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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-27640
RENAL CARE GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 62-1622383
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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2100 West End Ave., Suite 800, Nashville, Tennessee 37203
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (615) 345-5500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant 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 the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class Outstanding at May 6, 1998
---------------------------- ---------------------------
Common Stock, $.01 par value 26,558,079
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RENAL CARE GROUP, INC.
INDEX
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PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets
December 31, 1997 and March 31, 1998 (unaudited) 1
Consolidated Income Statements - (unaudited)
For the three months ended March 31, 1997 and 1998 2
Consolidated Statements of Cash Flows - (unaudited)
For the three months ended March 31, 1997 and 1998 3
Notes to the Consolidated Financial Statements 4
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Risk Factors 9
PART II - OTHER INFORMATION
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
Note: Items 1, 3, 4, and 5 of Part II are omitted because they are not applicable
</TABLE>
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
RENAL CARE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
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(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 9,138 $ 18,400
Investments 3,625 --
Accounts receivable, net 45,199 60,549
Inventories 4,516 5,082
Prepaid expenses and other current assets 3,327 3,832
-------- --------
Total current assets 65,805 87,863
Property and equipment, net 60,974 70,485
Goodwill, net 116,721 148,693
Intangible assets, net 1,266 1,894
Other assets 3,317 1,981
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Total assets $248,083 $310,916
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,580 $ 13,398
Income taxes payable 1,653 5,786
Other current liabilities 30,103 31,805
-------- --------
Total current liabilities 41,336 50,989
Long-term debt, net of current portion 15,470 51,297
Minority interest 14,597 18,243
Deferred income taxes 1,921 2,721
-------- --------
Total liabilities 73,324 123,250
Stockholders' equity:
Preferred Stock, $.01 par value, 10,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 60,000 shares authorized,
24,897 and 26,486 shares issued and outstanding at
December 31, 1997 and March 31, 1998, respectively 249 265
Additional paid-in capital 150,748 156,566
Retained earnings 23,762 30,835
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Total stockholders' equity 174,759 187,666
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Total liabilities and stockholders' equity $248,083 $310,916
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
1
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RENAL CARE GROUP, INC.
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1998
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Net revenue $ 46,109 $ 80,463
Operating costs and expenses:
Patient care costs 31,934 53,540
General and administrative expenses 4,802 7,849
Provision for doubtful accounts 942 2,101
Depreciation and amortization 1,964 3,937
Merger expenses -- 700
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Total operating costs and expenses 39,642 68,127
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Income from operations 6,467 12,336
Interest income (expense), net 404 (562)
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Income before minority interest and income taxes 6,871 11,774
Minority interest -- 547
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Income before income taxes 6,871 11,227
Provision for income taxes 2,577 4,154
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Net income $ 4,294 $ 7,073
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Net income per share:
Basic $ 0.20 $ 0.27
======== ========
Diluted $ 0.19 $ 0.25
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Weighted average shares outstanding:
Basic 21,611 26,300
======== ========
Diluted 22,687 27,900
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
2
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RENAL CARE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
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<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1998
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OPERATING ACTIVITIES
Net income $ 4,294 $ 7,073
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,964 3,937
Equity in earnings of subsidiaries -- 547
Other (9,629) (6,335)
-------- --------
Net cash (used in) provided by operating activities (3,371) 5,222
INVESTING ACTIVITIES
Purchases of property and equipment (4,988) (3,758)
Cash paid for acquisitions, net of cash acquired (28,479) (32,583)
Proceeds from investments, net (27) 3,625
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Net cash used in investing activities (33,494) (32,716)
FINANCING ACTIVITIES
Net borrowings under line of credit -- 35,827
Payments on long-term debt -- (2,184)
Proceeds from exercise of stock options 217 3,213
Distributions to minority shareholders -- (100)
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Net cash provided by financing activities 217 36,756
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(Decrease) increase in cash and cash equivalents (36,648) 9,262
Cash and cash equivalents, at beginning of period $ 47,624 $ 9,138
-------- --------
Cash and cash equivalents, at end of period $ 10,976 $ 18,400
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ -- $ 219
======== ========
Income taxes $ 3,395 $ 21
======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Issuance of common stock in acquisition $ 5,648 $ 1,696
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
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RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 1998
(in thousands, except per share data)
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Overview
Renal Care Group, Inc. (the "Company") is a specialized provider of
nephrology services to patients with kidney disease, including patients
suffering from chronic kidney failure also known as end-stage renal disease
("ESRD"). As of March 31, 1998, the Company provided dialysis and ancillary
services to approximately 10,000 patients through 146 outpatient dialysis
centers in 18 states, and acute dialysis services in 83 hospitals.
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 three months ended March 31, 1998, approximately 68% 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 private health insurance,
effective September 1, 1997, the health insurance coordination period was
extended to 30 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.
Interim Financial Statements
In the opinion of management, the information contained herein reflects
all adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations. All such adjustments are of a
normal recurring nature. Operating results for interim periods are not
necessarily indicative of results which may be expected for the year as a whole.
It is suggested that these financial statements be read in conjunction with the
consolidated financial statements and the related notes thereto included in the
Company's Form 10-K as filed with the Securities and Exchange Commission on
March 31, 1998.
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RENAL CARE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 - SIGNIFICANT EVENTS
In January 1998, the Company acquired in a series of merger
transactions nine dialysis facilities located in Arkansas, Oklahoma and
Missouri. The facilities provide treatment to approximately 625 patients, as
well as acute, in-patient dialysis treatment services to six area hospitals. The
transaction was a tax-free exchange in stock and will be treated as a
pooling-of-interests for accounting purposes. The Company issued approximately
1,298 shares of restricted common stock. The financial statements have not been
restated for this transaction as the effect is not considered material.
In February 1998, the Company formed a joint venture with Oregon Health
Sciences University, Legacy Health System, and Comprehensive Kidney Center for
purposes of operating six dialysis facilities and a home dialysis program
serving approximately 700 patients. The Company acquired an 80% interest in the
joint venture in exchange for cash.
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
income per share in accordance with SFAS 128.
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THREE MONTHS ENDED MARCH 31,
1997 1998
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Numerator:
Numerator for basic and diluted income per share $ 4,294 $ 7,073
Denominator:
Denominator for basic net income per share -
weighted-average shares 21,611 26,300
Effect of dilutive securities:
Stock options 817 1,314
Warrants 259 286
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Denominator for diluted net income per share -
adjusted weighted-average shares and assumed
conversions 22,687 27,900
====== ======
Net income per share:
Basic $0.20 $0.27
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Diluted $0.19 $0.25
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</TABLE>
5
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NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("Statement 131"). Statement 131
establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. Statement 131 is effective for the fiscal years beginning after
December 15, 1997. Management of the Company is currently reviewing the impact
of Statement 131. The Company will adopt Statement 131 on December 31,1998 and
will report interim information effective in the first quarter of 1999.
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RENAL CARE GROUP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net revenue. Net revenue increased from $46,109,000 for the three
months ended March 31, 1997 to $80,463,000 for the three months ended March 31,
1998, an increase of $34,354,000, or 74.5%. This increase resulted primarily
from a 61.9% increase in the number of treatments from 224,168 in the 1997
period to 362,905 in the 1998 period. This growth in treatments is the result of
the acquisition and development of various dialysis facilities and a 10.2%
increase in same-center treatments for the 1998 period over the 1997 period. In
addition, average revenue per treatment increased 5.9% from $204 in the 1997
period to $216 in the 1998 period. The remaining revenue increase is a result of
hyperbaric and wound care revenues as a result of the STAT acquisition, higher
management fees and earnings of 50% owned partnerships in the 1998 period
compared to the 1997 period. The revenue per treatment increase is due to an
improvement in the Company's payor mix, increases in erythropoietin (EPO) and
other drug utilization, the implementation of the Company's in-house laboratory
services and the positive impact on commercial payments of the Medicare
Secondary Payor Provisions of the Balanced Budget Act.
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
$31,934,000 for the three months ended March 31, 1997 to $53,540,000 for the
three months ended March 31, 1998, an increase of $21,606,000, or 67.7%. This
increase resulted primarily from an increase in the number of treatments
performed during the period, which caused a corresponding increase in the use of
drugs, supplies and labor. Patient care costs as a percent of net revenue
decreased from 69.3% in the 1997 period to 66.5% in the 1998 period primarily
due to an increase in net revenues. Patient care costs per treatment increased
from $142 in the 1997 period to $148 in the 1998 period, an increase of $6.00,
or 4.2%. This increase is due to EPO and other drug utilization costs, the cost
of providing in-house laboratory services and normal healthcare inflation.
General and Administrative Expenses. General and administrative
expenses include corporate office costs and facility costs not directly related
to the care of patients, including facility administration, accounting, billing,
and information systems. General and administrative expenses increased from
$4,802,000 for the three months ended March 31, 1997 to $7,849,000 for the three
months ended March 31, 1998, an increase of $3,047,000, or 63.5%. General and
administrative expenses as a percent of net revenue decreased from 10.4% in the
1997 period to 9.8% in the 1998 period, primarily a result of higher net
revenues for the 1998 period.
Provision for Doubtful Accounts. 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 the
revenue is recognized based on management's estimate of the net collectibility
of the accounts receivable. The provision for doubtful accounts increased from
$942,000 for the three months ended March 31, 1997 to $2,101,000 for the three
months ended March 31, 1998. The provision for doubtful accounts as a percent of
net revenue increased from 2.0% in the 1997 period to 2.6% in 1998 period, or
0.6%. This increase in provision for doubtful accounts was influenced by the
amount of net operating revenues generated from non-governmental payor sources
and the temporary degradation of accounts receivable collections due to the
conversion of patient billing systems.
7
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RENAL CARE GROUP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Depreciation and Amortization. Depreciation and amortization increased
from $1,964,000 for the three months ended March 31, 1997 to $3,937,000 for the
three months ended March 31, 1998, an increase of $1,973,000, or 100.5%. This
net increase was due to the start-up of dialysis facilities, the normal
replacement costs of dialysis facilities and equipment, the purchase of
information systems, and the amortization of the goodwill associated with the
acquisitions accounted for under the purchase method of accounting.
Merger Expenses. Merger expenses of $700,000 represented legal,
accounting, employee severance and related benefits, and other assimilation and
transitional costs related to the Company's merger of the operations of nine
dialysis facilities located in Arkansas, Oklahoma, and Missouri.
Income from Operations. Income from operations increased from
$6,467,000 for the three months ended March 31, 1997 to $12,336,000 for the
three months ended March 31, 1998, an increase of $5,869,000, or 90.7%. Income
from operations as a percent of net revenue increased from 14.0% in the 1997
period to 15.3% in the 1998 period. Income from operations increased due to the
increase in net revenue in excess of patient care costs, which was primarily due
to an increase in the number of treatments performed during the period.
Interest, net. Interest income was $404,000 for the three months ended
March 31, 1997 and interest expense was $562,000 for the three months ended
March 31, 1998. Interest expense is a result of borrowings from the Company's
credit facility. The use of the Company's credit facility has increased due to
the use of cash in acquisitions and de novo facilities, the replacement of
dialysis facilities and equipment, and the purchase of information systems.
Minority Interest. Minority interest represents the proportionate
equity interest of other partners in the Company's consolidated entities which
are not wholly-owned. As of March 31, 1998, this was primarily comprised of
three joint venture partnerships.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the acquisition and the
development of dialysis facilities, the purchase of property and equipment for
existing facilities and to finance working capital requirements. At March 31,
1998, the Company's working capital was $36,874,000, cash and cash equivalents
were $18,400,000 and the Company's current ratio was 1.7 to 1.
The Company's net cash provided by operating activities was $5,222,000
for the three months ended March 31, 1998. Cash provided by operating activities
consists of net income before depreciation and amortization expense, partially
offset by increases in accounts receivable and other current assets. The
Company's net cash used in investing activities was $32,716,000 for the three
months ended March 31, 1998. Cash used in investing activities resulted
primarily from $32,583,000 of cash paid for acquisitions, net of cash acquired,
and $3,758,000 of capital expenditures, partially offset by a $3,625,000
decrease in investments.
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RENAL CARE GROUP, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Cash provided by financing activities was $36,756,000 for the three
months ended March 31, 1998. Cash provided by financing activities resulted
primarily from $35,827,000 in net borrowings under the line of credit in
connection with certain acquisitions and $3,213,000 in proceeds from the
exercise of stock options, offset by $2,184,000 in debt paid in connection with
the merger transaction discussed in Note 2.
A significant component of the Company's growth strategy is the
acquisition and development of dialysis facilities. 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 for the foreseeable future.
However, 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.
Capital expenditures of approximately $28,000,000, primarily for
equipment replacement, expansion of existing dialysis facilities and
construction of de novo facilities are planned in 1998. The Company has made
capital expenditures to date of $3,758,000. The Company expects that such
capital expenditures will be funded with cash provided by operating activities
and available lines of credit. The Company believes that capital resources
available to it will be sufficient to meet the needs of its business, both on a
short- and long-term basis.
RISK FACTORS
In evaluating the Company and its business, prospective investors
should carefully consider the following risk factors in addition to the other
information contained herein. This quarterly report contains statements that
constitute "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements relate
to future events or the future financial performance of the Company and involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those discussed below, and such factors could cause actual results to
differ materially from those indicated by such forward-looking statements. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this quarterly
report or the materials incorporated herein by reference will in fact transpire.
Limited Combined Operating History. The Company has conducted
operations as a combined entity only since February 1996, upon the closing of
its initial public offering. Since the initial public offering, the Company has
made several additional acquisitions of entities that, in some cases, have been
part of the Company's combined operations for only a few weeks or months. There
can be no assurance that the Company will be able to integrate the dialysis
centers, information systems and related operations of the entities acquired by
it or to continue operating them profitably. Nor can there be any assurance that
the Company's management group will be able to implement effectively the
Company's operating and growth strategy while it is engaged in acquisition
activity. Failure to integrate successfully
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the centers and other operations acquired by the Company or to implement
effectively the Company's operating and growth strategy could have a material
adverse effect on the Company's results of operations, financial condition or
business.
Dependence On Government Reimbursement. The Company estimates that
approximately 68%, 63%, and 62% of its net revenue for the years ended December
31, 1996 and 1997, and the three months ended March 31, 1998, respectively,
consisted of reimbursements from Medicare under the ESRD program, including
revenue for the reimbursement of the administration of a bio-engineered hormone,
EPO, to treat anemia. Since 1983, Congressional actions have resulted in
occasional changes in the Medicare composite reimbursement rate, and the Company
is not able to predict whether future rate changes will be made. Legislation or
regulations may be enacted in the future that may significantly modify the ESRD
program or otherwise affect the amount paid for the Company's services. Any such
action could have a material adverse effect on the Company's results of
operations, financial condition and business. Furthermore, increases in
operating costs that are subject to inflation, such as labor and supply costs,
without a compensating increase in prescribed rates, may have a material adverse
effect on the Company's earnings in the future. The Company is also unable to
predict whether certain ancillary services, for which the Company currently is
reimbursed separately, may in the future be included in the Medicare composite
rate.
Revenues from the administration of EPO (the substantial majority of
which are reimbursed through Medicare and Medicaid programs) were approximately
19%, 21%, and 22% of the net revenue of the Company for the years ended December
31, 1996 and 1997, and the three months ended March 31, 1998, respectively. EPO
reimbursement significantly affects the Company's earnings. The President has
included in his 1999 budget a proposal to decrease Medicare reimbursement for
EPO. Any reduction in reimbursement rates for EPO could have a material adverse
effect on the Company's results of operations, financial condition or business.
EPO is produced by a single manufacturer, and any interruption of supply or
product cost increases could have a material adverse effect on the Company's
results of operations, financial condition or business.
The Company estimates that approximately 6%, 6%, and 6% of the
Company's net revenue for the years ended December 31, 1996 and 1997, and the
three months ended March 31, 1998, respectively, were funded by Medicaid or
comparable state programs. The Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy and
governmental funding restrictions, all of which may have the effect of
decreasing program payments, increasing costs or modifying the way the Company
operates its dialysis business.
Dependence On Other Sources Of Reimbursement. The Company estimates
that approximately 26%, 30%, and 32% of its net revenue for the years ended
December 31, 1996 and 1997, and the three months ended March 31, 1998,
respectively, were derived from sources other than Medicare and Medicaid.
Substantially all of this revenue comes from private insurance for chronic
dialysis treatments and payments from hospitals with which the Company has
contracts for the provision of acute dialysis services. In general, private
insurance reimbursement and payments for treatments performed at hospitals are
at rates significantly higher than Medicare and Medicaid rates. The Company
believes that if Medicare reimbursement for dialysis treatment is reduced in the
future, these private payors may be required to assume a greater percentage of
the costs of dialysis care and, as a result, may focus on reducing dialysis
payments as their overall costs increase. In addition, the Company believes that
health maintenance organizations ("HMOs") and other managed care providers may
have a strong incentive to reduce further the costs of specialty care and may
seek to reduce amounts paid for dialysis. The Company is unable to predict
whether and to what extent changes in these private reimbursement rates may be
made in the future. Any reduction in the rates paid by private insurers and
hospitals or a significant change in the Company's payor mix toward additional
Medicare or Medicaid reimbursement
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could have a material adverse effect on the Company's results of operations,
financial condition and business. Similarly, increases in operating costs that
are subject to inflation, such as labor and supply costs, without a compensating
increase in private reimbursement rates, could have a material adverse effect on
the Company's results of operations, financial condition or business.
Risks Associated With Growth Strategy. The Company's strategy includes
expanding its dialysis business through the acquisition and development of
dialysis centers and the management of nephrology practices. Competition for
acquisitions in the dialysis industry has increased significantly in recent
years and, as a result, the cost of acquiring dialysis centers has increased.
There can be no assurance that the Company will be able to identify, acquire or
profitably integrate acquired dialysis centers and nephrology practices.
Acquisitions involve a number of risks related to integration, including adverse
short-term effects on the Company's reported operating results, diversion of
management's attention, dependence on retention, hiring and training of key
personnel, including Medical Directors for each dialysis center, some or all of
which could have a material adverse effect on the Company's results of
operations, financial condition or business. In addition, there can be no
assurance that acquired or managed dialysis centers will achieve net revenue and
earnings that justify the Company's investment therein or expenses related
thereto. In order to implement its growth strategy, the Company may require
substantial capital resources and need to incur, from time to time, short- and
long-term bank indebtedness. The Company also may need to issue in public or
private transactions, equity or debt securities, the terms of which will depend
on market and other conditions. There can be no assurance that any such
additional financing will be available on terms acceptable to the Company, if at
all. To the extent that the Company is unable to acquire dialysis centers or
acquire or manage nephrology practices, to integrate such centers and practices
successfully, or to obtain financing on terms acceptable to the Company, its
ability to expand its business could be reduced significantly.
Risks Associated With Liabilities Of Acquired Businesses. The Company
has acquired and will continue to acquire businesses with prior operating
histories. Acquired companies may have unknown or contingent liabilities,
including liabilities for failure to comply with health care laws and
regulations, such as billing and reimbursement, fraud and abuse and similar
anti-referral laws. The Company has from time to time identified certain past
practices of acquired companies that do not conform to its standards. Although
the Company institutes policies designed to conform such practices to its
standards following completion of acquisitions, there can be no assurance that
the Company will not become liable for past activities that may later be
asserted to be improper by private plaintiffs or government agencies. Although
the Company generally seeks to obtain indemnification from prospective sellers
covering such matters, there can be no assurance that any such matter will be
covered by indemnification or, if covered, that the liability sustained will not
exceed contractual limits or the financial capacity of the indemnifying party.
Dependence On Physician Referrals. The Company's dialysis centers
depend upon local nephrologists for referrals of ESRD patients for treatment and
one or a few physicians typically account for all or a significant portion of
the patient referral base at a center. The loss of one or more referring
physicians at a particular center could have a material adverse effect on the
operations of such center, and the loss of a significant number of referring
physicians could have a material adverse effect on the Company's results of
operations, financial conditions and business. In many instances stockholders of
the Company are the primary referral sources for the dialysis centers operated
by the Company. If such ownership is deemed to violate applicable federal or
state law, such as the illegal remuneration provisions of the Social Security
Act and similar state laws which prohibit the payment of remuneration to induce
referrals, such physician owners may be forced to dispose of their stock in the
Company.
Operations Subject To Extensive Government Regulation. The Company is
subject to extensive federal, state and local regulation regarding, among other
things, fraud and abuse, patient referral, false
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claims, health and safety, environmental compliance and toxic waste disposal.
Much of this regulation, particularly in the areas of fraud and abuse and
patient referral, is complex and open to differing interpretations. First, the
illegal remuneration provisions of the Anti-Kickback Statute make it illegal for
any person to, among other things, solicit, offer, receive or pay any
remuneration in exchange for referring, or to induce the referral of, a patient
for treatment which may be paid for by Medicare, Medicaid or a similar state
program. Second, the Stark Law prohibits physician referrals for "designated
health services" (including some of the specific services offered by the
Company) to entities with which a physician or an immediate family member has a
"financial relationship." These laws contain certain statutory exemptions, and
federal agencies have promulgated regulations clarifying certain of these
provisions and exceptions and creating certain additional exceptions or "safe
harbors" from such prohibitions. Many states have enacted similar provisions of
law, which may not have identical prohibitions or exceptions, but which may
apply regardless of whether Medicare or Medicaid funds are involved. However,
due to the breadth of the statutory provisions and the absence in many instances
of regulations or court decisions addressing the specific arrangements by which
the Company conducts its business, it is possible that some of the Company's
practices might be challenged under these laws. Sanctions for violating these
federal and state laws may include civil monetary fines, disqualification from
participation in the Medicare or Medicaid programs, and criminal sanctions.
There can be no assurance that the Company's practices will not be challenged by
governmental authorities, or that the Company will not be subject to sanctions
under such laws or be required to alter or discontinue certain of its practices.
In addition, there can be no assurance that if the Company is required to alter
its practices, that it will be able to do so successfully. The occurrence of any
of these events could result in a material adverse effect on the Company's
results of operations, financial condition or business.
A number of proposals for health care reform have been made recently to
provide greater governmental control of health care spending and to provide
broader access to health care services. For example, HIPAA, among other things,
provides for insurance portability for individuals who lose or change jobs,
limits exclusions for pre-existing conditions, and establishes a pilot program
for medical savings accounts. HIPAA also amends existing crimes and criminal
penalties for Medicare fraud and enacts new federal health care fraud crimes. It
is uncertain what additional health care reform legislation, if any, ultimately
will be implemented or whether other changes in the administration or
interpretation of governmental health care programs will occur. The Company
cannot predict what effect future health care legislation or other changes in
the administration or interpretation of governmental health care statutes,
regulations, or programs may have on the Company's operations.
Substantial Competition. The dialysis industry is fragmented and is
consolidating rapidly. Accordingly, the industry is highly competitive,
particularly from the standpoint of competition for the acquisition of existing
dialysis centers and the development of relationships with referring physicians.
Many of the Company's competitors have substantially greater financial resources
and more established operations and infrastructure than the Company and may
compete with the Company for acquisitions of dialysis centers and nephrology
practices. In addition, the Company may also experience competition from
referring physicians who open their own dialysis centers. There can be no
assurance that the Company will be able to compete effectively with any such
competitors.
Dependence On Key Personnel. The Company is dependent upon the services
of certain key executive officers and the Chairman of the Board. The Company's
growth will depend in part upon its ability to attract and retain skilled
employees, for whom competition is intense. The Company believes that its future
success will also depend on its ability to attract and retain qualified
physicians to serve as Medical Directors of its dialysis centers. The Company
does not carry key-man life insurance on any of its officers. The loss by the
Company of any of its executive officers or the Chairman of the Board, or the
inability to attract and retain qualified management personnel and Medical
Directors, could have a material adverse effect on the Company's results of
operations, financial condition or business.
12
<PAGE> 15
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
THIS REPORT, PRESS RELEASES AND OTHER PUBLIC STATEMENTS BY THE COMPANY CONTAIN
"FORWARD-LOOKING STATEMENTS," WITHIN THE MEANING OF VARIOUS PROVISIONS OF THE
FEDERAL SECURITIES LAWS, THAT ADDRESS ACTIVITIES, EVENTS OR DEVELOPMENTS THAT
WILL OR MAY OCCUR IN THE FUTURE. THESE STATEMENTS ARE BASED ON ASSUMPTIONS AND
ANALYSES MADE BY THE COMPANY IN LIGHT OF ITS EXPERIENCE AND PERCEPTION OF
HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE DEVELOPMENTS, AND
OTHER FACTORS BELIEVED APPROPRIATE IN THE CIRCUMSTANCES. ACTUAL RESULTS AND
DEVELOPMENTS ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING
GENERAL ECONOMIC, MARKET OR BUSINESS CONDITIONS; OPPORTUNITIES (OR 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 AS MAY BE
DISCUSSED FROM TIME TO TIME IN THE COMPANY'S SEC REPORTS AND OTHER FILINGS, MANY
OF WHICH 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.
13
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(a) None
(b) None
(c) On January 7, 1998, the Company issued 1,298,234 shares of Common Stock
to the former owners of Little Rock Dialysis, Inc., Northwest Dialysis,
Inc., Jefferson County Dialysis, Inc., KDCO Dialysis, Inc., and Lawton
Dialysis, Inc. in a private placement pursuant to the exemption from
registration set forth in Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<S> <C>
10.3 Employment Agreement, dated January 5, 1998, between the
Company and Raymond Hakim, M.D.
27.1 Financial Data Schedule for the three months ended March 31,
1998 (filed via Edgar on May 15, 1998)
27.2 Financial Data Schedule for three months ended March 31, 1997
(filed via Edgar on May 15, 1998)
</TABLE>
(b) Reports on Form 8-K
Form 8-K/A dated February 20, 1998 relating to the acquisition of all
of the issued and outstanding stock of STAT Dialysis Corporation and
STAT Management Corporation.
14
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RENAL CARE GROUP, INC.
----------------------
(Registrant)
May 15, 1998 BY: /s/ Ronald Hinds
- ------------ -----------------
Ronald Hinds
Executive Vice President,
Chief Financial Officer, Secretary/Treasurer
and Principal Financial Officer and Principal
Accounting Officer
15
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits Page No.
- ------- ----------------------- --------
<S> <C> <C>
10.3 Employment Agreement, dated January 5, 1998, between the Company and
Raymond Hakim, M.D.
27.1 Financial Data Schedule for the three months ended March 31, 1998
27.2 Financial Data Schedule for the three months ended March 31, 1997
</TABLE>
<PAGE> 1
Exhibit 10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of January 15, 1998, by and
between RENAL CARE GROUP, INC., a Delaware corporation (the "Company"), and
RAYMOND HAKIM, M.D., Ph.D. (hereinafter "Employee"), and supersedes and replaces
that certain Employment Agreement between the parties hereto dated as of June
__, 1996.
WITNESSETH:
WHEREAS, the Company desires to employ Employee, and Employee desires
to be employed by the Company, on the terms and conditions contained herein; and
NOW, THEREFORE, in consideration of the compensation payable to
Employee by the Company pursuant to this Agreement, and the mutual promises,
covenants, representations and warranties contained herein, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do agree as
follows:
1. Employment.
Effective as of January 15, 1998 (the "Effective Date"), the Company
employs Employee and Employee accepts employment with the Company under the
terms of this Agreement.
2. Term.
This Agreement shall begin on the Effective Date, and shall continue
for an initial period of thirty-six (36) months from the Effective Date (the
"Initial Period"), subject to earlier termination by employee or the Company as
hereinafter provided. This Agreement shall renew for additional terms of twelve
(12) months each, subject to earlier termination as hereinafter provided, on the
same terms and conditions (subject to mutually agreeable modifications, if any).
3. Compensation and Benefits.
(a) Base Compensation: The Company shall pay Employee an annual
salary of Two Hundred Thousand Dollars ($200,000), as may be adjusted as
provided herein (the "Base Compensation"), payable according to the pay periods
of the Company as may be in effect from time to time. Such payments shall be
prorated for periods less than a full pay period. The Base Compensation shall be
subject to withholding for federal, state and local payroll and all other taxes
or withholdings applicable to Employee. Any increases of the Base Compensation
shall be at the discretion of the Company, provided that any decreases to the
then current Base Compensation shall require the consent of Employee.
(b) Benefits: During the term of this Agreement, Employee shall also
be entitled to participate in the insurance and other fringe benefits made
available generally to similar employees of the Company, as such benefits may be
determined from time to time by the Company, provided that Employee shall have
at least four (4) weeks of paid vacation time. In addition, during the term of
this Agreement, the Company will provide term life insurance coverage of One
Million Dollars ($1,000,000) on Employee's life with the death benefit to be
payable to Employee's estate or as otherwise directed in writing by Employee.
<PAGE> 2
(c) Bonuses: In addition to the Base Compensation payable to
Employee pursuant to Section 3(a) above, from time to time Employee may be
entitled to an annual bonus as determined in the sole discretion of the Company.
(d) Expenses: The Company shall reimburse Employee for any and
all expenses reasonably incurred by employee incident to the performance of the
duties imposed upon Employee hereunder.
4. Duties, Extent of Services:
Employee is engaged as Executive Vice President and Chief Medical
Officer and shall perform such duties and responsibilities as are typically
incident thereto, and shall perform in a faithful and competent manner such
additional duties as may be reasonably assigned from time to time by the
Company. Such duties shall be performed on a full-time basis for the Company at
the Company's offices in Nashville, Tennessee. Employee may be required, from
time to time, to perform his duties temporarily hereunder at such other place or
places as the Company shall reasonably require, provided that such period does
not exceed thirty (30) consecutive days without Employee's consent and that
during any such period Employee is able to return to Nashville, Tennessee at the
Company's expense for weekends.
Employee shall devote all of Employee's business time, attention,
knowledge, and skill solely to the business and interest of the Company, and the
Company shall be entitled to all the benefits, profits, and other issues arising
from, or incident to, all work, services, and advice of Employee.
5. Termination.
This Agreement may be terminated by the parties in the manners
specified below:
(a) Termination without Cause. Either the Company or the employee
may terminate Employee's employment under this Agreement at any time for any
reason upon thirty (30) day's prior written notice to the other party.
(b) Termination for Cause
The Company may terminate this Agreement on written notice at
any time for "cause". For purposes of this Agreement, "cause" shall mean: (i)
Employee is convicted of, pleads guilty to, or confesses to a felony or any
crime involving any act of dishonesty, fraud, misappropriation, embezzlement or
moral turpitude, in which event the Company may terminate this Agreement
immediately, (ii) the misconduct or gross negligence by Employee in connection
with the performance of Employee's duties hereunder, (iii) the engaging by
Employee in any fraudulent, disloyal or unprofessional conduct which results in
an injury to the Company, its affiliates or any of its or their centers,
monetarily or otherwise, (iv) Employee breaches any provision of Section 6 of
this Agreement, or (v) the failure by Employee to otherwise substantially
perform his duties with the Company (other than any such failure resulting from
the disability of Employee under Section 5(c)(i)) or the breach of any provision
of this Agreement other than Section 6. In the event of any termination for
cause pursuant to the provisions of (ii), (iii), (iv) or (v) of this subsection,
the Company shall give Employee written notice prior to such termination
detailing the specific acts, actions, failures, or events upon which the
forecast termination is based, and Employee shall have fifteen (15) days after
such written notice to cease such actions or otherwise correct any such failure
or breach. If Employee does not cease such action or otherwise correct such
failure or breach within such fifteen day time period, or having once
- 2 -
<PAGE> 3
received such written notice and ceased such actions or corrected such failure
or breach, Employee at any time thereafter again so acts, fails or breaches, the
Company may terminate this Agreement immediately.
(c) Involuntary Termination.
The employment of Employee hereunder shall be a
utomatically terminated by the death or disability of Employee as outlined
below.
(i) Disability. The Company may terminate this Agreement
at the time Employee shall have been Disabled for a continuous period of six (6)
months during any continuous twelve month period. For purposes of this Paragraph
5(c)(i), the term "Disabled" shall mean Employee's inability to perform the
essential functions of his duties, with or without reasonable accommodation.
During Employee's six month period of Disability, the Company agrees to continue
to pay Employee's Base Compensation (less regular withholdings for payroll or
other taxes and other required or proper items, and less proceeds from all
disability insurance policies or plans provided or made available by the
Company). In the event of a termination of Employee on account of Disability,
the Company shall be obligated to pay Employee's Base Compensation for a period
of six months following the effective date of termination (less regular
withholdings for payroll or other taxes and other required or proper times, and
less proceeds from all disability insurance policies or plans provided or made
available by the Company). In addition, any provisions in the relevant stock
option agreements notwithstanding, all outstanding stock options granted to
Employee pursuant to a Company stock option plan shall vest immediately upon
termination pursuant to this Section 5(c)(i).
(ii) Death. In the event Employee shall die during the
term of this Agreement, this Agreement shall terminate and Employee's estate
shall receive the remainder of the Base Compensation set forth in Section 3(a)
hereof accrued to the last day of the month in which death occurs. In addition,
any provisions in the relevant stock option agreements notwithstanding, all
outstanding stock options granted to Employee pursuant to a Company stock option
plan shall vest immediately upon termination pursuant to this Section 5(c)(ii).
(d) Post-Termination Compensation. Except as provided in
Section 5(c) above, upon termination of this Agreement, the Company shall be
relieved of all of its obligations hereunder notwithstanding any period of time
remaining under the initial or any renewal term, subject to the following:
(i) Termination without Cause. In the event that the
Company terminates Employee's employment hereunder without Cause under Section
5(a) above, then Employee shall, after the effective date of such termination,
as Employee's sole and exclusive remedy, receive an amount equal to the annual
Base Compensation (as then in effect) for a period of twelve (12) months after
the termination date. If the Employee's employment is terminated by the Company
without Cause, the Employee shall be under no duty to seek or accept other
employment; but if he shall do so, any compensation he shall receive therefrom
shall not diminish the Company's obligation to make payments required to the
Employee hereunder In the event that Employee terminates his or her employment
under Section 5(a) above, the Company's obligation to pay Employee's Base
Compensation shall terminate as of the date of such termination.
(ii) Termination for Cause. In the event that the Company
terminates Employee's employment hereunder with Cause under Section 5(b) above,
then Employee shall, after the effective date of such termination, receive the
Base Compensation (as then in effect) for a period of one (1) month after the
termination date.
- 3 -
<PAGE> 4
(iii) Termination following Change in Control. If within
twelve (12) months following a Change in Control (as defined below), either (A)
the Company terminates the employment of Employee hereunder without Cause under
Section 5(a) above or (B) Employee resigns from a declined reassignment of a job
that is not reasonably equivalent in responsibility or compensation or that is
not in the same geographic area, then, in lieu of any other compensation that
may be specified herein, Employee shall receive an amount equal to three (3)
multiplied by the Base Compensation (as then in effect) plus an amount of Annual
Bonus for the current year (the amount of Annual Bonus for the current year
shall be equal in amount to any Annual Bonus paid or to be paid to Employee in
connection with the Company's last completed fiscal year), payable by the
Company in a single lump-sum payment, to be paid not later than thirty (30) days
after termination. In the event such payment obligation arises, no compensation
received from other employment (or otherwise) shall reduce the obligation to
make the payment(s) described in this paragraph.
(e) Change in Control. "Change in Control" means a change in
control of the Company of a nature that would be required to be reported
(assuming such event has not been "previously reported") in response to Item
1(a) of a Current Report on Form 8-K pursuant to Section 13 or 15(d) of the
Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, a
Change in Control shall also be deemed to have occurred at such time as:
(i) any "person" within the meaning of Section 14(d) of
the Exchange Act, other than the Company; a subsidiary, or any employee benefit
plan(s) sponsored by the Company or any Subsidiary, is or has become the
"beneficial owner," as defined in rule 13d-3 under the Exchange Act, directly or
indirectly, of 25% or more of the combined voting power of the outstanding
securities of the Company ordinarily having the right to vote at the election of
directors, or
(ii) individuals who constitute the Board immediately
prior to any meeting of stockholders (the "Incumbent Board") have ceased for any
reason to constitute at least a majority thereof, provided that any person
becoming a director whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least three-quarters (3/4) of the
directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named as
a nominee for director without objection to such nomination) shall be, for
purposes of this Agreement, considered as though such person were a member of
the Incumbent Board; or
(iii) upon approval by the Company's stockholders of a
reorganization, merger, share exchange or consolidation, other than one with
respect to which those persons who were the beneficial owners, immediately prior
to such reorganization, merger, share exchange or consolidation, or outstanding
securities of the Company ordinarily having the right to vote in the election of
directors own, immediately after such transaction, more than 75% of the
outstanding securities of the resulting corporation ordinarily having the right
to vote in the election of directors; or
(iv) upon approval by the Company's stockholders of a
complete liquidation and dissolution of the Company or the sale or other
disposition of all or substantially all of the assets of the Company other than
to a Subsidiary.
- 4 -
<PAGE> 5
6. Nondisclosure, Confidentiality; Competition.
(a) Subject to Section 6(f) below, Employee agrees that, during the
term of this Agreement and of Employee's employment by the Company, and for a
period twelve (12) months after the termination of Employee's employment with
the Company, Employee will not in any manner, directly or indirectly, by himself
or in conjunction with any other person, (i) conduct any of the activities or
perform any of the responsibilities or duties that Employee provided the Company
during his employment by the Company for any business entity that is competitive
with the business of the Company or its affiliates or (ii) establish or own any
financial, beneficial or other interest in (other than an interest consisting of
less than one percent (1%) of a class of publicly traded security), make any
loan to or for the benefit of, or render any managerial, marketing or other
business advice, to any entity that is then conducting activities that are
competitive with those of the business of the Company or its affiliates, in
either case within a geographic territory defined as the greater of (i) a
seventy-five (75) mile radius of any renal dialysis center, unit or facility
owned or operated by the Company or an affiliate of the Company (an "RCG
Center"), or (ii) the geographic area, as narrowly construed as is practicable,
from which the Company received patients at each of the RCG Centers. For
purposes of this Section, the "business of the Company or its affiliates" shall
mean owning or operating a renal dialysis center, unit or facility, and
providing practice management services to nephrologists. However, any Vanderbilt
Medical Center owned dialysis operation is excluded from this non-compete.
(b) Subject to Section 6(f) below, Employee further agrees that, for
a period of three (3) years after the termination of Employee's employment with
the Company, Employee will keep confidential and not directly divulge, or allow
through a lack of reasonable care to be divulged to anyone, or use or otherwise
appropriate for Employee's own benefit or for the benefit of others, any
knowledge or information of a confidential nature with respect to the Company's
and its affiliates' current business, the Company itself, or any of its
affiliates, including all trade secrets, pricing information, marketing
information or technical information (hereinafter referred to as the
"Confidential Data"), except for (i) a disclosure that is required by law; or
(ii) information that has been made generally available to the public by the act
of one who has the right to disclose such information; or (iii) information that
has become part of the public domain through no fault of the Employee; and (iv)
was known to the Employee prior to May 1, 1996. Employee hereby acknowledges and
agrees that the prohibitions against disclosure of Confidential Data recited
herein are in addition to, and not in lieu of, any rights or remedies which the
Company may have available pursuant to the laws of any jurisdiction or at common
law to prevent the disclosure of confidential information, and the enforcement
by the Company of its rights and remedies pursuant hereto shall not be construed
as a waiver of any other rights or available remedies which the Company may
possess in law or equity. Employee acknowledges that the Company has taken
reasonable and appropriate steps to ensure the confidentiality and
non-disclosure of all such Confidential Data. For purposes of this Section the
Company's and its affiliates' "current business" shall mean owning or opening a
renal dialysis center, unit or facility.
(c) Subject to Section 6(f) below, Employee further agrees that,
for a period of three (3) years after the termination of Employee's employment
with the Company, Employee will not, for his own benefit or the benefit of
others, solicit any person or entity that has or has had, or disrupt or attempt
to disrupt, any relationship, contractual or otherwise, with the Company or an
affiliate of the Company (including any patient, payor, physician, provider,
managed care organization or supplier) at any time during Employee's employment
with the Company, for the purpose of assisting, or creating such a relationship
for, any business entity that is competitive with the Company or an affiliate of
the Company. For purposes of this Section, a business entity is competitive with
the Company or an affiliate of the Company if it provides or offers any renal
dialysis service that is provided by the Company or an affiliate of the Company.
- 5 -
<PAGE> 6
(d) Subject to Section 6(f) below, Employee further agrees that,
for a period of three (3) years after the termination of Employee's employment
with the Company, Employee shall not induce, nor attempt to induce, any employee
of the Company, or any of its affiliates, to terminate such employee's
association with the Company or any of its affiliates.
(e) These post-employment covenants are considered by the parties
hereto to be fair, reasonable and integral for the protection of the Company.
The parties mutually agree that if a violation of any of these covenants occurs,
such violation or any threatened violation will cause irreparable injury to the
Company and the remedy at law for any such violation or threatened violation
will be inadequate. The parties acknowledge that these covenants will survive,
and remain in effect and enforceable after, termination of this Agreement.
(f) The Company agrees that the forgoing covenants in paragraphs
6(a) through (d) shall be null and void as to any period following termination
of employment in the event such termination occurs within twelve (12) months
following a Change in Control through either (A) a termination by the Company
without Cause under Section 5(a) above or (B) a resignation by Employee for any
reason.
(g) Employee agrees to indemnify and hold harmless the Company
from and against any and all claims, causes of action, damages and/or any other
losses suffered or incurred by the Company as a result of any breach or
purported breach by Employee of any agreement applicable to Employee which
existed prior to the time of the entering into of this Agreement. Such
obligations of Employee to indemnify and hold the Company harmless shall include
any and all costs of defense of any such claim or threatened claim, including
reasonable attorneys' fees.
7. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company to or for the benefit of Employee (whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any additional payments
required under this Section 7) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties are incurred by
Employee with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then Employee shall be entitled to receive an additional payment
(a "Gross-Up Payment") in an amount such that after payment by Employee of all
taxes (including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
Employee retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
(b) Subject to the provisions of Section 7(c), all determinations
required to be made under this Section 7, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Ernst & Young
LLP or such other certified public accounting firm as may be designated by
Employee (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and Employee within 15 business days of the
receipt of notice from Employee that there has been a Payment, or such earlier
time as is requested by the Company. In the event that the Accounting Firm is
serving as accountant or auditor for the individual, entity or group effecting
the Change in Control, Employee shall appoint another nationally recognized
accounting firm to make the determinations required hereunder (which accounting
firm shall then be referred to as the Accounting Firm hereunder). All fees and
expenses of the Accounting Firm shall be borne solely by the Company.
- 6 -
<PAGE> 7
Any Gross-Up Payment, as determined pursuant to this Section 7, shall be paid by
the Company to Employee within five days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be binding upon
the Company and Employee. It is possible (due to the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder) that Gross-Up Payments will not have been made
by the Company which it is ultimately determined should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. Consequently, in the event that the Company exhausts its remedies
pursuant to Section 7(c) and Employee thereafter is required to make a payment
of any Excise Tax, the Accounting Firm shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall be promptly paid
by the Company to or for the benefit of Employee.
(c) Employee shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after Employee is informed in
writing of such claim and shall apprise the Company of the nature of such claim
and the date on which such claim is requested to be paid. Employee shall not pay
such claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies Employee in writing prior to the expiration of such period that
it desires to contest such claim, Employee shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Employee harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation of the foregoing provisions of
this Section 7(c), the Company shall control all
- 7 -
<PAGE> 8
proceedings taken in connection with such contest and, at its sole option, may
pursue or forgo any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Employee to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Employee agrees to prosecute
such contest to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs Employee to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to Employee, on an interest-free basis and shall indemnify and hold
Employee harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of Employee with respect to which such
contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
Employee shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Employee of an amount advanced by the
Company pursuant to Section 7(c), Employee becomes entitled to receive any
refund with respect to such claim, Employee shall (subject to the Company's
complying with the requirements of Section 7(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by Employee of an amount
advanced by the Company pursuant to Section 7(c), a determination is made that
Employee shall not be entitled to any refund with respect to such claim and the
Company does not notify Employee in writing of its intent to contest such denial
of refund prior to the expiration of 30 days after such determination, then such
advance shall be forgiven and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid.
8. Severability.
The parties hereto hereby expressly agree and contract that it is
not the intention of either party to violate any public policy, or any statutory
or common law, and that if any paragraph, sentence, clause or combination of the
same of this Agreement shall be in violation of the laws of any state where
applicable, such paragraph, sentence, clause or the combination of the same
shall be void in the jurisdictions where it is unlawful, and the remainder
thereof shall remain binding on the parties hereto. It is the intention of the
parties to make the covenants of this Agreement binding only to the extent that
they may be lawfully done under existing applicable laws. In the event that any
part of any term or covenant of this Agreement is determined by a court of law
or equity to be overly broad or otherwise unenforceable, the parties hereto
agree that such court shall be empowered to substitute, and it is the intent of
the parties hereto that such court substitute, a reasonably judicially
enforceable term or limitation in the place of such unenforceable term or
covenant, and that as so modified this Agreement shall be fully enforceable.
9. Entire Agreement; Modification.
This Agreement constitutes the entire agreement between the parties
and supersedes any and all prior understandings or agreements, and any changes
or additions hereto must be in writing and signed by both parties.
- 8 -
<PAGE> 9
10. Assignment.
(a) The rights and benefits of Employee under this Agreement,
other than accrued and unpaid amounts due under Section 3(a) hereof, are
personal to Employee and shall not be assignable.
(b) This Agreement may not be assigned by the Company except to an
affiliate of the Company, provided that such affiliate assumes the Company's
obligations under this Agreement; provided, further, that if the Company shall
merge or effect a consolidation or share exchange with or into, or sell or
otherwise transfer substantially all its assets to, another business entity, the
Company may assign its rights hereunder to that business entity without the
consent of the Employee provided that it causes such business entity to assume
the Company's obligations under this Agreement.
11. Notice.
The references to the notice periods of certain "days" contained in
this Agreement shall mean calendar days. Any notice provided for in this
Agreement shall be delivered to Employee at the most recent address of employee
listed in the Company's then current employment records. Notice to the Company
shall be delivered to the following address: c/o Renal Care Group, Inc., 2100
West End Avenue, Suite 800, Nashville, Tennessee 37203, Attention: President.
12. Waiver.
The waiver by any party to this Agreement of a breach of any
of the provisions contained herein shall not operate or be construed as a waiver
of any subsequent breach.
13. Disputes and Governing Law.
The Company and employee agree that any dispute arising in
connection with, or relating to, this Agreement or the termination of this
Agreement, to the maximum extent allowed by applicable law, shall be subject to
resolution through informal methods and, failing such efforts, through
arbitration. Either party may notify the other party of the existence of a
dispute by written notice to the address indicated above in Section 11. The
parties shall thereafter attempt in good faith to resolve their differences
within thirty (30) days after the receipt of such notice. If the dispute cannot
be resolved within such 30-day period, either party may file a written demand
for arbitration with the other party. The arbitration shall proceed in
accordance with the terms of the Federal Arbitration Act and the rules and
procedures of the American Arbitration Association. A single arbitrator shall be
appointed through the American Arbitration Association's procedures to resolve
the dispute.
The parties agree that in the event arbitration is necessary,
the laws of the State of Tennessee and any applicable federal law shall apply.
The place of the arbitration shall be Nashville, Tennessee.
The award of the arbitrator shall be binding and conclusive
upon the parties. Either party shall have the right to have the award made the
judgment of a court of competent jurisdiction in the State of Tennessee.
In the event of a dispute arising under this Agreement, the
prevailing party shall be entitled to all reasonable attorneys' fees incurred in
connection with such dispute. The Company agrees, to the maximum extent
permitted by law and the Bylaws and Certificate of Incorporation of the Company,
to defend and indemnify the Employee against and to hold the Employee harmless
from any and all claims, suits, losses, liabilities, and expenses (including
disputes arising under this Agreement
- 9 -
<PAGE> 10
and including reasonable attorneys' fees and payment of reasonable expenses
incurred in defending against such claim or suit as such expenses are incurred)
asserted against the Employee for actions taken or omitted to be taken by the
Employee in good faith and within the scope of his responsibilities as an
officer or employee of the Company. If requested by the Employee, the Company
shall advance to the Employee, promptly following the Company's receipt of any
such request, any and all expenses for which indemnification is available
hereunder, subject to the requirements of applicable law and the Company's
Bylaws and Certificate of Incorporation.
IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement on the day and year first above written.
COMPANY:
RENAL CARE GROUP, INC.
By: /s/ Sam A. Brooks
-----------------------------------
Sam A. Brooks
President
[Corporate Seal]
EMPLOYEE:
/s/ Raymond Hakim (Seal)
-------------------------------
Raymond Hakim, M.D., Ph.D.
- 10 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. FOR THE THREE MONTHS ENDED MARCH
31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 18,400
<SECURITIES> 0
<RECEIVABLES> 60,549
<ALLOWANCES> 0
<INVENTORY> 5,082
<CURRENT-ASSETS> 87,863
<PP&E> 70,485
<DEPRECIATION> 0
<TOTAL-ASSETS> 310,916
<CURRENT-LIABILITIES> 50,989
<BONDS> 0
0
0
<COMMON> 265
<OTHER-SE> 187,401
<TOTAL-LIABILITY-AND-EQUITY> 310,916
<SALES> 80,463
<TOTAL-REVENUES> 80,463
<CGS> 53,540
<TOTAL-COSTS> 53,540
<OTHER-EXPENSES> 13,033
<LOSS-PROVISION> 2,101
<INTEREST-EXPENSE> (562)
<INCOME-PRETAX> 11,227
<INCOME-TAX> 4,154
<INCOME-CONTINUING> 7,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,073
<EPS-PRIMARY> .27
<EPS-DILUTED> .25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF RENAL CARE GROUP, INC. FOR THE THREE MONTHS ENDED MARCH
31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 10,976
<SECURITIES> 5,841
<RECEIVABLES> 35,036
<ALLOWANCES> 0
<INVENTORY> 3,056
<CURRENT-ASSETS> 56,881
<PP&E> 36,535
<DEPRECIATION> 0
<TOTAL-ASSETS> 143,868
<CURRENT-LIABILITIES> 37,307
<BONDS> 0
0
0
<COMMON> 218
<OTHER-SE> 104,872
<TOTAL-LIABILITY-AND-EQUITY> 141,868
<SALES> 46,109
<TOTAL-REVENUES> 46,109
<CGS> 31,934
<TOTAL-COSTS> 31,934
<OTHER-EXPENSES> 6,766
<LOSS-PROVISION> 942
<INTEREST-EXPENSE> 404
<INCOME-PRETAX> 6,871
<INCOME-TAX> 2,577
<INCOME-CONTINUING> 4,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,294
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
</TABLE>
