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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27640
RENAL CARE GROUP, INC.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1622383
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2100 WEST END AVENUE, SUITE 800
NASHVILLE, TENNESSEE 37203
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(615) 321-2333
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Company was $404,927,582 as of March 19, 1997, based upon the closing
price of such stock as reported on the Nasdaq National Market System ("Nasdaq
Stock Market") on that day (assuming for purposes of this calculation, without
conceding, that all executive officers and directors are affiliates). There
were 14,273,393 shares of common stock, $.01 par value, outstanding at
March 19, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Annual Report.
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PART I
ITEM 1. BUSINESS
GENERAL
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 also known as
end-stage renal disease ("ESRD"). As of December 31, 1996, the Company provided
dialysis and ancillary services to approximately 5,200 patients through 81
outpatient dialysis centers in 12 states and managed an additional 10 dialysis
centers in 4 states, 7 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 provided acute dialysis services through contractual relationships with 45
hospitals, staff-assisted dialysis services to 37 skilled nursing facilities and
physician practice management services to 23 of the 64 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 partnership 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. An essential
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 due to 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-affiliated centers.
Although nephrology groups have in the past sold their dialysis centers to
entities focused on owning and operating such facilities, the Company believes
that many nephrology groups recognize the benefits of affiliation with an entity
having broader clinical, financial and business capability 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 increasingly 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. Patients with ESRD eventually require dialysis or kidney
transplantation to sustain life; transplants constituting approximately 6% of
ESRD patients annually. Since 1972, individuals with ESRD
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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 payments for ESRD were approximately $11.1 billion in 1994. The
Company attributes the growth in the number of ESRD patients principally to
the aging of the general population and better treatment and survival of
patients with hypertension, diabetes and other illnesses that lead to chronic
kidney disease. In addition, improved technology has enabled older patients and
those who previously could not tolerate dialysis due to other illnesses to
benefit from this life-sustaining treatment. The Company believes these trends
will result in continued growth in the number of ESRD patients and increased
demand for dialysis and associated nephrology services.
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 payments for
ESRD exceeded $11.1 billion during 1994. Of the total direct medical payments
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.
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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.
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Ancillary Services
Nephrologists provide ancillary services to ESRD patients, the most
significant of which is the administration of erythropoietin ("EPO"). EPO is a
bio-engineered protein that mimics a hormone produced 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 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 large geographic 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.
BUSINESS 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 medical center-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 appropriate 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
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payors by improving the quality of care while reducing the overall costs
associated with treating patients with all forms of kidney disease, including
those with ESRD. Following is a discussion of the key components of the
Company's growth strategy.
ACQUISITION AND DEVELOPMENT ACTIVITIES
In February 1996, the Company commenced its business with the simultaneous
acquisition 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") (the "Combination"). 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 April 1996, the Company entered into 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.
In April 1996, the Company completed a merger with Main Line Suburban
Dialysis Centers, Inc. ("Main Line") based in Wynnewood, Pennsylvania, which
currently 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.
In September 1996, the Company completed a merger with RenalWest, L.C.
("RenalWest") which has 18 affiliated nephrologists and operates 19 freestanding
hemodialysis centers and three home peritoneal dialysis centers serving
approximately 1,260 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 consisting of two facilities, and began managing, with the right to
develop and own, a dialysis facility in Bay City, Texas, which together serve an
aggregate of approximately 200 patients.
In November 1996, the Company acquired substantially all of the assets of
the Watson Wise Dialysis Center of St. Joseph's Hospital and Health Center of
Paris, Texas, which serves
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approximately 100 patients. In addition, acute in-patient dialysis services will
be provided to St. Joseph's Hospital by the Company.
In December 1996, the Company formed a joint venture with The Cleveland
Foundation and MetroHealth Systems, Cleveland Ohio to operate four outpatient
facilities which expects to serve approximately 450 patients in the Cleveland
metropolitan area.
In January 1997, the Company exercised an option to acquire the assets
of a laboratory from Kidney Care, Inc.
In March 1997, the Company announced that it had acquired substantially
all of the assets of seven federated dialysis facilities in Central Indiana:
Eastern Indiana Kidney Center, Richmond Indiana; Southeastern Indiana Kidney
Center, Greensburg, Indiana; Saint Joseph Dialysis Center, Kokomo, Indiana; and
Indiana Kidney Center, Indiana Kidney Center South, St. Vincent Dialysis Center
and St. Vincent Dialysis Center West, all in Indianapolis, Indiana. The
facilities combined currently provide treatment to approximately 600 patients
as well as acute, inpatient dialysis treatment services to four local
hospitals. The consideration for the purchase transaction; excluding working
capital acquired consisted of cash of approximately $24,800,000 and $7,200,000
of restricted common stock.
OPERATIONS
Location, Capacity and Use of Facilities
Renal Care Group operates 81 outpatient dialysis centers in 12 states with
64 affiliated nephrologists and 1,294 certified dialysis stations, excluding 10
centers managed by the Company. The Company leases 61 centers and owns 20
centers. The Company also provides inpatient dialysis services to 45 acute care
hospitals and 37 skilled nursing facilities. Excluding managed centers, 703,549
hemodialysis treatments were provided at the Company's facilities during the
year ended December 31, 1996.
The Company estimates that on average its centers were operating at
approximately 60% of capacity as of December 31, 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.
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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
dialysis, primarily CAPD or CCPD, and home hemodialysis. As of December 31,
1996, approximately 11% 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.
Hospital and Skilled Nursing Facility Care
Certain of Renal Care Group's centers provide in-patient dialysis services
through contracts with 45 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 to a group of patients at
the University of Arkansas, provides consulting
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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 entered in a partnership agreement with Saint Louis University
effective in October 1996, to operate outpatient dialysis facilities in
the Saint Louis area. 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 expand the Company's patient base, provide opportunities for
the development of new centers and access to highly qualified physicians to act
as Medical Directors. Furthermore, as a result of these affiliations, the
Company will have access to outcomes research which, will support the Company's
quality initiative.
Relationships with Nephrologists; 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 patients.
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, in consideration for such
non-competition agreements, the Company has granted options to purchase shares
of Common Stock to the physicians serving as Medical Directors or their
professional practice groups.
Nephrology Practice Management
Renal Care Group currently provides certain practice management services to
the practices of 23 of the Company's nephrologists. Under these arrangements,
the Company typically provides to the physicians, in exchange for a management
fee, certain equipment, supplies and
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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
established a Medical Advisory Board to maintain quality criteria for its
clinical operations, monitor patient outcomes in all of its centers, and to
develop a protocol-driven clinical management model and involves its patients
in their own care.
Medical Advisory Board
The Company'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.
Quality Criteria
The Company actively involves its Medical Advisory Board in the
oversight 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
The Company 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. The Company 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.
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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.
REIMBURSEMENT
Sources of Net Patient Revenue
The following table sets forth information regarding the percentages of
Company net patient revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
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<S> <C> <C> <C>
Medicare 68% 68% 68%
Medicaid 8 7 6
Private and other payors 18 20 21
Hospital inpatient dialysis services 6 5 5
--- --- ---
Total 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 labor costs. Certain other services and drugs are eligible
for separate reimbursement under Medicare and are not part of the composite
rate, including specific drugs such as EPO and some physician ordered tests
provided to dialysis patients. The Company generally submits Medicare claims
monthly and is usually paid within 30 days of the submission.
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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, executive and
congressional budget reduction and control processes, inflation and costs
incurred in rendering the services. In the past, adjustments in the composite
rate 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 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.
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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 45 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
13
<PAGE> 14
reimbursement or reducing or eliminating 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, civil penalties, 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.
14
<PAGE> 15
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.
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.
The Company believes that the current arrangements of the Company with
nephrologist owners, Medical Directors, laboratories, IDPN suppliers, hospitals,
and other persons or entities who either refer patients to the Company's
dialysis centers or from whom the Company purchases items or services generally
are in material compliance with the federal anti-kickback statute. Specifically,
the Company believes that such arrangements now generally provide, and will
provide for reasonable compensation to or by the Company for the items and
services it buys from or furnishes to such persons or entities. Moreover, the
Company intends that IDPN therapy will be furnished in accordance with specified
utilization protocols consistent with Medicare coverage guidelines, and only to
patients for whom it is deemed medically necessary, as demonstrated by
physician-authorized Certificates of Medical Necessity. However, there can be no
assurance that the Company's future arrangements will not be challenged or
subject to sanctions for any of the Founding Companies' past arrangements. Any
such challenge or change, including any related sanctions which might be
assessed, could have a material adverse effect on the Company's operations, net
revenue and earnings.
Stark II
Provisions enacted as part of the Omnibus Reconciliation Act of 1989 and
the Omnibus Reconciliation Act of 1993 ("Stark I" and "Stark II," respectively)
restrict physician referrals for certain designated health services to entities
with which a physician or an immediate family
15
<PAGE> 16
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
restrictions to clinical laboratory services became effective in 1992. Stark II
provisions applicable to "designated health services" that may be relevant to
the Company became effective in January 1995.
A "financial relationship" under Stark II is defined as an ownership or
investment interest in, or a compensation arrangement between, the physician (or
an immediate family member) and the entity. The Company has entered into
compensation agreements with its Medical Directors or their respective
professional practices. The Medical Directors or their professional practices
also will own shares, and options to purchase shares, of Common Stock.
Accordingly, the Medical Directors will have a "financial relationship" with the
Company for purposes of Stark II.
For purposes of Stark II, "designated health services" include, among other
things: clinical laboratory services; parenteral and enteral nutrients,
equipment and supplies, including IDPN; prosthetics; orthotics; prosthetic
devices; physical and occupational therapy services; outpatient prescription
drugs; durable medical equipment; and inpatient and outpatient hospital
services. Dialysis is not a designated health service under Stark II. However,
the Stark II definition of "designated health services" includes items and
services that are components of dialysis or that may be provided to a patient in
connection with dialysis, if such items and 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, services and items
including, but not limited to, outpatient prescription drugs, including
EPO, enteral and parenteral nutrients, such as IDPN, clinical laboratory
services,in-center dialysis services and supplies, home dialysis supplies and
equipment, and services to hospital inpatients and outpatients, are reimbursed
separate from the Medicare composite rate and therefore may be construed as
"designated health services" within the meaning of Stark II.
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.
16
<PAGE> 17
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 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. Upon closing of the secondary
offering on November 22, 1996, the Company exceeded stockholders' equity of
$75.0 million.
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
17
<PAGE> 18
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.
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 for a number of reasons,
including deficit reduction. 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
("Kennedy-Kassebaum legislation"), signed into law in August 1996, will, among
other things, provide for insurance portability for individuals who lose or
change jobs, limit exclusions for preexisting conditions, and establish a pilot
program for medical savings accounts. In addition, this legislation also greatly
expands federal efforts at combating health care fraud and abuse by making
numerous amendments to the Social Security Act and the federal criminal code.
Among other things, the new 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.
From time to time, the Company pays Medicare supplemental insurance
premiums for patients with financial need. The provisions of the
Kennedy-Kassebaum legislation issued January 1, 1997 may limit the Company's
ability to pay for policy premiums for patients even with proven financial
hardship. However, the Company believes that the bill did not intend to limit
the
18
<PAGE> 19
Company's ability to pay premiums for insurance coverage to third-party or
governmental payors. Furthermore, the Company believes that the bill may be
amended to include provisions for the payment of premiums on behalf of ESRD
patients or allow the Company to make grants to a foundation that may provide
for such premium payments on behalf of ESRD patients.
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.
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-affiliated centers. Certain of the
Company's competitors have substantially greater financial resources than the
Company and may compete with the Company for acquisitions, development and/or
management of dialysis centers and nephrology practices. The Company believes
that competition for acquisitions has increased the cost of acquiring dialysis
centers and will likely increase the cost of acquiring nephrology practices. The
Company may also experience competition from centers established by former
Medical Directors or other referring physicians. There can be no assurance that
the Company will be able to compete effectively with any such competitors.
INSURANCE
The Company maintains a $1,000,000 per occurrence general liability
insurance policy for all of its operations. To date no payments have been made
under the Company's general liability insurance policies because of any action
brought as a result of the operations of any of its facilities. The Company also
maintains insurance in amounts it deems adequate to cover professional
liability, property and casualty risks, workers' compensation and directors and
officers liability. There can be no assurance that the aggregate amount and
kinds of the Company's insurance are adequate to cover all risks it may incur or
that insurance will be available in the future.
EMPLOYEES
At December 31, 1996 the Company employed 1,640 full-time employees and 212
part-time employees. Of such full-time employees 26 were employed at the
Company's headquarters and 1,826 were employed at the Company's facilities. In
the opinion of management, employee relations are considered good.
19
<PAGE> 20
ITEM 2. PROPERTIES
PROPERTIES
Excluding the 10 managed centers, the Company operates 81 dialysis centers
in 12 states, of which 61 are located in leased facilities and 20 are owned. The
following is a summary of the Company's outpatient dialysis centers.
<TABLE>
<CAPTION>
Centers
Acquired Company States Owned Managed
- ---------------- ------ ----- -------
<S> <C> <C> <C>
Kidney Care Mississippi, Arkansas
Louisiana, Florida 26 -
DMN Indiana, Ohio 6 1
Tyler Texas 6 2
Kansas Kansas, Oklahoma 10 -
Tennessee Tennessee, Ohio, Kentucky
Missouri - 7
Main Line Pennsylvania 5 -
The Nephrology Center Florida, Alabama 6 -
RenalWest Arizona 22 -
-- --
81 10
</TABLE>
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.
20
<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business, including those arising from patient treatment, which the Company
believes will be covered by malpractice insurance. The Company is not currently
a party to any material legal actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of stockholders during the fourth quarter
of 1996.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
System under the symbol "RCGI" since February 7, 1996. The following table sets
forth the quarterly high and low closing sales prices as reported on the Nasdaq
National Market System from February 7, 1996 through December 31, 1996.
<TABLE>
<CAPTION>
Price Range
1996 High Low
---- ------ ------
<S> <C> <C>
First Quarter(1) $28.75 $23.25
Second Quarter 36.00 27.75
Third Quarter 38.00 26.50
Fourth Quarter 37.50 30.63
</TABLE>
(1) Represents trading of the Common Stock from February 7, 1996 through March
31, 1996.
HOLDERS
As of March 17, 1997, the approximate number of registered stockholders was
3,442, including 142 stockholders of record and approximately 3,300 persons or
entities holding Common Stock in nominee name.
DIVIDEND POLICY
The Company has never paid any cash dividend 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 dividend will be declared or paid on the Common Stock
in the foreseeable future. Any future declaration of
21
<PAGE> 22
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.
SALES OF UNREGISTERED SECURITIES
The Company issued the following securities during the 1996 calendar year
in transactions that were not registered under the Securities Act of 1933:
(A) On February 12, 1996, the Company issued 4,834,000 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.
(B) On April 26, 1996, the Company issued 528,000 shares of Common Stock
to the former owners of Main Line in private placement
pursuant to the exemption from registration set forth in Section 4(2)
of the Securities Act.
(C) On July 1, 1996, the Company issued 298,775 shares of Common Stock to
the former owners of The Nephrology Centers, Inc. in a private
placement pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act.
(D) On September 30, 1996, the Company issued 2,400,000 shares of Common
Stock to the former owners of RenalWest, L.C. in a private placement
pursuant to the exemption from registration set forth in Section 4(2)
of the Securities Act.
(E) 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.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Historical Financial Data -- Renal Care Group, Inc. on page 24
represents 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. This information does not include the
results of operations for the Founding Companies for any periods prior to the
date of the initial public offering.
The Selected Combined and Pro Forma Financial Data -- Renal Care Group,
Inc. and Founding Companies on page 25 represents the results of operations had
the Founding Companies and the Company been combined for all periods presented
without giving effect to the initial public offering for periods prior to
February 1, 1996 except on a pro forma basis.
22
<PAGE> 23
The Combination was accounted for using historical cost, in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 48, because no
single owner group from any of the Founding Companies held more than 50% equity
interest in the Company as of the closing of the Company's initial public
offering. Accordingly, the Company has recorded the net assets acquired at the
Founding Companies' historical cost basis, as determined by generally accepted
accounting principles.
The Selected Historical Financial Data -- Renal Care Group, Inc. for the
years ended December 31, 1994, 1995, and 1996, is derived from audited data
included elsewhere in the Form 10-K. The unaudited combined financial data has
been prepared on the same basis as the audited consolidated 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
Form 10-K.
23
<PAGE> 24
SELECTED HISTORICAL FINANCIAL DATA -- RENAL CARE GROUP, INC.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
---------------------------
1992 1993 1994 1995 1996
------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue......................................... $8,713 $18,126 $41,627 $42,971 $129,518
Patient care costs.................................. 6,309 13,034 25,003 26,908 90,122
General and administrative expenses................. 1,626 3,649 8,721 8,701 13,364
Provision for doubtful accounts..................... 170 584 1,418 2,355 2,446
Depreciation and amortization....................... 153 601 1,484 1,580 4,541
Merger expenses..................................... -- -- -- -- 1,960
------ ------- ------- ------- --------
Total operating costs and expenses.................. 8,258 17,868 36,626 39,544 112,433
------ ------- ------- ------- --------
Income from operations.............................. 455 258 5,001 3,427 17,085
Interest income (expense), net...................... (44) (128) (363) (452) 619
------ ------- ------- ------- --------
Income (loss) before income taxes................... $ 411 $ 130 $ 4,638 $ 2,975 17,704
====== ======= ======= =======
Provision for income taxes.......................... 6,958
--------
Net income.......................................... $ 10,746
========
Earnings per share.................................. $ 0.84
========
Weighted average shares outstanding................. 12,739
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,(1)
---------------
1992 1993 1994 1995 1996
------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 774 $ 3,519 $ 3,171 $(1,418) $ 49,462
Total assets........................................ 2,613 14,393 17,318 20,765 131,812
Total debt.......................................... 367 5,248 5,420 7,340 --
Stockholders' equity................................ 1,468 4,901 5,919 4,566 93,325
- ----------
</TABLE>
(1) The financial information for the years ended December 31, 1992, 1993, 1994
and 1995 does not include the Founding Companies. The financial information
for the year ended December 31, 1996 includes the results of operations for
the Founding Companies since February 1996 when they were acquired by the
Company simultaneously with its initial public offering.
(2) Earnings per share amounts are not presented for the years ended December
31, 1992, 1993, 1994 and 1995 as the historical results of operations of
the Company for these years consisted of non-taxed earnings from Main Line
and RenalWest which were S corporations and therefore all taxes were
payable personally by the stockholders of the respective entities.
Additionally, the entities had different equity structure from the Company
and earnings per share is not considered meaningful.
24
<PAGE> 25
SELECTED COMBINED AND PRO FORMA FINANCIAL DATA --
RENAL CARE GROUP, INC. AND FOUNDING COMPANIES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
---------------------------
1992 1993 1994 1995(2) 1996(3)
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue......................................... $64,309 $80,442 $110,670 $115,329 $135,894
Patient care costs.................................. 46,752 58,314 75,366 80,417 94,849
General and administrative expenses................. 4,423 6,799 12,616 12,866 13,797
Provision for doubtful accounts..................... 1,309 2,010 2,914 3,995 2,571
Depreciation and amortization....................... 1,895 2,416 3,414 3,661 4,715
Merger expenses..................................... -- -- -- -- 1,960
------- ------- -------- -------- --------
Total operating costs and expenses.................. 54,379 69,539 94,310 100,939 117,892
------- ------- -------- -------- --------
Income from operations.............................. 9,930 10,903 16,360 14,390 18,002
Interest income (expense), net...................... (570) (460) (646) 1,013 525
------- ------- -------- -------- --------
Income before income taxes.......................... $ 9,360 $10,443 $ 15,714 $13,377 18,527
======= ======= ======== ========
Provision for income taxes.......................... 7,025
--------
Net income (loss)................................... $ 11,502
========
Earnings per share.................................. $ 0.85
========
Weighted average shares outstanding................. 13,496
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, (1)
----------------
1992 1993 1994 1995 1996
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 9,638 $14,761 $18,158 $12,237 $ 49,462
Total assets........................................ 28,670 42,770 49,918 60,899 131,812
Total debt.......................................... 4,037 8,265 8,620 15,915 --
Stockholders' equity................................ 18,506 24,211 26,825 25,358 93,325
</TABLE>
- ----------
(1) The financial information for each of the years presented 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.
(2) Pro forma information for the year ended December 31, 1995 excludes the
following adjustments: (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.
(3) Pro forma information for the year ended December 31, 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 and includes the results of
operations for the Founding Companies for the month of January. Net
income and earnings per share before merger expenses for the year ended
December 31, 1996 would have been $12,738,000 and $0.94, respectively.
25
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements, including the notes thereto, contained
elsewhere in this Annual Report on Form 10-K.
OVERVIEW
Renal Care Group 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 the
comparative discussion that follows, the selected Combined Financial and Pro
Forma 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 Selected Combined Financial and Pro Forma
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 Selected Combined and
Pro Forma 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.
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 based on rates that are established by
HCFA. For the year ended December 31, 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.
26
<PAGE> 27
RESULTS OF OPERATIONS
As indicated elsewhere, in February 1996 the Company commenced its business
with the simultaneous acquisition of the five Founding Companies. As a result of
this Combination, a comparison of the current operations of the Company to its
historical operations is not considered meaningful. Therefore, the results of
operations for all periods in the table below and in the period comparisons that
follow reflect the historical operations of the Company combined with the
operations of the Founding Companies had the Combination occurred for all
periods presented.
The following table sets forth, results of operations (in thousands) for
the periods indicated and the percentage of net revenue represented by the
respective financial items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Revenue $110,670 100.0% $115,329 100.0% $135,894 100.0%
Patient care costs 75,366 68.1 80,417 69.7 94,849 69.8
General and administrative
expenses 12,616 11.4 12,866 11.1 13,797 10.2
Provision for doubtful accounts 2,914 2.6 3,995 3.5 2,571 1.9
Depreciation and amortization 3,414 3.1 3,661 3.2 4,715 3.5
Merger expenses -- -- -- -- 1,960 1.4
-------- ----- -------- ----- -------- -----
Total operating costs and
expenses 94,310 85.2 100,939 87.5 117,892 86.8
-------- ----- -------- ----- -------- -----
Income from operations $ 16,360 14.8% $ 14,390 12.5% $ 18,002 13.2%
======== ===== ======== ===== ======== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Revenue. Net revenue increased from $115,329,000 for the year ended
December 31, 1995 to $135,894,000 for the year ended December 31, 1996, an
increase of $20,565,000, or 17.8%. This increase resulted primarily from a 12.6%
increase in the number of treatments from 624,988 in the 1995 period to 703,549
in the 1996 period and a 4.3% increase in the average revenue per treatment from
$185 in the 1995 period to $193 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 $80,417,000 for the year ended December 31, 1995 to $94,849,000
for the year ended December 31, 1996, an increase of $14,432,000, or 17.9%.
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 69.7% in the 1995
period to 69.8% in the 1996 period. Average patient care cost per treatment
increased from $129 in the 1995 period to $135 in the 1996 period. This
increase was due to normal health care inflation, increased EPO utilization and
the increase in higher cost acute treatments.
27
<PAGE> 28
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, billing and
information systems. General and administrative expenses increased from
$12,866,000 for the year ended December 31, 1995 to $13,797,000 for the year
ended December 31, 1996, an increase of $931,000, or 7.2%. 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 11.1% in the 1995 period to 10.2% in the
1996 period.
Provision for Doubtful Accounts. The provision for doubtful accounts
decreased from $3,995,000 for the year ended December 31, 1995 to $2,571,000 for
the year ended December 31, 1996. The provision for doubtful accounts as a
percentage of net revenue decreased from 3.5% 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
$3,661,000 for the year ended December 31, 1995 to $4,715,000 for the year ended
December 31, 1996, an increase of $1,054,000, or 28.8%. This increase was due to
the purchase of patient care facilities previously leased, higher than normal
replacement cost 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, RenalWest and other acquisitions.
Income from Operations. Income from operations increased from $14,390,000
for the year ended December 31, 1995 to $18,002,000 for the year ended December
31, 1996, an increase of $3,612,000, or 25.1%. Income from operations as a
percentage of net revenue increased from 12.5% in the 1995 period to 13.2% 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.
28
<PAGE> 29
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 11.1% in the 1995 period. General and administrative
expenses as a percentage of net revenue decreased in the 1995 period due to
the growth in revenue.
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.
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.
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 December 31,
1996, the Company's working capital was $49,462,000, cash and cash equivalents
were $47,624,000 and the Company's current ratio was 2.3:1.
The Company's net cash provided by operating activities was $17,085,000
in the year ended December 31, 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 $62,513,000 in the year ended
December 31, 1996. Cash used in investing activities included $37,853,000 of
cash, working capital and
29
<PAGE> 30
certain other distributions made at the closing of the Combination, net of
cash acquired. Additional uses of cash for investing activities have been
related to acquisitions, purchases of equipment and leasehold improvements for
the Company's facilities and purchases of investments. Cash provided by
financing activities was $91,711,000 for the year ended December 31, 1996. The
Company's initial public offering in February 1996 and stock offering in
November 1996 resulted in the sale of 5,830,000 shares from which the Company
received $112,131,000 after offering costs. Long-term debt repayments totaled
$14,713,000, and pre-closing distributions of $6,245,000 were made to former
shareholders of acquired companies after 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 aggregate amount of the
contingent payments is $7,000,000. The Company expects to satisfy this
obligation through working capital.
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%.
A significant component of the Company's growth strategy is the acquisition
and development of dialysis centers. The Company believes that 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.
FORWARD-LOOKING INFORMATION
Certain of the matters discussed in the preceding pages of this Form 10-K,
particularly regarding implementation of the Company's strategy, development of
the dialysis and nephrology industries, anticipated growth and revenues,
anticipated working capital and sources of funding for growth opportunities and
construction, expenditures, interest, costs and income constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended. Actual results or developments are subject
to a number of substantial risks and uncertainties, including general economic
market and business conditions; opportunities (or the lack thereof) that may be
presented to and pursued by the Company; competitive actions by other
companies; changes in laws or regulations; and other factors discussed from
time to time in the Company's
30
<PAGE> 31
SEC reports and other filings. Many of the foregoing factors are beyond
the control of the Company. Accordingly, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date made and which the Company undertakes no obligation to revise to reflect
events after the date made.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and financial statement schedules in
Part IV, Item 14(a) (1) and (2) of the report are incorporated by reference into
this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item will appear in, and is incorporated
by reference from, the sections entitled "Proposals for Stockholder Action -
Proposal 1. Election of Directors" and "Management - Directors and Executive
Officers" included in the Company's definitive Proxy Statement relating to the
1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the sections entitled
"Executive Compensation", included in the Company's definitive Proxy Statement
relating to the 1997 Annual Meeting of Stockholders, which information, other
than the Compensation Committee Report and Performance Graph required by Items
402(k) and (l) of Regulation S-K, is incorporated herein by reference.
31
<PAGE> 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in, and is incorporated
by reference from, the section entitled "Security Ownership of Directors,
Officers and Principal Stockholders" included in the Company's definitive Proxy
Statement relating to the 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will appear in, and is incorporated
by reference from, the sections entitled "Certain Relationships and Related
Transactions" included in the Company's definitive Proxy Statement relating to
the 1997 Annual Meeting of Stockholders.
32
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report:
(1) Index To Financial Statements Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets at December 31, 1995
and 1996 F-2
Consolidated Statements of Operations for the years
ended December 31, 1994, 1995, and 1996 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1994, 1995, and 1996 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995, and 1996 F-6
Notes to Consolidated Financial Statements F-8
(2) Index to Financial Statement Schedules.
Report of Independent Accountants F-18
Schedule II - Valuation and Qualifying Accounts F-19
(3) The Exhibits are listed in the Index of Exhibits Required by
Item 601 of Regulation S-K included herewith, which is incorporated
herein by reference.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
33
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------- -----------------------
<S> <C>
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)
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(1)*
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 Anne
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)
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 related Lease
Agreement between Dodge City Medical Center Building, Inc. and M-W-R Investment (1)
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------- -----------------------
<S> <C>
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(3)*
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(3)*
10.21 Chief Medical Officer Agreement, dated February 12, 1996, between the Company
and John D. Bower, M.D.(3)
10.22 Medical Director Services Agreement, dated September 30, 1996, between the
Company and a group of individual physicians(3)
10.23 Employment Agreement, dated June 30, 1996, between the Company and Gary
Brukardt(3) *
10.24 Management Agreement, dated March 1, 1996, between the Company and The
Cleveland Clinic Foundation(3) *
10.25 Loan Agreement, dated May 30, 1996, among the Company, its subsidiaries and
NationsBank of Tennessee, N.A.(3)
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.(3)
10.27 Stock Pledge Agreement, dated May 30, 1996, between the Company and
NationsBank of Tennessee, N.A.(3)
10.28 Asset Purchase Agreement with an effective date of February 1, 1997 among
the Company, RCG Indiana, LLC, Eastern Indiana Kidney Center, Indiana
Kidney Center, Indiana Kidney Center South, LLC, St. Vincent Dialysis
Center, Saint Joseph Dialysis Center and Indiana Dialysis Services PC and
Community Hospitals of Indiana, Inc., Seton Health Corporation of Central
Indiana, Inc., Reid Hospital & Health Care Services, Inc., and Saint
Joseph Hospital and Health Care Center of Kokomo, Indiana, Inc. and
Indiana Dialysis Services, PC, Reid Hospital Physicians, Greenwood Dialysis
Services, PC and certain individuals named on the signature pages thereto
and Indiana Nephrology & Internal Medicine, P.C.
10.29 Asset Purchase Agreement and Bill of Sale, dated effective as of January 1, 1997,
among the Company, RCG Laboratory, Inc., and Kidney Care, Inc.
11.1 Statement regarding computation of per share earnings
21.1 List of subsidiaries of the Company
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
<S> <C>
23.2 Consent of Ernst & Young LLP
24.1 Power of Attorney (contained on the signature page of this report)
27 Financial Data Schedule (for SEC use only)
</TABLE>
- ------------
(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).
(3) Incorporated by reference to the Company's Registration Statement on Form
S-1 (Reg. No. 333-13813) effective October 30, 1996.
* Management contract or executive compensation plan or arrangement.
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Nashville, State of Tennessee, on the 28th day of March, 1997.
RENAL CARE GROUP, INC.
By: /s/ Sam A. Brooks, Jr.
-----------------------------
Sam A. Brooks, Jr., President
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Sam A. Brooks, Jr. and Ronald Hinds and each of
them his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and, in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Sam A. Brooks, Jr. President, Chief Executive March 28, 1997
- ---------------------------- Officer and Director
Sam A. Brooks, Jr. (Principal Executive Officer)
/s/ Ronald Hinds Executive Vice President, March 28, 1997
- ---------------------------- Chief Financial Officer
Ronald Hinds Secretary/Treasurer (Principal
Financial Officer and Principal
Accounting Officer)
/s/ Joseph C. Hutts Director March 26, 1997
- ----------------------------
Joseph C. Hutts
</TABLE>
<PAGE> 38
<TABLE>
<S> <C> <C>
/s/ Harry R. Jacobson Director and Chairman March 28, 1997
- ---------------------------- of the Board
Harry R. Jacobson, M.D.
/s/ Thomas A. Lowery Director March 20, 1997
- ----------------------------
Thomas A. Lowery
/s/ John D. Bower Director March 20, 1997
- ----------------------------
John D. Bower, M.D.
/s/ Stephen D. McMurray Director March 24, 1997
- ----------------------------
Stephen D. McMurray, M.D.
/s/ W. Tom Meredith Director March 22, 1997
- ----------------------------
W. Tom Meredith, M.D.
/s/ Kenneth Johnson Director March 28, 1997
- ----------------------------
Kenneth Johnson, M.D.
</TABLE>
<PAGE> 39
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, 1995 and 1996, and the related consolidated
income statements, statements of changes in stockholders' equity, and cash flows
for each of the three years in the period ended December 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 consolidated financial position of Renal Care
Group, Inc. as of December 31, 1995 and 1996 and the consolidated results of
operations and cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Nashville, Tennessee
February 28, 1997
F-1
<PAGE> 40
RENAL CARE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,341 $ 47,624
Investments, held to maturity............................. -- 5,814
Accounts receivable, net.................................. 8,557 28,842
Inventories............................................... 727 2,658
Prepaid expenses and other current assets................. 493 1,540
------- --------
Total current assets.............................. 11,118 86,478
Property and equipment, net................................. 9,225 30,739
Goodwill, net............................................... -- 11,066
Intangible assets, net...................................... 53 2,749
Other long-term assets...................................... 369 780
------- --------
Total assets...................................... $20,765 $131,812
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,175 $ 7,984
Accrued wages and benefits................................ 1,420 6,263
Due to third party payors................................. 4,265 6,593
Due to related parties.................................... 270 7,000
Accrued expenses and other current liabilities............ 729 6,588
Income taxes payable...................................... -- 2,588
Current portion of long-term debt......................... 3,677 --
------- --------
Total current liabilities......................... 12,536 37,016
Long-term debt, net of current portion...................... 3,663 --
Deferred income taxes....................................... -- 1,471
------- --------
Total liabilities................................. 16,199 38,487
======= ========
Stockholders' equity:
Preferred stock, $.01 par value, 10,000 shares authorized,
none issued............................................ -- --
Common stock, $.01 par value, 22,000 shares authorized
2,938 and 14,182 shares issued and outstanding at
December 31, 1995 and 1996, respectively............... 29 142
Additional paid-in capital................................ 5,254 89,399
Retained (deficit) earnings............................... (717) 3,784
------- --------
Total stockholders' equity........................ 4,566 93,325
------- --------
Total liabilities and stockholders' equity........ $20,765 $131,812
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 41
RENAL CARE GROUP, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net revenue................................................. $41,627 $42,971 $129,518
Operating costs and expenses:
Patient care costs........................................ 25,003 26,908 90,122
General and administrative expenses....................... 8,721 8,701 13,364
Provision for doubtful accounts........................... 1,418 2,355 2,446
Depreciation and amortization............................. 1,484 1,580 4,541
Merger expenses........................................... -- -- 1,960
------- ------- --------
Total operating costs and expenses..................... 36,626 39,544 112,433
------- ------- --------
Income from operations...................................... 5,001 3,427 17,085
Interest, net............................................... (363) (452) 619
------- ------- --------
Income before taxes......................................... 4,638 2,975 17,704
Provision for income taxes.................................. -- -- 6,958
------- ------- --------
Net income.................................................. $ 4,638 $ 2,975 $ 10,746
======= ======= ========
Earnings per share.......................................... $ 0.84
========
Weighted average shares outstanding......................... 12,739
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 42
RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED STOCKHOLDERS
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993................... 2,928 $ 29 $ 4,075 $ 797 $ 4,901
Capital contributions........................ -- -- 411 -- 411
Net income................................... -- -- -- 4,638 4,638
Distributions to owners...................... -- -- -- (4,031) (4,031)
------ ---- -------- ------- --------
Balance at December 31, 1994................... 2,928 29 4,486 1,404 5,919
Capital contributions........................ -- -- 768 -- 768
Net income................................... -- -- -- 2,975 2,975
Distributions to owners...................... -- -- -- (5,096) (5,096)
------ ---- -------- ------- --------
Balance at December 31, 1995................... 2,928 29 5,254 (717) 4,566
Issuance of common stock in Initial Public
Offering................................... 4,485 45 71,752 -- 71,797
Issuance of common stock to Founders......... 4,834 49 14,817 -- 14,866
Issuance of common stock in acquisitions..... 369 4 2,324 -- 2,328
Issuance of common stock in Secondary
Offering................................... 1,345 13 40,321 -- 40,334
Conversion of subordinated notes............. 197 2 1,475 -- 1,477
Exercise of stock options.................... 24 -- 155 -- 155
Net income................................... -- -- -- 10,746 10,746
Distributions to owners...................... -- -- -- (6,245) (6,245)
Dividends to Founders........................ -- -- (46,699) -- (46,699)
------ ---- -------- ------- --------
Balance at December 31, 1996................... 14,182 $142 $ 89,399 $ 3,784 $ 93,325
====== ==== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 43
RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 4,638 $ 2,975 $ 10,746
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 1,484 1,580 4,541
Loss (gain) on sale of property and equipment............. -- 20 (118)
Equity in earnings of subsidiary.......................... -- -- (311)
Deferred income taxes..................................... -- -- 310
Changes in assets and liabilities:
Accounts receivable..................................... (3,284) 781 (8,127)
Inventories............................................. (72) 40 (8)
Prepaid expenses and other assets....................... 111 185 1,190
Intangibles and other assets............................ 15 (277) (1,133)
Accounts payable........................................ 1,646 2,639 1,773
Accrued wages and benefits.............................. 235 38 3,042
Due to related parties.................................. 250 20 (1,392)
Accrued expenses and other liabilities.................. 2 184 3,983
Income taxes payable.................................... -- -- 2,588
------- ------- --------
Net cash provided by operating activities................... 5,025 8,185 17,084
INVESTING ACTIVITIES
Proceeds from sale of property and equipment................ -- 171 395
Purchases of property and equipment......................... (2,428) (4,804) (11,365)
Cash paid for acquisitions, net of cash acquired............ -- -- (8,201)
Distributions received from affiliate....................... -- -- 325
Purchases of investments, held-to-maturity.................. -- -- (14,975)
Proceeds from sale of investments, held-to-maturity......... -- -- 9,161
Cash distribution to founders, net of cash contributions.... -- -- (37,852)
------- ------- --------
Net cash used in investing activities....................... (2,428) (4,633) (62,512)
FINANCING ACTIVITIES
Payments on line of credit.................................. (9,642) (8,414) (15,163)
Proceeds from line of credit................................ 9,603 9,155 15,006
Payments on long-term....................................... (1,830) (1,765) (14,713)
Proceeds from long-term debt................................ 1,960 2,844 540
Capital contributions....................................... 411 767 --
Proceeds from exercise of stock options..................... -- -- 155
Net proceeds from issuance of common stock.................. -- -- 112,131
Distributions to owners..................................... (4,031) (5,096) (6,245)
------- ------- --------
Net cash (used in) provided by financing activities......... (3,529) (2,509) 91,711
------- ------- --------
Increase (decrease) in cash and cash equivalents............ (932) 1,043 46,283
Cash and cash equivalents, at beginning of year............. 1,230 298 1,341
------- ------- --------
Cash and cash equivalents, at end of year................... $ 298 $ 1,341 $ 47,624
======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................... $ 386 $ 469 $ 673
======= ======= ========
Income taxes................................................ $ -- $ -- $ 4,697
======= ======= ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Common Stock to Founders.................................... $ -- $ -- $ 14,866
======= ======= ========
Conversion of subordinated notes............................ $ -- $ -- $ 1,477
======= ======= ========
Issuance of Common Stock in acquisitions.................... $ -- $ -- $ 2,328
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 44
RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1996
1. ORGANIZATION
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"), collectively, known as the
"Founding Companies," in exchange for shares of its Common Stock, cash, notes
payable and the assumption of certain debt (the "Combination"). As described
more fully in Note 8, on February 6, 1996, the Company closed an initial public
offering of 4,485 shares of its Common Stock and simultaneously consummated the
Combination. The four unrelated 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 was 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.
As described more fully in Note 10, the completed mergers with Main Line
Suburban Dialysis Centers, Inc. ("Main Line") and RenalWest, L.C., et al
("RenalWest") were accounted for as pooling of interests. These financial
statements reflect the restated consolidated financial statements of the Company
effecting these pooling of interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority owned corporate subsidiaries and partnership
interests. Significant intercompany transactions and accounts have been
eliminated in consolidation. Investments in affiliates less than 50% owned are
generally recorded on the equity method.
CASH EQUIVALENTS
The Company considers all highly-liquid investments with original
maturities of three months or less to be cash equivalents.
INVESTMENTS
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), the
Company's debt securities are classified as held-to-maturity. The Company has
both the positive intent and ability to hold to maturity and therefore the
securities are carried at amortized cost.
F-6
<PAGE> 45
INVENTORIES
Inventories consist of drugs, supplies and parts consumed in dialysis
treatments and are stated at the lower of cost (using the average cost method
and the first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided by the
straight-line method over the useful lives of the related assets, ranging from 3
to 40 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.
INTANGIBLE ASSETS
The excess of aggregate purchase price over the fair value of net assets of
businesses acquired is recorded as goodwill. Goodwill is amortized over 40 years
using the straight-line method. Other acquired intangibles are allocated to
patient lists and non-compete agreements and are amortized over the life of the
asset, typically seven to ten years, using the straight-line method.
Accumulated amortization on intangible assets is approximately $5 and $378 at
December 31, 1995 and 1996, respectively.
The carrying value of intangible assets is assessed for any permanent
impairment by evaluating the operating performance and future undiscounted cash
flows of the underlying businesses. Adjustments are made if the sum of the
expected future net cash flows is less than book value. Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of (SFAS 121), requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. SFAS 121 was
implemented by the Company in 1996 and did not have an impact on the Company's
financial statements.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal tax return and
separate company state tax returns. Income taxes are provided under the
liability method in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under the liability
method, deferred income taxes are recognized for the tax consequences of
differences between amounts reported for financial reporting and income tax
purposes by applying enacted statutory tax rates applicable to future years to
such differences. Deferred taxes result from temporary differences in the market
value of assets acquired in business combinations accounted for as purchases and
their tax bases. Under SFAS No. 109, the effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Federal and State income taxes for Main Line and RenalWest prior to their
acquisition by the Company were payable personally by the stockholders of Main
Line and RenalWest pursuant to S Corporation elections under the Internal
Revenue Code.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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.
F-7
<PAGE> 46
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.
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.
Reimbursements from Medicare and Medicaid at established rates approximated
78%, 71% and 74% of net patient revenue for the years ended December 31, 1994,
1995 and 1996, respectively.
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 includes estimates of the
ultimate costs of such claims. To date, the Company's experience with such
claims has not been significant; accordingly, no such provision has been made.
EARNINGS PER SHARE
Earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding including the dilutive
effect of options and warrants. Earnings per share amounts are not presented for
1994 and 1995 as the historical results of operations of the Company for these
years consisted of non-taxed earnings from Main Line and RenalWest which were S
Corporations. Additionally, the capital structure of the Company during 1996
was significantly different from that of prior years and an earnings per share
presentation is not considered meaningful.
MARKET VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
investments, accounts receivable, long-term debt and capital lease obligations.
The market values for these financial instruments approximates their carrying
value at December 31, 1995 and 1996.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current
year presentation.
F-8
<PAGE> 47
3. INVESTMENTS
The amortized cost and estimated fair value of the investments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
U.S. Government Agencies................................ $ 100 $ 2 $ -- $ 102
Corporate Bonds and Notes............................... 5,714 9 (19) 5,704
------ --- ---- ------
Total................................................... $5,814 $11 $(19) $5,806
====== === ==== ======
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1995 1996
------- -------
<S> <C> <C>
Patient accounts receivable................................. $12,185 $31,645
Other receivables........................................... 353 3,900
Allowance for doubtful accounts............................. (3,981) (6,703)
------- -------
Net accounts receivable..................................... $ 8,557 $28,842
======= =======
Percent of patient accounts receivable related to patients
participating in the Medicare and Medicaid programs....... 60% 68%
</TABLE>
Other receivables consist primarily of management fees and reimbursable
expenses incurred pursuant to certain management agreements.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1995 1996
------- -------
<S> <C> <C>
Medical equipment........................................... $ 8,551 $20,763
Furniture and nonmedical equipment.......................... 2,591 5,693
Leasehold improvements...................................... 2,836 6,298
Buildings................................................... 961 5,322
Construction in progress.................................... -- 714
------- -------
14,939 38,790
Less accumulated depreciation............................... (5,714) (8,051)
------- -------
Net property and equipment.................................. $ 9,225 $30,739
======= =======
</TABLE>
F-9
<PAGE> 48
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1996
------ ------
<S> <C> <C>
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), paid in 1996............ $1,460 --
Convertible senior subordinated promissory notes............. 1,380 --
Term note, bearing interest at the prime rate plus 1/2%
(9.0% at December 31, 1995), collateralized by inventory,
accounts receivable, property and equipment, paid in 1996.. 1,263 --
Term note, bearing interest at the prime rate plus 3/8%
(8.88% at December 31, 1995), collateralized by inventory,
accounts receivable, property and equipment, paid in 1996.. 1,200 --
Line of credit, interest at variable Bank Base Rate plus 3/8%
(8.88% at December 31, 1995), collateralized by accounts
receivable, inventory, equipment, furniture and general
intangibles, expired and paid in June 1996................. 785 --
Other........................................................ 1,252 --
------ ------
Total long-term debt......................................... 7,340 --
Less current portion......................................... 3,677 --
------ ------
Long-term debt, net of current portion....................... $3,663 $ --
====== ======
</TABLE>
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. At December 31, 1996, no amounts
were outstanding relative to this line of credit.
7. INCOME TAXES
The provision for income taxes for the years ended December 31, 1994, 1995,
and 1996 consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................... -- -- $5,542
State and local........................................... -- -- 1,106
------ ------ ------
-- -- 6,648
====== ====== ======
Deferred:
Federal................................................... -- -- $ 261
State and local........................................... -- -- 49
------ ------ ------
-- -- 310
====== ====== ======
Provision for income taxes.................................. -- -- $6,958
====== ====== ======
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards of
$2,000 for federal income tax purposes and $1,300 for state income tax purposes
that expire in years 2009 through 2011. The utilization of the federal net
operating loss may be limited in future years due to changes in Company
ownership.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-10
<PAGE> 49
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
---------------
1995 1996
----- -------
<S> <C> <C>
Deferred Tax Assets:
Net Operating Loss Carryforwards....................... $ 620 $ 765
Allowance for Doubtful Accounts........................ -- 2,281
Accrued Vacation....................................... -- 861
Other.................................................. 2 5
Less: Valuation Allowance.............................. (607) (1,214)
----- -------
15 2,698
----- -------
Deferred Tax Liabilities:
Depreciation........................................... 15 913
Cash to Accrual Adjustments............................ -- 3,247
Other.................................................. -- 9
----- -------
15 4,169
----- -------
Net Deferred Tax liability.................................. $ -- $ 1,471
===== =======
</TABLE>
The following is a reconciliation of the statutory federal and state income
tax rates to the effective rates as a percentage of income before provision for
income taxes as reported in the financial statements for the years ended
December 31, 1994, 1995, and 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1994 1995 1996
----- ----- ----
<S> <C> <C> <C>
U.S. federal income tax rate................................ 34.0% 34.0% 35.0%
State income tax, net of federal income tax benefit......... 6.1 6.1 5.5
Cash to accrual adjustments................................. -- -- 6.8
Federal and State income tax benefit from S Corporation
status of Main Line and RenalWest......................... (40.1) (40.1) (8.8)
Other....................................................... -- -- .8
----- ----- ----
Effective Income Tax Rate................................... --% --% 39.3%
===== ===== ====
</TABLE>
8. STOCKHOLDERS' EQUITY
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 exchange was 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. The Company received net proceeds of $71,797
after the deduction of underwriting discounts, commissions and other expenses.
F-11
<PAGE> 50
SECONDARY STOCK OFFERING
On November 22, 1996 the Company completed a secondary offering of 2,500
shares at a price of $32. The Company offered 1,064 of the shares with the
remaining shares being offered by certain stockholders of the Company. On
December 19, 1996 the underwriters of the offering exercised their over
allotment option for an additional 375 shares of which 281 were offered by the
Company and the balance offered by certain stockholders.
CONVERSION OF SUBORDINATED NOTES
In December 1995, the Company sold an aggregate principal amount of $1,380
of Convertible Senior Subordinated Promissory Notes (the "Convertible Notes")
bearing interest at a rate of 7.0% to provide funds to complete the Offering. On
December 7, 1996, the principal and accrued interest thereof was converted into
197 shares of Common Stock.
DIVIDENDS TO FOUNDERS
The Company used net proceeds from the initial public offering of $39,699
as the cash portion of the consideration paid to the owners of Tennessee and the
four unrelated businesses to be acquired. These amounts were paid in accordance
with Staff Accounting Bulletin No. 48 and has been treated as a dividend to
Founders for accounting purposes.
In addition, the Company has accrued $7,000 pursuant to its agreement
with KCI in connection with the Combination. The amount of the contingent
payment is based on a formula applied to the amount by which pre-tax earnings
of the operations acquired from Kidney Care for the years ended December 31,
1996 and 1997, respectively, exceed pre-tax earnings of such operations for the
year ended December 31, 1994. The amount is included as Due to Related Parties
in the accompanying financial statement and accounted for as a dividend to
Founders.
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 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.
STOCK OPTION PLANS
In January 1996, the Company adopted the Renal Care Group, Inc. 1996 Stock
Option Plan (the "1996 Employee Plan"), which was amended and restated effective
September 1996. Under the 1996 Employee Plan, Options to purchase a total of
1,000 shares of Common Stock were reserved for grant to eligible employees and
other key persons. Subsequent to year end, the Board increased the number of
shares for issuance under the 1996 Plan from 1,000 to 2,000 subject to
stockholder approval. In 1994, Tennessee adopted the 1994 Stock Option Plan (the
"1994 Plan") which provided for the grant of options to purchase up to 320
shares of Common Stock to directors, officers and other key persons. In 1995 the
Company issued options outside of a plan ("Free Standing") to key employees,
officers, directors and other key persons.
F-12
<PAGE> 51
The following is a summary of option transactions during the period from
January 1, 1994 through December 31, 1996:
<TABLE>
<CAPTION>
1996
WEIGHTED
AVERAGE
EXERCISE
1996 EMPLOYEE PLAN 1994 PLAN FREE STANDING PRICE
--------------------- --------------------- --------------------- --------
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS PRICE RANGE
------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, at January 1, 1994.................. -- -- --
Granted.................................... -- 85 $2-$7.50 --
Exercised.................................. -- -- --
Forfeited.................................. -- -- --
---- ---- ----
Balance, at December 31, 1994................ -- 85 --
Granted.................................... -- 31 $7.50 679 $7.50
Exercised.................................. -- -- --
Forfeited.................................. -- -- --
---- ---- ----
Balance, at December 31, 1995................ -- 116 $2-$7.50 679 $7.50 $ 8.86
Granted.................................... 876 $18-$37 -- 228 $7.50 $25.50
Exercised.................................. (4) $18 -- (10) $7.50 $10.65
Forfeited.................................. -- -- -- $7.50 --
---- ---- ----
Balance, at December 31, 1996................ 872 $18-$37 116 $2-$7.50 897 $7.50 $19.30
=== === === ======
Exercisable at December 31, 1996............. 97 63 412 $10.55
=== === === ======
Available for Grant at December 31, 1996..... 128 204 --
=== === ===
</TABLE>
The weighted-average fair value of options granted during 1996 is $8.60.
The weighted average remaining contractual life of all options is approximately
10 years.
The Company has elected to follow Accounting Principals Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting for provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company employee stock options equals the market price of the underlying stock
on the date of grant no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated a the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively; risk-free interest rates of 5.50%
and 5.50%; dividend yields of 0% and 0%; volatility factor of the expected
market price of the Company's common stock of .33 for 1996; and a weighted
average expected life of the option of approximately 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate,
F-13
<PAGE> 52
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Net income.................................................. $2,975 $10,746
Pro forma compensation expense from stock options, net of
taxes..................................................... 596 1,241
------ -------
Pro forma net income........................................ $2,379 $ 9,505
====== =======
Pro forma earnings per share................................ $ .75
=======
</TABLE>
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, 1996, future minimum rental payments under noncancelable operating
leases are:
<TABLE>
<S> <C>
1997 $ 4,230
1998 3,800
1999 3,117
2000 2,379
2001 2,006
Thereafter 4,420
-------
$19,952
=======
</TABLE>
Rent expense related to operating leases amounted to $1,428, $1,648, and
$3,692 for the years ending December 31, 1994, 1995 and 1996, respectively.
10. BUSINESS ACQUISITIONS
POOLING OF INTERESTS
On April 26, 1996, the Company completed a merger with Main Line through
the exchange of shares of the Company's Common Stock. Renal Care Group, Inc.
exchanged 538 shares of its common stock for the outstanding stock of Main Line.
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
exchanged for 2,400 shares of company common stock.
The Main Line and RenalWest mergers have been accounted for as
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:
F-14
<PAGE> 53
<TABLE>
<CAPTION>
RCG MAIN LINE RENALWEST COMBINED
------- --------- --------- --------
<S> <C> <C> <C> <C>
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
1996
Net revenue.......................................... 81,390 12,276 35,852 129,518
Income from operations............................... 9,902 1,590 5,593 17,085
Net income........................................... 3,954 1,577 5,215 10,746
</TABLE>
PURCHASES
During 1996, the Company acquired four dialysis centers, including three
acute care contracts, in Alabama, Texas, and Oklahoma for approximately $8,423
in cash, 70 shares of Common Stock, valued at approximately $1,960 which were
accounted for under the purchase method. The excess of the purchase price over
the fair value of net assets was approximately $9,615 and is being amortized on
a straight line basis over 40 years. For the above acquisitions, the results of
operations prior to the date of acquisition were not material to the
consolidated financial statements.
11. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN
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 $284, $157 and $599 for the years
ended December 31, 1994, 1995 and 1996, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Effective April 1996, the Company adopted an Employee Stock Purchase Plan
("Stock Purchase Plan") to provide substantially all employees an opportunity to
purchase shares of its common stock to the extent of 10% of eligible
compensation limited to $25 of common stock each calendar year. Annually, on
December 31, participant account balances are used to purchase shares of stock
at the lesser of 85% of the fair market value of shares at the beginning of the
year (grant date) or December 31 (exercise date). A total of 300 shares are
available for purchase under the plan. At December 31, 1996, approximately
$1,100 was included in accrued wages and benefits relating to the Stock Purchase
Plan.
12. RELATED PARTY TRANSACTIONS
PHYSICIAN SERVICES, MEDICAL DIRECTOR FEES AND MANAGEMENT FEE REVENUE
Physician services are provided to the Company by stockholders or legal
entities owned by stockholders of the Company. 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 $2,332, $787, and
$1,581 for the years ended December 31, 1994, 1995 and 1996, respectively.
Management fee revenues were $902 for the year ended December 31, 1996. Such
fees are included in net revenue.
F-15
<PAGE> 54
OTHER RELATED PARTY BALANCES AND TRANSACTIONS
Expenses for leases and other services provided through entities owned by
shareholders or other related parties aggregated $168, $116 and $613 for the
years ended December 31, 1994, 1995 and 1996, respectively.
SUPPLY RELATIONSHIP
The Company 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. Purchases through December 31, 1996
amounted to $3,596.
LABORATORY MANAGEMENT AND SERVICES CONTRACT
The Company entered into a lab agreement with Kidney Care Foundation dated
February 12, 1996, pursuant to which the Company provided certain business,
management, administrative and equipment maintenance services to the
Foundation's clinical laboratory located in Jackson, Mississippi. The laboratory
in turn provided clinical testing for certain Company patients on a fee for
service basis. In consideration for the management services provided by the
Company, the Foundation paid the Company management fees of $221 and reimbursed
the Company for its expenses in providing services under the agreement of
approximately $1,246. Fees paid by the Company to the Foundation for clinical
laboratory testing on its patients amounted to $192 in 1996. The Company
obtained an option from the Foundation to purchase the assets of the laboratory
for an exercise price of $147. Effective January 1, 1997, the Company exercised
the option and acquired the assets of the laboratory.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary unaudited quarterly data for the year ended December 31, 1996
has been restated from the Company's filings on Form 10-Q to reflect the
mergers accounted for as a pooling-of-interests transaction. The Company
believes that the following information includes all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Operating Revenues...................... $24,533 $31,827 $34,627 $38,531
Operating Expenses.......................... 19,967 26,244 28,323 31,398
Depreciation and Amortization............... 873 1,111 1,212 1,345
Merger Expenses............................. -- 680 1,280 --
------- ------- ------- -------
Income from Operations...................... 3,693 3,792 3,812 5,788
------- ------- ------- -------
Interest Income, net........................ 39 202 153 225
------- ------- ------- -------
Income before Income Taxes.................. 3,732 3,994 3,965 6,013
------- ------- ------- -------
Income Taxes................................ 998 1,096 2,517 2,347
------- ------- ------- -------
Net Income.................................. $ 2,734 $ 2,898 $ 1,448 $ 3,666
======= ======= ======= =======
Net Income Per Share........................ $ 0.26 $ 0.21 $ 0.11 $ 0.26
======= ======= ======= ========
</TABLE>
Pro forma summary results of quarterly operations before nonrecurring merger
expenses, had both the Founding Companies and the Company been combined for all
of 1996 are as follows:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net revenue $30,909 $31,826 $34,627 $ 38,531
Operating expenses:
Patient care costs 21,581 22,302 24.251 26,725
General and administrative expenses 3,061 3,354 3,433 3,937
Provision for doubtful accounts 610 587 639 736
Depreciation and amortization 1,046 1,112 1,212 1,345
------- ------- ------- -------
Total operating costs and expenses 26,298 27,355 29,535 32,743
------- ------- ------- -------
Income form operations 4,611 4,471 5,092 5,788
Interest, net (55) 202 153 225
------- ------- ------- -------
Income before income taxes 4,556 4,673 5,245 6,013
Provison for income taxes 1,731 1,729 1,942 2,347
------- ------- ------- -------
Net Income $ 2,825 $ 2,944 $ 3,303 $ 3,666
======= ======= ======= =======
Net income per share $ 0.22 $ 0.22 $ 0.24 $ 0.26
======= ======= ======= =======
</TABLE>
14. SUBSEQUENT EVENTS
ACQUISITIONS
Subsequent to year end, the Company announced that it had acquired
substantially all of the assets of seven federated dialysis facilities in
Central Indiana: Eastern Indiana Kidney Center, Richmond Indiana; Southern
Indiana Kidney Center, Greensburg, Indiana; Saint Joseph Dialysis Center,
Kokomo, Indiana; and Indiana Kidney Center, Indiana Kidney Center South, St.
Vincent Dialysis Center and St. Vincent Dialysis Center West, all in
Indianapolis, Indiana. The facilities currently provide treatment to
approximately 600 patients as well as acute, inpatient dialysis treatment
services to four local hospitals. The consideration for the purchase
transaction, excluding working capital acquired, consisted of cash of
approximately $24,800 and $7,200 of restricted common stock.
F-16
<PAGE> 55
15. SUPPLEMENTAL COMBINING FINANCIAL INFORMATION (UNAUDITED)
The following unaudited supplemental financial information presents
separately the results of operations of the Company and the Founders, and the
results of operations had the Founding Companies and the Company been combined
for all periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1995
----------------------------- ------------------------------
COMPANY FOUNDERS COMBINED COMPANY FOUNDERS COMBINED
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenue.............................. $42,971 $72,358 $115,329 $129,518 $ 6,376 $135,894
Operating costs and expenses:
Patient care costs..................... 26,908 53,509 80,417 90,122 4,727 94,849
General and administrative expenses.... 8,701 4,165 12,866 13,364 433 13,797
Provision for doubtful accounts........ 2,355 1,640 3,995 2,446 125 2,571
Depreciation and amortization.......... 1,580 2,081 3,661 4,541 174 4,715
Merger expenses........................ -- -- -- 1,960 -- 1,960
------- ------- -------- -------- ------- --------
Total operating costs and expenses.. 39,544 61,395 100,939 112,433 5,459 117,892
------- ------- -------- -------- ------- --------
Income from operations.................... $ 3,427 $10,963 $ 14,390 $ 17,085 $ 917 $ 18,002
======= ======= ======== ======== ======= ========
</TABLE>
F-17
<PAGE> 56
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, 1995 and 1996, and for each of the three years in the
period ended December 31, 1996, and have issued our report thereon dated
February 28, 1997 (included elsewhere in this Form 10-K). Our audit also
included the consolidated financial statement schedule listed in Item 14(a) of
this Form 10-K. This consolidated financial statement 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.
Nashville, Tennessee ERNST & YOUNG LLP
February 28, 1997
F-18
<PAGE> 57
SCHEDULE II
RENAL CARE GROUP, INC.
CONSOLIDATED SCHEDULE -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ----------------------- BALANCE AT
BEGINNING ALLOWANCES CHARGED TO CHARGED TO END OF
OF PERIOD ACQUIRED EXPENSE REVENUE WRITE-OFFS PERIOD
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1994..... $ 954 $ -- $1,418 $-- $ (543) $1,829
====== ====== ====== === ======= ======
Year ended December 31, 1995..... $1,829 $ -- $2,355 $-- $ (204) $3,980
====== ====== ====== === ======= ======
Year ended December 31, 1996..... $3,980 $4,344 $2,446 $-- $(4,067) $6,703
====== ====== ====== === ======= ======
</TABLE>
F-19
<PAGE> 1
Exhibit 10.28
ASSET PURCHASE AGREEMENT
BY AND AMONG
RCG INDIANA, LLC,
RENAL CARE GROUP, INC.,
INDIANA NEPHROLOGY & INTERNAL MEDICINE, P.C.
AND
EASTERN INDIANA KIDNEY CENTER,
INDIANA KIDNEY CENTER,
INDIANA KIDNEY CENTER SOUTH, LLC,
ST. VINCENT DIALYSIS CENTER,
SAINT JOSEPH DIALYSIS CENTER, AND
INDIANA DIALYSIS SERVICES, P.C.
AS SELLERS
AND
INDIANA DIALYSIS SERVICES, PC,
COMMUNITY HOSPITALS OF INDIANA, INC.,
SETON HEALTH CORPORATION OF CENTRAL INDIANA, INC.,
GREENWOOD DIALYSIS SERVICES, PC,
REID HOSPITAL PHYSICIANS,
REID HOSPITAL & HEALTH CARE SERVICES, INC., AND
SAINT JOSEPH HOSPITAL AND HEALTH CARE CENTER OF KOKOMO, INDIANA, INC.
AND CERTAIN INDIVIDUALS
AS OWNERS
DATED AS OF MARCH 27, 1997
<PAGE> 2
SCHEDULES
<TABLE>
<S> <C>
1.1(c) Leases Assigned
1.1(d) Contracts and Agreements Assigned
1.1(f) Dialysis Names
1.2 Consideration Allocation among Sellers
1.3 Retained Assets (Partnerships held by IDS)
1.6 Obligations to Owners
2.1 Foreign Qualifications
2.3 Conflicting Agreements or Required Consents
2.5 Subsidiaries, Investments and Predecessors
2.6 Financial Statements
2.7 Changes Since September 30, 1996
2.8 Liabilities
2.9 Litigation and Claims
2.10 Violations of Law
2.11(a) Personal Property
2.11(b) Leased Real Property
2.11(c) Zoning
2.11(e) Intangible Property Rights
2.12 Contracts and Commitments
2.13(a) Employees
2.13(c) Employment Matters
2.14(a) Pension Plans
2.14(b) Welfare Plans
2.14(c) Compensation Programs
2.14(n) Extended Coverage Benefits
2.15 Insurance Policies, Exceptions and Claims
2.16 Environmental Matters
2.17 Taxes, Claims, Extensions and Waivers
2.18.1 Licenses, Permits, Authorizations, Provider Agreements and Regulatory Deficiencies
2.18.2 Regulatory Consents, Approvals or Notices
2.18.3 Regulatory Appeals, Adjustments, Challenges, Audits
2.19 Inspections and Investigations
2.20(a) Certain Relationships
2.20(b) Affiliated Physicians and Practices
2.23 Interested Transactions
3.3 Conflicting Agreements or Required Consents
4.9 Absence of Changes
4.10 Liabilities
5.10 Leased Equipment
5.14 Allocation of Options
</TABLE>
<PAGE> 3
APPENDICES AND EXHIBITS
<TABLE>
<S> <C>
5.8 Territory for Covenant Not to Compete
5.9 Medical Director Agreement
6.2(b) Assignment and Bill of Sale
6.2(c) Assumption Agreement
6.9 Legal Opinion of Counsel to Sellers, Owners and the Practice
7.2(f) Registration Rights Agreement
7.6 Legal Opinion of Counsel to Buyer and RCG
</TABLE>
<PAGE> 4
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of March 27, 1997, but with an effective date for accounting purposes as of
12:01 a.m. February 1, 1997 (the "Effective Date") by and among RENAL CARE
GROUP, INC. ("RCG"), a Delaware corporation; RCG INDIANA, LLC, a Delaware
limited liability company ("Buyer"); EASTERN INDIANA KIDNEY CENTER, INDIANA
KIDNEY CENTER, INDIANA KIDNEY CENTER SOUTH, LLC, ST. VINCENT DIALYSIS CENTER,
SAINT JOSEPH DIALYSIS CENTER AND INDIANA DIALYSIS SERVICES, PC (collectively,
"Sellers") and COMMUNITY HOSPITALS OF INDIANA, INC., SETON HEALTH CORPORATION
OF CENTRAL INDIANA, INC., REID HOSPITAL & HEALTH CARE SERVICES, INC., and
SAINT JOSEPH HOSPITAL AND HEALTH CARE CENTER OF KOKOMO, INDIANA, INC.
(collectively, "Hospital Owners") and INDIANA DIALYSIS SERVICES, PC, REID
HOSPITAL PHYSICIANS, GREENWOOD DIALYSIS SERVICES, PC and certain individuals
named on the signature pages hereto (collectively, "Physician Owners," and
together with the Hospital Owners, the "Owners"); and INDIANA NEPHROLOGY &
INTERNAL MEDICINE, P.C. (the "Practice").
PREAMBLE
WHEREAS, Sellers own and operate seven (7) freestanding dialysis centers
(the "Centers") in the Indiana area and operate outpatient renal dialysis
programs, including outpatient hemodialysis, self-care hemodialysis, peritoneal
and hemodialysis home training, and in-patient acute services (collectively,
the "Business"); and
WHEREAS, Sellers desire to sell to Buyer and Buyer desires to purchase
from Sellers substantially all of the assets and contractual rights used in or
related to the operation or conduct of the Business on the terms and conditions
set forth in this Agreement (the "Acquisition").
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants and agreements set forth herein, the parties agree
as follows:
ARTICLE 1
PURCHASE OF RIGHTS AND ASSETS
1.1 Agreement to Purchase and Sell. Subject to the terms and conditions
set forth herein, Sellers agree to sell, convey, transfer, assign and deliver
to Buyer, and Buyer agrees to purchase, all of Sellers' right, title and
interest in and to all of the rights and assets owned by Sellers and used or
useful in the operation of the Business (except for Retained Assets as defined
in Section 1.3 below), free and clear of all liens, charges, claims or
encumbrances ("Liens") whatsoever, including, without limitation, the following
(collectively, the "Rights and Assets"):
(a) All inventory and tangible personal property used in the operation of
Centers, including all furniture, machinery, vehicles, office furnishings,
equipment and equipment leasehold improvements of the Sellers existing on the
Closing Date;
(b) To the extent assignable and subject to applicable regulatory
approvals, each of Sellers' valid authorizations, permits and licenses
necessary to operate the Business;
(c) All leases set forth on Schedule 1.1(c) hereto (including any capital
leases), lease purchase arrangement and license agreements pursuant to which
Sellers lease or license any real or personal property used in the Business,
including any and all security and other deposits, advance rents and any other
payments made thereunder prior to Closing for the benefit or to the account of
Sellers;
<PAGE> 5
(d) All contracts and agreements listed on Schedule 1.1(d) (to be attached
prior to the Closing) relating to the Business;
(e) All contract rights, leasehold rights, prepaid expenses, guarantees,
licenses, warranties and insurance policies;
(f) All other intangible assets of Sellers relating to the operation of
the Business including, but not limited to, all patents, trademarks, service
marks and designs and those trade names, service names and business names
relating to the Rights and Assets, which are set forth on Schedule 1.1(f)
hereto, all telephone numbers, and the goodwill of Sellers in or arising from
the operation of the Centers;
(g) All prepaid items including, without limitation, all equipment,
utility and other deposits existing on the Effective Date;
(h) All patient lists and patient medical or operating records, employment
records, medical staff roster and files, customer lists, customer contracts,
financial records and other tangible personal property of Sellers relating to
the Rights and Assets;
(i) All books, records and documents owned, required for or incident to
the operation of the Business;
(j) All of Sellers' building or construction plans, building permits,
designs or drawings related to the Centers;
(k) All accounts receivable of Sellers arising for services performed on
and after the Effective Date;
(l) Cash, if any, in an amount equal to the difference between the cash
balance of Sellers on the Closing Date minus the cash balance of Sellers on the
Effective Date;
(m) Any and all other assets of whatever type or description, other than
the Retained Assets (as defined in Section 1.3 hereof) which are (i) reflected
in the balance sheet contained in the Financial Statements, except to the
extent any such assets have been disposed of in the ordinary course of business
since the date of such balance sheet or (ii) used in the operation of the
Business.
1.2 Consideration. (a) The total consideration for the Rights and Assets
shall be:
(i) Twenty Four Million Eight Hundred Three Thousand Six Hundred Eighty
Five Dollars ($24,803,685) payable by Buyer in cash by wire transfer to an
account designated by Sellers on the Closing Date; and
(ii) that number of shares of Common Stock of RCG obtained by dividing
Seven Million Two Hundred Thousand Dollars ($7,200,000) by the Base Period
Trading Price ((i) and (ii) collectively, the "Consideration"). The "Base
Period Trading Price" is defined to mean the average of the daily closing
prices for the shares of RCG Common Stock for the ten (10) consecutive trading
days on which such shares are actually traded as over-the-counter securities
and quoted on the Nasdaq National Market (as reported by The Wall Street
Journal or, if not reported thereby, any other authoritative source) ending at
the close of trading on the second trading day immediately prior to the Closing
Date.
(b) The Consideration shall be allocated among the Sellers as set forth
in Schedule 1.2 hereto.
1.3 Retained Assets. The parties expressly agree that excluded from the
Rights and Assets assigned to Buyer hereunder are (i) except as set forth in
Section 1.1(l), cash of the Sellers (ii) accounts
- 2 -
<PAGE> 6
receivable of the Sellers arising from services rendered prior to the Effective
Date, (iii) those trade names, service names and business names not set forth on
Schedule 1.1(f) attached hereto, (iv) subject to Section 5.1 hereof, Sellers'
stock record books, tax returns and minute books; (v) those partnership, equity
or similar interests of Indiana Dialysis Services, PC in those entities listed
on Schedule 1.3 hereto; and (vi) those contracts and agreements not listed on
Schedule 1.1(d) hereto (the "Retained Assets").
1.4 Allocation of Consideration. The Consideration paid for the Rights
and Assets shall be allocated among the Rights and Assets by the Buyer and
Sellers prior to the Closing in a manner which the parties intend, in their
reasonable judgment, to be in accordance with the provisions contained in
Treasury Regulation Section 1.1060-1T(d) and the parties agree to report the
transaction contemplated herein for federal income tax purposes in accordance
with such allocation. In furtherance of the foregoing, the parties hereto
agree to execute and deliver Internal Revenue Service Form 8594 reflecting such
allocation.
1.5 Retained Liabilities. Except as specifically set forth in Section
1.6, Sellers retain all liabilities directly or indirectly arising out of or
related to (i) the Retained Assets and (ii) the operation of the Business on
and prior to the Closing Date, whether such liabilities are known or unknown,
disclosed or undisclosed, matured or unmatured, accrued, absolute or contingent
on and as of the Closing Date (collectively, the "Retained Liabilities").
Without limiting the generality of the preceding sentence, neither Buyer nor
RCG shall assume or become liable for any obligations and liabilities of
Sellers not specifically described in Section 1.6, including without
limitation, the following:
(a) Any liability or obligation arising out of any employee benefit
plan maintained by or covering employees of Sellers or to which a Seller has
made any contribution or to which a Seller could be subject to any liability;
(b) Any losses, costs, expenses, damages, claims, demands and
judgments of every kind and nature (including the defenses thereof and
reasonable attorneys' and other professional fees) related to, arising out of,
or in connection with the parties' waiver of compliance with the Indiana Bulk
Transfer Act or any similar statute as enacted in any jurisdiction, domestic or
foreign;
(c) Any liability or obligation arising out of any breach by any
Seller prior to the Closing of any provision of the Seller Agreements (as
defined herein) or any other contract to which a Seller is a party;
(d) Any liability of Sellers with respect to any claim or cause of
action, regardless of when made or asserted, which arises (i) out of or in
connection with the business and operations of Sellers prior to the Closing,
(ii) with respect to any product purchased or manufactured or any service
provided by Sellers on or prior to the Closing, including without limitation,
any liability or obligation (A) pursuant to any express or implied
representation, warranty, agreement, or guarantee made by Sellers or (B) imposed
or asserted to be imposed by operation of law, in connection with any service
performed or product designed, manufactured, sold, or leased by or on behalf of
Sellers prior to the Closing, including without limitation, any claim related to
any product delivered in connection with the performance of such service and any
claims seeking to recover for consequential damage, lost revenue, or income,
including pursuant to any doctrine of product liability, or (iii) out of or in
connection with the Business and operations of Sellers prior to the Closing
under any federal, state, or local law, rule, or regulation relating to (A)
environmental protection or clean-up, (B) taxation, or (C) employment or
termination of employment;
(e) Any liability or obligation, arising prior to or as a result of
the Closing, to any employee, agent, or independent contractor of Seller,
whether or not employed by Buyer after the Closing, or under any benefit
arrangement with respect thereto;
(f) Any liability of Sellers existing at the Closing, including any
liability related to any matter described on the Schedules hereto;
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<PAGE> 7
(g) Any liability or obligation for federal, state, county, local,
foreign and other taxes, assessments, charges, fees, and impositions, including
interest and penalties thereon or with respect thereto, whether disputed or not
("Taxes"), including any liabilities or obligations of Sellers relating to sales
and use, transfer, documentary, income or other Taxes levied on the transfer of
the Rights and Assets;
(h) Any liability for any overbillings made by any Seller or
overpayments received by any Seller under any Medicare or other government or
private payor arrangement in respect of goods or services provided on or prior
to the Closing Date; and
(i) All wages, commissions, vacation, holiday, workers' compensation
and sick pay obligations of Sellers with respect to its respective employees
accrued through the Closing Date and all bonuses and fringe benefits as to such
employees accrued through the Closing Date, and all severance pay obligations of
Sellers to employees resulting from Sellers' consummation of the transactions
contemplated by this Agreement.
1.6 Assumed Liabilities. Buyer shall assume on the Closing Date (i)
current operating liabilities of the Sellers as of the Effective Date
determined in accordance with generally accepted accounting principles and
accrued in accordance with past practices (the "Current Liabilities") up to the
Liabilities Limit (as defined below), (ii) amounts that may be payable by Buyer
or RCG due to any HCFA Liability, (iii) the payment and performance of
obligations under those contracts and agreements identified on Schedules 1.1(c)
and 1.1(d) hereto arising on and after the Effective Date, except to the extent
any such obligations relate to a default occurring on or before the Closing
Date (the "Assumed Liabilities"), and (iv) amounts up to $1,100,000 owed by the
Sellers to the Owners as scheduled on Schedule 1.6 hereto which shall be
satisfied at Closing.
1.7 Adjustments.
(a) As soon as practicable following the Closing Date, but in no event
later than sixty (60) days following the Closing Date, Buyer shall prepare and
deliver to Sellers a balance sheet setting forth the Current Liabilities of
Sellers determined in accordance with generally accepted accounting principles
as of the Effective Date. Promptly upon determination of the Current
Liabilities, Sellers and the Owners shall be obligated, jointly and severally,
to pay to Buyer the amount, if any, by which the Current Liabilities exceed
$1,600,000 (the "Liabilities Limit"). Alternatively, Buyer and RCG shall pay
to the Sellers in the manner specified in Schedule 1.2 and to the account
specified pursuant to Section 1.2(b) hereof, the amount, if any, by which the
Liabilities Limit exceeds the Current Liabilities.
(b) Upon the Closing, Buyer shall remit to the Sellers as additional
purchase price in the manner provided on Schedule 1.2 hereto an amount equal to
$300,000 multiplied by each full month occurring between the Effective Date and
the Closing Date plus $300,000 multiplied by a fraction equal to the number of
days passed in the month in which the Closing occurs divided by the number of
days in such month (the "Income Amount"). As soon as practicable following the
Closing Date, but in no event later than sixty (60) days following the Closing
Date, Buyer shall determine the aggregate pre-tax net income of the Centers for
the period between the Effective Date and the Closing Date ("Net Income"). Net
Income of the Centers shall be computed based on the accrual basis of
accounting consistently applied in accordance with generally accepted
accounting principles. In the event that such Net Income is greater than the
Income Amount, Buyer shall remit to the Sellers in the manner provided on
Schedule 1.2 said difference promptly upon such determination. Alternatively,
if the Net Income is less than the Income Amount, Sellers and Owners shall be
obligated, jointly and severally, to pay to Buyer such difference promptly upon
such determination.
1.8 Time and Place of Closing. The closing (the "Closing") will take
place on a date not later than two business days following the satisfaction of
the conditions set forth in Articles 6 and 7 hereof (the "Closing Date"). The
place of Closing shall be at the offices of Alston & Bird, One Atlantic Center,
1201 West Peachtree Street, Atlanta, Georgia 30309, or such other place as may
be mutually agreed upon by the
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Parties. The parties agree and intend that the transactions herein shall for
financial accounting and reporting purposes be deemed to have closed on the
Effective Date.
1.9 Deliveries. All deliveries, payments and other transactions and
documents relating to the Closing (i) shall be independent and none shall be
effective unless and until all are effective (except to the extent that the
party entitled to the benefit thereof has waived satisfaction or performance
thereof as a condition precedent to Closing), and (ii) shall be deemed to be
consummated simultaneously.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SELLERS AND THE OWNERS
The Sellers and the Owners jointly and severally represent and warrant the
following to Buyer and RCG:
2.1 Organization, Authority and Capacity. Each Seller is a corporation,
partnership or limited liability company, duly organized, validly existing and
in good standing under the laws of its state of jurisdiction, and has the full
power and authority necessary to (i) execute, deliver and perform its
obligations under the Acquisition Documents and (ii) carry on its business as
it has been and is now being conducted and to own and lease the properties and
assets which it now owns or leases. Each Seller is duly qualified to do
business and is in good standing in the jurisdictions set forth with respect to
that Seller in Schedule 2.1, which includes every jurisdiction in which the
failure to be so qualified or in good standing would have a material adverse
effect on (i) such Seller's ability to perform its obligations under the
Acquisition Documents or (ii) the assets, results of operations or prospects of
the Business.
2.2 Authorization and Validity. The execution, delivery and performance
of the Acquisition Documents have been duly authorized by all necessary
corporate action on the part of each Seller. The Acquisition Documents to be
executed and delivered by the Sellers have been or will be, as the case may be,
duly executed and delivered by each Seller and constitute or will constitute
the legal, valid and binding obligations of each Seller, enforceable in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency, or other laws affecting creditors' rights generally, or as may be
modified by a court of equity.
2.3 Absence of Conflicting Agreements or Required Consents. Except as set
forth on Schedule 2.3, the execution, delivery and performance by each Seller
of the Acquisition Documents to be executed and delivered by each Seller: (i)
do not require the consent of or notice to any governmental or regulatory
authority or any other third party; (ii) will not conflict with any provision
of such Seller's organizational documents; (iii) will not conflict with or
result in a violation of any law, ordinance, regulation, ruling, judgment,
order or injunction of any court or governmental instrumentality to which such
Seller is subject or by which such Seller or any of its properties are bound;
(iv) will not conflict with, constitute grounds for termination of, result in a
breach of, constitute a default under, require any notice under, or accelerate
or permit the acceleration of any performance required by the terms of any
agreement, instrument, license or permit to which such Seller is a party or by
which such Seller or any of its properties are bound; and (v) will not create
any lien, encumbrance or restriction upon any of the assets or properties of
such Seller.
2.4 Governing Documents of the Sellers. True and correct copies of the
organizational documents and all amendments thereto of each Seller (certified
by the Secretary of State of the state of organization, if Seller is a
corporation, limited partnership or limited liability company) have been
provided to Buyer. Buyer has previously been provided with access to each
Seller's minutes, and such minutes accurately reflect in all material respects
the proceedings of the board of directors (or other similar governing body) of
each Seller (and all committees thereof). The record books of each Seller,
which have been made available to Buyer for review, contain true, complete and
accurate records of the ownership of each Seller.
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2.5 Subsidiaries and Investments. Except as set forth on Schedule 2.5, no
Seller has owned or currently owns, directly or indirectly, of record,
beneficially or equitably, any capital stock or other equity, ownership or
proprietary interest in any corporation, partnership, limited liability
company, association, trust, joint venture or other entity. Except as listed
on Schedule 2.5, no Seller has sold or disposed of, by way of asset sale, stock
sale, spin-off or otherwise, any material assets or business.
2.6 Financial Statements. Attached hereto as Schedule 2.6 are the
unaudited financial statements of the Sellers on a combined basis for the years
ended December 31, 1994, 1995 and 1996 and interim financial statements for the
nine-month period ending September 30, 1996, which reflect the results of
operations and financial condition of the Sellers on a combined basis for such
periods and at such dates (collectively, the "Financial Statements"). The
Financial Statements have been prepared in accordance with generally accepted
accounting principles consistently applied, except for (i) the omission of
notes to unaudited Financial Statements, (ii) the fact that interim Financial
Statement are subject to normal and customary year-end adjustments which will
not, in the aggregate, be material and (iii) any exceptions that may be
indicated in the notes to such Financial Statements. The Financial Statements
present fairly in all material respects the financial position of the Sellers
as of the dates indicated and present fairly in all material respects the
results of the operations of the Sellers on a combined basis for the periods
then ended, and are in accordance with the books and records of the Sellers,
which have been properly maintained and are complete and correct in all
material respects.
2.7 Absence of Changes. Except as set forth on Schedule 2.7, and except
as contemplated by this Agreement, since September 30, 1996, the Sellers have
conducted the Business only in the ordinary course and have not:
(i) suffered any material adverse change in their working capital,
condition (financial or otherwise), assets, liabilities, reserves, business or
operations;
(ii) paid, discharged or satisfied any material liability other
than in the ordinary course of business;
(iii) written off as uncollectible any account receivable other than
in the ordinary course of business;
(iv) compromised any debts, claims or rights or disposed of any of
its properties or assets other than in the ordinary course of business;
(v) entered into any commitments or transactions not in the
ordinary course of business involving aggregate value in excess of $50,000 or
made aggregate capital expenditures or commitments in excess of $50,000;
(vi) made any material change in any method of accounting or
accounting practice;
(vii) sold, assigned or transferred any of its tangible assets other
than in the ordinary course of business or any patents, trademarks, trade names,
copyrights or other intangible assets;
(viii)subjected any of their assets, tangible or intangible, to any
lien, encumbrance or restriction of any nature whatsoever, except for liens for
current property taxes not yet due and payable;
(ix) increased any salaries, wages or employee benefits or made any
arrangement for payment of any bonus or special compensation for any employee of
such Seller other than in the ordinary course of business;
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(x) hired, committed to hire or terminated any employee or medical
director other than in the ordinary course of business;
(xi) terminated or amended any material contract, license or other
instrument to which any Seller is a party or suffered any loss or termination or
threatened loss or termination of any existing material business arrangement or
supplier, the termination or loss of which, in the aggregate, could materially
and adversely affect the Sellers;
(xii) sold or otherwise transferred any interest in Seller; or
(xiii)agreed, whether in writing or otherwise, to take any action
described in this Section 2.7.
2.8 No Undisclosed Liabilities. Except as listed on Schedule 2.8 hereto,
the Sellers have no material Liabilities or obligations, whether accrued,
absolute, contingent or otherwise, except for liabilities and obligations
reflected in the Financial Statements or incurred in the ordinary course of its
business since the date of the most recent balance sheet included in the
Financial Statements.
2.9 Litigation, etc. Except as listed on Schedule 2.9 hereto, there are
no claims, lawsuits, actions, arbitrations, administrative or other proceedings
pending against any Seller. Except as listed on Schedule 2.9, (i) to the
knowledge of the Sellers and the Owners, no such matter described in the
previous sentence is threatened and there is no basis for any such action, and
(ii) there are no governmental or administrative investigations or inquiries
pending that involve any Seller, except in either case for any such matter that
could not reasonably be expected to have a material adverse effect on the
Sellers on a combined basis, financial or otherwise. Except as listed on
Schedule 2.9, there are no judgments against or consent decrees binding on any
Seller or its assets or, to the knowledge of the Sellers and its Owners, any
licensed professional relating to the Business.
2.10 No Violation of Law. (a) Except as set forth on Schedule 2.10, no
Seller has been or is currently in violation of any applicable local, state or
federal law, ordinance, regulation, order, injunction or decree, or any other
requirement of any governmental body, agency or authority or court binding on
it, or relating to its property or business or its advertising, sales or
pricing practices, except for any such violations as would not individually or
in the aggregate have a material adverse effect on the Sellers on a combined
basis, financial or otherwise.
(b) No Seller is currently subject to any fine, penalty, liability
or disability as the result of a failure to comply with any requirement of
federal, state or local law or regulation nor has any Seller received any notice
of such noncompliance.
2.11 Real and Personal Property. (a) Schedule 2.11(a) sets forth a list
of all items of personal and mixed, tangible and intangible property, rights
and assets of each Seller having an original or replacement cost or value
greater than $10,000. Except as set forth on Schedule 2.11(a), each Seller (i)
has good and valid title to all of the personal and mixed, tangible and
intangible property, rights and assets which it purports to own, including all
the personal property and assets reflected in the Financial Statements; and
(ii) owns such rights, assets and personal property free and clear of all
liens, encumbrances or restrictions of any nature whatsoever (except for
current year ad valorem taxes). All of the Rights and Assets being acquired by
Buyer, whether owned or leased, are in the possession and control of the
Sellers and are located at the Centers.
(b) The Sellers do not own any real property. Schedule 2.11(b)
contains a true and correct description of all real property leased by each
Seller, including all improvements located thereon. Sellers have valid and
binding leases for each property listed on Schedule 2.11(b), and (i) Sellers are
current with respect to all payments due under such leases; (ii) Sellers have
complied in all respects with its obligations under such leases, and (iii) there
are no defaults under any such lease that remain uncured and
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no condition exists which, with the lapse of time or giving of notice, or both,
would give rise to a default under any such lease. Buyer has been furnished
with true, correct and complete copies of all leases, deeds, easements and
other documents and instruments concerning the matters listed on Schedule
2.11(b). No condemnation or similar actions are currently in effect or pending
or, to the knowledge of the Sellers and the Owners, threatened against any part
of any real property leased by any Seller. To the knowledge of the Seller and
the Owners, there are no encroachments, leases, easements, covenants,
restrictions, reservations or other burdens of any nature which might impair in
any material respect the use of any leased real property in a manner consistent
with past practices nor does any part of any building structure or any other
improvement thereon encroach on any other property.
(c) Except as set forth on Schedule 2.11(c), the present zoning,
subdivision, building and other ordinances and regulations applicable to the
leased real property permit the continued operation, use, occupancy and
enjoyment of such real property consistent with past practices, and each Seller
is in compliance with, and has received no notices of violations of, any
applicable zoning, subdivision or building regulation, ordinance or other law,
regulation, or requirement. Each Seller has all rights and easements necessary
for public ingress thereto and egress therefrom and for the provision of all
utility services thereto, including any required curb cut or street opening
permits or licenses for vehicular access over presently existing roads and
driveways. No portion of the leased real property, or any building, structure,
fixture or improvement thereon, is the subject of, or affected by, any
condemnation, taking, eminent domain or inverse condemnation proceeding
currently instituted or pending, and, to the knowledge of Sellers and Owners,
none of the foregoing are, or will be, the subject of, or affected by, any such
proceedings.
(d) Each Seller's assets (including all buildings and improvements
in connection therewith) are in good operating condition and repair, ordinary
wear and tear excepted, and such assets include all rights, properties,
interests in properties, and assets necessary to permit RCG to continue the
Business after the Closing Date as presently conducted.
(e) Schedule 2.11(e) contains a complete and correct list of all
trademarks, trade names, service marks, service names, brand names, copyrights,
technology rights and licenses, know-how, software and patents, registrations
thereof and applications therefor, and any other intellectual property used in
the business of each Seller, together with a complete list of all licenses
granted by or to each Seller with respect to any of the foregoing. Neither the
Seller nor any of the Owners is currently in receipt of any notice of any
violation of, and each has no reason to believe that the Seller's operations are
violating, the rights of others with respect to any such matter.
2.12 Contracts and Commitments. (a) Schedule 2.12 contains a complete
and accurate list of all contracts, agreements, commitments, instruments and
obligations (whether written or oral, contingent or otherwise) of each Seller
of or concerning the following matters (the "Seller Agreements"):
(i) the lease, as lessee or lessor, or license, as licensee or
licensor, of any real or personal property (tangible or intangible);
(ii) the employment or engagement of any officer, director,
employee, consultant or agent, other than those terminable at will without
material severance obligation;
(iii) any relationship that requires financial payments, or
performance over a period of more than 90 days, with any Owner, or any person or
entity affiliated with or related to any Owner or any officer or director;
(iv) any arrangement limiting the freedom of such Seller to compete
in any manner in any line of business or requiring such Seller to share profits;
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(v) any arrangement that could reasonably be anticipated to have a
material adverse effect on such Seller, financial or otherwise;
(vi) any material arrangement not in the ordinary course of
business;
(vii) any power of attorney, whether limited or general, granted by
or to such Seller; and
(viii)any other arrangement that requires performance for a period
of more than 90 days or that requires payments in excess of $10,000.
(b) Each Seller has delivered to Buyer true and complete copies of all of
its Seller Agreements. Except as indicated on Schedule 2.12, the Seller
Agreements are valid and effective in accordance with their terms, and there is
not under any of such Seller Agreements (i) any existing or claimed default by
any Seller or event which with the notice or lapse of time, or both, would
constitute a material default by such Seller or (ii) to the knowledge of the
Sellers and the Owners, any existing or claimed default by any other party or
event which with notice or lapse of time, or both, would constitute a material
default by any such party. Except as indicated on Schedule 2.12, the
continuation, validity and effectiveness of the Seller Agreements will not be
affected by the Acquisition and the Acquisition will not result in a breach of
or default under, or require the consent of any other party to, any of the
Seller Agreements. There is no actual or, to the knowledge of the Sellers and
the Owners, threatened termination, cancellation or limitation of any Seller
Agreements that would have a material adverse effect on the Business, financial
or otherwise. To the knowledge of the Sellers and the Owners, there is no
pending or threatened bankruptcy, insolvency or similar proceeding with respect
to any other party to the Seller Agreements.
2.13 Employment and Labor Matters. (a) Schedule 2.13(a) sets forth (i)
the number of full-time and part-time employees of each Seller and (ii) the
name and compensation (including benefits) paid to each employee of or
consultant to each Seller who received salary and bonuses for either of such
Seller's two most recently ended fiscal years in excess of $50,000.
(b) Each Seller is in compliance in all material respects with all
applicable laws respecting employment and employment practices, terms and
conditions of employment, wages and hours, occupational safety and health,
including laws concerning unfair labor practices within the meaning of Section 8
of the National Labor Relations Act, and the employment of non-residents under
the Immigration Reform and Control Act of 1986.
(c) Except as disclosed on Schedule 2.13(c),
(i) there are no charges, governmental audits, investigations,
administrative proceedings or complaints concerning any Seller's employment
practices pending or, to the knowledge of the Sellers and the Owners,
threatened before any federal, state or local agency or court that could
reasonably be expected to have a material adverse effect on the Business,
financial or otherwise, and, to the knowledge of the Sellers and the Owners, no
basis for any such matter exists;
(ii) to the knowledge of the Sellers and the Owners, there are no
inquiries, investigations or monitoring of activities of any licensed,
registered, or certified professional personnel employed by, credentialed or
privileged by, or otherwise affiliated with any Seller pending or threatened by
any state professional board or agency charged with regulating the professional
activities of health care practitioners;
(iii) no Seller is a party to any union or collective bargaining
agreement, and, to the knowledge of the Sellers and the Owners, no union
attempts to organize the employees of any Seller have been made, nor are any
such attempts now threatened; and
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(iv) no Seller has experienced any organized slowdown, work
interruption, strike, or work stoppage by its employees.
2.14 Employee Benefit Matters.
(a) The Sellers currently maintain only the employee pension benefit
plans, as defined in Section 3(2) of ERISA, as are listed on Schedule 2.14(a)
(the "Pension Plans"). The Sellers have never maintained or contributed to any
other employee pension benefit plan, as defined in Section 3(2) of ERISA.
(b) The Sellers currently maintain only the employee welfare benefit
plans, as defined in Section 3(1) of ERISA (including but not limited to, life
insurance, medical, hospitalization, holiday, vacation, disability dental and
vision plans) as are listed on Schedule 2.14(b) (the "Welfare Plans").
(c) The Sellers currently maintain, or have entered into, only the
compensation programs and/or employment arrangements, (including but not limited
to, any written or unwritten incentive compensation, fringe benefit, payroll or
employment practice, bonus, severance, sick pay, salary continuation, deferred
compensation, supplemental executive compensation plans, employment agreements
and consulting agreements for the benefit of their officers, directors,
employees, former employees, or independent contractors) as are listed on
Schedule 2.14(c) (the "Compensation Programs").
(d) No Seller or an ERISA Affiliate contributes or has contributed
within the last five years to any multiemployer plan, as defined by Section
3(37) of ERISA.
(e) Each Pension Plan and Welfare Plan has been operated and
administered in substantial compliance with ERISA and the Code; each Pension
Plan which is intended to be qualified under Section 401(a) of the Code has been
determined by the Internal Revenue Service to be so qualified or a request for
such determination has been timely filed with the Internal Revenue Service (and
no Seller has any knowledge that any event has occurred between the date of the
last such determination and the Closing Date that would cause the Internal
Revenue Service to revoke such determination).
(f) Each Pension Plan and Welfare Plan designed to satisfy the
requirements of Section 125, Section 401, Section 401(k), Section 409, Section
501(c)(9), Section 4975(e)(7), and/or Section 4980B of the Code, satisfies such
section.
(g) No accumulated funding deficiency, as defined in Section
302(a)(2) of ERISA, exists (whether or not waived) with respect to any Pension
Plan as of the date hereof.
(h) All amounts required to be paid by the Sellers with respect to
each Pension Plan, Welfare Plan and Compensation Program on or before the
Closing Date have been paid.
(i) Neither the execution and delivery of this Agreement nor the
consummation of any of the transactions contemplated hereby will (i) result in
any payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due to any current or
former employee, (ii) increase any benefits otherwise payable under any Pension
Plan, Welfare Plan or Compensation Program, or (iii) result in any acceleration
of the time of payment or vesting of any such benefits.
(j) Neither the execution and delivery of this Agreement nor the
consummation of any of the transactions contemplated hereby will result in a
material increase in the premium costs of any Welfare Plan for which benefits
are insured or a material increase in benefit costs of any Welfare Plan which
provides self-insured benefits.
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(k) No Pension Plan is subject to a lien (or expected to be subject
to a lien) under Code Section 412(n) or ERISA Section 302(f) or to tax under
Code Section 4971. No Pension Plan has a "liquidity shortfall" as defined in
Code Section 412(m)(5). No event has occurred in connection with a
Pension Plan that could result in liability under Title IV of ERISA. None of
the Sellers has incurred any liability to the Pension Benefit Guaranty
Corporation in connection with any Pension Plan.
(l) The assets of each Pension Plan are sufficient to provide all
"benefit liabilities" (as defined in ERISA Section 4001(a)(16)) under such
Pension Plan if such Pension Plan is terminated, and are also sufficient to
provide all other benefits due under the Pension Plan (including, but not
limited to, ancillary, disability, shutdown, early retirement and welfare
benefits).
(m) None of the Pension Plans or a Seller or any party in interest
or disqualified person has engaged in any non-exempt "prohibited transactions"
as defined in Section 406 of ERISA or Section 4975 of the Code.
(n) Except as disclosed in Schedule 2.14(n), no Pension Plan or
Welfare Plan provides benefits, including without limitation death or medical
benefits (whether or not insured), with respect to current or former employees
beyond their retirement or other termination of service other than (i) coverage
mandated by applicable law, (ii) retirement benefits under a Pension Plan, (iii)
death benefits under a Welfare Plan, (iv) deferred compensation accrued on the
books of the Seller or a Subsidiary, or (v) benefits the full cost of which is
borne by the current or former employer (or his or her beneficiary).
(o) No "leased employee," as that term is defined in Section 414(n)
of the Code, performs services for a Seller.
(p) No liability has been, or is expected by a Seller to be,
incurred by a Seller under Section 4062 of ERISA with respect to any Pension
Plan.
(q) No reportable event within the meaning of Title IV of ERISA has
occurred with respect to any Pension Plan.
(r) The Sellers have furnished Buyer with correct and complete
copies of each Pension Plan, Welfare Plan, and Compensation Program, together
with any trust agreements, summary plan descriptions, employee informational
material, IRS Forms 5500, the most recent actuarial valuation for any Pension
Plan, financial statements relating thereto and participant listings.
(s) Each Seller has complied with the continuation coverage
requirements of Section 1001 of the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, and ERISA Sections 601 through 608. Each Seller shall
be responsible for complying with the requirements of Code Section 4980 B and
Part 6 of Title 1 of ERISA for its employees (including the Transferred
Employees) and their "qualified beneficiaries" whose "qualifying event" (as such
terms are defined in Code Section 4980 B) occurs on or prior to the Closing.
2.15 Insurance Policies. (a) All of the Rights and Assets and the
operations of Sellers and the Centers of an insurable nature and of a character
usually insured by companies of similar size and in similar businesses are
insured by Sellers or Owners in such amounts and against such losses,
casualties or risks as is (i) usual in such companies and for such assets,
operations and businesses, (ii) required by any Law applicable to Sellers or
the Centers, or (iii) required by any contract or agreement of Sellers or
Owners relating to the Centers. Schedule 2.15 contains a complete and accurate
list of all insurance policies held or owned by Sellers or Owners relating to
the Centers and now in force and such Schedule indicates the name of the
insurer, the type of policy, the risks covered thereby, the amount of the
premiums, the term of each policy, the policy number, the amounts of coverage,
the deductible in each case and all outstanding claims thereunder. Correct and
complete copies of all such policies have been delivered to Buyer by Sellers on
or before the date of this Agreement. All such policies are in full force and
effect and enforceable in
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accordance with their terms. None of the Sellers or the Owners, as the case
may be, is now in default regarding the provisions of any such policy,
including, without limitation, failure to make timely payment of all premiums
due thereon, and none of them has failed to five any notice or present any
claim thereunder in due and timely fashion. None of Sellers or Owners has been
refused, or denied renewal of, any insurance coverage by insurance companies
offering such insurance in connection with the ownership or use of the Rights
and Assets or the operation of the Centers. In addition to the deductibles set
forth on Schedule 2.15, such Schedule discloses all risks that are self-insured
by Sellers or Owners that in the ordinary course of business could be insured.
(b) Sellers' licensed professional employees have not, in the last
seven (7) years, filed a written application for professional malpractice
insurance coverage which has been denied by an insurance agency or carrier.
Sellers' professional employees have been continuously insured for professional
malpractice claims during the same period. None of Sellers' professional
employees are in default with respect to any provision contained in any such
policy and none of them has failed to give any notice or present any claim under
any such policy in due and timely fashion.
2.16 Environmental Matters. Except as set forth in Schedule 2.16, there
are no present or past Environmental Conditions in any way relating to the
business, properties or assets of any Seller. For the purposes of this
Agreement, "Environmental Condition" means (a) the introduction into the
environment of any pollution, including without limitation any contaminant,
irritant or pollutant or other toxic or hazardous substance, in violation of
any federal, state or local law, ordinance or governmental rule or regulations,
as a result of any spill, discharge, leak, emission, escape, injection, dumping
or release of any kind whatsoever of any substance or exposure of any type in
any work places or to any medium, including without limitation air, land,
surface waters or ground waters, or from any generation, transportation,
treatment, discharge, storage or disposal of waste materials, raw materials,
hazardous materials, toxic materials or products of any kind or from the
storage, use or handling of any hazardous or toxic materials or other
substances, as a result of which any Seller has or may become liable to any
person or by any reason of which any of the assets of any Seller may suffer or
be subjected to any lien, encumbrance or restriction of any nature, or (b) any
noncompliance with any federal, state or local environmental law, rule,
regulation or order as a result of or in connection with any of the foregoing.
2.17 Taxes. (a) Except as listed in Schedule 2.17 or as reflected in the
Financial Statements, there does not exist any material liability for taxes
which may be asserted by any taxing authority against, and no lien or other
encumbrance for taxes will attach to, any Seller or any of its assets other
than taxes due in respect of periods for which tax returns are not yet due and
for which adequate accruals have been made in the Financial Statements. All
federal, state and local tax returns and tax reports required to be filed prior
to the date hereof with respect to any Seller have been filed (other than
returns for which extensions to file have been granted) with the appropriate
governmental agencies in all jurisdictions in which such returns and reports
are required to be filed, all of which are true, correct and complete, and all
amounts shown as owing thereon have been paid.
(b) Except as listed on Schedule 2.17, no Seller has received notice
of any tax claims being asserted or any proposed assessment by any taxing
authority and no tax returns of any Seller have been audited by the Internal
Revenue Service (the "IRS") or the appropriate state agencies for any fiscal
year or period ended prior to the date hereof, and no Seller is presently under,
nor has received notice of any, contemplated investigation or audit by the IRS
or any state agency concerning any fiscal year or period ended prior to the date
hereof. Except as listed on Schedule 2.17, no Seller has executed any extension
or waivers of any statute of limitations on the assessment or collection of any
tax due that is currently in effect.
(c) Each Seller and any of its predecessors in interest have
withheld or collected from each payment made to each of their employees the
amount of all taxes required to be withheld or collected therefrom and each
Seller and any of its predecessors in interest have paid the same to the proper
tax depositories or collecting authorities.
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(d) Except as disclosed on Schedule 2.17, there is no liability for
taxes on the part of any Seller or any of their subsidiaries (excluding
transactions for which the financial reporting gain would exceed applicable
income tax liability related to such transaction) (i) that will arise with
respect to a current or a future taxable period, (ii) that is wholly or partly a
consequence of a transaction or occurrence, or transactions or occurrences, one
or more of which occurred before the date hereof, and (iii) that is not fully
reserved on the Financial Statements. In addition, except as disclosed on
Schedule 2.17, there are no joint venture, partnership or other arrangements or
contracts to which any Seller or any of their subsidiaries is a party and that
could be treated as a partnership for federal income tax purposes.
(e) For purposes hereof, "taxes" shall mean any federal, state,
county, local, foreign or other tax, charge, imposition or other levy (including
interest or penalties thereon) including without limitation, income taxes
estimated taxes, excise taxes, sales taxes, use taxes, gross receipts taxes,
franchise taxes, taxes on earnings and profits, employment and payroll related
taxes, property taxes, real property transfer taxes, Federal Insurance
Contributions Act taxes, any taxes or fees related to unclaimed property, taxes
on value added and import duties, whether or not measured in whole or in part by
net income, imposed by the United States or any political subdivision thereof or
by any jurisdiction other than the United States or any political subdivision
thereof.
2.18 Licenses, Authorizations and Provider Programs. (a) Each Seller is
the holder of all valid licenses and other rights, permits and authorizations
required by law, ordinance, regulation or ruling of any governmental regulatory
authority necessary to operate the Business. Each Seller is certified for
participation and reimbursement under Titles XVIII and XIX of the Social
Security Act (the "Medicare and Medicaid programs") (Medicare and Medicaid
programs and such other similar federal, state or local reimbursement or
governmental programs for which the Seller is eligible are hereinafter referred
to collectively as the "Government Programs") and has current provider
agreements for such Government Programs and with such private non-governmental
programs, including without limitation any private insurance program, under
which the Seller directly or indirectly is presently receiving payments (such
non-governmental programs herein referred to as "Private Programs"). Set forth
on Schedule 2.18.1, as to each facility, is a correct and complete list of such
licenses, permits and other authorizations, and provider agreements under all
Government and Private Programs, complete and correct copies of which have been
provided to Buyer. True, complete and correct copies of all surveys of each
Seller or its facilities conducted in connection with any Government Program,
Private Program or licensing or accrediting body during the past two (2) years
have been provided to Buyer.
(b) No violation, default, order or deficiency exists with respect
to any of the items listed on Schedule 2.18.1. None of the Sellers or the
Owners has received any notice of any action pending or recommended by any state
or federal agencies having jurisdiction over the items listed on Schedule
2.18.1, either to revoke, withdraw or suspend any license, right or
authorization, or to terminate the participation of any Seller in any Government
or Private Program. To the knowledge of the Sellers and the Owners, no event
has occurred which, with the giving of notice, the passage of time, or both,
would constitute grounds for a material violation, order or deficiency with
respect to any of the items listed on Schedule 2.18.1 or to revoke, withdraw or
suspend any such license, or to terminate or modify the participation of any
Seller in any Government or Private Program. To the knowledge of the Sellers
and the Owners, there has been no decision not to renew any provider or
third-party payor agreement of any Seller. Except as listed on Schedule 2.18.2,
no consent or approval of, prior filing with or notice to, or any action by, any
governmental body or agency or any other third party is required in connection
with any such license, right or authorization, or Government or Private Program,
by reason of the consummation of the Acquisition, and the continued operation of
the business of the Sellers thereafter on a basis consistent with past
practices.
(c) Each Seller has timely filed all cost reports and other reports
required to be filed by it prior to the date hereof with respect to the
Government and Private Programs, all fiscal intermediaries and other insurance
carriers and all such reports are complete and accurate in all material respects
and have been prepared in material compliance with all applicable laws,
regulations, and principles governing
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<PAGE> 17
reimbursement and payment claims. True and complete copies of such cost reports
filed by each Seller for the most recent cost-reporting year, if applicable,
have heretofore been delivered to Buyer. Each Seller has paid or caused to be
paid or has properly reflected in the Financial Statements all known and
undisputed refunds, overpayments, discounts or adjustments which have become due
pursuant to such reports and has no liability under any Government or Private
Program (known or unknown, contingent or otherwise) for any refund, overpayment,
discount or adjustment other than in the ordinary course, and no interest or
penalties accruing with respect thereto, except as has been specifically
reserved for in the Financial Statements or disclosed herein or in the Schedules
hereto. To the knowledge of the Sellers and Owners, except as set forth on
Schedule 2.18.3, there are no pending appeals, adjustments, challenges, audits,
litigation, or notices of intent to reopen any closed cost reports. There are
no other reports required to be filed by any Seller in order to be paid under
any Government or Private Program for services rendered, except for cost reports
not yet due.
2.19 Inspections and Investigations. Except as set forth and described in
Schedule 2.19, (i) neither any of the Seller's right nor, to the knowledge of
the Sellers and the Owners, the right of any licensed professional or other
individual affiliated with any Seller to receive reimbursements pursuant to any
Government or Private Program has been terminated or otherwise adversely
affected as a result of any investigation or action whether by any federal or
state governmental regulatory authority or other third party, (ii) no Seller,
or, to the knowledge of the Sellers and the Owners, any licensed professional
or other individual affiliated with any Seller has, during the past three (3)
years, been the subject of any inspection, investigation, survey, audit,
monitoring or other form of review by any governmental regulatory entity, trade
association, professional review organization, accrediting organization or
certifying agency based upon any alleged improper activity on the part of such
individual, nor has any Seller received any notice of deficiency during the
past three years in connection with its operations, (iii) there are not
presently, and at the Closing Date there will not be, any outstanding
deficiencies or work orders of any governmental authority having jurisdiction
over any Seller, or other third party, requiring conformity to any applicable
agreement, statute, regulation, ordinance or bylaw, including but not limited
to, the Government and Private Programs, and (iv) there is not any notice of
any claim, requirement or demand of any licensing or certifying agency or other
third party supervising or having authority over any Seller or their operations
to rework or redesign any part thereof or to provide additional furniture,
fixtures, equipment, appliances or inventory so as to conform to or comply with
any existing law, code, rule, regulation or standard. Attached as part of
Schedule 2.19 are copies of all reports, correspondence, notices and other
documents relating to any matter described or referenced therein.
2.20 Certain Relationships. (a) Except as set forth on Schedule 2.20(a),
no Seller has:
(i) offered, paid, solicited or received anything of value, paid
directly or indirectly, overtly or covertly, in cash or in kind ("Remuneration")
to or from any physician, family member of a physician, or an entity in which a
physician or physician family member has an ownership or investment interest,
including, but not limited to:
(A) payments for personal or management services pursuant to a
medical director agreement, consulting agreement, management contract,
personal services agreement, or otherwise;
(B) payments for the use of premises leased to or from a
physician, a family member of a physician or an entity in which a
physician or family member has an ownership or investment interest;
(C) payments for the acquisition or lease of equipment, goods
or supplies from a physician, a family member of a physician or an entity
in which a physician or family member has an ownership or investment
interest; or
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<PAGE> 18
(ii) offered, paid, solicited or received any Remuneration
(excluding fair market value payments for equipment or supplies) to or from any
healthcare provider, pharmacy, drug or equipment supplier, distributor or
manufacturer, including, but not limited to:
(A) payments or exchanges of anything of value under a
warranty provided by a manufacturer or supplier of an item to the Seller;
or
(B) discounts, rebates, or other reductions in price on
a good or service received by the Seller;
(iii) offered, paid, solicited or received any Remuneration
to or from any person or entity in order to induce business, including, but not
limited to, payments intended not only to induce referrals of patients, but also
to induce the purchasing, leasing, ordering or arrangement for any good,
facility, service or item;
(iv) entered into any joint venture, partnership,
co-ownership or other arrangement involving any ownership or investment interest
by any physician, or family member of a physician, or an entity in which
physician or physician family member has an ownership or investment interest,
directly or indirectly, through equity, debt, or other means, including, but not
limited to, an interest in an entity providing goods or services to such Seller;
(v) entered into any joint venture, partnership, co-ownership
or other arrangement involving any ownership or investment interest by any
person or entity including, but not limited to, a hospital, pharmacy, drug or
equipment supplier, distributor or manufacturer, that is or was in a position to
make or influence referrals, furnish items or services to, or otherwise generate
business for the Seller; or
(vi) entered into any agreement providing for the referral of
any patient for the provision of goods or services by such Seller, or payments
by such Seller as a result of any referrals of patients to the Seller.
(b) Set forth on Schedule 2.20(b) is a list of all affiliated
practices or physicians who have privileges to use any Seller's dialysis
facilities or who are otherwise involved with the use or operation of or
referral of patients to any Seller's dialysis facilities.
2.21 Fraud and Abuse. Sellers, Owners and persons and entities providing
professional services for Sellers have not engaged in any activities which are
prohibited under 42 U.S.C. Section 1320a-7b, or the regulations promulgated
thereunder pursuant to such statutes, or related state or local statutes or
regulations, or which are prohibited by rules of professional conduct,
including but not limited to the following: (a) knowingly and willfully making
or causing to be made a false statement or representation of a fact in any
application for any benefit or payment; (b) knowingly and willfully making or
causing to be made any false statement or representation of a fact for use in
determining rights to any benefit or payment; (c) failing to disclose knowledge
by a claimant of the occurrence of any event affecting the initial or continued
right to any benefit or payment on its own behalf or on behalf of another, with
intent to fraudulently secure such benefit or payment; and (d) knowingly and
willfully soliciting or receiving any remuneration (including any kickback,
bribe or rebate), directly or indirectly, overtly or covertly, in cash or in
kind or offering to pay or receive such remuneration (i) in return for
referring an individual to a person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in whole or in
part by Medicare or Medicaid, or (ii) in return for purchasing, leasing, or
ordering or arranging for or recommending purchasing, leasing, or ordering any
good, facility, service or item for which payment may be made in whole or in
part by Medicare or Medicaid.
2.22 Rates and Reimbursement Policies. Except for ethical limitations,
the jurisdictions in which Sellers are located or conduct business do not
currently impose any restrictions or limitations on rates
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<PAGE> 19
which may be charged to private pay patients receiving services provided by
Sellers. Sellers do not have any rate appeal currently pending before any
governmental authority or any administrator of any Private Programs. None of
Sellers or Owners have knowledge of any applicable law, which has been enacted,
promulgated or issued within the eighteen (18) months preceding the date of this
Agreement or any such legal requirement proposed or currently pending in the
jurisdictions in which Sellers are located or does business, which could have an
adverse effect on Sellers or may result in the imposition of additional
Medicaid, Medicare, charity, free care, welfare, or other discounted or
government assisted patients at Sellers or require Sellers to obtain any
necessary authorization which Sellers do not currently possess.
2.23 Interested Transactions. Except as set forth on Schedule 2.23, no
Seller is a party to any contract, loan or other transaction with any Owner nor
does any Seller have any direct or indirect interest in or affiliation with any
Owner to any such a contract, loan or other transaction. Except as set forth
on Schedule 2.23, no Owner is an employee, consultant, partner, principal,
director or owner of, or has any other direct or indirect interest in or
affiliation with, any person or business entity that is engaged in a business
that competes with or is similar to the business of any Seller. No Seller has
made any cash or in-kind distribution to its Owners at any time on or after the
Effective Date.
2.24 Accounts Receivable and Payable. To the knowledge of the Sellers
and the Owners, the accounts receivable of the Centers outstanding as of the
Effective Date represent, and the accounts receivable outstanding as of the
Closing Date will represent, bona fide claims for services actually rendered
and goods actually provided, subject to no defenses, counterclaims, or rights
of setoff other than those arising in the ordinary course of business and for
which adequate reserves have been or will be established, as applicable. No
accounts payable of the Centers are, at this date, over 30 days old and no
accounts payable of the Company will be over 30 days old at the Closing Date.
2.25 Purchase for Investment, Etc. (a) Such Seller is acquiring the RCG
Common Stock for such Seller's own account and not with a view to or for sale
in connection with any public distribution thereof within the meaning of the
1933 Act;
(b) such Seller (i) has sufficient knowledge and experience in
financial and business matters to enable him, her or it to evaluate the merits
and risks of an investment in the RCG Common Stock, (ii) has the ability to bear
the economic risk of acquiring the RCG Common Stock, (iii) has received and
reviewed the RCG Documents identified in Section 4.8 below, and (iv) has had an
opportunity to ask questions of and to receive answers from the officers of RCG
and to obtain additional information in writing as requested, which has been
made available to and examined by such Seller or such Seller's advisors;
(c) such Seller (i) acknowledges that the RCG Common Stock has not
been registered under any securities laws and cannot be resold without
registration thereunder or exemption therefrom, (ii) agrees not to transfer all
or any of the RCG Common Stock received by such Seller unless such transfer has
been registered or is exempt from registration under applicable securities laws
and (iii) acknowledges that the certificate(s) representing the RCG Common Stock
shall bear a prominent legend with respect to the restrictions on transfer under
applicable securities laws; and
(d) such Seller has accurately completed the Investor Questionnaire
required by RCG contemporaneous with the execution of this Agreement and the
statements therein are true and correct.
2.26 Statements True and Correct. No representation or warranty made
herein by the Sellers or any of the Owners, nor in any statement, certificate
or instrument to be furnished to Buyer or RCG by the Sellers or any of the
Owners pursuant to any Acquisition Document, contains or will contain any
untrue statement of material fact or omits or will omit to state a material
fact necessary to make these statements contained herein and therein not
misleading.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE OWNERS
Each Owner, severally and not jointly, represents and warrants the
following to Buyer and RCG:
3.1 Organization, Authority and Capacity. Owner has the full authority
and capacity necessary to execute, deliver and perform his or her obligations
under the Acquisition Documents to be executed and delivered by Owner. Owner
has the legal capacity required for executing, delivering and performing the
Acquisition Documents to be executed and delivered by Owner.
3.2 Authorization and Validity. The execution, delivery and performance
of the Acquisition Documents to be executed and delivered by Owner have been
duly authorized by all necessary action by Owner. If Owner is married and his
or her ownership interest constitutes community property, appropriate
documentation for consent has been or will be, as the case may be, duly
executed and delivered by Owner's spouse. The Acquisition Documents to be
executed and delivered by Owner have been or will be, as the case may be, duly
executed and delivered by Owner and constitute or will constitute the legal,
valid and binding obligations of Owner, enforceable in accordance with their
respective terms, except as may be limited by bankruptcy, insolvency, or other
laws affecting creditors' rights generally, or as may be modified by a court of
equity.
3.3 Absence of Conflicting Agreements or Required Consents. Except as set
forth on Schedule 3.3, the execution, delivery and performance by Owner of the
Acquisition Documents to be executed and delivered by Owner (i) do not require
the consent of or notice to any governmental or regulatory authority or any
other third party; (ii) will not conflict with or result in a violation of any
law, ordinance, regulation, ruling, judgment, order or injunction of any court
or governmental instrumentality to which Owner is subject or by which Owner is
bound; and (iii) will not conflict with, constitute grounds for termination of,
result in a breach of, constitute a default under, require any notice under, or
accelerate or permit the acceleration of any performance required by the terms
of any agreement, instrument, license or permit material to the Acquisition.
3.4 Purchase for Investment, Etc. To the extent the shares of RCG Common
Stock are distributed by Sellers to Owners in accordance with a plan of
distribution or liquidation, the Owners represent that
(a) Such Owner is acquiring the RCG Common Stock for such Owner's
own account and not with a view to or for sale in connection with any public
distribution thereof within the meaning of the 1933 Act;
(b) such Owner (i) has sufficient knowledge and experience in
financial and business matters to enable him, her or it to evaluate the merits
and risks of an investment in the RCG Common Stock, (ii) has the ability to bear
the economic risk of acquiring the RCG Common Stock, (iii) has received and
reviewed the RCG Documents identified in Section 4.8 below, and (iv) has had an
opportunity to ask questions of and to receive answers from the officers of RCG
and to obtain additional information in writing as requested, which has been
made available to and examined by such Owner or such Owner's advisors;
(c) such Owner (i) acknowledges that the RCG Common Stock has not
been registered under any securities laws and cannot be resold without
registration thereunder or exemption therefrom, (ii) agrees not to transfer all
or any of the RCG Common Stock received by such Owner unless such transfer has
been registered or is exempt from registration under applicable securities laws
and (iii) acknowledges that the certificate(s) representing the RCG Common Stock
shall bear a prominent legend with respect to the restrictions on transfer under
applicable securities laws; and
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<PAGE> 21
(d) such Owner has accurately completed the Investor Questionnaire
required by RCG contemporaneous with the execution of this Agreement and the
statements therein are true and correct.
3.5 Statements True and Correct. No representation or warranty made
herein by Owner, nor in any statement, certificate or instrument furnished or
to be furnished to Buyer or RCG by Owner pursuant to any Acquisition Document,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the statements contained
herein and therein not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER AND RCG
Buyer and RCG hereby represent and warrant to the Sellers and the Owners
as follows:
4.1 Organization, Authority and Capacity. Buyer is a limited liability
company, duly organized, validly existing and in good standing under the laws
of the State of Delaware. RCG is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Each of
Buyer and RCG has the full power and authority necessary to (i) execute,
deliver and perform its obligations under the Acquisition Documents to be
executed and delivered by them, and (ii) carry on its business as it has been
and is now being conducted and to own and lease the properties and assets which
it now owns or leases. Each of Buyer and RCG is duly qualified to do business
and is in good standing in each jurisdiction in which a failure to be so
qualified or in good standing would have a material adverse effect on (i) its
ability to perform its obligations under the Acquisition Documents to be
executed and delivered by it or, (ii) the assets, results of operations or
prospects of Buyer or RCG.
4.2 Authorization and Validity. The execution, delivery and performance
of the Acquisition Documents to be executed and delivered by Buyer and RCG have
been duly authorized by all necessary action by Buyer and RCG. The Acquisition
Documents to be executed and delivered by Buyer and RCG have been or will be,
as the case may be, duly executed and delivered by Buyer and RCG and constitute
or will constitute the legal, valid and binding obligations of Buyer and RCG,
enforceable in accordance with their respective terms, except as may be limited
by bankruptcy, insolvency, or other laws affecting creditors' rights generally,
or as may be modified by a court of equity.
4.3 Absence of Conflicting Agreements or Required Consents. The
execution, delivery and performance by Buyer and RCG of the Acquisition
Documents to be executed and delivered by it: (i) do not require the consent of
or notice to any governmental or regulatory authority or any other third party;
(ii) will not conflict with any provision of Buyer's certificate or articles
of organization or operating agreement or RCG's certificate of incorporation or
bylaws, respectively; (iii) will not conflict with or result in a violation of
any law, ordinance, regulation, ruling, judgment, order or injunction of any
court or governmental instrumentality to which Buyer or RCG is a party or by
which Buyer or RCG or any of their respective properties is bound; (iv) will
not conflict with, constitute grounds for termination of, result in a breach
of, constitute a default under, require any notice under, or accelerate or
permit the acceleration of any performance required by the terms of any
agreement, instrument, license or permit to which Buyer or RCG is a party or by
which any of their respective properties is bound; and (v) will not create any
lien, encumbrance or restriction upon any of the assets or properties of Buyer
or RCG, respectively.
4.4 Governing Documents. True and correct copies of the organizational
documents and all amendments thereto of Buyer and RCG (certified by the
Secretary of State of the State of Delaware) and copies of the operating
agreement of Buyer and bylaws of RCG have been provided to the Sellers and the
Owners.
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<PAGE> 22
4.5 Outstanding and Authorized Capitalization. The authorized capital
stock of RCG consists of 22,000,000 shares of RCG Common Stock and 10,000,000
shares of $.01 par value Preferred Stock. As of December 31, 1996, RCG had
approximately 14,200,000 shares of RCG Common Stock and no shares of Preferred
Stock issued and outstanding. All issued and outstanding shares of RCG Common
Stock have been duly and validly issued, are fully paid and non-assessable.
Except for (i) options to purchase 1,912,993 shares of common stock, and (ii)
warrants to purchase 220,000 shares of common stock, there are no outstanding
warrants, options, rights, calls or other commitments of any nature relating to
shares of capital stock of RCG, no outstanding securities convertible into or
exchangeable for shares of capital stock of RCG, and, RCG is not obligated to
issue or repurchase any of its shares of capital stock for any reason and no
person or entity has any right or privilege (whether preemptive or contractual)
for the purchase, subscription or issuance of any unissued shares of capital
stock of RCG. Except for rights with respect to 6,888,552 shares outstanding
and the 220,000 shares under warrants, there are no outstanding rights to demand
registration of any shares of capital stock of RCG or to sell any securities in
connection with a registration by RCG under the 1933 Act. No shares of Common
Stock are held in RCG's treasury. All RCG Common Stock to be issued in
connection with the Acquisition will be duly and validly issued, fully paid and
nonassessable, and, based on the representations of the Sellers and the Owners
herein and in documents delivered pursuant hereto, will be issued pursuant to a
valid exemption from registration under the 1933 Act and all applicable state
securities laws.
4.6 Litigation and Claims. There are no claims, lawsuits, actions,
arbitrations, administrative or other proceedings, governmental investigations
or inquiries pending or threatened against Buyer or RCG which could (i) affect
the performance by Buyer or RCG of their respective obligations under the
Acquisition Documents, or (ii) materially and adversely affect the condition of
Buyer or RCG (financially or otherwise), and, to the knowledge of Buyer and
RCG, there is no basis for any such action or any state of facts or occurrence
of any event which might give rise to the foregoing.
4.7 Statements True and Correct. No representation or warranty made
herein by Buyer or RCG, nor in any statement, certificate or instrument to be
furnished to the Sellers or any of the Owners by Buyer or RCG pursuant to any
Acquisition Document contains or will contain any untrue statement of material
fact or omits or will omit to state a material fact necessary to make these
statements contained therein not misleading.
4.8 RCG Documents. RCG has heretofore furnished the following documents
to the Sellers:
(a) Final Prospectus, dated February 6, 1996, contained in its
Registration Statement on Form S-1 (Registration No. 33-80221);
(b) Current Report on Form 8-K, dated March 22, 1996 (Commission File No.
0-2764);
(c) Press release, dated April 1, 1996;
(d) Registration Statement on Form S-8, dated April 22, 1996;
(e) Press release, dated April 29, 1996;
(f) Current report on Form 8-K/A, dated May 3, 1996;
(g) Form 12b-25, dated May 3, 1996;
(h) Press release, dated May 6, 1996;
(i) Form 12b-25, dated May 13, 1996;
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<PAGE> 23
(j) Form SR, dated May 17, 1996;
(k) Form 10-Q, for the quarter ended March 31, 1996, dated May 20, 1996;
(l) Form 10-K, dated May 21, 1996;
(m) Form 10-K/A, dated June 7, 1996;
(n) Press Release, dated July 1, 1996;
(o) Press Release, dated July 18, 1996;
(p) Press Release, dated August 6, 1996;
(q) Press Release dated August 7, 1996;
(r) Form 10-Q, for the quarter ended June 30, 1996, dated August 14, 1996;
(s) Form 10-K/A dated August 9, 1996;
(t) Proxy Statement, dated September 9, 1996;
(u) Press Release, dated October 1, 1996;
(v) Press Release, dated October 10, 1996;
(w) Press Release, dated October 30, 1996;
(x) Press Release, dated October 31, 1996;
(y) Form 10-Q, for the quarter ended September 30, 1996, dated November
14, 1996;
(z) Press Release, dated November 15, 1996
(aa) Current Report on Form 8-K, dated November 15, 1996 (Commission File
No. 0-2764);
(bb) Final Prospectus, dated November 19, 1996, contained in its
Registration Statement on Form S-1 (Registration No. 333-13813);
(cc) Press Release, dated November 19, 1996;
(dd) Press Release, dated December 2, 1996; and
(ee) Press Release, dated December 16, 1996.
The foregoing documents together with the exhibits thereto (which will be
made available upon written request), are collectively referred to herein as
the "RCG Documents." The RCG Documents include accurate and complete copies of
each (i) report and registration statement filed with the SEC ("SEC Documents")
and (ii) publicly disseminated press release of RCG during the past twelve
months ("Press Releases"). As of the time each SEC Document was filed with the
SEC, such SEC Document did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein
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<PAGE> 24
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.9 Absence of Changes. Except as set forth on Schedule 4.9, since
September 30, 1996 (the date of last financial statements), neither Buyer nor
RCG has suffered any material adverse change in its working capital, condition
(financial or otherwise), assets, liabilities, reserves, business or
operations.
4.10 No Undisclosed Liabilities. Except as listed on Schedule 4.10, and
except for liabilities and obligations reflected in the most recent financial
statements of RCG contained in the RCG Documents or incurred in the ordinary
course of its business since the date of RCG's most recent balance sheet
included in the RCG Documents, neither Buyer nor RCG has any material
liabilities or obligations, whether accrued, absolute, contingent or otherwise.
4.11 Compliance with Legal Requirements. To the knowledge of Buyer and
RCG, Buyer and RCG are in compliance with all applicable legal requirements,
except where the failure to comply with such legal requirements has not had and
could not reasonably be expected to have a material adverse effect on Buyer and
RCG. Neither Buyer nor RCG has received any notice or any communication from
any governmental authority regarding any actual or possible violation of, or
failure to comply with, any legal requirement, except where failure to comply
with such legal requirement has not had and could not reasonably be expected to
have a material adverse effect on Buyer and RCG.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 Access to Seller Information. At all times prior to the Closing, the
Sellers and the Owners will afford the officers and authorized representatives
of Buyer and RCG access upon reasonable notice to all of the Sellers'
properties, books and records that may relate to or concern the Business and
will furnish such parties with such additional financial, operating and other
information as to the business and properties of the Sellers as such parties
may from time to time reasonably request. Such parties shall also be allowed
access, upon reasonable notice, to consult with the officers, employees,
accountants, counsel and agents of the Sellers in connection with such
investigation of the properties and business of the Sellers. In addition, at
all times prior to the Closing, Buyer and RCG will afford to the Sellers and
the Owners, and their representatives, access, upon reasonable notice, to all
of Buyer's and RCG's and its affiliate's properties, books and records as the
Sellers and the Owners may reasonably request. No such investigation shall
diminish or otherwise affect any of the representations, warranties, covenants
or agreements of any party under this Agreement. At all times following the
Closing, the Sellers and the Owners will afford the officers and authorized
representatives of Buyer and RCG access upon reasonable notice to all of the
Sellers' books and records that are retained by Sellers as part of the Retained
Assets as such parties may from time to time reasonably request.
5.2 No-Shop. Unless and until this Agreement is terminated pursuant to
Article 8.1 hereof, neither any of the Sellers nor any Owner shall directly or
indirectly, through any officer, director, employee, agent, intermediary or
otherwise: (i) solicit, initiate or encourage submission of proposals or offers
from any person or other entity relating to any purchase of an interest, direct
or indirect, in any of the Sellers or the Business; (ii) participate in any
discussions or negotiations regarding, or furnish to any other person or other
entity, any information with respect to, or otherwise respond to, cooperate or
encourage, any effort or attempt by any other person or other entity to
purchase any interest in any of the Sellers or the Business (provided that
Sellers and Owners may provide information to other parties in the ordinary
course of business consistent with past custom and practice, so long as no
Seller or Owner has reason to believe that the information may be utilized to
evaluate a possible acquisition); (iii) without the prior written consent of
RCG, participate in any discussions or negotiations regarding the establishment
of any management, medical director or similar agreement, or (iv) approve or
undertake any such transaction. The Sellers and
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the Owners shall promptly communicate to RCG the terms of any such oral or
written proposal or offer upon knowledge or receipt of such proposal or offer.
5.3 Affirmative Covenants of the Sellers and the Owners. From the date
hereof until the earlier of the Closing Date or the termination of this
Agreement, unless the prior written consent of RCG shall have been obtained,
and except as otherwise expressly contemplated herein, each Seller shall, and
the Owners shall cause each Seller to:
(i) operate the Business only in the usual, regular, and
ordinary course of business, consistent with past practices;
(ii) use reasonable commercial efforts to preserve intact its
business organization, licenses, permits, government programs, private programs
and customers;
(iii) use reasonable commercial efforts to retain the
services of its employees, agents and consultants on terms and conditions not
less favorable than those existing prior to the date hereof and to ensure that
there are no material or adverse changes to employee relations;
(iv) keep and maintain its assets in their present condition,
repair and working order, except for normal depreciation and wear and tear, and
maintain its insurance, rights and licenses;
(v) pay all accounts payable of the Seller in accordance with
past practice and collect all accounts receivable in accordance with past
practice, but not less than in accordance with prudent business practices;
(vi) confer on a regular and frequent basis with one or more
designated representatives of RCG to report material operational matters and to
report the general status of ongoing Business operations;
(vii) make available to RCG true and correct copies of all
internal management and control reports (including aging of accounts receivable,
listings of accounts payable, and inventory control reports) and financial
statements related to the Business and furnished to management of the Seller;
(viii) cause all tax returns that are due and have not been
filed prior to the date hereof or which become due prior to the Closing Date, to
be prepared and filed on or before the date such tax return is required to be
filed (taking into account any extensions of the filing deadlines granted);
provided, however, that any such tax return shall not be filed without a
reasonable opportunity for prior review and comment by RCG;
(ix) as soon as reasonably practicable after they become
available, but in no event more than thirty (30) days following the end of each
calendar month, deliver to RCG true and complete copies of its monthly financial
statements for each calendar month ending subsequent to the date hereof in the
format historically utilized by the Seller;
(x) perform in all material respects all obligations under
agreements relating to or affecting its assets, properties or rights, except for
the failure of which performance would not have a material adverse effect on the
business of the Sellers taken as a whole, financial or otherwise;
(xi) keep in full force and effect present insurance policies
or other comparable insurance coverage; and
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(xiii) notify RCG of (i) any event or circumstance which is
reasonably likely to have a material adverse effect on the Business or would
cause or constitute a breach of any of the Seller's representations, warranties
or covenants contained herein; or (ii) any unexpected change in the normal
course of business or in the operation of the assets of the Business, and of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), adjudicatory proceedings, budget
meetings or submissions involving any material property. Each Seller shall keep
RCG fully informed of such events and to permit RCG's representatives prompt
access to all materials prepared in connection therewith.
5.4 Negative Covenants of the Seller and the Owners. From the date hereof
until the earlier of the Closing Date or the termination of this Agreement, no
Seller will, and no Owner will cause a Seller to, do any of the following
without the prior written consent of RCG:
(i) take any action which would (a) adversely
affect the ability of any party to the Acquisition Documents to obtain any
consents required for the transactions contemplated thereby, or (b) adversely
affect the ability of any party hereto to perform its covenants and agreements
under the Acquisition Documents;
(ii) amend any of its organizational or governing
documents, except as provided herein or for the purpose of accomplishing the
transactions contemplated by this Agreement;
(iii) impose, or suffer the imposition, on any
material asset of the Business of any lien or permit any such lien to exist;
(iv) other than pursuant to the Acquisition
Documents, sell, pledge or encumber, or enter into any contract to sell, pledge
or encumber, any interest in the assets of the Business;
(vi) purchase or acquire any assets or properties
related to the Business, whether real or personal, tangible or intangible, or
sell or dispose of any assets or properties, whether real or personal, tangible
or intangible, except in the ordinary course of business and consistent with
past practices;
(vii) grant any increase in compensation or
benefits to the employees or officers of the Seller, except in accordance with
past practice; pay any severance or termination pay or any bonus other than
pursuant to written policies or written contracts in effect as of the date
hereof and disclosed on the Schedules hereto; enter into or amend any severance
agreements with officers of the Seller; or grant any material increase in fees
or other increases in compensation or other benefits to directors of the Seller
except in accordance with past practice;
(viii) enter into or amend any employment contract
between the Seller and any person or entity (unless such amendment is required
by law) that the Seller does not have the unconditional right to terminate
without liability (other than liability for services already rendered), at any
time on or after the Closing Date;
(ix) adopt any new employee benefit plan or make
any material change in or to any existing employee benefit plans other than any
such change that is required by law or that, in the opinion of counsel, is
necessary or advisable to maintain the tax qualified status of any such plan;
(x) make any significant change in any tax or
accounting methods or systems of internal accounting controls, except as may be
appropriate to conform to changes in tax laws or regulatory accounting
requirements or GAAP;
(xi) commence any litigation other than in
accordance with past practice, settle any litigation involving any liability of
the Business for material money damages or restrictions upon the operations of
the Business;
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(xii) except in the ordinary course of business and
which is not material, modify, amend or terminate any material contract or
waive, release, compromise or assign any material rights or claims;
(xiii) except in the ordinary course of business
and, even if in the ordinary course of business, then not in an amount to exceed
$50,000 in the aggregate, make or commit to make any capital expenditure, or
enter into any lease of capital equipment as lessee or lessor, related to the
Business;
(xiv) take any action, or omit to take any action,
which would cause any of the representations and warranties contained in Article
2 to be untrue or incorrect; or
(xv) make any loan to any person or increase the
aggregate amount of any loan currently outstanding to any person.
5.5 Affirmative Covenants of Buyer and RCG. From the date hereof until
the earlier of the Closing Date or the termination of this Agreement, Buyer and
RCG covenant and agree that, unless the prior written consent of Sellers shall
have been obtained, and except as expressly contemplated herein, Buyer and RCG
shall
(i) as soon as reasonably practicable after they
become available, deliver to Sellers true and complete copies of its monthly
financial statements for each calendar month ending subsequent to the date
hereof, in the format historically utilized by RCG;
(ii) perform in all material respects all
obligations under agreements relating to or affecting its assets, property or
rights, except for the failure of which performance would not have a material
adverse effect on the business of Buyer and RCG, financial or otherwise; and
(iii) notify Sellers of (i) any event or
circumstance which is reasonably likely to have a material adverse effect on
Buyer and RCG or would cause or constitute a breach of any of Buyer's or RCG's
representations, warranties or covenants contained herein; or (ii) any
unexpected change in the normal course of business or in the operation of
Buyer's or RCG's assets, and of any governmental complaints, investigations or
hearings (or communications indicating that the same may be contemplated),
adjudicatory proceedings, budget meetings or submissions involving any material
property. Buyer and RCG agree to keep Sellers fully informed of such events and
to permit Sellers' representatives prompt access to all materials prepared in
connection therewith.
5.6 Negative Covenants of Buyer and RCG. From the date hereof until the
earlier of the Closing Date or the termination of this Agreement, each of Buyer
and RCG covenants and agrees that it will not take any action that would (a)
adversely affect the ability of any party to the Acquisition Documents to
obtain any consents required for the transactions contemplated thereby, or (b)
adversely affect the ability of any party hereto to perform its covenants and
agreements under the Acquisition Documents.
5.7 Confidentiality, Public Announcements. Each party hereto agrees (i)
not to disclose any aspect of the discussions, negotiations, terms, status or
conditions relating to the transactions contemplated herein to any third party
other than their respective officers, directors, authorized employees and
authorized representatives and then only on a need to know basis and shall
cause and require all such persons to who such information is disclosed to
abide by the provisions of this Section 5.7, and (ii) not to issue any press
release or other general public announcement (including in any trade journal or
other publication) of the transactions, in either case, without the prior
written consent of each of the parties hereto, except to the extent that
disclosure may be required by law, in which case the party required to made
such disclosure will give the other party prior written notice, and except that
Sellers and Owners acknowledge that RCG shall issue a press release promptly
upon the execution of this Agreement.
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5.8 Confidentiality, Noncompetition and Nonsolicitation. (a) Each Seller
and Physician Owner agrees that, for a period of ten (10) years after the
Closing Date, such party will not in any manner, directly or indirectly, by
itself, himself or herself or in conjunction with any other person, conduct
activities that are competitive with the business of RCG or acquire, establish
or own any financial, beneficial or other interest in (other than an interest
consisting of less than one percent (1%) of a class of publicly traded
security), make any loan to or for the benefit of, or render any managerial,
marketing or other business advice, to any entity that is then conducting
activities that are competitive with the business of RCG, in either case within
a geographic territory defined as the counties listed on Exhibit 5.8 hereto and
the territory within a fifty (50) mile radius around any of the Centers (the
"Territory"). For purposes of this Section 5.8, the "business of RCG" shall
mean owning or operating a renal dialysis center, unit or facility or providing
renal dialysis supplies or services to any other center, unit or facility or
any acute care facility or any home renal dialysis patient, including the
provision of pharmaceuticals or laboratory services related to renal dialysis.
(b) Each Hospital Owner agrees that, for a period of ten (10) years
after the Closing Date, neither it nor any of its affiliates will in any manner,
directly or indirectly, by itself, or in conjunction with any other person,
conduct activities that are competitive with the business of RCG or acquire,
establish or own any financial, beneficial or other interest in (other than an
interest consisting of less than one percent (1%) of a class of publicly traded
security), make any loan to or for the benefit of, or render any managerial,
marketing or other business advice, to any entity that is then conducting
activities that are competitive with the business of RCG, in either case within
the Territory, provided, however, that each Hospital Owner may (i) subject to
Section 5.24 hereof, provide acute care dialysis services to inpatients of its
hospital, and (ii) any Hospital Owner may acquire (by merger or otherwise)
another hospital that may be engaged in the business of RCG within the
Territory, provided that (A) a primary purpose of such acquisition is not to
reenter such business within the Territory, (B) for so long as such business is
owned by such Hospital Owner or any of its affiliates, the resources (financial
or otherwise) dedicated to the conduct of such business shall not be
substantially increased and (C) the Hospital Owner shall notify RCG of any such
acquisition and shall, if it determines to sell such business substantially as a
discreet operation to any unaffiliated party, give RCG at least sixty (60) days
notice thereof prior to accepting any offer for such business, during which time
it will provide RCG a first right of refusal to purchase said business on the
same or substantially similar terms and conditions as contained in the offer
from the unaffiliated party.
(c) Each Seller and Owner further agrees that, for a period of ten
(10) years after the Closing Date, such Seller and Owner will keep confidential
and not directly or indirectly divulge to anyone or use or otherwise appropriate
for his or its own benefit or for the benefit of others, any knowledge or
information of a confidential nature with respect to the business of the
Sellers, RCG, or any of their affiliates, including all trade secrets, pricing
information, marketing information or technical information (hereinafter
referred to as the "Confidential Data"), except for (i) a disclosure that is
required by law; or (ii) information that has been made generally available to
the public by the act of one who has the right to disclose such information.
Each Seller and Owner hereby acknowledges and agrees that the prohibitions
against disclosure of Confidential Data recited herein are in addition to, and
not in lieu of, any rights or remedies which RCG may have available pursuant to
the laws of any jurisdiction or at common law to prevent the disclosure of
confidential information, and the enforcement by RCG of its rights and remedies
pursuant hereto shall not be construed as a waiver of any other rights or
available remedies which RCG may possess in law or equity. Each Seller and
Owner acknowledges that RCG has taken reasonable and appropriate steps to ensure
the confidentiality and non-disclosure of all such Confidential Data.
(d) Each Seller and Owner also agrees that, for a period of ten (10)
years after the Closing Date, such Seller or Owner will not, for his or her own
benefit or the benefit of others, solicit any person or entity that has had, or
disrupt or attempt to disrupt, any relationship, contractual or otherwise
(including with any patient, payor, physician, provider, managed care
organization or supplier), with RCG or any of its affiliates (including the
Sellers, prior to the closing), for the purpose of assisting, or creating such a
relationship for, any business entity that is conducting activities competitive
with the business of the Sellers within the Territory.
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(e) Each Seller and Owner further agrees that, for a period of ten
(10) years after the Closing Date, such Seller or Owner shall not induce, nor
attempt to induce, any employee of RCG, or any of its affiliates, to terminate
his or her association with any such party.
(f) The covenants contained in this Section 5.8 are considered by
the parties hereto to be fair, reasonable and necessary for the protection of
RCG and the Business. The parties mutually agree that if a violation of any
covenant contained in this Section 5.8 occurs, such violation or threatened
violation will cause irreparable injury to RCG and the remedy at law for any
such violation or threatened violation will be inadequate. Each Seller and
Owner therefore agrees that RCG shall be entitled to appropriate equitable
relief, including but not limited to a temporary restraining order or a
preliminary injunction, in addition to any other remedy that might be available
at law or in equity.
(g) Nothing in this Section 5.8 shall be deemed to prohibit any
Owner who is a physician from exercising his or her medical judgment concerning
the treatment of his or her patient in any manner whatsoever in any location
whatsoever, and shall not be deemed to require the referral of any such patient
to any facility of RCG or any of its affiliates.
(h) The covenants contained in paragraphs (a) and (b) of this
Section 5.8 shall terminate in the event that none of the Centers or any other
dialysis unit, facility or center shall continue to be operated within the
Territory by RCG or any of its affiliates or any of its or their successors or
permitted assigns.
5.9 Medical Director Agreement. The parties hereto agree that the
Practice, its physician shareholders and employees who are nephrologists, and
any other nephrologists having an equity or other ownership interest in the
Centers, shall enter into a Medical Director Agreement at Closing under which
they shall provide medical director services to the Centers. Such Medical
Director Agreement shall be substantially in the form of Exhibit 5.9 and shall
have an initial term of ten (10) years with two renewal terms for additional
five year periods and shall provide for (i) an aggregate annual fee to be paid
by Buyer to the Practice of $550,000 (subject to agreed upon modifications) to
be divided among the Practice at the Practice's discretion, (ii) certain
restrictive covenants, including but not limited to a covenant not to compete
with a duration of the term of the Medical Director Agreement and three (3)
years after termination of the Medical Director Agreement, and (iii) other
customary terms and conditions.
5.10 Right of First Refusal; Management of Practice.
(a) The Physician Owners recognize the opportunities to provide
care for End Stage Renal Disease in an integrated manner and agree to work in
good faith with RCG to pursue opportunities for RCG and its affiliates to offer
the full range of dialysis services, including physician and transplant
services, to payors, health maintenance and other managed care organizations.
Furthermore, the Physician Owners agree to work in good faith with RCG or any of
its affiliates for the provision of medical director services for dialysis
treatment and for the provision of nephrology physician services at the Centers
after the Closing. The Owners and the Practice hereby agree that for a period
of five years from the Closing Date, the Practice will allow RCG to have a right
of first refusal with respect to any proposed contract or other arrangement with
a third party for the sale or management of the Practice on the same terms and
conditions as proposed by such third party, provided that any shareholders of
Practice that are not nephrologists may opt out of such sale or management by
separating their practice from the Practice. RCG or any of its affiliates may
accept the offer by giving written notice of such acceptance at any time within
20 days following receipt of written notice of the offer. No activities of any
Physician Owner under this Section 5.10 shall be deemed a violation of Section
5.8 hereof.
(b) The Practice, Buyer and RCG acknowledge and agree that certain
personnel of the Practice may become employed by Buyer or RCG (the "Practice
Personnel"). Buyer and RCG agree to work in good faith with the Practice to
make available the services of the Practice Personnel to perform
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substantially the same functions for the Practice as have been performed by such
persons for the Practice prior to the Closing Date and the Practice agrees to
reimburse Buyer or RCG its for their reasonable direct and indirect costs and
expenses associated therewith. The Practice, Buyer and RCG acknowledge and
agree that certain equipment used by the Centers is owned by the Practice as
listed on Schedule 5.10 hereto (the "Leased Equipment"). For so long as
requested by Buyer, the Practice agrees to continue to make available to Buyer
the use of such equipment on the same terms and conditions that such Leased
Equipment has been made available by the Practice to the Centers prior to the
date hereof. In addition, the Practice leases certain administrative office
space located at 10585 North Meridian Street that, for so long as requested by
Buyer, it agrees to sublease to Buyer on the same terms and conditions that such
property has been leased by the Practice prior to the date hereof. The
Practice, Buyer and RCG agree to negotiate in good faith to formalize and enter
into an agreement under which Buyer or RCG will provide traditional physician
practice management services and Practice will lease to Buyer or RCG the Leased
Equipment and the office space, for a term and for a fee as may be negotiated
between the parties in good faith prior to Closing.
5.11 Delivery of Schedules. As soon as reasonably practical following the
execution hereof but not later than five days following the execution hereof,
the Sellers and the Owners shall deliver all Schedules to be delivered by them
to RCG and its counsel that have not previously been delivered, if any,
accompanied by a certificate, executed by the Sellers and the Owners stating
that all Schedules required to be delivered by them hereunder have been
delivered. The Sellers and the Owners understand and acknowledge that RCG's
obligation to consummate the Closing is subject to its satisfactory review of
said Schedules as contemplated by Section 6.6 hereof.
5.12 Availability of Rule 144 Information. For so long as RCG is subject
to the 1934 Act, RCG shall take all actions necessary to enable the Sellers and
Owners to sell any shares of RCG Stock received by them without registration
under the 1933 Act within the limitations of the exemption provided by Rule 144
under the 1933 Act, as such rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Securities and Exchange
Commission, including filing on a timely basis all reports required to be filed
by the 1934 Act.
5.13 Approval of Transactions. Subject to Article 8 hereof, each Owner
that constitutes an "accredited investor" under the Securities Act of 1933, as
amended, through the execution and delivery of this Agreement, irrevocably
votes for and approves the Acquisition in its capacity as partner or member of
each Seller and each such Owner does hereby waive any required notice for any
meeting concerning such matters. Subject to Article 8 hereof, at any further
meeting of the Sellers of the Owners called to vote on the Acquisition or in
any other circumstances upon which a vote, consent or other approval with
respect to the Acquisition is sought, such Owner shall vote (or cause to be
voted) in favor of the Acquisition and the execution, delivery and performance
by the Sellers of the Acquisition Documents. Each Owner acknowledges and
agrees that he, she or it has had adequate opportunity to review the terms and
conditions of the Acquisition and to seek independent legal, tax and financial
advice.
5.14 Grant of Options. Subject to Section 6.12, RCG shall grant options
to purchase an aggregate of 90,000 shares of RCG Common Stock to certain
employees and management of Sellers at the Closing as set forth on Schedule
5.14 attached hereto and physicians who later join the Practice. Such options
shall (i) to the extent possible be granted under RCG's 1996 Stock Option Plan,
(ii) be non-qualified stock options for tax purposes, (iii) be allocated among
the employees or consultants of the Sellers in a manner mutually agreed by RCG
and the Board of Directors of the Practice prior to the Closing, (iv) vest over
a five-year period, and (v) have exercise prices equal to the closing price of
the RCG Common Stock on the Nasdaq National Market on the date of grant. The
additional terms of said options shall be commensurate with similar stock
options granted generally by RCG to similarly situated employees and affiliates
of RCG.
5.15 Bulk Sales Act. The parties hereby waive compliance with the Indiana
Bulk Sales Act, to the extent that it may be applicable to the transactions
contemplated hereby. Sellers and the Owners shall indemnify Buyer and RCG with
respect to such waiver as a Retained Liability as provided in Section 9.1.
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5.16 Retained Liabilities. Owners covenant and agree to cause Sellers to
pay and Sellers agree to pay all Retained Liabilities, as and when due.
Sellers and Owners further covenant and agree that they will not take or fail
to take any action which is likely to affect RCG's relationship with any of its
suppliers or representatives between the date hereof and the Closing Date, and
following the Closing.
5.17 Use of Names; License Agreement. On the Closing Date, Sellers shall
cease to use the names listed on Schedule 1.1(f) or any derivation thereof or
other name confusingly similar thereto for any commercial or other public
purpose without the prior written consent of Buyer. On the Closing Date, St.
Vincent Dialysis Center and Saint Joseph Dialysis Center shall enter into a
License Agreement with Buyer in form and substance satisfactory to Buyer
providing for the royalty-free licensure of those names of the Centers which
include the name of such Hospital Owners.
5.18 Conditions to Closing. The Owners, the Sellers, Buyer and RCG agree
to use their commercially reasonable efforts to satisfy the closing conditions
set forth in Articles 6 and 7 of this Agreement by March 15, 1997, and if not
by such time, as soon thereafter as possible. Owners and Sellers agree, on or
prior to the Closing Date, to execute those documents listed in Article 6
hereof to which they are a party. Buyer and RCG agree, on or prior to the
Closing Date, to execute those documents listed in Article 7 hereof to which
they are a party.
5.19 Risk of Loss. Sellers and Owners shall maintain all risk of
condemnation, destruction, loss or damage due to fire or other casualty from
the date of this Agreement until the Closing. If the condemnation,
destruction, loss or damage is such that the operation of the Business is
materially interrupted or curtailed or the Rights and Assets of Sellers are
materially affected, then Buyer and RCG shall have the right to terminate this
Agreement. If Buyer and RCG nonetheless elect to close, Sellers and Owners
shall remit all net condemnation proceeds or third party insurance proceeds to
Buyer and the purchase price shall be adjusted at Closing to reflect such
condemnation, destruction, loss or damage to the extent that insurance or
condemnation proceeds are not sufficient to cover such destruction, loss or
damage.
5.20 Certain Tax Matters. (a) Each Seller shall file all Tax Returns
required to be filed by it on or before the Closing Date.
(b) Buyer and RCG, on the one hand, and Sellers and Owners, on the other
hand, shall provide the other parties to this Agreement, at the expense of the
requesting party, with such assistance as may reasonably be requested by any of
them in connection with the preparation of any Tax Return, any audit or other
examination by any Regulatory Authority, or any judicial or administrative
proceedings relating to Liability for Taxes, and each will retain and provide
the requesting party with any records or information that may be relevant to
any of the foregoing.
5.21 Title Search; Discharge of Liens. As soon as practicable after the
date hereof, Sellers and Owners shall (i) each use commercially reasonable
efforts to ascertain all Liens, if any, to which any of the Rights and Assets
is subject, (ii) notify Buyer in writing of the nature and extent thereof, and
(iii) discharge all such Liens. Without limiting the generality of the
foregoing, Sellers and Owners shall provide to Buyer Uniform Commercial Code
searches (conducted as soon as possible after the date hereof of filings made
pursuant to Article 9 thereof in all jurisdictions where Seller has any Rights
and Assets.
5.22 Agreement with Hospital Owners Concerning Certain Managed Care
Arrangements.
(a) Fee for Service Contracts.
(i) With respect to any contract to which a Hospital Owner or any
managed care network entity of which the Hospital Owner is a member, owner,
sponsor or with which the Hospital Owner is affiliated (a "Hospital Party") is
a party with any payor, health insurance company, health maintenance or managed
care organization or employer (a "Managed Care Contract") between the Closing
Date and the
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third anniversary thereof (the "Covered Period") under which the Hospital Party
has or will agree to provide outpatient dialysis services to patients suffering
from end stage renal disease ("ESRD") on either a fee for service basis or
discounted fee for services basis, (A) the Hospital Party shall, during the
Covered Period, engage Buyer (subject to Buyer or its applicable facilities
meeting applicable credentialing requirements) to provide such services to the
patients of such Hospital Party, and (B) if so engaged, Buyer shall provide such
services to the patients of such Hospital Party during the Covered Period for a
fee for such services equal to 90% of the list charges of the Centers as of
January 1, 1997, a schedule of which is attached hereto as Schedule 5.22(a).
(ii) The foregoing rates shall be increased or decreased at the end
of each calendar year during the Covered Period by the same percentage increase
or decrease in the consumer price index for all urban consumers, in the
Indianapolis metropolitan area (as published by the United States Department of
Labor), occurring during the preceding calendar year. Neither the Buyer (or its
affiliates) nor any Hospital Party shall have any obligation under the foregoing
agreements contained in this Section 5.22(a) after the end of the Covered Period
notwithstanding any remaining term under any Managed Care Contract to which a
Hospital Party may be a party.
(b) Risk-Based Contracts.
(i) With respect to any Managed Care Contract to which a Hospital
Party is a party during the Covered Period which includes the Hospital Party's
agreement to provide "ESRD Care" (as defined below) to patients of the Hospital
Party on a capitated or at-risk basis, (A) the Hospital Party shall, during the
Covered Period, engage Buyer (subject to Buyer or its applicable facilities
meeting applicable credentialing requirements) to provide such ESRD Care, and
(B) if so engaged, Buyer shall, during the Covered Period, provide such ESRD
Care on a case rate basis to those patients covered by any such Managed Care
Contract who are actually diagnosed with ESRD, with a case rate for such ESRD
Care as may be agreed upon between Buyer and the Hospital Party or, failing
such agreement within 30 days after the effective date of any such Managed Care
Contract, at a case rate applicable to such services as determined by an
independent actuary mutually agreeable to each such party by using such
actuary's expected cost of ESRD Care, on a per case basis, for the persons
entitled to benefits under the Managed Care Contract.
(ii) With respect to any ESRD Care actually provided by Buyer under
the foregoing provisions, Buyer agrees to engage the Hospital Owner affiliated
with the contracting Hospital Party for the provision of hospital in-patient
services within the scope of such ESRD Case, provided that the Hospital Party's
charges for such services and standard of care are competitive within the market
area.
(iii) "ESRD Care" shall mean all of the typical medical services,
including professional services, provided to patients suffering from ESRD and
related co-morbid or causatory conditions or complications, but shall not
include services as a result of accidents or other diagnoses outside of
co-morbid or causatory conditions or complications, such as cancer, and shall
not include hospitalization or other costs unrelated to ESRD.
(iv) Within 30 days after the end of any calendar year during the
Covered Period, either the Hospital Party or the Buyer may request that the case
rate applicable to the services described above be reset by an independent
actuary mutually agreeable to each such party, the determination of which shall
result in a new case rate applicable for the duration of the remaining Covered
Period, unless either party shall again request a change at the end of any
calendar year falling within the Covered Period. Neither the Buyer nor any of
its affiliates nor any Hospital Party shall have any obligation under the
foregoing agreements contained in this Section 5.22(b) after the end of the
Covered Period notwithstanding any remaining term under any Managed Care
Contract to which a Hospital Party may be a party. With respect to any Managed
Care Contract described in this Section 5.22(b) that is in effect as of the
Closing Date, the Hospital Party and Buyer will implement the agreements in this
Section 5.22(b) within 180 days following the Closing Date.
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(c) The Physician Owners recognize the opportunities to provide care under
Managed Care Contracts on a collaborative basis with Buyer and agree to work in
good faith with Buyer, and to cause the Practice to work in good faith with
Buyer, to provide physician services that may be included under the requirement
to provide ESRD Care under any of the Managed Care Contracts. This
collaboration likely may include the development of a joint venture MSO capable
of assuming full risk ESRD services.
5.23 Development of Certain New Facilities. In the event that the
Practice notifies RCG in writing of an opportunity to develop a new facility
within the State of Indiana and provides therewith a written analysis supporting
the profitability of such new center (including an analysis of whether any
patients are expected to be drawn from any other center then owned by RCG or one
of its affiliates), and RCG or one of its affiliates fails to commit to develop
such new facility within 30 days of such written notice, then, if such new
facility is outside of a 10-mile radius of, and is projected by such written
analysis to draw no more than 10% of the patients from, any then existing
facility of RCG or any of its affiliates, then the Practice shall have the right
to pursue the development of such facility notwithstanding the covenants
contained in Section 5.8(a) hereof or in Article VII of the Medical Director
Agreement, provided that the Practice shall offer to RCG or any of its
affiliates the right to invest 60% of the development capital for such facility
at the time of the opening of such facility for a 60% interest in and the right
to control the operations of such facility. Furthermore, whether or not such
investment by RCG is exercised, RCG or any of its affiliates shall have the
right to manage the operations of such new facility for a fair market value
management fee. In addition, for any new facility in which RCG does not invest
pursuant to the previous provisions of this Section 5.23, RCG shall have the
option, exercisable for a period of two years following the date such facility
commences operations, to acquire a 60% interest in and the right to control the
operations of such facility for a purchase price equal to (i) 60% of the book
value of such facility; plus (ii) if the option is exercised in its first year,
20% of the amount determined in clause (i); plus (iii) if the option is
exercised in its second year, an additional 1.67% of the amount in clause (i)
for each full month that passes between the date of commencement of the second
year of the option and the date such option is exercised.
5.24 Acute Care Services. Hospital Owners, other than Community Hospital
of Indiana, Inc. ("CHI"), agree, effective upon the Closing, to engage Buyer to
provide acute care dialysis services to inpatients of such Hospital Owners on a
basis consistent with past practices with the Centers, but for a period of no
less than three (3) years from the date hereof and with the pricing and other
terms contained in the acute care contracts to which such Hospital Parties are
a party listed in Schedule 1.1(d). In addition, Hospital Owners, other than
CHI, hereby grant RCG a first right of refusal to continue to provide such
services to such Hospital Owners after the expiration of the initial 3-year
term and CHI hereby grants RCG a first right of refusal to provide such
services at such time as it elects to obtain acute care dialysis services for
its inpatients from an outside source.
5.25 Collection of Accounts Receivable. For a period of one (1) year
following the Closing Date, Buyer shall use its reasonable best efforts to
collect the accounts receivable of the Sellers arising from services rendered
prior to the Effective Date. Buyer shall promptly transfer or deliver to the
appropriate Seller any cash or other property that Buyer may receive in payment
of such accounts receivable, provided that Buyer shall have a right of offset
for any amounts due to Buyer from Sellers or the Owners hereunder.
ARTICLE 6
CONDITIONS TO OBLIGATIONS OF BUYER AND RCG
The obligation of Buyer and RCG to consummate the Acquisition is subject
to the satisfaction or waiver, at or prior to Closing, of each of the following
conditions:
6.1 Representations and Warranties. The representations and warranties of
the Sellers and the Owners set forth in this Agreement, or any document or
instrument delivered to Buyer or RCG hereunder, shall be true and correct as of
the Closing Date with the same force and effect as if such
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<PAGE> 34
representations and warranties had been made at and as of the Closing Date,
except with respect to any of such representations and warranties referring to a
state of facts existing on a specified date prior to the Closing Date, it shall
be sufficient if at the Closing Date such representation and warranty continues
to describe accurately the state of facts existing on the date so specified.
6.2 Performance; Covenants. All of the terms, covenants and conditions of
the Acquisition Documents to be complied with or performed by the Sellers or
the Owners at or prior to Closing shall have been complied with and performed
in all material respects including, but not limited to, the delivery of the
following documents:
(a) A certificate of existence regarding the Sellers which are not
general partnerships, certified by the Secretary of State of its state of
organization dated within ten (10) business days of the Closing;
(b) An Assignment and Bill of Sale in substantially the form of
Exhibit 6.2(b) hereof;
(c) An Assumption Agreement in substantially the form of Exhibit
6.2(c) hereof;
(d) A certificate dated as of the Closing Date signed by the duly
authorized officers of the Sellers and by the Owners certifying the satisfaction
of the condition in Section 6.1 and that the Sellers and each of the Owners have
fulfilled all of the conditions of this Article 6;
(e) Written consents of all third parties necessary for the
consummation of the transactions contemplated by the Acquisition Documents;
(f) Resolutions of the Sellers (board and shareholder or partner) in
form and substance reasonably satisfactory to Buyer and RCG approving the
execution, delivery and performance of this Agreement and the consummation of
the Acquisition, certified by an appropriate officer of each Seller;
(g) Incumbency certificates certifying the identity of the officers
of the Sellers;
(h) The Medical Director Agreement entered into by the Practice as
described in Section 5.9;
(i) Employment Agreement with David Holst in form and substance
satisfactory to Buyer;
(j) Estoppel Certificates or status letters from each landlord of
leased real property related to the Business dated no more than ten (10) days
prior to the Closing Date, which estoppel certificate or status letter certifies
(1) the lease being valid and in full force and effect, (2) there being no other
agreements between Seller and such landlord with respect to the leased real
property, (3) the rents and charges payable by Seller under such lease and the
date to which they have been paid, (4) whether there are, to the knowledge of
said landlord, any defaults thereunder, and if so, specifying the nature
thereof, and (5) the existence of any Lien, prior interests or superior
interests of any nature that currently do, or potentially could, terminate or
otherwise adversely affect such leased real property or any of Seller's right or
interest therein;
(k) The License Agreement referred to in Section 5.17 in form and
substance satisfactory to Buyer; and
(l) All books and records of the Sellers pertaining to the Business,
including all corporate and other records, books of accounts, contracts,
agreements and such other documents or certificates as shall be reasonably
requested by Buyer and RCG (except minute books and stock records).
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<PAGE> 35
6.3 [Intentionally left blank].
6.4 Necessary Consents and Approvals. Buyer, RCG, the Sellers and the
Owners shall have obtained all licenses, consents and permits, provided all
notices, and all waiting periods required by Law shall have expired, necessary
in order for Buyer, RCG and the Sellers to consummate the Acquisition and for
the continued operation of the Business after the Closing Date consistent with
its operation prior to the Closing Date, including all consents and approvals
listed on the Schedules hereto.
6.5 No Material Adverse Change. There shall not have occurred any
material adverse change in the business, assets, liabilities or condition,
financial or otherwise, of the Sellers, between the date hereof and the Closing
Date, and a certificate shall have been delivered to Buyer to such effect
signed by each of the executive officers of the Sellers as Buyer may request.
6.6 No Injunction, Etc. No action, proceeding, investigation or
legislation shall have been instituted, threatened or proposed before any
court, governmental agency, or legislative body to enjoin, restrain, prohibit
or obtain substantial damages in respect of, or which is related to, arises out
of, this Agreement or the consummation of the Acquisitions, or which is related
to or arises out of the business or operations of the Sellers, if such action,
proceeding, investigation or legislation, in the reasonable judgment of Buyer,
RCG or their counsel, would make it inadvisable to consummate such
transactions.
6.7 Satisfactory Due Diligence. Buyer shall in all respects be reasonably
satisfied with the results of its due diligence investigation of the Sellers,
including its continuing review of matters contained or not contained in the
Schedules.
6.8 SEC and Exchange Approval. Buyer and RCG shall have taken all actions
and complied in all material respects with requirements necessary to notify and
obtain any consents from the SEC, Nasdaq and any state securities law
regulatory agency of all actions contemplated by this Agreement.
6.9 Legal Opinion. Buyer shall have received an opinion of counsel to the
Sellers, Owners and the Practice substantially in the form attached as Exhibit
6.9.
6.10 Approval of RCG Board of Directors. This Agreement and the
Acquisition shall have been approved by the Board of Directors of RCG.
6.11 Approval of Allocation. Buyer shall have approved the allocation and
distribution of the Consideration among the Sellers as set forth on Schedule
1.2 hereof.
6.12 Covenants Not to Compete. Buyer shall have received Covenants Not to
Compete from those nephrologists affiliated with the Practice who are not
parties to this Agreement pursuant to which such nephrologists agree not to
compete with Buyer for a period of five (5) years on the same terms as Section
5.8 hereof.
ARTICLE 7
CONDITIONS TO OBLIGATIONS OF THE SELLERS AND THE OWNERS
The obligations of the Sellers and the Owners to close the Acquisition are
subject to the satisfaction or waiver, at or prior to Closing, of each of the
following conditions:
7.1 Representations and Warranties. The representations and warranties of
Buyer and RCG set forth in this Agreement, or any document or instrument
delivered to any party hereunder, shall be true and correct as of the Closing
Date with the same force and effect as if such representations and warranties
had been made at and as of the Closing Date, except with respect to any of such
representations and
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<PAGE> 36
warranties referring to a state of facts existing at a specified date prior to
the Closing Date, it shall be sufficient if at the Closing Date such
representation and warranty continues to describe accurately the state of facts
existing on the date so specified.
7.2 Performance; Covenants. All of the terms, covenants and conditions of
this Agreement to be complied with or performed by Buyer and RCG at or prior to
the Closing shall have been complied with and performed in all material
respects, including, but not limited to delivery of the following documents:
(a) An Assumption Agreement in substantially the form of Exhibit
6.2(c) hereof;
(b) A certificate dated as of the Closing Date signed by a duly
authorized officer of Buyer and RCG certifying the satisfaction of the condition
in Section 7.1 and that Buyer and RCG have fulfilled all of the conditions of
this Article 7;
(c) Resolutions adopted by the Members of Buyer and the Board of
Directors of RCG in form and substance satisfactory to the Sellers and the
Owners approving the execution, delivery and performance of this Agreement and
the consummation of the Acquisitions, certified by Buyer and the Secretary of
RCG;
(d) The Medical Director Agreement entered into by RCG as described
in Section 5.9;
(e) An incumbency certificate certifying the identity of the
officers of RCG; and
(f) A Registration Rights Agreement in substantially the form of
Exhibit 7.2(f) hereto signed by RCG.
7.3 Necessary Consents and Approvals. Buyer, RCG, the Sellers and the
Owners shall have obtained all licenses, consents and permits, provided all
notices, and all waiting periods required by Law shall have expired, necessary
in order for Buyer, RCG and the Sellers to consummate the Acquisitions and for
the continued operation of the business of the Seller after the Closing Date
consistent with their operation prior to the Closing Date, including all
consents and approvals listed on the Schedules hereto.
7.4 No Material Adverse Change. There shall not have occurred any
material adverse change in the business, assets, liabilities or condition,
financial or otherwise, of Buyer or RCG between the date hereof and the Closing
Date, and a certificate shall have been delivered to the Sellers and the Owners
to such effect signed by an authorized officer of Buyer and RCG.
7.5 No Injunction, Etc. No action, proceeding, investigation or
legislation shall have been instituted, threatened or proposed before any
court, governmental agency, or legislative body to enjoin, restrain, prohibit
or obtain substantial damages in respect of, or which is related to, arises out
of, this Agreement or the consummation of the Acquisitions, or which is related
to or arises out of the business or operations of Buyer or RCG, if such action,
proceeding, investigation or legislation, in the reasonable judgment of the
Sellers or their counsel, would make it inadvisable to consummate such
transactions.
7.6 Legal Opinion. The Sellers shall have received an opinion of counsel
to Buyer and RCG substantially in the form attached as Exhibit 7.6.
7.7 SEC and Exchange Approval. Buyer and RCG shall have taken all actions
and complied in all material respects with requirements necessary to notify and
obtain any consents from the SEC, Nasdaq and any state securities law
regulatory agency of all actions contemplated by this Agreement.
7.8 Satisfactory Due Diligence. The Owners shall in all respects be
satisfied with the results of the due diligence investigation of Buyer and RCG.
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7.9 Approval of Certain Physician Owners. This Agreement and the
Acquisition shall have been approved at a duly called meeting of the
shareholders or partners of each of the Sellers and Owners.
ARTICLE 8
TERMINATION
8.1 Right of Termination. This Agreement and the Acquisition may be
terminated at any time prior to the Closing Date:
(a) By the mutual written consent of Buyer, RCG and each Seller.
(b) By Buyer in the event that the conditions set forth in Article 6
of this Agreement shall not have been satisfied or waived by April 30, 1997,
unless such satisfaction shall have been frustrated or made impossible by any
act or failure to act of Buyer or RCG.
(d) By the Sellers in the event that the conditions set forth in
Article 7 of this Agreement shall not have been satisfied or waived by April 30,
1997, unless such satisfaction shall have been frustrated or made impossible by
any act or failure to act of any Seller or Owner.
(e) By the Sellers or Buyer if the Closing shall not have occurred
by May 31, 1997.
(f) By Buyer in accordance with Section 5.19 hereof.
8.2 Effect of Termination. In the event of termination in accordance with
Section 8.1, this Agreement shall become void and of no further force or
effect, without any liability on the part of any of the parties hereto or their
respective owners, directors, officers or employees, except the obligations of
each party to preserve the confidentiality of documents, certificates and
information furnished to such party pursuant thereto and for any obligation or
liability of any party based on or arising from any breach or default by such
party with respect to its representations, warranties, covenants or agreements
contained in the Acquisition Documents.
ARTICLE 9
INDEMNIFICATION
9.1 Indemnification by Sellers and Owners. (a) Subject to Sections 9.3
through 9.5, each Owner shall, severally and not jointly, indemnify and hold
harmless Buyer, RCG and their respective officers, directors, agents or
affiliates, from and against any and all demands, claims, actions or causes of
action, assessments, losses, diminution in value, damages (including special
and consequential damages), liabilities, costs and expenses, including but not
limited to reasonable attorneys' fees ("Losses"), suffered or incurred by any
such party by reason of or arising out of any of the following:
(i) the breach by Owner or any entity in which Owner
has an ownership interest of any representation or warranty contained in Article
3 hereof or in any Acquisition Document or any document or instrument delivered
by such Owner in connection therewith; and
(ii) the non-fulfillment by Owner or any entity in which
Owner has an ownership interest of any covenant or agreement of such Owner
contained in the Acquisition Documents or any document or instrument delivered
by such Owner in connection therewith.
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<PAGE> 38
(b) Subject to Sections 9.3 through 9.5, the Sellers and Owners
shall jointly and severally indemnify and hold harmless Buyer, RCG and their
respective officers, directors, agents or affiliates, from and against any and
all demands, claims, actions or causes of action, assessments, losses,
diminution in value, damages (including special and consequential damages),
liabilities, costs and expenses, including but not limited to reasonable
attorneys' fees ("Losses"), suffered or incurred by any such party by reason of
or arising out of any of the following:
(i) the Retained Liabilities and the Retained Assets;
(ii) the excess of the Current Liabilities over the Liability
Limit as set forth in Section 1.2(c);
(iii) the breach of any representation or warranty contained
in Article 2 hereof or in any Acquisition Document or any document or instrument
delivered by a Seller in connection therewith; and
(iv) the non-fulfillment of any covenant or agreement of a
Seller contained in the Acquisition Documents or any document or instrument
delivered by a Seller in connection therewith.
(c) No claim for indemnification with respect to any alleged
misrepresentation or breach of warranty may be made after three (3) years
following the Closing Date; provided, however, that the right to
indemnification shall extend beyond such period (i) with respect to any
specific claim for indemnification for which written notice was given to the
Sellers or Owners during such period but shall expire on the expiration of the
applicable statutes of limitations unless an action has been brought with
respect thereto, (ii) with respect to any claim brought for a misrepresentation
or breach of Section 2.17 of this Agreement (a "Tax Claim"), until the
liability to which any such claim may relate is barred by all applicable
statutes of limitations, and (iii) with respect to any claim brought for a
misrepresentation or breach of Section 2.11 (an "Ownership Claim") or Section
2.16 (an "Environmental Claim") of this Agreement, indefinitely.
9.2 Indemnification by Buyer and RCG. (a) Subject to Sections 9.3
through 9.5, Buyer and RCG shall indemnify and hold harmless the Sellers and
Owners, and any of their officers, directors, agents and affiliates, at all
times after the date hereof from and against any and all Losses suffered or
incurred by any such party by reason of, or arising out of any of the
following:
(i) the breach of any representation or warranty
contained in Article 4 hereof or in any Acquisition Document or any document or
instrument delivered by Buyer or RCG in connection therewith; and
(ii) the non-fulfillment of any covenant or agreement of
Buyer or RCG contained in the Acquisition Documents or any document or
instrument delivered by Buyer or RCG in connection therewith.
(b) No claim for indemnification with respect to any alleged
misrepresentation or breach of warranty may be made after three (3) years
following the Closing Date; provided, however, that the right to indemnification
shall extend beyond such period with respect to any specific claim for
indemnification for which written notice was given to Buyer or RCG during such
period but shall expire on the expiration of the applicable statutes of
limitations unless an action has been brought with respect thereto.
9.3 Notice and Opportunity to Defend. The party indemnified under this
Article 9 (the "Indemnified Party") shall promptly notify in writing the
indemnifying party (the "Indemnifying Party") of any matter giving rise to an
obligation to indemnify and the Indemnifying Party shall defend such claim at
its expense with counsel reasonably acceptable to the Indemnified Party,
provided that the Indemnifying
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Party may not settle any such claim without the consent of the Indemnified
Party. The Indemnified Party agrees to cooperate with the Indemnifying Party
and to make reasonably available to the Indemnifying Party any necessary records
or documents in the possession of the Indemnified Party which are necessary to
defend such claim. If the Indemnifying Party does not defend or settle such
claim, the Indemnified Party may do so without the Indemnifying Party's
participation, in which case the Indemnifying Party shall pay the expenses of
such defense, and the Indemnified Party may settle or compromise such claim
without the Indemnifying Party's consent. The failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations hereunder except to the extent that the Indemnifying Party is
actually prejudiced by such failure to give notice.
9.4 Indemnification Limits. (a) No Indemnifying Party (with the Sellers
and Owners as a group deemed as a single Indemnifying Party for this purpose)
shall be required to indemnify the Indemnified Party (with the Sellers and
Owners as a group deemed as a single Indemnifying Party for this purpose)
unless the amount of the loss or claim for which indemnification is sought,
when aggregated with all other losses and claims for which indemnification is
sought by the Indemnified Party (with the Sellers and Owners as a group deemed
as a single Indemnifying Party for this purpose), exceeds $20,000 ("Minimum
Aggregate Liability Amount"), at which time rights to indemnification for losses
and claims may be asserted for the Minimum Aggregate Liability Amount and any
amounts in excess thereof.
(b) No Seller or Owner shall be required to satisfy an indemnification
obligation in excess of one hundred percent (100%) of the aggregate value of
the Consideration received by such Seller or Owner and in no event shall Buyer
and RCG collectively be required to satisfy an indemnification obligation in
excess of one hundred percent (100%) of the aggregate value of the
Consideration.
(c) The limitations contained in this Section 9.4 shall not apply to (i)
any indemnification claim under Sections 9.1(a)(ii), 9.1(b)(i), 9.1(b)(ii),
9.1(b)(iv) or 9.2(a)(ii); (ii) a Tax Claim, Ownership Claim or Environmental
Claim; or (iii) any Loss which results from or arises out of fraud and
intentional misrepresentation or an intentional breach of warranty on the part
of a party to the Acquisition Documents.
9.5 Survival and Exclusivity. The representations and warranties of the
parties contained in the Acquisition Documents or in any document or instrument
delivered in connection therewith shall survive the Closing and shall not be
extinguished thereby notwithstanding any investigation or other examination by
any party, provided that from and after the Closing the remedies set forth in
this Article 9 shall constitute the sole and exclusive remedy for any
inaccuracy or breach of any such representation or warranty. The limitations
contained in this Article 9 shall not apply to fraud or intentional
misrepresentation.
9.6 Contribution Among Owners and Sellers. If any Owner or Seller
("Unrelated Indemnifying Parties") is required to make a payment to an
Indemnified Party pursuant to Section 9.1(b) of this Agreement that is related
to a breach of a representation, warranty or covenant by another Seller or
Owner ("Related Indemnifying Parties") with respect to a Center in which such
Unrelated Indemnifying Party has no ownership interest, the Related
Indemnifying Parties shall promptly pay to the Unrelated Indemnifying Parties
the amount of such payment plus any Losses incurred by the Unrelated
Indemnifying Parties in the collection of such payment.
ARTICLE 10
[RESERVED]
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ARTICLE 11
CERTAIN DEFINITIONS
Except as otherwise provided herein, the capitalized terms set
forth below shall have the following meanings:
"Acquisition Documents" shall mean this Agreement and the other
documents and instruments to be delivered pursuant to this Agreement.
"Agreement" shall mean this Asset Purchase Agreement, including the
Exhibits and Schedules delivered pursuant hereto and incorporated herein by
reference.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Affiliate" shall mean, with respect to any entity, any other
entity, which, together with such entity, would be treated as a single employer
(i) under Section 414(b) or (c) of the Code or (ii) for purposes of any Benefit
Plan subject to Title IV of ERISA, under Section 414(b), (c), (m) or (o) of the
Code.
"Exhibits" shall mean the Exhibits so marked, copies of which are
attached to this Agreement. Such Exhibits are hereby incorporated by reference
herein and made a part hereof, and may be referred to in this Agreement and any
other related instrument or document without being attached hereto.
"HCFA Liability" shall mean any Liability for which the Centers may
be liable because of the revised Health Care Financing Association
interpretation concerning the timing of Medicare eligibility under the Medicare
Secondary Payor 1993 amendments which interpretation was applied retroactively
to require refunds of certain amounts collected from employer-based group health
plans and which is subject to a preliminary injunction issued by the United
States District Court for the District of Columbia.
"Law" shall mean any code, law, ordinance, regulation, reporting or
licensing requirement, rule, or statute applicable to a person or its assets,
Liabilities or business, including those promulgated, interpreted or enforced by
any Regulatory Authority.
"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including costs
of investigation, collection and defense), claim, deficiency, guaranty or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for collection or deposit in the ordinary course of
business) of any type, whether accrued, absolute or contingent, liquidated or
unliquidated, matured or unmatured, or otherwise.
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Person" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
"RCG Common Stock" shall mean the $0.01 par value common stock of
RCG.
"Regulatory Authorities" shall mean, collectively, all federal
and state regulatory agencies having jurisdiction over the Parties and their
respective Subsidiaries, including the SEC.
"SEC" shall mean the Securities and Exchange Commission.
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"Tax Return" shall mean any and all returns, reports, filings,
declarations and statements relating to Taxes that are required to be filed,
recorded, or deposited with any Regulatory Authority, including any attachment
thereto or amendment thereof.
(b) In addition to the terms defined in Section 11.1(a) above,
the terms set forth below shall have the meanings ascribed thereto in the
referenced sections:
<TABLE>
<S> <C>
Acquisition - Preamble IRS - Section 2.17(b)
Assumed Liabilities - Section 1.3 Losses - Section 9.1(b)
Base Period Trading Price - Section 1.2 Medicare and Medicaid programs - Section 2.18
Business - Preamble Minimum Aggregate Liability Amount - Section 9.4(a)
Cash Amount - Section 1.1(a)Centers - Preamble Ownership Claim - Section 9.1(c)Pension Plans -
Closing - Section 1.7 Section 2.14(a)
Closing Date - Section 1.7 Private Programs - Section 2.18
Compensation Programs - Section 2.14(b) RCG Documents - Section 4.8
Confidential Data - Section 5.8(b) Remuneration - Section 2.20
Consideration - Section 1.2 Retained Assets - Section 1.5
Current Liabilities - Section 1.3 Retained Liabilities - Section 1.4
Dialysis Name - Section 5.17 Rights and Assets - Section 1.1
Environmental Condition - Section 2.16 Seller Agreements - Section 2.12
Environmental Claim - Section 9.1(c) SEC Documents - Section 4.8
Financial Statements - Section 2.6 Tax Claim - Section 9.1(c)
Government Programs - Section 2.18 Taxes - Section 1.4(g)
Indemnified Party - Section 9.3 Territory - Section 5.8(a)
Indemnifying Party - Section 9.3 Welfare Plans - Section 2.14(b)
</TABLE>
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
ARTICLE 12
MISCELLANEOUS PROVISIONS
12.1 Notices. (a) Any notice sent in accordance with the provisions of
this Section 12.1 shall be deemed to have been received (even if delivery is
refused or unclaimed) on the date which is: (i) the date of proper posting, if
sent by certified U.S. mail or by Express U.S. mail or private overnight
courier; or (ii) the date on which sent, if sent by facsimile transmission,
with confirmation and with the original to be sent by certified U.S. mail,
addressed as follows:
If to the Sellers or Owners: c/o David W. Holst
Indiana Nephrology & Internal Medicine, P.C.
10585 North Meridian Street
Indianapolis, Indiana 46290
Telecopy Number: (317) 574-4737
Copy to Counsel: Hall, Render, Killian, Heath & Lyman, P.C.
One American Square
Suite 2000, Box 82064
Indianapolis, Indiana 46282
Telecopy Number: (317) 633-4878
Attention: R. Terry Heath, Esq.
- 38 -
<PAGE> 42
If to Buyer: RCG Indiana, LLC
c/o Renal Care Group, Inc.
2100 West End Avenue, Suite 800
Nashville, Tennessee 37203
Telecopy Number: (615) 321-5419
Attention: Mr. Sam A. Brooks
If to RCG: Renal Care Group, Inc.
2100 West End Avenue, Suite 800
Nashville, Tennessee 37203
Telecopy Number: (615) 321-5419
Attention: Mr. Sam A. Brooks
Copy to Counsel: Alston & Bird
One Atlantic Center
1201 W. Peachtree Street
Atlanta, Georgia 30309
Telecopy Number: (404) 881-7777
Attention: Steven L. Pottle, Esq.
(b) Any party hereto may change its address specified for notices
herein by designating a new address by notice in accordance with this Section
12.1.
12.2 Expenses. Notwithstanding Section 12.11, each of the parties hereto
shall bear and pay all costs and expenses incurred by it or on its behalf in
connection with the transactions contemplated hereunder; provided, however,
that RCG agrees to bear and pay up to $739,148 of the fees and expenses of
Merrill, Lynch, Pierce, Fenner & Smith and up to $207,167 of legal, accounting
and other expenses incurred by or on behalf of the Sellers and the Owners in
connection with the transactions contemplated hereby, payable in the manner
provided in Schedule 12.2.
12.3 Further Assurances. Each party covenants that at any time, and from
time to time, after the Closing, it will execute such additional instruments
and take such actions as may be reasonably requested by the other parties to
confirm or perfect or otherwise to carry out the intent and purposes of this
Agreement.
12.4 Waiver. Any failure on the part of any party to comply with any of
its obligations, agreements or conditions hereunder may be waived by any other
party to whom such compliance is owed. No waiver of any provision of this
Agreement shall be deemed, or shall constitute, a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a continuing
waiver.
12.5 Assignment. This Agreement shall not be assignable by any of the
parties hereto without the written consent of all other parties, provided that
RCG or Buyer may assign its rights and obligations under this Agreement without
the consent of the Sellers and Owners to any direct or indirect subsidiary or
affiliate of RCG or to any party that acquires substantially all of the assets
or stock of RCG or Buyer or any successor entity resulting from a merger or
consolidation of or with RCG or Buyer. No such assignment shall relieve RCG or
Buyer of its obligations hereunder.
12.6 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, legal
representatives, executors, administrators, successors and assigns. This
Agreement shall survive the Closing and not be merged therein.
12.7 Headings. The section and other headings in this Agreement are
inserted solely as a matter of convenience and for reference, and are not a
part of this Agreement.
- 39 -
<PAGE> 43
12.8 Entire Agreement. All Schedules and Exhibits attached to this
Agreement are by reference made a part hereof. This Agreement and the
Exhibits, Schedules, certificates and other documents delivered pursuant hereto
or incorporated herein by reference, contain and constitute the entire
agreement among the parties and supersede and cancel any prior agreements,
representations, warranties, or communications, whether oral or written, among
the parties relating to the transactions contemplated by this Agreement.
Neither this Agreement nor any provision hereof may be changed, waived,
discharged or terminated orally, but only by an agreement in writing signed by
the party against whom or which the enforcement of such change, waiver,
discharge or termination is sought.
12.9 Governing Law; Severability. This Agreement shall be governed by and
construed in accordance with the Laws of the State of Delaware, without regard
to any applicable conflicts of Laws. The provisions of this Agreement are
severable and the invalidity of one or more of the provisions herein shall not
have any effect upon the validity or enforceability of any other provision.
12.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.11 Brokers. The Sellers and the Owners shall jointly and severally
indemnify, hold harmless and defend RCG and its affiliates, and RCG shall
indemnify, hold harmless and defend Sellers and Owners from and against the
payment of any and all broker's and finder's expenses, commissions, fees or
other forms of compensation which may be due or payable from or by the
indemnifying party, or which may have been earned by any third party acting on
behalf of the indemnifying party in connection with the negotiation, execution
and consummation of the transactions contemplated hereby.
[Signatures Begin on Next Page]
- 40 -
<PAGE> 44
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf and its corporate seal to be hereunto affixed and
attested by officers thereunto as of the day and year first above written.
ATTEST: RCG INDIANA, LLC
By: /s/ Sam A. Brooks
- ----------------------- --------------------------------
Secretary Title:
------------------------------
ATTEST: RENAL CARE GROUP, INC.
By: /s/ Sam A. Brooks
- ----------------------- --------------------------------
Secretary Title:
------------------------------
ATTEST: INDIANA NEPHROLOGY & INTERNAL
MEDICINE, P.C.
By: /s/ Thomas R. Artingh, M.D.
- ----------------------- --------------------------------
Secretary Title:
------------------------------
SELLERS:
ATTEST: EASTERN INDIANA KIDNEY CENTER
By: /s/ James R. Lewis, M.D.
- ----------------------- --------------------------------
Secretary Title:
------------------------------
ATTEST: INDIANA KIDNEY CENTER
By: /s/ Kevin J. Lavelle
- ----------------------- --------------------------------
Secretary Title:
------------------------------
- 41 -
<PAGE> 45
ATTEST: INDIANA KIDNEY CENTER SOUTH, LLC
By: /s/ Douglas R. Maxwell
- ----------------------- --------------------------------
Secretary Title:
------------------------------
ATTEST: ST. VINCENT DIALYSIS CENTER
By: /s/ Clifford A. Jaffe
- ----------------------- --------------------------------
Secretary Title:
------------------------------
ATTEST: SAINT JOSEPH DIALYSIS CENTER
By: /s/ Clifford A. Jaffe
- ----------------------- --------------------------------
Secretary Title:
------------------------------
ATTEST: INDIANA DIALYSIS SERVICES, PC
By: /s/ Kevin J. Lavelle
- ----------------------- --------------------------------
Secretary Title:
------------------------------
OWNERS:
ATTEST: INDIANA DIALYSIS SERVICES, PC
By: /s/ Kevin J. Lavelle
- ----------------------- --------------------------------
Secretary Title:
------------------------------
ATTEST: COMMUNITY HOSPITALS OF INDIANA, INC.
By: /s/ William E. Corley
- ----------------------- --------------------------------
Secretary Title:
------------------------------
- 42 -
<PAGE> 46
ATTEST: SETON HEALTH CORPORATION OF CENTRAL INDIANA, INC.
By: /s/ Clifford A. Jaffe
- ----------------------- --------------------------------
Secretary Title:
------------------------------
ATTEST: GREENWOOD DIALYSIS SERVICES, PC
By: /s/ Douglas R. Maxwell
- ----------------------- --------------------------------
Secretary Title:
------------------------------
ATTEST: REID HOSPITAL PHYSICIANS
By: /s/ James R. Lewis
- ----------------------- --------------------------------
Secretary Title:
------------------------------
ATTEST: REID HOSPITAL & HEALTH CARE SERVICES, INC.
By: /s/ B. Allen Dowell
- ----------------------- --------------------------------
Secretary Title:
------------------------------
ATTEST: SAINT JOSEPH HOSPITAL AND HEALTH CARE CENTER OF
KOKOMO, INDIANA, INC.
By: /s/ Steve Linerode
- ----------------------- --------------------------------
Secretary Title:
------------------------------
/s/ Kenneth W. Beckley, M.D.
------------------------------------
Kenneth W. Beckley, M.D.
/s/ Ronald K. Bloom, M.D.
------------------------------------
Ronald K. Bloom, M.D.
/s/ TaeKae Chong, M.D.
------------------------------------
TaeKae Chong, M.D.
- 43 -
<PAGE> 47
/s/ Alan E. Handt, M.D.
------------------------------------
Alan E. Handt, M.D.
/s/ Kevin J. Lavelle, M.D.
------------------------------------
Kevin J. Lavelle, M.D.
/s/ Patsy Maikranz, M.D.
------------------------------------
Patsy Maikranz, M.D.
/s/ Ronald I. Reisman, M.D.
------------------------------------
Ronald I. Reisman, M.D.
/s/ Jay H. Weiss, M.D.
------------------------------------
Jay H. Weiss, M.D.
/s/ Douglas R. Maxwell, M.D.
------------------------------------
Douglas R. Maxwell, M.D.
- 44 -
<PAGE> 48
EXHIBIT A
MANAGEMENT SERVICES
- - Executive management and administration
- - All facility accounting and reporting, consistent with
Medicare requirements
- - All budget preparation
- - Regulatory compliance monitoring and reporting
- - Personnel including hiring, training and development of all
non-physician employees, consistent with Medicare requirements
- - Computer systems and support
- - Facility operations, policies and procedures, consistent with
Medicare requirements
- - Quality assurance programs, consistent with Medicare
requirements
- - Patient education programs, customer service programs and
staff support programs
- - Materials management including purchasing (supplies,
pharmaceutical, equipment maintenance)
- - Laboratory services
- - Billing and technical and facility fees
- - Billing of physicians' professional services for chronic
dialysis care
- - Supervision and management of all records storage, maintenance and
security procedures in compliance with all applicable federal, state
and local laws and regulations, and in accordance with industry
standards.
<PAGE> 1
Exhibit 10.29
ASSET PURCHASE AGREEMENT
AND BILL OF SALE
BY AND AMONG
RENAL CARE GROUP, INC.,
RCG LABORATORY, INC.
AND
KIDNEY CARE, INC.
DATED EFFECTIVE AS OF
JANUARY 1, 1997
<PAGE> 2
ASSET PURCHASE AGREEMENT AND
BILL OF SALE
THIS ASSET PURCHASE AGREEMENT AND BILL OF SALE (this "Agreement") is made
and entered on January 23, 1997 but with an effective date as of 12:01 a.m.
January 1, 1997 (the "Effective Date") by and among RENAL CARE GROUP, INC.
("RCG"), a Delaware corporation, RCG LABORATORY, INC., a Delaware corporation
("Buyer"), and KIDNEY CARE, INC., a Mississippi non-profit corporation
("Seller").
PREAMBLE
WHEREAS, Seller owns and operates a clinical laboratory (the "Laboratory");
WHEREAS, Seller and RCG are parties to that certain Amended and Restated
Transfer Agreement, dated as of November 14, 1995 (the "Transfer Agreement"),
pursuant to which Seller granted RCG an option to acquire the assets of
Laboratory;
WHEREAS, Seller and RCG are parties to that certain Laboratory Management
Agreement, dated as of February 12, 1996 (the "Management Agreement");
WHEREAS, Seller provides certain laboratory services to certain dialysis
facilities owned by RCG's affiliates pursuant to those certain Laboratory
Services Agreements, each dated as of February 12, 1996 (the "Laboratory
Agreements");
WHEREAS, RCG and Buyer desire for Buyer to purchase the Laboratory on the
terms and conditions set forth herein (the "Acquisition"); and
WHEREAS, the Management Agreement and the Laboratory Agreements shall
terminate in accordance with their respective terms.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and the mutual warranties,
representations, covenants and agreements set forth herein, the parties agree
as follows:
ARTICLE 1
PURCHASE OF RIGHTS AND ASSETS
1.1 Agreement to Purchase and Sell. On the terms and conditions set forth
herein, Seller hereby sells, grants, conveys, transfers, assigns and delivers to
Buyer, and Buyer hereby purchases, all of Seller's right, title and interest in
and to all of the rights and assets owned by Seller and used or useful in the
operation of the Laboratory (except for Retained Assets as defined in Section
1.5 below), free and clear of all liens, charges, claims or encumbrances
whatsoever, including, without limitation, the following (collectively, the
"Rights and Assets"):
(a) All accounts receivable of Seller relating to the Laboratory arising
for services performed on and after the Effective Date;
(b) All inventory and tangible personal property used in the operation of
the Laboratory, including, but not limited to, such property listed on Schedule
2.8(a), including all furniture, machinery, vehicles, office furnishings,
equipment and equipment leasehold improvements of the Seller existing on the
date hereof;
<PAGE> 3
(c) To the extent assignable, each of Seller's valid authorizations,
permits and licenses, including its Medicare and other provider numbers and
related agreements as listed on Schedule 1.1(c) necessary to operate the
Laboratory and bill for its services on a basis consistent with past practices
as listed on Schedule 1.1(c);
(d) All contracts and agreements, including leases, listed on Schedule
1.1(d) hereto relating to the Laboratory;
(e) All contract rights, leasehold rights, guarantees, warranties and
insurance policies and proceeds therefrom relating to the Laboratory;
(f) All other intangible assets of Seller relating to the operation of the
Laboratory including, but not limited to, all patents, trademarks, service
marks and designs and all trade names, service names and business names
relating to the Rights and Assets, which are set forth on Schedule 1.1(f)
hereto, all telephone numbers, and the goodwill of Seller in or arising from
the operation of the Laboratory;
(g) Except as set forth in Section 1.5 below, all prepaid items including,
without limitation, all equipment, utility and other deposits existing on the
Effective Date;
(h) All patient lists and patient medical or operating records, employment
records, medical staff roster and files, customer lists, customer contracts,
financial records and other tangible personal property of Seller relating to
the Laboratory;
(i) All books, records and documents owned, required for or incident to
the operation of the Laboratory;
(j) All of Seller's building or construction plans, building permits,
designs or drawings related to the Laboratory; and
(k) Any and all other assets of whatever type or description, other than
the Retained Assets (as defined in Section 1.5 hereof) which are (i) reflected
in the balance sheet contained in the Financial Statements, except to the
extent any such assets have been disposed of in the ordinary course of business
since the date of such balance sheet or (ii) used in the operation of the
Laboratory.
1.2 Consideration. The total consideration for the Rights and Assets is
$196,384 paid on the date hereof by Buyer in cash by wire transfer to an
account designated by Seller (the "Consideration"). The Consideration includes
$147,000 specified as the purchase price in the Transfer Agreement, plus
$72,596 for additional purchased assets in accordance with Section 5.4 of the
Management Agreement (the "Additional Amount"), less $23,212 for the amount of
accrued vacation assumed under Section 1.3 below (the "Vacation Amount"). The
parties agree that they shall each have until February 28, 1997 to propose any
adjustments to the Additional Amount or the Vacation Amount and that if they
are unable to agree on any proposed adjustments by March 15, 1997, they shall
choose a mutually agreeable "Big 6" accounting firm, the costs of which they
shall share equally, to resolve the amount of any adjustment, which resolution
shall be final and binding.
1.3 Assumed Liabilities. Buyer hereby assumes (i) the payment and
performance of obligations under those contracts and agreements identified on
Schedule 1.1(d) hereto arising on and after the Effective Date, except to the
extent any such obligations relate to a default occurring on or before the
Closing Date (other than a default that may arise by reason of the assignment
contemplated hereby and which is disclosed on Schedule 2.3), (ii) trade
payables, rent and wages payable accrued on and after the Effective Date, and
(iii) Sellers obligations, if any, with respect to vacation and sick time
accrued as of the
- 2 -
<PAGE> 4
Effective Date for employees of Buyer or RCG, the services of whom are provided
to Seller by RCG under the Management Agreement (the "Assumed Liabilities").
1.4 Retained Liabilities. Except as specifically set forth in Section
1.3, Seller retains all liabilities directly or indirectly arising out of or
related to (i) the Retained Assets and (ii) the operation of the Laboratory on
and prior to the Closing Date, whether such liabilities are known or unknown,
disclosed or undisclosed, matured or unmatured, accrued, absolute or contingent
on and as of the Closing Date (the "Retained Liabilities"). Without limiting
the generality of the preceding sentence, neither Buyer nor RCG shall assume or
become liable for any obligations and liabilities of Seller not specifically
described in Section 1.3, including without limitation, the following:
(a) Any liability or obligation arising out of any employee benefit plan
maintained by or covering employees of Seller or to which Seller has made any
contribution or to which Seller could be subject to any liability;
(b) Any losses, costs, expenses, damages, claims, demands and judgments of
every kind and nature related to, arising out of, or in connection with the
Mississippi Bulk Transfer Act or any similar statute as enacted in any
jurisdiction, domestic or foreign;
(c) Any liability or obligation arising out of any breach by Seller on or
prior to the Closing Date of any provision of the Seller Agreements (as defined
herein) or any other contract to which Seller is a party;
(d) Any liability of Seller with respect to any claim or cause of action,
regardless of when made or asserted, which arises (i) out of or in connection
with the business and operations of Seller on or prior to the Closing, (ii)
with respect to any product purchased or manufactured or any service provided
by Seller on or prior to the Closing Date, including without limitation, any
liability or obligation (A) pursuant to any express or implied representation,
warranty, agreement, or guarantee made by Seller or (B) imposed or asserted to
be imposed by operation of law, in connection with any service performed or
product designed, manufactured, sold, or leased by or on behalf of Seller on or
prior to the Closing Date, including without limitation, any claim related to
any product delivered in connection with the performance of such service and
any claims seeking to recover for consequential damage, lost revenue, or
income, including pursuant to any doctrine of product liability, or (iii) out
of or in connection with the Laboratory and operations of Seller on or prior to
the Closing Date under any federal, state, or local law, rule, or regulation
relating to (A) environmental protection or clean-up, (B) taxation, or (C)
employment or termination of employment;
(e) Any liability or obligation, arising prior to or as a result of the
Acquisition, to any employee, agent, or independent contractor of Seller
(excluding employees, agents or independent contractors of Buyer or RCG prior
to the Closing), whether or not employed by Buyer or RCG after the Closing, or
under any benefit arrangement with respect thereto;
(f) Any liability of Seller existing on or prior to the Closing Date,
including any liability related to any matter described on the Schedules
hereto;
(g) Any liability or obligation for federal, state, county, local, foreign
and other taxes, assessments, charges, fees, and impositions, including
interest and penalties thereon or with respect thereto, whether disputed or not
("Taxes"), including any liabilities or obligations of Seller relating to sales
and use, transfer, documentary, income or other Taxes levied on the transfer of
the Rights and Assets;
(h) Any liability for any overbillings made by Seller or overpayments
received by Seller relating to the Laboratory under any Medicare or other
government or private payor arrangement in respect of services provided on or
prior to the Closing Date; and
- 3 -
<PAGE> 5
(i) All wages, commissions, vacation, holiday and workers'
compensation pay obligations of Seller with respect to its respective employees
accrued through the Effective Date and all bonuses and fringe benefits as to
such employees accrued through the Effective Date, and all severance pay
obligations of Seller to employees resulting from Seller's consummation of the
transactions contemplated by this Agreement.
1.5 Retained Assets. The parties expressly agree that excluded from the
Rights and Assets assigned to and purchased by Buyer hereunder are (i) Seller's
stock record books, tax returns and minute books; (ii) any assets of Seller not
related to the Laboratory, (iii) cash and cash equivalents, (iv) prepaid
expenses relating to any insurance coverage of Seller or to any equipment
acquired or leased by Seller in accordance with Section 5.4 of the Management
Agreement; (v) all notes and all accounts receivable relating to services
provided prior to the Effective Date, (vi) any records which by law Seller is
required to retain in its possession, (vii) claims for refunds and rights to
offset in respect thereof relating to operations conducted prior to the
Effective Date; and (viii) such other assets as are set forth on Schedule 1.5
hereto (collectively, the "Retained Assets").
1.6 Time and Place of Closing. The closing (the "Closing") will take
place on the date of this Agreement (the "Closing Date") at such place as may
be mutually agreed upon by the Parties. The Parties hereto intend and agree
that the transactions contemplated herein shall, for financial accounting and
reporting purposes and the filing of income tax returns, be deemed to have
closed on the Effective Date.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SELLER
The Seller represents and warrants the following to Buyer and RCG:
2.1 Organization, Authority and Capacity. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Mississippi, and has the full power and authority necessary to (i) execute,
deliver and perform its obligations under this Agreement and the other
agreements and documents delivered in furtherance of the transactions
contemplated hereby (the "Acquisition Documents") and (ii) carry on its
business as it has been and is now being conducted and to own and lease the
properties and assets which it now owns or leases. Seller is duly qualified to
do business and is in good standing in the jurisdictions set forth in Schedule
2.1, which includes every jurisdiction in which the failure to be so qualified
or in good standing would have a material adverse effect on (i) Seller's
ability to perform its obligations under the Acquisition Documents or (ii) the
assets, results of operations or prospects of the Laboratory.
2.2 Authorization and Validity. The execution, delivery and performance
of the Acquisition Documents have been duly authorized by all necessary
corporate action on the part of Seller. The Acquisition Documents to be
executed and delivered by the Seller have been or will be, as the case may be,
duly executed and delivered by Seller and constitute or will constitute the
legal, valid and binding obligations of Seller, enforceable in accordance with
their respective terms, except as may be limited by bankruptcy, insolvency, or
other laws affecting creditors' rights generally, or as may be modified by a
court of equity.
2.3 Absence of Conflicting Agreements or Required Consents. Except as set
forth on Schedule 2.3, the execution, delivery and performance by Seller of the
Acquisition Documents to be executed and delivered by Seller: (i) do not
require the consent of or notice to any governmental or regulatory authority or
any other third party; (ii) will not conflict with any provision of Seller's
organizational documents; (iii) will not conflict with or result in a violation
of any law, ordinance, regulation, ruling, judgment, order or injunction of any
court or governmental instrumentality to which Seller is subject or by which
Seller or any of its properties are bound; (iv) will not conflict with,
constitute grounds for termination of, result in a breach of, constitute a
default under, require any notice under, or
- 4 -
<PAGE> 6
accelerate or permit the acceleration of any performance required by the terms
of any agreement, instrument, license or permit to which Seller is a party or by
which Seller or any of its properties are bound; and (v) will not create any
lien, encumbrance or restriction upon any of the assets or properties of Seller.
2.4 Financial Statements. Attached hereto as Schedule 2.4 is an unaudited
income statement for the interim period ending November 30, 1996, which
reflects the results of operations of the Laboratory for such period (the
"Financial Statements"). The Financial Statements present fairly in all
material respects the results of the operations of the Laboratory for the
period then ended, and are in accordance with the books and records of the
Seller, which have been properly maintained and are complete and correct in all
material respects. The accounts receivable of Seller relating to the
Laboratory arising on and after the Effective Date and on or prior to the
Closing Date arose in the ordinary course of business and represent bona fide
claims for the provision of customary laboratory services actually provided by
Seller except for customary reserves.
2.5 No Undisclosed Liabilities. Except as listed on Schedule 2.5 hereto,
the Seller has no material Liabilities or obligations related to the operations
of the Laboratory, whether accrued, absolute, contingent or otherwise, except
for liabilities and obligations of the nature reflected as operating costs and
expenses in the Financial Statements, which liabilities consist solely of costs
and expenses incurred in the ordinary course of business of operating the
Laboratory.
2.6 Litigation, etc. Except as listed on Schedule 2.6 hereto, there are
no claims, lawsuits, actions, arbitrations, administrative or other proceedings
pending against Seller. Except as listed on Schedule 2.6, (i) to the knowledge
of Seller, no such matter described in the previous sentence is threatened and
there is no basis for any such action, and (ii) there are no governmental or
administrative investigations or inquiries pending that involve Seller, except
in either case for any such matter that could not reasonably be expected to
have a material adverse effect on the Seller, financial or otherwise. Except
as listed on Schedule 2.9, there are no judgments against or consent decrees
binding on Seller or its assets or, to the knowledge of the Seller, any
employee relating to the Laboratory.
2.7 No Violation of Law. (a) Except as set forth on Schedule 2.7, Seller
has not been nor is currently in violation of any applicable local, state or
federal law, ordinance, regulation, order, injunction or decree, or any other
requirement of any governmental body, agency or authority or court binding on
it, or relating to its property or business or its sales or pricing practices,
except for any such violations as would not individually or in the aggregate
have a material adverse effect on the Seller, financial or otherwise.
(b) Seller is not currently subject to any fine, penalty, liability
or disability as the result of a failure to comply with any requirement of
federal, state or local law or regulation nor has Seller received any notice of
such noncompliance.
2.8 Real and Personal Property. (a) Schedule 2.8(a) sets forth a list of
all items of personal and mixed, tangible and intangible property, rights and
assets of Seller relating to the Laboratory having an original or replacement
cost or value greater than $5,000. Except as set forth on Schedule 2.8(a),
Seller (i) has good and valid title to all of the personal and mixed, tangible
and intangible property, rights and assets which it purports to own, including
all the personal property and assets reflected in the Financial Statements; and
(ii) owns such rights, assets and personal property free and clear of all
liens, encumbrances or restrictions of any nature whatsoever (except for
current year ad valorem taxes). All of the Rights and Assets being acquired by
Buyer, whether owned or leased, are in the possession and control of the Seller
and are located at the Laboratory.
(b) Seller does not own any real property. Schedule 2.8(b) contains
a true and correct description of all real property leased by Seller related to
the Laboratory, including all improvements located thereon. Seller has valid
and binding leases for each property listed on Schedule 2.8(b), and (i) Seller
is current with respect to all payments due under such leases; (ii) Seller has
complied in all respects with its obligations under such leases, and (iii) there
are no defaults under any such lease that remain
- 5 -
<PAGE> 7
uncured and no condition exists which, with the lapse of time or giving of
notice, or both, would give rise to a default under any such lease. Buyer and
RCG have been furnished with true, correct and complete copies of all leases,
deeds, easements and other documents and instruments concerning the matters
listed on Schedule 2.8(b).
(c) The Rights and Assets are in good operating condition and
repair, ordinary wear and tear excepted, and such assets include all rights,
properties, interests in properties, and assets necessary to permit Buyer to
continue the business of the Laboratory after the date hereof as presently
conducted.
2.9 Contracts and Commitments. Schedule 2.9 contains a complete and
accurate list of all contracts, agreements, commitments, instruments and
obligations (whether written or oral, contingent or otherwise) of Seller
related to the Laboratory ("Seller Agreements"). Seller has delivered to Buyer
and RCG true and complete copies of all of its Seller Agreements. Except as
indicated on Schedule 2.9, the Seller Agreements are valid and effective in
accordance with their terms, and there is not under any of such Seller
Agreements (i) any existing or claimed default by Seller or event which with
the notice or lapse of time, or both, would constitute a material default by
Seller or (ii) to the knowledge of the Seller, any existing or claimed default
by any other party or event which with notice or lapse of time, or both, would
constitute a material default by any such party. Except as indicated on
Schedules 2.3 and 2.9, the continuation, validity and effectiveness of the
Seller Agreements will not be affected by the Acquisition and the Acquisition
will not result in a breach of or default under, or require the consent of or
notice to any other party to, any of the Seller Agreements. There is no actual
or, to the knowledge of the Seller, threatened termination, cancellation or
limitation of any Seller Agreements that would have a material adverse effect
on the business of the Laboratory, financial or otherwise. To the knowledge of
the Seller, there is no pending or threatened bankruptcy, insolvency or similar
proceeding with respect to any other party to the Seller Agreements.
2.10 Insurance Policies. (a) Except as described on Schedule 2.10, all
of the Rights and Assets are insured in such amounts and against such losses,
casualties or risks as are customary for similar properties and businesses, and
the Seller has maintained such insurance continuously from the earlier of (i)
the date of its inception and (ii) the date of inception of any of its
predecessors. All such policies are in full force and effect and the premiums
due thereon have been timely paid.
2.11 Licenses, Authorizations and Provider Programs. (a) Seller is the
holder of all valid licenses and other rights, permits and authorizations
required by law, ordinance, regulation or ruling of any governmental authority
necessary to operate the Laboratory. With respect to the Laboratory, Seller or
the Laboratory is certified for participation and reimbursement under Titles
XVIII and XIX of the Social Security Act, including, without limitation, the
end stage renal disease program, (the "Medicare and Medicaid programs")
(Medicare and Medicaid programs and such other similar federal, state or local
reimbursement or governmental programs for which the Seller is eligible are
hereinafter referred to collectively as the "Government Programs") and has
current provider agreements for such Government Programs and with such private
non-governmental programs, including without limitation any private insurance
program, under which the Seller directly or indirectly is presently receiving
payments (such non-governmental programs herein referred to as "Private
Programs"). Set forth on Schedule 2.11.1, is a correct and complete list of
such licenses, permits and other waivers or authorizations, and provider
agreements under all Government and Private Programs, complete and correct
copies of which have been provided to Buyer and RCG. True, complete and
correct copies of all surveys (and plans of correction related thereto) or
audits of Seller or the Laboratory conducted in connection with any Government
Program, Private Program or licensing or accrediting body during the past two
(2) years have been provided to Buyer and RCG.
(b) No violation, default, order or deficiency exists with respect
to any of the items listed on Schedule 2.11.1. Seller has not received any
notice of any action pending or recommended by any state, federal or accrediting
agencies having jurisdiction over the items listed on Schedule 2.11.1, either to
revoke, withdraw, suspend or limit any license, right or authorization, or to
terminate the participation of
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<PAGE> 8
Schedule 2.11.2, no consent or approval of, prior filing with or notice to, or
Seller or the Laboratory in any Government or Private Program. To the knowledge
of the Seller, no event has occurred which, with the giving of notice, the
passage of time, or both, would constitute grounds for a material violation,
order or deficiency with respect to any of the items listed on Schedule 2.11.1
or to revoke, withdraw, suspend or limit any such license, or to terminate or
modify the participation of Seller in any Government or Private Program. To the
knowledge of Seller, there has been no decision by any third party not to renew
Seller's participation in any Government Program or Private Program. Except as
listed on any action by, any governmental body or agency or any other third
party is required in connection with any such license, right or authorization,
or Government or Private Program, by reason of the consummation of the
Acquisition, and the continued operation of the Laboratory thereafter on a basis
consistent with past practices.
(c) Seller has timely filed all billing and other reports required
to be filed by it prior to the date hereof with respect to the Government and
Private Programs, all fiscal intermediaries and other insurance carriers and all
such reports are complete and accurate in all material respects and have been
prepared in material compliance with all applicable laws, regulations, and
principles governing reimbursement and payment claims. Seller has paid or
caused to be paid or has properly reflected in its books and records all known
and undisputed refunds, overpayments, discounts or adjustments which have become
due pursuant to reports and has no liability under any Government or Private
Program (known or unknown, contingent or otherwise) for any refund, overpayment,
discount or adjustment other than in the ordinary course, and no interest or
penalties accruing with respect thereto, except as has been specifically
reserved for in its books and records or disclosed herein or in the Schedules
hereto. To the knowledge of Seller, except as set forth on Schedule 2.11.3,
there are no pending appeals, adjustments, challenges, audits, litigation, or
notices of intent to review any such reports. There are no other reports
required to be filed by Seller in order to be paid under any Government or
Private Program for services rendered, except for reports not yet due.
2.12 Inspections and Investigations. Except as set forth and described in
Schedule 2.12, (i) neither Seller's right nor, to the knowledge of the Seller,
the right of any licensed professional or other individual affiliated with
Seller to receive reimbursements pursuant to any Government or Private Program
with respect to the Laboratory has been terminated or otherwise adversely
affected as a result of any investigation or action whether by any federal or
state governmental regulatory authority or other third party, (ii) none of
Seller, or, to the knowledge of the Seller, any licensed professional or other
individual affiliated with Seller has, during the past three (3) years, been
the subject of any inspection, investigation, survey, audit, monitoring or
other form of review by any governmental regulatory entity, trade association,
professional review organization, accrediting organization or certifying agency
based upon any alleged improper activity on the part of such individual, nor
has Seller received any notice of deficiency during the past three years in
connection with its operation of the Laboratory, (iii) there are not any
outstanding deficiencies or work orders of any governmental authority having
jurisdiction over Seller, or other third party, requiring conformity to any
applicable agreement, statute, regulation, ordinance or bylaw, including but
not limited to, the Government and Private Programs, and (iv) there is not any
notice of any claim, requirement or demand of any licensing or certifying
agency or other third party supervising or having authority over Seller or its
operation of the Laboratory to rework or redesign any part thereof or to
provide additional furniture, fixtures, equipment, appliances or inventory so
as to conform to or comply with any existing law, code, rule, regulation or
standard. Attached as part of Schedule 2.12 are copies of all reports,
correspondence, notices and other documents relating to any matter described or
referenced therein.
2.13 Stark and Fraud and Abuse. Seller and persons and entities providing
professional services for Seller have not engaged in any activities which are
prohibited under 42 U.S.C. Section 1395nn or 42 U.S.C. Section 1320a-7b, or
the regulations promulgated thereunder pursuant to such statutes, or related
state or local statutes or regulations, or which are prohibited by rules of
professional conduct.
2.14 Statements True and Correct. No representation or warranty made
herein by the Seller, nor in any statement, certificate or instrument to be
furnished to Buyer or RCG by the Seller pursuant to any
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<PAGE> 9
Acquisition Document, contains or will contain any untrue statement of material
fact or omits or will omit to state a material fact necessary to make these
statements contained herein and therein not misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF RCG AND BUYER
3.1 Organization, Authority and Capacity. Each of Buyer and RCG is a
corporation duly organized and validly existing under the laws of the State of
Delaware, and has the full power and authority necessary to (i) execute,
deliver and perform its obligations under the Acquisition Documents and (ii)
carry on its business as it has been and is now being conducted and to own and
lease the properties and assets which it now owns or leases. Each of Buyer and
RCG is duly qualified to do business and is in good standing in the
jurisdictions in which the failure to be so qualified or in good standing would
have a material adverse effect on Buyer's or RCG's ability to perform its
obligations under the Acquisition Documents.
3.2 Authorization and Validity. The execution, delivery and performance
of the Acquisition Documents have been duly authorized by all necessary
corporate action on the part of each of Buyer and RCG. The Acquisition
Documents to be executed and delivered by each of Buyer and RCG have been or
will be, as the case may be, duly executed and delivered by Buyer and RCG and
constitute or will constitute the legal, valid and binding obligations of such
parties, enforceable in accordance with their respective terms, except as may
be limited by bankruptcy, insolvency, or other laws affecting creditors' rights
generally, or as may be modified by a court of equity.
3.3 Absence of Conflicting Agreements or Required Consents. The
execution, delivery and performance by each of Buyer and RCG of the Acquisition
Documents to be executed and delivered by them: (i) do not require the consent
of or notice to any governmental or regulatory authority or any other third
party; (ii) will not conflict with any provision of such party's organizational
documents; (iii) will not conflict with or result in a violation of any law,
ordinance, regulation, ruling, judgment, order or injunction of any court or
governmental instrumentality to which either such party is subject or by which
such party or any of its properties are bound; (iv) will not conflict with,
constitute grounds for termination of, result in a breach of, constitute a
default under, require any notice under, or accelerate or permit the
acceleration of any performance required by the terms of any agreement,
instrument, license or permit to which either such party is a party or by which
either such party or any of its properties are bound; and (v) will not create
any lien, encumbrance or restriction upon any of the assets or properties of
either such party.
3.4 Statements True and Correct. No representation or warranty made
herein by Buyer or RCG, nor in any statement, certificate or instrument to be
furnished to Seller by Buyer or RCG pursuant to any Acquisition Document,
contains or will contain any untrue statement of material fact or omits or will
omit to state a material fact necessary to make the statements contained herein
and therein not misleading.
ARTICLE 4
ADDITIONAL AGREEMENTS
4.1 Proration. Seller and Buyer shall prorate as of the Effective Date
any amounts which become due and payable after the Closing Date with respect to
(i) the contracts listed on Schedule 1.1(d) (ii) ad valorem taxes, if any, on
the Rights and Assets, (iii) property taxes on the Rights and Assets, and (iv)
all utilities servicing any of the Rights and Assets, including without
limitation, water, sewer, telephone, electricity and gas service.
4.2 Post-Closing Access to Information. Seller and Buyer acknowledge that
subsequent to Closing each party may need access to information or documents in
the control or possession of the other party for the purposes of concluding the
transactions herein contemplated, audits, compliance with
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<PAGE> 10
governmental requirements and regulations, and the prosecution or defense of
third party claims. Accordingly, Seller and Buyer agree that for a period of
five (5) years after Closing each will make reasonably available to the other's
agents, independent auditors and/or governmental agencies upon written request
and at the request of the requesting party such documents and information as may
be available relating to the Rights and Assets for periods prior and subsequent
to Closing to the extent necessary to facilitate concluding the transactions
herein contemplated, audits, compliance with governmental requirements and
regulations and the prosecution or defense of claims.
4.3 Preservation and Access to Records After the Closing. After the
Closing, Buyer shall, in the ordinary course of business and as required by
law, keep and preserve all medical records and other records of the Laboratory
existing as of the Closing and which constitute a part of the Rights and Assets
delivered to Buyer at Closing. Buyer acknowledges that as a result of entering
into this Agreement and operating the Laboratory it will gain access to patient
and other information which is subject to rules and regulations concerning
confidentiality. Buyer agrees to abide by any such rules and regulations
relating to the confidential information it acquires. Buyer agrees to
maintain the patient records delivered to Buyer at Closing in accordance with
applicable law (including, if applicable, Section 1861(v)(i)(1) of the Social
Security Act (42 U.S.C. Section 1395(v)(1)(l)), and requirements of relevant
insurance carriers, all in a manner consistent with the maintenance of patient
records generated at the Laboratory after Closing. Upon reasonable notice,
during normal business hours Buyer will afford to the representatives of
Seller, including its counsel and accountants, reasonable access to, and copies
(at their expense) of, the records transferred to Buyer at the Closing. In
addition, Seller shall be entitled to remove from the Laboratory any such
patient records, but only for purposes of pending or threatened litigation
involving a patient to whom such records refer. Any patient records so removed
from the Laboratory shall be promptly returned to Buyer following its use by
Seller.
4.4 Management Agreement and Laboratory Agreement. Seller and RCG hereby
terminate the Management Agreement and the Laboratory Agreements as of the
Closing Date, provided that the annual management fee of $250,000 payable to
RCG shall terminate as of the Effective Date and that RCG shall continue to
administer on behalf of Seller the billing and other procedures in respect of
accounts receivable and liabilities existing on and before the Effective Date
for a fee equal to 5% of the amount of such receivables as are collected,
payable on the 5th day of each month for collections received during the
previous month. Notwithstanding anything in this Section 4.4 to the contrary,
the rights and obligations of Seller and RCG under the Management Agreement,
including, but not limited to, the mutual indemnity provisions contained in
Section 2.11 of the Management Agreement, shall continue to apply for matters
occurring during the period in which the Management Agreement was in effect.
For example, if pursuant to an audit of payments made to Seller under any
Government Program for the period during which the Management Agreement was in
effect it is determined that Seller received payments in excess of amounts
properly due, then Seller shall be responsible for refunding such excess,
provided that responsibility as between RCG and Seller for any penalties or
interest applicable in respect of any such excess shall be determined, inter
alia, with reference to the relative rights, obligations and duties of the
parties under the Management Agreement.
4.5 Consents. If and to the extent the assignment of any contract or
agreement included in the Rights and Assets requires the consent of another
party thereto, then (i) such contract or agreement shall constitute a Right or
Asset only upon and subject to receipt of such consent; (ii) such contract or
agreement, shall not be included in the Rights and Assets if and for so long as
the attempted assignment would constitute a breach thereof; and (iii) Seller
shall cooperate fully with Buyer in seeking such consent or reasonable
arrangement designed to provide to Buyer the benefits, claim rights arising
thereunder.
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<PAGE> 11
ARTICLE 5
INDEMNIFICATION
5.1 Indemnification by Seller. (a) From and after the date hereof,
Seller shall indemnify and hold harmless Buyer and RCG and their respective
officers, directors, agents or affiliates, from and against any and all
demands, claims, actions or causes of action, assessments, losses, diminution
in value, damages (including special and consequential damages), liabilities,
costs and expenses, including but not limited to reasonable attorneys' fees
("Losses"), suffered or incurred by any such party by reason of or arising out
of any of the following:
(i) the Retained Liabilities and the Retained Assets;
(ii) the breach by Seller of any representation or warranty
contained in Article 2 hereof or in any Acquisition Document or any document or
instrument delivered by Seller in connection therewith; and
(iii) the non-fulfillment of any covenant or agreement of
Seller contained in the Acquisition Documents or any document or instrument
delivered by Seller in connection therewith.
5.2 Indemnification by Buyer and RCG. (a) From and after the date
hereof, Buyer and RCG shall jointly and severally indemnify and hold harmless
Seller and its officers, directors, agents or affiliates, from and against any
and all Losses suffered or incurred by any such party by reason of or arising
out of any of the following:
(i) the Assumed Liabilities and the operation of the Rights
and Assets from and after the Closing Date;
(ii) the breach by Buyer or RCG of any representation or
warranty contained in Article 3 hereof or in any Acquisition Document or any
document or instrument delivered by Buyer or RCG in connection therewith; and
(iii) the non-fulfillment of any covenant or agreement of
Buyer or RCG contained in the Acquisition Documents or any document or
instrument delivered by Buyer or RCG in connection therewith.
5.3 Survival. The representations and warranties of the parties contained
in the Acquisition Documents or in any document or instrument delivered in
connection therewith shall survive the Closing for a period of four (4) years.
ARTICLE 6
MISCELLANEOUS PROVISIONS
6.1 Notices. (a) Any notice sent in accordance with the provisions of
this Section 6.1 shall be deemed to have been received (even if delivery is
refused or unclaimed) on the date which is: (i) the date of proper posting, if
sent by certified U.S. mail or by Express U.S. mail or private overnight
courier; or (ii) the date on which sent, if sent by facsimile transmission,
with confirmation and with the original to be sent by certified U.S. mail,
addressed as follows:
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<PAGE> 12
If to the Seller: Kidney Care, Inc.
3925 West Northside Drive
Jackson, Mississippi 39209
Telecopy Number: (601) 923-3642
Attention: Mr. James F. Dorris
Copy to Counsel: Vinson & Elkins, LLP
2300 First City Tower
1001 Fannin
Houston, Texas
Telecopy Number: (713) 615-5613
Attention: R. Todd Greenwalt, Esq.
If to Buyer or RCG: Renal Care Group, Inc.
2100 West End Avenue, Suite 800
Nashville, Tennessee 37203
Telecopy Number: (615) 321-5419
Attention: Mr. Sam A. Brooks
Copy to Counsel: Alston & Bird
One Atlantic Center
1201 W. Peachtree Street
Atlanta, Georgia 30309-3424
Telecopy Number: (404) 881-7777
Attention: Steven L. Pottle, Esq.
(b) Any party hereto may change its address specified for notices
herein by designating a new address by notice in accordance with this Section
6.1.
6.2 Expenses. Each of the parties hereto shall bear and pay all costs and
expenses incurred by it or on its behalf in connection with the transactions
contemplated hereunder.
6.3 Further Assurances. Each party covenants that at any time, and from
time to time, after the Closing, it will execute such additional instruments
and take such actions as may be reasonably requested by the other parties to
confirm or perfect or otherwise to carry out the intent and purposes of this
Agreement.
6.4 Waiver. Any failure on the part of any party to comply with any of
its obligations, agreements or conditions hereunder may be waived by any other
party to whom such compliance is owed. No waiver of any provision of this
Agreement shall be deemed, or shall constitute, a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a continuing
waiver.
6.5 Binding Effect. Neither party may assign this Agreement without the
express written consent of the other party. Subject to the foregoing, this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, legal representatives, executors, administrators,
successors and assigns. This Agreement shall survive the Closing and not be
merged therein.
6.6 Headings. The section and other headings in this Agreement are
inserted solely as a matter of convenience and for reference, and are not a
part of this Agreement.
6.7 No Third Party Beneficiaries. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and it is not the intention of the
parties hereto to confer third-party beneficiary rights upon any other person.
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<PAGE> 13
6.8 Entire Agreement. This Agreement and the Exhibits, Schedules,
certificates and other documents delivered pursuant hereto or incorporated
herein by reference, contain and constitute the entire agreement among the
parties and supersede and cancel any prior agreements, representations,
warranties, or communications, whether oral or written, among the parties
relating to the transactions contemplated by this Agreement. Neither this
Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally, but only by an agreement in writing signed by the party
against whom or which the enforcement of such change, waiver, discharge or
termination is sought.
6.9 Governing Law; Severability. This Agreement shall be governed by and
construed in accordance with the Laws of the State of Mississippi, without
regard to any applicable conflicts of Laws. The provisions of this Agreement
are severable and the invalidity of one or more of the provisions herein shall
not have any effect upon the validity or enforceability of any other provision.
[SIGNATURES ON NEXT PAGE]
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<PAGE> 14
IN WITNESS WHEREOF, each of the parties has caused this Asset Purchase
Agreement and Bill of Sale to be executed on its behalf and its corporate seal
to be hereunto affixed and attested by officers thereunto as of the day and
year first above written.
ATTEST: RENAL CARE GROUP, INC.
By:/s/ Ronald Hinds
- ----------------------- --------------------------
Secretary Title:
-----------------------
ATTEST: RCG LABORATORY, INC.
By:/s/ Ronald Hinds
- ----------------------- --------------------------
Secretary Title:
-----------------------
ATTEST: KIDNEY CARE, INC.
By:/s/ James F. Dorris
- ----------------------- --------------------------
Secretary Title:
-----------------------
- 13 -
<PAGE> 1
EXHIBIT 11.1
RENAL CARE GROUP, INC. (OF DELAWARE)
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
December 31, 1996
-----------------
<S> <C>
PRIMARY EARNINGS PER SHARE
Common Stock issued to Founders 4,431,000
Common Stock issued to Public 4,269,000
Common Stock issued to acquired entities 3,070,000
-----------
Common Stock outstanding 11,770,000
Treasury Stock Method of Options and Warrants 969,000
-----------
Average weighted shares outstanding 12,739,000
===========
Net Income $10,746,000
===========
Earnings Per Share $ 0.84
===========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
RENAL CARE GROUP, INC.
Subsidiaries
RCG Mississippi, Inc.
Renal Care Group of the Midwest, Inc.
Renal Care Group Texas, Inc.
D.M.N. of Indiana Corporation
The Nephrology Center, Inc.
Main Line Suburban Dialysis Centers, Inc.
Renal Care Group, Inc.
RenalWest, L.C.
4-Co., Inc.
3-Co., Inc.
9-Co., Inc.
Northeast Alabama Kidney Center, Inc.
RenaLab, Inc.
RenalNet, Inc.
RenalPartners, Inc.
RenalNet Florida, Inc.
<PAGE> 1
Exhibit 23.2
Consent of Independent Auditors
We consent to the inclusion in this Annual Report (Form 10-K) of Renal Care
Group, Inc, of our reports dated February 28, 1997, included in the 1996 Annual
Report to Shareholders of Renal Care Group, Inc.
ERNST & YOUNG LLP
Nashville, Tennessee
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. FOR THE YEAR ENDED DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 47,624
<SECURITIES> 5,814
<RECEIVABLES> 35,545
<ALLOWANCES> 6,703
<INVENTORY> 2,658
<CURRENT-ASSETS> 86,478
<PP&E> 38,790
<DEPRECIATION> 8,051
<TOTAL-ASSETS> 131,812
<CURRENT-LIABILITIES> 37,016
<BONDS> 0
0
0
<COMMON> 142
<OTHER-SE> 93,183
<TOTAL-LIABILITY-AND-EQUITY> 131,812
<SALES> 129,518
<TOTAL-REVENUES> 129,518
<CGS> 90,122
<TOTAL-COSTS> 90,122
<OTHER-EXPENSES> 19,865
<LOSS-PROVISION> 2,446
<INTEREST-EXPENSE> (619)
<INCOME-PRETAX> 17,704
<INCOME-TAX> 6,958
<INCOME-CONTINUING> 10,746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,746
<EPS-PRIMARY> .84
<EPS-DILUTED> 0
</TABLE>
