes 600 shares of Common Stock which may be acquired upon exercise of
options exercisable within 60 days.
(20) Includes 6,025 shares of Common Stock which may be acquired upon exercise
of options exercisable within 60 days.
(21) Includes 1,000 shares of Common Stock which may be acquired upon exercise
of options exercisable within 60 days.
(22) Includes 4,000 shares of Common Stock which may be acquired upon exercise
of options exercisable within 60 days.
(23) Includes 2,000 shares of Common Stock which may be acquired upon exercise
of options exercisable within 60 days.
52
<PAGE> 54
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 13,689,552 shares of Common Stock (13,970,802 if the
Underwriters' over-allotment option is exercised in full) and no shares of
Preferred Stock. As of November 18, 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.
53
<PAGE> 55
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.
54
<PAGE> 56
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
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) of the DGCL 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
such 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 13,689,552 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
2,500,000 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 ("Rule 144") may generally only be
sold in compliance with the limitations of Rule 144 under the Securities Act, as
described below.
The remaining 6,704,552 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 5,902,000
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 Rule 144, subject to the
applicable volume, holding period and other limitations of Rule 144 as described
55
<PAGE> 57
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 1,436,402 shares are being offered hereby
(1,530,152 shares if the over-allotment option is exercised in full). Any such
stockholder who has elected to participate in the Offering and is not able to
dispose of 20% of his Common Stock in the Offering (40% in the case of former
stockholders of RenalWest), may, upon the request of persons holding at least
20% of the restricted shares of Common Stock, 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 1,912,993 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 585,822
shares of Common Stock are exercisable on or prior to December 31, 1996; (ii)
options to purchase up to 337,124 shares of Common Stock will become exercisable
on or prior to December 31, 1997; (iii) options to purchase up to 327,124 shares
of Common Stock will become exercisable on or prior to December 31, 1998; (iv)
options to purchase up to 317,124 shares of Common Stock will become exercisable
on or prior to December 31, 1999; (v) options to purchase up to 215,799 shares
of Common Stock will become exercisable on or prior to December 31, 2000; and
(vi) options to purchase up to 130,000 shares of Common Stock will become
exercisable on or prior to December 31, 2001. 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 Affiliate, is entitled to sell within any three-month
period a number of shares of Common Stock that does not
56
<PAGE> 58
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 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.
57
<PAGE> 59
UNDERWRITING
The Underwriters named below, 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.......................................... 937,500
Hambrecht & Quist LLC..................................................... 750,000
Morgan Keegan & Company, Inc.............................................. 500,000
Needham & Company, Inc.................................................... 312,500
---------
Total Underwriters.............................................. 2,500,000
=========
</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 $0.90 per share, and the Underwriters may allow, and
such dealers may reallow, a concession of not more than $0.10 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 and the Selling Stockholders have granted a 30-day option to
the Underwriters, to purchase up to a maximum of 281,250 and 93,750 additional
shares of Common Stock, respectively, to cover over-allotments, if any, at the
same price per share as the initial 2,500,000 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 approximately 5,902,000 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 Exchange Act
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.
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<PAGE> 60
On December 7, 1995, Equitable Securities Corporation 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 Securities Corporation prior to February 6, 1997. The Convertible
Notes provide that Equitable Securities Corporation 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 Securities
Corporation will be deemed to have received additional compensation in
connection with the Offering. Equitable Securities Corporation 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 Exchange 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.
59
<PAGE> 61
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 nine months ended September 30,
1996 and the year ended December 31, 1995........................................... F-3
Notes to Pro Forma Combining Financial Statements..................................... F-5
RENAL CARE GROUP, INC.
Report of Independent Auditors'....................................................... F-6
Consolidated Balance Sheets as of December 31, 1994 and 1995, and September 30, 1996
(unaudited)......................................................................... F-7
Consolidated Income Statements for the years ended December 31, 1993, 1994 and 1995,
and the nine months ended September 30, 1995 and 1996 (unaudited)................... F-8
Consolidated Statements of Changes in Owners' Equity for the years ended December 31,
1993, 1994 and 1995, and the nine months period ended September 30, 1996
(unaudited)......................................................................... F-9
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995, and the nine months ended September 30, 1995 and 1996 (unaudited)............. F-10
Notes to 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.................................... F-38
Combined Statements of Cash Flows for the years ended January 31, 1994, 1995 and
1996................................................................................ F-39
Notes to Combined Financial Statements................................................ F-40
</TABLE>
F-1
<PAGE> 62
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 nine months ended September 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> 63
PRO FORMA COMBINING FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC.
(OF DELAWARE)
UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 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.......................... $ 90,987 $ 3,440 $ 2,936 $97,363 $ $97,363
Operating costs and expenses:
Patient care costs................. 63,397 2,518 2,209 68,124 68,124
General and administrative
expenses......................... 9,427 254 179 9,860 9,860
Provision for doubtful accounts.... 1,710 77 48 1,835 1,835
Depreciation and amortization...... 3,197 70 103 3,370 3,370
Merger expenses.................... 1,960 -- -- 1,960 1,960
----------- ---------- -------------- ------- ----------- ---------
Total operating costs and
expenses.................. 79,691 2,919 2,539 85,149 85,149
----------- ---------- -------------- ------- ----------- ---------
Income from operations............... 11,296 521 397 12,214 12,214
Interest expense, net................ (394) 18 75 (300 ) (300)
----------- ---------- -------------- ------- ----------- ---------
Income before taxes.................. 11,690 503 322 12,514 12,514
Pro forma provision for income
taxes.............................. 4,609 -- -- 4,609 67(a) 4,676
----------- ---------- -------------- ------- ----------- ---------
Pro forma net income................. $ 7,081 $ 503 $ 322 $7,905 $ (67) $ 7,838
=========== ========= ============= ======== =========== =========
Pro forma net income per share....... $ .59
=========
Pro forma weighted average shares
outstanding........................ 13,207
</TABLE>
See accompanying notes to Unaudited Pro Forma Combining Financial Statements.
F-3
<PAGE> 64
PRO FORMA COMBINING FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC.
(OF DELAWARE)
UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS -- (CONTINUED)
FOR THE 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....................... 11,091
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combining Financial Statements.
F-4
<PAGE> 65
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 $1,567 for state and
federal taxes at a combined effective rate of 37.5% 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) reduced by $1,500 reflecting the
cumulative deferred tax adjustment included in the historical operations for
temporary differences existing at the time the conversion of RenalWest to a
taxable entity.
(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 nine months
ended September 30, 1996 is based upon 13,207 weighted average shares of Common
Stock outstanding, which includes (i) 4,834 shares issued to the owners of the
Founding Companies, (ii) 4,389 shares being sold in the Offering, (iii) 3,003
shares issued to entities acquired through a pooling-of-interests transaction,
and (iv) 981 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 11,091 weighted average shares of Common Stock outstanding, which
includes (i) 4,834 shares issued to the owners of the Founding Companies, (ii)
3,329 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> 66
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Renal Care Group, Inc.
We have audited the accompanying consolidated balance sheets of Renal Care
Group, Inc. as of December 31, 1994 and 1995, and the related consolidated
income statements, statements of changes in 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 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 consolidated financial position of Renal Care
Group, Inc. as of December 31, 1994 and 1995 and the consolidated results of
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
October 28, 1996
F-6
<PAGE> 67
RENAL CARE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION> DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
(UNAUDITED --
NOTE 12)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 298 $ 1,341 $25,476
Accounts receivable, net............................... 9,338 8,204 26,678
Inventory.............................................. 767 727 2,525
Prepaid expenses and other assets...................... 392 650 1,751
Related party receivable............................... 186 196 --
------- ------- -------
Total current assets........................... 10,981 11,118 56,430
Property, plant and equipment, net....................... 6,192 9,225 27,292
Intangible assets, net................................... 64 53 3,310
Other assets............................................. 81 369 1,747
------- ------- -------
Total assets................................... 17,318 20,765 88,779
======= ======= =======
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable....................................... 1,389 2,175 8,663
Accrued wages and benefits............................. 1,382 1,420 4,721
Due to third parties................................... 2,413 4,265 4,884
Due to related parties................................. 250 270 --
Accrued expenses and other current liabilities......... 545 729 6,675
Income taxes payable................................... -- -- 623
Line of credit......................................... 44 785 --
Current portion of long-term debt...................... 1,787 2,892 6,638
------- ------- -------
Total current liabilities...................... 7,810 12,536 32,204
Long-term debt, net of current portion................... 3,589 3,663 --
Deferred tax liabilities................................. -- -- 2,471
------- ------- -------
Total liabilities.............................. 11,399 16,199 34,675
Total owners' equity........................... 5,919 4,566 54,104
------- ------- -------
Total liabilities and owners' equity........... $17,318 $20,765 $88,779
======= ======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE> 68
RENAL CARE GROUP, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED -- NOTE
12)
<S> <C> <C> <C> <C> <C>
Net revenue.................................... $18,126 $41,627 $42,971 $32,072 $90,987
Operating costs and expenses:
Patient care costs........................... 13,034 25,003 26,908 20,090 63,397
General and administrative expenses.......... 3,649 8,721 8,701 6,521 9,427
Provision for doubtful accounts.............. 584 1,418 2,355 1,596 1,710
Depreciation and amortization................ 601 1,484 1,580 1,120 3,197
Merger expenses.............................. -- -- -- -- 1,960
------- ------- ------- ------- -------
Total operating costs and expenses... 17,868 36,626 39,544 29,327 79,691
------- ------- ------- ------- -------
Income from operations......................... 258 5,001 3,427 2,745 11,296
Interest expense, net.......................... 128 363 452 335 (394)
------- ------- ------- ------- -------
Income before taxes............................ 130 4,638 2,975 2,410 11,690
Provision for income taxes..................... -- -- -- -- 4,609
------- ------- ------- ------- -------
Net income..................................... $ 130 $ 4,638 $ 2,975 $ 2,410 $ 7,081
======= ======= ======= ======= =======
Earnings per share............................. $ .53
=======
Weighted average shares outstanding............ 13,350
</TABLE>
See accompanying notes.
F-8
<PAGE> 69
RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN OWNERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
--------
<S> <C>
Balance at December 31, 1992...................................................... $ 5,435
Capital contributions............................................................. 104
Net income........................................................................ 130
Distributions to owners........................................................... (768)
--------
Balance at December 31, 1993...................................................... 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 (unaudited -- Note 12)................... 71,797
Common stock issued to Founders (unaudited -- Note 12)............................ 16,237
Equity acquired in business combination (unaudited -- Note 12).................... 368
Net income (unaudited -- Note 12)................................................. 7,081
Distributions to owners (unaudited -- Note 12).................................... (6,246)
Dividends (Note 11) (unaudited -- Note 12)........................................ (39,699)
--------
Balance at September 30, 1996 (unaudited -- Note 12).............................. $ 54,104
========
</TABLE>
See accompanying notes.
F-9
<PAGE> 70
RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(UNAUDITED -- NOTE
12)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................... $ 130 $ 4,638 $ 2,975 $ 2,410 $ 7,081
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............... 601 1,484 1,580 1,120 3,197
Loss (gain) on sale of property and
equipment................................. 72 -- 20 (7) (118)
Equity in earnings of subsidiary............ -- -- -- -- (309)
Deferred income taxes....................... -- -- -- -- 1,500
Changes in assets and liabilities:
Accounts receivable....................... (497) (3,284) 1,134 988 (5,469)
Inventory................................. (392) (72) 40 82 13
Prepaid expenses and other assets......... (369) 186 (258) 127 2,177
Related party receivables................. (36) (75) 90 151 --
Accounts payable.......................... (637) 1,646 2,639 279 1,596
Accrued wages and benefits................ 68 235 38 430 --
Due to related parties.................... 1,210 250 20 -- --
Accrued expenses and other liabilities.... 1,075 2 184 1,238 3,770
Income taxes payable...................... -- -- -- -- 623
---- ------- ------- ------- --------
Net cash provided by operating activities........ 1,225 5,010 8,462 6,818 14,061
INVESTING ACTIVITIES
Sale of property and equipment................... 21 -- 171 48 196
Purchases of property and equipment.............. (1,051) (2,428) (4,804) (2,930) (9,880)
Cash acquired through business combination....... -- -- -- -- 189
Change in other assets........................... 105 15 (277) (27) --
Cash distributions to founders, net of cash
contributions.................................. -- -- -- -- (35,796)
---- ------- ------- ------- --------
Net cash used in investing activities............ (925) (2,413) (4,910) (2,909) (45,291)
FINANCING ACTIVITIES
Payments on line of credit....................... (3,253) (9,642) (8,414) (4,398) (10,814)
Proceeds from line of credit..................... 2,453 9,603 9,155 4,658 10,358
Payments on long-term debt and capital leases.... (296) (1,830) (1,765) (1,306) (10,266)
Proceeds from long-term debt and capital
leases......................................... 1,272 1,960 2,844 560 540
Capital contribution............................. 104 411 767 592 (4)
Distributions to owners.......................... (768) (4,031) (5,096) (3,930) (6,246)
IPO proceeds, net of IPO costs................... -- -- -- -- 71,797
---- ------- ------- ------- --------
Net cash provided by (used in) financing
activities..................................... 488 (3,529) (2,509) (3,824) 55,365
---- ------- ------- ------- --------
Increase (decrease) in cash and cash
equivalents.................................... (188) (932) 1,043 85 24,135
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 $ 383 $ 25,476
==== ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid.................................... $ $ 386 $ 469 $ 336 $ 588
==== ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
TRANSACTIONS:
Due from related party for issuance of
convertible senior subordinated promissory
notes.......................................... $ -- $ -- $ 100 $ -- $ --
==== ======= ======= ======= ========
Common stock issued to Founders.................. -- -- -- -- $ 16,237
==== ======= ======= ======= ========
Non-cash conversion of redeemable preferred stock
to common stock................................ -- -- -- -- $ 2,451
==== ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 71
RENAL CARE GROUP, INC.
NOTES TO 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. These financial statements reflect the restated consolidated
financial statements of the Company effecting these poolings-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.
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.
F-11
<PAGE> 72
RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the Company does not
believe that receivables from the Medicare and Medicaid programs represent any
credit risk.
F-12
<PAGE> 73
RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reimbursements from Medicare and Medicaid at established rates approximated
83%, 78% and 71% for the years ended December 31, 1993, 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 nine months ended September 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> 74
RENAL CARE GROUP, INC.
NOTES TO 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 outstanding 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 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
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............................... -- 10,934 32,037 42,971
Income from operations.................... -- 12 3,415 3,427
Net income................................ (6) (25) 3,006 2,975
September 30, 1995 (unaudited -- Note 12)
Net revenue............................... -- 8,266 23,806 32,072
Income from operations.................... -- 214 2,531 2,745
Net income................................ -- 185 2,225 2,410
September 30, 1996 (unaudited -- Note 12)
Net revenue............................... 55,880 8,974 26,133 90,987
Income from operations.................... 6,386 1,011 3,899 11,296
Net income................................ 2,554 998 3,529 7,081
</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> 75
RENAL CARE GROUP, INC.
NOTES TO 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% (9.0% 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% (9.0% 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%, (9.0% 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> 76
RENAL CARE GROUP, INC.
NOTES TO 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, 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, 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, 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, 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.
Related party receivables consist primarily of amounts paid by the Company
on behalf of its owner members which were repaid subsequent to year-end.
F-16
<PAGE> 77
RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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
---- ------- -------
<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, 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 and $2,430 and $4,290 for the nine months ended
September 30, 1995 and 1996, respectively (unaudited -- Note 12). 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
Standard No. 109 would have been $50, $1,764, and $1,136 for the years ending
December 31, 1993, 1994 and 1995, respectively, and $1,136 and $1,630 for the
nine months ended September 30, 1995 and 1996, 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
F-17
<PAGE> 78
RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and September 30, 1996, the deferred income
tax liability would have been $1,941 and $1,638, respectively. 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, contingent
payments 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 contingent payments are payable by the
Company in two installments on each of April 30, 1997 and 1998 based on a
formula applied to the amount by which the pre-tax earnings of the operations
acquired from KidneyCare for the twelve months ended December 31, 1996 and 1997,
respectively, exceed the pre-tax earnings of such operations for the twelve
months ended December 31, 1994. 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.
In May, 1996 the Company entered into a line of credit which allows for
borrowings of up to $35,000 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%. The Company
has pledged the stock of its subsidiaries as collateral and would be obligated
to pledge its assets and the assets of its subsidiaries if the Company should
become in default under the line of credit.
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);
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). 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 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 September 30, 1996 and the
unaudited consolidated statements of income, changes in owners' equity and cash
flows for the nine months ended September 30, 1995 and 1996 have been prepared
by management. The financial statements include all adjustments, consisting of
only normal recurring adjustments necessary for a fair presentation of the
results.
F-18
<PAGE> 79
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> 80
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> 81
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> 82
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 4,767
Inventories............................................................ 583 592
Due from related parties............................................... 217 275
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> 83
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> 84
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........................................................... (8,028)
Capital contributions by owners and partners.................................... 495
Other decreases................................................................. 376
-------
Balance at December 31, 1995...................................................... 7,406
=======
</TABLE>
See accompanying notes.
F-24
<PAGE> 85
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) (269)
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) 959 152
Accrued wages and benefits............................... 102 181 301
Other accrued expenses and other liabilities............. 48 35 1,173
------- ------- -------
Net cash provided by operating activities........... 7,159 6,619 5,522
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) (1,691)
Intangible assets acquired.................................... -- -- (3,001)
Contributions from (to) an equity investment.................. (102) -- 116
------- ------- -------
Net cash used in investing activities............... (632) (3,089) (3,049)
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
======= ======= =======
DMN Equity through acquisition................................ $ -- $ -- $ 311
======= ======= =======
</TABLE>
See accompanying notes.
F-25
<PAGE> 86
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> 87
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> 88
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> 89
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. Accumulated amortization is
approximately $62 at December 31, 1995.
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 28
Allowance for doubtful accounts................................... (1,122) (745)
------- -------
Net accounts receivable........................................... $ 5,344 $4,767
======= =======
Percent of patient accounts receivable related to patients
participating in the Medicare and Medicaid programs............. 76% 69%
</TABLE>
F-29
<PAGE> 90
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> 91
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........................................................................ $1,233
1997........................................................................ 1,023
1998........................................................................ 944
1999........................................................................ 846
2000........................................................................ 666
Thereafter.................................................................. 3,274
------
$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> 92
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> 93
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>
At December 31, 1994 and 1995, Tennessee had federal income tax operating
loss carryforwards expiring in 2009 and 2010, respectively, of approximately
$600 and $1,632, respectively.
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> 94
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.
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.
F-34
<PAGE> 95
RENAL CARE GROUP, INC. (OF TENNESSEE) AND
THREE UNRELATED BUSINESSES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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.
15. UNAUDITED FINANCIAL INFORMATION
The unaudited combined statements of operations, owners' equity and cash
flows for the nine months ended September 30, 1996 have been prepared by
management. The financial statements include all adjustments, consisting of only
normal recurring adjustments necessary for a fair presentation of the results.
F-35
<PAGE> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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 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> 102
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> 103
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> 104
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> 105
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> 106
- ------------------------------------------------------
- ------------------------------------------------------
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 OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY 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.................... 3
Risk Factors.......................... 7
The Company........................... 12
Use of Proceeds....................... 13
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Capitalization........................ 14
Selected Historical, Pro Forma and
Combined Financial Data............. 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 23
Management............................ 41
Certain Transactions.................. 47
Principal and Selling Stockholders.... 50
Description of Capital Stock.......... 53
Shares Eligible for Future Sale....... 55
Underwriting.......................... 58
Legal Matters......................... 59
Experts............................... 59
Additional Information................ 59
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,500,000 SHARES
(LOGO)RENAL CARE GROUP
COMMON STOCK
-----------------
PROSPECTUS
-----------------
EQUITABLE SECURITIES CORPORATION
HAMBRECHT & QUIST
MORGAN KEEGAN & COMPANY, INC.
NEEDHAM & COMPANY, INC.
November 19, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 107
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.................................................. 90,000
Legal fees and expenses......................................................... 150,000
Printing and engraving costs.................................................... 235,000
Blue Sky fees and expenses...................................................... 20,000
Transfer Agent and Registrar fees............................................... 10,000
Miscellaneous................................................................... 26,596
--------
Total................................................................. $600,000
========
</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
DGCL, as amended from time to time, indemnify its officers and directors.
Section 145 of the DGCL 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 DGCL,
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> 108
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 Notes to 17 former 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. The
Convertible 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 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 TNC 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 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> 109
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 -- 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> 110
<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
*10.25 -- Loan Agreement, dated May 30, 1996, among the Company, its subsidiaries and
NationsBank of Tennessee, N.A.
*10.26 -- Revolving/Term Note, dated May 30, 1996, made by the Company and its subsidiaries
to the order of NationsBank of Tennessee, N.A.
*10.27 -- Stock Pledge Agreement, dated May 30, 1996, between the Company and NationsBank of
Tennessee, N.A.
*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
</TABLE>
- ---------------
* Previously filed
(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.
II-4
<PAGE> 111
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
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
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
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Representatives of the Underwriters at the closing specified in the underwriting
agreements, certificates in such denominations and registered in such names as
required by the Representatives to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 112
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Nashville, State of Tennessee, on November 18, 1996.
RENAL CARE GROUP, INC.
By: /s/ SAM A. BROOKS, JR.
--------------------------------------
Sam A. Brooks, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to this Registration Statement has been signed below by the following
persons in the capacities indicated on November 18, 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)
* Director
- -----------------------------------------------
Joseph C. Hutts
* Director and Chairman of the Board
- -----------------------------------------------
Harry R. Jacobson, M.D.
Director
- -----------------------------------------------
Thomas A. Lowery
* Director and Vice Chairman of the Board
- -----------------------------------------------
John D. Bower, M.D.
* Director
- -----------------------------------------------
Stephen D. McMurray, M.D.
* Director
- -----------------------------------------------
W. Tom Meredith, M.D.
Director
- -----------------------------------------------
Kenneth Johnson, M.D.
*By: /s/ RONALD HINDS
- -----------------------------------------------
Ronald Hinds, Attorney-in-Fact
</TABLE>
II-6
<PAGE> 113
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Renal Care Group, Inc.
We have audited the consolidated financial statements of Renal Care Group,
Inc., as of December 31, 1994 and 1995, and for each of the three years in the
period ended December 31, 1995, and have issued our report thereon dated October
28, 1996 (included elsewhere in this Registration Statement). Our audits also
included the consolidated financial statement schedule listed in Item 16(b) of
this Registration Statement. This 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 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 28, 1996
S-1
<PAGE> 114
SCHEDULE II
RENAL CARE GROUP, INC.
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, 1993............. $ 516 $ 584 $ -- $ (146) $ 954
========= ======== ======== ======= ========
Year ended December 31, 1994............. $ 954 $1,418 $ -- $ (543) $1,829
========= ======== ======== ======= ========
Year ended December 31, 1995............. $1,829 $2,355 $ -- $ (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 1.1
2,500,000 SHARES EXECUTION COPY
RENAL CARE GROUP, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
November 18, 1996
Equitable Securities Corporation
Hambrecht & Quist, LLC
Morgan Keegan & Company, Inc.
Needham & Company, Inc.
As Representatives of the
several Underwriters named
in Schedule A
c/o Equitable Securities Corporation
Nashville City Center, Suite 800
511 Union Street
Nashville, Tennessee 37219
Ladies and Gentlemen:
Renal Care Group, Inc., a Delaware corporation (the "Company"), and
certain stockholders of the company named in Schedule B hereto (the "Selling
Stockholders") propose to sell to the several underwriters (the "Underwriters")
for whom you are acting as representatives (the "Representatives") an aggregate
of 2,500,000 shares (the "Firm Shares") of the Company's common stock, $.01 par
value (the "Common Stock"). The respective amounts of the Firm Shares to be
purchased by the several Underwriters are set forth opposite their names in
Schedule A hereto. The Company also propose to sell at the Underwriters'
option an aggregate of up to 375,000 and the Selling Stockholders additional
shares of the Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule A, plus their pro rata portion of the Option
Shares if you elect to exercise the over-allotment option in whole or in part
for the accounts of the several Underwriters. The Firm Shares and the Option
Shares (to the extent the aforementioned option is exercised) are herein
collectively called the "Shares."
<PAGE> 2
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company. The Company represents
and warrants as follows:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have
filed an amendment or amendments thereto, on Form S-1 (No. 333-13813),
for the registration of the Shares under the Securities Act of 1933, as
amended (the "Act"). Such registration statement, including the
prospectus, financial statements and schedules, exhibits and all other
documents filed as a part thereof, as amended at the time of
effectiveness of the registration statement, including any information
deemed to be a part thereof as of the time of effectiveness pursuant to
paragraph (b) of Rule 430A of the rules and regulations of the Commission
under the Act (the "Rules and Regulations"), as well as any registration
statement filed by the Company pursuant to Rule 462(b) of the Rules and
Regulations, is herein called the "Registration Statement" and the
prospectus, in the form first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or filed as part of the Registration
Statement at the time of effectiveness if no Rule 424(b) filing is
required, is herein called the "Prospectus." The term "Preliminary
Prospectus" as used herein means a preliminary prospectus as described in
Rule 430 of the Rules and Regulations. Copies of the Registration
Statement, including any amendments thereto, any Preliminary Prospectuses
contained therein and the exhibits, financial statements and schedules,
as finally amended and revised, have heretofore been delivered by the
Company to you.
(b) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement; the
Company is duly qualified to transact business in all jurisdictions in
which the conduct of its business requires such qualification, except
where the failure to so qualify would not have a material adverse effect
on the financial condition, results of operations or business of the
Company and the Subsidiaries (as defined herein) taken as a whole.
(c) All of the Company's current subsidiaries are listed on Exhibit
21.1 to the Registration Statement (hereinafter collectively referred to
as the "Subsidiaries"). Each Subsidiary has been duly incorporated, and
is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with power or authority to own or
lease its properties and conduct its business as described in the
Registration
2
<PAGE> 3
Statement. Each Subsidiary is duly qualified to transact business in all
jurisdictions in which the conduct of its business requires such
qualification. The outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, and are fully
paid and non-assessable. Such shares of capital stock in each Subsidiary
are wholly owned by the Company free and clear of all liens, encumbrances
and security interests, except as disclosed in the Registration
Statement. No options, warrants or other rights to purchase, agreements
or other obligations to issue or other rights to convert any obligations
into shares of capital stock or ownership interests in the Subsidiaries
are outstanding, except to the extent set forth in the Registration
Statement, including the exhibits thereto.
(d) The outstanding shares of Common Stock have been duly
authorized and validly issued and are fully paid and non-assessable; the
Shares to be issued and sold by the Company have been duly authorized and
when issued and paid for as contemplated herein will be validly issued,
fully paid and non-assessable. No person or entity holds a right to
require or participate in the registration under the Act of shares of
Common Stock of the Company which right has not been waived by the holder
thereof as to the offering contemplated hereby and by the Registration
Statement, or satisfied by participation by such holder in the offering.
No person or entity has any preemptive or other right of participation or
first refusal with respect to any of the Shares or the issue or sale
thereof by the Company, which rights have not been waived.
(e) The Shares conform with the statements concerning them set
forth in the Registration Statement.
(f) The Commission has not issued an order preventing or suspending
the use of any Preliminary Prospectus or Prospectus relating to the
proposed offering of the Shares nor instituted proceedings for that
purpose. The Registration Statement and the Prospectus and any
amendments or supplements thereto, as of their respective effective or
issue dates, in all material respects conform or will conform, as the
case may be, to the requirements of the Act and the Rules and
Regulations. Neither the Registration Statement nor any amendment
thereto, as of its effective date, nor any Preliminary Prospectus,
Prospectus or any supplement thereto, as of its issue date, contains or
will contain, as the case may be, any untrue statement of a material fact
or omits or will omit to state any material fact required to be stated
therein or necessary to make the statements therein (as to the
Prospectus, in light of the circumstances under which they were made) not
misleading; provided, however, that the Company makes no representations
or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives, specifically for use in the preparation thereof.
3
<PAGE> 4
(g) The historical financial statements of the Company and the
Founding Companies (as defined in the Registration Statement),
together with related notes and schedules as set forth in the
Registration Statement, present fairly in all material respects the
combined financial position and the results of operations and cash flows
of the Company and the Founding Companies, as the case may be, at the
indicated dates and for the indicated periods. Such financial statements
have been prepared in accordance with generally accepted principles of
accounting, consistently applied throughout the periods involved, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The pro forma combining financial statements set forth
in the Registration Statement fairly present in all material respects the
information required to be presented therein, and such statements meet
the requirements of the Act. No other financial statements or schedules
of the Company or the Founding Companies are required by the Act or the
Rules and Regulations to be included in the Registration Statement or the
Prospectus. The summary financial and statistical data included in the
Registration Statement present fairly in all material respects the
information shown therein and, as to the financial data, have been
compiled on a basis consistent with the financial statements presented
therein.
(h) There is no litigation or governmental or third-party payor
audit, investigation or other proceeding ("Proceeding") pending or, to
the best knowledge of the Company, threatened against the Company or any
of the Subsidiaries which the Company has reason to believe is likely to
result in any material adverse change in the business or condition of the
Company and of the Subsidiaries taken as a whole, except as set forth in
the Registration Statement, including, without limitation, any such
Proceeding pursuant to federal or state laws or regulations (i)
prohibiting the payment or receipt of remuneration for patient referrals,
(ii) prohibiting the filing of false claims, (iii) prescribing conditions
of participation for certification by the Medicare and Medicaid programs
and state kidney fund programs or standards for licensure or health
planning approval or (iv) providing for coverage and reimbursement under
the Medicare and Medicaid and state kidney fund programs.
(i) The Company and the Subsidiaries have good and marketable title
to all of the properties and assets reflected in the financial statements
included in the Registration Statement (or as described in the
Registration Statement) hereinabove described, subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except those
reflected in such financial statements (or as disclosed in the
Registration Statement) or which are not material in amount. The Company
and the Subsidiaries occupy leased properties under valid and binding
leases
4
<PAGE> 5
except where the failure to have such leases or agreements would not
have a material adverse effect on the Company and its Subsidiaries taken
as a whole.
(j) The Company and the Subsidiaries have filed all federal, state
and foreign income tax returns which have been required to be filed and
have paid all taxes indicated by said returns and all assessments
received by them or any of them to the extent that such taxes have become
due, except where the failure to do so would not have a material adverse
effect on the Company and its Subsidiaries taken as a whole.
(k) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there
has not been any material adverse change or, to the knowledge of the
Company, any development involving a prospective material adverse change
in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business affairs,
management, or business prospects of the Company and its Subsidiaries
taken as a whole, whether or not occurring in the ordinary course of
business, and there has not been any material transaction entered into by
the Company or the Subsidiaries, other than transactions in the ordinary
course of business or changes and transactions contemplated by the
Registration Statement, as it may be amended or supplemented. The
Company and the Subsidiaries taken as a whole have no material contingent
obligations which are not disclosed in the Registration Statement, as it
may be amended or supplemented.
(l) Neither the Company nor any of the Subsidiaries is, or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Articles of Incorporation or Bylaws or under any
agreement, lease, contract, indenture or other instrument or obligation
to which it is a party or by which it or any of its properties is bound
except for such defaults as do not have a material adverse effect on the
business or financial condition of the Company and the Subsidiaries taken
as a whole. The consummation of the transactions contemplated herein and
the fulfillment of the terms hereof will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default
under, (A) any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any Subsidiary is a party, except for
any such breach or default which would not have a material adverse effect
on the Company and the Subsidiaries, taken as a whole, or (B) the
Articles of Incorporation or Bylaws of the Company or any Subsidiary or
any order, rule or regulation applicable to the Company or any Subsidiary
of any court or of any regulatory body or administrative agency or other
governmental body having jurisdiction over the Company or any Subsidiary
or any of their respective properties or assets.
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<PAGE> 6
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
contemplated herein (except (i) such additional steps as may be required
by the NASD or may be necessary to qualify the Shares for public offering
by the Underwriters under state securities or Blue Sky laws and (ii) such
approvals, consents, orders, authorizations, designations, declarations
and filings the absence of which does not and will not have a material
adverse effect on the business or financial condition of the Company and
the Subsidiaries taken as a whole) has been obtained or made as of the
Closing Date (as hereinafter defined), or the Option Closing Date (as
hereinafter defined), as the case may be, and is in full force and effect
as of the Closing Date, or Option Closing Date, as the case may be. All
consents and waivers from all other persons required in connection with
the execution and delivery by the Company of this Agreement and the
consummation of the transactions contemplated herein have been obtained
or made and are in full force and effect as of the Closing Date (except
such consents and waivers the absence of which do not and will not have a
material adverse effect on the business or financial condition of the
Company and the Subsidiaries taken as a whole).
(n) To the best knowledge of the Company, the Company and each of
the Subsidiaries has conducted its business in material compliance with
all the laws, rules and regulations of the jurisdictions in which each
such entity is conducting business. Without limiting the foregoing, the
Company and each of the Subsidiaries, and each of the professional
employees of the Company and each Subsidiary, owns or possesses and is in
compliance with the terms, provisions and conditions of all permits,
licenses, franchises, operating certificates, orders, authorizations,
registrations, qualifications, consents or approvals (including
certificates of need, licenses, pharmacy licenses, Medicare and Medicaid
provider agreements, accreditations and other similar documentation, or
approvals of any local health departments of any Authority (as
hereinafter defined)), of any court, arbitrator or arbitral body, or any
federal, state, local or foreign governmental agency or self-regulatory
authority, department or commission, or any other board, bureau, review
board, instrumentality or similar organization, domestic or foreign, or
any applicable private accrediting organizations (collectively,
"Authority") (hereinafter collectively, "Permits") necessary to own and
use the properties and assets of the Company and each of the
Subsidiaries, respectively, and to conduct their respective businesses,
except where the failure to comply, individually or in the aggregate,
would not have a material adverse effect on the Company and the
Subsidiaries, taken as a whole; as to the Company and each Subsidiary,
each such Permit of and from such Authorities is valid and in full force
and effect and there is no Proceeding pending or, to the Company's
knowledge, threatened (or any reasonable basis therefor) which may cause
any such Permit of and from all Authorities to be revoked, withdrawn,
canceled, suspended or not renewed.
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<PAGE> 7
(o) The Company and its officers and directors, and, to the best
knowledge of the Company, persons who provide professional services
under agreements with the Company and the employees of the Subsidiaries
have not, on behalf of the Company:
(i) knowingly and willfully made or caused to be made a false
statement or representation of a material fact in any application for any
benefit or payment;
(ii) knowingly and willfully made or caused to be made any false
statement or representation of a material fact for use in determining
rights to any benefit or payment;
(iii) presented or caused to be presented a claim for reimbursement
under CHAMPUS, Medicare, Medicaid or other state health care program that
is (A) for an item or service that the person presenting or causing to be
presented knows or should know was not provided as claimed, or (B) for an
item or service and the person presenting knows or should know that the
claim is false or fraudulent;
(iv) failed to disclose knowledge of the occurrence of any event
affecting the initial or continued right of a claimant to any benefit or
payment on its own behalf or on behalf of another, with intent to
fraudulently secure such benefit or payment in a greater amount or
quantity than is due or when no such benefit or payment is authorized if
such event results in an improper benefit to the Company; or
(v) knowingly and willfully made or caused to be made or induced or
sought to induce the making of any false statement or representation (or
knowingly and willfully omitted to state a fact required to be stated
therein or necessary to make the statements contained therein not
misleading) of a material fact with respect to (i) the conditions or
operations of a facility in order that the facility may qualify for
CHAMPUS, Medicare, Medicaid or other state health care program
certification, or (ii) information required to be provided under Section
1124A of the Social Security Act (42 U.S.C. Section 1320a-3a).
(p) No person who immediately following the Closing Date will have a
direct or indirect ownership interest (as those terms are defined in 42
C.F.R. Section 1001.1001) in the Company of 5% or more (a "Major
Investor"), (1) has had a civil monetary penalty
7
<PAGE> 8
assessed against it under 42 U.S.C. Section 1320a-7a; (2) has been
excluded from participation in the Medicare program or a State health
care program as defined in 42 U.S.C. Section 1320a-7(h) ("State Health
Care Program"); or (3) has been convicted (as that term is defined in 42
C.F.R. Section 1001.2) of any of the following categories of offenses as
described in 42 U.S.C. Section 1320a-7(a) or (b)(1), (2), (3):
(A) criminal offenses relating to the delivery of an item or service
under Medicare or any State Health Care Program;
(B) criminal offenses under federal or state law relating to patient
neglect or abuse in connection with the delivery of a health care item or
service;
(C) criminal offenses under federal or state law relating to fraud,
theft, embezzlement, breach of fiduciary responsibility, or other
financial misconduct in connection with the delivery of a health care
item or service or with respect to any act or omission in a program
operated by or financed in whole or in part by any federal, state or
local government agency;
(D) criminal offenses under federal or state laws relating to the
interference with or obstruction of any investigation into any criminal
offense described in (A) through (C) above; or
(E) criminal offenses under federal or state law relating to the
unlawful manufacture, distribution, prescription or dispensing of a
controlled substance.
(q) To the best knowledge of the Company and except as disclosed in
the Prospectus, there are no Medicare, Medicaid or CHAMPUS recoupment or
recoupments of any other third-party payor being sought, threatened,
requested or claimed against the Company or any Subsidiary.
(r) Ernst & Young LLP, Henry & Peters, P.C. and Allen, Gibbs &
Houlik, L.C., who have certified the financial statements filed with the
Commission as part of the Registration Statement, are independent public
accountants as required by the Act and the Rules and Regulations.
(s) Neither the Company nor, to the Company's knowledge, any of its
affiliates or subsidiaries, has taken or may take, directly or
indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of stock to facilitate the
sale or resale of the Shares.
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<PAGE> 9
(t) The Company is not an "investment company" within the meaning
of the Investment Company Act of 1940, as amended, and the Company is
not, nor will be, subject to regulation under said act.
(u) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and
the Company further agrees that if it commences engaging in business with
the government of Cuba or with any person or affiliate located in Cuba
after the date the Registration Statement becomes or has become effective
with the Commission or with the Florida Department of Banking and Finance
(the "Department"), whichever date is later, or if the information
reported in the Prospectus, if any, concerning the Company's business
with Cuba or with any person or affiliate located in Cuba changes in any
material way, the Company will, if required by Florida law, provide the
Department notice of such business or change, as appropriate, in a form
acceptable to the Department.
(v) No labor dispute with the employees of the Company or any
Subsidiary exists or, to the best knowledge of the Company, is threatened
or imminent that could result in a material adverse change in or
affecting the condition, financial or otherwise, of the Company and the
Subsidiaries taken as a whole, except as described in or contemplated by
the Prospectus.
(w) The Company and, to the best knowledge of the Company, each
of the Subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are
prudent and customary in the businesses in which they are engaged;
neither the Company nor, to the best knowledge of the Company, any
Subsidiary has been refused any insurance coverage sought or applied for;
and neither the Company nor, to the best knowledge of the Company, any
Subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not materially and adversely
change or affect the condition, financial or otherwise, of the Company
and the Subsidiaries taken as a whole, except as disclosed in or
contemplated by the Registration Statement.
(x) No Subsidiary of the Company is currently prohibited, directly
or indirectly, from paying any dividends to the Company, from making any
other distribution on such Subsidiary's capital stock, from repaying to
the Company any loans or advances to such Subsidiary from the Company or
from transferring any of such Subsidiary's property or assets to the
Company or any other Subsidiary of the Company, except as described in or
contemplated by the Prospectus.
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<PAGE> 10
(y) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to each
Underwriter as to the matters covered thereby.
(z) The Company and each of the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (A) transactions are executed in accordance with management's
general or specific authorizations; (B) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain assets
accountability; (C) access to assets is permitted only in accordance with
management's general or specific authorization; and (D) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(aa) This Agreement and the transactions contemplated herein have
been duly and validly authorized by the Company and this Agreement has
been duly and validly executed and delivered by the Company.
(bb) The Company has obtained from each of the persons listed on
Schedule C their agreement, in the form attached hereto as Exhibit A,
that for a period of 180 days from the date of this Agreement they will
not, without the prior consent of Equitable Securities Corporation,
offer, sell or dispose of any shares of Common Stock of the Company, or
any securities convertible into, exercisable for, or exchangeable for
any shares of Common Stock or derivative therefrom owned by them.
(cc) All offers and sales of shares of the Company's capital stock
(including securities convertible into, or exercisable or exchangeable
for, shares of the Company's capital stock) made by the Company after the
date of closing of its initial public offering (the "IPO") were, unless
registered under the Act, exempt from the registration requirements of
the Act, and were the subject of an available exemption from the
requirements of all applicable state securities or Blue Sky laws.
2. Representations, Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder severally represents, warrants
and agrees that:
(a) The Selling Stockholder has, and immediately prior to the
Closing Date or the Option Closing Date, as the case may be (each as
defined in Section 3 hereof) the Selling Stockholder will have, good and
valid title to the shares of Common Stock to be sold by the Selling
Stockholder hereunder on such Closing Date or the Option Closing Date, as
the case may be, free and clear of all liens, encumbrances, equities,
claims, security interests
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<PAGE> 11
or other restrictions whatsoever (including any restrictions on
transfer); and upon delivery of such shares and payment therefor pursuant
hereto, good and valid title to such shares, free and clear of all liens,
encumbrances, equities or claims, will pass to the several Underwriters
who have purchased such shares in good faith and without notice of any
such lien, encumbrance, equity or claim or any other adverse claim within
the meaning of the Uniform Commercial Code. Except for this Agreement,
there are no outstanding options, warrants, rights, or other agreements
or arrangements requiring the Selling Stockholder at any time to
transfer any Shares to be sold hereunder by the Selling Stockholder.
(b) The Selling Stockholder has placed in custody under a custody
agreement (the "Custody Agreement" and, together with all other similar
agreements executed by the other Selling Stockholders, the "Custody
Agreements") with First Union National Bank of North Carolina, as
custodian (the "Custodian"), for delivery under this Agreement,
certificates in negotiable form (with signature guaranteed by a
commercial bank or trust company having an office or correspondent in the
United States or a member firm of the New York or American Stock
Exchanges) representing the Shares to be sold by the Selling Stockholder
hereunder.
(c) The Selling Stockholder has duly and irrevocably executed and
delivered a power of attorney (the "Power of Attorney" and, together with
all other similar agreements executed by the other Selling Stockholders,
the "Powers of Attorney") appointing one or more other persons as
attorneys-in-fact, with full power of substitution, and with full
authority (exercisable by any one or more of them) to execute and deliver
this Agreement on behalf of such Selling Stockholder and to take such
other action as may be necessary or desirable to carry out the provisions
hereof on behalf of the Selling Stockholder.
(d) The Selling Stockholder has, and at all times through the
Closing Date or the Option Closing Date, as the case may be will have,
full legal right and power and all authorizations and approvals required
by law to execute, deliver and perform this Agreement, the Power of
Attorney and the Custody Agreement. This Agreement, the Power of
Attorney and the Custody Agreement have been duly authorized (if
applicable), executed and delivered by or on behalf of such Selling
Stockholder and are and at all times through the Closing Date will be the
legal, valid and binding agreements of such Selling Stockholder,
enforceable against such Selling Stockholder in accordance with their
terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, or other similar laws relating to
creditors' rights generally, and general equitable principles relating to
the availability of remedies, and as rights to indemnity or contribution
may be limited by state or federal securities laws and the public policy
underlying such laws).
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<PAGE> 12
(e) The execution, delivery and performance of this Agreement, the
Power of Attorney and the Custody Agreement by the Selling Stockholder
and the consummation by the Selling Stockholder of the transactions
contemplated hereby and thereby will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default (or result in acceleration of any obligation, termination of any
right or creation of any lien or encumbrance) under, any material
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Selling Stockholder is a party or by which the
Selling Stockholder is bound or to which any of the property or assets of
the Selling Stockholder is subject, nor will such actions result in any
violation of the provisions of the organizational documents of the
Selling Stockholder (if applicable) or any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Selling Stockholder or the property or assets of
the Selling Stockholder; and, except for the registration of the Shares
under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required by the NASD or under
the Exchange Act and applicable state securities laws in connection with
the purchase and distribution of the Shares by the Underwriters, no
consent, approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement, the Power of
Attorney or the Custody Agreement by the Selling Stockholder and the
consummation by the Selling Stockholder of the transactions contemplated
hereby and thereby.
(f) The Registration Statement, each Preliminary Prospectus, the
Prospectus, any amendment or supplement thereto, or any document
incorporated by reference therein do not, and the Prospectus and any
amendments or supplements to or documents incorporated by reference in
the Registration Statement or the Prospectus, when they become effective
or are filed with the Commission or were first used to confirm sales of
the Firm Shares, as the case may be, will not, contain any untrue
statement of a material fact regarding the Selling Stockholder or omit to
state any material fact regarding the Selling Stockholder required to be
stated therein or necessary to make the statements therein not
misleading; provided, however, that no representation or warranty is made
as to information contained in or omitted from the Registration Statement
or the Prospectus in reliance upon and in conformity with written
information furnished to the Company through the Representatives by or on
behalf of any Underwriter specifically for inclusion therein.
(g) The representations and warranties of such Selling Stockholder
in the Custody Agreement and the Power of Attorney, are, and on the
Closing Date of Option Closing Date, as the case may be, will be, true
and correct.
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<PAGE> 13
(h) There is not pending or, to the knowledge of such Selling
Stockholder, threatened against the Selling Stockholder any action, suit
or proceeding which (i) questions the validity of this Agreement or of
any action taken or to be taken by the Selling Stockholder pursuant to or
in connection with this Agreement or (ii) is required to be disclosed in
or incorporated by reference in the Registration Statement which is not
so disclosed or incorporated.
(i) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to stabilize or manipulate
the price of any security of the Company, or which might in the future
reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company, to facilitate
the sale or resale of the Shares pursuant to the distribution
contemplated by this Agreement.
3. Purchase, Sale and Delivery of the Firm Shares. On the basis of the
representations, warranties and covenants herein contained, and subject to the
conditions herein set forth, the Company agrees to sell 1,063,598 shares of the
Firm Shares and each Selling Stockholder agrees to sell the number of Firm
Shares set opposite its name in Schedule B hereto, severally and not jointly,
to the Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase, at a price of $30.48 per share, the number of Firm Shares set
forth opposite the name of each Underwriter in Schedule A hereof, subject to
adjustments in accordance with Section 11 hereof. Each Underwriter shall be
obligated to purchase from the Company, and from each Selling Stockholder, that
number of shares of the Firm Shares which represents the same proportion of the
number of shares of the Firm Shares to be sold by the Company, and by each
Selling Stockholder, as the number of shares of the Firm Shares set forth
opposite the name of such Underwriter in Schedule A represents of the total
number of shares of the Firm Shares to be purchased by all of the Underwriters
pursuant to this Agreement. The respective purchase obligations of the
Underwriters with respect to the Firm Shares shall be rounded among the
Underwriters to avoid fractional shares, as the Representatives may determine.
Payment for the Firm Shares to be sold hereunder is to be made in New York
Clearing House (next day) funds by wire transfer to an account specified by the
Company and by certified or bank cashier's checks drawn to the order of the
Company (at the Company's discretion) and the Selling Stockholders, as
applicable, against delivery of certificates therefor to the Representatives
for the several accounts of the Underwriters. Such payment and delivery are to
be made at the offices of Equitable Securities Corporation, Nashville City
Center, Suite 800, 511 Union Street, Nashville, Tennessee, at 10:00 a.m.,
Nashville time, on the third business day after the date of this Agreement,
unless otherwise required by the Commission pursuant to Rule 15c6-1 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or at such
other time and date not later than five business days thereafter as you and the
Company shall agree upon, such time and date being herein referred to as the
"Closing Date." (As used herein, "business day" means a day on which the New
York
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<PAGE> 14
Stock Exchange is open for trading and on which banks in New York are open for
business and not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such denominations and
registered in such manner as the Representatives request in writing not later
than the second full business day prior to the Closing Date, and will be made
available for inspection by the Representatives at least one business day prior
to the Closing Date.
In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
and the Selling Stockholders hereby grants an option to the several
Underwriters to purchase the Option Shares at the price per share as set forth
in the first paragraph of this Section 3. The maximum number of Option Shares
to be sold by the Company and the Selling Stockholders is 375,000. The option
granted hereby may be exercised in whole or in part but only once and at any
time upon written notice given within 30 days after the date of this Agreement,
by you, as Representatives of the several Underwriters, to the Company setting
forth the number of Option Shares as to which the several Underwriters are
exercising the option, the names and denominations in which the Option Shares
are to be registered and the time and date at which such certificates are to be
delivered. The time and date at which certificates for Option Shares are to be
delivered shall be determined by the Representatives but shall not be earlier
than three nor later than 10 full business days after the exercise of such
option, nor in any event prior to the Closing Date (such time and date being
herein referred to as the "Option Closing Date"). If the date of exercise of
the option is three or more days before the Closing Date, the notice of
exercise shall set the Closing Date as the Option Closing Date. The number of
Option Shares to be purchased by each Underwriter shall be in the same
proportion to the total number of Option Shares being purchased as the number
of Firm Shares being purchased by such Underwriter bears to the total number of
Firm Shares to be sold hereunder, adjusted by you in such manner as to avoid
fractional shares. The number of Option Shares to be sold by the Company and the
Selling Stockholders shall be allocated as follows: (i) 75% of the Option
Shares shall be sold by the Company to the Underwriters and (ii) 25% of the
Option Shares shall be sold to the Underwriters by the Selling Stockholder
allocated among them as provided in the various agreements under which they are
entitled to participate in the offering contemplated hereby. The option with
respect to the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters. You, as
Representatives of the several Underwriters, may cancel such option at any time
prior to its expiration by giving written notice of such cancellation to the
Company. To the extent, if any, that the option is exercised, payment for the
Option Shares shall be made on the Option Closing Date in New York Clearing
House (next day) funds by wire transfer to an account specified by the Company
and by certified or bank cashier's checks drawn to the order of the Company (at
the Company's discretion) and the Selling Stockholders as applicable, for the
Option Shares to be sold by it against delivery of certificates therefor at the
offices of Equitable Securities Corporation, Nashville City Center, Suite 800,
511 Union Street, Nashville, Tennessee.
4. Offering by the Underwriters. It is understood that the several
Underwriters are to make a public offering of the Firm Shares as soon as the
Representatives deem it advisable to do so. The Firm Shares are to be offered
to the public at the public offering price set forth in the Prospectus. To the
extent, if at all, that any Option Shares are purchased pursuant to Section 3
hereof, the Underwriters will offer them to the public on the foregoing terms.
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<PAGE> 15
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with an
Agreement Among Underwriters entered into by you and the several other
Underwriters.
5. Covenants of the Company. The Company covenants and agrees with the
several Underwriters that:
(a) If the Registration Statement has not yet been declared
effective, the Company will use its best efforts to cause the
Registration Statement and any amendments thereto to become effective as
promptly as possible, and if Rule 430A is used or the filing of the
Prospectus is otherwise required under Rule 424(b), the Company will file
the Prospectus (properly completed if Rule 430A has been used) pursuant
to Rule 424(b) within the prescribed time period and will provide
evidence reasonably satisfactory to you of such timely filing. In
addition, the Company will (A) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives
shall not previously have been advised and furnished with a copy or to
which the Representatives shall have reasonably objected in writing or
which is not in compliance with the Rules and Regulations, and (B) file
on a timely basis all reports and any definitive proxy or information
statements required to be filed by the Company with the Commission prior
to the termination of the offering of the Shares by the Underwriters.
(b) The Company will advise the Representatives promptly when the
Registration Statement or any post-effective amendment thereto shall have
become effective; of the receipt of any comments from the Commission; of
any request of the Commission for amendment of the Registration Statement
or for supplement to the Prospectus or for any additional information, or
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the use of the Prospectus
or of the institution of any proceedings for that purpose, and the
Company will use its best efforts to prevent the issuance of any such
stop order preventing or suspending the use of the Prospectus and to
obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have designated
in writing and will make such applications, file such documents, and
furnish such information as may be reasonably required for that purpose,
provided the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction where it is not now so qualified or required to file such a
consent. The Company will, from time to time, prepare and file such
statements, reports, and other documents, as are or may be
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<PAGE> 16
required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the
Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company
will deliver to, or upon the order of, the Representatives during the
period when delivery of a Prospectus is required under the Act, as many
copies of the Prospectus in final form, or as thereafter amended or
supplemented, as the Representatives may reasonably request. The Company
will deliver to the Representatives at or before the Closing Date, three
signed copies of the Registration Statement and all amendments thereto
including all exhibits filed therewith, and will deliver to the
Representatives such number of copies of the Registration Statement, but
without exhibits, and of all amendments thereto, as the Representatives
may reasonably request.
(e) The Company will comply to the best of its ability with the Act
and the Rules and Regulations, and the Exchange Act and the rules and
regulations of the Commission thereunder, so as to permit the completion
of the distribution of the Shares as contemplated in this Agreement and
the Prospectus. If during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event shall occur
as a result of which, in the judgment of the Company or in the opinion of
counsel for the Underwriters, it becomes necessary to amend or supplement
the Prospectus in order to make the statements therein, in the light of
the circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly
will prepare and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Prospectus, so that the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with applicable law.
(f) The Company will make generally available to its security
holders, not later than 18 months after the effective date of the
Registration Statement, an earnings statement (which need not be audited)
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings statement
shall satisfy the requirements of Section 11(a) of the Act and Rule 158
of the Rules and Regulations.
(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies
of all other documents, reports and information (including similar
documents, reports and information with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations, which
are not consolidated in the Company's financial statements) furnished by
the Company to its
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stockholders generally or filed with any securities exchange pursuant to
the requirements of such exchange or with the Commission pursuant to the
Act or the Exchange Act.
(h) No offering, sale, short sale or other disposition of any Common
Stock of the Company or other securities convertible into or exchangeable
or exercisable for Common Stock or derivative of Common Stock will be
made for a period of 180 days after the date of this Agreement, directly
or indirectly, by the Company otherwise than hereunder or with the prior
written consent of Equitable Securities Corporation except that the
Company may, without such consent, issue shares of Common Stock (or other
securities convertible into or exchangeable or exercisable for Common
Stock or derivatives therefrom) in connection with the acquisition of
another business (whether in an asset purchase, stock purchase, merger,
joint venture or other type of transaction), issue shares or options to
directors pursuant to the Company's director stock option plan, issue
shares or options pursuant to its stock purchase and option plans
described in the Prospectus, and issue shares upon the exercise of
options and warrants or the conversion of securities outstanding on the
date of this Agreement and described in the Prospectus.
(i) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the Nasdaq Stock Market's National Market (the
"Nasdaq National Market").
(j) The Company will apply the net proceeds from the sale of the
Shares for the purposes set forth in the Prospectus.
(k) The Company will file with the Commission such reports on Form
SR as may be required pursuant to Rule 463 of the Rules and Regulations.
6. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) To execute and deliver a written lockup agreement pursuant to
which such Selling Stockholder agrees not to, directly or indirectly,
offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected to,
result in the disposition by any person at any time in the future of)
any shares of Common Stock (other than the Shares), without the prior
written consent of Equitable Securities Corporation for a period of 180
days after the Closing Date;
(b) That the Shares to be sold by the Selling Stockholder hereunder,
which are represented by the certificates held in custody for the Selling
Stockholder, are subject to the interest of the Underwriters in such
Shares pursuant to this Agreement, that the arrangements made by the
Selling Stockholder for such custody are to that extent irrevocable, and
that the obligations of the Selling Stockholder hereunder shall not be
terminated by any act of the Selling Stockholder, by operation of law, by
the death or
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incapacity of any individual Selling Stockholder or, in the case of a
trust, by the death or incapacity of any executor or trustee or the
termination of such trust, or the occurrence of any other event; and
(c) To deliver to the Representatives prior to the Closing Date a
properly completed and executed United States Treasury Department Form
W-8 (if the Selling Stockholder is a non-United States person) or Form
W-9 (if the Selling Stockholder is a United States person).
Each Selling Stockholder consents to the use, in accordance with the
provisions of the Act and with the securities laws of the jurisdictions
in which the Shares are offered by the Underwriters and by all dealers to
whom the Shares may be sold, of each Preliminary Prospectus furnished by
the Company, the Prospectus and any amendment or supplement thereto, both
in connection with the offering and sale of the Shares and for such
period of time thereafter as the Prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer.
7. Cost and Expenses. The Company will pay all costs, expenses and fees
incident to the performance of the obligations of the Company and the Selling
Stockholders under this Agreement, including, without limiting the generality
of the foregoing, the following: accounting fees of the Company; the fees and
disbursements of counsel for the Company; the cost of printing and delivering
to, or as requested by, the Underwriters copies of the Registration Statement,
Preliminary Prospectuses, the Prospectus, and any supplements or amendments
thereto; the filing fees of the Commission; NASD filing fees; the listing fee
of the Nasdaq National Market and the expenses, including the reasonable fees
and disbursements (not to exceed $25,000) of counsel for the Underwriters,
incurred in connection with the qualification of the Shares under state
securities or Blue Sky laws. Any transfer taxes imposed on the sale of the
Shares to the several Underwriters will be paid by the Company or by the
Selling Stockholders, in accordance with the respective sales of their Shares
to the Underwriters. The Selling Stockholders shall also pay the fees and
expenses of their respective counsel and their respective share of underwriting
discounts and commissions. The Company shall not be required to pay for any of
the Underwriters' expenses (other than those related to qualification under
state securities or Blue Sky laws and NASD review) except that, if this
Agreement shall not be consummated because the conditions in Section 8 hereof
are not satisfied, or because this Agreement is terminated by the
Representatives pursuant to Section 8 hereof, or by reason of any failure,
refusal or inability on the part of the Company to perform any undertaking or
satisfy any condition of this Agreement or to comply with any of the terms
hereof on its part to be performed, unless such failure to satisfy said
condition or to comply with said terms results from the act or omission of
any Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating, marketing and proposing
to market the Shares or in contemplation of performing their obligations
hereunder; but the Company shall not in any event be liable to any of the
several
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<PAGE> 19
Underwriters for damages on account of loss of anticipated profits from the
sale by them of the Shares.
8. Conditions of Obligations of the Underwriters. The several obligations
of the Underwriters to purchase the Firm Shares on the Closing Date and the
Option Shares, if any, on the Option Closing Date are subject to the accuracy,
as of the Closing Date or the Option Closing Date, as the case may be, of the
representations and warranties of the Company and Selling Stockholders
contained herein, and to the performance by the Company and Selling
Stockholders of their respective covenants and obligations hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
request. No stop order suspending the effectiveness of the Registration
Statement, as amended from time to time, shall have been issued, and no
proceedings for that purpose shall have been taken or, to the best
knowledge of the Company, shall be contemplated by the Commission.
(b) The respective counsel for the Selling Stockholders shall have
furnished to the Representatives their written opinions, as counsel to
the Selling Stockholder(s) for whom they are acting as counsel, addressed
to the Underwriters and dated the Closing Date or the Option Closing
Date, as the case may be, in form and substance satisfactory to the
Representatives, to the effect that:
(i) The Selling Stockholder (if an entity) has full right, power and
authority to execute, deliver and perform this Agreement, the Power of
Attorney and the Custody Agreement. This Agreement, the Power of
Attorney and the Custody Agreement have been duly authorized (if the
Selling Stockholder is an entity), executed and delivered by or on behalf
of such Selling Stockholder and are the legal, valid and binding
agreements of such Selling Stockholder, enforceable against such Selling
Stockholder in accordance with their terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, or
other similar laws relating to creditors' rights generally, and general
equitable principles relating to the availability of remedies, and as
rights to indemnity or contribution may be limited by state or federal
securities laws and the public policy underlying such laws).
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<PAGE> 20
(ii) The execution, delivery and performance of this Agreement, the
Power of Attorney and the Custody Agreement by the Selling Stockholder
and the consummation by the Selling Stockholder of the transactions
contemplated hereby and thereby will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument known to such counsel to which the Selling
Stockholder is a party or by which the Selling Stockholder is bound, nor
will such actions result in any violation of the provisions of the
organizational documents of the Selling Stockholder (if an entity) or any
statute or any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over the Selling
Stockholder; and, except for such consents, approvals, authorizations,
registrations or qualifications as may be required under the Act or
applicable state securities laws in connection with the purchase and
distribution of the Shares by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such court
or governmental agency or body is required for the execution, delivery
and performance of this Agreement, the Power of Attorney or the Custody
Agreement by the Selling Stockholder and the consummation by the Selling
Stockholder of the transactions contemplated hereby and thereby; and
(iii) Assuming that each of the Underwriters at the Closing Time is
a "bona fide purchaser" (as defined in Article 8 of the Uniform
Commercial Code in the applicable jurisdiction), upon delivery of a
certificate or certificates therefor and payment of the purchase price
therefor by the Underwriters in accordance with this Agreement, the
Selling Stockholder will transfer to the Underwriters all of the Selling
Stockholder's interest in and to the shares (or warrants) free and clear
of any adverse claim (within the meaning of Section 8-302 of the
Uniform Commercial Code in the applicable jurisdiction).
In rendering such opinions, such counsel may (i) state that their
opinions are limited to matters governed by the Federal laws of the
United States of America, the jurisdiction in which the Selling
Stockholder is organized or resident and (ii) in rendering the opinion in
Section 8(b)(ii) above, rely upon a certificate of such Selling
Stockholder in respect of matters of fact as to the existence of any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Selling Stockholder is a party or by which the
Selling Stockholder is bound, provided, however, that such counsel shall
furnish copies thereof to the Representatives and state that they believe
that both the Underwriters and they are justified in relying upon such
certificate. Such counsel shall also have furnished to the
Representatives a written statement, addressed to the Underwriters and
dated the Closing Date or the Option Closing Date, as the case may be, in
form and substance
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<PAGE> 21
satisfactory to the Representatives, to the effect that (x) such counsel
has acted as counsel to such Selling Stockholder in connection with the
preparation of the Registration Statement, and (y) based on the
foregoing, no facts have come to the attention of such counsel which lead
them to believe that the Registration Statement, as of the effective
date, contained any untrue statement of a material fact relating to such
Selling Stockholder or omitted to state a material fact regarding the
Selling Stockholder required to be stated therein or necessary in order
to make the statements therein not misleading.
(c) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Alston &
Bird, counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters to the
effect that:
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct its
business as described in the Prospectus. The Company is duly qualified
to transact business in all jurisdictions in which the conduct of its
business as described in the Prospectus and based on inquiry of officers
of the Company requires such qualification, or in which the failure to
qualify would have a material adverse effect upon the business of the
Company and the Subsidiaries taken as a whole, based, as to matters of
fact, upon a certificate of officers of the Company.
(ii) Each of the Subsidiaries is a corporation validly existing and
in good standing under the laws of its jurisdiction of incorporation as
of the respective dates specified in such opinion letter and has the
corporate power and corporate authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus.
Each such Subsidiary is authorized to transact business as a foreign
corporation in each jurisdiction identified on a Schedule to such opinion
letter, as of the respective dates of the certificates specified therein.
All of the outstanding shares of capital stock of Renal West, L.C. (a)
have been duly authorized and are validly issued, fully paid and
nonassessable, and (b) to such counsel's knowledge, were not issued in
violation of any preemptive rights under such Subsidiary's charter or
under the laws of the jurisdiction of its incorporation or in violation
of any similar contractual rights. The opinion in the last sentence may
come from local counsel reasonably acceptable to the Representatives.
(iii) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the
authorized shares of its
21
<PAGE> 22
Common Stock have been duly authorized; the outstanding shares of its
Common Stock have been duly authorized and validly issued and are fully
paid and non-assessable; all of the Shares conform to the description
thereof contained in the Prospectus; the certificates for the Shares are
in due and proper form; the shares of Common Stock, including the Option
Shares, if any, to be sold by the Company pursuant to this Agreement have
been duly authorized and will be validly issued, fully paid and
non-assessable when issued and paid for as contemplated by this
Agreement; and no preemptive rights of shareholders exist with respect to
any of the Shares or the issue and sale thereof.
(iv) The Registration Statement has become effective under the Act
and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened under the Act.
(v) The Registration Statement, all Preliminary Prospectuses, the
Prospectus and each amendment or supplement thereto comply as to form in
all material respects with the requirements of the Act and the applicable
rules and regulations thereunder (except that such counsel need express
no opinion as to the financial statements and schedules and other
financial and statistical information included therein).
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<PAGE> 23
(vi) The execution and delivery by the Company of this Agreement
and the consummation of the transactions herein and therein contemplated
do not and will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, the Articles of
Incorporation or Bylaws, as amended, of the Company or any Subsidiary, or
any agreement, lease, contract, indenture, instrument or obligation to
which the Company or any of the Subsidiaries is a party or by which the
Company or any of the Subsidiaries may be bound, and which is filed as
an exhibit to the Registration Statement.
(vii) This Agreement has been duly authorized, executed and
delivered by the Company.
(viii) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions contemplated herein (other than as may be required by the
NASD or as required by state securities and Blue Sky laws as to which
such counsel need express no opinion) except such as have been obtained
or made. No consents or waivers
23
<PAGE> 24
from any other person are required in connection with the execution and
delivery of this Agreement and the consummation of the transactions
contemplated herein and therein, except such as have been obtained or
made.
(ix) The Shares to be sold under this Agreement to the Underwriters
have been duly approved for listing on the Nasdaq National Market.
(x) To the best knowledge of such counsel, no person or entity
holds a right to require or participate in the registration under the Act
of shares of Common Stock of the Company which right has not been waived
by the holder thereof as to the offering contemplated hereby and by the
Registration Statement, or satisfied by participation by such holder
in the offering.
(xi) The Company is not and, upon consummation of the transactions
contemplated hereby, will not be an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(xii) To the best knowledge of such counsel, all offers and sales
of shares of the Company's capital stock (including securities
convertible into, or exchangeable or exercisable for, shares of the
Company's capital stock) made by the Company in connection with its
acquisition of Main Line Suburban Dialysis, Inc. and RenalWest, L.C.,
were exempt from the registration requirements of the Act, and were the
subject of an available exemption from the requirements of all applicable
state securities or Blue Sky laws. Nothing has come to the attention of
such counsel that would cause it to believe that the Company has made
any other offers or sales of shares of the Company's capital stock
(including securities convertible into, or exchangeable or exercisable
for, shares of the Company's capital stock) which were subject to the
registration requirements of the Act or of applicable State Securities
or Blue Sky laws and which were not so registered.
(xiii) Except as described in or contemplated by the Prospectus, to
the best knowledge of such counsel, there are no outstanding securities
of the Company convertible or exchangeable into or evidencing the right
to purchase or subscribe for any shares of capital stock of the Company
and there are no outstanding or authorized options, warrants or rights of
any character obligating the Company to issue any shares of its capital
stock or any securities convertible or exchangeable into or evidencing
the right to purchase or subscribe for any shares of such stock; and
except as described in the Prospectus, to the best knowledge of such
counsel, there is no holder of any securities of the Company or any other
person who has the right, contractual or otherwise, to cause the Company
to sell or otherwise issue to them, or to permit them to underwrite the
sale of, any of the Shares or the right to have any Common Stock or other
securities of the Company included in the Registration Statement or the
right, as a result of the filing of the Registration Statement, to
require registration under the Act of any Common Stock or other
securities of the Company.
In rendering such opinion, Alston & Bird may rely as to matters governed
by the laws of states other than Delaware or federal laws solely on local
counsel in such jurisdictions, provided that in each case Alston & Bird
shall state that they believe that they and the Underwriters are
justified in relying on such other counsel. In addition to the matters
set
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<PAGE> 25
forth above, such opinion shall also include a statement to the effect
that, although such counsel has not independently verified and is not
passing upon the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, nothing has
come to the attention of such counsel which leads them to believe that
(i) the Registration Statement, as of the time it became effective under
the Act (but after giving effect to the changes incorporated pursuant to
Rule 430A under the Act), or as of the Closing Date or the Option Closing
Date contained (or contains) an untrue statement of a material fact or
omitted (or omits) to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or that the
Prospectus or any amendment or supplement thereto, on the date it was
filed pursuant to Rule 424(b), or as of the Closing Date and the Option
Closing Date, as the case may be, contained (or contains), an untrue
statement of a material fact or omitted (or omits) to state a material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading (except that such counsel need express no view as to
financial statements, notes and schedules included therein and other
financial and statistical information included therein), or (ii) there
are any contracts or documents of a character required to be described in
the Registration Statement or the Prospectus or to be filed as exhibits
to the Registration Statement that are not described or referred to
therein or so filed).
(d) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, an opinion of counsel
reasonably acceptable to the Representatives and addressed to the
Underwriters of counsel reasonably acceptable to the Representatives and
addressed to the Underwriters to the effect that, to the best of such
counsel's knowledge, each of the Company's dialysis centers in
Mississippi and Arizona currently holds (or has pending renewal
applications for) any licenses or permits required under state law
authorizing such dialysis center to furnish nephrology services as
described under the heading "Business--Operations" in the Prospectus.
(e) The Representatives shall have received from Hogan & Hartson
L.L.P., counsel for the Underwriters, an opinion dated the Closing Date
or the Option Closing Date, as the case may be, with respect to the
incorporation of the Company, the validity of the Shares being delivered
to the Underwriters, the Registration Statement, the Prospectus and any
other related matters as you may reasonably request. Such counsel shall
have received such documents and information as they may reasonably
request to enable them to pass upon such matters. In rendering such
opinion, counsel for the Underwriters may rely as to all matters governed
other than by Delaware or federal laws on the opinions of counsel
referred to in Paragraphs (b) and (c) of this Section 8.
(f) The Representatives shall have received at or prior to the
Closing Date from counsel for the Underwriters a memorandum or summary,
in form and substance satisfactory to the Representatives, with respect
to the qualification for offering and sale by the Underwriters of the
Shares under the state securities or Blue Sky laws of such jurisdictions
as the Representatives may reasonably have designated to the Company.
(g) The Representatives shall have received, on the Closing Date or
the Option Closing Date, as the case may be, a signed letter from Ernst &
Young LLP, Henry & Peters, P.C. and Allen, Gibbs & Houlik, L.C.,
independent public accountants for the Company, dated the Closing Date or
the Option Closing Date, as the case may be, which
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<PAGE> 26
shall confirm, on the basis of a review in accordance with the procedures
set forth in the letter signed by such firm and dated and delivered to
the Representatives on the date hereof, that nothing has come to their
attention during the period from the date five days prior to the date
hereof, to a date not more than five days prior to the Closing Date or
the Option Closing Date, as the case may be, which would require any
change in their letter dated the date hereof if it were required to be
dated and delivered on the Closing Date or the Option Closing Date, as
the case may be. All such letters shall be in form and substance
satisfactory to the Representatives.
(h) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or
certificates on behalf of the Company of the chief executive officer and
the principal financial and accounting officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the
case may be:
(i) The Registration Statement has become effective under
the Act, and no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for such
purpose have been taken or are, to such person's knowledge, contemplated
by the Commission.
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be.
(iii) Such person has carefully examined the Registration
Statement and the Prospectus and, in such person's opinion, as of the
effective date of the Registration Statement, the statements contained in
the Registration Statement were true and correct in all material respects,
and the Registration Statement and Prospectus did not omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein (as to the Prospectus, in light of the
circumstances under which they were made) not misleading and, to his
knowledge, since the effective date of the Registration Statement, no
event has occurred which should have been set forth in a supplement to or
an amendment of the Prospectus which has not been so set forth in such
supplement or amendment.
(i) Each Selling Stockholder (or the attorneys-in-fact on behalf of
the Selling Stockholders) shall have furnished to the Representatives on
the Closing Date or the Option Closing Date, as the case may be, a
certificate, dated the Closing Date or the Option Closing Date, as the
case may be, signed by, or on behalf of, the Selling Stockholder (or
attorneys-in-fact) stating that the representations, warranties and
agreements of the Selling Stockholder contained herein are true and
correct as of the Closing Date or the Option Closing Date, as the case
may be, and that the Selling
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<PAGE> 27
Stockholder has complied with all agreements contained herein to be
performed by the Selling Stockholder at or prior to the Closing Date or
Option Closing Date, as the case may be.
(j) The Company and the Selling Stockholders shall have furnished to
the Representatives such further certificates and documents confirming
the representations and warranties contained herein and related matters
as the Representatives may reasonably have requested.
(k) The Firm Shares and Option Shares, if any, shall have been
approved for listing upon notice of issuance on the Nasdaq National
Market.
(l) All filings required to have been made pursuant to Rules 424 or
430A under the Act shall have been made.
(m) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there shall not have been any
material adverse change or any development involving a prospective
adverse change in or affecting the condition, financial or otherwise, of
the Company or the earnings, business affairs, management or business
prospects of the Company whether or not arising in the ordinary course of
business.
(n) The Company shall have delivered to you written lock-up
agreements from the officers, directors and shareholders of the Company
listed on Schedule C pursuant to which such persons agree with you not to
offer, sell or dispose of any Common Stock of the Company, or any
securities convertible into or exercisable or exchangeable therefor or
derivative therefrom, for a period of 180 days after the date of this
Agreement, directly or indirectly, except with the prior consent of
Equitable Securities Corporation.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all
material respects reasonably satisfactory to the Representatives and to
Hogan & Hartson L.L.P., counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 8 shall
not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be
terminated by the Representatives by notifying the Company and Selling
Stockholders of such termination in writing or by telegram at or prior
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<PAGE> 28
to the Closing Date or Option Closing Date (but only the Option Shares
with respect to the Option Closing Date), as the case may be.
In such event, the Company, the Selling Stockholders and the Underwriters
shall not be under any obligation to each other (except to the extent
provided in Sections 7 and 10 hereof).
9. Conditions of the Obligations of the Company. The obligations of the
Company and the Selling Stockholders to sell and deliver the Shares required to
be delivered as and when specified in this Agreement are subject to the
conditions that at the Closing Date or the Option Closing Date, as the case may
be, no stop order suspending the effectiveness of the Registration Statement
shall have been issued and in effect and no proceedings therefor shall have
been initiated or threatened.
10. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act against any losses, claims, damages or
liabilities to which such Underwriter or such controlling person may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or (ii) the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein (as to the Prospectus, in light of
the circumstances under which they were made) not misleading, and will
reimburse each Underwriter and each such controlling person upon demand for any
legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding and expenses reasonably incurred
in responding to a subpoena or governmental inquiry whether or not such
underwriter or controlling person is a party to the related action or
proceeding; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement, or omission
or alleged omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or such amendment or supplement, in reliance upon
and in conformity with written information furnished to the Company by or
through the Representatives specifically for use in the preparation thereof.
The Company shall not be liable to any Underwriter pursuant to this subsection
(a) with respect to any Prospectus to the extent that such loss, claim, damage
or liability of such Underwriter results from the fact that such Underwriter
sold securities in any case where delivery of a Prospectus is required by the
Act if the Company has previously furnished copies of the Prospectus or any
amendment or supplement thereto to such Underwriter and the loss, claim, damage
or liability of such Underwriter results from an untrue statement or omission
of a material fact contained in, or the omission of a material
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<PAGE> 29
fact from, the Preliminary Prospectus or an earlier Prospectus which was
corrected in the Prospectus or any amendment or supplement thereto and such
Underwriter failed to deliver such corrected Prospectus to a purchaser of
Shares as required by the Act. This indemnity agreement will be in addition to
any liability which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not jointly with other Selling
Stockholders, shall indemnify and hold harmless each Underwriter, its officers
and employees, and each person, if any, who controls any Underwriter within the
meaning of the Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof (including, but
not limited to, any loss, claim, damage, liability or action relating to
purchases and sales of Shares), to which that Underwriter, officer, employee or
controlling person may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out of, or is
based upon (i) any untrue statement or alleged untrue statement of a material
fact regarding such Selling Stockholder contained in the Preliminary
Prospectus, the Registration Statement or the Prospectus or in any amendment or
supplement thereto or (ii) the omission or alleged omission to state in the
Preliminary Prospectus, Registration Statement or the Prospectus, or in any
amendment or supplement thereto, any material fact regarding such Selling
Stockholder required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse each Underwriter, its officers and
employees and each such controlling person for any legal or other expenses
reasonably incurred by that Underwriter, its officers and employees or
controlling person in connection with investigating or defending or preparing
to defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Selling Stockholder shall
not be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or in any
such amendment or supplement in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for inclusion
therein; provided, further, that as to any Preliminary Prospectus or the
Prospectus, this indemnity agreement shall not inure to the benefit of any
Underwriter, its officers, employees or any person controlling that Underwriter
on account of any loss, claim, damage, liability or action arising from the
sale of Shares to any person by that Underwriter if that Underwriter failed to
send or give a copy of the Prospectus, or an amendment or supplement thereto,
to that person within the time required by the Securities Act, and the untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact in such Preliminary Prospectus or the
Prospectus was corrected in the Prospectus or the amendment or supplement
thereto and provided, further, that the liability of each Selling Stockholder
shall be limited to the net proceeds received by such Selling Stockholder upon
the sale of the Shares. The foregoing indemnity agreement is in addition to
any liability which the Selling Stockholders may otherwise have to any
Underwriter or any officer, employee or controlling person of that Underwriter.
29
<PAGE> 30
(c) Each Underwriter will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed the Registration Statement,
each Selling Stockholder and each person, if any, who controls the Company or
Selling Stockholder within the meaning of the Act, against any losses, claims,
damages or liabilities to which the Company or any such director, officer,
Selling Stockholder or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, Selling Stockholder or controlling person in connection
with investigating or defending any such loss, claim, damage, liability, action
or proceeding; provided, however, that each Underwriter will be liable in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 10, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in this
Section 10 shall be available to any party who shall fail to give notice as
provided in this Section 10(d) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
prejudiced by the failure to give such notice, but the failure to give such
notice shall not relieve the indemnifying party or parties from any liability
which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of this Section 10. In case any
such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party
(approval of such counsel shall not be unreasonably withheld or delayed by the
indemnified party) and shall pay as incurred the reasonable fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel at its own expense. Notwithstanding the foregoing, the indemnifying
party shall pay as incurred the reasonable fees and expenses of the counsel
retained by the indemnified party in the event (i) the indemnifying party and
the indemnified party shall have
30
<PAGE> 31
mutually agreed to the retention of such counsel, or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both parties
by the same counsel would be inappropriate due to actual or reasonably
potential conflicts of interests between them. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 10(a) and 10(b) and by the Company in the case of parties
indemnified pursuant to Section 10(c). The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment. In addition, the indemnifying party will not, without the prior
written consent of the indemnified party, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action or
proceeding, of which indemnification may be sought hereunder (whether or not
any indemnified party is an actual potential party to such claim, action or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of the indemnified party from all liability arising out
of such claim, action or proceeding.
(e) If the indemnification provided for in this Section 10 is unavailable
to or insufficient to hold harmless an indemnified party under Section 10(a),
10(b) or 10(c) above in respect of any losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and
Selling Stockholder on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under Section 10(d) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Selling
Stockholders on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on
the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
and the Selling Stockholders bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or
31
<PAGE> 32
alleged omission to state a material fact relates to information supplied by
the Company and the Selling Stockholders on the one hand or the Underwriters on
the other and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 10(e)
were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to above in this
Section 10(e). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) referred to above in this Section 10(e) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (e), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts
and commissions applicable to the Shares purchased by such Underwriter,
(ii) no person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation and (iii) no Selling
Stockholder shall be required to contritute any amount in excess of the net
proceeds received by such Selling Stockholder from the Underwriters upon the
sale of the Shares. The Underwriters' obligations in this Section 10(e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 10 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
11. Default by Underwriters. If on the Closing Date or the Option Closing
Date, as the case may be, any Underwriter shall fail to purchase and pay for
the portion of the Shares which such Underwriter has agreed to purchase and pay
for on such date (otherwise than by reason of any default on the part of the
Company), you, as Representatives of the Underwriters, shall use your best
efforts to procure within 24 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company and the Selling
Stockholders such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 24
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such
32
<PAGE> 33
default shall occur does not exceed 10% of the Firm Shares or Option Shares, as
the case may be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Shares or Option
Shares, as the case may be, which they are obligated to purchase hereunder, to
purchase the Firm Shares or Option Shares, as the case may be, which such
defaulting Underwriter or Underwriters failed to purchase, or (b) if the
aggregate number of shares of Firm Shares or Option Shares, as the case may be,
with respect to which such default shall occur exceeds 10% of the Firm Shares
or Option Shares, as the case may be, covered hereby, the Company or you as the
Representatives of the Underwriters will have the right, by written notice
given within the next 24-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the nondefaulting
Underwriters or of the Company except to the extent provided in Section 10
hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 11, the Closing Date or Option Closing Date, as the case
may be, may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section
11 shall not relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
12. Notices. All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered or telegraphed and
confirmed as follows: if to the Underwriters, to Equitable Securities
Corporation, Nashville City Center, Suite 800, 511 Union Street, Nashville,
Tennessee 37219, Attention: R. Riley Sweat, with a copy to Hogan & Hartson
L.L.P., Columbia Square, 555 Thirteenth Street, N.W., Washington, D.C. 20004,
Attention: Peter J. Romeo, Esq.; if to the Company, to Renal Care Group, Inc.,
1801 West End Avenue, Suite 1100, Nashville, Tennessee 37203, Attention: Sam A.
Brooks, Jr., with a copy to Alston & Bird, 1201 West Peachtree Street, Atlanta,
Georgia 30309-3424, Attention: Steven L. Pottle, Esq.; if to any Selling
Stockholder, to such Selling Stockholder at the address set forth on Schedule B
hereto.
13. Termination. This Agreement may be terminated by you by notice to the
Company as follows:
(a) At any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any material adverse change, or
any development, to the reasonable belief of the Representatives, involving a
prospective material adverse change, in or affecting the condition, financial
or otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business affairs, management or business prospects of the Company and
its Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency after the date hereof or other
national or international calamity or crisis or change in economic or political
conditions if the effect of such
33
<PAGE> 34
outbreak, escalation, declaration, emergency, calamity, crisis or change on the
financial markets of the United States would, in your reasonable judgment, make
the offering or delivery of the Shares impracticable or inadvisable, (iii)
suspension of trading in securities on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq Stock Market or limitation on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such Exchange or the Nasdaq Stock Market, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which in
your reasonable opinion materially and adversely affects or will materially and
adversely affect the business or operations of the Company, or (v) declaration
of a banking moratorium by either federal or New York State authorities.
(b) As provided in Sections 8 and 9 of this Agreement.
This Agreement also may be terminated by you, by notice to the Company, as
to any obligation of the Underwriters to purchase the Option Shares, upon the
occurrence at any time prior to the Option Closing Date of any of the events
described in subparagraph (a) above or as provided in Sections 8 and 11 of this
Agreement.
14. Successors. This Agreement has been and is made solely for the
benefit of the Underwriters, the Company and the Selling Stockholders and their
respective successors, executors, administrators, heirs and assigns, and the
officers, directors and controlling persons referred to herein, and no other
person will have any right or obligation hereunder. The term "successors"
shall not include any purchaser of the Shares merely because of such purchase.
No purchaser of Shares from any Underwriter shall be deemed a successor or
assign merely because of such purchase.
15. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or its directors or officers, or the Selling Stockholders and (c)
delivery of and payment for the Shares under this Agreement.
The Company, the Selling Stockholders and the Underwriters acknowledge and
agree that the only information furnished or to be furnished by any Underwriter
to the Company for inclusion in any Prospectus or the Registration Statement
consists of the information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), information
provided in connection with Item 502(d) of Regulation S-K under the Act and
information under the caption "Underwriting" in the Prospectus.
34
<PAGE> 35
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Tennessee, without giving effect to its principles of
conflicts of law.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, the Selling
Stockholders and the several Underwriters in accordance with its terms.
It is understood that your acceptance of this letter on behalf of each of
the Underwriters is pursuant to the authority set forth in a form of Agreement
Among Underwriters, the form of which shall be submitted to the Company for
examination, upon request.
35
<PAGE> 36
Very truly yours,
RENAL CARE GROUP, INC.
By: _______________________________
Ronald Hinds
Executive Vice President, Chief
Financial Officer, Treasuer and
Secretary
The Selling Stockholders named in
Schedule B to this Agreement
By: _______________________________
Ronald Hinds, Attorney-in-fact
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date
first above written.
Equitable Securities Corporation
Hambrecht & Quist LLC
Morgan Keegan & Company, Inc.
Needham & Company, Inc.
As Representatives of the several
Underwriters listed on Schedule A
By: Equitable Securities Corporation
By: ______________________________
Authorized Signatory
36
<PAGE> 37
SCHEDULE A
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF FIRM SHARES
- -----------
TO BE PURCHASED
---------------------
<S> <C>
Equitable Securities Corporation ........................... 937,500
Hambrecht & Quist LLC ...................................... 750,000
Morgan Keegan & Company, Inc................................ 500,000
Needham & Company, Inc...................................... 312,500
Total ..................................... 2,500,000
---------
</TABLE>
<PAGE> 38
SCHEDULE B
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF SELLING STOCKHOLDER OF FIRM STOCK
- ---------------------- ------------------
<S> <C>
Harry R. Jacobson 27,300
Kenneth E. Johnson, M.D. 72,173
Thomas A. Lowery, M.D. 49,299
Stephen D. McMurray, M.D. 31,900
W. Tom Meredith, M.D 40,000
Kidney Care, Inc. 158,339
Douglas A. and Lisa Anderson Family Trust 62,563
Bimbaum Family Trust 62,563
Kenneth R. Boren Family Trust 134,954
Chang Family Trust 19,599
James R. Cotton, Jr. M.D. 49,299
Kevin A. Curran, Jr. M.D. 32,866
Kimberly Ann Dauser 5,524
Robert W. Detmer, M.D. 30,000
John K. Dyer, M.D 25,900
Samuel R. Eby, M.D. 5,000
Richard P. Flick, M.D. 2,000
Ronald R. Fuller 10,616
Roy D. Gerard, Jr., M.D. 32,866
John E. Greksa & Teresa L. Greksa Revocable Trust 20,168
Robert H. Harris, Jr., M.D. 19,333
Ronald H. Hyde, M.D. 6,500
James Leininger 30,333
Richard L. Nielsen 30,000
Thomas D. Noland 569
O'Regan Family Trust 28,984
Packer Family Trust 62,563
Thomas F. Parker 1,231
David A. Reichart, M.D. 134,954
Dennis L. Ross, M.D. 5,000
Keith T. Shearlock, M.D. 24,857
William E. Smith & Nina Smith Family Trust 60,000
Voit Family Trust 50,760
Hugo P. Weber, Jr., M.D. 45,828
Berne Yee, M.D. 62,563
</TABLE>
<PAGE> 39
SCHEDULE C
SCHEDULE OF PERSONS SUBJECT TO LOCK-UP AGREEMENTS
C.R.A. Adams
Douglas and Lisa Anderson Family Trust
Robert Benz
Bimbaum Family Trust
Boren Family Revocable Trust
John D. Bower, M.D.
Sam A. Brooks
Gary Brukardt
Joseph A. Cashia
James R. Cotton, M.D.
Robert W. Dettmer, M.D.
John K. Dyer, M.D.
Gar Gilgore
Raymond Hakim, M.D., Ph.D.
Rob Harris Sr., M.D.
Ronald Hinds
Joseph C. Hutts
Harry R. Jacobson, M.D.
Jobe Trust
Kidney Care, Inc. Foundation
James Leininger
Thomas A. Lowery, M.D.
Stephen D. McMurray, M.D.
W. Tom Meredith, M.D.
Richard Nielsen, M.D.
Packer Family Trust
David Riechert, M.D.
Dennis L. Ross, M.D.
Charles Schleifer, M.D
Keith Shearlock, M.D.
Miles Sigler
William Smith and Nina Smith Family Trust
Brendan Teehan
Vanderbilt University
Hugo P. Weber, M.D.
Berne Yee, M.D.
<PAGE> 40
EXHIBIT A
FORM OF LOCK-UP AGREEMENT
<PAGE> 1
Exhibit 21.1
RCG Mississippi, Inc.
D.M.N. of Indiana Corporation
Renal Care Group Texas, Inc.
Kansas Nephrology Association
Renal Care Group, Inc. a Tennessee Corporation
Main Line Suburban Dialysis Centers, Inc.
3-Co., Inc.
4-Co., Inc.
9-Co., Inc.
RenalWest, L.C.
The Nephrology Centers, Inc.
RCG of Alabama, Inc.
<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 28, 1996 with respect to the 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
November 18, 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
November 18, 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
November 18, 1996
